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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Mark One:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EX-
CHANGE ACT OF 1934
For the Transition Period from to .
COMMISSION FILE NUMBER 1-11239
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COLUMBIA/HCA HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 75-2497104
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE PARK PLAZA
NASHVILLE, TENNESSEE 37203
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (615) 344-9551
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
New York Stock Exchange
Common Stock, $.01 Par Value
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 16, 1998, there were outstanding 621,527,226 shares of the Reg-
istrant's Common Stock and 21,000,000 shares of the Registrant's Nonvoting
Common Stock. As of March 16, 1998 the aggregate market value of the Common
Stock held by non-affiliates was approximately $17,188,414,000. For purposes
of the foregoing calculation only, the Registrant's directors, executive offi-
cers, and The Columbia/HCA Healthcare Corporation Stock Bonus Plan, The
Columbia/HCA Healthcare Corporation Salary Deferral Plan and the San Leandro
Retirement and Savings Plan have been deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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INDEX
PAGE
REFERENCE
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PART I
Item 1. Business.......................................... 1
Item 2. Properties........................................ 20
Item 3. Legal Proceedings................................. 21
Submission of Matters to a Vote of Security
Item 4. Holders........................................... 27
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters...................... 28
Item 6. Selected Financial Data........................... 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 31
Item 8. Financial Statements and Supplementary Data....... 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 45
PART III
Directors and Executive Officers of the
Item 10. Registrant........................................ 45
Item 11. Executive Compensation............................ 45
Security Ownership of Certain Beneficial Owners
Item 12. and Management.................................... 45
Item 13. Certain Relationships and Related Transactions.... 45
PART IV
Exhibits, Financial Statement Schedules and
Item 14. Reports on Form 8-K............................... 46
PART I
ITEM 1. BUSINESS.
GENERAL
Columbia/HCA Healthcare Corporation is one of the leading providers of
health care services in the United States. At December 31, 1997, the Company
operated 318 general, acute care hospitals and 18 psychiatric hospitals. In
addition, as part of its comprehensive health care networks, the Company
operated 145 outpatient surgery centers and provided extensive outpatient and
ancillary services, including home health (the Company plans to divest its
home health business, see NOTE 7 of the notes to consolidated financial
statements). The facilities "operated" by the Company included 27 hospitals
and five surgery centers which were operated through 50/50 joint ventures that
were managed by the Company, but which were not consolidated for financial
reporting purposes. The term the "Company" as used herein refers to
Columbia/HCA Healthcare Corporation and its affiliates unless otherwise stated
or indicated by context.
The Company's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. The Company's general, acute care hospitals usually provide a
full range of services commonly available in hospitals to accommodate such
medical specialties as internal medicine, general surgery, cardiology,
oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and
emergency services. Outpatient and ancillary health care services are provided
by the Company's general, acute care hospitals as well as at freestanding
facilities operated by the Company including outpatient surgery and diagnostic
centers, rehabilitation facilities, home health care agencies and other
facilities. In addition, the Company operates psychiatric hospitals which
generally provide a full range of mental health care services in inpatient,
partial hospitalization and outpatient settings.
In August 1997, the Company acquired Value Health, Inc. ("Value Health") in
a transaction accounted for as a purchase (the "Value Health Merger"). The
Company plans to divest three of the four primary Value Health business units
(see NOTE 7 of the notes to consolidated financial statements.) During April
1995, the Company acquired Healthtrust, Inc.--The Hospital Company
("Healthtrust") in a merger transaction accounted for as a pooling of
interests (the "Healthtrust Merger"). Healthtrust began operations through the
acquisition of a group of hospitals and related assets from Hospital
Corporation of America (the predecessor to HCA) in September 1987. During May
1994, Healthtrust acquired EPIC Holdings, Inc. ("EPIC") in a transaction
accounted for as a purchase. During September 1994, the Company acquired
Medical Care America, Inc. ("MCA") in a transaction accounted for as a
purchase. During February 1994, the Company acquired HCA-Hospital Corporation
of America ("HCA") in a merger transaction accounted for as a pooling of
interests. Effective September 1993, the Company acquired Galen Health Care,
Inc. ("Galen") in a merger transaction accounted for as a pooling of
interests. Galen began operations as an independent publicly held corporation
upon the distribution of all of its common stock by its then 100% owner,
Humana Inc., in March 1993.
The Company, through various predecessor entities, began operations on July
1, 1988. The Company was incorporated in Nevada in January 1990 and
reincorporated in Delaware in September 1993. The Company's principal
executive offices are located at One Park Plaza, Nashville, Tennessee 37203,
and its telephone number at such address is (615) 344-9551.
1
CHALLENGES AND REORGANIZATION OF THE COMPANY
The Company encountered significant challenges and changes during 1997. The
Company is currently the subject of several federal investigations into its
business practices, as well as governmental investigations by numerous states.
The Company is also named in various legal proceedings. In addition, the
Company experienced changes in numerous management positions. The new
management team developed and initiated significant changes in business
strategy for the Company during 1997. These factors, along with the
unfavorable media coverage related to the investigations, may have contributed
to a slowdown in the Company's revenue growth and a decline in results of
operations. Management is unable to predict if, or when, the Company can
return to its historical revenue growth rates, historical operating margins or
historical net income growth rates.
The Company is facing significant legal challenges. The Company is the
subject of various federal and state investigations, qui tam actions,
stockholder derivative and class action complaints filed in federal court,
stockholder derivative actions filed in state courts, patient/payer actions
and general liability claims. See Item 3--"Legal Proceedings."
Management believes the ongoing investigations, litigation and related media
coverage are having a negative effect on the Company's results of operations.
It is too early to predict the outcome or effect that the ongoing
investigations and litigation, the initiation of additional investigations or
litigation, if any, and the related media coverage will have on the Company's
financial condition or results of operations in future periods. Were the
Company to be found in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, the Company 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 the Company's financial position and results
of operations.
During 1997, the Company experienced a significant change in management and
changes in its business strategy. On July 25, 1997, the Company announced the
resignations of Richard L. Scott, Chairman and Chief Executive Officer and
David T. Vandewater, President and Chief Operating Officer. Thomas F. Frist,
Jr., M.D., Vice Chairman of the Company's Board of Directors, was named
Chairman and Chief Executive Officer. On August 4, 1997, the Company named
Jack O. Bovender, Jr. as President and Chief Operating Officer.
