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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-29816
Triad Hospitals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2816101
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13455 Noel Road, Suite 2000
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(972) 789-2700
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 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
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock of the latest practical date.
As of March 15, 2002, the number of shares of common stock of Triad Hospitals,
Inc. outstanding was 72,365,176. As of March 15, 2002 the aggregate market value
of the common stock held by non-affiliates was approximately $2,245,755,666. For
purposes of the foregoing calculation only, the Registrant's directors,
executive officers, and the Triad Hospitals, Inc. Retirement Savings Plan have
been deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2002 Annual Meeting of
Stockholders of Triad Hospitals, Inc. are incorporated by reference into Part
III hereof.
Part I
Item 1. Business
General
Triad Hospitals, Inc. is one of the largest publicly owned hospital
companies in the United States and provides health care services through
hospitals and ambulatory surgery centers that it owns and operates in small
cities and selected urban markets primarily in the southern, midwestern and
western United States. Triad's hospital facilities include 46 general acute care
hospitals and 14 ambulatory surgery centers located in the states of Alabama,
Arizona, Arkansas, California, Indiana, Kansas, Louisiana, Mississippi,
Missouri, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, Texas and West
Virginia. One hospital included among these facilities is operated through a
50/50 joint venture that is not consolidated for financial reporting purposes.
Triad is also a minority investor in three joint ventures that own seven general
acute care hospitals in Georgia and Nevada. Through its wholly-owned subsidiary,
Quorum Health Resources, LLC ("QHR"), Triad also provides management and
consulting services to independent general acute care hospitals located
throughout the United States. The terms "we", "our", "the Company", "us", and
"Triad" refer to the business of Triad Hospitals, Inc. and its subsidiaries as a
consolidated entity, except where it is clear from the context that such terms
mean only Triad Hospitals, Inc.
Triad's general acute care hospitals typically provide a full range of
services commonly available in hospitals, such as internal medicine, general
surgery, cardiology, oncology, neurosurgery, orthopedics, obstetrics, diagnostic
and emergency services. These hospitals also generally provide outpatient and
ancillary health care services such as outpatient surgery, laboratory,
radiology, respiratory therapy, cardiology and physical therapy. Outpatient
services also are provided by ambulatory surgery centers operated by Triad. In
addition, some of Triad's general acute care hospitals have a limited number of
licensed psychiatric beds and provide psychiatric skilled nursing services.
In addition to providing capital resources and general management, Triad
makes available a variety of management services to its health care facilities.
These services include ethics and compliance programs, national supply and
equipment purchasing and leasing contracts, accounting, financial and clinical
systems, governmental reimbursement assistance, information systems, legal
support, personnel management, internal audit, access to regional managed care
networks, resource management, and strategic and business planning.
Our Formation
Triad was incorporated under the laws of the State of Delaware in 1999. On
May 11, 1999, Triad became an independent, publicly traded company owning and
operating the healthcare service business which had comprised the Pacific Group
of HCA, Inc. ("HCA"). On that date, Triad was spun-off from HCA through the
distribution of all outstanding shares of Triad common stock to the stockholders
of HCA. Information regarding HCA in this Annual Report is derived from reports
and other information filed by HCA with the Securities and Exchange Commission
(the "Commission").
On April 27, 2001, Triad completed its merger of Quorum Health Group, Inc.
("Quorum") with and into Triad for approximately $2.4 billion in cash, stock and
assumption of debt. Each former Quorum shareholder became entitled to receive
$3.50 in cash and 0.4107 shares of Triad common stock for each outstanding share
of Quorum stock, plus cash in lieu of fractional shares of Triad common stock.
See "NOTE 3 - ACQUISITIONS" in the consolidated financial statements for a more
detailed description of the transaction.
The common stock of Triad is listed on the New York Stock Exchange (Symbol:
TRI). Information about the distribution and certain indemnification and other
arrangements entered into by Triad and HCA in connection with the distribution
is included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the consolidated financial statements.
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Principal Executive Offices
Our principal executive offices are located at 13455 Noel Road, 20th Floor,
Dallas, Texas 75240, and our phone number is (972) 789-2700. Our corporate
Website address is http://www.triadhospitals.com. Information contained on our
Website is not part of this Annual Report.
Triad's Markets
Most of Triad's owned facilities are located in two distinct types of
markets primarily in the southern, midwestern and western United States. Over
three-quarters of Triad's owned hospitals are located in small cities, generally
with populations of less than 150,000 residents and located more than 60 miles
from a major urban center. Triad's hospitals are usually either the only
hospital or one of two or three hospitals in the community. The remainder of
Triad's owned hospitals are located in selected larger urban areas. Triad owns
and operates hospitals in 16 states. Approximately half of Triad's facilities
are located in the states of Alabama, Indiana, and Texas.
Through QHR its separate contract management services and consulting
subsidiary, Triad also provides management services to independent hospitals and
hospital systems located throughout the United States.
Small City Markets
Triad believes that the small cities of the southern, midwestern and
western United States are attractive to health care service providers as a
result of favorable demographic, economic and competitive conditions. Thirty-six
of the 46 general acute care hospitals that Triad operated as of December 31,
2001 were located in these small city markets. Of these, 19 hospitals were
located in communities where they were the sole hospital and 17 hospitals were
located in communities where they were one of only two or three hospitals. Triad
believes that small city markets can support specialty services which generally
produce higher revenues than other health care services. In addition, in small
city markets, managed care penetration is generally lower than in urban areas,
and Triad believes that it is in a better position to negotiate more favorable
managed care contracts in these markets.
While Triad's hospitals located in these small cities are more likely to
face direct competition than facilities located in smaller rural markets, that
competition often is limited to a single competitor in the relevant market.
Triad believes that the smaller populations and relative strength of the one or
two acute care hospitals in these markets also limit the entry of alternate
non-hospital providers, such as outpatient surgery centers or rehabilitation or
diagnostic imaging centers, as well as managed care plans.
Selected Larger Urban Markets
Ten of the 46 general acute care hospitals that Triad operated as of
December 31, 2001 are located in selected larger urban markets of the southern,
midwestern and western United States.
In addition to the direct competition Triad faces from other health care
providers in its markets, there are higher levels of managed care penetration in
the larger urban markets (a higher relative proportion of the market population
enrolled in managed care programs such as HMOs and PPOs).
Business Strategy
Triad's primary objective is to provide quality health care services and
simultaneously generate strong financial performance using the following
strategies:
Unique Operating Strategy
. Operating Strategy Components
. Develop strong relationships with the physicians in our communities.
. Maximize community involvement by empowering local Board of Trustees.
. Build strategic relationships with employees, including our nurses.
. Launch quality initiatives to maximize patient, physician and employee
satisfaction
. Operating Strategy Objectives
. Grow volumes through the operating strategy and by adding specialty
and outpatient services.
. Improve reimbursement rates by leveraging improved market positions.
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. Increase operating margins through volume growth and collaborative
resource management.
. Increase the margins methodically without being the "low cost"
provider.
Capital Investment Strategy
. Invest capital in same-facility expansions, new-facility development and
selected acquisitions.
. Enhance and expand healthcare services and simultaneously generate
appropriate financial returns.
. Focus on small cities and selected larger urban markets compatible with
Triad's operating strategies.
. Form joint ventures with other providers, including not-for-profit
healthcare providers.
Contract Management and Consulting Services Strategy
. Grow core business by adding new contracts with independent hospitals.
. Negotiate new and renewal contract terms that achieve an appropriate
balance of risk and reward.
. Acquire and invest selectively in independent hospitals, if invited.
Operations
Triad's general acute care hospitals typically provide a full range of
services commonly available in hospitals, such as internal medicine, general
surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well
as diagnostic and emergency services. These hospitals also generally provide
outpatient and ancillary health care services such as outpatient surgery,
laboratory, radiology, respiratory therapy, cardiology and physical therapy.
Outpatient services also are provided by ambulatory surgery centers operated by
Triad. In addition, certain of Triad's general acute care hospitals have a
limited number of licensed psychiatric beds.
Each of Triad's hospitals is governed by a local Board of Trustees, which
is composed entirely of local community leaders and members of the hospital's
medical staff. The Board of Trustees establishes policies concerning the
medical, professional and ethical practices at each hospital, monitors such
practices, and is responsible for ensuring that these practices conform to
established standards. Triad maintains 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.
Services and Utilization
Hospital revenues depend upon inpatient occupancy levels, 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, such as medical/surgical,
intensive care or psychiatric, the payer and the geographic location of the
hospital.
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Triad believes that important factors relating to the overall utilization
of a hospital include the quality and market position of the hospital and the
number, quality and specialties of physicians providing patient care within the
facility. Generally, Triad believes that the ability of a hospital to meet the
health care needs of its community 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, market penetration of managed care
programs and the availability of reimbursement programs such as Medicare and
Medicaid. Utilization across the industry also is being affected by improved
treatment protocols as a result of advances in medical technology and
pharmacology.
The following table sets forth certain statistics for hospitals owned by
Triad for each of the past five years. The comparability of the statistics has
been affected by the acquisition of Quorum on April 27, 2001. Medical/surgical
hospital operations are subject to certain seasonal fluctuations, including
decreases in patient utilization during holiday periods and increases in patient
utilization during the cold weather months.
Years ended December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Number of hospitals at end of period (a) ... 46 28 29 39 39
Number of licensed beds at end of period (b) 7,557 3,520 3,722 5,902 5,859
Weighted average licensed beds (c) ......... 6,379 3,633 4,745 5,905 5,860
Admissions (d) ............................. 233,888 128,645 145,889 169,590 172,926
Adjusted admissions (e) .................... 396,256 220,590 241,547 276,771 275,125
Average length of stay (days) (f) .......... 4.8 4.4 4.5 4.9 4.9
Average daily census (g) ................... 3,060 1,532 1,818 2,263 2,326
Occupancy rate (h) ......................... 54% 49% 55% 44% 44%
(a) This table does not include any operating statistics for non-consolidating
joint ventures and facilities leased to others.
