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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
MARK ONE:
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________.
COMMISSION FILE NUMBER 1-11239
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COLUMBIA/HCA HEALTHCARE CORPORATION
(FORMERLY COLUMBIA HEALTHCARE CORPORATION)
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 75-2497104
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Indentification No.)
201 WEST MAIN STREET
LOUISVILLE, KENTUCKY 40202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (502) 572-2000
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 Par Value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of February 28, 1994, there were outstanding 318,289,550 shares of the
Registrant's Common Stock and 18,989,999 shares of the Registrant's Nonvoting
Common Stock. As of February 28, 1994 the aggregate market value of the Common
Stock held by non-affiliates was $12,304,680,760. For purposes of the foregoing
calculation only, the Registrant's directors, executive officers, and The
Hospital Corporation of America Stock Bonus Plan have been deemed to be
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1994 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
The Exhibit Index is on page 39.
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PART I
ITEM 1. BUSINESS.
GENERAL
Columbia/HCA Healthcare Corporation (the "Company") is a health care
services company that is primarily engaged in buying, selling, owning and
operating general, acute care and specialty hospitals and related health care
facilities. As of March 28, 1994, the Company operated 196 hospitals located in
26 states and two foreign countries.
On February 10, 1994, the Company acquired HCA-Hospital Corporation of
America ("HCA") pursuant to a merger transaction accounted for as a pooling of
interests (the "HCA Merger"). HCA was one of the leading hospital management
companies in the United States. Effective September 1, 1993, the Company
acquired Galen Health Care, Inc. ("Galen") pursuant to a merger transaction
accounted for as a pooling of interests (the "Galen Merger"). Galen was a health
care services company that primarily owned and operated acute care hospitals.
Galen began operations as an independent publicly held corporation upon the
distribution of all of its common stock (the "Spinoff") by its then 100% owner,
Humana Inc. ("Humana"), on March 1, 1993. Unless otherwise noted, the historical
financial and operating data contained in this Annual Report on Form 10-K have
been restated to include the relevant data for both HCA and Galen for all
periods presented.
The Company, through various predecessor entities, began operations on July
1, 1988. The Company was incorporated in Nevada in January 1990 and
reincorporated in Delaware in September 1993. The Company's principal executive
offices are located at 201 West Main Street, Louisville, Kentucky 40202, and its
telephone number at such address is (502) 572-2000.
BUSINESS STRATEGY
The Company's strategy is to become a significant, comprehensive provider of
quality health care services in targeted markets. The Company pursues its
strategy by acquiring the health care facilities necessary to develop a
comprehensive health care network with wide geographic presence throughout the
market. Typically, the Company enters a market by acquiring one or more mid-to
large-size general, acute care hospitals (over 150 licensed beds), which have
either desirable physical plants or ones which can be upgraded on an
economically feasible basis. The Company then upgrades equipment and facilities
and adds new services to increase the attractiveness of the hospital to local
physicians and patient populations. The Company typically develops a network by
acquiring additional health care facilities including additional general, acute
care hospitals, psychiatric hospitals and outpatient facilities such as surgery
centers, diagnostic centers, physical therapy centers and other treatment or
wellness facilities including home health care services. By developing a
comprehensive health care network in a local market, the Company achieves
greater visibility and is better able to attract physicians and patients by
offering a full range of services in the entire market area. The Company is also
able to reduce operating costs by sharing certain services among several
facilities in the same market and is better positioned to work with health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs")
and employers.
Upon acquisition of a facility, the Company hires experienced executives to
manage its operations and decentralizes operational decision making to the local
level, while providing local physicians and managers the opportunity to purchase
equity interests in the operations through a partnership or corporate structure.
The Company is currently implementing this strategy with certain of the former
Galen and HCA facilities. Management believes the Company's strategy of
co-ownership of its facilities with physicians produces significant operational
advantages. Physicians who have an ownership interest in a facility take a more
active role in recruiting other physicians and in improving efficiency by
containing costs and making more rational capital expenditure decisions, and
often are more active supporters of operations and medical staff quality
assurance activities, as they have a direct personal interest in the success and
reputation of the facility. Moreover, because the Company's facilities are co-
owned with and operated by prominent members of the local medical community,
both community
2
support for the facilities and the Company's ability to recruit physicians to
the facilities are enhanced. In addition, by giving local managers of its
facilities the opportunity to purchase equity interests in such facilities, the
Company creates incentives on the part of its local managers to operate their
facilities successfully with a long-term perspective.
HEALTH CARE FACILITIES
The Company currently operates hospitals, ambulatory surgery centers,
diagnostic centers, cardiac rehabilitation centers, physical therapy centers,
radiation oncology centers, comprehensive outpatient rehabilitation centers and
home health care agencies and programs.
The Company currently operates 168 general, acute care hospitals with 39,886
licensed beds. Most of the Company's general, acute care hospitals provides
medical and surgical services, including inpatient care, intensive and cardiac
care, diagnostic services and emergency services. The general, acute care
hospitals also provide outpatient services such as outpatient surgery,
laboratory, radiology, respiratory therapy, cardiology and physical therapy. A
local advisory board, which usually includes members of the hospital's medical
staff, generally makes recommendations concerning the medical, professional and
ethical practices at each hospital and monitors such practices. However, the
hospital is ultimately responsible for ensuring that these practices conform to
established standards. When the Company acquires a hospital, it establishes
quality assurance programs to support and monitor quality of care standards and
to meet accreditation and regulatory requirements. Patient care evaluations and
other quality of care assessment activities are monitored on a continuing basis.
Like most hospitals, the Company's hospitals do not engage in extensive
medical research and medical education programs. However, some of the Company's
hospitals have an affiliation with medical schools, including the clinical
rotation of medical students.
The Company currently operates 28 psychiatric hospitals with 3,285 licensed
beds. The Company's psychiatric hospitals provide therapeutic programs tailored
to child psychiatric, adolescent psychiatric, adult psychiatric, adolescent
alcohol or drug abuse and adult alcohol or drug abuse patients. The hospitals
use the treatment team concept whereby the admitting physician, team
psychologist, social workers, nurses, therapists and counselors coordinate each
phase of therapy. Services provided by this team include crisis intervention,
individual psychotherapy, group and family therapy, social services, chemical
dependency counseling, behavioral modification and physical medicine. Family
aftercare plans are actively promoted from the time of admission, through
hospitalization and after discharge. An aftercare plan measures each patient's
post-program progress and utilizes one or more self-help groups. Program
procedures are designed to ensure that quality standards are achieved and
maintained. Certain of the Company's general, acute care hospitals also have a
limited number of licensed psychiatric beds.
Other outpatient or related health care services operated by the Company
include ambulatory surgery centers, diagnostic centers, outpatient physical
therapy/rehabilitation centers, outpatient radiation therapy centers, cardiac
rehabilitation centers, skilled nursing services and home health/ infusion
services. These outpatient and related services are an integral component of the
Company's strategy to develop a comprehensive health care network in each of its
target markets.
In addition to providing capital resources, the Company makes available a
variety of management services to its health care facilities, most
significantly: national supply and equipment purchasing and leasing contracts;
financial policies; accounting, financial and clinical systems; governmental
reimbursement assistance; construction planning and coordination; information
systems; legal; personnel management; and internal audit.
SOURCES OF REVENUE
Hospital revenues depend upon inpatient occupancy levels, the extent to
which ancillary services and therapy programs are ordered by physicians and
provided to patients, the volume of outpatient procedures and the charges or
negotiated payment rates for such services. Charges and reimbursement rates for
inpatient routine services vary significantly depending on the type of service
(e.g.,
3
medical/surgical, intensive care or psychiatric) and the geographic location of
the hospital. The Company has experienced an increase in the percentage of
patient revenues attributable to outpatient services. This increase is primarily
the result of advances in technology, which allow more services to be provided
on an outpatient basis, acquisitions of additional outpatient facilities and
increased pressures from Medicare, Medicaid, HMOs and PPOs and insurers to
reduce hospital stays and provide services, where possible, on a less expensive
outpatient basis.
The Company receives payment for patient services from the federal
government primarily under the Medicare program, state governments under their
respective Medicaid programs, HMOs, PPOs and other private insurers and directly
from patients. The approximate percentages of patient revenues of the Company's
facilities from such sources during the periods specified below were as follows:
YEARS ENDED DECEMBER 31,
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1993 1992 1991
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Medicare........................................................... 34% 30% 29%
Medicaid........................................................... 4 4 4
Other sources...................................................... 62 66 67
--- --- ---
Total.............................................................. 100% 100% 100%
--- --- ---
--- --- ---
Medicare is a federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and persons
with end-stage renal disease. Medicaid is a federal-state program administered
by the states which provides hospital benefits to qualifying individuals who are
unable to afford care. Substantially all of the Company's hospitals are
certified as providers of Medicare and Medicaid services. Amounts received under
the Medicare and Medicaid programs are generally significantly less than the
hospital's customary charges for the services provided.
To attract additional volume, most of the Company's hospitals offer
discounts from established charges to certain large group purchasers of health
care services, including Blue Cross, other private insurance companies,
employers, HMOs, PPOs and other managed care plans. Blue Cross is a private
health care program that funds hospital benefits through independent plans that
vary in each state. These discount programs limit the Company's ability to
increase charges in response to increasing costs. See "Competition." Patients
are generally not responsible for any difference between customary hospital
charges and amounts reimbursed for such services under Medicare, Medicaid, some
Blue Cross plans and HMOs or PPOs, but are responsible to the extent of any
exclusions, deductibles or co-insurance features of their coverage. The amount
of such exclusions, deductibles and co-insurance has generally been increasing
each year. Collection of amounts due from individuals is more difficult than
from governmental or business payors.