On August 7, 1997, in an effort to address some areas of concern that may
have led to the investigations by certain government agencies, management
announced several significant steps that are being implemented to redefine the
Company's approach to a number of business practices. Some of the steps
include: elimination of annual cash incentive compensation for the Company's
employees, divestiture of the home health care business, the unwinding of
physician interests in hospitals, significant expansion of compliance
programs, increased disclosures in Medicare cost reports, changes in
laboratory billing procedures, increased reviews of Medicare coding and
further guidelines on any transactions with physicians. These changes have
been developed and are being implemented with consideration to laws,
regulations and existing contractual agreements. Management is not currently
able to predict what effect such actions might have on the Company's financial
position or results of operations.
On November 17, 1997, the Company announced that its Board of Directors had
approved an internal operating reorganization plan. Effective January 1, 1998,
the Company was organized into five principal groups--Eastern, Western,
Atlantic, Pacific and America.
The Board of Directors also authorized the evaluation of various
restructuring alternatives which could include divestitures of certain assets
to third parties and spin-offs of certain other
2
assets to the Company's stockholders. As part of these alternatives, the
Company is considering restructuring into a smaller, more focused company
located in strategic markets. No restructuring plan has been approved by the
Board of Directors and there can be no assurances that a plan will ultimately
be approved or implemented. Any spin-off or other restructuring alternative
would require Board of Directors approval as well as legal, regulatory and
governmental approvals.
BUSINESS STRATEGY
The Company's strategy is to be a comprehensive provider of quality health
care services in select markets. The Company maintains and replaces equipment,
renovates and constructs replacement facilities and adds new services to
increase the attractiveness of its hospitals and other facilities to local
physicians and patients. By developing a comprehensive health care network
with a broad range of health care services located throughout a market area,
the Company achieves greater visibility and is better able to attract and
serve physicians and patients. The Company is also able to reduce operating
costs by sharing certain services among several facilities in the same market
and is better positioned to work with health maintenance organizations
("HMOs"), preferred provider organizations ("PPOs") and employers.
The Company generally seeks to operate each of its facilities as part of a
network with other health care facilities that it owns or operates within the
same region. In instances where acquisitions of additional facilities in the
area are not possible or practical, the Company may seek joint ventures or
partnership arrangements with other local facilities.
HEALTH CARE FACILITIES
The Company currently owns, manages or operates hospitals, ambulatory
surgery centers, diagnostic centers, cardiac rehabilitation centers, physical
therapy centers, radiation oncology centers, comprehensive outpatient
rehabilitation centers and home health care agencies and programs. The Company
plans to divest its home health business and significant portions of Value
Health, Inc. as a component of the change in business strategy and
restructuring program. See Note 7 of the notes to consolidated financial
statements.
The Company currently operates 318 general, acute care hospitals with 65,184
licensed beds. Most of the Company's general, acute care hospitals provide
medical and surgical services, including inpatient care, intensive and cardiac
care, diagnostic services and emergency services. The general, acute care
hospitals also provide outpatient services such as outpatient surgery,
laboratory, radiology, respiratory therapy, cardiology and physical therapy. A
local advisory board, which usually includes members of the hospital's medical
staff, generally makes recommendations concerning the medical, professional
and ethical practices at each hospital and monitors such practices. However,
the hospital is ultimately responsible for ensuring that these practices
conform to established standards. When the Company acquires a hospital, it
establishes quality assurance programs to support and monitor quality of care
standards and to meet accreditation and regulatory requirements. Patient care
evaluations and other quality of care assessment activities are monitored on a
continuing basis.
Like most hospitals, the Company's hospitals do not engage in extensive
medical research and medical education programs. However, some of the
Company's hospitals have an affiliation with medical schools, including the
clinical rotation of medical students.
The Company currently operates 18 psychiatric hospitals with 1,914 licensed
beds. The Company's psychiatric hospitals provide therapeutic programs
tailored to child psychiatric, adolescent psychiatric, adult psychiatric,
adolescent alcohol or drug abuse and adult alcohol or drug abuse patients. The
hospitals use the "treatment team" concept whereby the admitting
3
physician, team psychologist, social workers, nurses, therapists and
counselors coordinate each phase of therapy. Services provided by this team
include crisis intervention, individual psychotherapy, group and family
therapy, social services, chemical dependency counseling, behavioral
modification and physical therapy. Family aftercare plans are actively
promoted from the time of admission, through hospitalization and after
discharge. An aftercare plan measures each patient's post-program progress and
utilizes one or more self-help groups. Program procedures are designed to
ensure that quality standards are achieved and maintained. Certain of the
Company's general, acute care hospitals also have a limited number of licensed
psychiatric beds.
Other outpatient or related health care services operated by the Company
include ambulatory surgery centers, diagnostic centers, outpatient physical
therapy/rehabilitation centers, outpatient radiation therapy centers, cardiac
rehabilitation centers and skilled nursing services. These outpatient and
related services are an integral component of the Company's strategy to
develop a comprehensive health care network in each of its target markets.
In addition to providing capital resources, the Company makes available a
variety of management services to its health care facilities, most
significantly: ethics and compliance programs; national supply and equipment
purchasing and leasing contracts; accounting, financial and clinical systems;
governmental reimbursement assistance; construction planning and coordination;
information systems; legal; personnel management and internal audit.
SOURCES OF REVENUE
Hospital revenues depend upon inpatient occupancy levels, the ancillary
services and therapy programs ordered by physicians and provided to patients,
the volume of outpatient procedures and the charges or negotiated payment
rates for such services. Charges and reimbursement rates for inpatient routine
services vary significantly depending on the type of service (e.g.,
medical/surgical, intensive care or psychiatric) and the geographic location
of the hospital. The Company has experienced an increase in the percentage of
patient revenues attributable to outpatient services. This increase is
primarily the result of advances in technology (which allow more services to
be provided on an outpatient basis), acquisitions of additional outpatient
facilities and increased pressures from Medicare, Medicaid, HMOs, PPOs,
employers and insurers to reduce hospital stays and provide services, where
possible, on a less expensive outpatient basis.
