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HCA > SEC Filings for HCA > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for HCA HOLDINGS, INC.


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This quarterly report on Form 10-Q includes certain disclosures which contain "forward-looking statements." Forward-looking statements include statements regarding estimated electronic health record ("EHR") incentive income and related EHR operating expenses, expected capital expenditures, expected net claim payments and all other statements that do not relate solely to historical or current facts, and can be identified by the use of words like "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan," "initiative" or "continue." These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, which could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to, (1) the impact of our substantial indebtedness and the ability to refinance such indebtedness on acceptable terms, (2) the effects related to the enactment and implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the "Health Reform Law"), the possible enactment of additional federal or state health care reforms and possible changes to the Health Reform Law and other federal, state or local laws or regulations affecting the health care industry, (3) the effects related to the enactment and implementation of the Budget Control Act of 2011 (the "BCA") and the outcome of negotiations and legislation related to BCA-mandated spending reductions, which include cuts to Medicare payments,
(4) increases in the amount and risk of collectibility of uninsured accounts and deductibles and copayment amounts for insured accounts, (5) the ability to achieve operating and financial targets, and attain expected levels of patient volumes and control the costs of providing services, (6) possible changes in the Medicare, Medicaid and other state programs, including Medicaid upper payment limit ("UPL") programs or Waiver Programs, that may impact reimbursements to health care providers and insurers, (7) the highly competitive nature of the health care business, (8) changes in service mix, revenue mix and surgical volumes, including potential declines in the population covered under managed care agreements, the ability to enter into and renew managed care provider agreements on acceptable terms and the impact of consumer driven health plans and physician utilization trends and practices, (9) the efforts of insurers, health care providers and others to contain health care costs, (10) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures, (11) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (12) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (13) changes in accounting practices,
(14) changes in general economic conditions nationally and regionally in our markets, (15) future divestitures which may result in charges and possible impairments of long-lived assets, (16) changes in business strategy or development plans, (17) delays in receiving payments for services provided,
(18) the outcome of pending and any future tax audits, appeals and litigation associated with our tax positions, (19) potential adverse impact of known and unknown government investigations, litigation and other claims that may be made against us, (20) our ongoing ability to demonstrate meaningful use of certified EHR technology and recognize income for the related Medicare or Medicaid incentive payments, and (21) other risk factors described in our annual report on Form 10-K for the year ended December 31, 2012 and our other filings with the Securities and Exchange Commission. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report, which forward-looking statements reflect management's views only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

Health Care Reform

As enacted, the Health Reform Law will change how health care services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending,


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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Health Care Reform (continued)

reductions in Medicare and Medicaid Disproportionate Share Hospital ("DSH") payments, and the establishment of programs in which reimbursement is tied to quality and integration. In addition, the Health Reform Law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement. Numerous lawsuits have challenged the constitutionality of the Health Reform Law. On June 28, 2012, the United States Supreme Court upheld the constitutionality of the individual mandate provisions of the Health Reform Law but struck down the provisions that would have allowed the Department of Health and Human Services ("HHS") to penalize states that do not implement the Medicaid expansion provisions with the loss of existing federal Medicaid funding. States that choose not to implement the Medicaid expansion will forego funding established by the Health Reform Law to cover most of the expansion costs. It is unclear how many states will decline to implement the Medicaid expansion. Due to these factors, we are unable to predict with any reasonable certainty or otherwise quantify the likely impact of the Health Reform Law on our business model, financial condition or result of operations.

First Quarter 2013 Operations Summary

Revenues increased to $8.440 billion in the first quarter of 2013 from $8.405 billion in the first quarter of 2012. Net income attributable to HCA Holdings, Inc. totaled $344 million, or $0.74 per diluted share, for the quarter ended March 31, 2013, compared to $540 million, or $1.18 per diluted share, for the quarter ended March 31, 2012. First quarter 2013 results include net losses on sales of facilities of $16 million, or $0.02 per diluted share, and a loss on retirement of debt of $17 million, or $0.03 per diluted share. First quarter 2012 results include two Medicare revenue adjustments (and related expenses) that added $170 million to income before income taxes, or $0.22 per diluted share. All "per diluted share" disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 462.4 million shares for the quarter ended March 31, 2013 and 458.3 million shares for the quarter ended March 31, 2012.