(b) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(c) Represents the average number of licensed beds weighted based on periods
owned.
(d) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(e) Adjusted admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "adjusts" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(f) Represents the average number of days admitted patients stay in Triad's
hospitals.
(g) Represents the average number of patients in Triad's hospital beds each
day.
(h) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms.
Triad's hospitals have historically experienced shifts from inpatient to
outpatient care as well as decreases in average lengths of inpatient stay,
primarily as a result of improvements in technology and clinical practices and
hospital payment changes by Medicare, insurance carriers and self-insured
employers. Some of these indicators increased during 2001 due to the acquisition
of Quorum, but Triad believes that these shifts will continue in the future.
These hospital payment changes generally encourage the utilization of
outpatient, rather than inpatient,
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services whenever possible, and shortened lengths of stay for inpatient care.
Triad has responded to the outpatient trend by enhancing its hospitals'
outpatient service capabilities, including:
(1) dedicating resources to its freestanding ambulatory surgery centers at
or near certain of its hospital facilities,
(2) reconfiguring certain hospitals to more effectively accommodate
outpatient treatment by, among other things, providing more convenient
registration procedures and separate entrances, and
(3) restructuring existing surgical capacity to allow a greater number and
range of procedures to be performed on an outpatient basis.
Triad expects the growth in outpatient services to continue in the future.
Triad's facilities will continue to emphasize those outpatient services that can
be provided on a quality, cost-effective basis and that Triad believes will
experience increased demand.
Sources of Revenue
Triad receives payment for patient services from the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, and HMOs, PPOs and other private insurers as well as directly
from patients. The approximate percentages of patient revenues of Triad's
facilities from such sources during the periods specified below were as follows:
Years Ended December 31,
---------------------------------
2001 2000 1999
----- ----- -----
Medicare .......................... 31.9% 29.6% 31.9%
Medicaid .......................... 4.4 6.4 6.9
Managed care plans ................ 28.9 31.0 32.7
Other sources ..................... 34.8 33.0 28.5
----- ----- -----
Total ............................. 100.0% 100.0% 100.0%
===== ===== =====
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. All of Triad'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. See "Reimbursement."
To attract additional volume, most of Triad's hospitals offer discounts
from established charges to certain large group purchasers of health care
services, including private insurance companies, employers, HMOs, PPOs and other
managed care plans. These discount programs limit Triad'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 private insurance plans, and HMOs or PPOs, but are responsible
for services not covered by such plans, 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 typically more difficult than from governmental or business
payers. For more information on the reimbursement programs on which Triad's
revenues are dependent, see "Reimbursement."
Hospital Management Services
QHR is a leading provider of management and consulting services to acute
care hospitals, providing management services to approximately 200 hospitals as
of December 31, 2001. QHR provides management services to independent hospitals
and hospital systems under management contracts and provides selected
consulting, educational and related services. In addition, QHR provides
turnaround management consulting services to distressed independent hospitals.
QHR assists hospitals in improving their financial performance and the scope of
their services. Most of the hospitals for which QHR performs management,
consulting or support services are
5
independent not-for-profit hospitals. These hospitals are generally located in
non-urban areas. Sixty-five percent (65%) of these hospitals have less than 100
beds. Upon entering into a management contract, QHR first assesses the
operations of the hospital, including the hospital's financial management, the
economic and population-related factors affecting the hospital's market,
physician relationships and staffing requirements. Then, based on its
assessment, QHR develops and recommends a management plan to the hospital's
governing board.
To implement the management plan adopted for each hospital, QHR provides
the hospital with personnel to serve as the hospital's chief executive officer
and, typically, a chief financial officer. Although these people are QHR
employees, they operate under the direction and control of the hospital's
governing body, and the balance of the hospital staff remain employees of the
hospital under the control and supervision of the hospital. QHR's hospital-based
team is supported by its regional and corporate management staff. QHR currently
has 22 regional offices located throughout the United States. QHR's regional
office staff is experienced in providing management services to hospitals of all
sizes in diverse markets throughout the United States. Each regional office is
responsible for the management services provided within its geographic area.
QHR's hospital management contracts generally have a term of three to five
years. QHR's management contract fees are based on amounts agreed upon by QHR
and the hospital's governing body, and generally are not related to the
hospital's revenues or other variables. Under QHR's hospital management
contracts, QHR is not responsible for hospital licensure, certificates of need,
liability coverage, capital expenditures or for other functions which are
normally the responsibility of a hospital's governing body.
QHR offers consulting and related educational and management services to
hospitals that are not part of its contract management program. QHR's consulting
services are directed at many of the operational needs of hospitals, including
accounts receivable management, health information management, human resources,
facility design and various operational services. QHR also provides consulting
services to large, sophisticated medical institutions that need hospital
management advice for specific issues.
Competition
The hospital industry is highly competitive. Triad competes with other
hospitals and health care providers for patients. The competition among
hospitals and other health care providers for patients has intensified in recent
years. In some cases, competing hospitals are more established than Triad's
hospitals. Certain of these competing facilities, particularly in urban markets,
offer services, including extensive medical research and medical education
programs, which are not offered by Triad's facilities. In addition, in certain
of the markets where Triad operates, there are large teaching hospitals which
provide highly specialized facilities, equipment and services which may not be
available at Triad's hospitals. Although some of Triad's hospitals are located
in geographic areas where they are currently the sole provider of general, acute
care hospital services in their communities, these hospitals also face
competition from other hospitals, including larger tertiary care centers.
Despite the fact that these competing hospitals may be as far as 30 to 50 miles
away, patients in these markets increasingly may migrate to these competing
facilities as a result of local physician referrals, managed care incentives or
personal choice.
In addition, some of the hospitals that compete with Triad are owned by
tax-supported governmental agencies or not-for-profit entities supported by
endowments and charitable contributions. These hospitals can make capital
expenditures without paying sales taxes, and are generally exempt from property
and income taxes. Triad also faces competition from other specialized care
providers, including outpatient surgery, orthopedic, oncology and diagnostic
centers.
State certificate of need laws, which place limitations on a hospital's
ability to expand hospital services and add new equipment, also may have the
effect of restricting competition. Five states in which Triad operates, Alabama,
Mississippi, Ohio, South Carolina and West Virginia, have certificate of need
laws ("CON laws"). The application process for approval of covered services,
facilities, changes in operations and capital expenditures in these states is,
therefore, highly competitive. In those states which have no CON laws or which
set relatively high thresholds before expenditures become reviewable by state
authorities, competition in the form of new services, facilities and capital
spending is more prevalent.
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The number and quality of the physicians on a hospital's staff are
important factors in a hospital's competitive advantage. Physicians decide
whether a patient is admitted to the hospital and the procedures to be
performed. Triad 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.
Admitting physicians may be on the medical staff of other hospitals in addition
to those of Triad's hospitals.
One element of Triad's business strategy is expansion through the
acquisition of acute care hospitals in select markets. The competition to
acquire hospitals is significant. Triad intends to acquire, on a selective
basis, hospitals that are similar to those currently owned and operated.
However, suitable acquisitions may not be accomplished on favorable terms.
Another major factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services, such as HMOs and PPOs, which attempt to direct and control
the use of hospital services through managed care programs and to obtain
discounts from hospitals' established charges. Employers and traditional health
insurers are also 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.
QHR also faces competitive challenges in the area of management services.
In seeking management services, hospitals have a variety of alternatives.
Hospitals managed by hospital management companies represent less than 10% of
the total acute care hospitals in the United States. Most hospitals have their
own management staff. Some hospitals choose to obtain management services from
large, tertiary care facilities that create referral networks with smaller
surrounding hospitals.
Triad, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payers. As both private and government payers
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, federal and state efforts to reform the health care system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
Triad's facilities, equipment, personnel, rates and/or services in the future.
The hospital industry and Triad's hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
occupancy rates have historically been negatively affected by payer-required
pre-admission authorization, utilization review and payer pressure to maximize
outpatient and alternative health care delivery services for less acutely ill
patients. Admissions constraints, payer pressures and increased competition are
expected to continue. Triad endeavors to meet these challenges by expanding many
of its facilities to include outpatient centers, offering discounts to private
payer groups, upgrading facilities and equipment and offering new programs and
services.
Employees and Medical Staff
At December 31, 2001, Triad had approximately 33,000 employees, including
approximately 9,000 part-time employees, as well as approximately 600 employees
providing hospital management and consulting services. Employees at two
hospitals are currently represented by labor unions. Triad considers its
employee relations to be good. While Triad's non-union hospitals experience
union organizational activity from time to time, Triad does not expect such
efforts to materially affect its future operations. Triad's hospitals, like most
hospitals, have experienced labor costs rising faster than the general inflation
rate, primarily in nursing. There can be no assurance as to future availability
and cost of qualified medical personnel.
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Triad's hospitals are staffed by licensed physicians who have been admitted
to the medical staff of individual hospitals. Physicians generally are not
employees of Triad's hospitals although there are varying levels of employed
physicians in certain markets. Some physicians provide services in Triad'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 Triad'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 credentialing criteria. Members of the medical
staffs of Triad's hospitals located in areas where there are other hospitals
often also serve on the medical staffs of other hospitals and may terminate
their affiliation with a hospital at any time.
Triad's Ethics and Compliance Program
It is Triad's policy that its business be conducted with integrity and in
compliance with the law. Triad has developed a corporate-wide ethics and
compliance program, which focuses on all areas of policy and regulatory
compliance, including physician recruitment, reimbursement and cost reporting
practices and laboratory operations.