The Company receives payment for patient services from the federal
government primarily under the Medicare program, state governments under their
respective Medicaid programs, HMOs, PPOs and other private insurers as well as
directly from patients. The approximate percentages of patient revenues from
continuing operations of the Company's facilities from such sources during the
periods specified below were as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Medicare...................................... 34% 35% 36%
Medicaid...................................... 6 6 6
Other sources................................. 60 59 58
-------- -------- --------
Total......................................... 100% 100% 100%
======== ======== ========
Medicare is a federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and
persons with end-stage renal disease. Medicaid is a federal-state program
administered by the states which provides hospital benefits
4
to qualifying individuals who are unable to afford care. Substantially all of
the Company's hospitals are certified as providers of Medicare and Medicaid
services. Amounts received under the Medicare and Medicaid programs are
generally significantly less than the hospital's customary charges for the
services provided.
To attract additional volume, most of the Company's hospitals offer
discounts from established charges to certain large group purchasers of health
care services, including Blue Cross, other private insurance companies,
employers, HMOs, PPOs and other managed care plans. Blue Cross is a private
health care program that funds hospital benefits through independent plans
that vary in each state. These discount programs limit the Company's ability
to increase charges in response to increasing costs. See "Competition."
Patients are generally not responsible for any difference between customary
hospital charges and amounts reimbursed for such services under Medicare,
Medicaid, some Blue Cross plans, HMOs or PPOs, but are responsible to the
extent of any exclusions, deductibles or co-insurance features of their
coverage. The amount of such exclusions, deductibles and co-insurance has
generally been increasing each year. Collection of amounts due from
individuals is typically more difficult than from governmental or business
payers.
Medicare
Under the Medicare program the Company receives reimbursement under a
prospective payment system ("PPS") for the routine and ancillary operating
costs of most Medicare inpatient hospital services. Psychiatric, long-term
care, rehabilitation, specially designated children's hospitals and certain
designated cancer research hospitals, as well as psychiatric or rehabilitation
units that are distinct parts of a hospital and meet Health Care Financing
Administration ("HCFA") criteria for exemption, are currently exempt from PPS
and are reimbursed on a cost based system, subject to certain cost limits. The
Balanced Budget Act of 1997 ("BBA-97") mandates a prospective payment system
for skilled nursing facility services for Medicare cost reporting periods
commencing after June 30, 1998, hospital outpatient services beginning
January 1, 1999, home health services for Medicare cost reporting periods
beginning after September 30, 1999, and inpatient rehabilitation hospital
services for Medicare cost reporting periods beginning after September 30,
2000. Prior to the commencement of the prospective payment systems, payment
constraints will be applied to home health services and inpatient
rehabilitation, psychiatric and long-term hospital services for Medicare cost
reporting periods beginning on or after October 1, 1997.
Under PPS, fixed payment amounts per inpatient discharge were established
based on the patient's assigned diagnosis related group ("DRG"). DRGs classify
patients' 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 individual hospital participating in the
Medicare program and are based upon a statistically normal distribution of
severity. When treatments for certain patients fall well outside the normal
distribution (defined as "outliers"), providers are afforded additional
payments. Under PPS, hospitals may retain payments in excess of costs but must
absorb costs in excess of such payments; therefore, hospitals are encouraged
to operate more efficiently.
DRG rates are updated and recalibrated annually and have been affected by
several recent federal enactments. The index used by HCFA to adjust the DRG
rates gives consideration to the inflation experienced by hospitals in
purchasing goods and services ("market basket"). However, 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
market basket is adjusted each federal fiscal year ("FY"), which begins on
October 1. The market basket for FY 1995 was 3.6%, FY 1996 was 3.5%, FY 1997
was 2.5% and for FY 1998 will be 2.7%.
5
The Omnibus Budget Reconciliation Act of 1993 ("OBRA-93") set the updates to
the DRG rates for FY 1995 as market basket minus 2.5%; FY 1996 as market
basket minus 2%; and FY 1997 as market basket minus 0.5%. The BBA-97
establishes the DRG updates as follows: FY 1998 0%; FY 1999 as market basket
minus 1.9%; FY 2000 as market basket minus 1.8%; FY 2001 and 2002 as market
basket minus 1.1%; and FY 2003 and after as market basket.
The BBA-97 establishes a prospective payment system for all hospital
outpatient services based upon hospital costs (with the exception of physical,
occupational and speech therapies) for services provided after December 31,
1998. These therapy services will be reimbursed based upon a separate fee
schedule. The hospital outpatient payments for 1998 are required to be set at
the same amount as would have been paid under the present system which is the
lesser of 94.2% of reasonable costs, charges, or a blend of fees and costs for
approved ambulatory surgery procedures, diagnostic radiology procedures, and
other diagnostic procedures. The BBA-97 also made a change in the formula for
determining the amount of the fees in the aforementioned blend that
effectively reduces payment amounts.
Subsequent to September 30, 1991 and through FY 1992, capital related pay-
ments for inpatient hospital services were made at the rate of 90% of reason-
able capital costs. The PPS capital costs reimbursement applies an estimated
national average of FY 1989 Medicare capital costs per patient discharge up-
dated to FY 1992 by the estimated increase in Medicare capital costs per dis-
charge (the "Federal Rate"). Capital PPS is applicable to cost reports begin-
ning on or after October 1, 1991. Under capital PPS reimbursement, a 10 year
transition period has been established. A hospital is paid under one of the
following two different payment methodologies during this transition period:
(i) hospitals with a hospital-specific rate (the rate established for a hospi-
tal based on the cost report ending on or before December 31, 1990) below the
Federal Rate would be paid on a fully prospective payment methodology and (ii)
hospitals with a hospital-specific rate above the Federal Rate would be paid
based on a hold-harmless payment methodology or 100% of the Federal Rate,
whichever results in a higher payment. A hospital is generally paid under one
methodology throughout the entire transition, although a hospital can transi-
tion to the full Federal Rate if it exceeds the hold-harmless payment rate.
After the transition period, all hospitals will be paid the Federal Rate.
The impact of PPS capital reimbursement in the first two years was not
material to Medicare capital reimbursement. The hospital-specific rates for FY
1994 decreased 2.16%. The established Federal Rate for FY 1994 was reduced by
9.33% to $378 per patient discharge and for FY 1995 was reduced by 0.4% to
$377 per patient discharge. The hospital-specific rate for FY 1996 increased
21.1% and decreased by 4.32% for FY 1997. The Federal Rate for FY 1996
increased 22.5% to $462 and decreased to $439 for FY 1997 per patient
discharge. These changes were primarily the result of the expiration of a
budget neutrality provision of The Omnibus Budget Reconciliation Act of 1990
that limited payments to 90% of payments estimated to have been made on a
reasonable cost basis during the fiscal year. Legislation passed by Congress
and vetoed by the President would have resulted in a reduction of capital
payment rates for FY 1996. The BBA-97 reduces the hospital-specific rate for
FY 1998 by 14.4% and the Federal Rate for FY 1998 decreases to $371 per
patient discharge.
