10-K 1 a11-31386_110k.htm FORM 10-K

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

Form 10-K

 

x

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

for the fiscal year ended December 31, 2011

 

OR

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

for the transition period from          to

 

Commission File Number 1-7293

 


 

TENET HEALTHCARE CORPORATION

(Exact name of Registrant as specified in its charter)

 

Nevada

(State of Incorporation)

 

95-2557091

(IRS Employer Identification No.)

 

1445 Ross Avenue, Suite 1400
Dallas, TX 75202
(Address of principal executive offices, including zip code)

(469) 893-2200

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

 

Common stock

 

New York Stock Exchange

 

Series A Junior Participating Preferred Stock

 

New York Stock Exchange

 

6 1¤2% Senior Notes due 2012

 

New York Stock Exchange

 

7 3¤8% Senior Notes due 2013

 

New York Stock Exchange

 

9 7¤8% Senior Notes due 2014

 

New York Stock Exchange

 

9¼% Senior Notes due 2015

 

New York Stock Exchange

 

6 7¤8% Senior Notes due 2031

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

 


 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90. Yes x No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x

 

As of June 30, 2011, there were 478,731,869 shares of common stock, $0.05 par value, outstanding. The aggregate market value of the shares of common stock held by non-affiliates of the Registrant as of June 30, 2011, based on the closing price of the Registrant’s shares on the New York Stock Exchange on that day, was approximately $2,576,016,843. For the purpose of the foregoing calculation only, all directors and the executive officers who were SEC reporting persons of the Registrant as of June 30, 2011 have been deemed affiliates. As of January 31, 2012, there were 409,993,592 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive proxy statement for the 2012 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

17

Item 1B.

Unresolved Staff Comments

23

Item 2.

Properties

23

Item 3.

Legal Proceedings

23

Item 4.

Mine Safety Disclosures

23

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

Item 6.

Selected Financial Data

26

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

79

Item 8.

Financial Statements and Supplementary Data

80

 

Consolidated Financial Statements

83

 

Notes to Consolidated Financial Statements

88

 

Supplemental Financial Information

122

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

123

Item 9A.

Controls and Procedures

123

Item 9B.

Other Information

123

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

124

Item 11.

Executive Compensation

124

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

124

Item 13.

Certain Relationships and Related Transactions, and Director Independence

124

Item 14.

Principal Accounting Fees and Services

124

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

125

 

 

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PART I.

 

ITEM 1. BUSINESS

 

DESCRIPTION OF BUSINESS

 

Tenet Healthcare Corporation is an investor-owned health care services company whose subsidiaries and affiliates own and operate acute care hospitals, ambulatory surgery centers, diagnostic imaging centers and related health care facilities. Unless the context otherwise requires, Tenet and its subsidiaries are referred to herein as “Tenet,” the “Company,” “we” or “us.”

 

Our core business is focused on providing acute care treatment, including inpatient care, intensive care, cardiac care, radiology services and emergency medical treatment, as well as outpatient services. In supporting our core business, we seek to offer superior quality and patient services, to make capital and other investments in our facilities and technology to remain competitive, to recruit and retain physicians, and to negotiate favorable contracts with managed care and other commercial payers.

 

At December 31, 2011, our subsidiaries operated 50 hospitals, including four academic medical centers and a critical access hospital, with a combined total of 13,453 licensed beds, serving primarily urban and suburban communities in 11 states. Of those hospitals, 45 were owned by our subsidiaries and five were owned by third parties and leased by our subsidiaries. In addition, at December 31, 2011, our subsidiaries operated a long-term acute care hospital and owned or leased and operated 32 medical office buildings, all of which were located on, or nearby, our hospital campuses.

 

Our subsidiaries also operated 98 free-standing and provider-based diagnostic imaging centers, ambulatory surgery centers and urgent care centers, as well as one free-standing emergency department, in 12 states at December 31, 2011. In recent years, we have increased our efforts to expand our outpatient services through organic growth and the acquisition of selected outpatient businesses. Historically, our outpatient business has generated significantly higher margins for us than other business lines. By expanding our outpatient business, we expect to increase our profitability over time.

 

Furthermore, we intend to continue expanding our revenue cycle management, health care information management, and patient communications services businesses under our Conifer Health Solutions (“Conifer”) subsidiary by marketing these services to non-Tenet hospitals and other health care-related entities. We are also seeking to develop Conifer’s management services business, which provides network development, utilization management, claims processing and contract negotiation services to physician organizations and hospitals that assume managed care risk. At December 31, 2011, Conifer provided services to more than 300 Tenet and non-Tenet hospitals and other health care organizations. We believe Conifer has the potential over time to generate high margins and improve our results of operations.

 

In addition, our subsidiaries own an interest in a health maintenance organization and operate occupational and rural health care clinics, physician practices, and captive insurance companies. All of these pursuits comprise a minor portion of our business.

 

We are committed to providing the communities our hospitals, outpatient centers and other health care facilities serve with high quality, cost-effective health care while growing our business, increasing our profitability and creating long-term value for our shareholders. Our operating strategies for accomplishing this mission in the complex and competitive health care industry are discussed in detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report. We adjust our strategies as necessary in response to changes in the economic and regulatory climates in which we operate and the results achieved by our various efforts.

 

OPERATIONS

 

Our continuing operations are structured as follows:

 

·                    Our California region includes all of our hospitals in California, as well as our hospital in Nebraska;

 

·                    Our Central region includes all of our hospitals in Missouri, Tennessee and Texas;

 

·                    Our Florida region includes all of our hospitals in Florida; and

 

·                    Our Southern States region includes all of our hospitals in Alabama, Georgia, North Carolina, Pennsylvania and South Carolina.

 



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The regions described above report directly to our president of hospital operations. Major decisions, including capital resource allocations, are made at the consolidated level, not at the regional, market or hospital level.

 

We seek to operate our hospitals in a manner that positions them to compete effectively in an evolving health care environment. From time to time, we also: build new hospitals; make strategic acquisitions of hospitals, outpatient businesses, physician practices, and other health care assets and companies; and enter into partnerships or affiliations with health care businesses – in each case in markets where we believe our operating strategies can improve performance and create shareholder value. During the year ended December 31, 2011, we acquired 15 outpatient centers – four diagnostic imaging centers, a majority interest in one other diagnostic imaging center, three oncology centers, an urgent care center, a majority interest in five ambulatory surgery centers, and a majority interest in one other ambulatory surgery center in which we previously held a minority interest. In 2011, we also acquired 26 physician practice entities. All of these acquisitions were in furtherance of our efforts to expand our outpatient services and increase our outpatient revenues.

 

Our hospitals classified in continuing operations for financial reporting purposes generated in excess of 96% of our net operating revenues before provision for doubtful accounts for all periods presented in our Consolidated Financial Statements. Factors that affect patient volumes and, thereby, our results of operations at our hospitals and related health care facilities include, but are not limited to: (1) the business environment, economic conditions and demographics of local communities; (2) the number of uninsured and underinsured individuals in local communities treated at our hospitals; (3) seasonal cycles of illness; (4) climate and weather conditions; (5) physician recruitment, retention and attrition; (6) advances in technology and treatments that reduce length of stay; (7) local health care competitors; (8) managed care contract negotiations or terminations; (9) any unfavorable publicity about us, which impacts our relationships with physicians and patients; (10) changes in health care regulations; and (11) the timing of elective procedures.

 

Each of our general hospitals offers acute care services, operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories and pharmacies; in addition, most offer intensive care, critical care and/or coronary care units, physical therapy, and orthopedic, oncology and outpatient services. A number of our hospitals also offer tertiary care services such as open-heart surgery, neonatal intensive care and neuroscience. Two of our hospitals — St. Louis University Hospital and Hahnemann University Hospital — offer quaternary care in areas such as heart, liver, kidney and bone marrow transplants. St. Christopher’s Hospital for Children provides tertiary and quaternary pediatric services, including bone marrow and kidney transplants, as well as burn services. Sierra Medical Center and Good Samaritan Medical Center offer gamma-knife brain surgery; and St. Louis University Hospital offers cyberknife radiation therapy for tumors and lesions nearly anywhere in the body, including in the brain, lung, neck and spine, that may have been previously considered inoperable or inaccessible by traditional radiation therapy. In addition, our hospitals will continue their efforts to deliver and develop those outpatient services that can be provided on a quality, cost-effective basis and that we believe will meet the needs of the communities served by the facilities.

 

Many of our hospitals also offer a wide range of clinical research studies, giving patients access to innovative care. We are committed to supporting this innovation, while ensuring that billing compliance and other regulations are followed. Current clinical research programs relate to a wide array of ailments, including cardiovascular disease, pulmonary disease, musculoskeletal disorders, neurological disorders, genitourinary disease and various cancers, as well as medical device studies. By supporting clinical research, our hospitals are actively involved in medical advancements that can lead to improvements in patient safety and clinical care.

 

Each of our acute care hospitals is accredited by the Joint Commission (formerly, the Joint Commission on Accreditation of Healthcare Organizations) or the American Osteopathic Association (in the case of one hospital). With such accreditation, our hospitals are deemed to meet the Medicare Conditions of Participation and are eligible to participate in government-sponsored provider programs, such as the Medicare and Medicaid programs.

 

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The following table lists, by state, the hospitals owned or leased and operated by our subsidiaries as of December 31, 2011:

 

Hospital

 

Location

 

Licensed
Beds

 

Status

 

Alabama

 

 

 

 

 

 

 

 

Brookwood Medical Center

 

Birmingham

 

631

 

 

Owned

 

 

 

 

 

 

 

 

 

 

California

 

 

 

 

 

 

 

 

Desert Regional Medical Center(1)

 

Palm Springs

 

387

 

 

Leased

 

Doctors Hospital of Manteca

 

Manteca

 

73

 

 

Owned

 

Doctors Medical Center

 

Modesto

 

461

 

 

Owned

 

Fountain Valley Regional Hospital & Medical Center

 

Fountain Valley

 

400

 

 

Owned

 

John F. Kennedy Memorial Hospital

 

Indio

 

156

 

 

Owned

 

Lakewood Regional Medical Center

 

Lakewood

 

172

 

 

Owned

 

Los Alamitos Medical Center

 

Los Alamitos

 

167

 

 

Owned

 

Placentia Linda Hospital

 

Placentia

 

114

 

 

Owned

 

San Ramon Regional Medical Center

 

San Ramon

 

123

 

 

Owned

 

Sierra Vista Regional Medical Center

 

San Luis Obispo

 

164

 

 

Owned

 

Twin Cities Community Hospital

 

Templeton

 

122

 

 

Owned

 

 

 

 

 

 

 

 

 

 

Florida

 

 

 

 

 

 

 

 

Coral Gables Hospital

 

Coral Gables

 

245

 

 

Owned

 

Delray Medical Center

 

Delray Beach

 

493

 

 

Owned

 

Good Samaritan Medical Center

 

West Palm Beach

 

333

 

 

Owned

 

Hialeah Hospital

 

Hialeah

 

378

 

 

Owned

 

North Shore Medical Center

 

Miami

 

357

 

 

Owned

 

North Shore Medical Center — FMC Campus

 

Lauderdale Lakes

 

459

 

 

Owned

 

Palm Beach Gardens Medical Center(2)

 

Palm Beach Gardens

 

199

 

 

Leased

 

Palmetto General Hospital

 

Hialeah

 

360

 

 

Owned

 

Saint Mary’s Medical Center

 

West Palm Beach

 

463

 

 

Owned

 

West Boca Medical Center

 

Boca Raton

 

195

 

 

Owned

 

 

 

 

 

 

 

 

 

 

Georgia

 

 

 

 

 

 

 

 

Atlanta Medical Center

 

Atlanta

 

460

 

 

Owned

 

North Fulton Regional Hospital(2)

 

Roswell

 

202

 

 

Leased

 

South Fulton Medical Center

 

East Point

 

338

 

 

Owned

 

Spalding Regional Hospital

 

Griffin

 

160

 

 

Owned

 

Sylvan Grove Hospital(3)

 

Jackson

 

25

 

 

Leased

 

 

 

 

 

 

 

 

 

 

Missouri

 

 

 

 

 

 

 

 

Des Peres Hospital

 

St. Louis

 

143

 

 

Owned

 

St. Louis University Hospital

 

St. Louis

 

356

 

 

Owned

 

 

 

 

 

 

 

 

 

 

Nebraska

 

 

 

 

 

 

 

 

Creighton University Medical Center(4)

 

Omaha

 

334

 

 

Owned

 

 

 

 

 

 

 

 

 

 

North Carolina

 

 

 

 

 

 

 

 

Central Carolina Hospital

 

Sanford

 

137

 

 

Owned

 

Frye Regional Medical Center(2)

 

Hickory

 

355

 

 

Leased

 

 

 

 

 

 

 

 

 

 

Pennsylvania

 

 

 

 

 

 

 

 

Hahnemann University Hospital

 

Philadelphia

 

496

 

 

Owned

 

St. Christopher’s Hospital for Children

 

Philadelphia

 

189

 

 

Owned

 

 

 

 

 

 

 

 

 

 

South Carolina

 

 

 

 

 

 

 

 

Coastal Carolina Hospital

 

Hardeeville

 

41

 

 

Owned

 

East Cooper Medical Center

 

Mount Pleasant

 

140

 

 

Owned

 

Hilton Head Hospital

 

Hilton Head

 

93

 

 

Owned

 

Piedmont Medical Center

 

Rock Hill

 

288

 

 

Owned

 

 

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Hospital

 

Location

 

Licensed
Beds

 

Status

 

Tennessee

 

 

 

 

 

 

 

 

Saint Francis Hospital

 

Memphis

 

519

 

 

Owned

 

Saint Francis Hospital — Bartlett

 

Bartlett

 

100

 

 

Owned

 

 

 

 

 

 

 

 

 

 

Texas

 

 

 

 

 

 

 

 

Centennial Medical Center

 

Frisco

 

118

 

 

Owned

 

Cypress Fairbanks Medical Center

 

Houston

 

181

 

 

Owned

 

Doctors Hospital at White Rock Lake

 

Dallas

 

218

 

 

Owned

 

Houston Northwest Medical Center(5)

 

Houston

 

430

 

 

Owned

 

Lake Pointe Medical Center(6)

 

Rowlett

 

112

 

 

Owned

 

Nacogdoches Medical Center

 

Nacogdoches

 

153

 

 

Owned

 

Park Plaza Hospital

 

Houston

 

444

 

 

Owned

 

Providence Memorial Hospital

 

El Paso

 

508

 

 

Owned

 

Sierra Medical Center

 

El Paso

 

351

 

 

Owned

 

Sierra Providence East Medical Center

 

El Paso

 

110

 

 

Owned

 

 


(1)

Lease expires in 2027.

(2)

The current lease terms for Palm Beach Gardens Medical Center, North Fulton Regional Hospital and Frye Regional Medical Center expire in February 2014, but may be renewed through at least February 2039, in each case subject to certain conditions contained in the respective leases.

(3)

Designated by the Centers for Medicare and Medicaid Services (“CMS”) as a critical access hospital. Although it has not sought to be accredited, the hospital participates in the Medicare and Medicaid programs by otherwise meeting the Medicare Conditions of Participation. The current lease term for this facility expires in December 2016, but may be renewed through December 2046, subject to certain conditions contained in the lease.

(4)

Owned by a limited liability company in which a Tenet subsidiary owned a 74.06% interest at December 31, 2011 and is the managing member.

(5)

Owned by a limited liability company in which a Tenet subsidiary owned an 86.18% interest at December 31, 2011 and is the managing member.

(6)

Owned by a limited liability company in which a Tenet subsidiary owned a 94.59% interest at December 31, 2011 and is the managing member.

 

As of December 31, 2011, the largest concentrations of licensed beds in our hospitals were in Florida (25.9%), Texas (19.5%) and California (17.4%). Strong concentrations of hospital beds within market areas help us contract more successfully with managed care payers, reduce management, marketing and other expenses, and more efficiently utilize resources. However, these concentrations increase the risk that, should any adverse economic, regulatory, environmental or other condition occur in these areas, our overall business, financial condition, results of operations or cash flows could be materially adversely affected. None of our individual hospitals represented more than 5% of our net operating revenues for the year ended December 31, 2011, and only one of our individual hospitals represented more than 5% (approximately 5.8%) of our total assets, excluding goodwill and intercompany receivables, at December 31, 2011.

 

The following table presents the number of hospitals operated by our subsidiaries, as well as the total number of licensed beds at those facilities, at December 31, 2011, 2010 and 2009:

 

 

 

December 31,

 

 

 

2011

 

2010

 

2009

 

Total number of facilities(1)

 

50

 

50

 

51

 

Total number of licensed beds(2)

 

13,453

 

13,428

 

13,601

 

 


(1)              Includes all general hospitals and our critical access facility, as well as one facility at December 31, 2009 that is classified in discontinued operations for financial reporting purposes as of December 31, 2011.

(2)              Information regarding utilization of licensed beds and other operating statistics can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.

 

PROPERTIES

 

Description of Real Property. The locations of our hospitals and the number of licensed beds at each hospital at December 31, 2011 are set forth in the table beginning on page 3. At December 31, 2011, our subsidiaries also operated 32 medical office buildings, all of which were located on, or nearby, our hospital campuses. Of those medical office buildings, 23 were owned by our subsidiaries and 9 were owned by third parties and leased by our subsidiaries.

 

Our corporate headquarters are located in Dallas, Texas. We have other corporate administrative offices in Anaheim, California and Coral Springs, Florida. One of our subsidiaries leases our corporate headquarters space under an operating lease agreement that expires in December 2019. Other subsidiaries lease the space for our offices in Anaheim and Coral Springs under operating lease agreements. We believe that all of our properties, including the administrative and medical office buildings described above, are suitable for their intended purposes.

 

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Obligations Relating to Real Property. As of December 31, 2011, we had approximately $7 million of outstanding loans secured by property and equipment, and we had approximately $25 million of capital lease obligations. In addition, from time to time, we lease real property to third-party developers for the construction of medical office buildings. Under our current practice, the financing necessary to construct the medical office buildings encumbers only the leasehold and not our fee interest in the real estate. In years past, however, we have at times subordinated our fee interest and allowed our property to be pledged as collateral for third-party loans. We have no contractual obligation to make payments on these third-party loans, but our property could be subject to loss in the case of default by the lessee.

 

Regulations Affecting Real Property. We are subject to a number of laws and regulations affecting our use of, and purchase and sale of, real property. Among these are California’s seismic standards, the Americans with Disabilities Act, and various environmental laws and regulations.

 

The State of California has established standards intended to ensure that all hospitals in the state withstand earthquakes and other seismic activity without collapsing or posing the threat of significant loss of life. To date, we have spent a total of approximately $28 million to comply with the requirements under California’s seismic regulations. We do not expect to incur material additional costs, however, because all of our general acute care hospitals in California are now in compliance with the current seismic requirements. In addition to safety standards, over time, hospitals must also meet performance standards meant to ensure that they are generally capable of providing medical services to the public after an earthquake or other disaster. Ultimately, all general acute care hospitals in California must meet these seismic performance standards by 2030 to remain open. We expect to meet California’s seismic performance standards by the 2030 deadline; however, we are unable to estimate the cost of compliance at this time.

 

The Americans with Disabilities Act generally requires that public accommodations, including hospitals and other health care facilities, be made accessible to disabled persons. Through December 31, 2011, we spent approximately $41 million on corrective work to improve disability access at our facilities, and we expect to spend approximately $88 million more on such improvements over the next four years pursuant to the terms of a negotiated consent decree.

 

Our properties are also subject to various federal, state and local environmental laws, rules and regulations, including with respect to asbestos abatement and the treatment of underground storage tanks, among other matters. We believe it is unlikely that the cost of complying with such laws, rules and regulations will have a material effect on our future capital expenditures, results of operations or competitive position.

 

MEDICAL STAFF AND EMPLOYEES

 

General. Our hospitals are staffed by licensed physicians who have been admitted to the medical staffs of individual hospitals. Under state laws and other licensing standards, hospital medical staffs are generally self-governing organizations subject to ultimate oversight by the hospital’s local governing board. Members of the medical staffs of our hospitals also often serve on the medical staffs of hospitals not owned by us. Members of our medical staffs are free to terminate their affiliation with our hospitals or admit their patients to competing hospitals at any time. Although we operate some physician practices and, where permitted by law, employ some physicians, the overwhelming majority of the physicians who practice at our hospitals are not our employees. However, nurses, therapists, lab technicians, facility maintenance workers and the administrative staffs of hospitals normally are our employees. We are subject to federal minimum wage and hour laws and various state labor laws, and maintain a number of different employee benefit plans.

 

Our operations depend on the efforts, abilities and experience of the physicians on the medical staffs of our hospitals, most of whom have no contractual relationship with us. It is essential to our ongoing business that we attract and retain an appropriate number of quality physicians in all specialties on our medical staffs. Although we had a net overall gain in physicians added to our medical staffs in each of the last three years, in some of our markets, physician recruitment and retention are still affected by a shortage of physicians in certain sought-after specialties and the difficulties that physicians experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Other issues facing physicians, such as proposed decreases in Medicare payments, are causing them to consider alternatives, including leaving private practice for employed physician arrangements, relocating their practices or retiring sooner than expected.

