10-Q 1 d594469d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

or

 

¨ 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: 001-11141

 

 

HEALTH MANAGEMENT ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   61-0963645

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5811 Pelican Bay Boulevard, Suite 500,

Naples, Florida

  34108-2710
(Address of principal executive offices)   (Zip Code)

(239) 598-3131

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of November 1, 2013, there were 264,495,187 shares of the registrant’s Class A common stock outstanding.

 

 

 


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

INDEX

 

         Page  

PART I – FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements.

  

Consolidated Statements of Operations – Three and Nine Months Ended September  30, 2013 and 2012

     3   

Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2013 and 2012

     4   

Condensed Consolidated Balance Sheets – September 30, 2013 and December 31, 2012

     5   

Consolidated Statements of Stockholders’ Equity – Nine Months Ended September  30, 2013 and 2012

     6   

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September  30, 2013 and 2012

     7   

Notes to Interim Condensed Consolidated Financial Statements

     8   

Item 2.

 

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

     40   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     51   

Item 4.

 

Controls and Procedures

     51   

PART II – OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     52   

Item 1A.

 

Risk Factors

     55   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     56   

Item 6.

 

Exhibits

     56   

Signatures

     57   

Index to Exhibits

     58   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

HEALTH MANAGEMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
           (restated)           (restated)  

Net revenue before the provision for doubtful accounts

   $ 1,676,679      $ 1,662,937      $ 5,100,474      $ 5,033,496   

Provision for doubtful accounts

     (255,436     (224,078     (729,695     (639,902
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     1,421,243        1,438,859        4,370,779        4,393,594   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     655,839        637,305        2,013,515        1,941,475   

Supplies

     220,522        216,819        689,034        677,416   

Rent expense

     40,493        41,807        125,706        130,521   

Other operating expenses

     371,392        332,356        1,043,982        970,613   

Medicare and Medicaid HCIT incentive program

     (2,015     (24,224     (23,607     (29,875

Change in control and other related expense

     102,886        —          112,026        —     

Depreciation and amortization

     99,351        91,563        289,595        255,575   

Interest expense

     70,747        76,916        212,352        241,049   

Other

     884        (2,363     (2,848     (1,745
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,560,099        1,370,179        4,459,755        4,185,029   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (138,856     68,680        (88,976     208,565   

Income tax benefit (provision)

     65,509        (19,663     48,796        (66,806
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (73,347     49,017        (40,180     141,759   

Loss from discontinued operations, net of income taxes

     —          (1,389     —          (5,805
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     (73,347     47,628        (40,180     135,954   

Net income attributable to noncontrolling interests

     (3,485     (6,685     (12,804     (21,757

Accretion of redeemable equity securities

     (19,813     —          (19,813     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ (96,645   $ 40,943      $ (72,797   $ 114,197   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to Health Management Associates, Inc. common stockholders:

        

Basic and diluted

        

Continuing operations

   $ (0.37   $ 0.16      $ (0.28   $ 0.47   

Discontinued operations

     —          —          —          (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (0.37   $ 0.16      $ (0.28   $ 0.45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding:

        

Basic

     261,927        254,516        258,911        254,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     261,927        256,784        258,911        256,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
           (restated)           (restated)  

Consolidated net income (loss)

   $ (73,347   $ 47,628      $ (40,180   $ 135,954   

Components of other comprehensive income before income taxes attributable to:

        

Available-for-sale securities:

        

Unrealized gains, net

     4,720        4,244        4,321        8,828   

Adjustments for net gains reclassified into net income

     (706     (443     (2,700     (340
  

 

 

   

 

 

   

 

 

   

 

 

 

Net activity attributable to available-for-sale securities

     4,014        3,801        1,621        8,488   

Interest rate swap contract:

        

Reclassification adjustments for amortization into net income

     17,208        19,404        53,515        59,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before income taxes

     21,222        23,205        55,136        68,425   

Income tax expense related to items of other comprehensive income

     (8,085     (8,863     (21,343     (26,240
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net

     13,137        14,342        33,793        42,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated comprehensive income (loss)

     (60,210     61,970        (6,387     178,139   

Total comprehensive income attributable to noncontrolling interests

     (3,485     (6,685     (12,804     (21,757

Accretion of redeemable equity securities

     (19,813     —          (19,813     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ (83,508   $ 55,285      $ (39,004   $ 156,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

     September 30,
2013
    December 31,
2012
 
           (restated)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,291      $ 59,173   

Available-for-sale securities

     62,961        121,106   

Accounts receivable, less allowances for doubtful accounts of $709,008 and $670,729 at September 30, 2013 and December 31, 2012, respectively

     970,132        957,918   

Supplies, prepaid expenses and other assets

     226,552        220,884   

Prepaid and recoverable income taxes

     164,803        60,438   

Restricted funds

     30,667        26,525   

Assets held for sale

     6,250        6,250   
  

 

 

   

 

 

 

Total current assets

     1,462,656        1,452,294   
  

 

 

   

 

 

 

Property, plant and equipment

     5,832,225        5,523,870   

Accumulated depreciation and amortization

     (2,241,393     (2,057,980
  

 

 

   

 

 

 

Net property, plant and equipment

     3,590,832        3,465,890   
  

 

 

   

 

 

 

Restricted funds

     125,042        125,532   

Goodwill

     1,032,713        1,025,137   

Deferred charges and other assets

     413,660        317,501   
  

 

 

   

 

 

 

Total assets

   $ 6,624,903      $ 6,386,354   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 160,565      $ 211,387   

Accrued expenses and other liabilities

     570,780        609,732   

Deferred income taxes

     10,169        29,026   

Current maturities of long-term debt and capital lease obligations

     110,780        126,262   
  

 

 

   

 

 

 

Total current liabilities

     852,294        976,407   

Deferred income taxes

     386,543        301,237   

Long-term debt and capital lease obligations, less current maturities

     3,636,948        3,440,353   

Other long-term liabilities

     469,512        460,886   
  

 

 

   

 

 

 

Total liabilities

     5,345,297        5,178,883   
  

 

 

   

 

 

 

Redeemable equity securities

     272,013        212,458   

Stockholders’ equity:

    

Health Management Associates, Inc. equity:

    

Preferred stock, $0.01 par value, 5,000 shares authorized, none issued

     —          —     

Common stock, Class A, $0.01 par value, 750,000 shares authorized, 264,495 shares and 256,394 shares issued at September 30, 2013 and December 31, 2012, respectively

     2,645        2,564   

Accumulated other comprehensive loss, net of income taxes

     (8,148     (41,940

Additional paid-in capital

     231,317        173,843   

Retained earnings

     771,141        843,938   
  

 

 

   

 

 

 

Total Health Management Associates, Inc. stockholders’ equity

     996,955        978,405   

Noncontrolling interests

     10,638        16,608   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,007,593        995,013   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 6,624,903      $ 6,386,354   
  

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2013 and 2012

(in thousands)

(unaudited)

 

     Health Management Associates, Inc.              
    

 

Common Stock

     Accumulated
Other
Comprehensive
Income (Loss),

Net
    Additional
Paid-in

Capital
    Retained
Earnings
    Noncontrolling
Interests
    Total
Stockholders’

Equity
 
     Shares      Par Value             
                         (restated)     (restated)           (restated)  

Balances at January 1, 2013

     256,394      $ 2,564      $ (41,940   $ 173,843     $ 843,938     $ 16,608     $ 995,013  

Net income (loss)

     —           —           —          —          (72,797     12,804       (59,993

Unrealized gains (losses) on available-for-sale securities and reclassifications into net income, net

     —           —           1,051       —          —          —          1,051  

Interest rate swap contract amortization of expense into net income, net

     —           —           32,741       —          —          —          32,741  

Exercises of stock options and related tax matters

     2,959        30        —          27,919       —          —          27,949  

Issuances of deferred stock and restricted stock and related tax matters, net of forfeitures

     5,142        51        —          (29,295     —          —          (29,244

Stock-based compensation expense

     —           —           —          58,850       —          —          58,850  

Distributions to noncontrolling shareholders

     —           —           —          —          —          (22,056     (22,056

Noncontrolling shareholder interests in an acquired business

     —           —           —          —          —          3,282       3,282  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2013

     264,495      $ 2,645      $ (8,148   $ 231,317     $ 771,141      $ 10,638     $ 1,007,593  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Health Management Associates, Inc.               
    

 

Common Stock

     Accumulated
Other
Comprehensive
Income (Loss),

Net
    Additional
Paid-in

Capital
    Retained
Earnings
     Noncontrolling
Interests
    Total
Stockholders’

Equity
 
     Shares      Par Value              
                         (restated)     (restated)            (restated)  

Balances at January 1, 2012

     254,156       $ 2,542      $ (95,440   $ 156,859     $ 693,991      $ 15,975     $ 773,927  

Net income

     —           —           —          —          114,197        21,757       135,954  

Unrealized gains (losses) on available-for-sale securities and reclassifications into net income, net

     —           —           5,515       —          —           —          5,515  

Interest rate swap contract amortization of expense into net income, net

     —           —           36,670        —          —           —          36,670  

Issuances of deferred stock and restricted stock and related tax matters, net of forfeitures

     2,212         22         —          (7,057     —           —          (7,035

Stock-based compensation expense

     —           —           —          19,492       —           —          19,492  

Distributions to noncontrolling shareholders

     —           —           —          —          —           (23,598     (23,598

Purchases of subsidiary shares from noncontrolling shareholders

     —           —           —          (274     —           (154     (428

Noncontrolling shareholder interests in an acquired business

     —           —           —          —          —           1,917       1,917  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balances at September 30, 2012

     256,368      $ 2,564      $ (53,255   $ 169,020     $ 808,188      $ 15,897     $    942,414  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes.

 

6


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2013     2012  
           (restated)  

Cash flows from operating activities:

    

Consolidated net income (loss)

   $ (40,180   $ 135,954   

Adjustments to reconcile consolidated net income (loss) to net cash provided by continuing operating activities:

    

Depreciation and amortization

     298,537        263,819   

Amortization related to interest rate swap contract

     53,515        59,937   

Fair value adjustments related to interest rate swap contract

     2,312        22,965   

Provision for doubtful accounts

     729,695        639,902   

Stock-based compensation expense

     58,850        19,492   

(Gains) losses on sales of assets, net

     (1,141     2,114   

Gains on sales of available-for-sale securities, net

     (1,478     (2,350

Write-off of deferred debt issuance costs

     584        —     

Deferred income tax expense (benefit)

     45,105        (22,068

Changes in assets and liabilities of continuing operations, net of the effects of acquisitions:

    

Accounts receivable

     (784,618     (716,046

Supplies, prepaid expenses and other current assets

     (100,402     49,728   

Deferred charges and other long-term assets

     (5,186     (1,839

Accounts payable, accrued expenses and other liabilities

     (116,329     2,096   

Equity compensation excess income tax benefits

     (19,056     (1,444

Loss from discontinued operations, net

     —          5,805   
  

 

 

   

 

 

 

Net cash provided by continuing operating activities

     120,208        458,065   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (207,652     (282,343

Acquisitions of hospitals and other ancillary health care businesses

     (173,653     (71,475

Purchases of available-for-sale securities

     (471,915     (1,431,548

Proceeds from sales of available-for-sale securities

     530,199        1,412,580   

Other investing activities

     5,300        (15,399
  

 

 

   

 

 

 

Net cash used in continuing investing activities

     (317,721     (388,185
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long-term debt borrowings

     476,900        17,000   

Principal payments on debt and capital lease obligations

     (358,511     (87,927

Payments of debt issuance costs

     (1,588     (636

Proceeds from exercises of stock options

     27,949        —     

Cash received from noncontrolling shareholders

     —          3,591   

Cash payments to noncontrolling shareholders

     (24,175     (30,815

Equity compensation excess income tax benefits

     19,056        1,444   
  

 

 

   

 

 

 

Net cash provided by (used in) continuing financing activities

     139,631        (97,343
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents before discontinued operations

     (57,882     (27,463

Net decreases in cash and cash equivalents from discontinued operations:

    

Operating activities

     —          (1,327

Investing activities

     —          (135
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (57,882     (28,925

Cash and cash equivalents at the beginning of the period

     59,173        64,143   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 1,291      $ 35,218   
  

 

 

   

 

 

 

See accompanying notes

 

7


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

 

1. Business and Basis of Presentation

Health Management Associates, Inc. by and through its subsidiaries (collectively, “we,” “our” or “us”) provides health care services to patients in hospitals and other health care facilities in non-urban communities located primarily in the southeastern United States. As of September 30, 2013, we operated 71 hospitals in fifteen states with a total of 10,782 licensed beds, including twenty-three hospitals located in Florida, ten hospitals in Mississippi and nine hospitals in Tennessee.

On July 29, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Community Health Systems, Inc. (“CHS”) and FWCT-2 Acquisition Corporation, an indirect, wholly-owned subsidiary of CHS (“Merger Sub”) pursuant to which, subject to the satisfaction or waiver of certain conditions (including the approval of our stockholders), Merger Sub will merge with and into us and we will become an indirect, wholly-owned subsidiary of CHS (the “Merger”). The terms and conditions are described in more detail in Note 14.

As further described in Note 13, on August 12, 2013, Glenview Capital Management, LLC and certain of its affiliated investment funds (collectively “Glenview”), delivered written consents from holders of our common stock, or their duly authorized proxies, sufficient to replace the then entire Board of Directors with nominees of Glenview pursuant to a consent solicitation process (the “Consent Solicitation Process”) that had previously been commenced by Glenview.

Unless specifically indicated otherwise, all amounts and percentages presented in the notes below are exclusive of our discontinued operations, which are identified at Note 9.

The condensed consolidated balance sheet as of December 31, 2012 is unaudited; however, it was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2012 (referred to as our “2012 Form 10-K”). The interim condensed consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 are unaudited; however, such interim financial statements reflect all adjustments (consisting only of those of a normal recurring nature) that are, in our opinion, necessary for a fair presentation of our financial position, results of operations and cash flows. Our results of operations and cash flows for the interim periods presented are not necessarily indicative of the results to be expected for the full year due to, among other things, the seasonal nature of our business and changes in the economy and the health care regulatory environment.

The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Based on the SEC’s guidance, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our 2012 Form 10-K.

Our preparation of interim condensed consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in those financial statements and the accompanying notes. Actual results could differ from those estimates.