MEDICARE
Beginning in 1983, reimbursement to hospitals under the Medicare program
changed significantly and these changes have had, and are expected to continue
to have, significant effects on the Company's hospitals and the health care
industry in general. Prior to 1983, Medicare reimbursed medical/surgical
hospitals on a cost-based system. In 1983, Medicare established a prospective
payment system under which inpatient discharges from medical/surgical hospitals
are classified into categories of treatments, known as Diagnosis Related Groups
("DRGs"), which classify illnesses according to the estimated intensity of
hospital resources necessary to furnish care for each principal diagnosis. At
December 31, 1993, there were 489 DRGs. Hospitals generally receive a fixed
amount per Medicare discharge based upon the assigned DRG (the "DRG rate")
regardless of how long the patient remains in the hospital or the volume of
ancillary services ordered by the attending physician. However, the DRG rate is
adjusted for each hospital to reflect the relative severity of diagnosis, higher
cost of certain geographical areas, disproportionate share of low income
patients and indirect medical education costs. Also, Medicare pays an additional
"outlier" payment for extraordinary Medicare
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cases involving long hospital stays or significant amounts of costs incurred.
Under the prospective payment system, hospitals generally are encouraged to
operate with greater efficiency, since they may retain payments in excess of
costs but must absorb costs in excess of such payments.
The Secretary of the Department of Health and Human Services ("HHS") is
required to establish annual increases in the DRG rates, effective October 1 of
each year, to counter inflationary pressure after considering the
recommendations of an independent panel of experts. In each year since 1984,
however, the increases in the DRG rates have been determined by Congress as part
of the federal budget process. The index used to adjust the DRG rates gives
consideration to the inflation experienced by hospitals in purchasing the goods
and services they need to provide inpatient services (the "market basket"). For
several years the percentage increases to the DRG rates have been lower than the
percentage increases in the market basket. Substantially all of the Company's
general, acute care hospitals are classified as urban for Medicare purposes. For
federal fiscal year ("FY") 1992 the net update of the DRG rates for urban
hospitals set by Congress was 2.8% (market basket minus 1.6%); for FY 1993 the
net update of the DRG rates for urban hospitals was 2.6% (market basket minus
1.6%); and for FY 1994 the net update of the DRG rates for urban hospitals will
be 1.8% (market basket minus 2.5%). As a result of the Omnibus Budget
Reconciliation Act of 1993 ("OBRA 1993"), the net update of DRG rates for future
fiscal years is as follows: (i) FY 1995 -- urban hospitals will equal the market
basket minus 2.5%; (ii) FY 1996 -- all hospitals will equal the market basket
minus 2.0%; (iii) FY 1997 -- all hospitals will equal the market basket minus
0.5%; and (iv) FY 1998 and thereafter -- all hospitals will equal the market
basket.
Medicare payments for the majority of outpatient services generally are the
lower of 94.2% of hospital costs, customary charges or a blend of 94.2% of
hospital costs and a fee schedule (such fee schedule generally being lower than
hospital costs). OBRA 1993 extended the 94.2% provision through FY 1998. HHS has
indicated its intention to change reimbursement procedures for Medicare
outpatients to a prospective payment system. The effect of a change to a
prospective payment system or other changes to the existing payment system, if
implemented, cannot be predicted by the Company at this time. Medicare
outpatient revenues were approximately 21% of the Company's total outpatient
revenues, or approximately 6% of the Company's total operating revenues, for the
year ended December 31, 1993.
In addition to the operating payments described above, the Medicare program
provides reimbursement to hospitals for certain costs of capital (such as
depreciation, property taxes, rent and interest). Pursuant to final HHS
regulations issued in August 1991, reimbursement for capital expenditures
related to inpatient care was incorporated into the prospective payment system
and will be phased in over a ten-year period beginning October 1, 1991. The
regulations establish a standard federal rate per discharge for capital-related
inpatient hospital costs. The standard federal rate is based on the estimated FY
1992 national average Medicare inpatient capital-related cost per discharge
under cost reimbursement. The rate will be adjusted for each hospital to reflect
the relative severity of diagnosis, higher cost of certain geographic areas,
disproportionate share of low income patients, indirect medical education costs
and extremely high cost cases. As required by law, however, the standard federal
rate will be adjusted in FY 1992 through FY 1995 so that aggregate payments for
capital will not exceed 90% of the amounts that would have been payable under a
reasonable cost reimbursement basis. High capital cost-per-discharge hospitals
may qualify to continue to be paid based on a blend of old and new capital, with
old capital being paid at 85% of reasonable cost. Based upon its analysis of the
manner in which these regulations will be applied, the Company does not believe
that, in the aggregate, its hospitals were materially affected by the
regulations for the year ended December 31, 1993. Payments for future years,
however, including those related to new capital expenditures, will be affected
by annual updates in the federal payment rate. Management cannot predict the
effect of such changes on the Company's results of operations or financial
condition.
The Medicare program reimburses each hospital on a reasonable cost basis for
the Medicare program's pro rata share of the hospital's allowable capital costs
related to outpatient services. Outpatient capital reimbursement was reduced by
15% (i.e., 85% of outpatient capital costs) during
5
FY 1990 and the Omnibus Budget Reconciliation Act of 1990 (the "1990 Budget
Act") extended the 15% reduction through FY 1991. The 1990 Budget Act further
directed that outpatient capital reimbursement be reduced by only 10% beginning
in FY 1992 through FY 1995. OBRA 1993 extended the 10% reduction through FY
1998.
In December 1985, the Gramm-Rudman-Hollings Amendment ("Gramm-Rudman") was
enacted by Congress mandating progressively smaller projected federal budget
deficits for FYs between 1986 and 1991. Gramm-Rudman provides for automatic
spending cuts in governmental programs (including Medicare) if certain deficit
targets are not met. Under Gramm-Rudman, Medicare payments were reduced in each
of the FYs 1986 through 1988 and in 1990. The 1990 Budget Act restructured
Gramm-Rudman and extended its term of effectiveness. For FY 1991 through FY
1993, fixed deficit targets were eliminated, but will be applied for FY 1994 and
FY 1995 unless the President orders such targets eliminated. In addition to the
possible fixed deficit targets for FY 1994 and FY 1995, the 1990 Budget Act
created two new limitations on federal spending, the Discretionary Spending
Limits and the "Pay As You Go" requirement. Each of the three spending
limitations is enforceable by sequestration, and under the "Pay As You Go"
limitation, the maximum reduction in Medicare payments is 4%. Management is
unable to determine what effect, if any, such provisions of the 1990 Budget Act
might have on the Company if implemented.
Certain specialized hospitals, including psychiatric hospitals, are exempt
from the Medicare prospective payment system and continue to be reimbursed on a
cost-based system. Under the Tax Equity and Fiscal Responsibility Act of 1982,
base year costs per Medicare case were determined for the Company's psychiatric
hospitals in 1982. The target rate of permitted increases in cost per case is
established each year by the increase in the cost of a market basket of hospital
goods and services (the "Target Rate"). If a hospital's costs increase less than
the Target Rate, the hospital receives a bonus of 50% of the difference between
its allowed increase and its actual increase (limited to 5% of the Target Rate).
These limits apply only to operating costs and do not apply to capital costs.
The effective increase in the Target Rate per discharge was 4.3% for the year
commencing October 1, 1993 and is expected to be market basket minus 1% for FYs
1995 through 1997. Beginning in FY 1998, the update will equal the percentage
increase in the market basket. The 1990 Budget Act, however, reduces the penalty
for hospitals that incur actual operating costs in excess of the Target Rate by
reimbursing 50% of the cost in excess of the limit up to 110% of the limit,
effective for cost reporting periods beginning on or after October 1, 1991. The
1990 Budget Act directed the Secretary of HHS to develop a new prospective
payment methodology for exempt hospitals and to report to Congress on this
matter by April 1, 1992. The report had not been made as of March 28, 1994.
Considerable uncertainty surrounds the future determination of payment
levels for DRGs and for other services currently being reimbursed on a cost
basis. Congress could consider further legislation in the prospective payment
area, such as further reducing or eliminating DRG rate increases or otherwise
revising DRG rates. In addition, any automatic spending cuts mandated under
Gramm-Rudman will further reduce payments to the Company's hospitals under the
Medicare program. Also, substantial areas of the Medicare program are subject to
legislative and regulatory changes, administrative rulings, interpretations,
administrative discretion, governmental funding restrictions and requirements
for utilization review (such as second opinions for surgery and preadmission
criteria). These matters, as well as more general governmental budgetary
concerns, may significantly reduce payments made to the Company's hospitals
under such programs, and there can be no assurance that future Medicare payment
rates will be sufficient to cover cost increases in providing services to
Medicare patients.
MEDICAID
Most state Medicaid payments are made under a prospective payment system or
under programs to negotiate payment levels with individual hospitals. Medicaid
reimbursement is generally substantially less than a hospital's cost of
services. Medicaid is currently funded approximately 50% by the states and
approximately 50% by the federal government. The federal government and many
states
6
are currently considering significant reductions in the level of Medicaid
funding while at the same time expanding Medicaid benefits, which could
adversely affect future levels of Medicaid reimbursement received by the
Company's hospitals.
On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution
and Provider-Specific Tax Amendments of 1991 (the "Medicaid Amendments"), which
limit the amount of voluntary contributions and provider-specific taxes that can
be used by states to fund Medicaid and require the use of broad-based taxes for
such funding. As a result of enactment of the Medicaid Amendments, certain
states in which the Company operates have adopted broad-based provider taxes to
fund their Medicaid programs. To date, the impact upon the Company of these new
taxes has not been materially adverse. However, the Company is unable to predict
whether any additional broad-based provider taxes will be adopted by the states
in which it operates and, accordingly, is unable to assess the effect thereof on
its results of operations or financial condition.