 

We continue to take steps to successfully attract and retain key employees, qualified physicians and other health care professionals. One of our initiatives is our Physician Relationship Program, which is centered on understanding the needs of physicians who admit patients both to our hospitals and to our competitors’ hospitals and responding to those needs with changes and improvements in our hospitals and operations. In general, the loss of some or all of our key employees or the

 

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inability to attract or retain sufficient numbers of qualified physicians and other health care professionals could have a material adverse effect on patient volumes and, thereby, our business, financial condition, results of operations or cash flows.

 

The number of our employees (of which approximately 24% were part-time employees) at December 31, 2011 was as follows:

 

Hospitals, outpatient centers and other related health care facilities(1)

 

56,961

 

Administrative offices

 

744

 

Total

 

57,705

 

 


(1)              Includes employees whose employment related to the operations of our general hospitals, critical access facility, long-term acute care hospital, ambulatory surgery centers, diagnostic imaging centers, occupational and rural health care clinics, physician practices, Conifer collection agency subsidiary and other health care operations.

 

At December 31, 2011, the largest concentrations of our employees (excluding employees in our administrative offices) were in those states where we had the largest concentrations of licensed hospital beds, as shown in the table below:

 

 

 

% of Employees

 

% of Licensed Beds

 

Florida

 

21.3

%

25.9

%

California

 

20.6

%

17.4.

%

Texas

 

16.5

%

19.5

%

 

Union Activity and Labor Relations. As of December 31, 2011, approximately 25% of our employees were represented by various labor unions. These employees — primarily registered nurses and service and maintenance workers — were located at 22 of our hospitals, the majority of which are in California and Florida. We are in the process of renegotiating the collective bargaining agreements for all of the facilities whose contracts have expired and negotiating new contracts where employees chose union representation in 2011. At this time, we are unable to predict the outcome of the negotiations, but increases in salaries, wages and benefits could result from these agreements. Moreover, there is a possibility that strikes could occur during the negotiation process, which could increase our labor costs and have an adverse effect on our patient admissions and net operating revenues. Organizing activities by labor unions and certain potential changes in federal labor laws and regulations could increase the likelihood of employee unionization in the future.

 

Shortage of Experienced Nurses and Mandatory Nurse-Staffing Ratios. In addition to union activity, factors that adversely affect our labor costs include the nationwide shortage of experienced nurses and the enactment of state laws regarding nurse-staffing ratios. Like others in the health care industry, we continue to experience a shortage of experienced nurses in certain key specialties and geographic areas. In addition, state-mandated nurse-staffing ratios in California affect not only our labor costs, but, if we are unable to hire the necessary number of experienced nurses to meet the required ratios, they may also cause us to limit patient admissions with a corresponding adverse effect on our net operating revenues. We continually monitor our nurse-staffing ratios in California in an effort to achieve full compliance with the state-mandated nurse-staffing ratios there. Nurse-staffing ratio legislation has been proposed in, but not yet enacted by, Congress and other states besides California in which we operate hospitals, including Florida and Pennsylvania. In 2009, Texas passed the Hospital Safe Staffing Law, which mandates the creation of nurse staffing committees at Texas hospitals and outlines each hospital’s responsibility to adopt, implement and enforce an official nurse staffing plan, but does not mandate staffing ratios. Also in 2009, the Missouri Department of Health and Senior Services adopted hospital nursing services regulations that are similar to the Texas requirements with respect to nurse staffing.

 

We cannot predict the degree to which we will be affected by the future availability or cost of nursing personnel, but we expect to continue to experience salary, wage and benefit pressures created by the shortage of experienced nurses throughout the country and state-mandated nurse-staffing ratios, particularly in California. In response, we have increased our efforts to recruit and retain experienced nurses and also to address workforce development with local schools of nursing. We expect that 24 of our hospitals will participate in the VersantTM RN Residency Program in 2012 by providing an 18- to 22-week residency program for new nursing school graduates to help ease the transition from student to professional practicing nurse, give nurses evidence-based experience and skills needed to increase their competency and confidence, reduce first-year nurse turnover and decrease the use of contract labor.

 

COMPETITION

 

Health Care Services. In general, competition among health care providers occurs primarily at the local level. A hospital’s position within the geographic area in which it operates is affected by a number of competitive factors, including, but

 

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not limited to: (1) the scope, breadth and quality of services a hospital offers to its patients and physicians; (2) the number, quality and specialties of the physicians who admit and refer patients to the hospital; (3) nurses and other health care professionals employed by the hospital or on the hospital’s staff; (4) the hospital’s reputation; (5) its managed care contracting relationships; (6) its location and the location and number of competitive facilities and other health care alternatives; (7) the physical condition of the hospital’s buildings and improvements; (8) the quality, age and state-of-the-art of its medical equipment; (9) its parking or proximity to public transportation; (10) the length of time it has been a part of the community; and (11) the charges for its services.

 

Overall, our hospitals, outpatient centers and other health care businesses operate in competitive environments. Generally, other hospitals and outpatient centers in the local communities we serve provide services similar to those we offer, and, in some cases, competing facilities are more established than ours. We also face increased competition from specialty hospitals (some of which are physician-owned) and unaffiliated freestanding outpatient centers for market share in high margin services and for quality physicians and personnel. Furthermore, some of the hospitals that compete with our hospitals are owned by government agencies or not-for-profit organizations. These tax-exempt competitors may have certain financial advantages not available to our facilities, such as endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property and income taxes. In addition, in certain markets in which we operate, large teaching hospitals provide highly specialized facilities, equipment and services that may not be available at our hospitals.

 

Another major factor in the competitive position of a hospital is the ability to negotiate service contracts with managed care plans. Our future success depends, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts on terms favorable to us. Other health care providers may impact our ability to enter into acceptable managed care contractual arrangements or negotiate increases in our reimbursement and other favorable terms and conditions. For example, some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us.

 

Moreover, state laws that require findings of need for construction and expansion of health care facilities or services (as described in “Health Care Regulation and Licensing — Certificate of Need Requirements” below) may also have the effect of restricting competition. In addition, in those states that do not have certificate of need requirements or that do not require review of health care capital expenditure amounts below a relatively high threshold, competition in the form of new services, facilities and capital spending is more prevalent.

 

Our strategies are designed to help our hospitals remain competitive. Broadly speaking, we attract physicians by providing high-quality care to our patients and otherwise creating an environment within which physicians prefer to practice. One of our specific initiatives is our Physician Relationship Program, which is centered on understanding the needs of physicians who admit patients both to our hospitals and to our competitors’ hospitals and responding to those needs with changes and improvements in our hospitals and operations. We have targeted capital spending in order to address specific needs or growth opportunities of our hospitals, which is expected to have a positive impact on their volumes. We have also sought to include all of our hospitals and an increased number of our affiliated physicians in the affected geographic area or nationally when negotiating new managed care contracts, which should result in additional volumes at facilities that were not previously a part of such managed care networks. In addition, we have completed clinical service line market demand analyses and profitability assessments to determine which services are highly valued that can be emphasized and marketed to improve our operating results. This Targeted Growth Initiative (“TGI”) has resulted in some reductions in unprofitable service lines in several locations. However, the de-emphasis or elimination of certain unprofitable service lines as a result of our TGI analyses will allow us to focus more resources on services that are in higher demand and are more profitable. We have also increased our focus on operating outpatient services with improved accessibility and more convenient service for patients, as well as increased predictability and efficiency for physicians.

 

Our Commitment to Quality and Medicare Performance Improvement initiatives are further helping position us competitively. We continue to work with physicians to implement the most current evidence-based medicine techniques to improve the way we provide care, while using labor management tools and supply chain initiatives to reduce variable costs. We believe the use of these practices will promote the most effective and efficient utilization of resources and result in shorter lengths of stay, as well as reductions in redundant ancillary services and readmissions for hospitalized patients. As a result of our efforts, our hospitals have improved substantially in quality metrics reported by the government and have been recognized by several managed care companies for their quality of care. Leveraging off of these initiatives, we expect to benefit over time from provisions in the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (“Affordable Care Act”) that tie certain payments to quality measures, establish a value-based purchasing system, and adjust hospital payment rates based on hospital-acquired conditions and hospital readmissions. In general, we believe that quality of care improvements may have the effect of reducing costs, increasing payments from Medicare and certain managed care payers for our services, and increasing physician and patient satisfaction, which may potentially improve our volumes.

 

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Further, each hospital has a local governing board, consisting primarily of community members and physicians, that develops short-term and long-term plans for the hospital to foster a desirable medical environment. Each local governing board also reviews and approves, as appropriate, actions of the medical staff, including staff appointments, credentialing, peer review and quality assurance. While physicians may terminate their association with our hospitals at any time, we believe that by striving to maintain and improve the quality of care at our hospitals and by maintaining ethical and professional standards, we will attract and retain qualified physicians with a variety of specialties.

 

Revenue Cycle Management Solutions. Our Conifer subsidiary faces competition from existing participants and new entrants to the revenue cycle management market (including software vendors and other technology-supported revenue cycle management outsourcing companies, traditional consultants and information technology outsourcers), as well as from the staffs of hospitals that handle these processes internally. To be successful, Conifer must respond more quickly and effectively than its competitors to new or changing opportunities, technologies, standards, regulations or customer requirements. Moreover, existing or new competitors may introduce technologies or services that render Conifer’s technologies or services obsolete or less marketable. Even if Conifer’s technologies and services are more effective than the offerings of its competitors, current or potential customers might prefer competitive technologies or services to Conifer’s technologies and services. Furthermore, increased competition may result in pricing pressures, which could negatively impact Conifer’s margins, growth rate or market share.

 

HEALTH CARE REGULATION AND LICENSING

 

AFFORDABLE CARE ACT

 

The Affordable Care Act, which was signed into law in March 2010, is expected to result in sweeping changes across the health care industry. The primary goal of this comprehensive legislation is to extend health coverage to approximately 32 million uninsured legal U.S. residents through a combination of public program expansion and private sector health insurance reforms. To fund the expansion of insurance coverage, the legislation contains measures designed to promote quality and cost efficiency in health care delivery and to generate budgetary savings in the Medicare and Medicaid programs. We are unable to predict with certainty the full impact of the Affordable Care Act on our future revenues and operations at this time due to the law’s complexity, the limited amount of implementing regulations and interpretive guidance, gradual or potentially delayed implementation, the pending U.S. Supreme Court review, and possible amendment. However, we expect that several provisions of the Affordable Care Act, including those described below, will have a material effect on our business.

 

Public Program Reforms. The Affordable Care Act expands eligibility under existing Medicaid programs to non-pregnant adults with incomes up to 138% of the federal poverty level beginning in 2014. Further, the law permits states to create federally funded, non-Medicaid plans for low-income residents not eligible for Medicaid. However, the Affordable Care Act also contains a number of provisions designed to reduce Medicare and Medicaid program spending by significant amounts, including:

 

·                    negative adjustments to the annual input price index, or “market basket,” updates for Medicare’s inpatient, outpatient, long-term acute and inpatient rehabilitation prospective payment systems, which began in 2010, as well as additional “productivity adjustments,” which began in 2011; and

 

·                    reductions to Medicare and Medicaid disproportionate share hospital payments beginning in 2013 as the number of uninsured individuals declines.

 

Any reductions to our reimbursement under the Medicare and Medicaid programs by the Affordable Care Act could adversely affect our business and results of operations to the extent such reductions are not offset by increased revenues from providing care to previously uninsured individuals.

 

In addition, the Affordable Care Act contains a number of provisions intended to improve the quality and efficiency of medical care provided to Medicare and Medicaid beneficiaries. For example, the legislation expands payment penalties based on a hospital’s rates of hospital-acquired conditions (“HACs”). Currently, Medicare no longer assigns an inpatient hospital discharge to a higher paying Medicare severity-adjusted diagnosis-related group if a selected HAC was not present on admission. Effective July 1, 2011, the Affordable Care Act likewise prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat HACs. Beginning in federal fiscal year (“FFY”) 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will also receive a 1% reduction in Medicare payment rates. For discharges occurring during FFYs beginning on or after October 1, 2012, hospitals with excessive readmissions for certain conditions will receive reduced Medicare payments for all inpatient admissions.

 

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Separately, under a Medicare value-based purchasing program that will be launched in FFY 2013, hospitals that satisfy certain performance standards will receive increased payments for discharges during the following fiscal year. These payments will be funded by decreases in payments to all hospitals for inpatient services. For discharges occurring during FFY 2014 and after, the performance standards must assess hospital efficiency, including Medicare spending per beneficiary. In addition, the Affordable Care Act directed CMS to launch a national pilot program to study the use of bundled payments to hospitals, physicians and post-acute care providers relating to a single admission to promote collaboration and alignment on quality and efficiency improvement; implementation of the pilot program is currently ongoing through the newly established Center for Medicare and Medicaid Innovation within CMS, which has the authority to develop and test new payment methodologies designed to improve quality of care and lower costs.

 

The Affordable Care Act also contains provisions relating to recovery audit contractors (“RACs”), which are third-party organizations under contract with CMS that identify underpayments and overpayments under the Medicare program and recoup any overpayments on behalf of the government. The Affordable Care Act expanded the RAC program’s scope to include Medicaid claims by requiring all states to enter into contracts with RACs by December 31, 2010.

 

Health Insurance Market Reforms. The Affordable Care Act contains provisions, which do not become effective until 2014, requiring individuals to obtain, and employers to provide, insurance coverage. In addition, the law requires states to establish a health insurance exchange. The Affordable Care Act also establishes a number of health insurance market reforms, including bans on lifetime limits and pre-existing condition exclusions, new benefit mandates, and increased dependent coverage. Specifically, group health plans and health insurance issuers offering group or individual coverage (“Plans”):

 

·                    may not establish lifetime limits or, beginning January 1, 2014, annual limits on the dollar value of benefits;

 

·                    may not rescind coverage of an enrollee, except in instances where the individual has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of material fact;

 

·                    must reimburse hospitals for emergency services provided to enrollees without prior authorization and without regard to whether a participating provider contract is in place; and

 

·                    must continue to make dependent coverage available to unmarried dependents until age 26 (coverage for the dependents of unmarried adult children is not required) effective for health plan policy years beginning on or after September 23, 2010 (for Plans that offer dependent coverage).

 

It is not clear what impact, if any, the increased obligations on managed care payers and other payers imposed by the Affordable Care Act will have on our commercial managed care volumes and payment rates.

 

The Affordable Care Act also contains a number of other additional provisions, including provisions relating to the Medicare and Medicaid anti-kickback and anti-fraud and abuse amendments, Section 1877 of the Social Security Act (commonly referred to as the “Stark” law), and qui tam or “whistleblower” actions, each of which is described in detail below, as well as provisions regarding:

 

·                    the creation of an Independent Payment Advisory Board that will make recommendations to Congress regarding additional changes to provider payments and other aspects of the nation’s health care system; and

 

·                    new taxes on manufacturers and distributors of pharmaceuticals and medical devices used by our hospitals, as well as a requirement that manufacturers file annual reports of payments made to physicians.

 

Many of the law’s provisions will not take effect for months or several years, while others became effective immediately or have become effective more recently. Many provisions also will require the federal government and individual state governments to interpret and implement the new requirements. In addition, the Affordable Care Act remains the subject of significant debate and efforts to repeal, block or amend the law by Congress and many state legislatures. Finally, a number of state attorneys general and other parties have filed legal challenges to the Affordable Care Act seeking to block its implementation on constitutional grounds. Some federal court judges have issued rulings declaring all or key parts of the Affordable Care Act unconstitutional, including the mandate that individuals purchase insurance, while several other federal courts have upheld the law. In light of the disagreement among the lower federal courts, in November 2011, the U.S. Supreme Court agreed to review the law and issue a final ruling, which is expected in June 2012, on its constitutionality. The Court could uphold the law, strike down some or all or its provisions, or determine that a definitive decision is premature at this time.

 

Because of the many variables involved, we are unable to predict with certainty the net effect on us of the reductions in Medicare and Medicaid spending, the expected increase in revenues and expected decrease in bad debt expense from providing

 

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care to previously uninsured and underinsured individuals, and numerous other provisions in the law that may affect us. In addition, we are unable to predict the future course of federal, state and local health care regulation or legislation, including Medicare and Medicaid statutes and regulations. Further changes in the regulatory framework affecting health care providers could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

ANTI-KICKBACK AND SELF-REFERRAL REGULATIONS

 

Medicare and Medicaid anti-kickback and anti-fraud and abuse amendments codified under Section 1128B(b) of the Social Security Act (the “Anti-kickback Statute”) prohibit certain business practices and relationships that might affect the provision and cost of health care services payable under the Medicare and Medicaid programs and other government programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid for by such programs. The Affordable Care Act amended the Anti-kickback Statute to provide that knowledge of the law or the intent to violate the law is not required. Sanctions for violating the Anti-kickback Statute include criminal and civil penalties, as well as fines and possible exclusion from government programs, such as Medicare and Medicaid. In addition, under the Affordable Care Act, submission of a claim for services or items generated in violation of the Anti-kickback Statute constitutes a false or fraudulent claim and may be subject to additional penalties under the federal False Claims Act (“FCA”). Many states have statutes similar to the federal Anti-kickback Statute, except that the state statutes usually apply to referrals for services reimbursed by all third-party payers, not just federal programs. In addition, it is a violation of the federal Civil Monetary Penalties Law to offer or transfer anything of value to Medicare or Medicaid beneficiaries that is likely to influence their decision to obtain covered goods or services from one provider or service over another.

 

The federal government has also issued regulations that describe some of the conduct and business relationships that are permissible under the Anti-kickback Statute. These regulations are often referred to as the “Safe Harbor” regulations. The fact that certain conduct or a given business arrangement does not meet a Safe Harbor does not necessarily render the conduct or business arrangement illegal under the Anti-kickback Statute. Rather, such conduct and business arrangements may be subject to increased scrutiny by government enforcement authorities and should be reviewed on a case-by-case basis.

 

In addition to addressing other matters, as discussed below, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) also amended Title XI (42 U.S.C. Section 1301 et seq.) to broaden the scope of fraud and abuse laws to include all health plans, whether or not payments under such health plans are made pursuant to a federal program.

 

The Stark law generally restricts referrals by physicians of Medicare or Medicaid patients to entities with which the physician or an immediate family member has a financial relationship, unless one of several exceptions applies. The referral prohibition applies to a number of statutorily defined “designated health services,” such as clinical laboratory, physical therapy, radiology, and inpatient and outpatient hospital services. The exceptions to the referral prohibition cover a broad range of common financial relationships. These statutory, and the subsequent regulatory, exceptions are available to protect certain permitted employment relationships, relocation arrangements, leases, group practice arrangements, medical directorships, and other common relationships between physicians and providers of designated health services, such as hospitals. A violation of the Stark law may result in a denial of payment, required refunds to patients and the Medicare program, civil monetary penalties of up to $15,000 for each violation, civil monetary penalties of up to $100,000 for “sham” arrangements, civil monetary penalties of up to $10,000 for each day that an entity fails to report required information, and exclusion from participation in the Medicare and Medicaid programs and other federal programs. In addition, the submission of a claim for services or items generated in violation of the Stark law may constitute a false or fraudulent claim, and thus be subject to additional penalties under the FCA. Many states have adopted self-referral statutes similar to the Stark Law, some of which extend beyond the related state Medicaid program to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care. Our participation in and development of joint ventures and other financial relationships with physicians could be adversely affected by the Stark law and similar state enactments.

 

The Affordable Care Act also made changes to the “whole hospital” exception in the Stark law, effectively preventing new physician-owned hospitals after March 23, 2010 and limiting the capacity and amount of physician ownership in existing physician-owned hospitals. As revised, the Stark law prohibits physicians from referring Medicare patients to a hospital in which they have an ownership or investment interest unless the hospital has physician ownership and a Medicare provider agreement as of March 23, 2010 (or, for those hospitals under development at the time of the Affordable Care Act’s enactment, as of December 31, 2010). A physician-owned hospital that meets these requirements will still be subject to restrictions that limit the hospital’s aggregate physician ownership and, with certain narrow exceptions for hospitals with a high percentage of Medicaid patients, prohibit expansion of the number of operating rooms, procedure rooms or beds. The legislation also subjects a physician-owned hospital to reporting requirements and extensive disclosure requirements on the hospital’s website and in any public advertisements.

 

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In accordance with our ethics and compliance program, which is described in detail under “Compliance and Ethics” below, we have policies and procedures in place concerning compliance with the Anti-kickback Statute and the Stark law, among others. In addition, our ethics and compliance, law and audit services departments systematically review a substantial number of our arrangements with referral sources to determine the extent to which they comply with our policies and procedures and with the Anti-kickback Statute, the Stark law and similar state statutes.

 

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT

 

Title II, Subtitle F of the Health Insurance Portability and Accountability Act mandates the adoption of specific standards for electronic transactions and code sets that are used to transmit certain types of health information. HIPAA’s objective is to encourage efficiency and reduce the cost of operations within the health care industry. To protect the information transmitted using the mandated standards and the patient information used in the daily operations of a covered entity, HIPAA also sets forth federal rules protecting the privacy and security of protected health information (“PHI”). The privacy and security regulations address the use and disclosure of individually identifiable health information and the rights of patients to understand and control how their information is used and disclosed. The law provides both criminal and civil fines and penalties for covered entities that fail to comply with HIPAA.