 

8


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2. Restatement and Revision of Previously Reported Consolidated Financial Statements

We have restated our consolidated financial statements for the three and nine month periods ended September 30, 2012 due to an accounting error in our application of the requirements for certifying our electronic health record (“EHR”) technology under various Medicare and Medicaid Healthcare Information Technology (“HCIT”) programs. It was determined that 11 of our hospitals did not meet the “meaningful use” criteria necessary to qualify for HCIT incentive payments. We estimate that, between July 1, 2011 and June 30, 2013, we recognized as income HCIT incentive payments totaling approximately $31.0 million for the 11 hospitals that did not meet the “meaningful use” criteria. The impact of correcting the misstatement related to the HCIT payments for these 11 hospitals, as well as correction of unrelated immaterial errors, on our consolidated balance sheets and consolidated statements of income, comprehensive income and cash flows is as follows:

 

     Three Months Ended September 30, 2012  
     As Previously
Reported
    Adjustment     As Restated  

Consolidated Statements of Income and Comprehensive Income

      

Net revenue before the provision for doubtful accounts

   $ 1,664,187      $ (1,250   $ 1,662,937   

Provision for doubtful accounts

     (224,078     —          (224,078
  

 

 

   

 

 

   

 

 

 

Net revenue

     1,440,109        (1,250     1,438,859   
  

 

 

   

 

 

   

 

 

 

Salaries and benefits

     637,305        —          637,305   

Supplies

     216,819        —          216,819   

Rent expense

     41,882        (75     41,807   

Other operating expenses

     331,935        421        332,356   

Medicare and Medicaid HCIT incentive programs

     (24,224     —          (24,224

Depreciation and amortization

     91,610        (47     91,563   

Interest expense

     76,814        102        76,916   

Other

     (2,363     —          (2,363
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     70,331        (1,651     68,680   

Provision for income taxes

     (20,913     1,250        (19,663
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     49,418        (401     49,017   

Loss from discontinued operations

     (1,389     —          (1,389
  

 

 

   

 

 

   

 

 

 

Consolidated net income

     48,029        (401     47,628   

Net income attributable to noncontrolling interests

     (6,685     —          (6,685
  

 

 

   

 

 

   

 

 

 

Net income attributable to Health Management Associates, Inc.

   $ 41,344      $ (401   $ 40,943   
  

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 62,371      $ (401   $ 61,970   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to Health Management Associates, Inc. common stockholders:

      

Basic and diluted

      

Continuing operations

   $ 0.17      $ (0.01   $ 0.16   

Discontinued operations

     (0.01     0.01        —     
  

 

 

   

 

 

   

 

 

 

Net income

   $ 0.16      $ —        $ 0.16   
  

 

 

   

 

 

   

 

 

 

 

9


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2. Restatement and Revision of Previously Reported Consolidated Financial Statements (continued)

 

     Nine Months Ended September 30, 2012  
     As Previously
Reported
    Adjustment     As Restated  

Consolidated Statements of Income and Comprehensive Income

      

Net revenue before the provision for doubtful accounts

   $ 5,037,246      $ (3,750   $ 5,033,496   

Provision for doubtful accounts

     (639,902     —          (639,902
  

 

 

   

 

 

   

 

 

 

Net revenue

     4,397,344        (3,750     4,393,594   
  

 

 

   

 

 

   

 

 

 

Salaries and benefits

     1,942,322        (847     1,941,475   

Supplies

     677,416        —          677,416   

Rent expense

     130,746        (225     130,521   

Other operating expenses

     969,350        1,263        970,613   

Medicare and Medicaid HCIT incentive programs

     (31,685     1,810        (29,875

Depreciation and amortization

     255,716        (141     255,575   

Interest expense

     240,743        306        241,049   

Other

     (1,745     —          (1,745
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     214,481        (5,916     208,565   

Provision for income taxes

     (70,931     4,125        (66,806
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     143,550        (1,791     141,759   

Loss from discontinued operations

     (5,805     —          (5,805
  

 

 

   

 

 

   

 

 

 

Consolidated net income

     137,745        (1,791     135,954   

Net income attributable to noncontrolling interests

     (21,757     —          (21,757
  

 

 

   

 

 

   

 

 

 

Net income attributable to Health Management Associates, Inc.

   $ 115,988      $ (1,791   $ 114,197   
  

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 179,930      $ (1,791   $ 178,139   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to Health Management Associates, Inc. common stockholders:

      

Basic and diluted

      

Continuing operations

   $ 0.48      $ (0.01   $ 0.47   

Discontinued operations

     (0.03     0.01        (0.02
  

 

 

   

 

 

   

 

 

 

Net income

   $ 0.45      $ —        $ 0.45   
  

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2. Restatement and Revision of Previously Reported Consolidated Financial Statements (continued)

 

     December 31, 2012  
     As Previously
Reported
     Adjustment     As Restated  

Consolidated Balance Sheet

       

Accounts receivable, less allowances for doubtful accounts

   $ 976,872       $ (18,954   $ 957,918   

Other current assets

     494,376         —          494,376   
  

 

 

    

 

 

   

 

 

 

Total current assets

     1,471,248         (18,954     1,452,294   
  

 

 

    

 

 

   

 

 

 

Net property, plant and equipment

     3,463,052         2,838        3,465,890   

Goodwill

     1,023,456         1,681        1,025,137   

Other long-term assets

     443,033         —          443,033   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 6,400,789       $ (14,435   $ 6,386,354   
  

 

 

    

 

 

   

 

 

 

Accrued expenses and other liabilities

   $ 469,055       $ (5,242   $ 463,813   

Due to third party payors

     26,470         25,172        51,642   

Deferred income taxes

     45,170         (16,144     29,026   

Other current liabilities

     431,728         198        431,926   
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     972,423         3,984        976,407   

Long-term debt and capital lease obligations, less current maturities

     3,433,260         7,093        3,440,353   

Other long-term liabilities

     762,123         —          762,123   

Redeemable equity securities

     212,458         —          212,458   

Total stockholders’ equity

     1,020,525         (25,512     995,013   
  

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 6,400,789       $ (14,435   $ 6,386,354   
  

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2012  
     As Previously
Reported
    Adjustment     As Restated  

Consolidated Statements of Cash Flows

      

Operating activities:

      

Consolidated net income

   $   137,745      $ (1,791   $   135,954   

Depreciation and amortization

     263,960        (141     263,819   

Deferred tax expense

     (20,156     (1,912     (22,068

Accounts receivable

     (719,495     3,449        (716,046

Supplies, prepaid expenses and other current assets

     50,679        (951     49,728   

Accounts payable, accrued expenses and other liabilities

     831        1,265        2,096   

Other cash flows from operating activities

     744,582        —          744,582   
  

 

 

   

 

 

   

 

 

 

Net cash provided by continuing operating activities

     458,146        (81     458,065   
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Additions to property, plant and equipment

     (282,424     81        (282,343

Other cash flows from investing activities

     (105,842     —          (105,842
  

 

 

   

 

 

   

 

 

 

Net cash used in continuing investing activities

     (388,266     81        (388,185
  

 

 

   

 

 

   

 

 

 

Net cash provided by continuing financing activities

     (97,343     —          (97,343

Discontinued operations

     (1,462     —          (1,462
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (28,925     —          (28,925

Cash and cash equivalents at the beginning of the year

     64,143        —          64,143   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the year

   $ 35,218      $ —        $ 35,218   
  

 

 

   

 

 

   

 

 

 

The notes to the interim condensed consolidated financial statements have been restated for these adjustments as applicable.

 

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Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

3. Net Revenue, Provision for Doubtful Accounts, Cost of Revenue and Other

Net Revenue. We record gross patient service charges on the accrual basis in the period that the services are rendered. Net revenue before the provision for doubtful accounts represents gross patient service charges less provisions for contractual adjustments and uninsured self-pay patient discounts. Payments for services rendered to patients covered by Medicare, Medicaid and other government programs are generally less than billed charges and, therefore, provisions for contractual adjustments are made to reduce gross patient service charges to the estimated cash receipts based on each program’s principles of payment/reimbursement. Estimates of contractual allowances for services rendered to patients covered by commercial insurance, including managed care health plans, are primarily based on the payment terms of contractual arrangements, such as predetermined rates per diagnosis, per diem rates or discounted fee for service rates. Revenue and receivables from government programs are significant to our operations; however, we do not believe that there are substantive credit risks associated with such programs. There are no other concentrations of revenue or accounts receivable with any individual payor that subject us to significant credit or other risks.

In the ordinary course of business, we provide services to patients who are financially unable to pay for their care. Accounts identified as charity and indigent care are not recognized in net revenue before the provision for doubtful accounts. We maintain a company-wide policy whereby patient account balances are characterized as charity and indigent care only if the patient meets certain percentages of the federal poverty level guidelines. Local hospital personnel and our collection agencies pursue payments on accounts receivable from patients who do not meet such criteria. For uninsured self-pay patients who do not qualify for charity and indigent care treatment, we recognize net revenue before the provision for doubtful accounts using our standard gross patient service charges, less discounts of 60% or more for non-elective procedures. Because a significant portion of uninsured self-pay patients will be unable or unwilling to pay for their care, we record a significant provision for doubtful accounts in the period that the services are provided to those patients.

Net revenue before the provision for doubtful accounts, by major payor source, is summarized in the table below (dollars in thousands).

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Medicare

   $ 435,626         26.0   $ 456,934         27.5   $ 1,429,839         28.0   $ 1,460,766         29.0

Medicaid

     162,934         9.8        203,259         12.2        509,393         10.0        530,575         10.5   

Commercial insurance

     842,278         50.1        792,388         47.7        2,499,200         49.0        2,409,121         47.9   

Self-pay

     205,628         12.3        189,722         11.4        562,959         11.1        543,653         10.8   

Other

     30,213         1.8        20,634         1.2        99,083         1.9        89,381         1.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,676,679         100.0   $ 1,662,937         100.0   $ 5,100,474         100.0   $ 5,033,496         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Provision for Doubtful Accounts and Related Other. We grant credit without requiring collateral from our patients, most of whom live near our hospitals and are insured under third party payor agreements. The credit risk for non-governmental accounts receivable, excluding uninsured self-pay patients, is limited due to the large number of insurance companies and other payors that provide payment and reimbursement for patient services. Accounts receivable are reported net of estimated allowances for doubtful accounts.

Collection of accounts receivable from third party payors and patients is our primary source of cash and is therefore critical to our successful operating performance. Accordingly, we regularly monitor our cash collection trends and the aging of our accounts receivable by major payor source. Our collection risks principally relate to uninsured self-pay patient accounts and patient accounts for which the primary insurance payor has paid but patient responsibility amounts (generally deductibles and co-payments) remain outstanding. Provisions for doubtful accounts are primarily estimated based on cash collection analyses by major payor classification and accounts receivable aging reports. For accounts receivable associated with services provided to patients who have governmental and/or commercial insurance coverage, we analyze contractually due amounts and record an allowance for doubtful accounts as necessary. For accounts receivable associated with self-pay patients, which includes both patients without insurance and patients with deductible and co-payment balances due for which third party coverage exists for part of the bill, we record a significant provision for doubtful accounts in the period of service because many patients will not pay the portion of their bill for which they are financially responsible. We monitor the aging of accounts receivable from self-pay patients and record supplemental provisions for doubtful accounts when our likelihood of collection deteriorates.

At September 30, 2013 and December 31, 2012, our allowance for doubtful accounts for self-pay uninsured patient accounts was approximately 72.3% and 72.6%, respectively, of our total self-pay uninsured patient accounts receivable balance. The corresponding percentages for our allowance for doubtful accounts pertaining to accounts receivable from government payors, managed care health plans and other commercial payors were 5.4% and 6.3% at September 30, 2013 and

 

12


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

3. Net Revenue, Provision for Doubtful Accounts, Cost of Revenue and Other (continued)

 

December 31, 2012, respectively. Our write-offs of patient accounts receivable (most of which related to uninsured self-pay patients), net of recoveries, were approximately $217.5 million and $128.5 million during the three months ended September 30, 2013 and 2012, respectively. The corresponding amounts for the nine months ended September 30, 2013 and 2012 were $691.4 million and $503.4 million, respectively. The year-over-year increase in patient accounts receivable write-offs was primarily due to increases in patient responsibility amounts.

When considering the adequacy of the allowance for doubtful accounts, we review accounts receivable balances in conjunction with historical collection rates, health care industry trends/indicators and other business and economic conditions that we believe might reasonably be expected to affect the collectability of patient accounts. Accounts receivable are written off after collection efforts have been pursued in accordance with our policies and procedures. Accounts written off as uncollectible are deducted from the allowance for doubtful accounts and subsequent recoveries are netted against the provision for doubtful accounts. Changes in payor mix, general economic conditions or federal and state government health care coverage could each have a material adverse effect on our accounts receivable collections, cash flows and results of operations.

Cost of Revenue. The presentation of costs and expenses in our consolidated statements of operations does not differentiate between costs of revenue and other costs because substantially all such costs and expenses relate to providing health care services. Furthermore, we believe that the natural classification of expenses is the most meaningful presentation of our operations. Amounts that could be classified as general and administrative expenses, which include the costs of our home office as well as our regional service centers, were approximately $86.2 million and $64.7 million during the three months ended September 30, 2013 and 2012, respectively. The corresponding amounts for the nine months ended September 30, 2013 and 2012 were $242.3 million and $194.5 million, respectively.

Electronic Health Record Incentive Programs. Using a gain contingency model, we recognize benefits under the HCIT programs in our consolidated statements of income when the eligible hospitals and physician practices have demonstrated meaningful use of certified electronic health record technology during the period and, if applicable, the cost report information for the full cost report year that will determine the final calculation of the incentive payment is available. In addition, HCIT incentive payments previously recognized as income are subject to audit and potential recoupment if it is determined that we did not meet the applicable meaningful use standards required in connection with such incentive payments.

During the three months ended September 30, 2013 and 2012, we recognized benefits in our consolidated statements of income of approximately $2.0 million and $24.2 million, respectively, related to the HCIT programs. The corresponding amounts for the nine months ended September 30, 2013 and 2012 were $23.6 million and $29.9 million, respectively. Included in our condensed consolidated balance sheets at September 30, 2013 and December 31, 2012 were receivables under the HCIT Programs of $5.8 million and $11.7 million, respectively. There were $0.9 million and $19.2 million in deferred incentive payment liabilities at September 30, 2013 and December 31, 2012, respectively. See Note 2 for information relating to the restatement of these amounts.

 

4. Long-Term Debt and Capital Lease Obligations

The following discussion of our long-term debt and capital lease obligations should be read in conjunction with Notes 3 and 4 to the audited consolidated financial statements included in our 2012 Form 10-K. The table below summarizes our long-term debt and capital lease obligations by major component (in thousands).