This ethics and compliance program is intended to assure that high
standards of conduct are maintained in the operation of Triad's business and to
help assure that policies and procedures are implemented so that employees act
in full compliance with all applicable laws, regulations and company policies.
Under the ethics and compliance program, Triad provides initial and periodic
legal compliance and ethics training to every employee, reviews various areas of
Triad's operations, and develops and implements policies and procedures designed
to foster compliance with the law. Triad regularly monitors its ongoing
compliance efforts. The program also includes a mechanism for employees to
report, without fear of retaliation, any suspected legal or ethical violations
to their supervisors or designated compliance officers in Triad's hospitals, as
well as a national "hotline" to which employees can report, on an anonymous
basis if preferred, any suspected violations. Triad has also established a
separate committee of the Board of Directors to monitor the compliance program.
On November 1, 2001, Triad entered into a five-year corporate integrity
agreement with the Office of the Inspector General and agreed to maintain its
compliance program in accordance with the corporate integrity agreement. This
obligation could result in greater scrutiny by regulatory authorities.
Violations of the integrity agreement could subject Triad's hospitals to
substantial monetary penalties. Complying with the corporate integrity agreement
may impose expensive and burdensome requirements on certain operations which
could have a material adverse impact on Triad. The compliance measures and
reporting and auditing requirements for Triad's hospitals contained in the
integrity agreement include:
. Continuing the duties and activities of corporate compliance
officers and committees and maintaining a written code of conduct
and written policies and procedures;
. Providing general training on the compliance policy and the
agreement and specific training for the appropriate personnel on
billing, coding and cost report issues;
. Having an independent third party conduct periodic audits of
inpatient DRG coding and laboratory billing;
. Continuing a confidential disclosure program and compliance
hotline and implementing enhanced screening to ensure ineligible
employees and contractors are not hired;
. Reporting material deficiencies resulting in an overpayment by a
federal healthcare program and probable violations of certain
laws, rules and regulations; and
. Submitting annual reports to the Inspector General describing the
operations of the corporate compliance program for the past year.
Reimbursement
Medicare. Under the Medicare program, acute care hospitals generally
receive reimbursement under a prospective payment system ("PPS") for inpatient
hospital services. Psychiatric, specially designated children's hospitals and
certain designated cancer research hospitals, as well as psychiatric units that
are distinct parts of a
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hospital and meet the Centers for Medicare and Medicaid Services ("CMS")
criteria for exemption, are currently exempt from PPS and are reimbursed on a
cost-based system, subject to certain cost limits known as TEFRA limits.
Under PPS, fixed payment amounts per inpatient discharge are established
based on the patient's assigned diagnosis related group ("DRG"). DRGs classify
treatments for illnesses according to the estimated intensity of hospital
resources necessary to furnish care for each principal diagnosis. DRG rates have
been established for each hospital participating in the Medicare program, are
based upon a statistically normal distribution of severity and are adjusted for
area wage differentials but do not consider a specific hospital's costs. DRG
rates are updated and re-calibrated annually and have been affected by several
recent Federal enactments. The index used to adjust the DRG rates, known as the
"market basket index," gives consideration to the inflation experienced by
hospitals (and entities outside of the health care industry) in purchasing goods
and services. Although for several years the percentage increases to the DRG
rates have been lower than the percentage increases in the costs of goods and
services purchased by hospitals, the Benefits Improvement Protection Act of 2000
("BIPA") has updated the rates hospitals receive so that hospitals generally
received the market basket index minus 1.1% for discharges occurring on or after
October 1, 2000 and before March 31, 2001 or the market basket index plus 1.1%
for discharges occurring on or after April 1, 2001 and before October 1, 2001.
Triad received approximately $16.0 million of additional reimbursement from BIPA
in 2001 and anticipates the receipt of approximately $17.0 million of additional
reimbursement in 2002. For Federal fiscal years 2002 and 2003, hospitals
generally will receive the market basket index minus 0.55%. For Federal fiscal
year 2004, hospitals generally will receive the full market basket. Future
legislation may decrease the rate of increase for DRG payments, which could make
it more difficult to grow revenue and to maintain or improve operating margins.
Until August 1, 2000, outpatient services provided at general, acute care
hospitals typically were reimbursed by Medicare based on a fee schedule. The
Balanced Budget Act of 1997 ("BBA") contains provisions that affect outpatient
hospital services, including a requirement that CMS adopt a PPS system for
outpatient hospital services, which became effective August 1, 2000. Based on
provisions of BIPA, the fee schedule is to be updated by the market basket minus
0.8% and 1.0% in Federal fiscal years 2001 and 2002, respectively, and market
basket for Federal fiscal years 2003 and beyond. Similarly, effective January 1,
1999, therapy services rendered by hospitals to outpatients and inpatients not
reimbursed under Medicare are reimbursed according to the Medicare Physician fee
schedule.
Payments for Medicare skilled nursing facility services and home health
services historically have been paid based on costs, subject to certain
adjustments and limits. Although BBA mandates a PPS system for skilled nursing
facility services, home health services and inpatient rehabilitation hospital
services, BIPA has made adjustments to the PPS payments for these health care
service providers. Specifically, for skilled nursing facilities, BBA set the
annual inflation update at the market basket index minus 1.0% in 2001 and 2002.
However, BIPA adjusts the update to the full market basket index in 2001 and the
market basket index minus 0.5% in 2002 and 2003. In addition to the creation of
a PPS system for skilled nursing, the BBA also institutes consolidated billing
for skilled nursing facility services, under which payments for most
non-physician services for beneficiaries no longer eligible for skilled nursing
facility care will be made to the facility, regardless of whether the item or
service was furnished by the facility, by others under arrangement, or under any
other contracting or consulting arrangement. Consolidated billing is being
implemented on a transition basis. As of December 31, 2001, 24 of Triad's
hospitals operated skilled nursing facilities.
In addition to establishing a PPS system for home health services, BBA
requires a 15% payment reduction in payment limits to home health agencies.
However, BIPA delayed the implementation of this reduction until 2002. As of
December 31, 2001, less than 1% of Triad's revenues were derived from home
health services.
Payments to PPS-exempt hospitals and units, such as inpatient psychiatric
hospital services are based upon reasonable costs, subject to a cost per
discharge target. These limits are updated annually by a market basket index.
Significantly, BIPA increases payments to PPS-exempt hospitals. In particular,
total payments for rehabilitation hospitals in 2002 are to equal the amounts of
payments that would have been made if the rehabilitation PPS system had not been
enacted, and rehabilitation facilities are able to make a one-time election
before the start of the PPS to be paid based on a fully phased-in PPS rate. In
addition, BIPA increases the incentive payments paid for inpatient
9
psychiatric services from 2% to 3%, raises the national cap on long term care
hospital reimbursement by 2% and increases the individual long-term care
hospital target amounts by 35%.
Currently, physicians are paid by Medicare according to the physician fee
schedule. However, physicians working in rural health clinics, such as those
maintained by Triad, are reimbursed for their professional and administrative
services through the rural health clinic subject to per visit limits unless the
rural health clinic is based at a rural hospital with less than 50 beds. There
are 20 rural health clinics affiliated with Triad's hospitals.
Medicare has special payment provisions for "sole community hospitals." A
sole community hospital is generally the only hospital in at least a 35-mile
radius. Eight of Triad's facilities qualify as sole community hospitals under
Medicare regulations. Special payment provisions related to sole community
hospitals include a higher reimbursement rate, which is based on a blend of
hospital-specific costs and a national reimbursement rate, and a 90% payment
"floor" for capital costs which guarantees the sole community hospital capital
reimbursement equal to 90% of capital cost. In addition, the TRICARE program has
special payment provisions for hospitals recognized as sole community hospitals
for Medicare purposes.
On November 19, 1999, Congress passed the Balanced Budget Refinement Act of
1999 (the "Refinement Act") to reduce certain of the perceived adverse effects
of the BBA on various health care providers. Among other things, the Refinement
Act did reduce certain outpatient PPS reimbursement reductions proposed by CMS
as a part of its implementation of a PPS for outpatient hospital services by
attempting to limit certain losses sustained through the implementation of such
system during the first three years of implementation. The Refinement Act also
provided certain reimbursement increases for certain skilled nursing facilities,
in part by allowing such facilities the option of choosing to be reimbursed at
the new Federal PPS rate for certain cost reporting periods beginning after
December 15, 1999, as opposed to the three-year phase-in described above. Triad
received approximately $3.0 million and $1.0 million in additional reimbursement
as a result of the Refinement Act in 2001 and 2000, respectively.
Medicaid. Most state Medicaid payments are made under a PPS, or under
programs which negotiate payment levels with individual hospitals. Medicaid
reimbursement is often less than a hospital's cost of services. Medicaid is
currently funded jointly by the state and the Federal governments. The Federal
government and many states 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 our hospitals.
Annual Cost Reports. All hospitals participating in the Medicare program,
whether paid on a reasonable cost basis or under PPS, are required to meet
certain financial reporting requirements. Federal regulations require submission
of annual cost reports covering medical costs and expenses associated with the
services provided by each hospital to Medicare beneficiaries. Review of
previously submitted annual cost reports and the cost report preparation process
are areas included in the ongoing government investigations of HCA. See
"Governmental Investigations - Governmental Investigation of HCA and Related
Litigation." The investigations, actions and claims affecting HCA relate to HCA
and its subsidiaries, including subsidiaries that prior to the spin-off from HCA
owned facilities now owned by Triad. It is too early to predict the outcome of
these investigations, but if Triad, or any Triad facility is found to be in
violation of Federal or state laws relating to Medicare, Medicaid or similar
program, Triad could be subject to substantial monetary fines, civil and
criminal penalties and exclusion from participation in the Medicare and Medicaid
programs. Any such sanctions could have a material adverse effect on Triad's
financial position and results of operations. HCA has agreed to indemnify Triad
in respect of losses arising from such government investigations for the period
prior to the spin-off. See "Governmental Investigations - Governmental
Investigation of HCA and Related Litigation" for more information regarding such
arrangement.