ANNUAL COST REPORTS
The Company's annual cost reports which are required under the Medicare and
Medicaid programs are subject to audit which may result in adjustments to the
amounts ultimately determined to be due the Company under these reimbursement
programs. These audits often require several years to reach the final
determination of amounts earned under the programs. Providers also have rights
of appeal, and the Company is currently contesting certain issues raised in
audits of prior years' reports. Management believes that adequate provision has
been made in its financial statements for any material retroactive adjustments
that might result from all of such audits and that final resolution of all of
these issues will not have a material adverse effect upon the Company's results
of operations or financial position. Since the inception of the Medicare
prospective payment system in 1983, the amount of reimbursement to the Company's
general, acute care hospitals potentially affected by audit adjustments has
substantially diminished.
COMMERCIAL INSURANCE
The Company's hospitals provide services to individuals covered by private
health care insurance. Private insurance carriers either reimburse their policy
holders or make direct payments to the Company's hospitals based upon the
particular hospital's established charges and the particular coverage provided
in the insurance policy. Blue Cross is a health care financing program that
provides its subscribers with hospital benefits through independent
organizations that vary from state to state. The Company's hospitals are paid
directly by local Blue Cross organizations on the basis agreed to by each
hospital and Blue Cross by a written contract.
Recently, several commercial insurers have undertaken efforts to limit the
costs of hospital services by adopting prospective payment or DRG based systems.
To the extent such efforts are successful, and to the extent that the insurers'
systems fail to reimburse hospitals for the costs of providing services to their
beneficiaries, such efforts may have a negative impact on the Company's
hospitals.
HOSPITAL UTILIZATION
The Company believes that the two most important factors relating to the
overall utilization of a hospital are the quality and market position of the
hospital and the number and quality of physicians providing patient care within
the facility. Generally, the Company believes that the ability of a hospital to
be a market leader is determined by its breadth of services, level of
technology, emphasis on quality of care and convenience for patients and
physicians. Other factors which impact utilization include the growth in local
population, local economic conditions and market penetration of managed care
programs.
The following table sets forth certain operating statistics for hospitals
owned and operated by the Company for each of the five most recent years.
Medical/surgical hospital operations are subject to certain seasonal
fluctuations, including decreases in patient utilization during holiday periods
and
7
increases in the cold weather months. Psychiatric hospital operations are also
subject to certain seasonal fluctuations, including decreases in patient
occupancy during the summer months and holiday periods.
YEARS ENDED DECEMBER 31,
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1993 1992 1991 1990 1989
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Number of hospitals (1)...................... 193 200 219 221 218
Weighted average licensed beds (2)........... 41,263 40,608 42,437 42,264 41,452
Admissions (3)............................... 1,158,400 1,161,100 1,189,700 1,174,700 1,139,300
Average length of stay (days)................ 5.9 6.1 6.5 6.6 6.8
Average daily census......................... 18,702 19,253 21,255 21,351 21,155
Occupancy rate (4)........................... 45% 47% 50% 51% 51%
Emergency room visits........................ 3,139,700 3,042,900 3,028,600 2,894,800 2,756,900
Outpatient revenues as a % of patient
revenues.................................... 27% 26% 24% 22% 21%
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(1) End of period.
(2) Weighted average licensed beds is defined as the number of licensed beds
after giving effect to the length of time the beds have been licensed
during the period.
(3) Admissions represent the number of patients admitted for inpatient
treatment.
(4) Occupancy rates are calculated by dividing average daily census by
weighted average licensed beds.
Beginning in 1983, hospitals began experiencing significant shifts from
inpatient to outpatient care as well as decreases in average lengths of
inpatient stay primarily as a result of hospital payment changes by Medicare,
insurance carriers and self-insured employers. These changes generally
encouraged the utilization of outpatient, rather than inpatient, services
whenever possible, and shortened lengths of stay for inpatient care. Another
factor affecting hospital utilization levels is improved treatment protocols as
a result of medical technology and pharmacological advances.
COMPETITION
Generally, other hospitals in the local markets served by most of the
Company's hospitals provide services that are offered by the Company's
hospitals. Additionally, in the past several years, the number of free-standing
outpatient surgery and diagnostic centers in the geographic areas in which the
Company operates has increased significantly. As a result, most of the Company's
hospitals operate in an increasingly competitive environment. The rates charged
by the Company's hospitals are intended to be competitive with those charged by
other local hospitals for similar services. In some cases, competing hospitals
are more established than the Company's hospitals. Also, some competing
hospitals are owned by tax-supported government agencies and many others by
tax-exempt corporations which may be supported by endowments and charitable
contributions and which are exempt from sales, property and income taxes. Such
exemptions and support are not available to the Company's hospitals. In
addition, in certain localities served by the Company there are large teaching
hospitals which provide highly specialized facilities, equipment and services
which may not be available at most of the Company's hospitals. Psychiatric
hospitals frequently attract patients from areas outside their immediate locale
and, therefore, the Company's psychiatric hospitals compete with both local and
regional hospitals, including the psychiatric units of general, acute care
hospitals.
The Company believes that its hospitals compete within local markets on the
basis of many factors, including the quality of care, ability to attract and
retain quality physicians, location, breadth of services and technology offered
and prices charged. The competition among hospitals and other health care
providers has intensified in recent years as hospital occupancy rates have
declined. The Company's strategies are designed, and management believes that
its hospitals are positioned, to be competitive under these changing
circumstances.
8
One of the most significant factors in the competitive position of a
hospital is the number and quality of physicians affiliated with the hospital.
Although physicians may at any time terminate their affiliation with a hospital
operated by the Company, the Company seeks to retain physicians of varied
specialties on its hospitals' medical staffs and to attract other qualified
physicians. The Company believes that physicians refer patients to a hospital
primarily on the basis of the quality of services it renders to patients and
physicians, the quality of other physicians on the medical staff, the location
of the hospital and the quality of the hospital's facilities, equipment and
employees. Accordingly, the Company strives to maintain high ethical and
professional standards and quality facilities, equipment, employees and services
for physicians and their patients.
Another major factor in the competitive position of a hospital is its
management's ability to negotiate service contracts with purchasers of group
health care services. HMOs and PPOs attempt to direct and control the use of
hospital services through managed care programs and to obtain discounts from
hospitals' established charges. In addition, employers and traditional health
insurers are increasingly interested in containing costs through negotiations
with hospitals for managed care programs and discounts from established charges.
Generally, hospitals compete for service contracts with group health care
service purchasers on the basis of price, market reputation, geographic
location, quality and range of services, quality of the medical staff and
convenience. The importance of obtaining contracts with managed care
organizations varies from market to market depending on the market strength of
such organizations.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and add new equipment, may also
have the effect of restricting competition. The application process for approval
of covered services, facilities, changes in operations and capital expenditures
is, therefore, highly competitive. In those states which have no CON laws or
which set relatively high levels of expenditures before they become reviewable
by state authorities, competition in the form of new services, facilities and
capital spending is more prevalent. The Company has not experienced, and does
not expect to experience, any material adverse effects from state CON
requirements or from the imposition, elimination or relaxation of such
requirements. See "Regulation and Other Factors."
REGULATION AND OTHER FACTORS
LICENSURE, CERTIFICATION AND ACCREDITATION
Health care facility construction and operation is subject to federal, state
and local regulation relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, fire prevention, rate-setting and
compliance with building codes and environmental protection laws. Facilities are
subject to periodic inspection by governmental and other authorities to assure
continued compliance with the various standards necessary for licensing and
accreditation. All of the Company's health care facilities are properly licensed
under appropriate state laws. Substantially all of the Company's general, acute
care hospitals are certified under the Medicare program or are accredited by the
Joint Commission on Accreditation of Health Care Organizations ("Joint
Commission"), the effect of which is to permit the facilities to participate in
the Medicare and Medicaid programs. A few of the Company's psychiatric hospitals
do not participate in these programs. Should any facility lose its Joint
Commission accreditation, or otherwise lose its certification under the Medicare
program, the facility would be unable to receive reimbursement from the Medicare
and Medicaid programs. Management believes that the Company's facilities are in
substantial compliance with current applicable federal, state, local and
independent review body regulations and standards. The requirements for
licensure, certification and accreditation are subject to change and, in order
to remain qualified, it may be necessary for the Company to effect changes in
its facilities, equipment, personnel and services.
CERTIFICATES OF NEED
The construction of new facilities, the acquisition of existing facilities,
and the addition of new beds or services may be reviewable by state regulatory
agencies under a CON program. The Company operates hospitals in some states that
require approval under a CON program. Such laws generally
9
require appropriate state agency determination of public need and approval prior
to beds or services being added, or a related capital amount being spent.
Failure to obtain necessary state approval can result in the inability to
complete an acquisition or change of ownership, the imposition of civil or, in
some cases, criminal sanctions, the inability to receive Medicare or Medicaid
reimbursement or the revocation of a facility's license.
STATE RATE REVIEW
A few states in which the Company owns hospitals have adopted legislation
mandating rate or budget review for hospitals or have adopted taxes on hospital
revenues, assessments or licensure fees to fund indigent health care within the
state.