 

To receive reimbursement from CMS for electronic claims, health care providers must use HIPAA’s electronic data transmission (transaction and code set) standards when transmitting certain health care information electronically. Our electronic data transmissions are compliant with current standards. In January 2009, CMS published a final rule changing the formats used for certain electronic transactions and requiring the use of updated standard code sets for certain diagnoses and procedures known as ICD-10 code sets. At this time, use of the ICD-10 code sets is not mandatory until October 1, 2013, and CMS has announced it is considering delaying that date. Nonetheless, we have begun modifying our payment systems and processes to prepare for ICD-10 implementation. Although use of the ICD-10 code sets will require significant administrative changes, we believe that the cost of compliance with these regulations has not had and is not expected to have a material adverse effect on our business, financial condition, results of operations or revenues. However, we may experience a short-term adverse impact on our cash flows due to claims processing delays related to payer implementation of the new code sets. Furthermore, the Affordable Care Act requires HHS to adopt standards for additional electronic transactions and to establish operating rules to promote uniformity in the implementation of each standardized electronic transaction.

 

All covered entities, including those we operate, are also required to comply with the privacy and security requirements of HIPAA. We are in material compliance with the privacy and security regulations. Further, all covered entities, including those we operate, have been assigned unique 10-digit numeric identifiers and otherwise currently comply with the National Provider Identifier requirements of HIPAA.

 

We have developed a comprehensive set of policies and procedures in our efforts to comply with HIPAA, and similar state privacy laws, under the guidance of our ethics and compliance department. Hospital and Conifer compliance officers and information security officers are responsible for implementing and monitoring compliance with our HIPAA privacy and security policies and procedures at our hospitals and Conifer. We have also created an internal web-based HIPAA training program, which is mandatory for all employees. Based on existing regulations and our experience with HIPAA to this point, we continue to believe that the ongoing costs of complying with HIPAA will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

In May 2011, the Office for Civil Rights of the U.S. Department of Health and Human Services (“HHS”) proposed new regulations to implement changes to the HIPAA requirements set forth in the Health Information Technology for Economic and Clinical Health (“HITECH”) Act that state that covered entities and business associates must account for disclosures of PHI to carry out treatment, payment and health care operations if such disclosures are through an electronic health record. The proposed regulations seek to expand the scope of the requirements under the HITECH Act and create a new patient right to an “access report,” which would be required to list every person who has accessed, for any reason, PHI about the individual contained in any electronic designated record set. Because our hospitals currently utilize multiple, independent modules that may meet the definition of “electronic designated record set,” our ability to produce an access report that satisfies the proposed regulatory requirements would likely require new technology solutions to map across those multiple record sets. It is our understanding that many providers have expressed significant concerns to CMS regarding the access report requirement created by the proposed rule. Because we cannot predict the requirements of the final rule on this topic, we are unable to estimate the costs of compliance, if any, at this time.

 

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GOVERNMENT ENFORCEMENT EFFORTS AND QUI TAM LAWSUITS

 

Both federal and state government agencies continue heightened and coordinated civil and criminal enforcement efforts against the health care industry. The operational mission of the Office of Inspector General (“OIG”) of HHS is to protect the integrity of the Medicare and Medicaid programs and the well-being of program beneficiaries by: detecting and preventing waste, fraud and abuse; identifying opportunities to improve program economy, efficiency and effectiveness; and holding accountable those who do not meet program requirements or who violate federal laws. The OIG carries out its mission by conducting audits, evaluations and investigations and, when appropriate, imposing civil monetary penalties, assessments and administrative sanctions. Although we have extensive policies and procedures in place to facilitate compliance in all material respects with the laws, rules and regulations affecting the health care industry, if a determination is made that we were in material violation of such laws, rules or regulations, our business, financial condition, results of operations or cash flows could be materially adversely affected.

 

Health care providers are also subject to qui tam or “whistleblower” lawsuits under the federal False Claims Act, which allows private individuals to bring actions on behalf of the government, alleging that a hospital or health care provider has defrauded a government program, such as Medicare or Medicaid. If the government intervenes in the action and prevails, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties for each false claim submitted to the government. As part of the resolution of a qui tam case, the party filing the initial complaint may share in a portion of any settlement or judgment. If the government does not intervene in the action, the qui tam plaintiff may continue to pursue the action independently. There are many potential bases for liability under the FCA. Liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government. The FCA defines the term “knowingly” broadly. Though simple negligence will not give rise to liability under the FCA, submitting a claim with reckless disregard to its truth or falsity constitutes a “knowing” submission under the FCA and, therefore, will qualify for liability. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by, among other things, creating liability for knowingly and improperly avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers. Under the Affordable Care Act, the knowing failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later, constitutes a violation of the FCA. Further, the Affordable Care Act expands the scope of the FCA to cover payments in connection with the new health insurance exchanges to be created by the legislation, if those payments include any federal funds. Qui tam actions can also be filed under certain state false claims laws if the fraud involves Medicaid funds or funding from state and local agencies. Like other companies in the health care industry, we are subject to qui tam actions from time to time; however, we are unable to predict the future impact of such actions on our business, financial condition, results of operations or cash flows.

 

HEALTH CARE FACILITY LICENSING REQUIREMENTS

 

In order to maintain their operating licenses, health care facilities must comply with strict governmental standards concerning medical care, equipment and cleanliness. Various licenses and permits also are required in order to dispense narcotics, operate pharmacies, handle radioactive materials and operate certain equipment. Our health care facilities hold all required governmental approvals, licenses and permits material to the operation of their business.

 

UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE

 

In addition to certain statutory coverage limits and exclusions, federal laws and regulations, specifically the Medicare Conditions of Participation, generally require health care providers, including hospitals that furnish or order health care services that may be paid for under the Medicare program or state health care programs, to ensure that claims for reimbursement are for services or items that are (1) provided economically and only when, and to the extent, they are medically reasonable and necessary, (2) of a quality that meets professionally recognized standards of health care, and (3) supported by appropriate evidence of medical necessity and quality. The Social Security Act established the Utilization and Quality Control Peer Review Organization program, now known as the Quality Improvement Organization (“QIO”) program, to promote the effectiveness, efficiency, economy and quality of services delivered to Medicare beneficiaries and to ensure that those services are reasonable and necessary. CMS administers the QIO program through a network of QIOs that work with consumers, physicians, hospitals and other caregivers to refine care delivery systems to ensure patients receive the appropriate care at the appropriate time, particularly among underserved populations. The QIO program also safeguards the integrity of the Medicare trust fund by reviewing Medicare patient admissions, treatments and discharges, and ensuring payment is made only for medically necessary services, and investigates beneficiary complaints about quality of care. The QIOs have the authority to deny payment for services provided and recommend to HHS that a provider that is in substantial noncompliance with certain standards be excluded from participating in the Medicare program.

 

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Medical and surgical services and practices are extensively supervised by committees of staff doctors at each of our health care facilities, are overseen by each facility’s local governing board, the members of which primarily are community members and physicians, and are reviewed by our clinical quality personnel. The local hospital governing board also helps maintain standards for quality care, develop short-term and long-range plans, and establish, review and enforce practices and procedures, as well as approves the credentials, disciplining and, if necessary, the termination of privileges of medical staff members.

 

CERTIFICATE OF NEED REQUIREMENTS

 

Some states require state approval for construction, expansion and closure of health care facilities, including findings of need for additional or expanded health care facilities or services. Certificates of need, which are issued by governmental agencies with jurisdiction over health care facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services, and certain other matters. As of December 31, 2011, we operated hospitals in seven states that require a form of state approval under certificate of need programs applicable to those hospitals. We are unable to predict whether we will be required or able to obtain any additional certificates of need in any jurisdiction where they are required, or if any jurisdiction will eliminate or alter its certificate of need requirements in a manner that will increase competition and, thereby, affect our competitive position. In those states that do not have certificate of need requirements or that do not require review of health care capital expenditure amounts below a relatively high threshold, competition in the form of new services, facilities and capital spending is more prevalent.

 

ENVIRONMENTAL MATTERS

 

Our health care operations are subject to a number of federal, state and local environmental laws, rules and regulations that govern, among other things, our disposal of solid waste, as well as our use, storage, transportation and disposal of hazardous and toxic materials (including radiological materials). Our operations also generate medical waste that must be disposed of in compliance with laws and regulations that vary from state to state. In addition, although we are not engaged in manufacturing or other activities that produce meaningful levels of greenhouse gas emissions, our operating expenses could be adversely affected if legal and regulatory developments related to climate change or other initiatives result in increased energy or other costs. We could also be affected by climate change and other environmental issues to the extent such issues adversely affect the general economy or result in severe weather or climate change events affecting the communities in which our facilities are located. At this time, based on current climate conditions and our assessment of existing and pending environmental rules and regulations, as well as treaties and international accords relating to climate change, we do not believe that the costs of complying with environmental laws and regulations, including regulations relating to climate change issues, will have a material adverse effect on our future capital expenditures, results of operations or cash flows.

 

Consistent with our commitment to meet the highest standards of corporate responsibility, we have formed a sustainability committee consisting of corporate and hospital leaders to regularly evaluate our environmental outcomes and share best practices among our hospitals and other facilities. In 2011, we published our first sustainability report, using the industry-standard Global Reporting Initiative framework. In addition, we are a sponsor of the Healthier Hospitals Initiative and will work with each of our hospitals in adopting the initiative’s agenda, which focuses on improvements in (1) energy consumption, (2) waste, (3) safe chemicals and (4) purchasing. We are committed to report the results of our sustainability efforts on an annual basis.

 

COMPLIANCE AND ETHICS

 

General. Our ethics and compliance department maintains our multi-faceted, values-based ethics and compliance program, which is designed to (1) help staff in our corporate and Conifer offices, hospitals, outpatient centers and physician practices meet or exceed applicable standards established by federal and state laws and regulations, as well as industry practice, and (2) monitor and raise awareness of ethical issues among employees and others, and stress the importance of understanding and complying with our Standards of Conduct. The ethics and compliance department operates with independence — it has its own operating budget; it has the authority to hire outside counsel, access any Tenet document and interview any of our personnel; and our chief compliance officer reports directly to the quality, compliance and ethics committee of our board of directors.

 

Program Charter. Following the expiration of our five-year Corporate Integrity Agreement (the “CIA”) with the OIG on September 27, 2011, the quality, compliance and ethics committee of our board of directors approved an updated Quality, Compliance and Ethics Program Charter intended to continue certain of the safeguards implemented by the CIA and, among other things:

 

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·                    support and maintain our present and future responsibilities with regard to participation in federal health care programs; and

 

·                    further our goals of (1) fostering and maintaining the highest ethical standards among all employees, officers and directors, physicians practicing at Tenet facilities and contractors that furnish health care items or services, and (2) valuing our compliance with all state and federal laws and regulations as a foundation of our corporate philosophy.

 

The primary focus of our quality, compliance and ethics program is compliance with the requirements of Medicare, Medicaid and other federally funded health care programs. Pursuant to the terms of the charter, our ethics and compliance department is responsible for the following activities: (1) annually assessing, critiquing and (as appropriate) drafting and distributing company policies and procedures; (2) developing, providing and tracking ethics training for all employees, directors, contractors and agents; (3) developing, providing and tracking job-specific training to those who work in clinical quality, coding, billing, cost reporting and referral source arrangements; (4) developing, providing and tracking annual training on ethics and clinical quality oversight to the members of each hospital governing board; (5) creating and disseminating the company’s Standards of Conduct and obtaining certifications of adherence to the Standards of Conduct as a condition of employment; (6) maintaining and promoting Tenet’s Ethics Action Line, which allows confidential reporting of issues on an anonymous basis and emphasizes Tenet’s no retaliation policy; (7) responding to and resolving all compliance-related issues that arise from the Ethics Action Line and compliance reports received from our facilities, hospital compliance officers or any other source; (8) ensuring that appropriate corrective and disciplinary actions are taken when non-compliant conduct or improper contractual relationships are identified; (9) monitoring and measuring the Company’s adherence to all applicable Tenet policies and legal and regulatory requirements related to federal health care programs; (10) directing an annual screening of individuals for exclusion from federal health care program participation as required by federal regulations; (11) maintaining a database of all arrangements involving the payment of anything of value between Tenet and any physician or other actual or potential source of health care business or referrals to or from Tenet; and (12) overseeing annual audits of clinical quality, referral source arrangements, outliers, charging, coding, billing and other compliance risk areas as may be identified from time to time.

 

Standards of Conduct. All of our employees, including our chief executive officer, chief financial officer and principal accounting officer, are required to abide by our Standards of Conduct to advance our mission that our business be conducted in a legal and ethical manner. The members of our board of directors and many of our contractors are also required to abide by our Standards of Conduct. The standards reflect our basic values and form the foundation of a comprehensive process that includes compliance with all corporate policies, procedures and practices. Our standards cover such areas as quality patient care, compliance with all applicable laws and regulations, appropriate use of our assets, protection of patient information and avoidance of conflicts of interest.

 

As part of the program, we provide annual training sessions to every employee, as well as our board of directors and certain physicians and contractors. All employees are required to report incidents that they believe in good faith may be in violation of the Standards of Conduct, and are encouraged to contact our 24-hour toll-free Ethics Action Line when they have questions about the standards or any ethics concerns. All reports to the Ethics Action Line are kept confidential to the extent allowed by law, and employees have the option to remain anonymous. Incidents of alleged financial improprieties reported to the Ethics Action Line or the ethics and compliance department are communicated to the audit committee of our board of directors. Reported cases that involve a possible violation of the law or regulatory policies and procedures are referred to the ethics and compliance department for investigation. Retaliation against employees in connection with reporting ethical concerns is considered a serious violation of our Standards of Conduct, and, if it occurs, it will result in discipline, up to and including termination of employment.

 

Availability of Documents. The full text of our Quality, Compliance and Ethics Program Charter, our Standards of Conduct, and a number of our ethics and compliance policies and procedures are published on our website, at www.tenethealth.com, under the “Ethics and Compliance” caption in the “About” section. A copy of our Standards of Conduct is also available upon written request to our corporate secretary. Information about how to contact our corporate secretary is set forth under “Company Information” below. Amendments to the Standards of Conduct and any grant of a waiver from a provision of the Standards of Conduct requiring disclosure under applicable Securities and Exchange Commission (“SEC”) rules will be disclosed at the same location as the Standards of Conduct on our website.

 

PROPERTY AND PROFESSIONAL AND GENERAL LIABILITY INSURANCE

 

Property Insurance. We have property, business interruption and related insurance coverage to mitigate the financial impact of catastrophic events or perils that is subject to deductible provisions based on the terms of the policies. These policies

 

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are on an occurrence basis. For the policy periods April 1, 2010 through March 31, 2011 and April 1, 2011 through March 31, 2012, we have coverage totaling $600 million per occurrence, after deductibles and exclusions, with annual aggregate sub-limits of $100 million each for floods and earthquakes and a per-occurrence sub-limit of $100 million for windstorms with no annual aggregate. With respect to fires and other perils, excluding floods, earthquakes and windstorms, the total $600 million limit of coverage per occurrence applies. Deductibles are 5% of insured values up to a maximum of $25 million for floods, California earthquakes and wind-related claims, and 2% of insured values for New Madrid fault earthquakes, with a maximum per claim deductible of $25 million. Other covered losses, including fires and other perils, have a minimum deductible of $1 million.

 

Professional and General Liability Insurance. As is typical in the health care industry, we are subject to claims and lawsuits in the ordinary course of business. The health care industry has seen significant increases in the cost of professional liability insurance due to increased litigation. In response, we formed and maintain captive insurance companies to self-insure a substantial portion of our professional and general liability risk. Claims in excess of our self-insurance retentions are insured with commercial insurance companies.

 

For the policy period June 1, 2010 through May 31, 2011, our hospitals generally have a self-insurance retention of $5 million per occurrence for all claims incurred. Our captive insurance company, The Healthcare Insurance Corporation (“THINC”), retains $10 million per occurrence coverage above our hospitals’ $5 million self-insurance retention level. The next $10 million of claims in excess of these aggregate self-insurance retentions of $15 million per occurrence are 55% reinsured by THINC with independent reinsurance companies, with THINC retaining 45% or a maximum of $4.5 million. Claims in excess of $25 million are covered by our excess professional and general liability insurance policies with major independent insurance companies, on a claims-made basis, subject to an aggregate limit of $175 million.

 

For the policy period June 1, 2011 through May 31, 2012, our hospitals generally have a self-insurance retention of $5 million per occurrence for all claims incurred. THINC retains $10 million per occurrence coverage above our hospitals’ $5 million self-insurance retention level. The next $10 million of claims in excess of these aggregate self-insurance retentions of $15 million per occurrence are 65% reinsured by THINC with independent reinsurance companies, with THINC retaining 35% or a maximum of $3.5 million. Claims in excess of $25 million are covered by our excess professional and general liability insurance policies with major independent insurance companies, on a claims-made basis, subject to an aggregate limit of $175 million.

 

If the aggregate limit of any of our professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period. Any losses not covered by or in excess of the amounts maintained under insurance policies will be funded from our working capital.

 

In addition to the reserves recorded by our captive insurance subsidiaries, we maintain reserves, including reserves for incurred but not reported claims, for our self-insured professional liability retentions and claims in excess of the policies’ aggregate limits, based on actuarial estimates of losses and related expenses. Also, we provide standby letters of credit to certain of our insurers, which can be drawn upon under certain circumstances, to collateralize the deductible and self-insured retentions under a selected number of our professional and general liability insurance programs.

 

EXECUTIVE OFFICERS

 

Information about our executive officers, as of February 17, 2012, is as follows:

 

Name

 

Position

 

Age

Trevor Fetter

 

President and Chief Executive Officer

 

52

Britt T. Reynolds

 

President of Hospital Operations

 

46

Biggs C. Porter

 

Chief Financial Officer

 

58

Gary Ruff

 

Senior Vice President and General Counsel

 

52

Cathy Fraser

 

Senior Vice President, Human Resources

 

47

 

Mr. Fetter was named Tenet’s president in November 2002 and was appointed chief executive officer and a director in September 2003. From March 2000 to November 2002, Mr. Fetter was chairman and chief executive officer of Broadlane, Inc., a provider of cost management services to hospitals that was founded by Tenet and several other major health care providers. From October 1995 to February 2000, he served in several senior management positions at Tenet, including chief financial officer. Mr. Fetter began his career with Merrill Lynch Capital Markets, where he concentrated on corporate finance and advisory services for the entertainment and health care industries. In 1988, he joined Metro-Goldwyn-Mayer, Inc., where he had a broad range of corporate and operating responsibilities, rising to executive vice president and chief financial officer. Mr. Fetter

 

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holds an M.B.A. from Harvard Business School and a bachelor’s degree in economics from Stanford University. He is a member of the board of directors of The Hartford Financial Services Group, Inc. and a member of The Business Roundtable. Mr. Fetter served as chair of the Federation of American Hospitals from March 2009 to March 2010 and remains a trustee.

 

Mr. Reynolds was appointed president of hospital operations in January 2012. From December 2008 through December 2011, he served as senior vice president and division president of Health Management Associates, Inc. (“HMA”), overseeing HMA’s largest division, with 20 hospitals and related facilities in seven states. Prior to joining HMA, Mr. Reynolds served as a multi-facility divisional vice president of Community Health Systems, Inc. from December 2002 to December 2008, primarily in the northeast, midwest and southeast. Mr. Reynolds holds an M.B.A. from Baker University in Baldwin City, Kansas, and a bachelor’s degree in psychology from the University of Louisville. He is a Fellow of the American College of Healthcare Executives (FACHE).

 

Mr. Porter joined Tenet as chief financial officer in June 2006. From May 2003 until June 2006, he served as vice president and corporate controller of Raytheon Company. In addition, Mr. Porter served as acting chief financial officer for Raytheon from April 2005 to March 2006. From December 2000 to May 2003, he was senior vice president and corporate controller of TXU Corp. and, from August 1994 to December 2000, he was chief financial officer of Northrop Grumman Corporation’s integrated systems sector and its commercial aircraft division. Mr. Porter has also served as vice president, controller and assistant treasurer of Vought Aircraft Company, corporate manager of external financial reporting for LTV Corporation, and audit principal at Arthur Young & Co. He is a certified public accountant. Mr. Porter holds a master’s degree in accounting from the University of Texas/Austin and a bachelor’s degree in accounting from Duke University.

 

Mr. Ruff was appointed senior vice president and general counsel in July 2008. From 2003 until his promotion, he served as vice president and assistant general counsel for hospital operations. In addition, Mr. Ruff acted as the company’s interim general counsel from March 2008 to July 2008. Mr. Ruff joined Tenet in 1992 as associate counsel of the company’s former Gulf States region, which included 12 hospitals. Before joining Tenet, he was a tax manager for Deloitte & Touche LLP. Mr. Ruff received his master’s degree in management from Northwestern University’s Kellogg School of Management, his master of laws degree in taxation from Georgetown University, his J.D. from Pepperdine University and his bachelor’s degree in accounting from Gonzaga University.