Home health visits are paid based upon reasonable costs, subject to
aggregated cost per visit limits. For Medicare cost reporting periods
beginning after September 30, 1997, these limits are reduced by the amount of
the update for Medicare cost reporting periods beginning after June 30, 1994
and before July 1, 1996 and are further reduced by calculating the limits to
equal 105% of the median costs of freestanding home health agencies rather
than 112% of such median costs as was the case before October 1, 1997.
Further, aggregate payments are limited to an agency-
specific per-beneficiary cost from the 12 month Medicare cost reporting period
ending after September 30, 1993 and before October 1, 1994, updated for
inflation. The per beneficiary limit will be a blend of 75% of 98% of the
agency-specific amount and 25% of 98% of a standardized regional average.
6
Payments to PPS-exempt hospitals and units, (i.e., inpatient psychiatric,
rehabilitation and long-term hospital services), are based upon reasonable
cost, subject to a cost per discharge target. These limits are updated
annually by a market basket index. For FY 1995, 1996 and 1997, the market
basket was 4.7%, 4.4%, and 3.5% respectively. The update for each year was
market basket minus 1%. The BBA-97 reduces the FY 1998 update to 0%. Capital
payments, which have been 100% of reasonable cost will be reduced by 15% for
FY 1998 through 2002. Furthermore, limits have been established for the cost
per discharge target at the 75th percentile for each category of PPS-exempt
hospitals and hospital units, i.e., psychiatric, rehabilitation and long-term
hospitals. These caps are $10,547, $19,250, and $37,688 per discharge,
respectively, for FY 1998. In addition the cost per discharge for new
hospitals/hospital units cannot exceed 110% of the national median target rate
for hospitals in the same category. For FY 1998 these amounts are $8,517,
$16,738, and $18,947 per discharge for psychiatric, rehabilitation and long-
term hospital services, respectively.
Prospective payments for skilled nursing facilities ("SNFs") will be based
upon per diems, which will be phased in over a four-year period starting with
cost reporting periods beginning after June 30, 1998. In the first year,
payments will be based on 75% of facility-specific rates and 25% federal rate;
year two will be 50% facility-specific rates and 50% federal rate; year three
will be 25% facility-specific rates and 75% federal rate; and year four 100%
federal rate. The facility-specific and federal rates will be updated
annually. For 1999, the facility-specific rate will be updated by the SNF
market basket minus 1% and thereafter by the SNF market basket. For 1999
through 2002 the federal rate will be updated by the SNF market basket minus
1%.
The BBA-97 reduced Medicare payment for enrollees' bad debts resulting from
non-payment of deductibles and coinsurance by 25% in FY 1998, 40% in FY 1999
and 45% in FY 2000 and after.
The BBA-97 also mandates a change in payment for certain hospital discharges
to post acute care providers. Beginning October 1, 1998, the Secretary of
Health and Human Services is required to identify 10 high-volume DRGs that
utilize a disproportionate amount of post discharge services to SNFs, PPS-
exempt hospitals and units, and home health agencies. Payments to a hospital
for these 10 DRGs, if the patient is discharged to one of the aforementioned
post acute services, will be a per-diem not to exceed the DRG payment (the so-
called transfer payment rate).
The changes in Medicare payments as a result of the BBA-97 may have a
material effect on the Company's results of operation.
Medicaid
Most state Medicaid payments are made under a prospective payment system 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 approximately 50% by the states and approximately
50% by the federal government. 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 the Company's
hospitals.
On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution
and Provider-Specific Tax Amendments of 1991 (the "Medicaid Amendments"),
which limit the amount of voluntary contributions and provider-specific taxes
that can be used by states to fund Medicaid and require the use of broad-based
taxes for such funding. As a result of enactment of the Medicaid Amendments,
certain states in which the Company operates have adopted broad-based provider
taxes to fund their Medicaid programs. To date, the impact upon the Company of
these new taxes has not been materially adverse. However, the Company is
unable to predict whether any additional broad-based provider taxes will be
adopted by the states in which it operates and, accordingly, is unable to
assess the effect thereof on its results of operations or financial position.
7
Annual Cost Reports
Review of previously submitted annual cost reports and the cost report
preparation process are areas included in the ongoing government
investigations. It is too early to predict the outcome of these
investigations, but if the Company were found to be in violation of federal or
state laws relating to Medicare, Medicaid or similar programs, the Company
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 the Company's financial
position and results of operations.
The Company's annual cost reports which are 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 the Company under
these reimbursement programs. These audits often require several years to
reach the final determination of amounts earned under the programs. Providers
also have rights of appeal, and the Company is currently contesting certain
issues raised in audits of prior years' reports. Management believes that
adequate provision has been made in its financial statements for any material
retroactive adjustments that might result from such audits and that final
resolution of the contested issues will not have a material adverse effect
upon the Company's results of operations or financial position.
Managed Care
Pressures to control the cost of health care have resulted in increases to
the percentage of admissions and net revenues attributable to managed care
payers. The percentage of the Company's admissions attributable to managed
care payers increased from 31.9% in 1996 to 35.2% in 1997 and the percentage
of the Company's net revenue from continuing operations attributable to
managed care payers increased from 25.2% in 1996 to 28.4% in 1997. The Company
expects that the trend of increasing percentages related to managed care
payers will continue in the future. The Company generally receives lower
payments from managed care payers than from traditional commercial/indemnity
insurers.
Commercial Insurance
The Company's hospitals provide services to individuals covered by private
health care insurance. Private insurance carriers either reimburse their
policy holders or make direct payments to the Company's hospitals based upon
the particular hospital's established charges and the particular coverage
provided in the insurance policy. Blue Cross is a health care financing
program that provides its subscribers with hospital benefits through
independent organizations that vary from state to state. The Company's
hospitals are paid directly by local Blue Cross organizations on the basis
agreed to by each hospital and Blue Cross by a written contract.