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to Triad 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 it
is common to contest issues raised in audits of prior years' reports. The due
dates for cost reports for cost reporting periods ending after August 31, 2000
have been delayed due to CMS not issuing the final payment schedules for
outpatient PPS. Triad has not filed cost reports for these periods, although the
estimated impact of filing these cost reports has been reflected in the
financial statements. The delay in filing these cost reports will extend the
time period of final determination of amounts earned. Pursuant to
10
the terms of the spin-off distribution agreement, Triad will be responsible for
the Medicare, Medicaid and Blue Cross cost reports, and associated receivables
and payables, for Triad's facilities for all periods ending after the spin-off.
HCA has agreed to indemnify Triad for any payments which it is required to make
with respect to the Medicare, Medicaid and Blue Cross cost reports for Triad
facilities operated by HCA prior to the spin-off relating to periods ending on
or prior to the spin-off and Triad agreed to indemnify HCA for and pay to HCA
any payments received by Triad relating to such cost reports.
Managed Care. Pressures to control the cost of health care have
historically resulted in increases in admissions attributable to managed care
payers, although admissions for managed care payers declined in 2001 due, in
part, to the Quorum acquisition. Triad expects that volumes related to managed
care payers will increase in the future. Triad generally receives lower payments
from managed care payers than from traditional commercial/indemnity insurers;
however, as part of its business strategy, Triad intends to take steps to
improve its managed care position. The percentage of Triad's revenues
attributable to managed care payers were 28.9%, 31.0% and 32.7% for the years
ended December 31, 2001, 2000 and 1999, respectively. See "Business Strategy"
for a more detailed discussion of such strategy.
Commercial Insurance. Triad hospitals provide services to some individuals
covered by private health care insurance. Private insurance carriers make direct
payments to such hospitals or, in some cases, reimburse their policy holders,
based upon the particular hospital's established charges and the particular
coverage provided in the insurance policy.
Commercial insurers are continuing efforts to limit the payments for
hospital services by adopting discounted payment mechanisms, including
prospective payment or DRG based payment systems, for more inpatient and
outpatient services. To the extent that such efforts are successful and reduce
the insurers' reimbursement to hospitals and the costs of providing services to
their beneficiaries, such reduced levels of reimbursement may have a negative
impact on the operating results of the hospitals of Triad.
Government Regulation and Other Factors
Licensure, Certification and Accreditation. Health care facilities are
subject to Federal, state and local regulations 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 Triad's health care facilities
are properly licensed under appropriate state laws.
All of the hospitals affiliated with Triad are certified under the Medicare
and Medicaid programs and all are accredited by the Joint Commission on
Accreditation of Healthcare Organizations, the effect of which is to permit the
facilities to participate in the Medicare and Medicaid programs. Should any
facility lose its accreditation by this Joint Commission, or otherwise lose its
certification under the Medicare and/or Medicaid program, the facility would be
unable to receive reimbursement from the Medicare and Medicaid programs. The
facilities of Triad 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 Triad 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 subject
to review by state regulatory agencies under a CON program. Triad operates in
five states (Alabama, Mississippi, Ohio, South Carolina, and West Virginia) that
require CON approval to expand certain acute care hospital services. Such laws
generally require state agency determination of public need and approval prior
to the addition of beds or services or certain other capital expenditures.
Failure to obtain necessary state approval can result in the inability to expand
facilities, add services, complete an acquisition or change ownership. Further,
violation of such laws may result in the imposition of civil sanctions or the
revocation of a facility's license.
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State Rate Review. The state of Arizona adopted legislation mandating rate
or budget review for hospitals. In the aggregate, state rate or budget review
and indigent tax provisions have not materially adversely affected the results
of operations of Triad. Triad is not able to predict whether any additional
state rate or budget review or indigent tax provisions will be adopted and,
accordingly, is not able 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, 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. Peer review organizations may deny
payment for services provided, may assess fines and also have the authority to
recommend to the Department of Health and Human Services ("HHS") that a provider
which is in substantial noncompliance with the standards of the peer review
organization be excluded from participation in the Medicare program. Utilization
review is also a requirement of most non-governmental managed care
organizations.
The Federal False Claims Act and Similar State Laws. A trend affecting the
health care industry today is the increased use of the Federal False Claims Act,
and, in particular, actions being brought by individuals on the government's
behalf under the False Claims Act's qui tam, or whistleblower, provisions.
Whistleblower provisions allow private individuals to bring actions on behalf of
the government alleging that the defendant has defrauded the Federal government.
When a defendant is determined by a court of law to be liable under the
False Claims Act, the defendant must pay three times the actual damages
sustained by the government, plus mandatory civil penalties of between $5,000 to
$10,000 for each separate false claim. Settlements entered into prior to
litigation usually involve a less severe damages methodology. There are many
potential bases for liability under the False Claims Act. Liability often arises
when an entity knowingly submits a false claim for reimbursement to the Federal
government. In addition, a number of states have adopted their own false claims
provisions as well as their own whistleblower provisions whereby a private party
may file a civil lawsuit on behalf of the state in state court. From time to
time, companies in the health care industry, including Triad, may be subject to
actions under the False Claims Act. For a more complete discussion of litigation
brought against Triad under the False Claims Act, see "Governmental
Investigations."
Federal and State Fraud and Abuse. Participation in the Medicare program is
heavily regulated by Federal statute and regulation. If a hospital fails
substantially to comply with the numerous conditions of participation in the
Medicare program or performs certain prohibited acts, such hospital's
participation in the Medicare program may be terminated or civil or criminal
penalties may be imposed upon it under certain provisions of the Social Security
Act. For example, the Social Security Act prohibits providers and others from
soliciting, receiving, offering or paying, directly or indirectly, any
remuneration intended to induce referrals of patients to receive goods or
services covered by a Federal health care program (the "Anti-Kickback Statute").
In addition to felony criminal penalties (fines up to $25,000 and imprisonment),
the Social Security Act establishes civil monetary penalties and the sanction of
excluding violators from participation in the Federal health care programs.
The Anti-Kickback Statute has been interpreted broadly by Federal
regulators and certain courts to prohibit the intentional payment of anything of
value if even one purpose of the payment is to influence the referral of
Medicare or Medicaid business. Therefore, many commonplace commercial
arrangements between hospitals and physicians could be considered by the
government to violate the Anti-Kickback Statute.
As authorized by Congress, the Office of the Inspector General has
published final safe harbor regulations that outline categories of activities
that are deemed protected from prosecution under the Anti-Kickback Statute.
Currently, there are safe harbors for various activities, including, but not
limited to: investment interest, space rental, equipment rental, practitioner
recruitment, personal services and management contracts, sale of practice,
discounts, employees, investments in group practices, and ambulatory surgery
centers. The fact that conduct or a business arrangement does not fall within a
safe harbor does not automatically render the conduct or business arrangement
12
unlawful under the Anti-Kickback Statute. The conduct and business arrangements,
however, do risk increased scrutiny by government enforcement authorities.
Triad has a variety of financial relationships with physicians who refer
patients to Triad's hospitals. Triad also has contracts with physicians
providing for a variety of financial arrangements, including employment
contracts, leases, and professional service agreements. Triad also provides
financial incentives, including loans and minimum revenue guarantees, to recruit
physicians into the communities served by Triad's hospitals. Several of Triad's
freestanding surgery centers have physician investors and physicians own
interests in certain of Triad's hospitals. Some of the arrangements with
physicians do not expressly meet requirements for safe harbor protection. It
cannot be assured that regulatory authorities that enforce the Anti-Kickback
Statute will not determine that any of these arrangements violate the
Anti-Kickback Statute or other Federal or state laws.
The Social Security Act also imposes criminal and civil penalties for
submitting false claims to Medicare and Medicaid. False claims include, but are
not limited to, billing for services not rendered, billing for services without
prescribed documentation, misrepresenting actual services rendered in order to
obtain higher reimbursement and cost report fraud. Like the Anti-Kickback
Statute, these provisions are very broad. Further, the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") created civil penalties for
conduct including improper coding and billing for unnecessary goods and
services. HIPAA also broadened the scope of the fraud and abuse laws by adding
several criminal provisions for health care fraud offenses that apply to all
health benefit programs.
The Social Security Act also includes a provision commonly known as the
"Stark Law." This law prohibits physicians from referring Medicare and Medicaid
patients to entities with which they or any of their immediate family members
have a financial relationship if these entities provide certain designated
health services that are reimbursable by Medicare, including inpatient and
outpatient hospital services. Sanctions for violating the Stark Law include
civil money penalties up to $15,000 per prohibited service provided, assessments
equal to twice the dollar value of each such service provided and exclusion from
the Federal health care programs. There are a number of exceptions to the
self-referral prohibition, including an exception for a physician's ownership
interest in an entire hospital as opposed to an ownership interest in a hospital
department. There are also exceptions for many of the customary financial
arrangements between physicians and providers, including employment contracts,
leases and recruitment agreements.
On January 4, 2001, CMS issued final regulations subject to comment
intended to clarify parts of the Stark Law and some of the exceptions to it.
These regulations are considered Phase I, of a two-phase process, with the
remaining regulations to be published at an unknown future date. Phase I of the
regulations became effective January 4, 2002, except in the case of the
provisions relating to home health agencies, which became effective April 5,
2001.
Many of the states in which Triad operates also have adopted laws that
prohibit payments to physicians in exchange for referrals similar to the
Anti-Kickback Statute and the Stark Law, some of which apply regardless of the
source of payment for care. These statutes typically provide criminal and civil
penalties as well as loss of licensure. Little precedent exists for the
interpretation or enforcement of these state laws.