In Florida, a budget review process and a ceiling on net revenue increases
per admission has been in effect with respect to the Company's hospitals since
January 1, 1986. The ceiling on net revenue increases per admission limits
hospital net revenue per admission increases to an annually-determined
percentage increase in costs that Florida hospitals pay for goods and services
plus a statutory 2%, plus additional amounts to recognize the hospital's
Medicare patient days and Medicaid and uncompensated charity care days. This law
limits the ability of Florida hospitals to increase rates to maintain operating
margins. The Company owned 47 hospitals aggregating 11,596 beds in Florida as of
March 28, 1994.
In the aggregate, state rate or budget review and indigent tax provisions
have not materially adversely affected the Company's results of operations. The
Company is unable to predict whether any additional state rate or budget review
or indigent tax provisions will be adopted and, accordingly, is unable to assess
the effect thereof on its results of operations or financial condition.
UTILIZATION REVIEW
Federal law contains numerous provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards, are medically necessary and that claims for reimbursement
are properly filed. These provisions include a requirement that a sampling of
admissions of Medicare and Medicaid patients must be reviewed by peer review
organizations ("PROs"), which review the appropriateness of Medicare and
Medicaid patient admissions and discharges, the quality of care provided, the
validity of DRG classifications and the appropriateness of cases of
extraordinary length of stay or cost. While no PROs have ever taken any material
adverse action against any of the Company's hospitals, PROs may deny payment for
services provided, assess fines and also have the authority to recommend to HHS
that a provider which is in substantial noncompliance with the standards of the
PRO be excluded from participating in the Medicare program.
MEDICARE REGULATIONS AND FRAUD AND ABUSE
Participation in the Medicare program is heavily regulated by federal
statute and regulation. If a hospital provider fails substantially to comply
with the numerous conditions of participation in the Medicare program or
performs certain prohibited acts (e.g., (i) making false claims to Medicare for
services not rendered or misrepresenting actual services rendered in order to
obtain higher reimbursement; (ii) paying remuneration for Medicare referrals (so
called "fraud and abuse" which is prohibited by the "anti-kickback" provisions
of the Social Security Act); (iii) failing to stabilize all individuals who come
to its emergency room who have an "emergency medical condition," whether or not
any such individual is eligible for Medicare; (iv) transferring any stabilized
patient to another health care facility before such other facility has agreed to
the transfer of such patient, while such other facility does not have sufficient
room and staff to treat the patient, without the patient's emergency department
medical records, or without appropriate life support equipment; and (v)
transferring any unstabilized patient except those transferred at the patient's
request or with physician certification that the medical risks from the transfer
are less harmful than continued treatment at the transferring facility), such
hospital's participation in the Medicare program may be terminated or civil or
criminal penalties may be imposed upon such hospital under certain provisions of
the Social Security Act.
10
Moreover, HHS and the courts have interpreted the "fraud and abuse"
anti-kickback provisions of the Social Security Act (presently codified in
Section 1128B(b) of the Social Security Act) broadly to include the intentional
offer, payment, solicitation or receipt of anything of value if one purpose of
the payment is to induce the referral of Medicare business. Health care
providers generally are concerned that many relatively innocuous, or even
beneficial, commercial arrangements with their physicians may technically
violate this strict interpretation of Section 1128B(b).
In 1976 Congress established the Office of Inspector General ("OIG") at HHS
to identify and eliminate fraud, abuse and waste in HHS programs and to promote
efficiency and economy in HHS departmental operations. The OIG carries out this
mission through a nationwide program of audits, investigations and inspections.
In order to provide guidance to health care providers on ways to engage in
legitimate business practices and avoid scrutiny under the fraud and abuse
statute, the OIG has from time to time issued "fraud alerts" identifying
features of transactions, which, if present, may indicate that the transaction
violates the fraud and abuse law. In May 1992, the OIG issued a special fraud
alert regarding hospital incentives to physicians. The alert identified the
following incentive arrangements as potential violations of the statute: (a)
payment of any sort of incentive by the hospital each time a physician refers a
patient to the hospital, (b) the use of free or significantly discounted office
space or equipment (in facilities usually located close to the hospital), (c)
provision of free or significantly discounted billing, nursing or other staff
services, (d) free training for a physician's office staff in areas such as
management techniques, CPT coding and laboratory techniques, (e) guarantees
which provide that, if the physician's income fails to reach a predetermined
level, the hospital will supplement the remainder up to a certain amount, (f)
low-interest or interest-free loans, or loans which may be forgiven if a
physician refers patients (or some number of patients) to the hospital, (g)
payment of the costs of a physician's travel and expenses for conferences, (h)
coverage on the hospital's group health insurance plans at an inappropriately
low cost to the physician and (i) payment for services (which may include
consultations at the hospital) which require few, if any, substantive duties by
the physician, or payment for services in excess of the fair market value of
services rendered. In this fraud alert the OIG encouraged persons having
information about hospitals who offer the above types of incentives to
physicians to contact any of the eleven regional OIG offices or to report
information to the OIG.
In addition, on July 29, 1991, the OIG issued final regulations outlining
certain "safe harbor" practices, which, although potentially capable of inducing
prohibited referrals of business under Medicare or state health programs, would
not be subject to enforcement action under the Social Security Act. The
practices covered by the regulations include certain physician joint venture
transactions, rental of space and equipment, personal services and management
contracts, sales of physician practices, referral services, warranties,
discounts, payments to employees, group purchasing organizations and waivers of
beneficiary deductibles and co-payments. Additional proposed safe harbors are
expected to be published in the near future by the OIG, including a safe harbor
regulation for physician recruitment. Certain of the Company's current
arrangements with physicians, including joint ventures, do not qualify for the
current safe harbor exemptions.
Although the Company exercises care in an effort to structure its
arrangements with physicians to comply in all material respects with these laws,
and although management believes that the Company is in compliance with Section
1128B(b) of the Social Security Act, there can be no assurance that (i)
government officials charged with responsibility for enforcing the prohibitions
of Section 1128B(b) of the Social Security Act will not assert that the Company
or certain transactions in which it is involved are in violation of Section
1128B(b) of the Social Security Act and (ii) such statute will ultimately be
interpreted by the courts in a manner consistent with the practices of the
Company.
The federal Medicaid regulations also prohibit fraudulent and abusive
practices and authorize the exclusion from such program of providers in
violation of such regulations.
11
STATE LEGISLATION
Some of the states in which the Company operates also have laws that
prohibit corporations and other entities from employing physicians and
practicing medicine for a profit or that prohibit certain direct and indirect
payments or fee-splitting arrangements between health care providers that are
designed to induce or encourage the referral of patients to, or the
recommendation of, particular providers for medical products and services. In
addition, some states restrict certain business relationships between physicians
and pharmacies. Possible sanctions for violation of these restrictions include
loss of licensure and civil and criminal penalties. These statutes vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. Although the Company exercises care in an effort to
structure its arrangements with health care providers to comply with the
relevant state statutes, and although management believes that the Company is in
compliance with these laws, there can be no assurance that (i) governmental
officials charged with responsibility for enforcing these laws will not assert
that the Company or certain transactions in which it is involved are in
violation of such laws and (ii) such state laws will ultimately be interpreted
by the courts in a manner consistent with the practices of the Company.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
affect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan that would cover all citizens. President Clinton has
stated that one of his primary objectives is to reform the nation's health care
system to insure universal coverage and address the rising costs of care. In
early 1993, President Clinton appointed Hillary Rodham Clinton to lead a health
care reform task force with the objective of developing a health care reform
proposal which could be submitted by the President. On September 22, 1993,
before a Joint Session of Congress, President Clinton outlined the basic
principles of his upcoming health care reform proposal. President Clinton's
health care reform bill, introduced as legislation on November 22, 1993,
includes certain measures that could be viewed as advancing the scope of
government regulation on the health care industry. Key elements in the
President's proposal include various insurance market reforms, the requirement
that businesses provide health insurance coverage for their full-time and
part-time employees, significant reductions in future Medicare and Medicaid
payments to providers, and stringent government cost controls that would
directly control insurance premiums and indirectly affect the fees of hospitals,
physicians and other health care providers. In addition to the President's
reform proposal, several other health care reform bills have recently been
introduced, including The Managed Competition Act of 1993, Affordable Health
Care Now Act of 1993 and Health Equity & Access Reform Today. While the Company
cannot predict whether any such proposals will be adopted, or if adopted what
effect, if any, such proposals would have on its business, the Company believes
that it is implementing measures to respond to such prospective changes by
expanding its network strategy, building integrated health care delivery
systems, negotiating with managed care providers and controlling its costs.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local statutes and
ordinances regulating the discharge of materials into the environment.
Management does not believe that the Company will be required to expend any
material amounts in order to comply with these laws and regulations or that
compliance will materially affect its capital expenditures, earnings or
competitive position.
INSURANCE
As is typical in the health care industry, the Company is subject to claims
and legal actions by patients in the ordinary course of business. Through two
wholly-owned insurance subsidiaries, the Company insures substantially all of
its general and professional liability risks. Subject to various
12
deductibles, the Company's hospitals are insured by these insurance subsidiaries
for losses of up to $25 million per occurrence for the former HCA hospitals and
up to $5 million per occurrence for the former Columbia Healthcare Corporation
hospitals. The Company currently carries general and professional liability
insurance from unrelated commercial carriers for losses in excess of amounts
insured by its insurance subsidiaries.
The Company and its insurance subsidiaries maintain allowances for loss for
professional and general liability risks which totalled $817 million at December
31, 1993. Management considers such allowances, which are based on actuarially
determined estimates, to be adequate for such liability risks. Any losses
incurred in excess of the established allowances for loss will be reflected as a
charge to earnings of the Company. Any losses incurred within the deductible(s)
or in excess of amounts funded and commercial excess liability insurance will be
funded from the Company's working capital. While the Company's cash flow has
been adequate to provide for alleged and unforeseen liability claims in the
past, there can be no assurance that such amounts will continue to be adequate.