Commercial insurers are continuing efforts to limit the costs of hospital
services by adopting prospective payment or DRG based payment systems for more
inpatient and outpatient services. To the extent such efforts are successful
and reduce the insurers' reimbursements to hospitals for the costs of
providing services to their beneficiaries, such efforts may have a negative
impact on the operating results of the Company's hospitals.
HOSPITAL UTILIZATION
The Company believes that the two most important factors relating to the
overall utilization of a hospital are the quality and market position of the
hospital and the number and quality of physicians providing patient care
within the facility. Generally, the Company believes that the ability of a
hospital to be a market leader is determined by its breadth of services, level
of technology, emphasis on quality of care and convenience for patients and
physicians. Other factors
8
which impact utilization include the growth in local population, local
economic conditions and market penetration of managed care programs.
The following table sets forth certain operating statistics for hospitals
owned by the Company for each of the most recent five years. Medical/surgical
hospital operations are subject to certain seasonal fluctuations, including
decreases in patient utilization during holiday periods and increases in the
cold weather months. Psychiatric hospital operations are also subject to
certain seasonal fluctuations, including decreases in patient occupancy during
the summer months and holiday periods.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997(g) 1996(g) 1995(g) 1994 1993
--------- --------- --------- --------- ---------
Number of hospitals (a). 309 319 319 311 274
Weighted average
licensed beds (b)...... 61,096 62,708 61,617 57,517 53,247
Admissions (c).......... 1,915,100 1,895,400 1,774,800 1,565,500 1,451,000
Average length of stay
(days) (d)............. 5.0 5.1 5.3 5.6 5.8
Average daily census
(e).................... 26,006 26,583 25,917 23,841 22,973
Occupancy rate (f)...... 43% 42% 42% 41% 43%
- --------
(a) End of period.
(b) Represents the average number of licensed beds weighted based on periods
owned. Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(c) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals.
(d) Represents the average number of days admitted patients stay in the
Company's hospitals.
(e) Represents the average number of patients in the Company's hospital beds
each day.
(f) Represents the percentage of hospital licensed beds occupied by patients.
(g) Excludes 27 facilities in 1997, 22 facilities in 1996 and 19 facilities in
1995 that are not consolidated (accounted for using the equity method) for
financial reporting purposes.
Hospitals have experienced significant shifts from inpatient to outpatient
care as well as decreases in average lengths of inpatient stay, primarily as a
result of hospital payment changes by Medicare, insurance carriers, managed
care programs and self-insured employers. These changes generally encouraged
the utilization of outpatient, rather than inpatient, services whenever
possible, and shortened lengths of stay for inpatient care. Another factor
affecting hospital utilization levels is improved treatment protocols as a
result of medical technology and pharmacological advances.
COMPETITION
Generally, other hospitals in the local markets served by most of the
Company's hospitals provide services that are offered by the Company's
hospitals. Additionally, in the past several years, the number of freestanding
outpatient surgery and diagnostic centers in the geographic areas in which the
Company operates has increased significantly. As a result, most of the
Company's hospitals operate in an increasingly competitive environment. The
rates charged by the Company's hospitals are intended to be competitive with
those charged by other local hospitals for similar services. In some cases,
competing hospitals are more established than the Company's hospitals. Some
competing hospitals are owned by tax-supported government agencies and many
others by tax-exempt entities which may be supported by endowments and
charitable contributions and are exempt from sales, property and income taxes.
Such exemptions and support are not available to the Company's hospitals. In
addition, in certain localities served by the Company, there are large
teaching hospitals which provide highly specialized facilities,
9
equipment and services which may not be available at most of the Company's
hospitals. Psychiatric hospitals frequently attract patients from areas
outside their immediate locale and, therefore, the Company's psychiatric
hospitals compete with both local and regional hospitals, including the
psychiatric units of general, acute care hospitals.
The Company believes that its hospitals compete within local markets on the
basis of many factors, including the quality of care, ability to attract and
retain quality physicians, location, breadth of services, technology offered
and prices charged. The competition among hospitals and other health care
providers has intensified in recent years as hospital occupancy rates have
declined. The Company's strategies are designed, and management believes that
its hospitals are positioned, to be competitive under these changing
circumstances.
One of the most significant factors in the competitive position of a
hospital is the number and quality of physicians affiliated with the hospital.
Although physicians may at any time terminate their affiliation with a
hospital operated by the Company, the Company's hospitals seek to retain
physicians of varied specialties on the hospitals' medical staffs and to
attract other qualified physicians. The Company believes that physicians refer
patients to a hospital primarily on the basis of the quality of services it
renders to patients and physicians, the quality of other physicians on the
medical staff, the location of the hospital and the quality of the hospital's
facilities, equipment and employees. Accordingly, the Company strives to
maintain high ethical and professional standards and quality facilities,
equipment, employees and services for physicians and their patients.
Another major factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services. HMOs and PPOs attempt to direct and control the use of
hospital services through managed care programs and to obtain discounts from
hospitals' established charges. In addition, employers and traditional health
insurers are increasingly interested in containing costs through negotiations
with hospitals for managed care programs and discounts from established
charges. Generally, hospitals compete for service contracts with group health
care service purchasers on the basis of price, market reputation, geographic
location, quality and range of services, quality of the medical staff and
convenience. The importance of obtaining contracts with managed care
organizations varies from market to market depending on the market strength of
such organizations.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and add new equipment, may also
have the effect of restricting competition. The application process for
approval of covered services, facilities, changes in operations and capital
expenditures is, therefore, highly competitive. In those states which have no
CON laws or which set relatively high levels of expenditures before they
become reviewable by state authorities, competition in the form of new
services, facilities and capital spending is more prevalent. The Company has
not experienced, and does not expect to experience, any material adverse
effects from state CON requirements or from the imposition, elimination or
relaxation of such requirements. See "Regulation and Other Factors."
The Company, 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 United States 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 the Company's facilities, equipment, personnel,
rates and/or services in the future.
10
The hospital industry and the Company's hospitals continue to have
significant unused capacity and substantial competition for patients.
Inpatient utilization, average lengths of stay and average occupancy rates
continue to be negatively affected by payer-required pre-admission
authorization, utilization review and by payer pressure to maximize outpatient
and alternative health care delivery services for less acutely ill patients.
Increased competition, admissions constraints and payer pressures are expected
to continue. To meet these challenges, the Company expands many of its
facilities to include outpatient centers, offers discounts to private payer
groups, enters into capitation contracts in some service areas, upgrades
facilities and equipment and offers new programs and services.