Corporate Practice of Medicine. Some of the states in which Triad operates
have laws that prohibit corporations and other entities from employing
physicians or that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers. In addition, some
states restrict certain business relationships between physicians and
pharmacies. Possible sanctions for violation of these restrictions include loss
of a physician's license 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 Triad exercises care to structure its
arrangements with health care providers to comply with the relevant state law,
and believes such arrangements comply with applicable laws in all material
respects, there can be no assurance that governmental officials charged with
responsibility for enforcing these laws will not assert that Triad, or certain
transactions in which it is involved, is in violation of such laws, or that such
laws ultimately will be interpreted by the courts in a manner consistent with
the interpretations of Triad.
13
Health Care Reform. Health care, as one of the largest industries in the
United States, continues to attract much legislative interest and public
attention. In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the health care system, either nationally or at
the state level. Proposals that have been considered include cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, patients' bills of rights and requirements that
all businesses offer health insurance coverage to their employees. The costs of
certain proposals would be funded in significant part by reductions in payments
by governmental programs, including Medicare and Medicaid, to health care
providers such as hospitals. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
business, financial condition or results of operations of Triad.
Administrative Simplification. The Administrative Simplification Provisions
of HIPAA require the use of uniform electronic data transmission standards for
health care claims and payment transactions submitted or received
electronically. On August 17, 2000, CMS published final regulations establishing
electronic data transmission standards that all health care providers must use
when submitting or receiving certain health care transactions electronically.
Compliance with these regulations is required by October 2002 subject to certain
recently enacted exceptions, but Triad cannot yet predict the impact that these
final regulations will have.
HIPAA also requires CMS to adopt standards to protect the security and
privacy of health-related information. Regulations were proposed on August 12,
1998, but have not yet been finalized. However, as proposed, these regulations
would require health care providers to implement organizational and technical
practices to protect the security of electronically maintained or transmitted
health-related information. In addition, CMS released final regulations
containing privacy standards in December 2000 and which require compliance by
February 2003. As currently drafted, the privacy regulations will extensively
regulate the use and disclosure of individually identifiable health-related
information. The security regulations, as proposed, and the privacy regulations,
when they become effective, could impose significant costs on Triad's facilities
in order to comply with these standards. Violations of the Administrative
Simplification provisions of HIPAA could result in civil penalties of up to
$25,000 per type of violation in each calendar year and criminal penalties of up
to $250,000 per violation.
In addition, Triad's facilities will continue to remain subject to any
state laws that are more restrictive than the regulations issued under HIPAA,
which vary by state and could impose additional penalties.
Conversion Legislation. Many states have enacted or are considering
enacting laws affecting the conversion or sale of not-for-profit hospitals.
These laws, in general, include provisions relating to attorney general
approval, advance notification and community involvement. In addition, state
attorneys general in states without specific conversion legislation may exercise
authority over these transactions based upon existing law. In many states there
has been an increased interest in the oversight of not-for-profit conversions.
The adoption of conversion legislation and the increased review of
not-for-profit hospital conversions may increase the cost and difficulty or
prevent the completion of transactions with not-for-profit organizations in
certain states in the future.
Revenue Ruling 98-15. During March 1998, the IRS issued guidance regarding
the tax consequences of joint ventures between for-profit and not-for-profit
hospitals. Triad has not determined the impact of the tax ruling on the
development of future ventures. The tax ruling could limit joint venture
development with not-for-profit hospitals, and could influence the exercise of
"put agreements"--agreements that require the purchase of the partner's interest
in the joint venture--by Triad's existing joint venture partner.
Environmental Matters. Triad is subject to various Federal, state and local
statutes and ordinances regulating the discharge of materials into the
environment. Triad does not expect that it 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, Triad is subject to
claims and legal actions by patients in the ordinary course of business. To
cover these claims, Triad maintains professional malpractice liability insurance
and general liability insurance in amounts which it believes to be sufficient
for its operations, although it is possible that some claims may exceed the
scope of the coverage in effect. At various times in the past, the cost of
malpractice
14
and other liability insurance has risen significantly. Therefore, there can be
no assurance that such insurance will continue to be available at reasonable
prices which will allow Triad to maintain adequate levels of coverage.
Substantially all losses in periods prior to the spin-off are insured through a
wholly-owned insurance subsidiary of HCA and excess loss policies maintained by
HCA. HCA has agreed to indemnify Triad in respect of claims covered by such
insurance policies arising prior to the spin-off. After the spin-off, Triad
obtained insurance coverage on a claims incurred basis from HCA's wholly-owned
insurance subsidiary with excess coverage obtained from other carriers which is
subject to certain deductibles which Triad considers to be reasonable. For the
facilities acquired in the Quorum transaction, Triad obtained tail coverage,
subject to certain deductibles, to cover claims incurred prior to July 31, 2001.
These facilities were converted to Triad's existing coverage on August 1, 2001.
Triad has a reserve for general and professional liability risks of $36.0
million at December 31, 2001. Any losses incurred in excess of amounts
maintained under such insurance will be funded from working capital. There can
be no assurance that the cash flow of Triad will be adequate to provide for
professional and general liability claims in the future. See "NOTE 2 -
ACCOUNTING POLICIES - General and Professional Liability Risks" in the
consolidated financial statements for a more detailed discussion of such
arrangements.
Governmental Investigations
False Claims Act Litigation. At a meeting in September 1998, Quorum learned
from the government that the government would likely join in a lawsuit filed
against Quorum under the False Claims Act. The suit was filed in January 1993 by
a former employee of a hospital managed by a Quorum subsidiary. These lawsuits,
commonly known as qui tam actions, are filed "under seal." That means that the
claims are kept secret until the government decides whether to join the case.
The person who files the lawsuit is called a "relator." The government joined
the case against Quorum in October 1998. The relator's lawsuit named Quorum,
QHR, HCA and all hospitals that Quorum or HCA owned, operated or managed from
1984 through 1997, as defendants. The unsealed complaint, prepared by the
relator, alleged that Quorum knowingly prepared and caused to be filed cost
reports which claimed payments from Medicare and other government payment
programs greater than the amounts due.
On February 24, 1999, the government filed its own complaint in the case.
The new complaint alleged that Quorum, on behalf of hospitals it managed between
1985 and 1995 and hospitals it owned from 1990 to the date of the complaint,
violated the False Claims Act by knowingly submitting or causing to be submitted
false Medicare cost reports, resulting in the submission of false claims to
Federal health care programs.
The government asserted that the false claims in cost reports were, in
part, reflected in "reserve analyses" created by Quorum. The complaint also
alleged that these cost report filings were prepared as the result of company
policy. This qui tam action sought three times the amount of damages caused to
the United States by Quorum's submission of any alleged false claims to the
government, civil penalties of not less than $5,000 nor more than $10,000 for
each claim, and the relator's attorneys' fees and costs. On April 23, 2001, a
settlement agreement was signed and a stipulation of dismissal was filed with
the court dismissing all claims against Quorum, QHR and the other Quorum
subsidiaries named in the lawsuit. The settlement provided for a payment of
$82.5 million in compensation to the government, plus interest accruing on $77.5
million at 7.25% per annum from October 2, 2000 (the date on which an
understanding with the government to settle this lawsuit was reached) to the
payment date. The settlement was paid in April 2001. The settlement agreement
also provides, on certain conditions, for a release of all hospitals currently
or formerly managed by QHR electing to participate in the settlement.
In connection with the settlement, Quorum entered into a corporate
integrity agreement with the Office of the Inspector General containing, among
other things, an affirmative obligation to report certain violations of
applicable laws and regulations. On August 10, 2001, the Office of Inspector
General agreed to suspend Quorum's obligations under this corporate integrity
agreement until November 1, 2001, in exchange for Triad's agreement to negotiate
a corporate integrity agreement that would also include the hospitals owned by
Triad at the time of its merger with Quorum, as well as hospitals Triad might
subsequently acquire. (In the distribution agreement with HCA at the time of its
spin-off, Triad agreed to participate in the negotiation of a corporate
integrity agreement with the Office of Inspector General.) These negotiations of
a "combined" corporate integrity agreement were concluded and the agreement
became effective on November 1, 2001. See "Triad's Ethics and Compliance
Program".
15
Other Qui Tam Actions and Related Investigations. In May 1998, Quorum was
informed that it was a defendant in another qui tam action involving home health
services provided by two of its owned hospitals and alleging that Quorum had
violated Medicare laws. This action was filed under seal in June 1996 by a
former employee, whom Quorum fired in April 1996. The United States Attorney's
Office allowed Quorum an opportunity to review the results of the government's
investigations and discuss the allegations made in the action prior to the
government making a decision to intervene as a plaintiff. Quorum cooperated
fully with the United States Attorney's Office and provided additional
information and made employees available for interviews.
On October 26, 2000, Quorum completed settlement of a qui tam lawsuit which
primarily involved allegedly improper allocation of costs at Flowers Hospital,
Dothan, Alabama, to its home health agency (CV-96-P1638-S, N.D. Alabama). Quorum
paid to the government on October 26, 2000 approximately $18 million in
connection with this settlement. In addition to the settlement agreement, Quorum
entered into a five year corporate integrity agreement covering Flowers Hospital
with the Office of the Inspector General which was terminated upon the effective
date of the Quorum corporate integrity agreement entered into in connection with
the False Claims Act litigation discussed above. The government always reserves
the right to investigate and pursue other allegations made by a relator under a
complaint. However, under the settlement agreement, the relator is prohibited
from pursuing these additional allegations.