 

     September 30,
2013
    December 31,
2012
 
           (restated)  

Bank borrowings:

    

Revolving credit facilities

   $ 222,500      $ —     

Term Loan A (as defined below)

     619,988        670,625   

Term Loan B (as defined below), net of discounts

     1,344,364        1,374,318   

7.375% Senior Notes due 2020

     875,000        875,000   

6.125% Senior Notes due 2016, net of discounts

     399,062        398,785   

3.75% Convertible Senior Subordinated Notes due 2028, net of discounts

     88,658        85,522   

Installment notes and other long-term debt

     13,576        13,988   

Capital lease obligations

     184,580        148,377   
  

 

 

   

 

 

 

Long-term debt and capital lease obligations

     3,747,728        3,566,615   

Less current maturities

     (110,780     (126,262
  

 

 

   

 

 

 

Long-term debt and capital lease obligations, less current maturities

   $ 3,636,948      $ 3,440,353   
  

 

 

   

 

 

 

 

13


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

4. Long-Term Debt and Capital Lease Obligations (continued)

 

Bank Borrowings. Our bank borrowings include variable rate senior secured credit facilities with a syndicate of banks (collectively, the “Credit Facilities”) that we entered into on November 18, 2011. At that date, the Credit Facilities consisted of: (i) a $500.0 million five-year revolving credit facility (the “Revolving Credit Agreement”); (ii) a $725.0 million five-year term loan (the “Term Loan A”); and (iii) a $1.4 billion seven-year term loan (the “Term Loan B”). On March 20, 2013, we amended the loan agreement underlying the Credit Facilities (the “Amendment”) in order to, among other things, provide for the refinancing of the then outstanding balance under the Term Loan B. The principal payments were unchanged; however, the Term Loan B was subject to a prepayment premium equal to 1.0% of the principal amount that is repriced or prepaid on or before September 20, 2013.

We can elect whether interest on borrowings under the Credit Facilities is determined using LIBOR or the Base Rate (as defined in the loan agreement). The effective interest rates on such borrowings, which fluctuate with market changes, include a spread above the base rate that we select. Through March 20, 2013, the effective interest rate for the Term Loan B was subject to a floor of 1.0% and 2.0% (before consideration of the interest rate spread) when using LIBOR and the Base Rate, respectively. The Amendment reduced both such interest rate floors under the Term Loan B by 0.25%. The amount of the interest rate spread is predicated on, among other things, our Consolidated Leverage Ratio (as defined in the loan agreement). The Amendment reduced the interest rate spread on the Term Loan B by 0.75%. We can elect differing interest rates for each of the debt instruments under the Credit Facilities. As of September 30, 2013, the effective interest rates on the Term Loan A and the Term Loan B were 3.0% and 3.5%, respectively. Those rates remained unchanged as of November 1, 2013.

The Revolving Credit Agreement provides that we can borrow, on a revolving basis, up to an aggregate of $500.0 million, as adjusted for outstanding standby letters of credit of up to $75.0 million. During the nine months ended September 30, 2013, we borrowed $476.9 million and repaid $254.4 million under the Revolving Credit Agreement to fund working capital and the entire purchase price of an acquisition that we completed on April 1, 2013 (see Note 8 for additional information about such acquisition). During the nine months ended September 30, 2012, we borrowed and repaid $17.0 million. As of November 1, 2013, the amount unused and available for borrowing under the Revolving Credit Agreement was approximately $237.0 million, which reflected the then outstanding balance of $210.0 million thereunder and $53.0 million of standby letters of credit in favor of third parties. The effective interest rate on the variable rate Revolving Credit Agreement was approximately 3.0% on September 30, 2013 and 2.9% on November 1, 2013.

The Credit Facilities are subject to mandatory prepayment in amounts equal to 50% of our Excess Cash Flow (as defined in the amended loan agreement) with step-downs of such percentage based on our Consolidated Leverage Ratio. Based on our Excess Cash Flow for the year ended December 31, 2012, we repaid approximately $31.5 million of additional principal under the Credit Facilities during the nine months ended September 30, 2013. As a result of such principal repayment, we wrote off $0.4 million of deferred debt issuance costs.

On July 29, 2013, we obtained the agreement of the requisite lenders under the Revolving Credit Agreement to (i) waive any default which would otherwise arise if the persons nominated by Glenview in its Consent Solicitation Process (or any other persons nominated by Glenview) (collectively, the “Glenview Nominees”) were elected or appointed as directors, provided that such Glenview Nominees were approved by at least a majority of the then Board of Directors and (ii) make a technical clarification to the definition of “Change of Control” to provide that we may enter into a merger or similar agreement and not trigger a “Change of Control” event of default until the transaction contemplated by such agreement is consummated. After interviews of all of the Glenview Nominees had been conducted, our previous Board of Directors approved the Glenview Nominees on August 1, 2013 solely for purposes of preventing a “Change of Control” under the indenture governing HMA’s 7.375% Senior Notes due 2020 and the Revolving Credit Agreement and preventing a “Fundamental Change” under the terms of the indenture governing HMA’s 3.75% Convertible Senior Subordinated Notes due 2028 and for no other purpose.

Other. Cash paid for interest on our long-term debt and capital lease obligations during the nine months ended September 30, 2013 and 2012, including amounts that have been capitalized, was approximately $212.6 million and $206.6 million, respectively. We entered into capital leases and other similar arrangements for real property and equipment aggregating $19.6 million and $58.3 million during the nine months ended September 30, 2013 and 2012, respectively. See Note 7 for information regarding the estimated fair values of our long-term debt instruments. Additionally, see Note 15 for summarized financial information in respect of our subsidiaries that provide joint and severable guarantees of payment for certain of our long-term debt obligations.

At September 30, 2013, we were in compliance with all of the covenants contained in our debt agreements.

 

14


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

5. Shareholder Rights Plan

On May 24, 2013, we adopted and entered into a Shareholder Rights Plan (the “Rights Plan”) with American Stock Transfer & Trust Company, LLC, as rights agent. The Rights Plan is designed to promote the fair and equal treatment of all of our stockholders and ensures that the Board of Directors remains in the best position to discharge its fiduciary duties.

The Rights Plan authorizes the issuance of one preferred share purchase right (a “Right”) for each outstanding share of our common stock held of record as of June 3, 2013, and directs the issuance of one preferred share purchase right with respect to each share of our common stock that shall become outstanding thereafter until the Rights become exercisable or they expire, as described below.

Each Right, once exercisable, entitles holders of our common stock to purchase one-thousandth of a share of our preferred stock designated as Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”) at a price of $45.00 per one one-thousandth of a share, subject to certain adjustments. The Rights will generally become exercisable only following the tenth day after a person or group (with certain exceptions) acquires or obtained the right to acquire, or announced a tender or exchange offer, that if consummated would result in such person or group acquiring beneficial ownership of 15% or more of our outstanding common stock. Upon the occurrence of a triggering event, the Rights will entitle every holder of our common stock, other than the acquirer, to purchase our stock on terms that would likely be economically dilutive to the acquirer.

The Rights expire upon the close of business on the earliest to occur of: (i) May 24, 2014, (ii) the date on which the Rights are redeemed or exchanged by us in accordance with the Rights Plan or (iii) the date of our 2014 annual meeting of stockholders if requisite stockholder approval of the Rights Plan is not obtained at such meeting.

On July 29, 2013, prior to and in connection with entering into the Merger Agreement, we entered into an amendment (the “Rights Amendment”) to the Rights Plan which provides that, among other things, (i) none of CHS, Merger Sub or any other subsidiary of CHS is an Acquiring Person (as defined in the Rights Agreement) pursuant to the Rights Plan solely as a result of the Merger Agreement and the transactions contemplated thereby, (ii) a “Distribution Date” or a “Stock Acquisition Date” (as such terms are defined in the Rights Plan) does not occur, in each case, as a result of the adoption, approval, execution or delivery of the Merger Agreement or the consummation of the Merger Agreement and (iii) the “Final Expiration Date” prior to the Effective Time (as defined in the Merger Agreement). The Rights Amendment also provides that if for any reason the Merger Agreement is terminated in accordance with its terms, the Rights Amendment will be of no further force and effect and the Rights Plan shall remain exactly the same as it existed immediately prior to the execution of the Rights Amendment.

 

6. Earnings Per Share and Related Other

Basic earnings per share is computed based on the weighted average number of outstanding common shares. Diluted earnings per share is computed based on the weighted average number of outstanding common shares plus the dilutive effect of common stock equivalents, computed using the treasury stock method. The table on the following page sets forth the computations of basic and diluted earnings per share for the common stockholders of Health Management Associates, Inc. (in thousands, except per share amounts).

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

6. Earnings Per Share and Related Other (continued)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
           (restated)           (restated)  

Numerators:

        

Income (loss) from continuing operations

   $ (73,347   $ 49,017      $ (40,180   $ 141,759   

Income attributable to noncontrolling interests

     (3,485     (6,685     (12,804     (21,757

Accretion of redeemable equity securities

     (19,813     —          (19,813     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to Health Management Associates, Inc. common stockholders

     (96,645     42,332        (72,797     120,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations attributable to Health Management Associates, Inc. common stockholders

     —          (1,389     —          (5,805
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ (96,645   $ 40,943      $ (72,797   $ 114,197   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominators:

        

Denominator for basic earnings (loss) per share-weighted average number of outstanding common shares

     261,927        254,516        258,911        254,111   

Dilutive securities:

        

Stock-based compensation arrangements

     —          2,268        —          2,061   

Convertible notes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator for diluted earnings (loss) per share

     261,927        256,784        258,911        256,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

        

Continuing operations

   $ (0.37   $ 0.16      $ (0.28   $ 0.47   

Discontinued operations

     —          —          —          (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (0.37   $ 0.16      $ (0.28   $ 0.45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Continuing operations

   $ (0.37   $ 0.16      $ (0.28   $ 0.47   

Discontinued operations

     —          —          —          (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (0.37   $ 0.16      $ (0.28   $ 0.45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Securities excluded from diluted earnings per share because they were antidilutive or performance conditions were not met:

        

Stock options

     60        3,417        60        3,977   
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred stock and restricted stock

     —          1,624        —          2,091   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

7. Fair Value Measurements, Available-For-Sale Securities and Restricted Fund

General. GAAP defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes the following three levels of inputs that may be used:

 

  Level 1:    Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
  Level 2:    Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
  Level 3:    Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7. Fair Value Measurements, Available-For-Sale Securities and Restricted Fund (continued)

 

We recognize transfers between levels within the fair value hierarchy on the date of the change in circumstances that requires such transfer. We began classifying all of our fixed income available-for-sale securities as Level 2 in the first quarter of 2013 and have recast $175.4 million of those securities at December 31, 2012. The following table summarizes the estimated fair values of certain of our financial assets (liabilities) (in thousands).

 

     Level 1      Level 2     Level 3      Totals  

As of September 30, 2013:

          

Available-for-sale securities, including those in restricted funds

   $ 65,510       $ 153,160      $ —         $ 218,670   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest rate swap contract

   $ —         $ (32,175   $ —         $ (32,175
  

 

 

    

 

 

   

 

 

    

 

 

 

As of December 31, 2012:

          

Available-for-sale securities, including those in restricted funds

   $ 51,156       $ 222,007      $ —         $ 273,163   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest rate swap contract

   $ —         $ (93,045   $ —         $ (93,045
  

 

 

    

 

 

   

 

 

    

 

 

 

The estimated fair values of our Level 1 available-for-sale securities were primarily determined by reference to quoted market prices. Our Level 2 available-for-sale securities primarily consisted of: (i) bonds and notes issued by the United States government and its agencies, domestic and foreign corporations and foreign governments and (ii) preferred securities issued by domestic and foreign corporations. The estimated fair values of these securities are determined using various valuation techniques, including a multi-dimensional relational model that incorporates standard observable inputs and assumptions such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids/offers and other pertinent reference data.

The estimated fair value of our interest rate swap contract, which is discussed at Note 3(a) to the audited consolidated financial statements included in our 2012 Form 10-K, was determined using a model that considers various inputs and assumptions, including LIBOR swap rates, cash flow activity, forward yield curves and other relevant economic measures, all of which are observable market inputs that are classified under Level 2 of the fair value hierarchy. The model also incorporates valuation adjustments for credit risk. The table below summarizes our balance sheet classification of the estimated fair values of our interest rate swap contract liabilities (in thousands).

 

     September 30,
2013
     December 31,
2012
 

Accrued expenses and other liabilities

   $ 32,175       $ 84,277   

Other long-term liabilities

     —           8,768   
  

 

 

    

 

 

 

Totals

   $ 32,175       $ 93,045   
  

 

 

    

 

 

 

Cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses and other liabilities are reflected in the condensed consolidated balance sheets at their estimated fair values primarily due to their short-term nature.

The estimated fair values of our long-term debt instruments, which are discussed at Note 4, are determined by reference to quoted market prices and/or bid and ask prices in the relevant market. The following table summarizes the estimated fair values of our debt securities (in thousands) and indicates their corresponding level within the fair value hierarchy.

 

     September 30,
2013
     December 31,
2012
 

Level 1:

     

6.125% Senior Notes due 2016

   $ 438,000       $ 434,000   

7.375% Senior Notes due 2020

     958,125         945,000   

3.75% Convertible Senior Subordinated Notes due 2028

     109,902         100,948   

Level 2:

     

Term Loan A

     620,732         672,704   

Term Loan B

     1,355,984         1,397,227   

The estimated fair values of our other long-term debt instruments reasonably approximate their carrying amounts in the condensed consolidated balance sheets.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7. Fair Value Measurements, Available-For-Sale Securities and Restricted Fund (continued)

 

Available-For-Sale Securities (including those in restricted funds). Supplemental information regarding our available-for-sale securities (all of which had no withdrawal restrictions) is set forth in the table below (in thousands).

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Values
 

As of September 30, 2013:

          

Debt securities and debt-based mutual funds

          

Government and corporate

   $ 143,819       $ 2,839       $ (1,428   $ 145,230   

Equity securities and equity-based mutual funds

          

Domestic

     44,807         7,709         (1,012     51,504   

International

     18,988         3,241         (461     21,768   

Commodity-based mutual fund

     182         —           (14     168   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 207,796       $ 13,789       $ (2,915   $ 218,670   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2012:

          

Debt securities and debt-based mutual funds

          

Government and corporate

   $ 206,258       $ 3,963       $ (331   $ 209,890   

Equity securities and equity-based mutual funds

          

Domestic

     37,825         4,307         (234     41,898   

International

     18,005         1,766         (219     19,552   

Commodity-based mutual fund

     1,823         —           —          1,823   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 263,911       $ 10,036       $ (784   $ 273,163   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2013 and December 31, 2012, investments with aggregate estimated fair values of approximately $44.9 million (449 investments) and $123.8 million (195 investments), respectively, generated the gross unrealized losses disclosed in the above table. We concluded that other-than-temporary impairment charges were not necessary for such gross unrealized losses at either of the balance sheet dates because of, among other things, recent declines in the value of the affected securities and/or our brief holding period (i.e., most of such securities have been held for less than one year), as well as our ability to hold the securities for a reasonable period of time sufficient for a projected recovery of fair value. We will continue to monitor and evaluate the recoverability of our available-for-sale securities.