 

Ms. Fraser joined Tenet as senior vice president, human resources, in September 2006. From June 2000 to September 2006, she served as a management consultant with McKinsey & Co. Inc., the international consulting firm. In that role, Ms. Fraser counseled senior executives at a number of large companies on organizational design, talent management and retention strategies, recruiting and related human resources topics. Prior to her work with McKinsey, Ms. Fraser served as a vice president of Sabre Holdings Inc., a major provider of travel product distribution and technology solutions for the travel industry, from 1994 to 2000. She has also worked for American Airlines and General Motors Acceptance Corp. Ms. Fraser holds an M.B.A. from the University of Michigan and a bachelor’s degree in business administration from the University of Washington in Seattle. She is a board member of Workforce Solutions of Greater Dallas and the JKU Foundation, a family non-profit foundation. Ms. Fraser also serves as a volunteer on various committees in the City of Coppell, Texas.

 

COMPANY INFORMATION

 

Tenet Healthcare Corporation was incorporated in the State of Nevada in 1975. We file annual, quarterly and current reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our reports, proxy statements and other documents filed electronically with the SEC are available at the website maintained by the SEC at www.sec.gov.

 

Our website, www.tenethealth.com, also offers, free of charge, access to our annual, quarterly and current reports (and amendments to such reports) and other filings made with, or furnished to, the SEC as soon as reasonably practicable after such documents are submitted to the SEC. The information found on our website is not part of this or any other report we file with or furnish to the SEC.

 

Inquiries directed to our corporate secretary may be sent to Corporate Secretary, Tenet Healthcare Corporation, P.O. Box 139003, Dallas, Texas 75313-9003 or by e-mail at CorporateSecretary@tenethealth.com.

 

FORWARD-LOOKING STATEMENTS

 

The information in this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, each as amended. All statements, other than statements of historical or present facts, that address activities, events, outcomes, business strategies and other matters that we plan, expect,

 

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intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements represent management’s current belief, based on currently available information, as to the outcome and timing of future events. They involve known and unknown risks, uncertainties and other factors — many of which we are unable to predict or control — that may cause our actual results, performance or achievements, or health care industry results, to be materially different from those expressed or implied by forward-looking statements. Such factors include, but are not limited to, the risks described in Item 1A, Risk Factors, of this report and the following:

 

·                    Our ability to identify and execute on measures designed to save or control costs or streamline operations;

 

·                    Changes in our business strategies or development plans;

 

·                    Technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, health care services;

 

·                    Various factors that may increase supply costs;

 

·                    The soundness of our investments in marketable securities and other instruments;

 

·                    Adverse fluctuations in interest rates and other risks related to interest rate swaps or any other hedging activities we undertake;

 

·                    Our ability to integrate new businesses with our existing operations;

 

·                    National, regional and local economic and business conditions;

 

·                    Demographic changes; and

 

·                    Other factors and risk factors referenced in this report and our other public filings.

 

When considering forward-looking statements, a reader should keep in mind the risk factors and other cautionary statements in this report. Should one or more of the risks and uncertainties described above, in Item 1A, Risk Factors, below or elsewhere in this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim any obligation to update any information contained in a forward-looking statement or any forward-looking statement in its entirety and, therefore, disclaim any resulting liability for potentially related damages.

 

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks and uncertainties — many of which are beyond our control — that may cause our actual operating results or financial performance to be materially different from our expectations. If one or more of the events discussed in the following risks were to occur, actual outcomes could differ materially from those expressed in or implied by any forward-looking statements we make in this report or our other filings with the SEC, and our business, financial condition, results of operations or liquidity could be materially adversely affected; furthermore, the trading price of our common stock could decline and our shareholders could lose all or part of their investment.

 

If we are unable to enter into and maintain managed care contractual arrangements on acceptable terms, if we experience material reductions in the contracted rates we receive from managed care payers or if we have difficulty collecting from managed care payers, our results of operations could be adversely affected.

 

We currently have thousands of managed care contracts with various health maintenance organizations and preferred provider organizations. The amount of our managed care net patient revenues during the year ended December 31, 2011 was $5.2 billion, which represented approximately 57% of our total net patient revenues before provision for doubtful accounts. Approximately 62% of our managed care net patient revenues for the year ended December 31, 2011 was derived from our top ten managed care payers. In the year ended December 31, 2011, our commercial managed care net inpatient revenue per admission from our acute care hospitals was approximately 79% higher than our aggregate yield on a per admission basis from government payers, including managed Medicare and Medicaid insurance plans. In addition, at December 31, 2011, approximately 55% of our net accounts receivable were due from managed care payers.

 

Our future success depends, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts on terms favorable to us. Other health care providers may impact our ability to enter into acceptable

 

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managed care contractual arrangements or negotiate increases in our reimbursement and other favorable terms and conditions. For example, some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us. Furthermore, managed care payers are continuing to demand discounted fee structures, and the trend toward consolidation among these payers tends to increase their bargaining power. In some cases, commercial managed care payers rely on all or portions of Medicare’s severity-adjusted diagnosis-related group system to determine payment rates, which could result in decreased reimbursement from some of these payers if levels of payments to health care providers or payment methodologies under the Medicare program are changed. Other changes to government health care programs, such as the increased obligations on managed care payers imposed by the Affordable Care Act, may negatively impact commercial managed care volumes and payment rates from managed care payers. Any material reductions in the contracted rates we receive for our services, coupled with any difficulties in collecting receivables from managed care payers, could have a material adverse effect on our financial condition, results of operations or cash flows.

 

We cannot predict with certainty the effect that the Affordable Care Act may have on our business, financial condition, results of operations or cash flows.

 

As enacted, the Affordable Care Act will change how health care services are covered, delivered and reimbursed. The expansion of health insurance coverage under the law may result in a material increase in the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements. Two such states are Florida and Texas, where nearly half of our licensed beds are currently located. On the other hand, the Affordable Care Act provides for significant reductions in the growth of Medicare spending and reductions in Medicare and Medicaid disproportionate share hospital payments. A significant portion of both our patient volumes and, as result, our revenues is derived from government health care programs, principally Medicare and Medicaid. Reductions to our reimbursement under the Medicare and Medicaid programs by the Affordable Care Act could adversely affect our business and results of operations.

 

We are unable to predict with certainty the full impact of the Affordable Care Act on our future revenues and operations at this time due to the law’s complexity and the limited amount of implementing regulations and interpretive guidance, as well as our inability to foresee how individuals and businesses will respond to the choices available to them under the law. Furthermore, many of the provisions of the Affordable Care Act that expand insurance coverage will not become effective until 2014 or later. In addition, the Affordable Care Act will result in increased state legislative and regulatory changes in order for states to comply with new federal mandates, such as the requirement to establish health insurance exchanges and to participate in grants and other incentive opportunities, and we are unable to predict the timing and impact of such changes at this time. It is also possible that implementation of the Affordable Care Act could be delayed or even blocked due to court challenges and efforts to repeal or amend the law.

 

In general, there is significant uncertainty with respect to the positive and negative effects the Affordable Care Act may have on reimbursement, utilization and the future designs of provider networks and insurance plans (including pricing, provider participation, coverage, co-pays and deductibles), and the multiple models that attempt to predict those effects may differ materially from our expectations.

 

Further changes in the Medicare and Medicaid programs or other government health care programs could have an adverse effect on our business.

 

For the year ended December 31, 2011, approximately 23% of our net patient revenues were related to the Medicare program, and approximately 9% of our net patient revenues were related to various state Medicaid programs, in each case excluding Medicare and Medicaid managed care programs. In addition to the changes affected by the Affordable Care Act, the Medicare and Medicaid programs are subject to: other statutory and regulatory changes, administrative rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities, which could in turn adversely affect our overall business, financial condition, results of operations or cash flows. Any material adverse effects resulting from future reductions in payments from government programs could be exacerbated if we are not able to manage our operating costs effectively.

 

Moreover, the recent economic downturn has increased budget pressures on most states, and these budget pressures have resulted, and likely will continue to result, in decreased spending for Medicaid programs in many states. Most states began a new fiscal year on July 1, 2011 and, although most addressed projected shortfalls in their final budgets, some states are still facing budget gaps. Increased Medicaid enrollment due to the economic downturn, limits on the ability of states to reduce Medicaid eligibility criteria enacted as part of the Affordable Care Act, budget gaps and other factors could result in future

 

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reductions to Medicaid payments or additional taxes on hospitals. Some states are considering proposals that would result in such reductions.

 

In general, we are unable to predict the effect of future government health care funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited or if we or one or more of our subsidiaries’ hospitals are excluded from participation in the Medicare or Medicaid program or any other government health care program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.

 

Our business continues to be adversely affected by a high volume of uninsured and underinsured patients, as well as declines in commercial managed care patients.

 

Like other organizations in the health care industry, we continue to provide services to a high volume of uninsured patients and more patients than in prior years with increased burdens of co-payments and deductibles due to changes in their health care plans. As a result, we continue to experience a high level of uncollectible accounts, and, unless our business mix shifts toward a greater number of insured patients as a result of the Affordable Care Act or otherwise, the trend of higher co-payments and deductibles reverses, or the economy improves and unemployment rates decline, we anticipate this high level of uncollectible accounts to continue or increase. In addition, even after implementation of the Affordable Care Act, we may continue to experience bad debts and have to provide uninsured discounts and charity care for undocumented aliens who are not permitted to enroll in a health insurance exchange or government health care program.

 

Over the past several years, we have experienced declines in our commercial managed care volumes, which in the aggregate generate substantially higher yields than Medicare and Medicaid volumes. The declines in our commercial managed care volumes are due, in part, to the related effects of higher unemployment and reductions in commercial managed care enrollment. In addition, we believe our commercial managed care volumes may have been adversely impacted by the expiration of federal subsidies for those unemployed individuals and their family members who have been receiving subsidized continued health insurance coverage under their former employers’ health plans.

 

We operate in a competitive industry, and competition is one reason increases in patient volumes have been constrained.

 

Overall, our hospitals, outpatient centers and other health care businesses operate in competitive environments, and we believe increases in patient volumes have been constrained, in part, by competition for market share in high margin services and for quality physicians and personnel. Generally, other hospitals and outpatient centers in the local communities we serve provide services similar to those we offer, and, in some cases, competing facilities are more established than ours. We also face increased competition from specialty hospitals (some of which are physician-owned) and unaffiliated freestanding outpatient centers. Furthermore, some of the hospitals that compete with our hospitals are owned by government agencies or not-for-profit organizations. These tax-exempt competitors may have certain financial advantages not available to our facilities, such as endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property and income taxes. In addition, in certain markets in which we operate, large teaching hospitals provide highly specialized facilities, equipment and services that may not be available at our hospitals. If competing health care providers are better able to attract patients, recruit and retain physicians, expand services or obtain favorable managed care contracts at their facilities, our patient volume levels may suffer.

 

If we are unable to recruit and retain an appropriate number of quality physicians on the medical staffs of our hospitals, our business may suffer.

 

The success of our business depends in significant part on the number, quality and specialties of the physicians on the medical staffs of our hospitals, the admitting practices of those physicians and maintaining good relations with those physicians. Although we operate some physician practices and, where permitted by law, employ some physicians, physicians are often not employees of the hospitals at which they practice and, in many of the markets we serve, most physicians have admitting privileges at other hospitals in addition to our hospitals. Such physicians may terminate their affiliation with our hospitals or admit their patients to competing hospitals at any time. In some of our markets, physician recruitment and retention are affected by a shortage of physicians in certain sought-after specialties and the difficulties that physicians experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Other issues facing physicians, such as proposed decreases in Medicare payments, are causing them to consider alternatives, including leaving private practice for employed physician arrangements, relocating their practices or retiring sooner than expected. If we are unable to attract and retain sufficient numbers of quality physicians by providing adequate support personnel, technologically advanced equipment and hospital facilities that meet the needs of those physicians and their patients, physicians may be discouraged from referring patients to our facilities, admissions may decrease and our operating performance may decline.

 

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Our labor costs could be adversely affected by competition for staffing, the shortage of experienced nurses and labor union activity.

 

Our operations depend on the efforts, abilities and experience of our management and medical support personnel, including nurses, pharmacists and lab technicians, as well as our employed physicians. We compete with other health care providers in recruiting and retaining physicians and qualified management responsible for the daily operations of our hospitals. In addition, like others in the health care industry, we continue to experience a shortage of experienced nurses in certain key specialties and geographic areas. As a result, from time to time, we may be required to enhance wages and benefits to recruit and retain experienced nurses or hire more expensive temporary or contract personnel. Furthermore, state-mandated nurse-staffing ratios in California affect not only our labor costs, but, if we are unable to hire the necessary number of experienced nurses to meet the required ratios, they may also cause us to limit patient admissions with a corresponding adverse effect on our net operating revenues. In general, our failure to recruit and retain qualified management, experienced nurses and other medical support personnel, or to control labor costs, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

Increased labor union activity is another factor that could adversely affect our labor costs. At December 31, 2011, approximately 25% of our employees were represented by various labor unions. These employees — primarily registered nurses and service and maintenance workers — were located at 22 of our hospitals, the majority of which are in California and Florida. We are in the process of renegotiating the collective bargaining agreements for all of the facilities whose contracts have expired and negotiating new contracts where employees chose union representation in 2011. At this time, we are unable to predict the outcome of the negotiations, but increases in salaries, wages and benefits could result from these agreements. Moreover, there is a possibility that strikes could occur during the negotiation process, which could increase our labor costs and have an adverse effect on our patient admissions and net operating revenues. In addition, union organizing activities and certain potential changes in federal labor laws and regulations could increase the likelihood of employee unionization in the future; to the extent a greater portion of our employee base unionizes, it is possible our labor costs could increase materially.

 

Our licensed hospital beds are heavily concentrated in certain market areas in Florida, Texas and California, which makes us sensitive to economic, regulatory, environmental and other conditions in those areas.

 

As of December 31, 2011, the largest concentrations of licensed beds in our general hospitals were in Florida (25.9%), Texas (19.5%) and California (17.4%). These concentrations increase the risk that, should any adverse economic, regulatory, environmental or other condition occur in these areas, our overall business, financial condition, results of operations or cash flows could be materially adversely affected.

 

Furthermore, a natural disaster or other catastrophic event could affect us more significantly than other companies with less geographic concentration, and the property insurance we obtain may not be adequate to cover our losses. In the past, hurricanes have had a disruptive effect on the operations of our hospitals in Florida and Texas and the patient populations in those states. Our California operations could be adversely affected by a major earthquake or wildfires in that state.

 

Our business and financial results could be harmed by violations of existing regulations or compliance with new or changed regulations.

 

Our business is subject to extensive federal, state and local regulation relating to, among other things, licensure, conduct of operations, privacy of patient information, ownership of facilities, physician relationships, addition of facilities and services, and reimbursement rates for services. The laws, rules and regulations governing the health care industry are extremely complex and, in certain areas, the industry has little or no regulatory or judicial interpretation for guidance. If a determination is made that we were in violation of such laws, rules or regulations, we could be subject to penalties or liabilities or required to make significant changes to our operations. Even a public announcement that we are being investigated for possible violations of these laws could have a material adverse effect on our business, financial condition or results of operations, and our business reputation could suffer. Furthermore, health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations. Further changes in the regulatory framework affecting health care providers could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

We are also required to comply with various federal and state labor laws, rules and regulations governing a variety of workplace wage and hour issues. From time to time, we have been and expect to continue to be subject to regulatory proceedings and private litigation concerning our application of such laws, rules and regulations.

 

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We could be subject to substantial uninsured liabilities or increased insurance costs as a result of significant legal actions.

 

We are subject to medical malpractice lawsuits, class action lawsuits and other legal actions in the ordinary course of business. Some of these actions may involve large demands, as well as substantial defense costs. Even in states that have imposed caps on damages, litigants are seeking recoveries under new theories of liability that might not be subject to such caps. Our professional and general liability insurance does not cover all claims against us, and it may not continue to be available at a reasonable cost for us to maintain at adequate levels, as the health care industry has seen significant increases in the cost of such insurance due to increased litigation. We cannot predict the outcome of current or future legal actions against us or the effect that judgments or settlements in such matters may have on us or on our insurance costs. Additionally, all professional and general liability insurance we purchase is subject to policy limitations. If the aggregate limit of any of our professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period. Any losses not covered by or in excess of the amounts maintained under insurance policies will be funded from our working capital. Furthermore, one or more of our insurance carriers could become insolvent and unable to fulfill its or their obligations to defend, pay or reimburse us when those obligations become due. In that case or if payments of claims exceed our estimates or are not covered by our insurance, it could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

Our expectations for our business and future financial results could be adversely affected if our plans for our Conifer subsidiary are not realized.

 

We intend to continue expanding our revenue cycle management, health care information management, management services, and patient communications services businesses under our Conifer subsidiary by marketing these services to non-Tenet hospitals and other health care-related entities. We believe Conifer has the potential over time to generate high margins and improve our results of operations. However, the market for revenue cycle management solutions in particular is competitive. Our Conifer subsidiary faces competition from existing participants and new entrants to the revenue cycle management market (including software vendors and other technology-supported revenue cycle management outsourcing companies, traditional consultants and information technology outsourcers), as well as from the staffs of hospitals that handle these processes internally. To be successful, Conifer must respond more quickly and effectively than its competitors to new or changing opportunities, technologies, standards, regulations or customer requirements. Moreover, existing or new competitors may introduce technologies or services that render Conifer’s technologies or services obsolete or less marketable. Even if Conifer’s technologies and services are more effective than the offerings of its competitors, current or potential customers might prefer competitive technologies or services to Conifer’s technologies and services. Furthermore, increased competition may result in pricing pressures, which could negatively impact Conifer’s margins, growth rate or market share. If we cannot continue to expand and realize earnings contributions from the businesses under our Conifer subsidiary, our expectations for our overall business and future financial results could be adversely affected.

 

Our business could be negatively impacted by security threats, catastrophic events and other disruptions affecting our information technology and related systems.

 

As a provider of health care services, we rely on our information technology in the day-to-day operation of our business to process, transmit and store sensitive or confidential data, including electronic health records and other PHI of patients in our facilities, as well as to store our proprietary and confidential business performance data. Our centralized information technology delivery model supports all of our hospitals, outpatient centers and other health care businesses, including Conifer. We utilize a diversified data and voice network, along with technology systems for billing, supply chain, clinical information systems and labor management. Although we have redundancies and other measures designed to protect the security and availability of the data we process, transmit and store, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error or malfeasance. Furthermore, our network and technology systems may be subject to disruption due to events such as a major earthquake, fire, telecommunications failure, terrorist attack or other catastrophic event. Any such breach or system interruption could result in the unauthorized disclosure, misuse or loss of confidential, sensitive or proprietary information, could negatively impact our ability to conduct normal business operations, and could result in potential liability and damage to our reputation, any of which could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

The recent economic downturn and other economic factors have impacted, and may continue to impact, our business, financial condition and results of operations.

 

We continue to be impacted by a number of industry-wide challenges, including constrained growth in patient volumes and high levels of bad debt. We believe factors associated with the recent economic downturn — including higher levels of

 

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unemployment, reductions in commercial managed care enrollment, and patient decisions to postpone or cancel elective and non-emergency health care procedures — have impacted our volumes and affected our ability to collect outstanding receivables. If industry trends or general economic conditions worsen, we may not be able to sustain future profitability, and our liquidity and ability to repay our outstanding debt may be harmed.

 

Furthermore, the availability of liquidity and credit to fund the continuation and expansion of many business operations worldwide has been limited in recent years. Our ability to access the capital markets on acceptable terms may be severely restricted at a time when we would like, or need, to access those markets, which could have a negative impact on our growth plans, our flexibility to react to changing economic and business conditions, and our ability to refinance existing debt. The economic downturn or other economic conditions could also adversely affect the counterparties to our agreements, including the lenders under our senior secured revolving credit facility, causing them to fail to meet their obligations to us.

 

Trends affecting our actual or anticipated results may require us to record charges that would adversely affect our results of operations.

 

As a result of factors that have negatively affected our industry generally and our business specifically, we have been required to record various charges in our results of operations. Our impairment tests presume stable, improving or, in some cases, declining results in our hospitals, which are based on programs and initiatives being implemented that are designed to achieve the hospitals’ most recent projections. If these projections are not met, or if in the future negative trends occur that impact our future outlook, further impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges. Future restructuring of our operating structure that changes our goodwill reporting units could also result in future impairments of our goodwill. Any such charges could adversely affect our results of operations.

 

The amount and terms of our current and any future debt could, among other things, adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.

 

As of December 31, 2011, we had approximately $4.3 billion of total long-term debt, as well as approximately $164 million in standby letters of credit outstanding under our senior secured revolving credit facility, which is collateralized by patient accounts receivable of all of our wholly owned acute care and specialty hospitals. From time to time, we expect to engage in additional capital markets, bank credit and other financing activities depending on our needs and financing alternatives available at that time.

 

The terms and conditions in our credit agreement and the indentures governing our outstanding senior notes and senior secured notes, as well as our payment obligations under these agreements, could have important consequences to our business and to holders of our securities, including the following:

 

·                    Our credit agreement and the indentures contain, and any future debt obligations may contain, covenants that, among other things, restrict our ability to pay dividends, incur additional debt and sell assets. Our credit agreement also requires us to maintain a financial ratio relating to our ability to satisfy certain fixed expenses, including interest payments. The indentures contain covenants that, among other things, restrict our ability and the ability of our subsidiaries to incur liens, consummate asset sales, enter into sale and lease-back transactions or consolidate, merge or sell all or substantially all of our or their assets. If we do not comply with these obligations, it may cause an event of default, which, if not cured or waived, could require us to repay the indebtedness immediately.