REGULATION AND OTHER FACTORS
Licensure, Certification and Accreditation
Health care facility construction and operation is 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 the Company's health care
facilities are properly licensed under appropriate state laws. Substantially
all of the Company's general, acute care hospitals are certified under the
Medicare program or are accredited by the Joint Commission on Accreditation of
Healthcare Organizations ("Joint Commission"), the effect of which is to
permit the facilities to participate in the Medicare and Medicaid programs.
Certain of the Company's psychiatric hospitals do not participate in these
programs. Should any facility lose its Joint Commission accreditation, or
otherwise lose its certification under the Medicare program, the facility
would be unable to receive reimbursement from the Medicare and Medicaid
programs. Management believes that the Company's facilities are in substantial
compliance with current applicable federal, state, local and independent
review body regulations and standards. The requirements for licensure,
certification and accreditation are subject to change and, in order to remain
qualified, it may be necessary for the Company to effect changes in its
facilities, equipment, personnel and services.
Certificates of Need
The construction of new facilities, the acquisition of existing facilities,
and the addition of new beds or services may be subject to review by state
regulatory agencies under a CON program. The Company operates hospitals in
some states that require approval under a CON program. Such laws generally
require appropriate 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, complete an acquisition or change ownership.
Further, violation may result in the imposition of civil or, in some cases,
criminal sanctions, the denial of Medicare or Medicaid reimbursement or the
revocation of a facility's license.
State Rate Review
Some states in which the Company owns hospitals have adopted legislation
mandating rate or budget review for hospitals or have adopted taxes on
hospital revenues, assessments or licensure fees to fund indigent health care
within the state.
In Florida, a budget review process and limitations on net revenue increases
per admission have been in effect with respect to the Company's hospitals
since January 1, 1986. The increase in hospital net revenues per admission is
limited to an annually-determined percentage increase in costs that Florida
hospitals pay for goods and services plus a statutory 2%, plus additional
amounts which recognize the effect of patient days related to Medicare,
Medicaid and
11
uncompensated charity care. This law limits the ability of Florida hospitals
to increase rates to maintain operating margins. The Company operated 52
hospitals aggregating 12,105 beds in Florida as of December 31, 1997.
In the aggregate, state rate or budget review and indigent tax provisions
have not materially adversely affected the Company's results of operations.
The Company is unable to predict whether any additional state rate or budget
review or indigent tax provisions will be adopted and, accordingly, is unable
to assess the effect thereof on its results of operations or financial
condition.
Utilization Review
Federal law contains numerous provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards, are medically necessary and that claims for
reimbursement are properly filed. These provisions include a requirement that
a sampling of admissions of Medicare and Medicaid patients must be reviewed by
peer review organizations ("PROs"), which review the appropriateness of
Medicare and Medicaid patient admissions and discharges, the quality of care
provided, the validity of DRG classifications and the appropriateness of cases
of extraordinary length of stay or cost. PROs 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 PRO be excluded from
participating in the Medicare program. Utilization review is also a
requirement of most non-governmental managed care organizations.
Medicare Regulations and Fraud and Abuse
Participation in the Medicare program is heavily regulated by federal
statute and regulation. If a hospital provider fails substantially to comply
with the numerous conditions of participation in the Medicare program or
performs certain prohibited acts (e.g., (i) making false claims to Medicare
for services not rendered or misrepresenting actual services rendered in order
to obtain higher reimbursement; (ii) paying remuneration for Medicare
referrals (so called "fraud and abuse" which is prohibited by the "anti-
kickback" provisions of the Social Security Act); (iii) failing to stabilize
all individuals who come to its emergency room who have an "emergency medical
condition," whether or not any such individual is eligible for Medicare; (iv)
transferring any stabilized patient to another health care facility before
such other facility has agreed to the transfer of such patient, while such
other facility does not have sufficient room and staff to treat the patient,
without the patient's emergency department medical records, or without
appropriate life support equipment; and (v) transferring any unstabilized
patient (except those transferred at the patient's request or with physician
certification that the medical risks from the transfer are less harmful than
continued treatment at the transferring facility), such hospital's
participation in the Medicare program may be terminated or civil or criminal
penalties may be imposed upon such hospital under certain provisions of the
Social Security Act.
Moreover, HHS and the courts have interpreted the "fraud and abuse" anti-
kickback provisions of the Social Security Act (presently codified in Section
1128B(b) of the Social Security Act, hereinafter the "Antifraud Amendments")
broadly to include the intentional offer, payment, solicitation or receipt of
anything of value if one purpose of the payment is to induce the referral of
Medicare business. Health care providers generally are concerned that many
relatively innocuous, or even beneficial, commercial arrangements with their
physicians may technically violate this strict interpretation of the Antifraud
Amendments.
In 1976 Congress established the Office of Inspector General ("OIG") at HHS
to identify and eliminate fraud, abuse and waste in HHS programs and to
promote efficiency and economy in HHS departmental operations. The OIG carries
out this mission through a nationwide program
12
of audits, investigations and inspections. In order to provide guidance to
health care providers on ways to engage in legitimate business practices and
avoid scrutiny under the fraud and abuse statutes, the OIG has from time to
time issued "fraud alerts" identifying features of transactions, which, if
present, may indicate that the transaction violates the fraud and abuse law.
In May 1992, the OIG issued a special fraud alert regarding hospital
incentives to physicians. The alert identified the following incentive
arrangements as potential violations of the statute: (a) payment of any sort
of incentive by the hospital each time a physician refers a patient to the
hospital, (b) the use of free or significantly discounted office space or
equipment (in facilities usually located close to the hospital), (c) provision
of free or significantly discounted billing, nursing or other staff services,
(d) free training for a physician's office staff in areas such as management
techniques and laboratory techniques, (e) guarantees which provide that, if
the physician's income fails to reach a predetermined level, the hospital will
supplement the remainder up to a certain amount, (f) low-interest or interest-
free loans, or loans which may be forgiven if a physician refers patients (or
some number of patients) to the hospital, (g) payment of the costs of a
physician's travel and expenses for conferences, (h) coverage on the
hospital's group health insurance plans at an inappropriately low cost to the
physician and (i) payment for services (which may include consultations at the
hospital) which require few, if any, substantive duties by the physician, or
payment for services in excess of the fair market value of services rendered.