The contractual maturities of debt-based securities held by us as of September 30, 2013, excluding mutual fund holdings, are set forth in the table below. Expected maturities will differ from contractual maturities because the issuers of the debt securities may have the right to prepay their obligations without prepayment penalties.

 

     Amortized
Cost
     Estimated
Fair Values
 
     (in thousands)  

Within 1 year

   $ 88       $ 89   

After 1 year and through year 5

     12,302         12,473   

After 5 years and through year 10

     10,704         10,956   

After 10 years

     18,147         17,600   

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7. Fair Value Measurements, Available-For-Sale Securities and Restricted Fund (continued)

 

The weighted average cost method is used to calculate the historical cost basis of securities that are sold. Gross realized gains and losses on sales of available-for-sale securities and other investment income, which includes interest and dividends, are summarized in the table below (in thousands).

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Realized gains

   $ 1,233      $ 2,043      $ 4,474      $ 3,508   

Realized losses

     (2,140     (276     (3,192     (1,158

Investment income

     1,577        1,640        4,909        4,760   

Restricted Funds. Our restricted funds, which consisted solely of available-for-sale securities at both September 30, 2013 and December 31, 2012, are held by a wholly owned captive insurance subsidiary that is domiciled in the Cayman Islands. The assets of such subsidiary are effectively limited to use in its proprietary operations. Supplemental information regarding the available-for-sale securities that are included in restricted funds is set forth in the table below (in thousands).

 

     Nine Months Ended
September 30,
 
     2013      2012  

Proceeds from sales

   $ 64,337       $ 52,583   

Purchases

     65,208         70,610   

 

8. Acquisitions, Joint Ventures and Other Activity

Acquisition Activity. The acquisitions described below are typically financed using a combination of available cash balances, proceeds from sales of available-for-sale securities, borrowings under revolving credit agreements and other long-term financing arrangements. The operating results of entities that are acquired by our subsidiaries are included in our consolidated financial statements from the date of acquisition.

2013 Acquisitions. On April 1, 2013, one of our subsidiaries acquired an 80% interest in Bayfront Health System, which includes Bayfront Medical Center, a tertiary and teaching hospital in St. Petersburg, Florida that is licensed to operate 480 beds, and certain related health care operations. A not-for-profit organization affiliated with Bayfront Health System, Bayfront Health, Education and Research Organization, retained a 20% interest in such entities. The net purchase price for our 80% interest was approximately $162.0 million in cash, plus a working capital adjustment. The acquired assets and assumed liabilities included, among other things, supply inventories, property, plant and equipment and certain long-term lease obligations. We funded the entire purchase price of this acquisition with borrowings under the Revolving Credit Agreement, which is discussed at Note 4. During the nine months ended September 30, 2013, certain of our subsidiaries also acquired ancillary health care businesses for aggregate cash consideration of approximately $5.4 million.

2012 Acquisitions. Effective April 1, 2012, one of our subsidiaries acquired from a subsidiary of INTEGRIS Health, Inc. (“Integris”) an 80% interest in five Oklahoma-based general acute care hospitals with a total of 218 beds and certain related health care operations. A subsidiary of Integris retained a 20% interest in each of these entities. The net purchase price for our 80% interest was approximately $61.9 million in cash. During the nine months ended September 30, 2012, certain of our subsidiaries also acquired ancillary health care businesses for aggregate cash consideration of approximately $9.6 million.

Other. Our acquisitions are accounted for using the purchase method of accounting. We use estimated exit price fair values as of the date of acquisition to (i) allocate the related purchase price to the assets acquired and liabilities assumed and (ii) record noncontrolling interests. We use a variety of techniques to estimate exit price fair values, including, but not limited to, valuation methodologies that derive fair values using a market approach based on comparable transactions and an approach based on depreciated replacement cost. We recorded incremental goodwill during each of the nine months ended September 30, 2013 and 2012 because the final negotiated purchase price in certain of our completed acquisitions exceeded the fair value of the net tangible and intangible assets acquired. Most of the goodwill that was added during those periods is expected to be tax deductible.

Acquisition-related costs have been included in other operating expenses in the consolidated statements of operations; however, such costs for each of the nine months ended September 30, 2013 and 2012 were not material.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

8. Acquisitions, Joint Ventures and Other Activity (continued)

 

The table below summarizes the purchase price allocations for the acquisitions that we completed during the nine months ended September 30, 2013 and 2012; however, in some cases, such purchase price allocations are preliminary and remain subject to future refinement as we gather supplemental information.

 

     Nine Months Ended
September 30,
 
     2013     2012  
     (in thousands)  

Assets acquired:

    

Current and other assets

   $ 8,308      $ 1,811   

Property, plant and equipment

     126,626        14,311   

Intangible assets (primarily contractual rights to operate hospitals)

     116,341        48,775   

Goodwill

     7,576        25,176   
  

 

 

   

 

 

 

Total assets acquired

     258,851        90,073   
  

 

 

   

 

 

 

Liabilities assumed:

    

Current liabilities

     (1,124     (501

Capital lease obligations

     (36,657     (961

Other long-term liabilities

     (2,274     —     
  

 

 

   

 

 

 

Total liabilities assumed

     (40,055     (1,462
  

 

 

   

 

 

 

Net assets acquired

   $ 218,796      $ 88,611   
  

 

 

   

 

 

 

Joint Ventures and Redeemable Equity Securities. As of September 30, 2013, we had established joint ventures to own/lease and operate 29 of our hospitals. Local physicians and/or other health care entities own minority equity interests in each of the joint ventures and participate in the related hospital’s governance. We own a majority of the equity interests in each joint venture and manage the related hospital’s day-to-day operations.

When completing a joint venture transaction, our subsidiary that is a party to the joint venture customarily issues equity securities that provide the noncontrolling shareholders with certain rights to require our subsidiary to redeem such securities. Redeemable equity securities with redemption features that are not solely within our control are classified outside of permanent equity. Those securities are initially recorded at their estimated fair value on the date of issuance. Securities that are currently redeemable or redeemable after the passage of time are adjusted to their redemption value as changes occur. If it is unlikely that a redeemable equity security will ever require redemption then subsequent adjustments to the initially recorded amount will only be recognized in the period that a redemption becomes probable.

As recorded in the condensed consolidated balance sheets, redeemable equity securities represent the minimum amounts that can be unilaterally redeemed for cash by noncontrolling shareholders in respect of their subsidiary equity holdings or the initial unadjusted estimated fair values of contingent rights held by certain noncontrolling shareholders. Through October 25, 2013, the mandatory redemptions requested by noncontrolling shareholders in respect of their subsidiary equity holdings have been nominal. A rollforward of our redeemable equity securities is summarized in the table below (in thousands).

 

     Nine Months Ended
September 30,
 
     2013     2012  

Balances at the beginning of the period

   $ 212,458      $ 200,643   

Noncontrolling shareholder interests in acquired businesses

     41,861        15,218   

Investments by noncontrolling shareholders

     —          3,591   

Purchases of subsidiary shares from and distributions to noncontrolling shareholders

     (2,119     (6,789

Accretion in carrying value

     19,813        —     
  

 

 

   

 

 

 

Balances at the end of the period

   $ 272,013      $ 212,663   
  

 

 

   

 

 

 

Upon the occurrence of certain events that are defined in the underlying operating agreements, some noncontrolling shareholders may require our affected subsidiary to purchase their minority equity holdings. Specifically, we may be required to purchase the 30% noncontrolling interest in Lake Norman Regional Medical Center for the higher of fair market value or $150.0 million upon the completion of the Merger (as described in Note 14). Accordingly, upon entering into the Merger Agreement, it became probable that this noncontrolling interest will become redeemable. As such, starting in August 2013 and up to the estimated date of closing, we will record adjustments on a straight line basis to this noncontrolling interest and recognize the respective impact to earnings per share. Otherwise, we believe that it is not probable that the contingent

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

8. Acquisitions, Joint Ventures and Other Activity (continued)

 

rights of any other noncontrolling shareholders will vest because there are no circumstances known to us that would trigger such equity repurchase obligations of our subsidiaries. Accordingly, insofar as the contingent rights are concerned, the carrying values of the related redeemable equity securities have not been adjusted since being initially recorded.

 

9. Discontinued Operations and Assets Held for Sale

Our discontinued operations during the periods presented herein included: (i) the 172-bed Woman’s Center at Dallas Regional Medical Center in Mesquite, Texas, which was closed in 2008 and the related real property of which was sold on May 21, 2012; (ii) 25-bed St. Mary’s Medical Center of Scott County in Oneida, Tennessee, which was returned to the lessor on May 24, 2012; and (iii) the 293-bed idle Riverside hospital campus (“Riverside”) in Knoxville, Tennessee. The operating results and cash flows of discontinued operations are included in our consolidated financial statements up to the date of disposition. Additionally, as required by GAAP, the operating results and cash flows of the abovementioned entities have been separately presented as discontinued operations in the interim condensed consolidated financial statements. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value, less costs to sell. The estimates of fair value are based on recent sales of similar assets, market analyses, pending disposition transactions and market responses based on discussions with, and offers received from, potential buyers (i.e., Level 2 inputs under the GAAP fair value hierarchy described at Note 7).

One of our subsidiaries acquired Riverside on September 30, 2011. The hospital at the Riverside location was closed prior to our acquisition. Although we are currently evaluating various disposal alternatives, the timing of a divestiture of Riverside has not yet been determined. At both September 30, 2013 and December 31, 2012, the assets held for sale in our condensed consolidated balance sheets were comprised of the remaining property, plant and equipment at the location.

The table below sets forth the underlying details of our discontinued operations (in thousands) during the three and nine months ended September 30, 2012 (there was no such activity during the three and nine months ended September 30, 2013).

 

     Three Months Ended
September 30, 2012
    Nine Months Ended
September 30, 2012
 

Net revenue before the provision for doubtful accounts

   $ —        $ 7,316   

Provision for doubtful accounts

     —          (2,139
  

 

 

   

 

 

 

Net revenue

     —          5,177   
  

 

 

   

 

 

 

Salaries and benefits

     192        4,587   

Depreciation and amortization

     —          1,988   

Other operating expenses

     889        5,791   

Loss on sales of assets

     —          1,102   

Long-lived asset and goodwill impairment charges

     1,187        1,187   
  

 

 

   

 

 

 
     2,268        14,655   
  

 

 

   

 

 

 

Loss before income taxes

     (2,268     (9,478

Income tax benefit

     879        3,673   
  

 

 

   

 

 

 

Loss from discontinued operations

   $ (1,389   $ (5,805
  

 

 

   

 

 

 

Activity Subsequent to September 30, 2013. On October 7, 2013, we announced that we had signed a definitive agreement to sell Williamson Memorial Hospital (“Williamson”), a 76-bed general acute care hospital in Williamson, West Virginia. Subject to regulatory approvals, we anticipate this transaction will close on or before March 31, 2014. Williamson will be reflected as discontinued operations in our next Annual Report on Form 10-K. Accordingly, Williamson’s results of operations and cash flows, which are not material to the consolidated financial statements as a whole for all periods presented, will be reclassified to discontinued operations in the consolidated financial statements, and the corresponding assets and liabilities will be segregated on the balance sheets.

 

10. Income Taxes

Our effective income tax rates were approximately 54.8% and 32.0% during the nine months ended September 30, 2013 and 2012, respectively, and 47.2% and 28.6% during the three months ended September 30, 2013 and 2012, respectively. Net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements, reduced our effective income tax rates by approximately 310 basis points and 370 points during the three and nine months ended September 30, 2012, respectively. The impact was an increase of 120 basis points and 690 basis points during the three and nine months ended September 30, 2013, respectively.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

10. Income Taxes (continued)

 

Our effective income tax rates were impacted by the finalization of certain federal and state income tax returns, the satisfactory completion of certain state tax audits and examinations and the lapsing of state statutes of limitations. The impacts of these items, combined with the overall decrease in income from continuing operations, contributed to the overall change in effective income tax rate.

Our net federal and state income tax payments during the nine months ended September 30, 2013 and 2012 approximated $6.3 million and $38.3 million, respectively.

 

11. Accumulated Other Comprehensive Income (Loss)

GAAP defines comprehensive income as the change in equity of a business enterprise from transactions and other events and circumstances that relate to non-owner sources. Rollforwards of our accumulated other comprehensive income (loss) are presented in the table below (in thousands).

 

     Unrealized Gains
(Losses)  on
Available-for-Sale
Securities
    Interest Rate
Swap Contract
    Totals  

Balances at January 1, 2013, net of income taxes of $27,192

   $ 6,017     $ (47,957   $ (41,940

Unrealized gains (losses) on available-for-sale securities, net of income taxes of $1,514

     2,807       —          2,807   

Adjustments for net (gains) losses reclassified into net income, net of income taxes of $(945)

     (1,756     —          (1,756

Reclassification adjustments for amortization of expense into net income, net of income taxes of $20,774

     —          32,741       32,741  
  

 

 

   

 

 

   

 

 

 

Balances at September 30, 2013, net of income taxes of $5,848

   $ 7,068     $ (15,216   $ (8,148
  

 

 

   

 

 

   

 

 

 

Balances at January 1, 2012, net of income taxes of $60,635

   $ 831     $ (96,271   $ (95,440

Unrealized gains (losses) on available-for-sale securities, net of income taxes of $3,092

     5,736       —          5,736   

Adjustments for net (gains) losses reclassified into net income, net of income taxes of $(119)

     (221     —          (221

Reclassification adjustments for amortization of expense into net income, net of income taxes of $23,267

     —          36,670       36,670  
  

 

 

   

 

 

   

 

 

 

Balances at September 30, 2012, net of income taxes of $34,395

   $ 6,346     $ (59,601   $ (53,255
  

 

 

   

 

 

   

 

 

 

Supplemental information about our accumulated other comprehensive income (loss) reclassification adjustments is summarized in the table below (in thousands).