As a result of its ongoing discussions with the government, prior to the
merger Quorum learned that there are two additional unrelated qui tam complaints
against it alleging violations of the False Claims Act for claims allegedly
submitted to the government involving one owned and two managed hospitals.
Quorum accrued $3.5 million on these items prior to the merger. Both matters
remain under seal. With respect to the matter involving the two managed
hospitals, the government has requested that Quorum conduct a self audit with
respect to one Medicare cost report for one managed hospital and three other
specific issues and that matter remains under seal. The government could
undertake additional investigative efforts. The government has stated that it
intends to investigate certain other allegations. With respect to the complaint
involving the owned hospital, Triad reached an agreement to settle this matter
through the payment to the government of $427,500 (plus interest to the date of
actual payment), and payment of certain attorneys' fees to the relators under
the complaint. Payment was made on January 15, 2002, and the case has been
dismissed with prejudice. As Quorum's successor, Triad was also a defendant in
another qui tam complaint, in which the government declined to intervene. After
receipt of service, Triad filed motions to dismiss such litigation against
Quorum and QHR and on October 9, 2001, the relators filed notices of voluntary
dismissal, to which the government indicated its consent. The court dismissed
such litigation on October 17, 2001.
From time to time, Triad may be the subject of additional investigations or
a party to additional litigation which alleges violations of law. Triad may not
know about such investigations, or about qui tam actions filed against Triad
unless and to the extent such are unsealed.
Governmental Investigation of HCA and Related Litigation. In connection
with the spin-off, Triad entered into a distribution agreement with HCA. The
terms of the distribution agreement provide that HCA will indemnify Triad for
any losses (other than consequential damages) which it may incur as a result of
proceedings described below. HCA has also agreed to indemnify Triad for any
losses (other than consequential damages) which it may incur as a result of
proceedings which may be commenced by government authorities or by private
parties in the future that arise from acts, practices or omissions engaged in
prior to the date of the spin-off and that relate to the proceedings described
below.
HCA is currently the subject of several Federal investigations into certain
of its business practices, as well as governmental investigations by various
states. HCA is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, HCA expects additional
subpoenas and other investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. HCA is the subject of a formal order of
investigation by the SEC. HCA understands that the SEC's investigation includes
the anti-fraud, insider trading, periodic reporting and internal accounting
control provisions of the Federal securities laws.
16
HCA is a defendant in several qui tam actions on behalf of the United
States of America, which have been unsealed and served on HCA. The actions
allege, in general, that HCA and certain subsidiaries and/or affiliated
partnerships violated the False Claims Act, 31 U.S.C. ss. 3729 et seq., by
submitting improper claims to the government for reimbursement. The lawsuits
seek three times the amount of damages caused to the United States by the
submission of any Medicare or Medicaid false claims presented by the defendants
to the Federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. HCA
has disclosed that of the original 30 qui tam actions, the Department of Justice
remains active in and has elected to intervene in 8 actions. HCA has also
disclosed that it is aware of additional qui tam actions that remain under seal
and believes that there may be other sealed qui tam cases of which it is
unaware.
The investigations, actions and claims affecting HCA relate to HCA and its
subsidiaries, including subsidiaries that, prior to the spin-off, owned
facilities now owned by Triad. On May 5, 2000, Triad was advised that one of the
qui tam cases which had been unsealed listed three of Triad's hospitals as
defendants. This qui tam action alleges various violations arising out of the
relationship between Curative Health Services and the other defendants,
including allegations of false claims relating to contracts with Curative Health
Services for the management of certain wound care centers and excessive and
unreasonable management fees paid to Curative Health Services and submitted for
reimbursement. Two of the three Triad hospitals named as defendants terminated
their relationship with Curative Health Services prior to the spin-off and the
third hospital terminated its contract thereafter.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with HCA), announced that they would pay $61
million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges (conspiracy, mail
fraud and violating the Medicare Anti-Kickback statute) filed by the U.S.
Attorneys in the Middle and Southern Districts of Florida and the Northern
District of Georgia. While HCA was not specifically named in these guilty pleas,
the guilty pleas refer to the involvement of a "Company A" or a "company not
named as a defendant." HCA has disclosed that it believes these references refer
to HCA or its subsidiaries.
HCA is a defendant in a number of other suits, which allege, in general,
improper and fraudulent billing, overcharging, coding and physician referrals,
as well as other violations of law. Certain of the suits have been conditionally
certified as class actions. Since April 1997, numerous securities class action
and derivative lawsuits have been filed in the United States District Court for
the Middle District of Tennessee against HCA and a number of its current and
former directors, officers and/or employees. Several derivative actions have
been filed in state court by certain purported stockholders of HCA against
certain of its current and former officers and directors alleging breach of
fiduciary duty, and failure to take reasonable steps to ensure that HCA did not
engage in illegal practices thereby exposing it to significant damages.
On December 14, 2000, HCA announced that it had entered into a settlement
agreement with the Civil Division of the Department of Justice resolving certain
civil claims actions against HCA relating to diagnosis related group coding,
outpatient laboratory billing and home health issues. HCA paid $745 million in
compensation to the government, with interest accruing at a fixed rate of 6.5%
per annum (beginning May 18, 2000), and HCA's existing letter of credit
agreement with the government was reduced from $1 billion to $250 million. HCA
also entered into a corporate integrity agreement with the Health and Human
Services Office of the Inspector General. Civil issues relating to cost
reporting and physician relations are not covered by the settlement agreement.
On December 14, 2000, HCA also announced that it had signed an agreement
with the Criminal Division of the Department of Justice and various U.S.
Attorney's offices to resolve pending Federal criminal actions against HCA. HCA
received a full release from criminal liability for conduct arising from or
relating to certain specified billing and reimbursement for services provided
pursuant to Federal health care benefit programs. In addition, the government
agreed not to prosecute HCA for other possible criminal offenses which are or
have been under investigation by the Department of Justice arising from or
relating to billing and reimbursement for services provided pursuant to Federal
health care benefit programs. As part of the criminal agreement, HCA paid the
government $95 million and two non-operating subsidiaries of HCA entered certain
pleas in respect of the criminal actions.
17
The agreements announced on December 14, 2000 relate only to conduct that
was the subject of the Federal investigations resolved in the agreements, and
HCA has stated publicly that it continues to discuss civil claims relating to
cost reporting and physician relations with the government. These agreements
with the government do not resolve various qui tam actions filed by private
parties against HCA, or any pending state actions. In addition to other claims
not covered by these agreements, the government also reserved its rights under
these agreements to pursue any claims it may have for:
. any civil, criminal or administrative liability under the Internal
Revenue Code;
. any other criminal liability;
. any administrative liability, including mandatory exclusion from
Federal health care programs;
. any liability to the United States (or its agencies) for any conduct
other than the conduct covered in the government's investigation;
. any express or implied warranty claims or other claims for defective
or deficient products or services, including quality of goods and
services, provided by HCA;
. any claims for personal injury or property damage or for other similar
consequential damages arising from the conduct subject to the
investigation; and
. any civil or administrative claims of the United States against
individuals.
In addition, 14 of Triad's current and former hospitals received notices in
early 2001 from CMS that it was re-opening for examination cost reports for
Medicare and Medicaid reimbursement filed by these hospitals for periods between
1993 and 1998, which pre-dates Triad's spin-off from HCA. Furthermore, two of
Triad's hospitals formerly owned by Quorum have received such notices. HCA or
its predecessors owned these hospitals during the period covered by the notices.
HCA is obligated to indemnify Triad for liabilities arising out of cost reports
filed during these periods.
On March 28, 2002, HCA announced that it had reached an understanding with
CMS to resolve all Medicaid cost report appeal issues between HCA and CMS on
more than 2,600 cost reports for reporting periods from 1993 through July 31,
2001. The understanding, which is subject to approval of the Department of
Justice and execution of a mutually satisfactory definitive written agreement,
would require HCA to pay CMS the sum of $250 million. The understanding does not
include resolution of outstanding civil issues with the Department of Justice
and relators under HCA's various qui tam cases with respect to cost reports and
physician relations.
HCA has agreed that, in the event that any hospital owned by Triad at the
time of the spin-off is permanently excluded from participation in the Medicare
and Medicaid programs as a result of the proceedings described above, then HCA
will make a cash payment to Triad, in an amount (if positive) equal to five
times the excluded hospital's 1998 income from continuing operations before
depreciation and amortization, interest expense, management fees, impairment of
long-lived assets, minority interests and income taxes, as set forth on a
schedule to the distribution agreement, less the net proceeds of the sale or
other disposition of the excluded hospital.
HCA will not indemnify Triad under the distribution agreement for losses
relating to any acts, practices or omissions engaged in by Triad after the
spin-off, whether or not Triad is indemnified for similar acts, practices and
omissions occurring prior to the spin-off. HCA also will not indemnify Triad
under the distribution agreement for similar qui tam litigation, governmental
investigations and other actions to which Quorum was subject, some of which are
described above. If indemnified matters were asserted successfully against Triad
or any of its facilities, and HCA failed to meet its indemnification
obligations, then this event could have a material adverse effect on Triad's
business, financial condition, and results of operations or prospects.
Triad is unable to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. The extent to which Triad may or
may not continue to be affected by the ongoing investigations of HCA and the
initiation of additional investigations, if any, cannot be predicted. These
matters could have a material adverse effect on Triad's business, financial
condition, and results of operations or prospects.
18
Item 2. Properties
The following table lists the hospitals owned, except as otherwise
indicated, by Triad as of December 31, 2001.