In this fraud alert the OIG encouraged persons having information about
hospitals who offer the above types of incentives to physicians to report such
information to the OIG.
In addition, on July 29, 1991, the OIG issued final regulations outlining
certain "safe harbor" practices, which, although potentially capable of
inducing prohibited referrals of business under Medicare or state health
programs, would not be subject to enforcement action under the Social Security
Act. The practices covered by the regulations include certain physician joint
venture transactions, rental of space and equipment, personal services and
management contracts, sales of physician practices, referral services,
warranties, discounts, payments to employees, group purchasing organizations
and waivers of beneficiary deductibles and co-payments. Certain of the
Company's current arrangements with physicians, including joint ventures, do
not qualify for the current safe harbor exemptions and, as a result, such
arrangements risk scrutiny by the OIG and may be subject to enforcement
action. The failure of these arrangements to satisfy all of the conditions of
the applicable safe harbor criteria does not mean that the arrangements are
illegal. Nevertheless, certain of the Company's current financial arrangements
with physicians, including joint ventures, and the Company's future financial
arrangements with physicians, could be adversely affected by the failure of
such arrangements to comply with the safe harbor regulations, or the future
adoption of other legislation or regulation in these areas.
Section 1877 of the Social Security Act (commonly known as "Stark I")
prohibits referrals of Medicare and Medicaid patients to clinical laboratories
with which a referring physician has a financial relationship. OBRA-93
included certain amendments to Section 1877 (such amendments commonly known as
"Stark II") which substantially broadened the scope of prohibited physician
self-referrals to include referrals by physicians to entities with which the
physician has a financial relationship and which provide certain "designated
health services" which are reimbursable by Medicare or Medicaid. "Designated
health services" include not only the clinical laboratory services which were
the only such services covered by Stark I, but also, among other things,
physical and occupational therapy services, radiology services, durable
medical equipment, home health, and inpatient and outpatient hospital
services. Sanctions for violating Stark I or II include civil money penalties
up to $15,000 per prohibited service provided, assessments equal to 200% of
the dollar value of each such service provided and exclusion from the Medicare
and Medicaid programs. Stark II contains certain exceptions to the self-
referral prohibition, including an exception if the physician has an ownership
interest in the entire hospital. Stark II became effective January 1, 1995 and
proposed regulations implementing the new provisions were
13
published on January 9, 1998. The Company cannot predict the final form that
such regulations will take or the effect that Stark II or the regulations
promulgated thereunder will have on the Company.
Many states in which the Company operates also have laws that prohibit
payments to physicians for patient referrals with statutory language similar
to the Antifraud Amendments, but with broader effect since they apply
regardless of the source of payment for care. These statutes typically provide
criminal and civil penalties as well as loss of licensure. Many states also
have passed legislation similar to Stark II, but with broader effect, since
the legislation applies regardless of the source of payment for care. The
scope of these state laws is broad, and little precedent exists for their
interpretation or enforcement.
On August 21, 1996, President Clinton signed significant new federal health
reform legislation known as the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). Most important for health care
providers, the new law includes comprehensive and far-reaching amendments or
supplements to the Antifraud Amendments. It also contains substantive
provisions relating to portability of health insurance coverage and
limitations on preexisting condition exclusions. Under HIPAA, health care
fraud, now defined as knowingly and willfully executing or attempting to
execute a "scheme or device" to defraud any health care benefit program, is
made a federal criminal offense. In addition, for the first time, federal
enforcement officials will have the ability to exclude from Medicare and
Medicaid any investors, officers and managing employees associated with
business entities that have committed health care fraud, even if the investor,
officer or employee had no knowledge of the fraud. HIPAA also establishes a
new violation for the payment of inducements to Medicare or Medicaid
beneficiaries in order to influence those beneficiaries to order or receive
services from a particular provider or practitioner. Most of the provisions of
HIPAA became effective January 1, 1997.
HIPAA was followed by BBA-97 which was enacted by Congress on August 5,
1997. BBA-97 contains a significant number of new fraud and abuse provisions.
Civil monetary penalties ("CMP") may now be imposed for violations of the
anti-kickback provisions of the Medicare and Medicaid statute (previously,
exclusion or criminal prosecution were the only actions under the anti-
kickback statute) as well as contracting with an individual or entity that the
provider knows or should know is excluded from a federal health care program.
BBA-97 provides for a CMP of $50,000 and damages of not more than three times
the amount of remuneration in the prohibited activity. In addition, BBA-97
also has important discharge planning and reimbursement provisions as well as
surety bond requirements for home health agencies.
The Social Security Act also imposes criminal and civil penalties for making
false claims to Medicare and Medicaid for services not rendered or for
misrepresenting actual services rendered in order to obtain higher
reimbursement. Like the Antifraud Amendments, this statute is very broad.
Careful and accurate coding of claims for reimbursement must be performed to
avoid liability under the false claims statutes.
The Company is currently the subject of government investigations into the
Company's business practices in several states. See Item 3--"Legal
Proceedings."
Certain of the Company's current financial arrangements with physicians,
including joint ventures, and the Company's future development of joint
ventures and other financial arrangements with physicians, could be adversely
affected by the failure of such arrangements to comply with the Antifraud
Amendments, Section 1877, current state laws or other legislation or
regulation in these areas adopted in the future. The Company is unable to
predict the effect of such regulations, whether other legislation or
regulations at the federal or state level in any of
14
these areas will be adopted, what form such legislation or regulations may
take or their impact on the Company. The Company is continuing to enter into
new financial arrangements with physicians and other providers in a manner
structured to comply in all material respects with these laws. There can be no
assurance, however, that (i) governmental officials charged with the
responsibility for enforcing these laws will not assert that the Company is in
violation thereof or (ii) such statutes will ultimately be interpreted by the
courts in a manner consistent with the Company's interpretation.
The federal Medicaid regulations also prohibit fraudulent and abusive
practices and authorize the exclusion from such program of providers in
violation of such regulations.
State Legislation
Some of the states in which the Company operates have laws that prohibit
corporations and other entities from employing physicians and practicing
medicine for a profit or that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of,
particular providers for medical products and services. In addition, some
states restrict certain business relationships between physicians and
pharmacies. Possible sanctions for violation of these restrictions include
loss of licensure and civil and criminal penalties. These statutes vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. Although the Company exercises care in an effort to
structure its arrangements with health care providers to comply with the
relevant state statutes, and although management believes that the Company is
in compliance with these laws, there can be no assurance that (i) governmental
officials charged with responsibility for enforcing these laws will not assert
that the Company or certain transactions in which it is involved are in
violation of such laws and (ii) such state laws will ultimately be interpreted
by the courts in a manner consistent with the practices of the Company.