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
    Affected Line Item in the
     2013     2012     2013     2012     Consolidated Statements of Income

Available-for-sale securities

   $ (706   $ (443   $ (2,700   $ (340   Other

Income tax expense

     247        155        945        119      Income tax benefit (provision)
  

 

 

   

 

 

   

 

 

   

 

 

   

Available-for-sale securities, net reclassification

   $ (459   $ (288   $ (1,755   $ (221   Consolidated net income
  

 

 

   

 

 

   

 

 

   

 

 

   

Interest rate swap contract

   $ 17,208      $ 19,404      $ 53,515      $ 59,937      Interest expense

Income tax expense

     (6,680     (7,533     (20,774     (23,267   Income tax benefit (provision)
  

 

 

   

 

 

   

 

 

   

 

 

   

Interest rate swap contract, net reclassification

   $ 10,528      $ 11,871      $ 32,741      $ 36,670      Consolidated net income
  

 

 

   

 

 

   

 

 

   

 

 

   

Prior to a debt restructuring that we completed on November 18, 2011, which is discussed at Note 3 to the audited consolidated financial statements included in our 2012 Form 10-K, our interest rate swap contract had been a perfectly effective cash flow hedge instrument that was used to manage the risk of variable interest rate fluctuation on certain long-term debt. Changes in the estimated fair value of our interest rate swap contract were previously recognized as a component of other comprehensive income (loss). As a result of our debt restructuring, the interest rate swap contract is no longer an effective cash flow hedge instrument. Therefore, changes in its estimated fair value subsequent to our debt restructuring are no longer included in other comprehensive income (loss) but are recognized in our consolidated statements of operations as a component of interest expense. Future amortization of the accumulated other comprehensive loss attributable to our interest rate swap contract is expected to approximate $24.9 million during the period from October 1, 2013 to the expiration of the interest rate swap contract in February 2014.

 

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

12. Commitments and Contingencies

Physician and Physician Group Guarantees. We are committed to providing financial assistance to physicians and physician groups practicing in the communities that our hospitals serve through certain recruiting arrangements and professional services agreements. At September 30, 2013, we were committed to guarantees of approximately $212.9 million under such arrangements. The actual amounts advanced will depend on the financial results of each physician’s and physician group’s private practice during the related contractual measurement period, which generally approximates one to two years. We believe that the recorded liabilities for physician and physician group guarantees of $77.0 million and $89.7 million at September 30, 2013 and December 31, 2012, respectively, are adequate and reasonable; however, there can be no assurances that the ultimate liability will not exceed our estimates.

Medicare/Medicaid Billing Lawsuit. On January 11, 2010, Health Management Associates, Inc. (referred to as “Health Management” for the remainder of this Note 12) and one of its subsidiaries were named in a qui tam lawsuit entitled United States of America ex rel. J. Michael Mastej v. Health Management Associates, Inc. et al. in the U.S. District Court for the Middle District of Florida, Tampa Division. The plaintiff’s complaint alleged that, among other things, the defendants erroneously submitted claims to Medicare and that those claims were falsely certified to be in compliance with Section 1877 of the Social Security Act of 1935 (commonly known as the “Stark law”) and the Anti-Kickback Statute. The plaintiff’s complaint further alleged that the defendants’ conduct violated the federal False Claims Act of 1863 (the “False Claims Act”). The plaintiff seeks recovery of all Medicare and Medicaid reimbursement that the defendants received as a result of the alleged false certifications and treble damages under the False Claims Act, as well as a civil penalty for each Medicare and Medicaid claim supported by such alleged false certifications. On August 18, 2010, the plaintiff filed a first amended complaint that was similar to the original complaint. On February 23, 2011, the case was transferred to the U.S. District Court for the Middle District of Florida, Fort Myers Division (Case No. 2:11-cv-00089-JES-DNF). On May 5, 2011, the plaintiff filed a second amended complaint, which was similar to the first amended complaint. On May 17, 2011, the defendants moved to dismiss the second amended complaint for failure to state a claim with the particularity required and failure to state a claim upon which relief can be granted. On January 26, 2012, the United States gave notice of its decision not to intervene in this lawsuit. On February 16, 2012, the court granted the defendants’ motion to dismiss, without prejudice. The court’s order permitted the plaintiff to file an amended complaint. On March 8, 2012, the plaintiff filed a third amended complaint, which was similar to the first amended complaint and the second amended complaint. On March 26, 2012, the defendants moved to dismiss the third amended complaint on the same bases set forth in earlier motions to dismiss. On March 19, 2013, the U.S. District Court for the Middle District of Florida, Tampa Division, dismissed the third amended complaint with prejudice. On March 28, 2013, the United States of America filed a motion to clarify that the dismissal with prejudice did not relate to the United States. On April 4, 2013, the defendants filed an opposition to the United States’ motion for clarification. The Government’s motion remains pending at this time. On April 16, 2013, the plaintiff filed a motion for relief from judgment and for leave to amend the complaint, and a proposed fourth amended complaint. On April 18, 2013, the plaintiff filed a notice of appeal. On May 2, 2013, the defendants filed an opposition to the plaintiff’s motion for relief from judgment and for leave to amend the complaint for the fourth time. On July 10, 2013, the court denied plaintiff’s motion for relief from judgment and for leave to amend the complaint for the fourth time. The case is now on appeal to the Eleventh Circuit Court of Appeals. On August 26, 2013, plaintiff submitted his initial brief and, on October 15, 2013, defendants filed their answer brief and on November 8, 2013 plaintiff filed his reply brief. We intend to vigorously defend Health Management and its subsidiary against the allegations in this matter. We do not believe that the final outcome of this matter will be material.

Governmental Matters. Several Health Management hospitals received letters during 2009 requesting information in connection with a U.S. Department of Justice (“DOJ”) investigation relating to kyphoplasty procedures. Kyphoplasty is a minimally invasive spinal procedure used to treat vertebral compression fractures. The DOJ is currently investigating hospitals and hospital operators in multiple states to determine whether certain Medicare claims for kyphoplasty were incorrect when billed as an inpatient service rather than as an outpatient service. We believe that the DOJ’s investigation originated with a False Claims Act lawsuit against Kyphon, Inc., the company that developed the kyphoplasty procedure. The requested information has been provided to the DOJ and we are cooperating with the investigation. To date, the DOJ has not asserted any monetary or other claims against the Health Management hospitals in this matter. Based on the aggregate billings for inpatient kyphoplasty procedures during the period under review that were performed at the Health Management hospitals subject to the DOJ’s inquiry, we do not believe that the final outcome of this matter will be material.

During September 2010, Health Management received a letter from the DOJ indicating that an investigation was being conducted to determine whether certain Health Management hospitals improperly submitted claims for the implantation of implantable cardioverter defibrillators (“ICDs”). The DOJ’s investigation covers the period commencing with Medicare’s expansion of coverage for ICDs in 2003 to the present. The letter from the DOJ further indicates that the claims submitted by Health Management’s hospitals for ICDs and related services need to be reviewed to determine if Medicare coverage and payment was appropriate. During 2010, the DOJ sent similar letters and other requests to a large

 

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

12. Commitments and Contingencies (continued)

 

number of unrelated hospitals and hospital operators across the country as part of a nation-wide review of ICD billing under the Medicare program. We are cooperating with the DOJ in its ongoing investigation, which could potentially give rise to claims against Health Management and/or certain of its subsidiary hospitals under the False Claims Act or other statutes, regulations or laws. Additionally, we are conducting an internal review of hospital medical records related to ICDs that are the subject of the DOJ investigation. To date, the DOJ has not asserted any monetary or other claims against Health Management or its hospitals in this matter and, at this time, we are unable to determine the potential impact, if any, that will result from the final resolution of the investigation.

The U.S. Department of Health and Human Services, Office of Inspector General (“HHS-OIG”) and the DOJ, including the Civil Division and U.S. Attorney’s Offices in the Eastern District of Pennsylvania, the Middle District of Florida, the Eastern District of Oklahoma, the Middle District of Tennessee, the Western District of North Carolina, the District of South Carolina and the Middle District of Georgia, are currently investigating Health Management and certain of its subsidiaries (HHS-OIG and the DOJ are collectively referred to as “Government Representatives”). We believe that such investigations relate to the Anti-Kickback Statute, the Stark law and the False Claims Act and are focused on: (i) physician referrals, including financial arrangements with our whole-hospital physician joint ventures; (ii) the medical necessity of emergency room tests and patient admissions, including whether the Pro-Med software that we used led to any medically unnecessary tests or admissions; and (iii) the medical necessity of certain surgical procedures. We further believe that the investigations may have originated as a result of qui tam lawsuits filed on behalf of the United States. In connection with the investigations, HHS-OIG has requested certain records through subpoenas, which apply system-wide, that were served on Health Management on May 16, 2011 and July 21, 2011. On June 10, June 26, and July 11, 2013, Health Management received additional subpoenas, which supplements the July 21, 2011 subpoena, from the HHS-OIG regional office in Atlanta, Georgia. On June 12, 2013, Health Management received an additional subpoena, which supplements the May 16, 2011 subpoena, from the HHS-OIG regional office in Miami Lakes, Florida. Additionally, Government Representatives have interviewed certain of our current and former employees. We are conducting internal investigations and have met with Government Representatives on numerous occasions to respond to their inquiries. We intend to cooperate with the Government Representatives during their investigations. At this time, we are unable to determine the potential impact, if any, that will result from the final resolution of these investigations.

On February 22, 2012 and February 24, 2012, HHS-OIG served subpoenas on certain Health Management hospitals relating to those hospitals’ relationships with Allegiance Health Management, Inc. (“Allegiance”). Allegiance, which is unrelated to Health Management, is a post acute health care management company that provides intensive outpatient psychiatric (“IOP”) services to patients. The Health Management hospitals that were served subpoenas were: (i) Central Mississippi Medical Center in Jackson, Mississippi; (ii) Crossgates River Oaks Hospital in Brandon, Mississippi; (iii) Davis Regional Medical Center in Statesville, North Carolina; (iv) Lake Norman Regional Medical Center in Mooresville, North Carolina; (v) the Medical Center of Southeastern Oklahoma in Durant, Oklahoma; and (vi) Natchez Community Hospital in Natchez, Mississippi. Each of those hospitals has or had a contract with Allegiance. Among other things, the subpoenas seek: (i) documents related to the hospitals’ financial relationships with Allegiance; (ii) documents related to patients who received IOP services from Allegiance at the Health Management hospitals, including their patient medical records; (iii) documents relating to complaints or concerns regarding Allegiance’s IOP services at the Health Management hospitals; (iv) documents relating to employees, physicians and therapists who were involved with the IOP services provided by Allegiance at the Health Management hospitals; and (v) other documents related to Allegiance, including leases, contracts, policies and procedures, training documents, budgets and financial analyses. The period of time covered by the subpoenas is January 1, 2008 through the date of subpoena compliance. We believe that HHS-OIG has served similar subpoenas on other non-Health Management hospitals that had contracts with Allegiance. We intend to cooperate with the investigations. At this time, we are unable to determine the potential impact that will result from the final resolution of these investigations.

On April 25, 2013, Health Management received a subpoena from the SEC, issued pursuant to an investigation, requesting documents related to accounts receivable, billing write-downs, contractual adjustments, reserves for doubtful accounts, and accounts receivable aging, and revenue from Medicare, Medicaid and from privately insured or uninsured patients. On June 5, 2013, Health Management received a supplemental subpoena from the SEC which requests additional financial reports. This investigation is ongoing and we are cooperating with the SEC’s investigation. We are unable to determine the potential course or impact, if any, of this investigation.

In addition to the abovementioned subpoenas and investigations, certain of our hospitals have received other requests for information from state and federal agencies. We are cooperating with all of the ongoing investigations by collecting and producing the requested materials. Because a large portion of our government investigations are in their early stages, we are unable to evaluate the outcome of such matters or determine the potential impact, if any, that could result from their final resolution.

Class Action and Derivative Action Lawsuits. On April 30, 2012, two class action lawsuits that were brought against Health Management and certain of its then executive officers, one of whom was at that time also a director, were

 

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

12. Commitments and Contingencies (continued)

 

consolidated in the U.S. District Court for the Middle District of Florida under the caption In Re: Health Management Associates, Inc., et al. (Case No. 2:12-cv-00046-JES-DNF) and three pension fund plaintiffs were appointed as lead plaintiffs. On July 30, 2012, the lead plaintiffs filed an amended consolidated complaint purportedly on behalf of stockholders who purchased our common stock during the period from July 27, 2009, through January 9, 2012. The amended consolidated complaint (i) alleges that Health Management made false and misleading statements in certain public disclosures regarding its business and financial results and (ii) asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. Among other things, the plaintiffs claim that Health Management inflated its earnings by engaging in fraudulent Medicare billing practices that entailed admitting patients to observation status when they should not have been admitted at all and to inpatient status when they should have been admitted to observation status. The plaintiffs seek unspecified monetary damages. On October 22, 2012, the defendants moved to dismiss the plaintiffs’ amended consolidated complaint for failure to state a claim or plead facts required by the Private Securities Litigation Reform Act. The plaintiffs filed an unopposed stipulation and proposed order to suspend briefing on the defendants’ motion to dismiss because they intended to seek leave of court to file a proposed second amended consolidated complaint. On December 15, 2012, the court entered an order approving the stipulation and providing a schedule for briefing with respect to the proposed amended pleadings. On February 11, 2013, the defendants were served with the second amended consolidated complaint, which asserts the same claims as the amended consolidated complaint. As of August 15, 2013, the defendants’ motion to dismiss the second amended complaint for failure to state a claim and plead facts required by the Private Securities Litigation Reform Act was fully submitted and awaiting the Court’s decision. We intend to vigorously defend against the allegations in this lawsuit. We are unable to predict the outcome or determine the potential impact, if any, that could result from its final resolution.

On January 22, 2013, a putative shareholder derivative action entitled The City of Haverhill Retirement System v. Dauten, et al. (Case No. 8:13-cv-00213) was filed in the U.S. District Court for the Middle District of Florida, Tampa Division, purportedly on behalf of Health Management against its then directors. Health Management was also named as a nominal defendant. The complaint alleges that, among other things, the defendants breached their fiduciary duties to Health Management and its stockholders by supposedly causing Health Management to undertake a scheme to defraud Medicare by improperly admitting certain emergency room patients as “inpatients” in violation of the False Claims Act and then issuing false and misleading public statements about Health Management’s financial outlook and compliance with laws and regulations. The complaint also alleges that the defendants breached their fiduciary duties by exposing Health Management to potentially significant civil and criminal penalties as a result of the aforementioned investigations by HHS-OIG and the DOJ as well as the stockholder class action and other ongoing litigation. The complaint seeks monetary damages from the defendants, other than Health Management. On February 8, 2013, the case was transferred to the U.S. District Court for the Middle District of Florida, Fort Myers Division (Case No. 2:13-cv-00092). On April 10, 2013 the plaintiff filed an amended complaint which asserts the same claims as its prior complaint, but also names two of the Company’s then executives as defendants. On May 15, 2013, the defendants moved to dismiss the amended complaint for threshold lack of derivative standing, for failure to make a demand on the Board, and for failure to state a claim. On June 26, 2013, the plaintiff opposed the defendants’ motion to dismiss, and on August 16, 2013, the plaintiff moved to amend its complaint to add class action claims related to the Merger Agreement. On August 19, 2013, the defendants moved to suspend briefing on their motion to dismiss pending the outcome of the plaintiff’s motion for leave to amend. On August 20, 2013, the Court granted an order suspending briefing on the defendants’ motion to dismiss and setting a schedule for the briefing of the plaintiff’s motion for leave to amend, which was fully submitted for the Court’s decision as of October 8, 2013. We intend to vigorously defend against the allegations in this lawsuit. Because this lawsuit is in its early stages, we are unable to predict the outcome or determine the potential impact, if any, that could result from its final resolution.