 

·                    We may be more vulnerable in the event of a deterioration in our business, in the health care industry or in the economy generally, or if federal or state governments set further limitations on reimbursement under the Medicare or Medicaid programs.

 

·                    We may be required to dedicate a substantial portion of our cash flow to the payment of principal and interest on our indebtedness, which could reduce the amount of funds available for our operations, capital expenditures or acquisitions.

 

We have the ability to incur additional indebtedness in the future, subject to the restrictions contained in our credit agreement and the indentures governing our outstanding senior notes and senior secured notes. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

 

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The utilization of our tax losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

 

Because of net operating losses we have experienced for federal income tax purposes, at December 31, 2011, we had federal net operating loss (“NOL”) carryforwards of approximately $1.8 billion pretax available to offset future taxable income. Our ability to utilize NOL carryforwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our Company occur during a rolling three-year period. These ownership changes include the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by our NOL carryforwards or tax credit carryforwards at the time of ownership change. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a significant portion of our NOL carryforwards or tax credit carryforwards could expire before we are able to use them. In such an event, our business, financial condition, results of operations or cash flows could be adversely affected.

 

We believe that we have not experienced an ownership change under Section 382 of the Internal Revenue Code as of February 17, 2012; however, the amount by which our ownership may change in the future could be affected by purchases and sales of stock by 5% shareholders, the conversion of our outstanding mandatory convertible preferred stock and new issuances of stock by us, should we choose to do so.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

The disclosure required under this Item is included in Item 1, Business, of this report.

 

ITEM 3. LEGAL PROCEEDINGS

 

For information regarding material pending legal proceedings in which we are involved, see Note 15 to our Consolidated Financial Statements, which is incorporated by reference.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Common Stock. Our common stock is listed on the New York Stock Exchange under the symbol “THC.” The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock on the NYSE:

 

 

 

High

 

Low

 

Year Ended December 31, 2011

 

 

 

 

 

First Quarter

 

$

7.55

 

$

6.57

 

Second Quarter

 

7.70

 

5.89

 

Third Quarter

 

6.54

 

4.02

 

Fourth Quarter

 

5.30

 

3.46

 

Year Ended December 31, 2010

 

 

 

 

 

First Quarter

 

$

6.46

 

$

4.92

 

Second Quarter

 

6.44

 

4.34

 

Third Quarter

 

4.78

 

3.92

 

Fourth Quarter

 

6.86

 

3.96

 

 

On February 17, 2012, the last reported sales price of our common stock on the NYSE composite tape was $5.66 per share. As of that date, there were 11,835 holders of record of our common stock. Our transfer agent and registrar is Computershare. Shareholders with questions regarding their stock certificates, including inquiries related to exchanging or replacing certificates or changing an address, should contact the transfer agent at (866) 229-8416.

 

Cash Dividends on Common Stock. We have not paid cash dividends on our common stock since the first quarter of fiscal 1994, and we do not intend to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain earnings, if any, for the future operation and development of our business. In addition, our senior secured revolving credit agreement contains provisions that limit or prohibit the payment of cash dividends on our common stock.

 

Equity Compensation. Refer to Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this report for information regarding securities authorized for issuance under our equity compensation plans.

 

Stock Performance Graph. The following graph shows the cumulative, five-year total return for our common stock compared to three indices, each of which includes us. The Standard & Poor’s 500 Stock Index includes 500 companies representing all major industries. The Standard & Poor’s Health Care Composite Index is a group of 52 companies involved in a variety of healthcare-related businesses. Because the Standard & Poor’s Health Care Composite Index is heavily weighted by pharmaceutical and medical device companies, we believe that at times it may be less useful than the Hospital Management Peer Group Index included below. We compiled this Peer Group Index by selecting publicly traded companies that have as their primary business the management of acute care hospitals and that have been in business for all five of the years shown. These companies are: Community Health Systems, Inc. (CYH), Health Management Associates, Inc. (HMA), Tenet Healthcare Corporation (THC) and Universal Health Services, Inc. (UHS).

 

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Performance data assumes that $100.00 was invested on December 31, 2006 in our common stock and each of the indices. The data assumes the reinvestment of all cash dividends and the cash value of other distributions. Stock price performance shown in the graph is not necessarily indicative of future stock price performance.

 

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN

 

 

 

 

Dec-06

 

Dec-07

 

Dec-08

 

Dec-09

 

Dec-10

 

Dec-11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenet Healthcare Corporation

 

$

100.00

 

$

72.88

 

$

16.50

 

$

77.33

 

$

95.98

 

$

73.60

 

S&P 500

 

$

100.00

 

$

105.49

 

$

66.46

 

$

84.05

 

$

96.71

 

$

98.75

 

S&P Health Care

 

$

100.00

 

$

107.15

 

$

82.71

 

$

99.00

 

$

101.87

 

$

114.85

 

Peer Group

 

$

100.00

 

$

77.47

 

$

33.22

 

$

85.26

 

$

106.01

 

$

77.15

 

 

Repurchase of Common Stock. On May 9, 2011, we announced that our board of directors had authorized the repurchase of up to $400 million of our common stock through a share repurchase program. Under the program, shares could be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by the Company, at times and in amounts based on market conditions and other factors. The share repurchase program, which was scheduled to expire on May 9, 2012, was completed in January 2012. Pursuant to the program, we repurchased a total of 81,073,864 shares for approximately $400 million (or an average of $4.94 per share). Purchases during the year ended December 31, 2011 are shown in the table in Note 2 to our Consolidated Financial Statements, which table is incorporated by reference.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

OPERATING RESULTS

 

The following tables present selected audited consolidated financial data for Tenet Healthcare Corporation and its wholly owned and majority-owned subsidiaries for the years ended December 31, 2007 through 2011:

 

 

 

 

Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

(In Millions, Except Per-Share Amounts)

 

Net operating revenues:

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues before provision for doubtful accounts

 

$

9,584

 

$

9,205

 

$

9,014

 

$

8,585

 

$

8,083

 

Less provision for doubtful accounts

 

730

 

738

 

696

 

627

 

552

 

Net operating revenues

 

8,854

 

8,467

 

8,318

 

7,958

 

7,531

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

4,082

 

3,900

 

3,857

 

3,779

 

3,617

 

Supplies

 

1,582

 

1,577

 

1,569

 

1,511

 

1,401

 

Other operating expenses, net

 

2,100

 

1,940

 

1,910

 

1,929

 

1,855

 

Electronic health record incentives

 

(55

)

 

 

 

 

Depreciation and amortization

 

413

 

394

 

386

 

371

 

336

 

Impairment of long-lived assets and goodwill, and restructuring charges, net

 

27

 

10

 

27

 

16

 

36

 

Hurricane insurance recoveries, net of costs

 

 

 

 

 

(3

)

Litigation and investigation costs, net of insurance recoveries

 

55

 

12

 

31

 

41

 

13

 

Operating income

 

650

 

634

 

538

 

311

 

276

 

Interest expense

 

(375

)

(424

)

(445

)

(418

)

(419

)

Gain (loss) from early extinguishment of debt

 

(117

)

(57

)

97

 

 

 

Investment earnings

 

3

 

5

 

 

22

 

47

 

Net gain on sales of investments

 

 

 

15

 

139

 

 

Income (loss) from continuing operations, before income taxes

 

161

 

158

 

205

 

54

 

(96

)

Income tax benefit (expense)

 

(61

)

977

 

23

 

25

 

61

 

Income (loss) from continuing operations, before discontinued operations and cumulative effect of change in accounting principle

 

$

100

 

$

1,135

 

$

228

 

$

79

 

$

(35

)

Basic earnings (loss) per share attributable to Tenet Healthcare Corporation common shareholders from continuing operations

 

$

0.13

 

$

2.28

 

$

0.44

 

$

0.15

 

$

(0.08

)

Diluted earnings (loss) per share attributable to Tenet Healthcare Corporation common shareholders from continuing operations

 

$

0.13

 

$

2.01

 

$

0.43

 

$

0.15

 

$

(0.08

)

 

The operating results data presented above is not necessarily indicative of our future results of operations. Reasons for this include, but are not limited to: overall revenue and cost trends, particularly the timing and magnitude of price changes; fluctuations in contractual allowances and cost report and commercial contract settlements and valuation allowances; managed care contract negotiations, settlements or terminations and payer consolidations; changes in Medicare and Medicaid regulations; Medicaid funding levels set by the states in which we operate; the timing of approval by CMS of Medicaid provider fee revenue programs; trends in patient accounts receivable collectability and associated provisions for doubtful accounts; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; the timing of when we meet the criteria to recognize electronic health record incentives; impairment of long-lived assets and goodwill; restructuring charges; losses, costs and insurance recoveries related to natural disasters; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; income tax rates and deferred tax asset valuation allowance activity; changes in estimates of accruals for annual incentive compensation; the timing and amounts of stock option and restricted stock unit grants to employees and directors; gains or losses from early extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect patient volumes and, thereby, our results of operations at our hospitals and related health care facilities include, but are not limited to: the business environment, economic conditions and demographics of local communities; the number of uninsured and

 

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underinsured individuals in local communities treated at our hospitals; seasonal cycles of illness; climate and weather conditions; physician recruitment, retention and attrition; advances in technology and treatments that reduce length of stay; local health care competitors; managed care contract negotiations or terminations; any unfavorable publicity about us, which impacts our relationships with physicians and patients; changes in health care regulation; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.

 

BALANCE SHEET DATA

 

 

 

December 31,

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

(In Millions)

 

Working capital (current assets minus current liabilities)

 

$

542

 

$

586

 

$

689

 

$

760

 

$

512

 

Total assets

 

8,462

 

8,500

 

7,953

 

8,174

 

8,393

 

Long-term debt, net of current portion

 

4,294

 

3,997

 

4,272

 

4,778

 

4,771

 

Total equity

 

1,492

 

1,819

 

697

 

147

 

88

 

 

CASH FLOW DATA

 

 

 

Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

(In Millions)

 

Net cash provided by operating activities

 

$

497

 

$

472

 

$

425

 

$

208

 

$

326

 

Net cash used in investing activities

 

(503

)

(420

)

(125

)

(274

)

(520

)

Net cash provided by (used in) financing activities

 

(286

)

(337

)

(117

)

1

 

(18

)

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INTRODUCTION TO MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The purpose of this section, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), is to provide a narrative explanation of our financial statements that enables investors to better understand our business, to enhance our overall financial disclosures, to provide the context within which our financial information may be analyzed, and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows. Unless otherwise indicated, all financial and statistical information included herein relates to our continuing operations, with dollar amounts expressed in millions (except per share, per admission, per patient day, per adjusted patient day and per visit amounts). MD&A, which should be read in conjunction with the accompanying Consolidated Financial Statements, includes the following sections:

 

·                  Management Overview

·                  Sources of Revenue

·                  Results of Operations

·                  Liquidity and Capital Resources

·                  Off-Balance Sheet Arrangements

·                  Recently Issued Accounting Standards

·                  Critical Accounting Estimates

 

MANAGEMENT OVERVIEW

 

STRATEGY AND TRENDS

 

We are committed to providing the communities our hospitals, outpatient centers and other health care facilities serve with high quality, cost-effective health care while growing our business, increasing our profitability and creating long-term value for our shareholders. We believe that our success in increasing our profitability depends in part on our success in executing the strategies and managing the trends discussed below.

 

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Core Business StrategyAt December 31, 2011, our subsidiaries operated 50 hospitals, including four academic medical centers and a critical access hospital, with a combined total of 13,453 licensed beds, serving primarily urban and suburban communities in 11 states. Our core business is focused on providing acute care treatment, including inpatient care, intensive care, cardiac care, radiology services and emergency medical treatment, as well as outpatient services. In supporting our core business, we seek to offer superior quality and patient services, to make capital and other investments in our facilities and technology to remain competitive, to recruit and retain physicians, and to negotiate favorable contracts with managed care and other commercial payers. In addition, we continually review our clinical service lines to determine which services are most highly valued and should be marketed to improve our operating results, and we strategically de-emphasize or eliminate unprofitable service lines, if appropriate.

 

Development StrategiesWe continue to focus on opportunities to increase our outpatient revenues through organic growth and the acquisition of selected outpatient businesses. During the year ended December 31, 2011, we derived approximately 31% of our revenues before provision for doubtful accounts from outpatient services. Historically, our outpatient business has generated significantly higher margins for us than other business lines. By expanding our outpatient business, we expect to increase our profitability over time. We also intend to focus on acquiring hospitals, services providers and other health care assets and companies in markets where we believe our operating strategies can improve performance and create shareholder value. We believe that this growth by strategic acquisitions, when and if opportunities are available, can supplement the growth we believe we can generate organically in our existing markets.

 

Expanding Our Conifer Health Solutions BusinessWe intend to continue expanding our revenue cycle management, health care information management, management services, and patient communications services businesses under our Conifer Health Solutions (“Conifer”) subsidiary by marketing these services to non-Tenet hospitals and other health care-related entities. At December 31, 2011, Conifer provided services to more than 300 Tenet and non-Tenet hospitals and other health care organizations. We believe this business has the potential over time to generate high margins and improve our results of operations.

 

Commitment to QualityThrough our Commitment to Quality and Medicare Performance Improvement initiatives, we continually work with physicians to implement the most current evidence-based medicine techniques to improve the way we provide care, while using labor management tools and supply chain initiatives to reduce variable costs. We believe the use of these practices will promote the most effective and efficient utilization of resources and result in shorter lengths of stay, as well as reductions in redundant ancillary services and readmissions for hospitalized patients. As a result of our efforts, our hospitals have substantially improved in quality metrics reported by the government and have been recognized by several managed care companies for their quality of care. Leveraging off of these initiatives, we expect to benefit over time from provisions in the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (“Affordable Care Act”) that tie certain payments to quality measures, establish a value-based purchasing system, and adjust hospital payment rates based on hospital-acquired conditions and hospital readmissions. In general, we believe that quality of care improvements may have the effect of reducing costs, increasing payments from Medicare and certain managed care payers for our services, and increasing physician and patient satisfaction, which may potentially improve our volumes.

 

Realizing HIT Incentive Payments and Other BenefitsDuring the year ended December 31, 2011, we achieved compliance with certain of the health information technology (“HIT”) requirements under the American Recovery and Reinvestment Act of 2009 (“ARRA”); as a result, we were able to recognize approximately $55 million of electronic health record incentives related to Medicaid ARRA HIT in 2011. These incentives, most of which were received by December 31, 2011, will partially offset the operating expenses we have incurred and continue to incur to invest in HIT systems. We also anticipate that we will be able to recognize Medicare and additional Medicaid ARRA HIT incentives in the year ending December 31, 2012. Furthermore, we believe that the operational benefits of HIT, including improved clinical outcomes and increased operating efficiencies, will contribute to our long-term ability to grow our business.

 

General Economic ConditionsWe believe that high unemployment rates and other adverse economic conditions are continuing to have a negative impact on our bad debt expense levels and patient volumes. However, as the economy recovers, we expect to experience improvements in these metrics relative to current levels.

 

Improving Operating LeverageWe are experiencing a gradual increase in patient volumes that we believe is primarily attributable to our focus on physician alignment and satisfaction, targeted capital spending on critical growth opportunities for our hospitals, emphasis on higher demand clinical service lines (including outpatient lines), the implementation of new payer contracting strategies, and improved quality metrics at our hospitals. Increases in patient volumes have been constrained by the slow pace of the current economic recovery, increased competition, utilization pressure by managed care organizations, the effects of higher patient co-pays and deductibles, and demographic trends.

 

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Impact of Affordable Care ActWe anticipate that we will benefit over time from the provisions of the Affordable Care Act that will extend insurance coverage through Medicaid or private insurance to a broader segment of the U.S. population. Although we are unable to predict the precise impact of the Affordable Care Act on our future results of operations, and while there will be some reductions in reimbursement rates, which began in 2010, we anticipate, based on the current timetable for implementing the law, that we could begin to receive reimbursement for caring for uninsured and underinsured patients as early as 2014. We believe we are well-positioned relative to other health care companies to benefit from extended insurance coverage given the concentration of our operations in California, Florida and Texas, which states historically have higher percentages of uninsured and underinsured patients compared to the national average.

 

Our ability to execute on these strategies and manage these trends is subject to a number of risks and uncertainties that may cause actual results to be materially different from expectations. For information about these risks and uncertainties, see the Forward-Looking Statements and Risk Factors sections in Part I of this report.

 

RESULTS OF OPERATIONS—OVERVIEW

 

Our results of operations have been and continue to be influenced by industry-wide and company-specific challenges, including constrained volume growth, decreased demand for inpatient cardiac procedures and high levels of bad debt, that have affected our revenue growth and operating expenses. We believe our results of operations for our most recent fiscal quarter best reflect recent trends we are experiencing with respect to volumes, revenues and expenses; therefore, we have provided below information about these metrics for the three months ended December 31, 2011 and 2010 for all of our continuing operations hospitals.

 

 

 

Three Months Ended December 31,

 

Admissions, Patient Days and Surgeries

 

2011

 

2010

 

Increase
(Decrease)

 

Total admissions

 

127,321

 

126,977

 

0.3

%

Paying admissions (excludes charity and uninsured)

 

118,545

 

118,583

 

%

Charity and uninsured admissions

 

8,776

 

8,394

 

4.6

%

Admissions through emergency department

 

77,075

 

74,648

 

3.3

%

Paying admissions as a percentage of total admissions

 

93.1

%

93.4

%

(0.3

)%(1)

Charity and uninsured admissions as a percentage of total admissions

 

6.9

%

6.6

%

0.3

%(1)

Emergency department admissions as a percentage of total admissions

 

60.5

%

58.8

%

1.7

%(1)

Surgeries — inpatient

 

36,284

 

37,448

 

(3.1

)%

Surgeries — outpatient

 

56,407

 

52,411

 

7.6

%

Total surgeries

 

92,691

 

89,859

 

3.2

%

Patient days — total

 

599,859

 

608,890

 

(1.5

)%

Adjusted patient days(2)

 

917,798

 

923,219

 

(0.6

)%

Average length of stay (days)

 

4.7

 

4.8

 

(0.1

)(1)

Adjusted patient admissions(2)

 

196,594

 

194,099

 

1.3

%

 


(1)

The change is the difference between the amounts shown for the three months ended December 31, 2011 as compared to the three months ended December 31, 2010.

 

(2)

Adjusted patient days/admissions represents actual patient days/admissions adjusted to include outpatient services by multiplying actual patient days/admissions by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.

 

Total admissions increased by 344, or 0.3%, in the three months ended December 31, 2011 as compared to the same period in 2010. Three of our four regions reported admissions increases in the three months ended December 31, 2011 as compared to the three months ended December 31, 2010. Total surgeries increased by 3.2% in the three months ended December 31, 2011 as compared to the same period in 2010. While our emergency department admissions increased 3.3% in the three months ended December 31, 2011 compared to the same period in the prior year, we believe the current economic conditions continue to have an adverse impact on the level of elective procedures performed at our hospitals, which constrained the overall change in our total admissions.

 

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Three Months Ended December 31,

 

Outpatient Visits

 

2011

 

2010

 

Increase
(Decrease)

 

Total visits

 

1,002,842

 

999,827

 

0.3

%

Paying visits (excludes charity and uninsured)

 

901,821

 

900,182

 

0.2

%

Charity and uninsured visits

 

101,021

 

99,645

 

1.4

%

Emergency department visits

 

370,381

 

359,168

 

3.1

%

Surgery visits

 

56,407

 

52,411

 

7.6

%

Paying visits as a percentage of total visits

 

89.9

%

90.0

%

(0.1

)%(1)

Charity and uninsured visits as a percentage of total visits

 

10.1

%

10.0

%

0.1

%(1)

 


(1)

The change is the difference between the amounts shown for the three months ended December 31, 2011 as compared to the three months ended December 31, 2010.

 

We had an increase of 3,015 total outpatient visits, or 0.3%, in the three months ended December 31, 2011 as compared to the three months ended December 31, 2010. Two of our four regions reported increased outpatient visits in the three months ended December 31, 2011, with the strongest improvement occurring in our Southern States region. We had 554 flu-related visits in the three months ended December 31, 2011 compared to 1,618 flu-related visits in the same period in 2010.

 

Outpatient surgery visits increased by 7.6% in the three months ended December 31, 2011 as compared to the same period in 2010. Charity and uninsured outpatient visits increased by 1.4% in the three months ended December 31, 2011 compared to the three months ended December 31, 2010.

 

 

 

Three Months Ended December 31,

 

Revenues

 

2011

 

2010

 

Increase
(Decrease)

 

Net operating revenues

 

$

2,226

 

$

2,111

 

5.4

%

Revenues from the uninsured

 

$

160

 

$

154

 

3.9

%

Net inpatient revenues(1)

 

$

1,536

 

$

1,477

 

4.0

%

Net outpatient revenues(1)

 

$

751

 

$

730

 

2.9

%

 


(1)

Net inpatient revenues and net outpatient revenues are components of net operating revenues. Net inpatient revenues include self-pay revenues of $73 million and $66 million for the three months ended December 31, 2011 and 2010, respectively. Net outpatient revenues include self-pay revenues of $87 million and $88 million for the three months ended December 31, 2011 and 2010, respectively.