Revenues increased 0.4% on a consolidated basis and increased 0.1% on a same facility basis for the quarter ended March 31, 2013, compared to the quarter ended March 31, 2012. The increase in consolidated revenues can be attributed primarily to the net impact of a 0.9% increase in revenue per equivalent admission and a 0.4% decline in equivalent admissions. The same facility revenues increase resulted primarily from the net impact of a 0.8% increase in same facility revenue per equivalent admission and a 0.7% decline in same facility equivalent admissions.

During the quarter ended March 31, 2013, consolidated admissions and same facility admissions increased 0.2% and 0.1%, respectively, compared to the quarter ended March 31, 2012. Inpatient surgeries declined 2.8% on a consolidated basis and 2.6% on a same facility basis during the quarter ended March 31, 2013, compared to the quarter ended March 31, 2012. Outpatient surgeries declined 2.9% on a consolidated basis and 4.3% on a same facility basis during the quarter ended March 31, 2013, compared to the quarter ended March 31, 2012. Emergency department visits increased 3.6% on a consolidated basis and 3.8% on a same facility basis during the quarter ended March 31, 2013, compared to the quarter ended March 31, 2012. Quarterly patient volume statistic comparisons were negatively impacted due to the additional day (leap day) in the quarter ended March 31, 2012.

For the quarter ended March 31, 2013, the provision for doubtful accounts declined $40 million, compared to the quarter ended March 31, 2012. The self-pay revenue deductions for charity care and uninsured discounts increased $107 million and $311 million, respectively, during the first quarter of 2013, compared to the first quarter of 2012. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, provision for doubtful accounts, uninsured discounts and charity care, was


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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

First Quarter 2013 Operations Summary (continued)

30.0% for the first quarter of 2013, compared to 27.8% for the first quarter of 2012. Same facility uninsured admissions increased 5.4% and same facility uninsured emergency room visits increased 3.5% for the quarter ended March 31, 2013, compared to the quarter ended March 31, 2012.

Interest expense increased $30 million to $472 million for the quarter ended March 31, 2013 from $442 million for the quarter ended March 31, 2012. The increase in interest expense was due to increases in both the average debt balance and average interest rate.

Cash flows from operating activities declined $57 million from $797 million for the first quarter of 2012 to $740 million for the first quarter of 2013. The decline is primarily related to the net impact of the decline in net income of $168 million, excluding the losses on sales of facilities of $16 million and loss on retirement of debt of $17 million, being partially offset by a positive impact from changes in working capital items of $50 million and a reduction of $50 million in income taxes.

Results of Operations

Revenue/Volume Trends

Our revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment rates for such services. Gross charges typically do not reflect what our facilities are actually paid. Our facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from gross charges. We do not pursue collection of amounts related to patients who meet our guidelines to qualify for charity care; therefore, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans. After the discounts are applied, we are still unable to collect a significant portion of uninsured patients' accounts, and we record significant provisions for doubtful accounts (based upon our historical collection experience) related to uninsured patients in the period the services are provided.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Revenue/Volume Trends (continued)

Revenues increased 0.4% from $8.405 billion in the first quarter of 2012 to $8.440 billion in the first quarter of 2013. Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under Medicare, Medicaid and other programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record a provision for doubtful accounts related to uninsured accounts to record the net self pay revenues at the estimated amounts we expect to collect. Our revenues from our third-party payers, the uninsured and other revenues for the quarters ended March 31, 2013 and 2012 are summarized in the following tables (dollars in millions):

                                                     2013           Ratio          2012           Ratio
Medicare                                            $ 2,138           25.3 %      $ 2,313           27.5 %
Managed Medicare                                        843           10.0            750            8.9
Medicaid                                                332            3.9            430            5.1
Managed Medicaid                                        401            4.8            342            4.1
Managed care and other insurers                       4,486           53.2          4,445           52.9
International (managed care and other insurers)         290            3.4            260            3.1