On July 23, 2013, an action entitled Town of Davie Police Officers’ Pension Plan v. Dauten, et al. (C.A. No. 8742) was filed in the Court of Chancery of the State of Delaware. This action purportedly was brought as a class action on behalf of all of Health Management’s stockholders, as well as derivatively on behalf of Health Management against Health Management’s then directors and Wells Fargo Bank, National Association, Wells Fargo Securities, LLC, and Deutsche Bank Securities, Inc. The complaint alleges, among other things, that those directors breached their fiduciary duties (i) by approving a credit agreement in 2011 that contains a change of control covenant which plaintiff contends will coerce shareholders into supporting the re-election of Health Management’s incumbent board of directors and (ii) by not approving Glenview Nominees for election to Health Management’s Board of Directors for purposes of seeking a waiver of the change of control covenant. The complaint further alleges that the Wells Fargo and Deutsche Bank defendants aided and abetted such breaches. The complaint seeks declaratory and injunctive relief, including (i) a declaration that those directors breached their fiduciary duties by entering into the credit agreement and (ii) an order permanently enjoining the board of directors from invoking or enforcing the change of control covenant in the credit agreement. Plaintiff also seeks unspecified damages from those directors and an award of attorneys’ fees and costs. On September 20, 2013, the defendants moved to dismiss this action for lack of subject matter jurisdiction, as well as the plaintiff’s failure to make a demand on the Board of Directors and failure to state a claim. We intend to defend this action.

 

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

12. Commitments and Contingencies (continued)

 

Five putative class action lawsuits challenging the Merger have been filed on behalf of a putative class consisting of Health Management’s stockholders. Four were filed in the Circuit Court of the Twentieth Judicial Circuit in and for Collier County, Florida: (1) Aliaga v. Health Mgmt. Assocs., Inc., et al., Civ. No. 13-2288-CA (“Aliaga”), filed on August 1, 2013; (2) Copeland v. Health Mgmt. Assocs., Inc., et al., Case No. 13-2356-CA (“Copeland”), filed on August 8, 2013; (3) Lopriore v. Health Mgmt. Assocs., Inc., et al., Case No. 13-2307-CA (“Lopriore”), filed on August 5, 2013; and (4) Smilow v. Health Mgmt. Assocs., Inc., et al., Case No. 13-2371-CA (“Smilow”), filed on August 13, 2013 (collectively, the “Florida Actions”). The fifth case, Margolis, et al. v. Schoen, et al., C.A. No. 8774-CS, was filed in the Court of Chancery of the State of Delaware on August 5, 2013. With limited exceptions, these actions name Health Management, former members of its board of directors, CHS, and Merger Sub as defendants. Generally, the plaintiffs in these actions allege that those directors breached their fiduciary duties to Health Management stockholders by, among other things, approving the Merger Agreement for allegedly inadequate consideration, following an allegedly unfair sale process that favored the interests of CHS and those directors over Health Management stockholders, and that CHS and Merger Sub aided and abetted such alleged breaches of fiduciary duty. The plaintiffs further allege that those directors breached their fiduciary duties by agreeing to terms in the Merger Agreement that favor CHS and deter alternative bids. The actions seek, among other things, an injunction against the completion of the Merger (or rescission of the Merger Agreement to the extent it has been implemented) and the payment of attorneys’ fees and expenses. We intend to defend these actions.

Other. We are also a party to various other legal actions arising out of the normal course of our business. Due to the inherent uncertainties of litigation and dispute resolution, we are unable to estimate the ultimate losses, if any, relating to each of our outstanding legal actions and other loss contingencies. Should an unfavorable outcome occur in some or all of our legal and other related matters, there could be a material adverse effect on our financial position, results of operations and liquidity.

 

13. Change in Control and Other Costs

On June 25, 2013, Glenview filed with the SEC a preliminary consent solicitation statement which, among other things, sought consent from our stockholders to remove all of the members of our then existing Board of Directors and replace them with the Glenview Nominees. On July 19, 2013, Glenview filed its definitive consent solicitation statement with the SEC and solicited consent from our stockholders (the “Glenview Consent Solicitation Process”). As a result of the Glenview Consent Solicitation Process, on August 16, 2013, all of the incumbent board members were removed and replaced by the Glenview Nominees. Such event constituted a change in control (the “Change in Control”) pursuant to the Health Management Associates, Inc. amended and restated 1996 Executive Incentive Compensation Plan (the “EICP”) and the 2006 Outside Director Restricted Stock Award Plan (the “2006 Director Plan”). As a result of such Change in Control and pursuant to the terms of the EICP and 2006 Director Plan and the applicable award agreements, all of the outstanding and unvested equity and performance cash awards held became vested. At such time an aggregate of approximately 7.3 million shares of common stock were subject to unvested restricted stock and deferred stock awards. The vesting of the stock resulted in the recognition of approximately $42.1 million of incremental stock compensation expense.

In addition, holders of stock options issued under the EICP were entitled to receive a cash payment due to the Change in Control and based on terms as defined in the EICP. This cash payment resulted in recognition of approximately $4.0 million of incremental compensation expense.

Finally, certain employees held an aggregate of approximately $39.0 million of unvested cash awards issued under the EICP. All such awards immediately vested upon the Change in Control.

Related to the Merger Agreement and the Glenview Consent Solicitation Process, we have incurred substantial costs associated with various advisors, including bankers, attorneys and others, and we have also entered into certain retention and severance agreements with key personnel. Outside fees associated with these events were approximately $12.3 million for the three and nine months ended September 30, 2013. Severance and retention costs were approximately $5.4 million and $14.6 million for the three and nine months, respectively, ended September 30, 2013.

All of the above items have been recognized as “Change in control and other related expense” in the Consolidated Statements of Operations in Item 1 of this report.

 

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

14. Agreement and Plan of Merger

On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of our common stock, par value $0.01 per share, (the “HMA Common Stock”) issued and outstanding immediately prior to the Effective Time (other than our treasury shares and any of our shares owned by CHS, Merger Sub or any subsidiary of CHS (other than Merger Sub), us or Merger Sub, and other than shares of HMA Common Stock as to which dissenters’ rights have been properly exercised) will be cancelled and converted into the right to receive (i) $10.50 in cash, without interest (the “Cash Consideration”), (ii) 0.06942 (the “Exchange Ratio”) of a share of CHS common stock, par value $0.01 per share, (the “CHS Common Stock”) and (iii) one contingent value right (each, a “CVR” and collectively, the “CVRs”) issued by CHS subject to and in accordance with the CVR Agreement described below (collectively, the “Merger Consideration”).

Additionally, at the Effective Time (i) each outstanding option to acquire shares of HMA Common Stock, whether or not then vested, will be cancelled and terminated in exchange for the right to receive a number of shares of HMA Common Stock equal to the number of shares of HMA Common Stock subject to such stock option minus the number of shares of HMA Common Stock subject to such option which, when multiplied by the per share closing price of HMA Common Stock as reported on the New York Stock Exchange the day before the Effective Time, is equal to the aggregate exercise price of such option; (ii) each outstanding restricted stock award, whether or not then vested, will vest in full and be treated as an outstanding share of HMA Common Stock; (iii) each deferred stock award that is then outstanding, whether or not then vested, will be cancelled and exchanged for a number of shares of HMA Common Stock underlying such deferred stock award so cancelled; and (iv) each performance cash award, whether or not then vested, will vest in full and be cancelled in exchange for a lump sum cash payment. Any shares of HMA Common Stock issued pursuant to the foregoing will be cancelled and converted into the right to receive the Merger Consideration at the Effective Time.

The Merger Agreement provides that we may not solicit competing acquisition proposals, subject to certain exceptions designed to allow our Board of Directors to fulfill its fiduciary duties.

The consummation of the Merger is subject to closing conditions, including the approval of holders of at least 70% of our outstanding shares, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, the receipt of certain healthcare regulatory approvals, the absence of certain governmental adverse events occurring with respect to us, the absence of a “material adverse effect” with respect to us or CHS, no change of control acceleration of our debt having occurred and other conditions customary for a transaction of this type.

The Merger Agreement also provides for certain termination rights for both us and CHS. Upon termination of the Merger Agreement under specified circumstances, we may be required to pay CHS a termination fee of $109 million. In the event either party terminates the Merger Agreement because our stockholders do not approve the Merger Agreement, then we may be required to pay CHS a fixed amount of $40 million in expense reimbursement.

We and CHS each made certain representations, warranties and covenants in the Merger Agreement, including, among other things, covenants by us and CHS to conduct our businesses in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger.

Upon the closing of the Merger, CHS and a trustee mutually acceptable to us and CHS will enter into a Contingent Value Rights Agreement (the “CVR Agreement”) governing the terms of the CVRs. A holder of a CVR will be entitled to receive a cash payment of $1.00 per CVR (the “CVR Payment”), following and conditioned upon the final resolution of certain of our legal matters, as defined in the CVR Agreement, (the “Existing Litigation”). If the amount of certain specified losses (including attorneys fees and expenses) arising out of or relating to the Existing Litigation exceeds $18.0 million (the “Deductible”), the amount paid to the CVR holders would be reduced by $0.90 for each dollar for which the amount of such losses exceeds the Deductible. For purposes of calculating the CVR Payment, the amount of such losses will be net of any amounts actually recovered by CHS under insurance policies. After the closing of the Merger, CHS shall control the management and disposition of the Existing Litigation, including with respect to the defense, negotiation and settlement thereof.

 

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

Health Management Associates, Inc. (referred to as the “Parent Issuer” for the remainder of this Note 14) is the primary obligor under the Credit Facilities, as well as our 6.125% Senior Notes due 2016 and our 7.375% Senior Notes due 2020. Certain of the Parent Issuer’s material domestic subsidiaries that are 100% owned (the “Guarantor Subsidiaries”) provide joint and several unconditional guarantees as to payment for borrowings under such long-term debt arrangements; however, other Parent Issuer subsidiaries (the “Non-Guarantor Subsidiaries”) have not been required to provide any such guarantees. See Note 3 herein and Note 3 to the audited consolidated financial statements included in our 2012 Form 10-K for further information regarding our long-term debt arrangements. Following are schedules which present condensed consolidating financial statements as of September 30, 2013 and December 31, 2012, as well as the three and nine months ended September 30, 2013 and 2012. However, this financial information may not necessarily be indicative of the results of operations, cash flows or financial position of the Parent Issuer, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries if they had operated as independent entities.

Health Management Associates, Inc.

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2013

(in thousands)

 

     Parent
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net revenue before the provision for doubtful accounts

   $ —        $ 969,614      $ 707,065      $ —        $ 1,676,679   

Provision for doubtful accounts

     —          (149,979     (105,457     —          (255,436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          819,635        601,608        —          1,421,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     —          307,950        347,889        —          655,839   

Supplies

     —          143,672        76,850        —          220,522   

Rent expense

     —          19,652        20,841        —          40,493   

Other operating expenses

     —          191,942        179,450        —          371,392   

Medicare and Medicaid HCIT incentive payments

     —          (1,972     (43     —          (2,015

Change in control and other related expense

     —          —          102,886        —          102,886   

Equity in the earnings of consolidated subsidiaries

     47,816        —          —          (47,816     —     

Depreciation and amortization

     9,294        55,331        34,726        —          99,351   

Interest expense

     65,231        2,652        2,864        —          70,747   

Other

     305        275        304        —          884   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     122,646        719,502        765,767        (47,816     1,560,099   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (122,646     100,133        (164,159     47,816        (138,856

Income tax (expense) benefit

     45,814        (66,809     86,504        —          65,509   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (76,832     33,324        (77,655     47,816        (73,347

Income (loss) from discontinued operations, net of income taxes

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     (76,832     33,324        (77,655     47,816        (73,347

Net income attributable to noncontrolling interests

     —          —          (3,485     —          (3,485

Accretion of redeemable equity securities

     —          —          (19,813     —          (19,813
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ (76,832   $ 33,324      $ (100,953   $ 47,816      $ (96,645
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended September 30, 2013

(in thousands)

 

     Parent
Issuer
    Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminations      Consolidated  

Consolidated net income (loss)

   $ (76,832   $ 33,324       $ (77,655   $ 47,816       $ (73,347

Components of other comprehensive income before income taxes attributable to:

            

Available-for-sale securities:

            

Unrealized gains (losses), net

     —          —           4,720        —           4,720   

Adjustments for net (gains) losses reclassified into net income

     —          —           (706     —           (706

Interest rate swap contract:

            

Reclassification adjustments for amortization into net income

     17,208        —           —          —           17,208   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income before income taxes

     17,208        —           4,014        —           21,222   

Income tax expense related to items of other comprehensive income

     (6,680     —           (1,405     —           (8,085
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss), net

     10,528        —           2,609        —           13,137   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated comprehensive income (loss)

     (66,304     33,324         75,046        47,816         (60,210

Total comprehensive income (loss) attributable to noncontrolling interests

     —          —           (3,485     —           (3,485

Accretion of redeemable equity securities

     —          —           (19,813     —           (19,813
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ (66,304   $ 33,324       $ (98,344   $ 47,816       $ (83,508
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

29


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2012

(in thousands)

(restated)

 

     Parent
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net revenue before the provision for doubtful accounts

   $ —        $ 1,004,282      $ 658,655      $ —        $ 1,662,937   

Provision for doubtful accounts

     —          (143,884     (80,194     —          (224,078
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          860,398        578,461        —          1,438,859   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     —          333,294        304,011        —          637,305   

Supplies

     —          147,995        68,824        —          216,819   

Rent expense

     —          21,409        20,398        —          41,807   

Other operating expenses

     —          182,506        149,850        —          332,356   

Medicare and Medicaid HCIT incentive payments

     —          (15,990     (8,234     —          (24,224

Equity in the earnings of consolidated subsidiaries

     (93,895     —          —          93,895        —     

Depreciation and amortization

     4,946        52,819        33,798        —          91,563   

Interest expense

     72,789        2,507        1,620        —          76,916   

Other

     (361     (137     (1,865     —          (2,363
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (16,521     724,403        568,402        93,895        1,370,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     16,521        135,995        10,059        (93,895     68,680   