Facility Name City State Licensed Beds
- ------------- ---- ----- -------------
Flowers Hospital Dothan AL 400
Medical Center Enterprise Enterprise AL 131
Gadsden Regional Medical Center Gadsden AL 346
Crestwood Medical Center Huntsville AL 120
Jacksonville Hospital Jacksonville AL 89
Bates Medical Center Bentonville AR 63
Medical Center of South Arkansas (1) El Dorado AR 166
Medical Park Hospital Hope AR 91
Northwest Medical Center Springdale AR 222
El Dorado Hospital Tucson AZ 166
Northwest Medical Center Tucson AZ 193
San Leandro Hospital San Leandro CA 122
Bluffton Regional Medical Center Bluffton IN 96
Dupont Hospital (2) Fort Wayne IN 86
Lutheran Hospital of Indiana Fort Wayne IN 404
St. Joseph Hospital Fort Wayne IN 191
Kosciusko Community Hospital Warsaw IN 72
Overland Park Regional Medical Center (3) Overland Park KS --
Women & Children's Hospital Lake Charles LA 80
Wesley Medical Center Hattiesburg MS 211
River Region Health System (4) Vicksburg MS 385
Independence Regional Health Center (3) Independence MO --
Carlsbad Medical Center Carlsbad NM 127
Lea Regional Medical Center Hobbs NM 250
Barberton Citizens Hospital (5) Barberton OH 327
Doctors Hospital of Stark County (5) Massillon OH 166
Claremore Regional Hospital Claremore OK 89
SouthCrest Hospital Tulsa OK 116
Willamette Valley Medical Center McMinnville OR 80
Carolinas Hospital System - Florence Florence SC 372
Carolinas Hospital System - Lake City (6) Lake City SC 48
Mary Black Memorial Hospital (7) Spartanburg SC 209
Abilene Regional Medical Center Abilene TX 187
Alice Regional Medical Center Alice TX 138
Brownwood Regional Medical Center Brownwood TX 218
College Station Medical Center College Station TX 119
Navarro Regional Hospital Corsicana TX 162
Denton Community Hospital Denton TX 122
Longview Regional Medical Center Longview TX 164
Woodland Heights Medical Center Lufkin TX 146
Pampa Regional Medical Center Pampa TX 115
San Angelo Community Medical Center San Angelo TX 162
Medical Center at Terrell (8) Terrell TX 130
DeTar Healthcare System Victoria TX 359
Gulf Coast Medical Center Wharton TX 161
Greenbrier Valley Medical Center Lewisburg WV 122
(1) Triad holds a 50% equity interest in a non-consolidated joint venture
which owns and operates this facility.
(2) Owned by a limited liability company which owns an 81.3% interest and
is the manager.
19
(3) Triad continues to own the assets related to this hospital, but has
transferred the exclusive rights to use and control the hospital's
operations to a separate, independent entity pursuant to a long-term
lease agreement effective as of January 1, 1999. There are 726
licensed beds at the leased facilities.
(4) Owned by a limited liability company which owns a 64.5% interest and
is the manager.
(5) Owned by a limited liability company which owns a 95% interest and is
the manager.
(6) Carolinas Hospital System - Lake City is held pursuant to operating
leases with initial terms of ten years and two renewal options of five
years each.
(7) Owned by a limited liability company which owns an 89.4% interest and
is the manager.
(8) Triad currently leases this hospital pursuant to a long-term lease
which provides the exclusive right to use and control the hospital
operations.
In addition to the hospitals listed in the table above, as of December 31,
2001, Triad operated 14 ambulatory surgery centers, including three surgery
centers that are operated by an unaffiliated third party pursuant to a long-term
lease. Medical office buildings also are operated in conjunction with its
hospitals. These office buildings are primarily occupied by physicians who
practice at Triad's hospitals.
The following table lists the hospitals owned by joint venture entities in
which Triad is the minority owner and our percentage ownership interest as of
December 31, 2001. Information on licensed beds was provided by the majority
owner and manager of each joint venture. HCA is the majority owner of Macon
Healthcare LLC. Universal Health Systems is the majority owner of Summerlin
Hospital Medical Center LLC and Valley Health System LLC.
Joint Venture Facility Name City State Licensed Beds
- ------------- ------------- ---- ----- -------------
Macon Healthcare LLC Coliseum Medical Center (38%) Macon GA 250
Macon Healthcare LLC Coliseum Psychiatric Center (38%) Macon GA 60
Macon Healthcare LLC Macon Northside Hospital (38%) Macon GA 103
Macon Healthcare LLC Middle Georgia Hospital (38%) Macon GA 119
Summerlin Hospital Medical Center LLC Summerlin Hospital Medical Center (26%) Las Vegas NV 166
Valley Health System LLC Desert Springs Hospital (28%) Las Vegas NV 233
Valley Health System LLC Valley Hospital Medical Center (28%) Las Vegas NV 417
Triad's headquarters are located in approximately 63,000 square feet of
space in one office building in Dallas, Texas. Triad sub-leases this space from
HCA. See "NOTE 13-AGREEMENTS WITH HCA" in the consolidated financial statements
for a more detailed description of such arrangement.
QHR leases its headquarters in Brentwood, Tennessee and regional offices
located throughout the United States.
Triad's hospitals and other facilities are suitable for their respective
uses and are, in general, adequate for Triad's present needs.
Item 3. Legal Proceedings
On October 20, 2000, a purported class action, Samuel Brand v. Colleen
Conway Welch, et al., Case No.: OCC-3066, was filed against Triad and members of
the board of directors of Quorum in the Circuit Court of Davidson County,
Tennessee, on behalf of all public stockholders of Quorum. The complaint
alleged, among other things, that Quorum's directors breached their fiduciary
duties to Quorum and its stockholders in agreeing to the merger at an unfair
price.
In April 2001, the parties negotiated a settlement that would result in the
dismissal of the action. The settlement was subject to a number of conditions,
including Court approval. Court approval was obtained, and on October 22, 2001
the court dismissed the action pursuant to the terms of the agreed upon
settlement and Triad paid the settlement. The settlement did not have a material
effect on Triad's financial position or results of operations.
In October and November 1998, some of Quorum's stockholders filed lawsuits
against Quorum in the U.S. District Court for the Middle District of Tennessee.
In January 1999, the court consolidated these cases into a single
20
lawsuit (M.D. Tenn. No. 3-98-1004). The plaintiffs filed an amended complaint in
March 1999. The plaintiffs seek to represent a class of plaintiffs who purchased
Quorum's common stock from October 25, 1995 through October 21, 1998, except for
Quorum's insiders and their immediate families. The amended complaint names
Quorum, several of Quorum's former officers, and one of Quorum's former outside
directors, as defendants.
The amended complaint alleges that defendants violated the Securities
Exchange Act of 1934. The plaintiffs claim that Quorum materially inflated
Quorum's net revenues during the class period by including in those net revenues
amounts received from the settlement of cost reports that had allegedly been
filed in violation of applicable Medicare regulations years earlier and that,
because of that practice, this statement, which first appeared in Quorum's Form
10-K filed in September 1996, was false: "The Company believes that its owned
hospitals are in substantial compliance with current federal, state, local, and
independent review body regulations and standards." In May 1999, Quorum filed a
motion to dismiss the complaint. On November 13, 2000, the judge denied Quorum's
motion to dismiss the complaint against Quorum and James E. Dalton, Jr.,
Quorum's former President/CEO. The judge granted Quorum's motion to dismiss as
to all other defendants. The judge has heard oral argument on Mr. Dalton's
motion to reconsider the judge's denial of Mr. Dalton's motion to dismiss and on
April 19, 2001 granted Mr. Dalton's motion to dismiss. The parties recently
tentatively agreed to submit the class action to non-binding mediation. As
Quorum's successor, Triad intends to vigorously defend the claims and
allegations in this action.
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 2001.
Part II.
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Triad's common stock commenced trading on the Nasdaq Stock Market National
Market, on May 11, 1999 (symbol "TRIH"). On April 30, 2001, Triad's common stock
commenced trading on the New York Stock Exchange (symbol "TRI"). The table below
set forth, for the calendar quarters indicated, the high and low reported
closing sales prices per share reported on by Nasdaq and New York Stock Exchange
for Triad's common stock for the years ended December 31, 2000 and 2001.
2000 High Low
- ---- ---- ---
First Quarter .......................... $18.75 $13.44
Second Quarter ......................... 25.00 14.88
Third Quarter .......................... 33.00 21.94
Fourth Quarter ......................... 34.38 25.44
2001
- ----
First Quarter .......................... $33.81 $24.81
Second Quarter ......................... 31.42 24.49
Third Quarter .......................... 36.70 29.95
Fourth Quarter ......................... 36.50 25.70
At the close of business on March 15, 2002, there were approximately 13,000
holders of record of Triad's common stock.
Triad has not paid any dividends on its shares of common stock and is
restricted from paying dividends by certain bank indebtedness covenants. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources".
Item 6. Selected Financial Data
The following consolidated selected financial data as of and for the years
ended December 31, 2001, 2000, 1999, 1998 and 1997 should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Triad's consolidated financial statements and related notes to
the consolidated financial statements, which are included herein.