                                                      8,490          100.6          8,540          101.6
Uninsured                                               399            4.7            442            5.3
Other                                                   305            3.6            217            2.6

Revenues before provision for doubtful accounts       9,194          108.9          9,199          109.5
Provision for doubtful accounts                        (754 )         (8.9 )         (794 )         (9.5 )

Revenues                                            $ 8,440          100.0 %      $ 8,405          100.0 %

The growth rate in revenues for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012 was reduced due to Medicare revenues for the quarter ended March 31, 2012 being impacted by two adjustments to Medicare revenues (the Rural Floor Provision Settlement which increased revenues by approximately $271 million and the implementation of revised Supplemental Security Income ratios which reduced revenues by approximately $83 million). The net effect of these Medicare adjustments was an increase of $188 million to revenues. The net effect of these adjustments (and related expenses) added $170 million to income before income taxes, or $0.22 per diluted share, for the quarter ended March 31, 2012.

Consolidated and same facility revenue per equivalent admission increased 0.9% and 0.8%, respectively, in the first quarter of 2013, compared to the first quarter of 2012. Consolidated and same facility equivalent admissions declined 0.4% and 0.7%, respectively, in the first quarter of 2013, compared to the first quarter of 2012. Consolidated and same facility admissions increased 0.2% and 0.1%, respectively, in the first quarter of 2013, compared to the first quarter of 2012. Consolidated and same facility outpatient surgeries declined 2.9% and 4.3%, respectively, in the first quarter of 2013, compared to the first quarter of 2012. Consolidated and same facility inpatient surgeries declined 2.8% and 2.6%, respectively, in the first quarter of 2013, compared to the first quarter of 2012. Consolidated and same facility emergency department visits increased 3.6% and 3.8%, respectively, in the first quarter of 2013, compared to the first quarter of 2012.

To quantify the total impact of and trends related to uninsured accounts, we believe it is beneficial to view the direct uninsured revenue deductions and provision for doubtful accounts in combination, rather than each separately. At March 31, 2013, our allowance for doubtful accounts represented approximately 93% of the


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Revenue/Volume Trends (continued)

$5.179 billion total patient due accounts receivable balance. The patient due accounts receivable balance represents the estimated uninsured portion of our accounts receivable. A summary of these adjustments to revenues amounts, related to uninsured accounts, for the quarters ended March 31, 2013 and 2012 follows (dollars in millions):

                                           2013       Ratio        2012       Ratio
        Charity care                      $   905         25 %    $   798         25 %
        Uninsured discounts                 1,950         54        1,639         51
        Provision for doubtful accounts       754         21          794         24

        Totals                            $ 3,609        100 %    $ 3,231        100 %

Same facility uninsured admissions increased by 1,688 admissions, or 5.4%, in the first quarter of 2013, compared to the first quarter of 2012. Same facility uninsured admissions in 2012, compared to 2011, increased 11.0% in the fourth quarter of 2012, increased 7.3% in the third quarter of 2012, increased 8.9% in the second quarter of 2012 and increased 11.6% in the first quarter of 2012.

The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters ended March 31, 2013 and 2012 are set forth in the following table.

                                                   2013       2012
                 Medicare                             33 %       34 %
                 Managed Medicare                     14         12
                 Medicaid                              8          9
                 Managed Medicaid                      9          8
                 Managed care and other insurers      29         30
                 Uninsured                             7          7

                                                     100 %      100 %

The approximate percentages of our inpatient revenues, before provision for doubtful accounts, related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters ended March 31, 2013 and 2012 are set forth in the following table.