If payments for general and professional liabilities exceed anticipated losses,
the results of operations and financial condition of the Company could be
adversely affected.
EMPLOYEES AND MEDICAL STAFFS
At December 31, 1993, the Company had approximately 131,600 employees,
including approximately 33,500 part-time employees. Three hospitals have
employees represented by various labor unions. The Company considers its
employee relations to be satisfactory. While the Company's hospitals experience
union organizational activity from time to time, the Company does not expect
such efforts to materially affect its future operations. The Company's
hospitals, like most hospitals, have experienced labor costs rising faster than
the general inflation rate. In recent years, the Company generally has not
experienced material difficulty in recruiting and retaining employees, including
nurses and professional staff members, primarily as a result of staff retention
programs and general economic conditions. There can be no assurance as to future
availability and cost of qualified medical personnel.
As of December 31, 1993, approximately 56,000 licensed physicians were
active members of the medical staffs of the Company's hospitals. With limited
exceptions, physicians generally are not employees of the Company's hospitals.
However, some physicians provide services in the Company's hospitals under
contracts, which generally describe a term of service, provide and establish the
duties and obligations of such physicians, require the maintenance of certain
performance criteria and fix compensation for such services. Any licensed
physician may apply to be admitted to the medical staff of any of the Company's
hospitals, but admission to the staff must be approved by the hospital's medical
staff and the appropriate governing board of the hospital in accordance with
established credentialling criteria. Members of the medical staffs of the
Company's hospitals often also serve on the medical staffs of other hospitals,
and may terminate their affiliation with a hospital at any time.
INTERNAL REVENUE SERVICE EXAMINATIONS AND TAX LITIGATION
As a result of examinations by the Internal Revenue Service (the "Service")
of HCA's federal income tax returns, HCA received statutory notices of
deficiency for the years 1981 through 1988. HCA has filed petitions in the U.S.
Tax Court opposing these claimed deficiencies. Additionally, the Service
completed its examination for the years 1989 and 1990 and has issued proposed
adjustments, which HCA has protested. The principal issues involved are:
(a) METHOD OF ACCOUNTING. For the taxable years 1981 through 1986,
most of HCA's hospital subsidiaries (the "Subsidiaries") reported taxable
income using primarily the cash method of accounting. The cash method was
prevalent within the hospital industry and the Subsidiaries applied the
method in accordance with prior agreements reached with the Service. The
Service now asserts that the accrual method of accounting should have been
used. The Tax Reform Act of 1986 (the "1986 Act") requires most large
corporate taxpayers (including the Company) to use the accrual method of
accounting beginning in 1987. Consequently, the Subsidiaries changed to the
accrual method beginning January 1, 1987. In accordance with the provisions
of the 1986 Act,
13
income that was deferred by use of the cash method at the end of 1986 is
being recognized as taxable income by the Subsidiaries in equal annual
installments over ten years (1987 through 1996). If the Service should
ultimately prevail in its claim that the Subsidiaries should have used the
accrual method for 1981 through 1986, HCA would be entitled to an offset as
a result of the prior inclusion of such installments for 1987 and
thereafter. Furthermore, the sale by HCA of numerous Subsidiaries in 1987
that had used the cash method resulted in the recognition of substantial
gain which would not have been recognized had they been using the accrual
method. Giving effect to these offsets, as of December 31, 1993, the net
effect to HCA of the Service prevailing would be $110 million in additional
income taxes plus interest of $432 million.
(b) HOSPITAL ACQUISITIONS. (i) In connection with hospitals acquired
by HCA in 1981, the Service asserts that certain assets claimed by HCA to
have an ascertainable useful life have no ascertainable useful life and are
therefore nonamortizable, and that the values assigned by HCA's independent
appraisers to certain assets acquired were excessive and that such amounts
actually constitute goodwill, a nondepreciable and nonamortizable asset. If
the Service ultimately prevails with regard to every assertion, the
additional income taxes owed through December 31, 1993 would be $55 million
plus interest of $97 million.
(ii) Similarly, in connection with assets acquired in 1985, the Service
is asserting that the relevant appraised values were excessive, with a
corresponding limitation on the resulting deductions. With regard to these
issues, the Service claims $58 million of additional income taxes and $42
million of interest through December 31, 1993.
(c) INSURANCE SUBSIDIARY. (i) Based on a Sixth Circuit Court of
Appeals decision (the Court having jurisdiction over HCA's issues), HCA has
claimed that insurance premiums paid to Parthenon Insurance Company
("Parthenon"), a wholly-owned subsidiary of HCA, are deductible, while the
Service maintains that such premiums are not deductible and that
corresponding losses are only deductible at the time and to the extent that
claims are actually paid. HCA has claimed the additional deductions in its
Tax Court petitions. Through December 31, 1993, HCA is seeking an income tax
refund of $51 million, plus interest of $93 million with respect to this
issue.
(ii) As an alternative to HCA's position set forth in (c)(i) above, HCA
has taken the position that in connection with its sale of hospitals to
HealthTrust, Inc. -- The Hospital Company ("HealthTrust") in 1987, premiums
paid to Parthenon by the hospitals sold, if not deductible as described in
(c)(i) above, became deductible by HCA upon the sale and HCA claimed such
deduction in its 1987 federal income tax return. The Service has disallowed
the deduction and is claiming an additional $5 million in income taxes and
$15 million in interest. A final determination that the premiums are not
deductible either when paid or upon the sale would increase HCA's taxable
basis in the hospitals sold, reducing HCA's gain realized on the sale.
(d) HEALTHTRUST SALE. (i) In its 1987 sale of certain hospitals to
HealthTrust in exchange for cash, HealthTrust preferred stock and stock
purchase warrants, HCA calculated its gain based on the valuation of such
stock and warrants by an independent appraiser. The Service claims a higher
aggregate valuation, based on the face amount of the preferred stock and a
separate appraisal HealthTrust obtained for the stock purchase warrants.
Application of the higher valuation would increase the gain recognized by
HCA on the sale. If, however, the Service succeeds in its assertion, HCA's
tax basis in its HealthTrust preferred stock and warrants will be increased
accordingly, thereby substantially reducing the tax from the sale of such
preferred stock and warrants by a corresponding amount. By the end of 1992,
HCA had sold its entire interest in the HealthTrust preferred stock and
warrants. Taking into consideration the sales, the Service is claiming
interest of $64 million through December 31, 1993.
(ii) Also in connection with the 1987 sale of certain hospitals to
HealthTrust, the Service claims that HCA's basis in the stock of the
subsidiaries owning such hospitals sold to HealthTrust should be calculated
by adjusting such basis to reflect accelerated rather than straight-line
depreciation. This would reduce HCA's basis in the stock sold, increasing
its taxable gain on the
14
sale. The Service's position is contrary to a Tax Court decision which HCA
believes to be controlling. The Service is claiming additional income taxes
of $79 million and interest of $66 million through December 31, 1993 based
on its position.
(iii) In connection with the 1987 HealthTrust transactions, the Service
further asserts that, to the extent the Subsidiaries were properly on the
cash method through 1986, and therefore were properly including deferred
income over a 10-year transition period, HCA should have additional income
in 1987 equal to the unamortized portion of the deferred income. It is HCA's
position that no additional income need be included in 1987 and that the
deferred income continues to qualify for the 10-year transition period after
the sale. Should the Service prevail, HCA would owe $11 million of
additional income taxes and $17 million of interest through December 31,
1993. This position of the Service is an alternative to its denial of the
use of the cash method of accounting as discussed in (a) above.
(e) DOUBTFUL ACCOUNTS. For 1986 the Service asserts that HCA is not
entitled to include charity care writeoffs in the formula used to calculate
its deduction for doubtful accounts. For the years 1987 and 1988, the
Service asserts that HCA is not entitled to exclude from income amounts
which are unlikely to be collected. Management believes that such exclusions
are permissible under an accrual method of accounting, and furthermore,
because HCA is a "service business" and not a "merchandising business", it
is entitled to a special exclusion provided to service businesses by the
1986 Act. The Service disagrees, asserting that HCA is engaged, at least in
part, in a "merchandising business" and that even if HCA is engaged in a
"service business," the exclusion taken by HCA is excessive under applicable
Temporary Treasury Regulations. HCA believes that the formula in the
Temporary Treasury Regulations which provides for the calculation of the
exclusion is inaccurate, in that it does not permit HCA to calculate the
exclusion in accordance with the controlling statute. If the Service
prevails, HCA would owe additional income taxes of $102 million and interest
of $48 million through December 31, 1993.
(f) LEVERAGED BUY-OUT EXPENSES. With respect to 1989 and 1990, the
Service has claimed that certain expense and amortization deductions claimed
with respect to the leveraged buy-out of HCA are not deductible. If the
Service were to prevail with respect to all of these items, additional
income taxes of $94 million would be owed, together with interest in the
amount of $24 million as of December 31, 1993.
(g) OTHER ISSUES. Additional federal income tax issues primarily
concern disputes over the depreciable lives utilized by HCA for constructed
hospital facilities, investment tax credits, vacation pay deductions and
income from foreign operations. Many of these items, such as depreciation,
investment tax credits and foreign issues, have been resolved favorably in
previous settlements and management believes the previous settlement
methodology should be followed again by the Service. The Service is claiming
an additional $44 million in income taxes and $28 million in interest
through December 31, 1993 with respect to these issues.
Management is of the opinion that HCA has properly reported its income and
paid its taxes in accordance with applicable laws and in accordance with
agreements established with the Service during previous examinations. In
management's opinion, the final outcome resulting from the Service's
examinations of prior years' income taxes will not have a material adverse
effect on the Company's results of operations, financial position or liquidity.