Income tax (expense) benefit

     24,422        (42,704     (1,381     —          (19,663
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     40,943        93,291        8,678        (93,895     49,017   

Loss from discontinued operations, net of income taxes

     —          —          (1,389     —          (1,389
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     40,943        93,291        7,289        (93,895     47,628   

Net income attributable to noncontrolling interests

     —          8        (6,693     —          (6,685
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ 40,943      $ 93,299      $ 596      $ (93,895   $ 40,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Comprehensive Income

Three Months Ended September 30, 2012

(in thousands)

(restated)

 

     Parent
Issuer
    Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Consolidated net income

   $ 40,943      $ 93,291       $ 7,289      $ (93,895   $ 47,628   

Components of other comprehensive income before income taxes attributable to:

           

Available-for-sale securities:

           

Unrealized gains (losses), net

     (1     —           4,245        —          4,244   

Adjustments for net (gains) losses reclassified into net income

     —          —           (443     —          (443

Interest rate swap contract:

           

Reclassification adjustments for amortization into net income

     19,404        —           —          —          19,404   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before income taxes

     19,403        —           3,802        —          23,205   

Income tax expense related to items of other comprehensive income

     (7,531     —           (1,332     —          (8,863
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net

     11,872        —           2,470        —          14,342   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total consolidated comprehensive income

     52,815        93,291         9,759        (93,895     61,970   

Total comprehensive income attributable to noncontrolling interests

     —          8         (6,693     —          (6,685
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ 52,815      $ 93,299       $ 3,066      $ (93,895   $ 55,285   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2013

(in thousands)

 

     Parent
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net revenue before the provision for doubtful accounts

   $ —        $ 3,017,338      $ 2,083,136      $ —        $ 5,100,474   

Provision for doubtful accounts

     —          (432,025     (297,670     —          (729,695
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          2,585,313        1,785,466        —          4,370,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     —          962,221        1,051,294        —          2,013,515   

Supplies

     —          459,728        229,306        —          689,034   

Rent expense

     —          61,619        64,087        —          125,706   

Other operating expenses

     —          561,775        482,207        —          1,043,982   

Medicare and Medicaid HCIT incentive payments

     —          (11,876     (11,731     —          (23,607

Change in control and other related expense

     —          —          112,026        —          112,026   

Equity in the earnings of consolidated subsidiaries

     (62,752     —          —          62,752        —     

Depreciation and amortization

     22,936        164,838        101,821        —          289,595   

Interest expense

     198,238        8,082        6,032        —          212,352   

Other

     1,150        (248     (3,750     —          (2,848
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     159,572        2,206,139        2,031,292        62,752        4,459,755   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (159,572     379,174        (245,826     (62,752     (88,976

Income tax (expense) benefit

     106,588        (181,786     123,994        —          48,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (52,464     197,388        (121,832     (62,752     (40,180

Loss from discontinued operations, net of income taxes

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     (52,464     197,388        (121,832     (62,752     (40,180

Net income attributable to noncontrolling interests

     —          —          (12,804     —          (12,804

Accretion of redeemable equity securities

     —          —          (19,813       (19,813
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ (52,464   $ 197,388      $ (154,449   $ (62,752   $ (72,797
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Comprehensive Income (Loss)

Nine Months Ended September 30, 2013

(in thousands)

 

     Parent
Issuer
    Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Consolidated net income (loss)

   $ (52,984   $ 197,388       $ (121,832   $ (62,752   $ (40,180

Components of other comprehensive income before income taxes attributable to:

           

Available-for-sale securities:

           

Unrealized gains (losses), net

     —          —           4,321        —          4,321   

Adjustments for net (gains) losses reclassified into net income

     —          —           (2,700     —          (2,700

Interest rate swap contract:

           

Reclassification adjustments for amortization into net income

     53,515        —           —          —          53,515   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income before income taxes

     53,515        —           1,621        —          55,136   

Income tax expense related to items of other comprehensive income

     (20,774     —           (569     —          (21,343
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net

     32,741        —           1,052        —          33,793   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total consolidated comprehensive income (loss)

     (20,243     197,388         (120,780     (62,752     (6,387

Total comprehensive income attributable to noncontrolling interests

     —          —           (12,804     —          (12,804

Accretion of redeemable equity securities

     —          —           (19,813     —          (19,813
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ (20,243   $ 197,388       $ (153,397   $ (62,752   $ (39,004
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2012

(in thousands)

(restated)

 

     Parent
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net revenue before the provision for doubtful accounts

   $ —        $ 3,059,365      $ 1,974,131      $ —        $ 5,033,496   

Provision for doubtful accounts

     —          (395,487     (244,415     —          (639,902
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          2,663,878        1,729,716        —          4,393,594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     —          1,007,196        934,279        —          1,941,475   

Supplies

     —          464,888        212,528        —          677,416   

Rent expense

     —          67,522        62,999        —          130,521   

Other operating expenses

     —          552,278        418,335        —          970,613   

Medicare and Medicaid HCIT incentive payments

     —          (18,612     (11,263     —          (29,875

Equity in the earnings of consolidated subsidiaries

     (267,785     —          —          267,785        —     

Depreciation and amortization

     10,623        152,230        92,722        —          255,575   

Interest expense

     229,237        7,180        4,632        —          241,049   

Other

     (768     (299     (678     —          (1,745
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (28,693     2,232,383        1,713,554        267,785        4,185,029   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     28,693        431,495        16,162        (267,785     208,565   

Income tax (expense) benefit

     85,504        (154,263     1,953        —          (66,806
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     114,197        277,232        18,115        (267,785     141,759   

Loss from discontinued operations, net of income taxes

     —          —          (5,805     —          (5,805
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     114,197        277,232        12,310        (267,785     135,954   

Net income attributable to noncontrolling interests

     —          (133     (21,624     —          (21,757
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ 114,197      $ 277,099      $ (9,314   $ (267,785   $ 114,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Comprehensive Income

Nine Months Ended September 30, 2012

(in thousands)

(restated)

 

     Parent
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Consolidated net income

   $ 114,197      $ 277,232      $ 12,310      $ (267,785   $ 135,954   

Components of other comprehensive income before income taxes attributable to:

          

Available-for-sale securities:

          

Unrealized gains (losses), net

     66        —          8,762        —          8,828   

Adjustments for net (gains) losses reclassified into net income

     —          —          (340     —          (340

Interest rate swap contract:

          

Reclassification adjustments for amortization into net income

     59,937        —          —          —          59,937   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before income taxes

     60,003        —          8,422        —          68,425   

Income tax expense related to items of other comprehensive income

     (23,292     —          (2,948     —          (26,240
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net

     36,711        —          5,474        —          42,185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated comprehensive income

     150,908        277,232        17,784        (267,785     178,139   

Total comprehensive income attributable to noncontrolling interests

     —          (133     (21,624     —          (21,757
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to Health Management Associates, Inc. common stockholders

   $ 150,908      $ 277,099      $ (3,840   $ (267,785   $ 156,382   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Balance Sheet

September 30, 2013

(in thousands)

 

     Parent
Issuer
    Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminations     Consolidated  

Current assets:

            

Cash and cash equivalents

   $ (11,989   $ 10,974      $ 2,306      $ —        $ 1,291  

Available-for-sale securities

     —          —           62,961        —          62,961  

Accounts receivable, net

     —          551,445        418,687        —          970,132  

Supplies, prepaid expenses and other assets

     3,605       134,892        88,055        —          226,552  

Prepaid and recoverable income taxes

     164,803       —           —           —          164,803  

Restricted funds

     —          —           30,667        —          30,667  

Assets held for sale

     —          —           6,250        —          6,250  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     156,419       697,311        608,926        —          1,462,656  

Property, plant and equipment, net

     165,248       2,272,618        1,152,966        —          3,590,832  

Investments in consolidated subsidiaries

     3,767,387       —           —           (3,767,387     —     

Restricted funds

     —          —           125,042        —          125,042  

Intercompany receivables

     931,826       343,308        —           (1,275,134     —     

Goodwill

     —          654,500        378,213        —          1,032,713  

Deferred charges and other assets

     87,404       101,170        225,086        —          413,660  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,108,284     $ 4,068,907      $ 2,490,233      $ (5,042,521   $ 6,624,903  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities:

            

Accounts payable

   $ 13,693     $ 91,004      $ 55,868      $ —        $ 160,565  

Accrued expenses and other current liabilities

     62,355       226,184        282,241        —          570,780  

Deferred income taxes

     10,169       —           —           —          10,169  

Current maturities of long-term debt and capital lease obligations

     80,690       22,666        7,424        —          110,780  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     166,907       339,854        345,533        —          852,294  

Deferred income taxes

     386,543       —           —           —          386,543  

Long-term debt and capital lease obligations, less current maturities

     3,468,883       81,083        86,982        —          3,636,948  

Intercompany payables

     27,008       —           1,248,126        (1,275,134     —     

Other long-term liabilities

     61,988       92,920        314,604        —          469,512  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     4,111,329       513,857        1,995,245        (1,275,134     5,345,297  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Redeemable equity securities

     —          —           272,013        —          272,013  

Stockholders’ equity:

            

Total Health Management Associates, Inc. stockholders’ equity

     996,955        3,555,050        212,337        (3,767,387     996,955   

Noncontrolling interests

     —          —           10,638        —          10,638  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     996,955       3,555,050        222,975        (3,767,387     1,007,593  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,108,284      $ 4,068,907      $ 2,490,233      $ (5,042,521   $ 6,624,903  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Balance Sheet

December 31, 2012

(in thousands)

(restated)

 

     Parent
Issuer
     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminations     Consolidated  

Current assets:

             

Cash and cash equivalents

   $ 23,214      $ 24,823      $ 11,136      $ —        $ 59,173  

Available-for-sale securities

     65,376        —           55,730        —          121,106  

Accounts receivable, net

     —           587,754        370,164        —          957,918  

Supplies, prepaid expenses and other assets

     4,459        136,078        80,347        —          220,884  

Prepaid and recoverable income taxes

     60,438        —           —           —          60,438  

Restricted funds

     —           —           26,525        —          26,525  

Assets held for sale

     —           —           6,250        —          6,250  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     153,487        748,655        550,152        —          1,452,294  

Property, plant and equipment, net

     118,699        2,322,678        1,024,513        —          3,465,890  

Investments in consolidated subsidiaries

     3,768,249        —           —           (3,768,249     —     

Restricted funds

     —           —           125,532        —          125,532  

Intercompany receivables

     827,770        24,838        —           (852,608     —     

Goodwill

     —           654,500        370,637        —          1,025,137  

Deferred charges and other assets

     80,118        125,144        112,239        —          317,501  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 4,948,323      $ 3,875,815      $ 2,183,073      $ (4,620,857   $ 6,386,354  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Current liabilities:

             

Accounts payable

   $ 42,093      $ 112,643      $ 56,651      $ —        $ 211,387  

Accrued expenses and other current liabilities

     120,598        239,281        249,853        —          609,732  

Deferred income taxes

     29,026        —           —           —          29,026  

Current maturities of long-term debt and capital lease obligations

     100,542        20,091        5,629        —          126,262  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     292,259        372,015        312,133        —          976,407  

Deferred income taxes

     301,237        —           —           —          301,237  

Long-term debt and capital lease obligations, less current maturities

     3,304,667        82,871        52,815        —          3,440,353  

Intercompany payables

     —           —           852,608        (852,608     —     

Other long-term liabilities

     71,755        96,250        292,881        —          460,886  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     3,969,918        551,136        1,510,437        (852,608     5,178,883  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Redeemable equity securities

     —           —           212,458        —          212,458  

Stockholders’ equity:

             

Total Health Management Associates, Inc. stockholders’ equity

     978,405        3,324,679        443,570        (3,768,249     978,405  

Noncontrolling interests

     —           —           16,608        —          16,608  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     978,405        3,324,679        460,178        (3,768,249     995,013  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,948,323      $ 3,875,815      $ 2,183,073      $ (4,620,857   $ 6,386,354  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2013

(in thousands)

 

     Parent
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidated  

Net cash provided by (used in) continuing operating activities

   $ (184,216   $ 344,180      $ (39,756   $ 120,208   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Additions to property, plant and equipment

     (70,328     (74,414     (62,910     (207,652

Acquisitions of hospitals and other ancillary health care businesses

     —          —          (173,653     (173,653

Purchases of available-for-sale securities

     (426,197     —          (45,718     (471,915

Proceeds from sales of available-for-sale securities

     491,471        —          38,728        530,199   

Other investing activities

     —          1,547        3,753        5,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing investing activities

     (5,054     (72,867     (239,800     (317,721
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Proceeds from long-term debt borrowings

     476,900        —          —          476,900   

Principal payments on debt and capital lease obligations

     (337,166     (18,193     (3,152     (358,511

Payments of debt issuance costs

     (1,588     —          —          (1,588

Proceeds from exercises of stock options

     27,949        —          —          27,949   

Cash payments to noncontrolling shareholders

     —          —          (24,175     (24,175

Changes in intercompany balances, net

     (31,084     (266,969     298,053        —     

Equity compensation excess income tax benefits

     19,056        —          —          19,056   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing financing activities

     154,007        (285,162     270,726        139,631   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (35,203     (13,849     (8,830     (57,882

Cash and cash equivalents at the beginning of the period

     23,214        24,823        11,136        59,173   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ (11,989   $ 10,974      $ 2,306      $ 1,291   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

15. Supplemental Condensed Consolidating Financial Statements

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2012

(in thousands)

(restated)

 

     Parent
Issuer
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidated  

Net cash provided by (used in) continuing operating activities

   $ (86,109   $ 445,061      $ 99,113      $ 458,065   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Additions to property, plant and equipment

     (16,705     (201,571     (64,067     (282,343

Acquisitions of hospitals and other ancillary health care businesses

     —          (800     (70,675     (71,475

Purchases of available-for-sale securities

     (1,395,665     —          (35,883     (1,431,548

Proceeds from sales of available-for-sale securities

     1,380,985        —          31,595        1,412,580   

Other investing activities

     —          —          (15,399     (15,399
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing investing activities

     (31,385     (202,371     (154,429     (388,185
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Proceeds from long-term debt borrowings

     17,000        —          —          17,000   

Principal payments on debt and capital lease obligations

     (68,890     (12,456     (6,581     (87,927

Payments for debt issuance costs

     (636     —          —          (636

Cash received from noncontrolling shareholders

     —          —          3,591        3,591   

Cash payments to noncontrolling shareholders

     —          (3,431     (27,384     (30,815

Changes in intercompany balances, net

     149,062        (274,666     125,604        —     

Equity compensation excess income tax benefits

     1,444        —          —          1,444   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing financing activities

     97,980        (290,553     95,230        (97,343
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents before discontinued operations

     (19,514     (47,863     39,914        (27,463

Net cash used in discontinued operations

     —          —          (1,462     (1,462
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (19,514     (47,863     38,452        (28,925

Cash and cash equivalents at the beginning of the period

     28,586        47,094        (11,537     64,143   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 9,072      $ (769   $ 26,915      $ 35,218   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

This Item 2 has been amended and restated to give effect to the restatement of our consolidated financial statements for the three and nine months ended September 30, 2012 due to an error in the Company’s application of the requirements for certifying its EHR technology under various Medicare and Medicaid HCIT programs and corrects certain unrelated immaterial errors. See Note 2 to the consolidated financial statements in Item 1 of this report for additional information

Overview

As of September 30, 2013, Health Management Associates, Inc. by and through its subsidiaries (collectively, “we,” “our” or “us”) operated 71 hospitals with a total of 10,782 licensed beds in non-urban communities in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Washington and West Virginia. The operating results of hospitals and other ancillary health care businesses that we acquire are included in our consolidated financial statements subsequent to the date of acquisition.