 

Net operating revenues increased by $115 million, or 5.4%, for the three months ended December 31, 2011 as compared to the same period in 2010. Net operating revenues in the three months ended December 31, 2011 included a $14 million increase in Medicaid disproportionate share hospital (“DSH”) revenues and other state-funded subsidy payments in the 2011 period compared to the same period in 2010, primarily due to $28 million of net revenues related to the California supplemental Medi-Cal payments program for the program period January 1, 2011 through June 30, 2011 that was approved by CMS during the three months ended December 31, 2011.

 

In addition to certain of the factors discussed above, net patient revenues increased by 3.6% in the three months ended December 31, 2011 as compared to the same period in 2010 primarily as a result of managed care pricing improvement.

 

 

 

Three Months Ended December 31,

 

Revenues on a Per Admission, Per Patient Day and Per Visit Basis

 

2011

 

2010

 

Increase
(Decrease)

 

Net inpatient revenue per admission

 

$

12,064

 

$

11,632

 

3.7

%

Net inpatient revenue per patient day

 

$

2,561

 

$

2,426

 

5.6

%

Net outpatient revenue per visit

 

$

749

 

$

730

 

2.6

%

Net patient revenue per adjusted patient admission(1)

 

$

11,633

 

$

11,370

 

2.3

%

Net patient revenue per adjusted patient day(1)

 

$

2,492

 

$

2,391

 

4.2

%

 


(1)

Adjusted patient days/admissions represents actual patient days/admissions adjusted to include outpatient services by multiplying actual patient days/admissions by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.

 

Inpatient unit revenue improvement was evident across all key metrics, primarily reflecting the improved terms of our managed care contracts in the three months ended December 31, 2011 compared to the same period in 2010. The increase in net outpatient revenue per visit was primarily due to improved terms of our managed care contracts, the 7.6% increase in outpatient surgery visits in the three months ended December 31, 2011 as compared to the same period in 2010 and favorable cost report

 

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adjustments in the 2011 period, partially offset by the impact of increased imaging visits, which typically have a lower associated per-visit revenue.

 

 

 

Three Months Ended December 31,

 

Provision for Doubtful Accounts

 

2011

 

2010

 

Increase
(Decrease)

 

Provision for doubtful accounts

 

$

185

 

$

190

 

(2.6

)%

Provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts

 

7.7

%

8.3

%

(0.6

)%(1)

Collection rate on self-pay accounts(2)

 

27.8

%

28.3

%

(0.5

)%(1)

Collection rate on commercial managed care accounts

 

98.2

%

98.4

%

(0.2

)%(1)

 


(1)

The change is the difference between the amounts shown for the three months ended December 31, 2011 as compared to the three months ended December 31, 2010.

(2)

Self-pay accounts receivable are comprised of both uninsured and balance-after insurance receivables.

 

Provision for doubtful accounts decreased by $5 million, or 2.6%, in the three months ended December 31, 2011 as compared to the same period in 2010. The decrease in provision for doubtful accounts primarily related to the favorable impact from our quarterly collection rate update in the 2011 period and the deterioration in the age of our managed care receivables in the three months ended December 31, 2010 that did not occur in the same period in 2011, partially offset by the impact of a 50 basis point decline in our collection rate on self-pay accounts. Our self-pay collection rate, which is the blended collection rate for uninsured and balance-after insurance accounts receivable, declined to approximately 27.8% as of December 31, 2011 from 28.3% as of December 31, 2010.

 

 

 

Three Months Ended December 31,

 

Selected Operating Expenses

 

2011

 

2010

 

Increase
(Decrease)

 

Salaries, wages and benefits

 

$

1,029

 

$

967

 

6.4

%

Supplies

 

391

 

394

 

(0.8

)%

Other operating expenses

 

517

 

469

 

10.2

%

Total

 

$

1,937

 

$

1,830

 

5.8

%

Rent/lease expense(1)

 

$

39

 

$

35

 

11.4

%

Salaries, wages and benefits per adjusted patient day(2)

 

$

1,121

 

$

1,047

 

7.1

%

Supplies per adjusted patient day(2)

 

426

 

427

 

(0.2

)%

Other operating expenses per adjusted patient day(2)

 

563

 

508

 

10.8

%

Total per adjusted patient day

 

$

2,110

 

$

1,982

 

6.5

%

 


(1)

Included in other operating expenses.

(2)

Adjusted patient days represent actual patient days adjusted to include outpatient services by multiplying actual patient days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.

 

Total selected operating expenses, which is defined as salaries, wages and benefits, supplies and other operating expenses, increased by 6.5% on a per adjusted patient day basis in the three months ended December 31, 2011 compared to the three months ended December 31, 2010.

 

Salaries, wages and benefits per adjusted patient day increased by 7.1% in the three months ended December 31, 2011 as compared to the same period in 2010. This increase is primarily due to annual merit increases for our employees, an increase in the number of physicians we employ and higher health benefits costs.

 

Supplies expense per adjusted patient day decreased by 0.2% in the three months ended December 31, 2011 compared to the three months ended December 31, 2010. Supplies expense was favorably impacted by a decline in orthopedic and cardiology-related costs due to renegotiated prices and lower volume levels, partially offset by increased costs of surgical supplies. In general, supplies expense changes are primarily attributable to changes in our patient volume levels and the mix of procedures performed.

 

Other operating expenses per adjusted patient day increased by 10.8% in the three months ended December 31, 2011 as compared to the same period in 2010. This change is primarily due to increased physician and medical fees, higher malpractice expense, increased costs of contracted services, and increased physician relocation and income guarantee costs. Malpractice expense in the 2011 period includes approximately $1 million of expense due to an eight basis point decrease in the interest rate used to estimate the discounted present value of projected future malpractice liabilities compared to a $10 million favorable adjustment as a result of an 80 basis point increase in the interest rate in the 2010 period.

 

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Our estimated direct and allocated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for uninsured patients were $108 million and $92 million in the three months ended December 31, 2011 and 2010, respectively.

 

The table below shows the pre-tax and after-tax impact on continuing operations for the three months and years ended December 31, 2011 and 2010 of the following items:

 

 

 

Three Months Ended
December 31

 

Years Ended
December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(Expense) Income

 

Impairment of long-lived assets and goodwill, and restructuring charges

 

$

(9

)

$

(9

)

$

(27

)

$

(10

)

Litigation and investigation costs

 

(31

)

(6

)

(55

)

(12

)

Loss from early extinguishment of debt

 

(117

)

(2

)

(117

)

(57

)

Pre-tax impact

 

$

(157

)

$

(17

)

$

(199

)

$

(79

)

Deferred tax asset valuation allowance and other tax adjustments

 

$

(8

)

$

23

 

$

8

 

$

1,043

 

Total after-tax impact

 

$

(108

)

$

9

 

$

(118

)

$

993

 

Diluted per-share impact of above items

 

$

(0.25

)

$

0.02

 

$

(0.24

)

$

1.78

 

Diluted earnings per share, including above items

 

$

(0.15

)

$

0.10

 

$

0.13

 

$

2.01

 

 

LIQUIDITY AND CAPITAL RESOURCES OVERVIEW

 

Cash and cash equivalents were $113 million at December 31, 2011, a decrease of $72 million from $185 million at September 30, 2011.

 

Significant cash flow items in the three months ended December 31, 2011 included:

 

·

$24 million of collections related to state Medicaid electronic health record incentives under the HIT provisions of ARRA;

 

 

·

Capital expenditures of $177 million;

 

 

·

Preferred stock dividend payments of $6 million;

 

 

·

Income tax payments of $19 million;

 

 

·

Payments on reserves for restructuring charges and litigation costs of $17 million;

 

 

·

Interest payments of $92 million;

 

 

·

$28 million of payments to acquire various outpatient and physician practice businesses;

 

 

·

$23 million of proceeds from the sale of seven medical office buildings in Texas; and

 

 

·

$178 million of payments to repurchase common stock.

 

Net cash provided by operating activities was $497 million in the year ended December 31, 2011 compared to $472 million in the year ended December 31, 2010. Key negative and positive factors contributing to the change between the 2011 and 2010 periods include the following:

 

·

Increased income from continuing operations before income taxes of $95 million, excluding investment earnings, loss from early extinguishment of debt, interest expense, litigation and investigation costs, impairment and restructuring charges, and depreciation and amortization, in the year ended December 31, 2011 compared to the year ended December 31, 2010;

 

 

·

Lower interest payments of $55 million;

 

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·

$30 million of proceeds from the interest rate swap agreement we terminated in August 2011, which generated approximately $8 million of cash interest savings and $22 million in proceeds from the termination of the agreement;

 

 

·

Reduced cash flows associated with various changes in working capital and changes in long-term liabilities, including the following:

 

 

 

·

a $13 million receivable as of December 31, 2011 that is expected to be collected in 2012 related to state Medicaid electronic health record incentives under the HIT provisions of ARRA;

 

 

 

 

·

a $16 million receivable recorded as of December 31, 2011 related to the California supplemental Medi-Cal payment program that was approved by CMS in the three months ended December 31, 2011, which resulted in the recognition of $28 million of net revenues in the period;

 

 

 

 

·

a $6 million receivable recorded in the year ended December 31, 2011 related to the estimated recovery of the employer portion of certain payroll taxes paid by us prior to April 2005 on behalf of medical residents that we expect will be refunded to us in 2012; and

 

 

 

 

·

$77 million of reduced net cash flows in the 2011 period compared to the 2010 period related to accounts receivable primarily due to payment delays by certain government payers and a temporary delay in the adjudication of accounts receivable due to processing changes we implemented to capture long-term operating efficiencies, partially offset by our management of liabilities;

 

 

·

Income tax payments of $10 million in the year ended December 31, 2011 compared to income tax refunds of $34 million in the year ended December 31, 2010;

 

 

·

Lower aggregate annual 401(k) matching contributions and annual incentive compensation payments of $20 million ($85 million in the year ended December 31, 2011 compared to $105 million in the year ended December 31, 2010);

 

 

·

Lower payments on reserves for restructuring charges and litigation costs of $39 million; and

 

 

·

$47 million of additional cash used in operating activities from discontinued operations (including approximately $13 million in payments relating to the settlement of two class action lawsuits resulting from Hurricane Katrina).

 

SOURCES OF REVENUE

 

We receive revenues for patient services from a variety of sources, primarily managed care payers and the federal Medicare program, as well as state Medicaid programs, indemnity-based health insurance companies and self-pay patients (that is, patients who do not have health insurance and are not covered by some other form of third-party arrangement).

 

The table below shows the sources of net patient revenues before provision for doubtful accounts for our general hospitals, expressed as percentages of net patient revenues before provision for doubtful accounts from all sources:

 

 

 

Years Ended December 31,

 

Net Patient Revenues from:

 

2011

 

2010

 

2009

 

Medicare

 

23.2

%

23.9

%

25.0

%

Medicaid

 

9.0

%

8.7

%

8.1

%

Managed care

 

57.0

%

56.5

%

56.1

%

Indemnity, self-pay and other

 

10.8

%

10.9

%

10.8

%

 

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Table of Contents

 

Our payer mix on an admissions basis for our general hospitals, expressed as a percentage of total admissions from all sources, is shown below:

 

 

 

Years Ended December 31,

 

Admissions from:

 

2011

 

2010

 

2009

 

Medicare

 

29.6

%

29.9

%

30.0

%

Medicaid

 

12.9

%

13.0

%

12.3

%

Managed care

 

47.7

%

47.6

%

48.5

%

Indemnity, self-pay and other

 

9.8

%

9.5

%

9.2

%

 

GOVERNMENT PROGRAMS

 

The Medicare program, the nation’s largest health insurance program, is administered by the Centers for Medicare and Medicaid Services (“CMS”) of the U.S. Department of Health and Human Services (“HHS”). Medicare is a health insurance program primarily for individuals 65 years of age and older, certain younger people with disabilities, and people with end-stage renal disease, and is provided without regard to income or assets. Medicaid is a program that pays for medical assistance for certain individuals and families with low incomes and resources, and is jointly funded by the federal government and state governments. Medicaid is the largest source of funding for medical and health-related services for the nation’s poor and most vulnerable individuals.

 

As enacted, the Affordable Care Act will change how health care services under Medicare, Medicaid and other government programs are covered, delivered and reimbursed. Among other things, the Affordable Care Act expands eligibility under existing Medicaid programs to non-pregnant adults with incomes up to 138% of the federal poverty level beginning in 2014. Further, the law permits states to create federally funded, non-Medicaid plans for low-income residents not eligible for Medicaid. However, the Affordable Care Act also contains a number of provisions designed to significantly reduce Medicare and Medicaid program spending, including: (1) negative adjustments to the annual market basket updates for Medicare inpatient, outpatient, long-term acute and inpatient rehabilitation prospective payment systems, which began in 2010, as well as additional “productivity adjustments” that began in 2011; and (2) reductions to Medicare and Medicaid disproportionate share hospital payments beginning in 2013 as the number of uninsured individuals declines. We are unable to predict with certainty the full impact of the Affordable Care Act on our future revenues and operations at this time due to the law’s complexity, the limited amount of implementing regulations and interpretive guidance, gradual or potentially delayed implementation, the pending U.S. Supreme Court review and possible amendment. However, we expect that several provisions of the Affordable Care Act will have a material effect on our business.

 

In addition to the changes affected by the Affordable Care Act, the Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative and judicial rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities. We are unable to predict the effect of future government health care funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if we or one or more of our subsidiaries’ hospitals are excluded from participation in the Medicare or Medicaid program or any other government health care program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.

 

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Medicare

 

Medicare offers its beneficiaries different ways to obtain their medical benefits. One option, the Original Medicare Plan, is a fee-for-service payment system. The other option, called Medicare Advantage (sometimes called “Part C” or “MA Plans”), includes health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), private fee-for-service Medicare special needs plans and Medicare medical savings account plans. The major components of our net patient revenues for hospital services provided to patients enrolled in the Original Medicare Plan for the years ended December 31, 2011, 2010 and 2009 are set forth in the table below:

 

 

 

Years Ended December 31,

 

Revenue Descriptions

 

2011

 

2010

 

2009

 

Medicare severity-adjusted diagnosis-related group — operating

 

$

1,147

 

$

1,171

 

$

1,191

 

Medicare severity-adjusted diagnosis-related group — capital

 

103

 

106

 

109

 

Outliers

 

46

 

51

 

68

 

Outpatient

 

474

 

453

 

421

 

Disproportionate share

 

219

 

215

 

219

 

Direct Graduate and Indirect Medical Education(1)

 

110

 

110

 

111

 

Other(2)

 

72

 

53

 

76

 

Adjustments for prior-year cost reports and related valuation allowances

 

(1

)

(15

)

10

 

Total Medicare net patient revenues

 

$

2,170

 

$

2,144

 

$

2,205

 

 


(1)

Includes Indirect Medical Education revenue earned by our children’s hospital under the Children’s Hospitals Graduate Medical Education Payment Program administered by the Health Resources and Services Administration of HHS.

(2)

The other revenue category includes one skilled nursing facility (which we sold in the three months ended June 30, 2009), inpatient psychiatric units, one inpatient rehabilitation hospital (which we closed in the three months ended March 31, 2009), inpatient rehabilitation units, one long-term acute care hospital, other revenue adjustments, and adjustments related to the estimates for current-year cost reports and related valuation allowances.

 

A general description of the types of payments we receive for services provided to patients enrolled in the Original Medicare Plan is provided below. Recent regulatory and legislative updates to the terms of these payment systems and their estimated effect on our revenues can be found below under “Regulatory and Legislative Changes.”

 

Acute Care Hospital Inpatient Prospective Payment System

 

Medicare Severity-Adjusted Diagnosis-Related Group Payments—Sections 1886(d) and 1886(g) of the Social Security Act (the “Act”) set forth a system of payments for the operating and capital costs of inpatient acute care hospital admissions based on a prospective payment system (“PPS”). Under the inpatient prospective payment system (“IPPS”), Medicare payments for hospital inpatient operating services are made at predetermined rates for each hospital discharge. Discharges are classified according to a system of Medicare severity-adjusted diagnosis-related groups (“MS-DRGs”), which categorize patients with similar clinical characteristics that are expected to require similar amounts of hospital resources. CMS assigns to each MS-DRG a relative weight that represents the average resources required to treat cases in that particular MS-DRG, relative to the average resources used to treat cases in all MS-DRGs.

 

The base payment amount for the operating component of the MS-DRG payment is comprised of an average standardized amount that is divided into a labor-related share and a nonlabor-related share. Both the labor-related share of operating base payments and the base payment amount for capital costs are adjusted for geographic variations in labor and capital costs, respectively. Using diagnosis and procedure information submitted by the hospital, CMS assigns to each discharge an MS-DRG, and the base payments are multiplied by the relative weight of the MS-DRG assigned. The MS-DRG operating and capital base rates, relative weights and geographic adjustment factors are updated annually, with consideration given to: the increased cost of goods and services purchased by hospitals; the relative costs associated with each MS-DRG; and changes in labor data by geographic area. Although these payments are adjusted for area labor and capital cost differentials, the adjustments do not take into consideration an individual hospital’s operating and capital costs.

 

Outlier Payments— Outlier payments are additional payments made to hospitals on individual claims for treating Medicare patients whose medical conditions are costlier to treat than those of the average patient in the same MS-DRG. To qualify for a cost outlier payment, a hospital’s billed charges, adjusted to cost, must exceed the payment rate for the MS-DRG by a fixed threshold established annually by CMS. A Medicare administrative contractor (“MAC”) calculates the cost of a claim by multiplying the billed charges by a cost-to-charge ratio that is typically based on the hospital’s most recently filed cost report. Generally, if the computed cost exceeds the sum of the MS-DRG payment plus the fixed threshold, the hospital receives 80% of the difference as an outlier payment.

 

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Under the Act, CMS must project aggregate annual outlier payments to all PPS hospitals to be not less than 5% or more than 6% of total MS-DRG payments (“Outlier Percentage”). The Outlier Percentage is determined by dividing total outlier payments by the sum of MS-DRG and outlier payments. CMS annually adjusts the fixed threshold to bring projected outlier payments within the mandated limit. A change to the fixed threshold affects total outlier payments by changing: (1) the number of cases that qualify for outlier payments; and (2) the dollar amount hospitals receive for those cases that still qualify for outlier payments.

 

Disproportionate Share Hospital Payments—In addition to making payments for services provided directly to beneficiaries, Medicare makes additional payments to hospitals that treat a disproportionately high share of low-income patients. DSH payments are determined annually based on certain statistical information defined by CMS and are calculated as a percentage add-on to the MS-DRG payments. During 2011, 42 of our hospitals in continuing operations qualified for DSH payments. The primary method for a hospital to qualify for DSH payments is based on a complex statutory formula that results in a DSH percentage that is applied to payments based on MS-DRGs. The hospital-specific DSH percentage is equal to the sum of the percentage of Medicare inpatient days attributable to patients eligible for both the Traditional Medicare Plan (“Part A”) and Supplemental Security Income (“SSI”) percentage, and the percentage of total inpatient days attributable to patients eligible for Medicaid but not Medicare Part A. Hospitals receive interim DSH payments that are reconciled in the annual cost report. CMS develops and distributes the hospital-specific SSI percentages, typically one year after the close of the federal fiscal year (“FFY”); however, the release of the SSI percentages has been delayed in recent years as CMS continues to examine and refine the data. Historically, the SSI percentage included only patient days paid under Part A. However, the FFY 2007 SSI percentages CMS released in June 2009 reflect a policy change to include the Part C days in the ratio. The 2007 SSI percentages will be used to settle our 2007 cost reports. As a result, during the three months ended June 30, 2009, we recorded an unfavorable adjustment of $23 million as our initial estimate of the impact of using the FFY 2007 SSI ratios. During the three months ended September 30, 2009, we learned that CMS had instructed the MACs to suspend the settlement of all cost reports (including ours) in which the 2007 SSI percentages would be used. However, the MACs are authorized to use the 2007 SSI percentages for current DSH interim payments and tentative settlements for post-2007 cost reporting periods pending the release of revised 2007 SSI percentages and the 2008 and subsequent SSI percentages. The cost report settlement suspension is still in effect, and we cannot predict with certainty when the suspension will be removed. CMS has not yet released the FFYs 2008, 2009 and 2010 SSI ratios. According to the CMS website, revised FFYs 2007 and 2008 SSI ratios that will include the Part C data were to be posted on the website in 2011; however, the website has not yet been updated. A 2011 U.S. Court of Appeals decision invalidated the inclusion of the Part C days in the SSI ratios for certain earlier periods; however, the proper treatment of the Part C days for periods after October 2004 remains unresolved. CMS has not indicated it intends to change its policy in this regard. As a result, in the three months ended June 30, 2010, we revised our estimate of the impact of using the FFY 2007 SSI ratios for the calculation of Medicare DSH payments for our non-teaching hospitals for 2007 and subsequent periods to reflect the inclusion of the estimated Part C days in the FFY 2007 SSI ratios, and we recorded an unfavorable adjustment to Medicare net revenue of $20 million ($14 million related to prior years and $6 million related to the year ended December 31, 2010). We intend to continue to pursue a reversal of CMS’ policy in this regard through the administrative and judicial appeal process; however, we cannot predict the outcome or timing of the appeals.