If all or a majority of the positions of the Service are upheld, however, the
results of operations, financial position and liquidity of the Company would be
materially adversely affected. Management believes that any cash payments
necessary as a result of such final outcome would be funded with cash from
operations and, if necessary, with amounts available under the Company's
revolving credit or other borrowing facilities.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 28, 1994, were as follows:
NAME AGE POSITION(S)
- ------------------------------ --- ----------------------------------------------------------------------------
Thomas F. Frist, Jr., M.D. 55 Chairman of the Board
Richard L. Scott 41 President and Chief Executive Officer
David T. Vandewater 43 Chief Operating Officer
Stephen T. Braun 38 Senior Vice President and General Counsel
Victor L. Campbell 47 Senior Vice President
Thomas H. Cato 51 Senior Vice President -- Information Systems
David C. Colby 40 Senior Vice President, Chief Financial Officer and Treasurer
Samuel A. Greco 42 Senior Vice President -- Financial Operations
Neil D. Hemphill 40 Senior Vice President -- Human Resources
Richard A. Lechleiter 35 Vice President and Controller
Joseph D. Moore 47 Senior Vice President -- Development
Lindy B. Richardson 47 Senior Vice President -- Marketing/Public Affairs
Russell D. Schneider 40 Senior Vice President -- Market Organization
Richard A. Schweinhart 44 Senior Vice President -- Finance
Thomas F. Frist, Jr., M.D. has served as Chairman of the Board of the
Company since February 1994. Dr. Frist, a founder of HCA, served as Chairman of
the Board, President and Chief Executive Officer of HCA from September 1987 to
February 1994. Dr. Frist was Chairman and Chief Executive Officer of HCA from
August 1985 until September 1987. Dr. Frist is also a director of International
Business Machines Corporation.
Richard L. Scott has served as President, Chief Executive Officer and a
director of the Company since September 1993. Mr. Scott was Chairman, Chief
Executive Officer and a director of the Company or its predecessors from July
1988 to September 1993.
David T. Vandewater has served as Chief Operating Officer of the Company
since September 1993. Mr. Vandewater was President of the Company from February
1991 to September 1993 and served as its Executive Vice President from May 1990
until February 1991. From July 1988 until February 1990, Mr. Vandewater was an
Executive Vice President and Chief Operating Officer of Republic Health
Corporation (presently called OrNda Healthcorp).
Stephen T. Braun has served as Senior Vice President and General Counsel of
the Company since September 1993. Mr. Braun served as Vice President and General
Counsel of the Company from October 1991 until September 1993. From July 1987 to
October 1991, Mr. Braun practiced law with the law firm of Doherty, Rumble &
Butler, Professional Association, Saint Paul, Minnesota.
Victor L. Campbell has served as Senior Vice President of the Company since
February 1994. For more than five years prior to that time, Mr. Campbell served
as HCA's Vice President for Investor, Corporate, and Government Relations. Mr.
Campbell is currently Chairman of the Board of the Federation of American Health
Systems.
Thomas H. Cato has served as Senior Vice President -- Information Systems of
the Company since February 1994. Mr. Cato was Senior Vice President --
Information Services of HCA from April 1992 to February 1994. Mr. Cato was Vice
President -- Information Services of HCA from 1987 until April 1992.
16
David C. Colby has served as Senior Vice President, Chief Financial Officer
and Treasurer of the Company since February 1994. Mr. Colby has served as Chief
Financial Officer of the Company or its predecessors since July 1988. Mr. Colby
was elected Treasurer of the Company in November 1991.
Samuel A. Greco has served as Senior Vice President -- Financial Operations
of the Company since July 1992. Mr. Greco served as Senior Vice President of
Finance -- South Florida Division of the Company from November 1990 to July
1992. Mr. Greco was Chief Financial Officer of University Hospital, Tamarac,
Florida, which is owned and operated by the Company, from January 1990 to
November 1990. From 1980 to 1989, Mr. Greco held various administrative
positions with Florida Medical Center and several diagnostic centers and
physician offices.
Neil D. Hemphill has served as Senior Vice President -- Human Resources of
the Company since February 1994. Mr. Hemphill served as Vice President -- Human
Resources of the Company from June 1992 to February 1994. Mr. Hemphill was a
Director of Human Resources of OrNda Healthcorp from January 1985 to June 1992.
Richard A. Lechleiter has served as Vice President and Controller of the
Company since September 1993. Mr. Lechleiter served in the same capacity at both
Galen and Humana from September 1990 to September 1993. From July 1988 until
September 1990, Mr. Lechleiter was the Controller of Humana.
Joseph D. Moore has served as Senior Vice President -- Development of the
Company since February 1994. Mr. Moore was Senior Vice President -- Finance and
Development of HCA from January 1993 to February 1994. Mr. Moore was Senior Vice
President -- Development of HCA from April 1992 until January 1993 and Vice
President -- Development of HCA from 1980 until April 1992.
Lindy B. Richardson has served as Senior Vice President -- Marketing/Public
Affairs of the Company since February 1994. Ms. Richardson served as Vice
President -- Marketing/Public Affairs of the Company from September 1993 to
February 1994. Ms. Richardson served as Director of Marketing/Public Affairs for
both Galen and Humana from 1988 to September 1993.
Russell D. Schneider has served as Senior Vice President -- Market
Organization of the Company since September 1993. Mr. Schneider served as
President of the Company's Southwest Division from May 1990 to September 1993,
and as President of the Company's El Paso Division from May 1988 to May 1990.
Richard A. Schweinhart has served as Senior Vice President -- Finance of the
Company since September 1993. Mr. Schweinhart served as Senior Vice President --
Finance for both Galen and Humana from November 1992 to September 1993. Mr.
Schweinhart also served as Vice President -- Finance of Humana from 1988 until
November 1992.
17
ITEM 2. PROPERTIES.
The location and name of, and the number of licensed beds in, each of the
health care facilities owned by the Company or its subsidiaries at March 28,
1994, grouped by state, are set forth in the following table:
NUMBER OF
STATE CITY NAME LICENSED BEDS TYPE
- --------- ------------------------- -------------------------------------------------------- ------------- ---------
AK Anchorage Alaska Regional Hospital 238 M
AL Enterprise Medical Center Enterprise 135 M
Florence Florence Hospital 155 M
Montgomery East Montgomery Medical Center 150 M
Montgomery Montgomery Regional Medical Center 250 M
Muscle Shoals Medical Center Shoals 128 M
Russellville Northwest Medical Center 100 M
AR Little Rock Doctors Hospital (1) 341 M
AZ Phoenix Healthwest Regional Medical Center 302 M
Phoenix Paradise Valley Hospital 140 M
CA Anaheim West Anaheim Medical Center 243 M
Canoga Park West Hills Regional Medical Center 236 M
Huntington Beach Huntington Beach Medical Center 135 M
Pasadena Las Encinas Hospital 153 P
San Leandro San Leandro Hospital 136 M
Thousand Oaks Los Robles Regional Medical Center 204 M
CO Aurora Aurora Regional Medical Center 200 M
Littleton Columbine Psychiatric Center 80 P
Thornton North Suburban Medical Center 200 M
DE Newark Rockford Center 74 P
FL Aventura Aventura Hospital and Medical Center 458 M
Bradenton L.W. Blake Hospital 383 M
Brandon Brandon Hospital 250 M
Coral Springs Outpatient Surgery Center at Coral Springs -- OS
Crestview Okaloosa Cancer Care Center -- O
Dade City Dade City Hospital 120 M
Daytona Beach Daytona Medical Center 214 M
Destin Destin Hospital 50 M
Englewood Englewood Community Hospital 100 M
Ft. Myers Southwest Florida Regional Medical Center 400 M
Ft. Myers Gulf Coast Hospital 120 M
Ft. Pierce Lawnwood Regional Medical Center 335 M
Ft. Walton Beach Ft. Walton Beach Medical Center 247 M
Gainesville North Florida Regional Medical Center 267 M
Hudson Bayonet Point/Hudson Medical Center 256 M
Kissimmee Osceola Regional Hospital 169 M
Largo Medical Center Hospital 256 M
Margate Northwest Regional Hospital 150 M
Miami Cedars Medical Center 585 M
Miami Deering Hospital 260 M
Miami Grant Center of Deering 140 P
Miami Kendall Regional Medical Center (1) 412 M
Miami Kendall Therapy Center -- O
Miami Medical Park Diagnostic Center -- OD
18
NUMBER OF
STATE CITY NAME LICENSED BEDS TYPE
- --------- ------------------------- -------------------------------------------------------- ------------- ---------
FL Miami Surgical Park Center -- OS
Miami Victoria Pavilion 300 M
Miami Beach Miami Heart Institute-North 273 M
Miami Beach Miami Heart Institute-South 258 M
Naples Naples Rehab Center -- R