On July 29, 2013, we entered into a definitive merger agreement with Community Health Systems, Inc. (“CHS”) pursuant to which, subject to the satisfaction of certain conditions, CHS will acquire us as described in more detail in Note 14 to the Interim Condensed Consolidated Financial Statements in Item 1 of this report.

Effective August 1, 2013, John M. Starcher Jr., who previously served as a Group President, was named our Interim President and Chief Executive Officer, succeeding Gary D. Newsome who retired as President, Chief Executive Officer and member of the board of directors effective July 31, 2013. Effective September 16, 2013, Gary S. Bryant, who previously served as our Senior Vice President and Controller, was appointed Senior Vice President and Interim Chief Financial Officer, succeeding Kelly E. Curry, whose employment as Executive Vice President and Chief Financial Officer ceased effective as of September 13, 2013.

As described in more detail in Note 13 to the Interim Condensed Consolidated Financial Statements in Item 1 of this report, as a result of consent solicitation process by Glenview Capital Partners, LLC and certain of its affiliated investment funds (collectively, “Glenview”), on August 16, 2013, we announced that a majority of our stockholders voted to appoint a new Board of Directors. As such, the persons nominated by Glenview were selected to serve on our Board of Directors. The new members of our Board of Directors are Steven Epstein, Mary Taylor Behrens, Kirk Gorman, Steven Guillard, Joann Reed, John McCarty, Steven Shulman and Peter Urbanowicz.

Unless specifically indicated otherwise, the following discussion excludes our discontinued operations, which are identified at Note 9 to the Interim Condensed Consolidated Financial Statements in Item 1. Discontinued operations were not material to our consolidated results of operations during the periods presented herein.

During March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Care Reform Act”) were signed into law by President Obama. The primary goals of the Health Care Reform Act are to: (i) provide coverage by January 1, 2014 to an estimated 32 to 34 million Americans who currently do not have health insurance; (ii) reform the health care delivery system to improve quality; and (iii) lower the overall costs of providing health care. To accomplish the goal of expanding coverage, such legislation mandates that all Americans maintain a minimum level of health care coverage. To that end, the Health Care Reform Act expands Medicaid coverage, provides federal subsidies to assist low-income individuals when they obtain health insurance and establishes insurance exchanges through which individuals and small employers can purchase health insurance. Health care cost savings under the Health Care Reform Act are expected to come from: (i) reductions in Medicare and Medicaid reimbursement payments to health care providers, including hospital operators; (ii) initiatives to reduce fraud, waste and abuse in government reimbursement programs; and (iii) other reforms to federal and state reimbursement systems. Although certain aspects of the Health Care Reform Act have already become effective, it will be several years before most of the far-reaching and innovative provisions of the legislation are fully implemented. While we continue to evaluate the provisions of the Health Care Reform Act, its overall effect on our business cannot be determined at the present time because, among other things, the legislation is very broad in scope and uncertainties exist regarding the interpretation and future implementation of many of the regulations mandated under the Health Care Reform Act. Additionally, the Health Care Reform Act remains subject to significant legislative debate, including the possible amendment and/or defunding of some of its provisions. For further discussion of the Health Care Reform Act and its possible impact on our business and results of operations, see “Business – Sources of Revenue” in Item 1 of Part I and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K/A for the year ended December 31, 2012.

Our consolidated financial statements for the three and nine months ended September 30, 2012 have been restated due to an accounting error in the Company’s application of the requirements for certifying its electronic health record (“EHR”) technology under various Medicare and Medicare incentive programs and corrects certain immaterial unrelated errors. See Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding the restated financial statements. See also “Item 4 – Controls and Procedures” for a discussion of management’s conclusions regarding the existence of material weakness in internal control over financial reporting at September 30, 2013 related to the administration, oversight and accounting for the Company’s EHR enrollment process and the remediation thereof.

 

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Table of Contents

Our loss from continuing operations before income taxes was $138.9 million during the three months ended September 30, 2013, compared to income of $68.7 million for the same period in the prior year. A significant factor in our net loss for the three months ended September 30, 2013 were the change in control expenses incurred as a result of the change in our Board of Directors as well as the merger agreement with CHS. These costs include severance and retention accruals, stock compensation expenses upon acceleration of deferred and restricted stock award vesting and additional legal and audit fees. Additionally, decreases in same three month hospital inpatient admissions, adjusted admissions, surgeries and emergency room visits substantially impacted our income from continuing operations before income taxes.

During the three months ended September 30, 2013 our net revenue before the provision for doubtful accounts increased by $13.7 million as compared to the three months ended September 30, 2012. We experienced some revenue growth principally resulting from our April 1, 2013 acquisition of an 80% interest in Bayfront Health System, which includes Bayfront Medical Center, a tertiary and teaching hospital in St. Petersburg, Florida that is licensed to operate 480 beds, and certain health care operations. Items that adversely affected our operations and profitability during the three months ended September 30, 2013 included (i) overall volume declines resulting primarily from increased efforts by managed care/commercial payors to reduce inpatient utilization; (ii) reductions in government reimbursement due to sequestration as well as the ongoing impact of recovery audit contractor (“RAC”) audits and (iii) increases in the provision for doubtful accounts. Partially offsetting these factors were declines in operating costs due to volume as well as a result of expense management efforts. In addition, during the three months ended September 30, 2013, we recognized a benefit of approximately $2.0 million under various Medicare and Medicaid Healthcare Information Technology programs (collectively, the “HCIT Programs”). We recognized $24.2 million for such HCIT Programs during the three months ended September 30, 2012.

In light of the Health Care Reform Act, we have designed our strategic operational objectives to, among other things, increase patient volume and achieve greater operational efficiencies. Our specific plans focus on center-led capabilities and include, among other things, utilizing experienced local and regional management teams, modifying physician employment agreements, renegotiating payor and vendor contracts, developing action plans responsive to feedback from patient, physician and employee satisfaction surveys and maintaining cost effective home office and regional service center operations. Based on the needs of the communities that we serve, we also seek opportunities for market service development, including, among other things, establishing ambulatory surgical centers, urgent care centers, cardiac cath labs, angiography suites and orthopedic, cardiology and neurology/neurosurgery centers of excellence. Furthermore, we are investing significant resources in physician recruitment and retention, emergency room operations, advanced robotic surgical systems, replacement hospital construction and other capital projects. For example, we have deployed new MAKOplasty® and da Vinci® robotic surgical systems at many of our hospitals and, in January 2013, we opened a newly constructed general acute care hospital in Poplar Bluff, Missouri to replace our north campus facility in that marketplace. We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and yield increased surgical volume, emergency room visits and admissions.

We have also taken steps that we believe are necessary to achieve industry leadership in patient safety and quality. Our goal is to be one of the highest rated health care providers of any hospital system in the country, as measured by Medicare. We measure key performance objectives, maintain accountability for achieving those objectives and recognize the leaders whose quality indicators and clinical outcomes demonstrate improvement. As most recently reported by the Centers for Medicare and Medicaid Services, all four of our core measure care areas (i.e., myocardial infarction, congestive heart failure, pneumonia and surgical care improvement project) have dramatically improved since the commencement of our clinical quality initiatives and we are now one of the top ranked systems in core measures amongst large for-profit hospital companies. Additionally, The Joint Commission, a leading independent not-for-profit organization that accredits and certifies health care organizations in the United States, in 2012 named 64% of our hospitals as Top Performers on Key Quality Measures, which compared to a nationwide achievement rate of approximately 18%. Moreover, 77% of our hospitals that were top performers during 2010 were once again recognized by The Joint Commission during 2012 based on 2011 quality performance statistics. To determine top performers, The Joint Commission aggregates certain evidence-based accountability data, including core measurement performance data.

Outpatient services continue to play an important role in the delivery of health care in our markets, with more than half of our net revenue before the provision for doubtful accounts generated on an outpatient basis. Recognizing the importance of these services, we have improved many of our health care facilities to accommodate the outpatient needs of the communities that they serve. We have also invested substantial capital in many of our hospitals and physician practices during the past several years, resulting in improvements and enhancements to our diagnostic imaging and ambulatory surgical services.

During the past several years, various economic and other factors have resulted in a large number of uninsured and underinsured patients seeking health care in the United States. Self-pay admissions as a percent of total admissions at our

 

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Table of Contents

hospitals were approximately 7.0% and 7.4% during the three months ended September 30, 2013 and 2012, respectively. We continue to take various measures to address the impact of uninsured and underinsured patients on our business. Additionally, one of the primary goals of the Health Care Reform Act is to provide health insurance coverage to more Americans. Nevertheless, there can be no assurances that our self-pay admissions will not grow in future periods, especially in light of the prolonged downturn in the economy and correspondingly higher levels of unemployment in many of the markets served by our hospitals. Therefore, we regularly evaluate our self-pay patient policies and programs and consider changes or modifications as circumstances warrant.

Critical Accounting Policies and Estimates Update

General. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider a critical accounting policy to be one that requires us to make significant judgments and estimates when we prepare our consolidated financial statements. Such critical accounting policies and estimates, which are more fully described in Note 2 to the Interim Condensed Consolidated Financial Stetments included in Item 1 of this report and in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2012, include (i) revenue; (ii) the provision for doubtful accounts; (iii) impairments of long-lived assets and goodwill; (iv) income taxes; (v) professional liability risks and other self-insured programs; and (vi) loss contingencies. There were no material changes to our critical accounting policies and estimates in 2013.

Goodwill. We test our goodwill for impairment on an annual basis on October 1 and whenever circumstances indicate that a possible impairment might exist. Our judgment regarding the existence of impairment indicators is based on many qualitative and quantitative factors, including market conditions and operational performance. When performing the goodwill impairment test, among other things, we compare the estimated fair values of the net assets of our reporting units to the corresponding carrying amounts on our consolidated balance sheet. If the estimated fair value of one of our reporting unit’s net assets is less than the balance sheet carrying amount, we determine the implied fair value of the reporting unit’s goodwill, compare such fair value to the corresponding carrying amount and, if necessary, record a goodwill impairment charge. We do not believe that any of our reporting units are currently at risk of requiring a goodwill impairment charge.

 

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Table of Contents

Three Months ended September 30, 2013 Compared to the Three Months ended September 30, 2012

The tables below summarize our operating results for the applicable periods. Hospitals that were owned/leased and operated by us for one year or more as of September 30, 2013 are referred to as our same three month hospitals. For all year-over-year comparative discussions herein, the operating results of our same three month hospitals are only considered to the extent that there was a similar period of operation in both years.

 

                                                           
     Three Months Ended September 30,  
     2013     2012  
     Amount     Percent
of Net
Revenue
    Amount     Percent
of Net
Revenue
 
     (in thousands)           (in thousands)        
                 (restated)        

Net revenue before the provision for doubtful accounts

   $ 1,676,679        $ 1,662,937     

Provision for doubtful accounts

     (255,436       (224,078  
  

 

 

     

 

 

   

Net revenue

     1,421,243        100.0     1,438,859        100.0
  

 

 

     

 

 

   

Salaries and benefits

     655,839        46.1        637,305        44.3   

Supplies

     220,522        15.5        216,819        15.1   

Rent expense

     40,493        2.9        41,807        2.9   

Other operating expenses

     371,392        26.1        332,356        23.1   

Medicare and Medicaid HCIT incentive payments

     (2,015     (0.1     (24,224     (1.7

Change in control and other related expense

     102,886        7.2        —          0.0   

Depreciation and amortization

     99,351        7.0        91,563        6.4   

Interest expense

     70,747        5.0        76,916        5.3   

Other

     884        0.1        (2,363     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,560,099        109.8        1,370,179        95.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (138,856     (9.8     68,680        4.8   

Income tax benefit (provision)

     65,529        4.6        (19,663     (1.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

   $ (73,347     (5.2 )%    $ 49,017        3.4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended
September 30,
          Percent
Change
 
     2013     2012     Change    

Same Three Month Hospitals *

        

Occupancy

     35.1     38.9     (380 ) bps **      n/a   

Patient days

     328,484        357,094        (28,610     (8.0 )% 

Admissions

     78,951        84,704        (5,753     (6.8 )% 

Adjusted admissions †

     166,284        171,206        (4,922     (2.9 )% 

Emergency room visits

     432,204        441,805        (9,601     (2.2 )% 

Surgeries

     95,169        97,253        (2,084     (2.1 )% 

Outpatient revenue percent ¿

     57.1     55.4     170   bps      n/a   

Inpatient revenue percent ¿

     42.9     44.6     (170 ) bps      n/a   

Total Hospitals

        

Occupancy

     35.6     38.9     (330 ) bps      n/a   

Patient days

     348,812        357,094        (8,282     (2.3 )% 

Admissions

     82,936        84,704        (1,768     (2.1 )% 

Adjusted admissions †

     171,215        171,206        9        0.0

Emergency room visits

     444,105        441,805        2,300        0.5

Surgeries

     97,603        97,253        350        0.4

Outpatient revenue percent ¿

     56.3     55.4     90   bps      n/a   

Inpatient revenue percent ¿

     43.7     44.6     (90 ) bps      n/a   

 

* Includes acquired hospitals to the extent we operated them for comparable periods
** basis points
Admissions adjusted for outpatient volume
¿ Determined by reference to net revenue before the provision for doubtful accounts