 

The Medicare DSH statutes and regulations have been the subject of various administrative appeals and lawsuits, and our hospitals have been included in these appeals for several years. These types of appeals generally take several years to resolve, in particular for multi-hospital organizations, because of CMS’ administrative appeal rules. The appeals have been further delayed due to CMS’ general moratorium on the release of information critical to certain elements of these appeals. We cannot predict the timing or outcome of the DSH appeals for our hospitals, but a favorable outcome could have a material impact on our future revenues and cash flows.

 

Direct Graduate and Indirect Medical Education Payments—The Medicare program provides additional reimbursement to approved teaching hospitals for additional expenses incurred by such institutions. This additional reimbursement, which is subject to certain limits, including intern and resident full-time equivalent (“FTE”) limits, is made in the form of Direct Graduate Medical Education (“DGME”) and Indirect Medical Education (“IME”) payments. During 2011, 13 of our hospitals in continuing operations were affiliated with academic institutions and were eligible to receive such payments. Medicare rules permit teaching hospitals to enter into Medicare Graduate Medical Education Affiliation Agreements for the purpose of applying the FTE limits on an aggregate basis, and some of our teaching hospitals have entered into such agreements.

 

Hospital Outpatient Prospective Payment System

 

Under the outpatient prospective payment system, hospital outpatient services, except for certain services that are reimbursed on a separate fee schedule, are classified into groups called ambulatory payment classifications (“APCs”). Services in each APC are similar clinically and in terms of the resources they require, and a payment rate is established for each APC.

 

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Depending on the services provided, hospitals may be paid for more than one APC for an encounter. CMS periodically updates the APCs and annually adjusts the rates paid for each APC.

 

Inpatient Psychiatric Facility Prospective Payment System

 

The inpatient psychiatric facility prospective payment system (“IPF-PPS”) applies to psychiatric hospitals and psychiatric units located within acute care hospitals that have been designated as exempt from the hospital inpatient prospective payment system. The IPF-PPS is based on prospectively determined per-diem rates and includes an outlier policy that authorizes additional payments for extraordinarily costly cases.

 

Inpatient Rehabilitation Prospective Payment System

 

Rehabilitation hospitals and rehabilitation units in acute care hospitals meeting certain criteria established by CMS are eligible to be paid as an inpatient rehabilitation facility (“IRF”) under the IRF prospective payment system (“IRF-PPS”). Payments under the IRF-PPS are made on a per-discharge basis. A patient classification system is used to assign patients in IRFs into case-mix groups. The IRF-PPS uses federal prospective payment rates across distinct case-mix groups.

 

To be paid under the IRF-PPS, each hospital or unit must demonstrate on an annual basis that at least 60% of its total population had either a principal or secondary diagnosis that fell within one or more of the qualifying conditions designated in the Medicare regulations governing IRFs. As of December 31, 2011, all of our rehabilitation units were in compliance with the required 60% threshold.

 

Physician Services Payment System

 

Medicare pays for physician and other professional services based on a list of services and their payment rates, called the Medicare Physician Fee Schedule (“MPFS”). In determining payment rates for each service on the fee schedule, CMS considers the amount of work required to provide a service, expenses related to maintaining a practice, and liability insurance costs. The values given to these three types of resources are adjusted by variations in the input prices in different markets, and then a total is multiplied by a standard dollar amount, called the fee schedule’s conversion factor, to arrive at the payment amount. Medicare’s payment rates may be adjusted based on provider characteristics, additional geographic designations and other factors. The conversion factor updates payments for physician services every year according to a formula called the sustainable growth rate (“SGR”) system. This formula is intended to keep spending growth (a function of service volume growth) consistent with growth in the national economy. However, in the last several years, Congress has specified an update outside of the SGR formula.

 

Cost Reports

 

The final determination of certain Medicare payments to our hospitals, such as DSH, DGME, IME and bad debt expense, are retrospectively determined based on our hospitals’ cost reports. The final determination of these payments often takes many years to resolve because of audits by the program representatives, providers’ rights of appeal, and the application of numerous technical reimbursement provisions.

 

For filed cost reports, we adjust the accrual for estimated cost report settlements based on those cost reports and subsequent activity, and record a valuation allowance against those cost reports based on historical settlement trends. The accrual for estimated cost report settlements for periods for which a cost report is yet to be filed is recorded based on estimates of what we expect to report on the filed cost reports and a corresponding valuation allowance is recorded as previously described. Cost reports must generally be filed within five months after the end of the annual cost report reporting period. After the cost report is filed, the accrual and corresponding valuation allowance may need to be adjusted. Typically, the MACs settle cost reports within two years after the end of the cost reporting period; however, due to the aforementioned CMS suspension of issuing cost report settlements nationwide, our Medicare cost reports for periods ended on and after December 31, 2007 have not yet been settled. We cannot predict when CMS will remove the settlement suspension.

 

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Medicaid

 

Medicaid programs and the corresponding reimbursement methodologies are administered by the states and vary from state to state and from year to year. Estimated revenues under various state Medicaid programs, excluding state-funded managed care Medicaid programs, constituted approximately 9.0%, 8.7% and 8.1% of net patient revenues at our continuing general hospitals for the years ended December 31, 2011, 2010 and 2009, respectively. We also receive DSH payments under various state Medicaid programs. For the years ended December 31, 2011, 2010 and 2009, our revenues attributable to DSH payments and other state-funded subsidy payments were approximately $260 million, $181 million and $171 million, respectively.

 

Several states in which we operate have recently faced budgetary challenges that resulted in reduced Medicaid funding levels to hospitals and other providers. Because most states must operate with balanced budgets, and the Medicaid program is generally a significant portion of a state’s budget, states can be expected to adopt or consider adopting future legislation designed to reduce their Medicaid expenditures. The economic downturn has increased budget pressures on most states, and these budget pressures have resulted, and likely will continue to result, in decreased spending for Medicaid programs in many states. Most states began a new fiscal year on July 1, 2011 and, although most addressed projected shortfalls in their final budgets, some states are still facing budget gaps. Increased Medicaid enrollment due to the economic downturn, limits on the ability of states to reduce Medicaid eligibility criteria enacted as part of the Affordable Care Act, budget gaps and other factors could result in future reductions to Medicaid payments or additional taxes on hospitals. Some states are considering proposals that would result in such reductions.

 

As an alternative means of funding provider payments, several states in which we operate have adopted or are considering adopting broad-based provider taxes to fund the non-federal share of Medicaid programs. Some states, such as California and Pennsylvania, as described below, have introduced provider fee arrangements, which are intended to enhance funding or partially mitigate reduced Medicaid funding levels to hospitals and other providers.

 

Because we cannot predict what actions the federal government or the states may take under existing legislation and future legislation to address budget gaps or deficits, we are unable to assess the effect that any such legislation might have on our business, but the impact on our future financial position, results of operations or cash flows could be material.

 

Medicaid-related patient revenues recognized by our continuing general hospitals from Medicaid-related programs in the states in which they are located, as well as from Medicaid programs in neighboring states, for the years ended December 31, 2011, 2010 and 2009 are set forth in the table below:

 

 

 

Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

 

 

Medicaid

 

Managed
Medicaid

 

Medicaid

 

Managed
Medicaid

 

Medicaid

 

Managed
Medicaid

 

California

 

$

221

 

$

127

 

$

137

 

$

111

 

$

125

 

$

99

 

Florida

 

184

 

60

 

194

 

55

 

182

 

56

 

Pennsylvania

 

91

 

195

 

53

 

161

 

53

 

157

 

Georgia

 

88

 

40

 

87

 

40

 

73

 

41

 

Texas

 

64

 

114

 

66

 

109

 

67

 

107

 

Missouri

 

52

 

5

 

81

 

6

 

75

 

6

 

South Carolina

 

40

 

22

 

61

 

20

 

52

 

17

 

Alabama

 

30

 

 

26

 

 

14

 

 

North Carolina

 

23

 

 

26

 

 

27

 

 

Nebraska

 

22

 

7

 

24

 

6

 

23

 

6

 

Tennessee

 

10

 

30

 

9

 

27

 

9

 

30

 

 

 

$

825

 

$

600

 

$

764

 

$

535

 

$

700

 

$

519

 

 

In October 2009, the Governor of California signed legislation supported by the hospital industry to impose a provider fee on general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental Medi-Cal payments to hospitals, as well as provide the state with $320 million annually for children’s health care coverage, for the 21-month period retroactive to April 2009 and expiring on December 31, 2010 (the “21-Month Program”). On January 18, 2011, CMS issued the final required federal approval of the program, which allowed us to recognize $63 million of additional revenues, net of provider fees and other expenses, during the three months ended March 31, 2011. We made $5 million of our required payments and received approximately $59 million in additional supplemental proceeds during 2011 related to the 21-Month Program, and we received $9 million of receipts in excess of payments related to this program in 2010.

 

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On April 13, 2011, the Governor of California signed legislation that created a fee program to provide supplemental Medi-Cal payments to hospitals retroactive to January 1, 2011 and expiring on June 30, 2011 (the “Six-Month Program”). On December 30, 2011, CMS issued the final required federal approval of the program, which allowed us to recognize $28 million of additional revenues, net of provider fees and other expenses, during the three months ended December 31, 2011. We made $44 million of our required payments and received approximately $56 million in additional supplemental proceeds during 2011 related to the Six-Month Program.

 

On September 16, 2011, the Governor of California signed legislation, similar to the 21-Month and Six-Month Programs described above, that created a fee program to provide supplemental Medi-Cal payments to hospitals retroactive to July 1, 2011 and expiring on December 31, 2013 (the “30-Month Program”). To date, CMS has not issued any approvals in connection with the 30-Month Program. Based on the most recent California Hospital Association estimates, the 30-Month Program could result in approximately $210 million of net revenues for our California hospitals. We expect to record the additional net revenues, net of provider fees and other expenses, ratably over 30 months (which will be calculated based on the program being retroactive to July 2011) beginning in the period CMS issues the required approvals of the 30-Month Program. We cannot provide any assurances regarding the final approval of the 30-Month Program by CMS or the timing or amount of the payments we may ultimately receive or be required to make.

 

During the three months ended March 31, 2011, CMS issued final approval of Pennsylvania’s Medical Assistance payment system, which includes, among other things, a three-year provider fee program for the period July 1, 2010 through June 30, 2013. Net operating revenues in the year ended December 31, 2011 included approximately $39 million related to the program, of which the portion related to the year ended December 31, 2010 was approximately $13 million. Based on estimates prepared by the Hospital Association of Pennsylvania, this program is expected to result in approximately $24 million of additional net revenues for our Pennsylvania hospitals in the state fiscal year 2012 (July 1, 2011-June 30, 2012).

 

In March 2011, the State of Georgia adopted an amended budget for the state fiscal year ended June 30, 2011 that included additional funding for payments to private hospitals from the Indigent Care Trust Fund (“ICTF”), the state’s disproportionate share program. During the six months ended June 30, 2011, we received payments to our hospitals from the ICTF of approximately $13 million, of which $10 million was recognized in the three months ended March 31, 2011, and the portion related to 2010 was approximately $7 million. The Governor of Georgia has proposed an amended budget for the state fiscal year ending June 30, 2012 that includes a provision to again fund the private hospital ICTF; however, the proposal must be approved by the state legislature. We cannot provide any assurances regarding the amount, if any, of ICTF payments we might receive for the current state fiscal year.

 

Based on a recent audit of Missouri’s 2005-2007 Medicaid plan years, it was determined that excess DSH payments were made to hospitals and that excess payments were likely in 2011. Effective June 1, 2011, the State of Missouri Department of Social Services Medicaid Division implemented an emergency rule that allows it to recoup state fiscal year 2011 (July 2010 - June 2011) DSH payments from hospitals with DSH “longfalls” (i.e., payments in excess of costs) and redistribute the funds to hospitals with DSH “shortfalls” (i.e., payments lower than costs). The state implemented this rule on an emergency basis as it allows the state to redistribute DSH payments to hospitals in accordance with CMS audit requirements. In September 2011, the state issued notices of the estimated overpayments to the affected hospitals. Based on these notices, the estimated amount that we have to repay as a result of this emergency rule is approximately $12 million. We are currently challenging the recoupment and redistribution; however, we cannot predict the outcome of such action. Accordingly, as of September 30, 2011, we recorded a liability of approximately $12 million for this matter. We were recently advised that collection of the liability has been placed in abeyance pending the outcome of our appeal.

 

Regulatory and Legislative Changes

 

Recent regulatory and legislative updates to the Medicare and Medicaid payment systems are provided below.

 

Payment and Policy Changes to the Medicare Inpatient Prospective Payment System

 

Under Medicare law, CMS is required annually to update certain rules governing the inpatient prospective payment system. The updates generally become effective October 1, the beginning of the federal fiscal year. On August 1, 2011, CMS issued the Changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2012 Rates (“Final Rule”). The Final Rule includes the following payment and policy changes:

 

·                  A market basket increase of 3.0% for MS-DRG operating payments for hospitals reporting specified quality measure data (hospitals that do not report specified quality measure data will receive an increase of 1.0%); CMS

 

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also made certain adjustments to the estimated 3.0% market basket increase that will result in a net market basket update of 1.0%, including the following adjustments to the market basket index:

 

·                  Market basket index and productivity reductions required by the Affordable Care Act of 0.10% and 1.0%, respectively;

 

·                  A reduction of 2.0% to permanently remove approximately one half of the estimated 3.9% documentation and coding adjustment resulting from the conversion to MS-DRGs; CMS did not indicate when it will remove the remaining 1.9%, however, CMS did indicate that it is feasible that all or most of the adjustment could be made in FFY 2013; and

 

·                  An increase of 1.1% to prospectively correct an error in the standardized rate related to the rural floor budget neutrality adjustment that occurred in prior years;

 

·                  A 0.34% net increase in the capital federal MS-DRG rate; and

 

·                  A decrease in the cost outlier threshold from $23,075 to $22,385.

 

The Final Rule also adopts for FFY 2014 a measure relating to Medicare spending per beneficiary for both the Hospital Inpatient Quality Reporting Program and the new Hospital Inpatient Value-Based Purchasing program required by the Affordable Care Act. The new measure will assess Part A and Part B beneficiary spending during a period of time that spans from three days prior to a hospital admission through 30 days after the patient is discharged. The goal is to encourage hospitals to provide high-quality care to Medicare beneficiaries at a lower cost and to promote greater efficiencies, including measures to reduce unnecessary hospital readmissions across patient care settings throughout the entire U.S. health care system.

 

CMS projects that the combined impact of the payment and policy changes will yield an average 1.2% increase in payments for hospitals in large urban areas (populations over one million). Using the impact percentages in the Final Rule as applied to our IPPS payments for the 12 months ended September 30, 2011, the estimated annual impact for all changes in the Final Rule on our hospitals is an increase in our Medicare inpatient revenues of approximately $16 million. Because of the uncertainty associated with various factors that may influence our future IPPS payments by individual hospital, including admission volumes, length of stay and case mix, we cannot provide any assurances regarding this estimate.

 

Payment Changes to the Medicare Inpatient Rehabilitation Facility Prospective Payment System

 

On July 29, 2011, CMS issued a final rule that implements certain provisions of the Affordable Care Act and updates the prospective payment rates for the Medicare inpatient rehabilitation facility prospective payment system for FFY 2012 (“IRF-PPS Final Rule”). The IRF-PPS Final Rule, as subsequently corrected on September 26, 2011, includes the following payment changes:

 

·                  A net payment increase for IRFs of 1.8%, which reflects a market basket index increase of 2.9%, reduced by a productivity adjustment of 1.0% and an additional 0.1%, both as required by the Affordable Care Act, as well as other adjustments, including a budget neutrality reduction; and

 

·                  A decrease in the outlier threshold for high cost outlier cases from $11,410 to $10,713.

 

The IRF-PPS Final Rule also implements Section 3004 of the Affordable Care Act, which establishes a new quality reporting program that provides for a 2% reduction in the annual IRF-PPS increase factor beginning in 2014 for IRFs that fail to report quality data.

 

At December 31, 2011, eight of our general hospitals operated inpatient rehabilitation units. CMS projects that the payment changes in the IRF-PPS Final Rule will result in an estimated total increase in aggregate IRF payments of 2.2%. This estimated increase includes an average 2.3% increase for rehabilitation units in hospitals located in urban areas for FFY 2012. Using the urban rehabilitation unit impact percentage as applied to our Medicare IRF payments for the 12 months ended September 30, 2011, the annual impact of the payment changes in the IRF-PPS Final Rule may result in an estimated increase in our Medicare revenues of less than $1 million. Because of the uncertainty associated with various factors that may influence our future IRF payments, including legislative action, admission volumes, length of stay and case mix, and the impact of compliance with IRF admission criteria, we cannot provide any assurances regarding our estimate of the impact of these changes.

 

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Payment Changes to the Medicare Inpatient Psychiatric Facility Prospective Payment System

 

On April 28, 2011, CMS issued a final rule updating the prospective payment rates for the Medicare inpatient psychiatric facility (“IPF”) PPS for the rate year beginning July 1, 2011 (“IPF-PPS Final Rule”). The IPF-PPS Final Rule includes the following payment and policy changes:

 

·                  A change to the IPF-PPS rate update period to a rate year that coincides with the FFY effective October 1, 2011 that will apply to discharges beginning July 1, 2011 through September 30, 2012; and

 

·                  An update to IPF-PPS payments equal to the market basket of 3.2% for the 15-month rate year period minus a 0.25% reduction required by the Affordable Care Act and a 0.21% reduction due to an update of the fixed dollar loss threshold.

 

At December 31, 2011, 11 of our general hospitals operated inpatient psychiatric units reimbursed under the IPF-PPS. CMS projects that the combined impact of the payment and policy changes included in the IPF-PPS Final Rule will yield an average 2.74% increase in payments for all IPFs (including psychiatric units in acute care hospitals) and an average 2.43% increase in payments for psychiatric units of acute care hospitals located in urban areas for the 15-month rate period beginning July 1, 2011. Using the urban psychiatric unit impact percentage as applied to our IPF-PPS payments for the 12 months ended June 30, 2011, the annual impact of all payment and policy changes in the IPF-PPS Final Rule on our IPF-PPS psychiatric units may result in an estimated increase in our Medicare revenues of approximately $1 million. Because of the uncertainty associated with various factors that may influence our future IPF-PPS payments, including legislative action, admission volumes, length of stay and case mix, we cannot provide any assurances regarding our estimate of the impact of the aforementioned changes.

 

Payment and Policy Changes to the Medicare Outpatient Prospective Payment System

 

On November 1, 2011, CMS released the Final Changes to the Hospital Outpatient Prospective Payment System (“OPPS”) and Calendar Year (“CY”) 2012 Payment Rates (“Final OPPS Rule”). The Final OPPS Rule includes the following payment and policy changes:

 

·                  A net update to OPPS payments equal to the estimated market basket of 1.9%, which takes into account a projected hospital OPPS market basket percentage increase of 3.0%, minus an estimated productivity adjustment of 1.0% and a 0.1% adjustment, both of which are necessary to comply with certain provisions of the Affordable Care Act;

 

·                  A budget neutrality reduction of 0.2% in payments for non-cancer OPPS hospitals to fund an increase in OPPS payments to cancer hospitals mandated under the Affordable Care Act; and

 

·                  The addition of three quality measures to the current list of 23 outpatient measures that hospitals would have to report for determining CY 2014 payments.

 

CMS projects that the combined impact of the payment and policy changes in the Final OPPS Rule will yield an average 1.9% increase in payments for all hospitals and an average 2.0% increase in payments for hospitals in large urban areas (populations over one million). According to CMS’ estimates, the projected annual impact of the payment and policy changes in the final OPPS Rule on our hospitals is an $8 million increase in our Medicare outpatient revenues. Because of the uncertainty associated with various factors that may influence our future OPPS payments by individual hospital, including patient volumes and case mix, we cannot provide any assurances regarding this estimate.

 

Changes to the Medicare Physician Fee Schedule

 

On November 1, 2011, CMS issued the CY 2012 Medicare Physician Fee Schedule final rule (“MPFS Final Rule”) detailing Medicare physician payment policies for 2012. The rule confirmed that, unless Congress intervened, Medicare’s physician payments were scheduled to decrease in January 2012 by 27.4%. On January 4, 2012, the President signed the Temporary Payroll Tax Cut Continuation Act into law, which prevented the scheduled 27.4% cut in Medicare physician payments from being implemented on January 1, 2012 and extended the CY 2011 rates through February 29, 2012. In February 2012, the President signed the Middle Class Tax Relief and Job Creation Act of 2012 (the “Job Creation Act”) into law, which further extended the CY 2011 rates through December 31, 2012.  Because the legislation does not change the underlying formula for calculating rates, it is projected that physician rates will be reduced by more than 30% on January 1, 2013 unless additional legislation is enacted.

 

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Affordable Care Act

 

As enacted, the Affordable Care Act will change how health care services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth and other reductions in Medicare program spending, and the establishment of programs where reimbursement is tied to quality and integration. In addition, the 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. The expansion of health insurance coverage under the Affordable Care Act may result in a material increase in the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements. Two such states are Florida and Texas, where nearly half of our licensed beds are currently located. On the other hand, the Affordable Care Act provides for significant reductions in Medicare market basket updates and reductions in Medicare and Medicaid DSH payments. Given that approximately 32.2% of our net patient revenues in 2011 were from Medicare and Medicaid, reductions to these programs may significantly impact us and could offset any positive effects of the Affordable Care Act.