New Port Richey New Port Richey Hospital 414 M
Niceville Twin Cities Hospital 75 M
North Miami Beach North Miami Beach Surgical Center -- OS
Ocala Marion Community Hospital 230 M
Okeechobee Raulerson Hospital 101 M
Orange Park Orange Park Medical Center 224 M
Orlando Lucerne Medical Center 267 M
Palatka Putnam Community Hospital 161 M
Panama City Gulf Coast Hospital 176 M
Pembroke Pines Pembroke Pines Hospital 301 M
Pensacola West Florida Regional Medical Center 547 M
Plantation Westside Regional Medical Center 204 M
Pompano Beach Pompano Beach Medical Center 273 M
Port Charlotte Fawcett Memorial Hospital 254 M
Port St. Lucie Medical Center of Port St. Lucie 150 M
Sanford Central Florida Regional Hospital 226 M
Sarasota Doctors Hospital of Sarasota (2) 168 M
Spring Hill Oak Hill Hospital 204 M
St. Petersburg Northside Hospital 301 M
St. Petersburg St. Petersburg General Hospital 219 M
Tallahassee Tallahassee Community Hospital 180 M
Tamarac University Hospital 269 M
Tamarac University Pavilion 60 P
West Palm Beach Palm Beaches Medical Center 250 M
Winter Park Winter Park Memorial Hospital 339 M
GA Albany Palmyra Medical Centers 248 M
Atlanta Northlake Regional Medical Center 120 M
Atlanta West Paces Medical Center (1)(3) 294 M
Augusta Augusta Oncology Center -- O
Augusta Augusta Regional Medical Center 374 M
Augusta Columbia County Ambulatory Surgery Center -- OS
Augusta West Augusta Imaging Center -- OD
Cartersville Cartersville Medical Center 80 M
Columbus Hughston Sports Medicine Hospital 100 M
Dublin Fairview Park Hospital (3) 190 M
Lithia Springs Parkway Medical Center 304 M
Macon Coliseum Medical Centers 250 M
Macon Coliseum Psychiatric Hospital 92 P
Newnan Peachtree Regional Hospital 144 M
Rome Redmond Regional Medical Center 201 M
Snellville Eastside Medical Center 122 M
IL Chicago Chicago Lakeshore Hospital 150 P
Chicago Grant Hospital 479 M
Chicago Michael Reese Hospital and Medical Center 955 M
Forest Park Riveredge Hospital 210 P
19
NUMBER OF
STATE CITY NAME LICENSED BEDS TYPE
- --------- ------------------------- -------------------------------------------------------- ------------- ---------
IL Hoffman Estates Hoffman Estates Medical Center 356 M
Hoffman Estates Woodland Hospital 100 P
IN Indianapolis The Women's Hospital -- Indianapolis 182 M
KS Dodge City Western Plains Regional Hospital 100 M
Overland Park Overland Park Regional Medical Center 400 M
Wichita Wesley Medical Center 760 M
KY Bowling Green Greenview Hospital 211 M
Frankfort King's Daughters Memorial Hospital 190 M
Louisville Audubon Regional Medical Center 480 M
Louisville Southwest Hospital 150 M
Louisville Suburban Medical Center 380 M
Louisville University of Louisville Hospital (1) 404 M
Somerset Lake Cumberland Regional 227 M
LA Lafayette Cypress Hospital 116 P
Lake Charles Lake Area Medical Center 80 M
Lake Charles Surgicare of Lake Charles -- OS
Marksville Avoyelles Hospital 55 M
Monroe North Monroe Hospital 228 M
New Orleans DePaul Hospital 309 P
New Orleans Lakeland Medical Center 150 M
Oakdale Oakdale Community Hospital 60 M
Shreveport Highland Hospital 126 M
Springhill Springhill Medical Center 86 M
Ville Platte Ville Platte Medical Center 124 M
Winnfield Winn Parish Medical Center 103 M
MO Independence Independence Regional Health Center 366 M
Kansas City Research Psychiatric Center 100 P
NH Derry Parkland Medical Center 86 M
Portsmouth Portsmouth Regional Hospital (3) 144 M
Portsmouth Portsmouth Pavilion 65 P
NM Albuquerque Heights Psychiatric Hospital 92 P
Carlsbad Guadalupe Medical Center 138 M
Hobbs Lea Regional Hospital 250 M
NV Las Vegas Sunrise Hospital & Medical Center 688 M
NC Fayetteville Highsmith-Rainey Memorial Hospital (1) 150 M
Raleigh Holly Hill Hospital 108 P
Raleigh Raleigh Community Hospital 230 M
OK Enid St. Mary's Hospital (1)(3) 277 M
Oklahoma City Presbyterian Hospital 396 M
SC Aiken Aiken Regional Medical Center 225 M
Charleston Trident Regional Medical Center 281 M
Myrtle Beach Grand Strand General Hospital 172 M
Summerville Summerville Medical Center 80 M
Summerville Summerville Medical Center -- Downtown -- O
TN Athens Athens Community Hospital 118 M
Chattanooga Parkridge Medical Center 296 M
Chattanooga Valley Psychiatric Hospital 118 P
20
NUMBER OF
STATE CITY NAME LICENSED BEDS TYPE
- --------- ------------------------- -------------------------------------------------------- ------------- ---------
TN East Ridge East Ridge Hospital 128 M
Jackson Regional Hospital of Jackson 166 M
Kingsport Indian Path Medical Center 295 M
Kingsport Indian Path Pavilion 61 P
Martin Volunteer General Hospital 100 M
Nashville Centennial Medical Center 656 M
Nashville Centennial Medical Center/Parthenon Pavilion 162 P
Nashville Donelson Hospital 218 M
Nashville Southern Hills Medical Center 180 M
Nashville Vanderbilt Child and Adolescent Psychiatric Hospital
(1)(3) 88 P
TX Abilene Abilene Regional Medical Center 160 M
Arlington Arlington Medical Center 287 M
Austin South Austin Medical Center 164 M
Beaumont Beaumont Neurological Hospital 131 P
Beaumont Beaumont Regional Medical Center 250 M
Bryan Brazos Valley Medical Center 100 M
Bryan Brazos Valley Surgical Center -- OS
Corpus Christi Bay Area Medical Center 144 M
Corpus Christi Bayview Hospital 68 P
Corpus Christi Doctors Regional Medical Center 271 M
Corpus Christi Rehabilitation Hospital of South Texas 80 R
Corpus Christi Surgicare Specialty Hospital of Corpus Christi -- OS
Corsicana Navarro Regional Hospital 185 M
Dallas Medical City Dallas Hospital (1) 555 M
Denton Denton Community Hospital 104 M
El Paso Columbia Back Institute -- O
El Paso Columbia Behavioral Center 125 P
El Paso Columbia Diagnostic Centers -- OD
El Paso Columbia Life Care Center -- O
El Paso Columbia Medical Center -- East 235 M
El Paso Columbia Medical Center -- West 252 M
El Paso Columbia Physical Therapy Centers -- R
El Paso Columbia Regional Oncology Center -- O
El Paso Columbia Rehabilitation Hospital 40 R
Ft. Worth Medical Plaza Hospital 338 M
Houston Bellaire General Hospital 349 M
Houston Champions Residential Treatment Center 48 P
Houston Heights Hospital 209 M
Houston Medical Center Hospital 281 M
Houston MRI Southwest -- OD
Houston Rosewood Medical Center 231 M
Houston Sam Houston Memorial Hospital 256 M
Houston Spring Branch Medical Center 365 M
Houston West Houston Medical Center 232 M
Houston Women's Hospital of Texas 198 M
Lewisville Lewisville Hospital (1) 148 M
McAllen Rio Grande Regional Hospital 220 M
North Richland Hills North Hills Medical Center 152 M
Plano Medical Center of Plano 267 M
21
NUMBER OF
STATE CITY NAME LICENSED BEDS TYPE
- --------- ------------------------- -------------------------------------------------------- ------------- ---------
TX San Antonio Metropolitan Hospital 273 M
San Antonio San Antonio Regional Hospital 416 M
San Antonio Village Oaks Medical Center 112 M
San Antonio Women's and Children's Hospital 150 M
Silsbee Silsbee Doctors Hospital 69 M
Webster Clear Lake Regional Medical Center 459 M
UT Layton Davis Hospital and Medical Center 120 M
Salt Lake City St. Mark's Hospital 306 M
VA Falls Church Dominion Hospital 100 P
Hampton Peninsula Hospital 125 P
Petersburg Poplar Springs Hospital 100 P
Reston Reston Hospital Center 127 M
Richlands Clinch Valley Medical Center 200 M
Richmond Chippenham Hospital 470 M
Richmond Henrico Doctors Hospital 340 M
Richmond Johnston-Willis Hospital 292 M
Salem Lewis-Gale Hospital 406 M
Salem Lewis-Gale Psychiatric Center (1) 145 P
WV Beckley Raleigh General Hospital 275 M
Bluefield St. Luke's Hospital 79 M
Huntington River Park Hospital 165 P
Hurricane Putnam General Hospital 68 M
Ronceverte Greenbrier Valley Medical Center 122 M
INTERNATIONAL
UK London The Wellington Hospital 121 M
London The Wellington Hospital II 124 M
SZ Geneva Hopital de la Tour et Pavillon Gourgas 242 M
M -- General, Acute Care
P -- Psychiatric
OD -- Outpatient Diagnostics/Imaging
OS -- Outpatient Surgery
O -- Outpatient Care
R -- Rehabilitation/Physical Therapy
- ------------------------
(1) Held pursuant to lease. The Company has options to purchase many of its
leased hospitals at the end of the lease terms.
(2) On October 1, 1990 the Company contributed this hospital to a limited
partnership (the "LP") in which it is a 35% limited partner. The LP
currently is seeking regulatory approval to build a replacement facility
for the current hospital facility. The Company receives a fixed percentage
of cash flow from the current hospital and will receive 35% of all cash
distributions from operations of the replacement hospital and any
ancillary businesses of the LP. The Company also manages the current
hospital and will manage the replacement hospital on a fixed fee basis. On
March 4, 1994, the Company entered into an agreement to purchase the
assets of the hospital from the LP.
(3) The former owner of this hospital or a successor thereto or affiliate
thereof either has a current option to purchase the hospital from the
Company at a previously agreed-upon amount or will have such option during
certain future periods.