21
Years Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Dollars in millions, except per share amounts)
Summary of Operations:
Revenues ......................................... $ 2,669.5 $ 1,235.5 $ 1,329.1 $ 1,588.7 $ 1,609.3
Income (loss) from operations (a) ................ 6.0 4.4 (95.6) (85.5) (19.0)
Net income (loss) (a) ............................ 2.8 4.4 (95.6) (87.1) (19.8)
Basic earnings (loss) per share:
Income (loss) from operations .................. $ 0.10 $ 0.14 $ (3.12) $ (2.80) $ (0.62)
Net income (loss) .............................. $ 0.04 $ 0.14 $ (3.12) $ (2.85) $ (0.65)
Shares used in computing basic earnings
(loss) per share (in millions) .............. 57.7 31.7 30.6 30.6 30.6
Diluted earnings (loss) per share:
Income (loss) from operations .................. $ 0.10 $ 0.13 $ (3.12) $ (2.80) $ (0.62)
Net income (loss) .............................. $ 0.05 $ 0.13 $ (3.12) $ (2.85) $ (0.65)
Shares used in computing diluted earnings (loss)
per share (in millions) ..................... 61.1 34.1 30.6 30.6 30.6
Financial Position:
Assets ........................................... $ 4,165.3 $ 1,400.5 $ 1,341.1 $ 1,371.3 $ 1,410.5
Long-term debt, including amounts due within
one year ......................................... 1,773.8 590.7 555.4 14.3 15.4
Intercompany balances payable to HCA ............. -- -- -- 613.7 525.0
Working capital .................................. 381.0 191.9 187.6 184.9 150.3
Capital expenditures ............................. 200.6 94.4 132.7 114.9 120.1
Operating Data:
EBITDA (b) ....................................... $ 361.1 $ 174.0 $ 124.5 $ 149.0 $ 187.8
Number of hospitals at end of period (c) ......... 46 28 29 39 39
Number of licensed beds at end of period (d) ..... 7,557 3,520 3,722 5,902 5,859
Weighted average licensed beds (e) ............... 6,379 3,633 4,745 5,905 5,860
Number of available beds at end of period (f) .... 6,776 3,162 3,280 5,199 5,230
Admissions (g) ................................... 233,888 128,645 145,889 169,590 172,926
Adjusted admissions (h) .......................... 396,256 220,590 241,547 276,771 275,125
Average length of stay (days) (i) ................ 4.8 4.4 4.5 4.9 4.9
Average daily census (j) ......................... 3,060 1,532 1,818 2,263 2,326
Occupancy rate (k) ............................... 54% 49% 55% 44% 44%
Selected Ratios:
Ratio of earnings to fixed charges (l) ........... 1.3x 1.3x -- -- --
(a) Includes charges related to impairment of long-lived assets of $23.1
million ($21.1 million after tax benefit), $8.0 million ($4.7 million after
tax benefit), $69.2 million ($55.8 million after tax benefit), $55.1
million ($32.9 million after tax benefit) and $13.7 million ($8.2 million
after tax benefit) for the years ended December 31, 2001, 2000, 1999, 1998
and 1997, respectively.
(b) EBITDA is defined as income (loss) from operations before depreciation and
amortization, interest expense, ESOP expense, management fees, gain on
sales of assets, impairment of long-lived assets, minority interests in
earnings of consolidated entities and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA should
not be considered in isolation or as an alternative to net income, cash
flows generated by operating, investing or financing activities or other
financial statement data presented in the consolidated financial statements
as an indicator of financial performance or liquidity. Because EBITDA is
not a measurement determined in accordance with generally accepted
accounting principles and is thus susceptible to varying calculations,
EBITDA as presented may not be comparable to other similarly titled
measures of other companies.
(c) This table does not include any operating statistics for non-consolidating
joint ventures and facilities leased to others.
(d) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
22
(e) Represents the average number of licensed beds, weighted based on periods
owned.
(f) Available beds are those beds a facility actually has in use.
(g) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(h) Adjusted admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "adjusts" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(i) Represents the average number of days admitted patients stay in Triad's
hospitals.
(j) Represents the average number of patients in Triad's hospital beds each
day.
(k) Represents the percentage of hospital available beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms.
(l) Triad's earnings were insufficient to cover fixed charges for the years
ended December 31, 1999, 1998 and 1997 by $112.4 million, $115.6 million
and $15.1 million, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On April 27, 2001, Triad completed the merger of Quorum with and into Triad
with Triad being the surviving corporation. Under the terms of the merger
agreement, Quorum shareholders became entitled to receive $3.50 in cash and
0.4107 shares of Triad common stock for each outstanding share of Quorum stock,
plus cash in lieu of fractional shares of Triad common stock. In addition, each
outstanding option to purchase shares of Quorum common stock, whether or not
vested or exercisable, was converted at the holder's election into either a
fully vested and exercisable option to purchase shares of Triad common stock or
cash and shares of Triad common stock. Triad issued 35,786,380 shares, paid
$305.0 million in cash and issued 1,638,479 options to Quorum option holders in
connection with the merger. The purchase price for the merger was determined
using the average stock price at the time the merger was announced, cash paid,
fair value of options converted and direct costs associated with the merger. The
purchase price was approximately $2.4 billion. The merger was accounted for
under the purchase method of accounting and the results of operations for Quorum
are included in Triad's results of operations beginning May 1, 2001.
On May 2, 2001, Triad sold two of the acute care hospitals acquired in the
merger with Quorum for $38.0 million plus $8.2 million for working capital.
Additionally, one hospital acquired in the merger with Quorum was designated as
held for sale prior to the completion of the merger. The purchase price
allocation of this hospital was equal to the estimated sales price of the
hospital plus the anticipated cash flows for its estimated holding period and
the estimated interest expense on the incremental debt incurred for the purchase
of the hospital. On August 7, 2001, Triad sold this hospital. The results of
operations of this entity are not included in Triad's results of operations.
Subsequent to the merger, Triad recorded charges of approximately $31.8
million associated with coordinating Quorum's accounting policies, practices and
estimation processes with those of Triad. These charges included an $8.3 million
pre-tax reduction to revenue, $18.5 million pre-tax increase in provision for
doubtful accounts and $5.0 million additional income tax provision.
During 2001, Triad acquired the remaining 50% interest in one of its joint
ventures and sold one hospital. During 2000, Triad sold one hospital, ceased
operations of two hospitals and purchased two hospitals. Triad sold its
partnership interest in a rehabilitation hospital on March 31, 2000. During 1999
after the spin-off, Triad sold ten hospitals and two ambulatory surgery centers
and opened one new hospital that was accounted for using the equity method.
The above described events significantly affect the comparability of the
results of operations for the years ended December 31, 2001, 2000, and 1999.
23
Forward-Looking Statements
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains disclosures which are "forward-looking
statements." Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may," "believe," "will," "expect," "project," "estimate,"
"anticipate," "plan" or "continue." These forward-looking statements are based
on the current plans and expectations of Triad and are subject to a number of
uncertainties and risks that could significantly affect current plans and
expectations and the future financial condition and results of Triad. These
factors include, but are not limited to,
. the highly competitive nature of the health care business,
. the efforts of insurers, health care providers and others to contain health
care costs,
. possible changes in the Medicare and Medicaid programs that may limit
reimbursements to health care providers and insurers,
. changes in federal, state or local regulation affecting the health care
industry,
. the possible enactment of federal or state health care reform,
. the ability to attract and retain qualified management and personnel,
including physicians and nurses,
. the departure of key executive officers from Triad,
. claims and legal actions relating to professional liabilities and other
matters,
. fluctuations in the market value of Triad common stock,
. changes in accounting practices,
. changes in general economic conditions,
. future divestitures which may result in additional charges,
. the ability to enter into managed care provider arrangements on acceptable
terms,
. the availability and terms of capital to fund the expansion of Triad's
business,
. changes in business strategy on development plans,
. the ability to obtain adequate levels of general and professional liability
insurance,
. potential adverse impact of known and unknown government investigations,
. timeliness of reimbursement payments received under government programs,
and
. other risk factors described herein.
As a consequence, current plans, anticipated actions and future financial
condition and results may differ from those expressed in any forward-looking
statements made by or on behalf of Triad. You are cautioned not to unduly rely
on such forward-looking statements when evaluating the information presented in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Critical Accounting Policies and Estimates
Triad's discussion and analysis of its financial condition and results of
operations are based upon Triad's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Triad to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an on-going basis, Triad evaluates its estimates, including
those related to third-party payer discounts, bad debts, property and equipment,
intangible assets, income taxes, general and professional liability risks and
contingencies and litigation. Triad bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Triad believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
24
Revenue Recognition
Triad's health care facilities have entered into agreements with
third-party payers, including government programs and managed care health plans,
under which the facilities are paid based upon several methodologies including
established charges, the cost of providing services, predetermined rates per
diagnosis, fixed per diem rates or discounts from established charges. Revenues
are recorded at estimated net amounts due from patients, third-party payers and
others for health care services provided. Settlements under reimbursement
agreements with third-party payers are estimated and recorded in the period the
related services are rendered and are adjusted in future periods as adjustments
become known or as the service years are no longer subject to audit, review or
investigation. Laws and regulations governing the Medicare and Medicaid programs
are extremely complex, subject to interpretation and are routinely modified for
provider reimbursement. All hospitals participating in the Medicare and Medicaid
programs are required to meet certain financial reporting requirements. Federal
regulations require submission of annual cost reports covering medical costs and
expenses associated with the services provided by each hospital to program
beneficiaries. Annual cost reports required under the Medicare and Medicaid
programs are subject to routine audits, which may result in adjustments to the
amounts ultimately determined to be due to Triad under these reimbursement
programs. These audits often require several years to reach the final
determination of amounts earned under the programs. As a result, there is at
least a reasonable possibility that recorded estimates will change by a material
amount in the near term.
Bad Debt
Triad maintains allowances for doubtful accounts for estimated losses
resulting from payers' inability to make payments on accounts. Triad estimates
these allowances based on historical net write-offs of uncollectible accounts.
If payers' ability to pay deteriorates, additional allowances may be required.
Property and Equipment and Intangible Assets
Triad evaluates the carrying value of long-lived assets and long-lived
assets to be disposed of, certain identifiable intangibles and goodwill related
to those assets, and recognizes impairment losses when the fair value is less
than the carrying value. The fair value of assets to be held and used is
determined using discounted future cash flows. The fair value of assets held for
sale is determined using estimated selling values. When events, circumstances
and operating results indicate that the carrying values of certain long-lived
assets and the related identifiable intangible assets might be impaired, Triad
prepares projections of the undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If