                                                   2013       2012
                 Medicare                             32 %       34 %
                 Managed Medicare                     11         10
                 Medicaid                              5          6
                 Managed Medicaid                      5          4
                 Managed care and other insurers      46         44
                 Uninsured                             1          2

                                                     100 %      100 %

At March 31, 2013, we had 74 hospitals in the states of Texas and Florida. During the first quarter of 2013, 55% of our admissions and 46% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 61% of our uninsured admissions during the first quarter of 2013.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Revenue/Volume Trends (continued)

We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. We provide indigent care services in several communities in the state of Texas, in affiliation with other hospitals. The state of Texas has been involved in efforts to increase the indigent care provided by private hospitals. As a result of additional indigent care being provided by private hospitals, public hospital districts or counties in Texas have available funds that were previously devoted to indigent care. The public hospital districts or counties are under no contractual or legal obligation to provide such indigent care. The public hospital districts or counties have elected to transfer some portion of these available funds to the state's Medicaid program. Such action is at the sole discretion of the public hospital districts or counties. It is anticipated that these contributions to the state will be matched with federal Medicaid funds. The state then may make supplemental payments to hospitals in the state for Medicaid services rendered. Hospitals receiving Medicaid supplemental payments may include those that are providing additional indigent care services. Our Texas Medicaid revenues included $79 million and $128 million during the first quarters of 2013 and 2012, respectively, of Medicaid supplemental payments. In addition, we receive supplemental payments in several other states. We are aware these supplemental payment programs are currently being reviewed by certain state agencies and some states have made waiver requests to the Centers for Medicare and Medicaid Services ("CMS") to replace their existing supplemental payment programs. It is possible these reviews and waiver requests will result in the restructuring of such supplemental payment programs and could result in the payment programs being reduced or eliminated. In 2011, CMS approved a Medicaid waiver that allows Texas to continue receiving supplemental Medicaid reimbursement while expanding its Medicaid managed care program, thus Texas is operating pursuant to a Waiver Program. However, we cannot predict whether the Texas private supplemental Medicaid reimbursement program will continue or guarantee that revenues recognized for the program will not decline. Because deliberations about these programs are ongoing, we are unable to estimate the financial impact the program structure modifications, if any, may have on our results of operations.

Electronic Health Record Incentive Payments

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments for eligible hospitals and professionals that adopt and meaningfully use certified EHR technology. We recognize income related to Medicare and Medicaid incentive payments using a gain contingency model that is based upon when our eligible hospitals have demonstrated meaningful use of certified EHR technology for the applicable period and the cost report information for the full cost report year that will determine the final calculation of the incentive payment is available.

We recognized $39 million and $55 million of electronic health record incentive income, primarily related to Medicare, during the first quarters of 2013 and 2012, respectively. At March 31, 2013, we have $80 million of deferred EHR incentive income, which represents incentive payments received for which EHR incentive income has not been recognized.

We have incurred and will continue to incur both capital costs and operating expenses in order to implement our certified EHR technology and meet meaningful use requirements. These expenses are ongoing and are projected to continue over all stages of implementation of meaningful use. The timing of recognizing the expenses may not correlate with the receipt of the incentive payments and the recognition of revenues. For the first quarters of 2013 and 2012, respectively, we incurred $26 million and $17 million of operating expenses to implement our certified EHR technology and meet meaningful use.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Electronic Health Record Incentive Payments (continued)

For 2013, we estimate EHR incentive income will be recognized in the range of $200 million to $225 million and that related EHR operating expenses will be in the range of $130 million to $150 million. Actual incentive payments and EHR operating expenses could vary from these estimates due to certain factors such as availability of federal funding for both Medicare and Medicaid incentive payments and our ability to continue to demonstrate meaningful use of certified EHR technology. The failure of our ability to continue to demonstrate meaningful use of EHR technology could have a material, adverse effect on our results of operations.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)



Operating Results Summary

The following is a comparative summary of results from operations for the
quarters ended March 31, 2013 and 2012 (dollars in millions):



                                                               2013                        2012
                                                       Amount         Ratio        Amount         Ratio
Revenues before provision for doubtful accounts        $ 9,194                     $ 9,199
Provision for doubtful accounts                            754                         794

Revenues                                                 8,440         100.0         8,405         100.0

Salaries and benefits                                    3,917          46.4         3,736          44.5
Supplies                                                 1,479          17.5         1,419          16.9
Other operating expenses                                 1,523          18.1         1,493          17.6
Electronic health record incentive income                  (39 )        (0.5 )         (55 )        (0.6 )
Equity in earnings of affiliates                            (8 )        (0.1 )         (11 )        (0.1 )
Depreciation and amortization                              424           5.0           417           4.9
. . .
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