22
The Company owns and maintains its headquarters in approximately 110,000
square feet of office space located in Louisville, Kentucky. In addition, the
Company maintains offices in approximately 400,000 square feet of office space
in four office buildings owned by the Company in Nashville, Tennessee.
The Company also operates medical office buildings in conjunction with its
hospitals. These office buildings are primarily occupied by physicians who
practice at the Company's hospitals. These office buildings are generally
operated at a loss.
The Company's headquarters, hospitals and other facilities are suitable for
their respective uses and are, in general, adequate for the Company's present
needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is currently, and from time to time, subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries or for wrongful restriction of, or interference with,
physicians' staff privileges. In certain of these actions the claimants have
asked for punitive damages against the Company, which are usually not covered by
insurance. In the opinion of management, the ultimate resolution of any of these
pending claims and legal proceedings will not have a material adverse effect on
the Company's results of operations or financial position.
On December 10, 1992 and December 15, 1992, respectively, two virtually
identical purported class action lawsuits (BERGER V. ROGER E. MICK ET AL., 92
CIV. 8960, United States District Court, Southern District of New York and FOX
V. ROGER E. MICK ET AL., 92 CIV 9139, United States District Court, Southern
District of New York) were filed by, respectively, holders of 400 and 500 shares
of HCA's Class A Common Stock against HCA, three of its officers and/or
directors (Messrs. Thomas F. Frist, Jr., Roger E. Mick and Donald J. Israel) and
the underwriters of its February 1992 initial public offering of Class A Common
Stock, on behalf of all purchasers of HCA's Class A Common Stock from the time
of the initial public offering (February 26, 1992) until HCA issued a press
release in respect of its psychiatric division restructuring on September 18,
1992. In the lawsuits it is alleged that HCA failed to disclose material adverse
financial information regarding its psychiatric division in its February 1992
offering prospectus in respect of such initial public offering and in HCA's
subsequent Forms 10-Q for the quarters ended March 31 and June 30, 1992.
Violations of the Securities Act of 1933 and of the Securities Exchange Act of
1934 are alleged. Damages are unspecified. In June 1993 the court granted HCA's
motion to transfer both lawsuits to the United States District Court for the
Middle District of Tennessee. After such transfer, the Tennessee District Court
dismissed the FOX lawsuit and joined the plaintiff of the FOX lawsuit as a party
plaintiff to the BERGER lawsuit. HCA's motion to dismiss the BERGER lawsuit is
still pending. While the Company cannot predict with certainty the outcome of
this proceeding, the Company, based upon information currently available,
believes that this proceeding is without merit.
A class action styled MARY FORSYTH ET AL. V. HUMANA INC. ET AL., Case
#CV-S-89-249-PMP (L.R.L.), was filed on March 29, 1989, in the United States
District Court for the District of Nevada (the "Forsyth" case). On August 12,
1991, a Second Amended Complaint was filed in the Forsyth case which
significantly increased the amount of damages claimed by the plaintiffs in
previously filed complaints. The claimed damages increased from $10 million to
$84,520,143 in connection with a count which alleges a violation of the Employee
Retirement Income Security Act (the "ERISA Count"); from $10 million to
$181,034,570 (before trebling) in connection with an alleged violation of the
Sherman Anti-Trust Act (the "Anti-Trust Count"); and from $10 million to
$181,034,570 (before trebling) for an alleged violation of the Racketeer
Influenced and Corrupt Organization Act (the "RICO Count"). In late March 1992,
as part of the discovery process, the plaintiffs provided information in regard
to their calculation of damages which indicates they are seeking recovery of
$49,440,000 of damages plus approximately $15,396,000 of interest in the ERISA
Count and $103,562,165 of damages (before trebling) plus approximately
$31,800,000 of interest in the RICO Count. Specific amounts were not readily
apparent for the Anti-Trust Count but it appears the plaintiffs believe their
23
claimed damages in the Anti-Trust Count would be similar to those in the RICO
Count. The ERISA Count, which is being asserted by the Co-Payer Class, claims
that Humana Inc. ("Humana") violated a fiduciary duty in connection with (i) the
calculation of co-insurance payments required under policies issued by Humana's
insurance subsidiary ("Humana Insurance") for insureds who were treated at
Sunrise Hospital in Las Vegas (now owned by the Company), and (ii) payments to
the hospital by Humana Insurance. The Anti-Trust Count, which is being asserted
by the Premium Payer Class, alleges that Sunrise Hospital has monopolized or has
attempted to monopolize the for-profit, acute care hospital services market in
Clark County, Nevada, and that Humana Insurance engaged in predatory pricing in
connection with the sale of insurance policies to members of such class. The
plaintiffs have also indicated damages with respect to the Co-Payer Class. The
RICO Count, which is being asserted by both the Premium Payer and Co-Payer
Classes, alleges fraud in connection with (i) the sale of insurance policies to
members of the Premium Payer Class and (ii) the calculation of the co-insurance
payments. On June 22, 1992, defendants filed a Motion for Summary Judgment on
all three counts of the Complaint. On July 21, 1993, Summary Judgment was
entered in favor of defendants on all counts, although the Court allowed the
Co-Payer Class to file a Third Amended Complaint. On August 24, 1993, the
plaintiffs filed a Third Amended Complaint against Humana Insurance, seeking to
recover at least $2,000,000, plus interest, which represents the difference
between their co-insurance payments and what the payments would have been if
calculated based on the discounted payments made by Humana Insurance to Sunrise
Hospital. Pursuant to an Assumption of Liabilities and Indemnification Agreement
entered into in connection with the Spinoff, Humana assumed approximately 39%
and Galen assumed approximately 61% of all liabilities, costs and expenses
arising out of certain identified legal proceedings and claims, including the
Forsyth case.
On April 22, 1993, an alleged stockholder of Galen filed a purported
stockholder derivative action in the Court of Chancery of the State of Delaware,
County of New Castle, styled LEWIS V. AUSTEN, ET AL., Civil Action No. 12937.
The action was purportedly brought on behalf of Galen and Humana against all of
the directors of both companies at the time of the Spinoff alleging, among other
things, that the defendants had improperly amended Humana's existing stock
option plans in connection with the Spinoff. The plaintiff claims that the
amendment to the stock option plans constituted a waste of corporate assets to
the extent that employees of such company received options in the stock of the
other company. (The challenged amendment to the plans was approved by Humana's
stockholders at the 1993 Annual Meeting of Stockholders, at which time Galen was
a wholly owned subsidiary of Humana.) The plaintiff requests, among other
things, an injunction prohibiting the exercise of Humana stock options by
Company personnel and the exercise of Company stock options by Humana personnel
and an award of damages. The Company believes that the complaint is without
merit.
A purported class action has been filed against HCA, the directors of HCA,
and the Company, in the Delaware Court of Chancery entitled 7547 PARTNERS V. HCA
HOSPITAL CORP. OF AMERICA, JACK O. BOVENDER, JR., THOMAS F. FRIST, JR., CHARLES
T. HARRIS, III, CHARLES J. KANE, RICHARD E. RAINWATER, CARL E. REICHARDT, FRANK
S. ROYAL AND COLUMBIA HEALTHCARE CORPORATION, C.A. No. 13159. The complaint,
brought by a purported stockholder of HCA, alleges that the defendants breached
their fiduciary duties to plaintiff and other members of the purported class and
also alleges that the defendants aided and abetted a gross abuse of trust. The
complaint alleges that the directors of HCA wrongfully failed to hold an open
auction and encourage bona fide bids for HCA and failed to take action to
maximize value to HCA stockholders. The complaint seeks rescission of the HCA
Merger or rescissionary damages. The complaint also seeks monetary damages of an
unspecified amount and attorneys' and experts' fees. The Company believes that
the complaint is without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1993.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been primarily traded on the New York Stock
Exchange (the "NYSE") (symbol "COL") since July 14, 1993. Prior to that date,
the Company's Common Stock was traded through the National Association of
Securities Dealers Automated Quotation National Market System ("NASDAQ/NMS").
The table below sets forth, for the calendar quarters indicated, the high and
low sales prices per share reported on the NYSE Composite Tape or NASDAQ/NMS for
the Company's Common Stock. The information with respect to NASDAQ/NMS
quotations was obtained from the National Association of Securities Dealers,
Inc. and reflects interdealer prices, without retail markup, markdown or
commissions and may not represent actual transactions.
HIGH LOW
--------- ---------
1992:
First Quarter.................................................................. $ 21.25 $ 16.50
Second Quarter................................................................. 22.00 16.25
Third Quarter.................................................................. 19.25 16.25
Fourth Quarter................................................................. 21.75 13.75
1993:
First Quarter.................................................................. 24.50 16.25
Second Quarter................................................................. 27.75 19.25
Third Quarter.................................................................. 31.00 25.38
Fourth Quarter................................................................. 33.88 27.00
The Company's registrar and transfer agent for its Common Stock is First
Union National Bank of North Carolina. At the close of business on February 28,
1994, there were 15,600 holders of record of the Company's Common Stock and one
holder of record of the Company's Nonvoting Common Stock.
The Company commenced the payment of a quarterly dividend of $.03 per share
in the fourth quarter of 1993. Prior to that time, the Company did not pay any
cash dividends. While it is the present intention of the Company's Board of
Directors to continue paying a quarterly dividend of $.03 per share, the
declaration and payment of future dividends by the Company will depend upon many
factors, including the Company's earnings, financial condition, business needs,
capital and surplus and regulatory considerations.
25
ITEM 6. SELECTED FINANCIAL DATA.
COLUMBIA HEALTHCARE CORPORATION
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS:
Revenues...........................