 

We are unable to predict the full impact of the Affordable Care Act on our future revenues and operations at this time due to the law’s complexity and the limited amount of implementing regulations and interpretive guidance, as well as our inability to foresee how individuals and businesses will respond to the choices available to them under the law. Furthermore, many of the provisions of the Affordable Care Act that expand insurance coverage will not become effective until 2014 or later. In addition, the Affordable Care Act will result in increased state legislative and regulatory changes in order for states to comply with new federal mandates, such as the requirement to establish health insurance exchanges and to participate in grants and other incentive opportunities, and we are unable to predict the timing and impact of such changes at this time. It is also possible that implementation of the Affordable Care Act could be delayed or even blocked due to court challenges and efforts to repeal or amend the law.

 

Because of the many variables involved, we are unable to predict with certainty the net effect on us of (1) the expected increases in volumes and revenues and decrease in bad debt expense from providing care to previously uninsured and underinsured individuals, (2) the reductions in Medicare spending, (3) the reductions in Medicare and Medicaid DSH funding, and (4) numerous other provisions in the Affordable Care Act legislation that may affect us.

 

The American Recovery and Reinvestment Act of 2009

 

The American Recovery and Reinvestment Act of 2009 was enacted to stimulate the U.S. economy. The law created federal tax incentives, expanded unemployment benefits and other social welfare provisions, and increased domestic spending on education, infrastructure and health care, including $31 billion in new spending on health information technology, most of which is for incentive Medicare and Medicaid payments to physicians and hospitals. ARRA requires that hospitals and physicians become “meaningful users” of electronic health records (“EHRs”) and submit quality data as a condition of receiving the incentive payments, which began in 2011. On July 13, 2010, CMS issued two final rules related to the adoption and dissemination of EHRs. One of the rules defines the “meaningful use” requirements that hospitals and other providers must meet to qualify for federal incentive payments for adopting EHRs under ARRA, and the other final rule describes the technical capabilities required for certified EHR technology.

 

The Medicaid Electronic Health Record Incentive Program provides incentive payments to eligible hospitals, physicians and certain other professionals (“Providers”) as they adopt, implement, upgrade or demonstrate meaningful use of certified EHR technology in their first year of participation and demonstrate meaningful use for up to five remaining participation years. Medicaid EHR incentive payments to Providers are 100% federally funded; however, the Medicaid EHR incentive program is voluntarily offered by individual states. As of December 31, 2011, all but one state (Nebraska) in which we operate had received the required CMS approval of their Medicaid EHR plans.

 

If we are able to achieve full compliance at all of our hospitals by 2013, we could receive approximately $345 million in total estimated combined Medicare and Medicaid hospital EHR incentive payments. However, based on the timeframe we anticipate it will take for us to achieve full compliance with the HIT requirements, it is unlikely that we will be able to realize the maximum amount of incentive payments of $345 million. We will be required to make investments in HIT through 2014 in excess of $600 million ($255 million of which had already been invested as of December 31, 2011) compared to approximately $320 million of Medicare and Medicaid EHR incentive payments, some of which we were able to recognize in 2011, as described below. The Medicare incentive payments to individual hospitals are made over a four-year, front-weighted transition period. The Medicaid incentive payments, which are administered by the states, are subject to more flexible payment and compliance standards than Medicare incentive payments; hospitals that achieve compliance between 2014 and 2015 will receive reduced incentive payments during the transition period. We anticipate that, in addition to the expenditures we incur to qualify

 

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for these incentive payments, our operating expenses have increased and will increase in the future as a result of these information system investments. Much or all of these expenditures may have been made by us as a part of our clinical systems enhancements, but would not have been incurred in the timeline to comply with the incentive payment requirements of ARRA. However, we anticipate there will be other operational benefits that we can realize as a result of these HIT enhancements that are not included in the above amounts. Hospitals that fail to become meaningful users of EHRs or fail to submit quality data by 2015 will be subject to penalties in the form of a reduction to Medicare payments. This reduction, which will be based on the market basket update, will be phased in over three years and will continue until a hospital achieves compliance. Using an estimated market basket of 2.9% and our annual Medicare inpatient net revenues for the year ended December 31, 2011, should all of our hospitals fail to become meaningful users of EHRs and fail to submit quality data, the penalties would result in reductions to our annual Medicare traditional inpatient net revenues of approximately $11 million, $21 million and $32 million in 2015, 2016, and 2017 and subsequent years, respectively.

 

During the year ended December 31, 2011, we acquired certified EHR technology for all of our acute care hospitals and certain of our employed physicians. As a result, we recognized approximately $55 million of EHR incentives related to the Medicaid EHR incentive program, a significant portion of which was received during the three months ended December 31, 2011 pursuant to the ARRA HIT programs in the various states in which we operate that received CMS approval as of December 31, 2011. These incentives offset approximately $85 million of operating expenses we incurred in 2011 related to our overall HIT implementation program. All states in which we operate that have CMS approval have become fully operational for providers to register for Year 1 Medicaid EHR incentive payments. The final Medicaid incentive payment amount to which a Provider is entitled is determined by several variables that are subject to validation by the state prior to such payment being issued, as well as post-payment audits.

 

The complexity of the changes required to our hospitals’ systems and the time required to complete the changes will likely result in some or all of our hospitals not being fully compliant in time to be eligible for the maximum HIT funding permitted under ARRA. Because of the uncertainties regarding the implementation of HIT, including CMS’ future EHR implementation regulations, the ability of our hospitals to achieve compliance and the associated costs, we cannot provide any assurances regarding the aforementioned estimates.

 

FFY 2013 Budget Proposal

 

The President released his FFY 2013 budget proposal on February 13, 2012. The key provisions of the budget proposal affecting Medicare and Medicaid include:

 

·                  A reduction in reimbursement from 70% of bad debts resulting from non-payment of deductibles and co-payments by Medicare beneficiaries to 25% over three years starting in 2013;

·                  A 10% reduction in IME payments beginning in 2014;

·                  A change to the Federal Matching Assistance Percentage formula in a manner that would result in a net reduction of federal money to the states;

·                  A phase-down of the cap on state provider taxes, which could require some states to develop alternative sources of Medicaid funding or reduce provider payments; and

·                  A reduction in DSH allotments to states as the number of uninsured individuals declines following implementation of the Affordable Care Act.

 

We cannot predict what action Congress or the President might take with respect to the budget proposal or the impact the resulting legislation might have on our business, financial condition, results of operations or cash flows.

 

Middle Class Tax Relief and Job Creation Act of 2012

 

In addition to extending the CY 2011 rates under the Medicare Physician Fee Schedule, the Job Creation Act, among other things, will reduce Medicare bad debt reimbursement from 70% to 65% for cost reporting periods beginning in FFY 2013 and thereafter. We estimate this change will reduce our annual Medicare bad debt reimbursement by approximately $2 million beginning in 2013. Legislation to implement the remaining proposals must be enacted by Congress for them to become effective. We cannot predict what action Congress or the President might take with respect to such legislation or the impact the legislation might have on our business, financial condition, results of operations or cash flows.

 

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Medicare and Medicaid Recovery Audit Contractor Initiatives

 

Section 302 of the Tax Relief and Health Care Act of 2006 authorized a permanent program involving the use of third-party recovery audit contractors (“RACs”) to identify Medicare overpayments and underpayments made to providers. RACs are compensated based on the amount of both overpayments and underpayments they identify by reviewing claims submitted to Medicare for correct coding and medical necessity. CMS must approve new issues prior to widespread review by the RACs. Historically, RACs have conducted claims reviews on a post-payment basis. In February 2012, CMS announced that it is moving forward with a RAC prepayment demonstration in 11 states. We have established protocols to respond to RAC requests and payment denials. Payment recoveries resulting from RAC reviews are appealable through administrative and judicial processes, and we intend to pursue the reversal of adverse determinations where appropriate. In addition to overpayments that are not reversed on appeal, we will incur additional costs to respond to requests for records and pursue the reversal of payment denials. We expect that the RACs will continue to seek CMS approval to review additional issues.

 

The Affordable Care Act expanded the RAC program’s scope by requiring all states to enter into contracts with RACs by December 31, 2010 to audit payments to Medicaid providers. CMS issued a letter to state Medicaid directors on October 1, 2010 that (1) provided preliminary guidance to states on the implementation of Medicaid RAC programs, (2) created a deadline of December 31, 2010 for states to establish RAC programs, and (3) established a deadline of April 1, 2011 for states to fully implement their RAC programs. In September 2011, CMS issued a final rule requiring all states to implement a Medicaid RAC program effective January 1, 2012. We cannot predict with certainty the impact of the Medicare and Medicaid RAC program on our future results of operations or cash flows.

 

MedPAC Recommendations

 

The Medicare Payment Advisory Commission (“MedPAC”) is an independent Congressional agency established by the Balanced Budget Act of 1997 to advise Congress on issues affecting the Medicare program. The MedPAC’s statutory mandate is quite broad; in addition to advising Congress on payments to private health plans participating in Medicare Advantage and providers in the Original Medicare Plan, MedPAC is also tasked with analyzing access to care, quality of care and other issues affecting Medicare.

 

On January 12, 2012, the MedPAC commissioners voted on final recommendations for their 2012 Report to Congress. Among other things, MedPAC voted in favor of recommending:

 

·                  A 1% market basket payment update for Medicare hospital inpatient and outpatient services in 2013; and

 

·                  A reduction in payments, phased-in over three years, for Medicare non-emergency hospital outpatient evaluation and management examinations, to equalize them to payments for similar services provided in physician offices.

 

MedPAC will submit its recommendations formally in a report to Congress, which is due no later than March 1, 2012.

 

Medicare Value-Based Purchasing

 

Section 3001 of the Affordable Care Act requires the Secretary of HHS to establish a value-based purchasing (“VBP”) program for hospital payments beginning in FFY 2013 based on hospital performance measures that are part of the hospital inpatient quality reporting program. The VBP program is intended to be budget-neutral, with 1% of IPPS payments allocated to the program in FFY 2013 and increasing over time to 2% in FFY 2017 and beyond. On April 29, 2011, CMS issued the final rule establishing the hospital VBP program under the Medicare IPPS. Under the hospital VBP program, CMS will evaluate hospitals’ performance during the period July 1, 2011 through March 31, 2012 for the FFY 2013 hospital VBP payment determination. Hospitals will receive points on each measure based on the higher of their level of (1) achievement relative to an established standard based on all other hospitals’ baseline period performance, or (2) improvement in performance from their performance during a prior baseline period. The combined scores on all the measures will be translated into value-based incentive payments for discharges occurring on or after October 1, 2012. CMS will notify each hospital of the estimated amount of its value-based incentive payment for FFY 2013 at least 60 days prior to October 1, 2012 and will notify each hospital of the exact amount of its value-based incentive payment on November 1, 2012. Although we believe that our Commitment to Quality initiatives will position our hospitals to benefit under the VBP program, we cannot predict with certainty the impact of the VBP program on our results of operations or cash flows.

 

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Children’s Hospital Graduate Medical Education Payments

 

We receive approximately $8 million in payments annually from the Children’s Hospital Graduate Medical Education (“CHGME”) program for resident training expenses at St. Christopher’s Hospital for Children. Legislative authority for payments to freestanding children’s hospitals for direct and indirect expenses attributable to medical residency programs under the federal Public Health Service Act expired on September 30, 2011. In December 2011, Congress passed a final omnibus appropriations bill that included funding in FFY 2012 for CHGME at levels similar to 2011; however, that funding will not be available for distribution to hospitals until Congress enacts legislation reauthorizing the CHGME program. We cannot provide any assurances that such legislation will be enacted in 2012.

 

The Budget Control Act

 

On August 2, 2011, the President signed the Budget Control Act of 2011 (“BCA”) into law. The intent of the BCA is to reduce federal spending by at least $1.2 trillion over FFYs 2013 through 2021. The savings will be achieved by:

 

·                  Spending caps on certain discretionary spending, excluding payments to providers under Medicare and Medicaid;

 

·                  The creation of a bipartisan and bicameral Joint Select Committee of Congress charged with developing a legislative proposal to reduce the federal deficit by at least an additional $1.5 trillion by FFY 2021; and

 

·                  An automatic $1.2 trillion reduction (or enough to make up any shortfall between actual cuts enacted and $1.2 trillion), allocated 50% to defense and 50% to non-defense discretionary spending, divided equally amongst FFYs 2013 through 2021 and enforced by sequestration that would begin during the first quarter of CY 2013 if legislation cutting $1.5 trillion was not enacted by January 15, 2012.

 

The deadline for the Joint Select Committee (“Committee”) to issue a proposal was November 23, 2011. On November 21, 2011, the Committee announced that it could not agree on any spending reductions, thus triggering the aforementioned automatic sequestration. Under current law, Medicare payments to all providers will be reduced by 2% beginning in the first quarter of CY 2013. Federal Medicaid payments to states are excluded from sequestration, but budget pressures caused by cuts to other federal payments could result in some states imposing additional Medicaid reductions to balance their budgets. We cannot predict what other action Congress or the states might take to address federal spending or the impact those actions could have on our operations or cash flows.

 

PRIVATE INSURANCE

 

Managed Care

 

We currently have thousands of managed care contracts with various HMOs and PPOs. HMOs generally maintain a full-service health care delivery network comprised of physician, hospital, pharmacy and ancillary service providers that HMO members must access through an assigned “primary care” physician. The member’s care is then managed by his or her primary care physician and other network providers in accordance with the HMO’s quality assurance and utilization review guidelines so that appropriate health care can be efficiently delivered in the most cost-effective manner. HMOs typically provide reduced benefits or reimbursement (or none at all) to their members who use non-contracted health care providers for non-emergency care.

 

PPOs generally offer limited benefits to members who use non-contracted health care providers. PPO members who use contracted health care providers receive a preferred benefit, typically in the form of lower co-payments, co-insurance or deductibles. As employers and employees have demanded more choice, managed care plans have developed hybrid products that combine elements of both HMO and PPO plans, including high-deductible health care plans that may have limited benefits, but cost the employee less in premiums.

 

The amount of our managed care net patient revenues during the years ended December 31, 2011, 2010 and 2009 was $5.2 billion, $5.0 billion and $4.9 billion, respectively. Approximately 62% of our managed care net patient revenues for the year ended December 31, 2011 was derived from our top ten managed care payers. National payers generate approximately 44% of our total net managed care revenues. The remainder comes from regional or local payers. At December 31, 2011 and 2010 approximately 55% and 57%, respectively, of our net accounts receivable related to continuing operations were due from managed care payers.

 

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Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers. The payers are billed for patient services on an individual patient basis. An individual patient’s bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. We believe it is reasonably likely for there to be an approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves as of December 31, 2011, a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately $9 million. Some of the factors that can contribute to changes in the contractual allowance estimates include: (1) changes in reimbursement levels for procedures, supplies and drugs when threshold levels are triggered; (2) changes in reimbursement levels when stop-loss or outlier limits are reached; (3) changes in the admission status of a patient due to physician orders subsequent to initial diagnosis or testing; (4) final coding of in-house and discharged-not-final-billed patients that change reimbursement levels; (5) secondary benefits determined after primary insurance payments; and (6) reclassification of patients among insurance plans with different coverage levels. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. Although we do not separately accumulate and disclose the aggregate amount of adjustments to the estimated reimbursement for every patient bill, we believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do not believe there were any adjustments to estimates of individual patient bills that were material to our revenues. In addition, on a corporate-wide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans.

 

We expect managed care governmental admissions to continue to increase as a percentage of total managed care admissions over the near term. However, the managed Medicare and Medicaid insurance plans typically generate lower yields than commercial managed care plans, which have been experiencing an improved pricing trend. Although we have had 26 consecutive quarters of improved year-over-year managed care pricing, we expect some moderation in the pricing percentage increases in future years. It is not clear what impact, if any, the increased obligations on managed care and other payers imposed by the Affordable Care Act will have on our commercial managed care volumes and payment rates. In the year ended December 31, 2011, our commercial managed care net inpatient revenue per admission from our acute care hospitals was approximately 79% higher than our aggregate yield on a per admission basis from government payers, including managed Medicare and Medicaid insurance plans.

 

Indemnity

 

An indemnity-based agreement generally requires the insurer to reimburse an insured patient for health care expenses after those expenses have been incurred by the patient, subject to policy conditions and exclusions. Unlike an HMO member, a patient with indemnity insurance is free to control his or her utilization of health care and selection of health care providers.

 

SELF-PAY PATIENTS

 

Self-pay patients are patients who do not qualify for government programs payments, such as Medicare and Medicaid, do not have some form of private insurance and, therefore, are responsible for their own medical bills. A significant portion of our self-pay patients is admitted through our hospitals’ emergency departments and often requires high-acuity treatment that is more costly to provide and, therefore, results in higher billings, which are the least collectible of all accounts. We believe that our level of self-pay patients has been higher in the last several years than previous periods due to a combination of broad economic factors, including increased unemployment rates, reductions in state Medicaid budgets, increasing numbers of individuals and employers who choose not to purchase insurance, and an increased burden of co-payments and deductibles to be made by patients instead of insurers.

 

Self-pay accounts pose significant collectability problems. At both December 31, 2011 and 2010, approximately 7% of our net accounts receivable related to continuing operations were due from self-pay patients. Further, a significant portion of our provision for doubtful accounts relates to self-pay patients, as well as co-payments and deductibles owed to us by patients with insurance. We provide revenue cycle management and patient communications services through our Conifer subsidiary, which has performed systematic analyses to focus our attention on the drivers of bad debt for each hospital. While emergency department use is the primary contributor to our provision for doubtful accounts in the aggregate, this is not the case at all hospitals. As a result, we are increasing our focus on targeted initiatives that concentrate on non-emergency department patients as well. These initiatives are intended to promote process efficiencies in working self-pay accounts, as well as co-payment and deductible amounts owed to us by patients with insurance, that we deem highly collectible. We are dedicated to modifying and

 

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refining our processes as needed, enhancing our technology and improving staff training throughout the revenue cycle in an effort to increase collections and reduce accounts receivable.

 

Over the longer term, several other initiatives we have previously announced should also help address this challenge. For example, our Compact with Uninsured Patients (“Compact”) is designed to offer managed care-style discounts to certain uninsured patients, which enables us to offer lower rates to those patients who historically have been charged standard gross charges. A significant portion of those charges had previously been written down in our provision for doubtful accounts. Under the Compact, the discount offered to uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the self-pay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value through provision for doubtful accounts based on historical collection trends for self-pay accounts and other factors that affect the estimation process.

 

In July 2010, the President signed the Restoring American Financial Stability Act of 2010 (the “Dodd-Frank Act”) into law. Under the Dodd-Frank Act, a new Consumer Financial Protection Bureau (“CFPB”) was formed within the U.S. Federal Reserve to promulgate regulations to promote transparency, simplicity, fairness, accountability and equal access in the market for consumer financial products or services, including debt collection services. The legislation gives significant discretion to the CFPB in establishing regulatory requirements and enforcement priorities. At this time, we cannot predict the extent to which the operations of our Conifer subsidiary could be affected by these developments.

 

Our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for our self-pay patients for the years ended December 31, 2011, 2010 and 2009 were approximately $406 million, $377 million and $365 million, respectively. We also provide charity care to patients who are financially unable to pay for the health care services they receive. Most patients who qualify for charity care are charged a per-diem amount for services received, subject to a cap. Except for the per-diem amounts, our policy is not to pursue collection of amounts determined to qualify as charity care; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid DSH payments. Revenues attributable to DSH payments and other state-funded subsidy payments for the years ended December 31, 2011, 2010 and 2009 were approximately $260 million, $181 million and $171 million, respectively. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels. Our estimated costs (based on the selected operating expenses described above) of caring for charity care patients for the years ended December 31, 2011, 2010 and 2009 were $125 million, $120 million and $118 million, respectively. Our method of measuring the estimated costs uses adjusted self-pay/charity patient days multiplied by selected operating expenses per adjusted patient day. The adjusted self-pay/charity patient days represents actual self-pay/charity patient days adjusted to include self-pay/charity outpatient services by multiplying actual self-pay/charity patient days by the sum of gross self-pay/charity inpatient revenues and gross self-pay/charity outpatient revenues and dividing the results by gross self-pay/charity inpatient revenues.

 

The expansion of health insurance coverage under the Affordable Care Act may result in a material increase in the number of patients using our facilities who have either private or public program coverage. However, because of the many variables involved, we are unable to predict with certainty the net effect on us of the expected increase in revenues and expected decrease in bad debt expense from providing care to previously uninsured and underinsured individuals, and numerous other provisions in the law that may affect us. In addition, even after implementation of the Affordable Care Act, we may continue to experience a high level of bad debt expense and have to provide uninsured discounts and charity care for undocumented aliens who are not permitted to enroll in a health insurance exchange or government health care program.

 

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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011 COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

The following two tables summarize our net operating revenues, operating expenses and operating income from continuing operations, both in dollar amounts and as percentages of net operating revenues, for the years ended December 31, 2011 and 2010:

 

 

 

Years Ended December 31,

 

 

 

2011

 

2010

 

Increase
(Decrease)

 

Net operating revenues:

 

 

 

 

 

 

 

General hospitals

 

$

9,273

 

$

8,966

 

$

307