Health Care Reform
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.
Among the proposals under consideration are cost controls on hospitals,
insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan that would cover all citizens. 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 Company's business, financial condition or results of operations.
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
15
not-for-profit conversions. The adoption of conversion legislation and the
increased review of not-for-profit hospital conversions may limit the
Company's ability to grow through acquisitions of not-for-profit hospitals.
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. The Company
has not determined the impact of the tax ruling on its existing joint
ventures, or the development of future ventures, and is consulting with its
joint venture partners and tax advisers to develop an appropriate course of
action. The tax ruling could limit joint venture development with not-for-
profit hospitals, require the restructuring of certain existing joint ventures
with not-for-profits and influence the exercise of "put agreements" (that
require the Company to purchase the partner's interest in the joint venture)
by certain existing joint venture partners.
15(a)
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local statutes and
ordinances regulating the discharge of materials into the environment.
Management does not believe that the Company will be required to expend any
material amounts in order to comply with these laws and regulations or that
compliance will materially affect its capital expenditures, earnings or
competitive position.
INSURANCE
As is typical in the health care industry, the Company is subject to claims
and legal actions by patients in the ordinary course of business. Through a
wholly-owned insurance subsidiary, the Company insures a substantial portion
of its general and professional liability risks. The Company's health care
facilities are insured by the insurance subsidiary for losses of up to $25
million per occurrence, a portion of which is reinsured with unrelated
commercial carriers. The Company also maintains general and professional
liability insurance with unrelated commercial carriers for losses in excess of
amounts insured by its insurance subsidiary.
The Company and its insurance subsidiary maintain allowances for loss for
professional and general liability risks which totalled $1.3 billion at
December 31, 1997. Management considers such allowances, which are based on
actuarially determined estimates, to be adequate for such liability risks. Any
losses incurred in excess of the established allowances for loss will be
reflected as a charge to earnings of the Company. Any losses incurred in
excess of amounts funded and maintained with commercial excess liability
insurance carriers will be funded from the Company's working capital. While
the Company's cash flow has been adequate to provide for professional and
general liability claims in the past, there can be no assurance that such
amounts will continue to be adequate. If payments for general and professional
liabilities exceed anticipated losses, the results of operations and financial
condition of the Company could be adversely affected.
EMPLOYEES AND MEDICAL STAFFS
At December 31, 1997, the Company had approximately 295,000 employees,
including approximately 65,000 part-time employees. Employees at 14 hospitals
are represented by various labor unions. The Company considers its employee
relations to be satisfactory. While the Company's hospitals experience union
organizational activity from time to time, the Company does not expect such
efforts to materially affect its future operations. The Company's hospitals,
like most hospitals, have experienced labor costs rising faster than the
general inflation rate. In recent years, the Company generally has not
experienced material difficulty in recruiting and retaining employees,
including nurses and professional staff members, primarily as a result of
staff retention programs and general economic conditions. There can be no
assurance as to future availability and cost of qualified medical personnel.
References herein to "employees" refer to employees of affiliates of the
Company.
The Company's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. With certain
exceptions, physicians generally are not employees of the Company's hospitals.
However, some physicians provide services in the Company's hospitals under
contracts, which generally describe a term of service, provide and establish
the duties and obligations of such physicians, require the maintenance of
certain performance criteria and fix compensation for such services. Any
licensed physician may apply to be admitted to the medical staff of any of the
Company's hospitals, but admission to the staff must be approved by the
hospital's medical staff and the appropriate governing board of the hospital
in accordance with established credentialling criteria. Members of the medical
staffs of the Company's hospitals often also serve on the medical staffs of
other hospitals, and may terminate their affiliation with a hospital at any
time.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 16, 1998, were as follows:
NAME AGE POSITION(S)
---- --- -----------
Chairman of the Board and Chief Executive
Thomas F. Frist, Jr., M.D.. 59 Officer
Jack O. Bovender, Jr....... 52 President and Chief Operating Officer
David G. Anderson.......... 50 Vice President--Finance and Treasurer
Richard M. Bracken......... 45 President--Western Group
Victor L. Campbell......... 51 Senior Vice President
Kenneth C. Donahey......... 47 Senior Vice President and Controller
W. Leon Drennan............ 42 President--Physician Services
Rosalyn S. Elton........... 36 Vice President--Financial Planning
James A. Fitzgerald, Jr.... 43 Vice President--Operations Support
James M. Fleetwood, Jr..... 50 President--America Group
V. Carl George............. 54 Vice President--Development
Jay F. Grinney............. 47 President--Eastern Group
Neil D. Hemphill........... 44 Senior Vice President--Human Resources
Senior Vice President--Quality and Medical
Frank M. Houser, M.D....... 57 Director
Daniel J. Moen............. 46 President--Columbia Sponsored Networks
A. Bruce Moore, Jr......... 38 Vice President--Operations Administration
Senior Vice President--Columbia Sponsored
Richard A. Schweinhart..... 48 Networks
James D. Shelton........... 44 President--Pacific Group
Joseph N. Steakley......... 43 Vice President--Audit and Consulting Services
Robert A. Waterman......... 44 Senior Vice President and General Counsel
David R. White............. 50 President--Atlantic Group
Noel Brown Williams........ 43 Senior Vice President and Chief Information
Officer
Alan R. Yuspeh............. 48 Senior Vice President--Ethics, Compliance and
Corporate Responsibility
Thomas F. Frist, Jr., M.D. has served as Chairman of the Board and Chief
Executive Officer since July 1997. Previously, he served as Vice Chairman of
the Board of the Company since April 1995. From February 1994 to April 1995,
he was Chairman of the Board of the Company. Dr. Frist was Chairman of the
Board, President and Chief Executive Officer of HCA-Hospital Corporation of
America ("HCA") from 1988 to February 1994. Dr. Frist was previously Chairman
and Chief Executive Officer of Hospital Corporation of America from August
1985 until September 1987.
Jack O. Bovender, Jr. has served as President and Chief Operating Officer of
the Company since August 1997. From April 1994 to August 1997, he was retired
after serving as Chief Operating Officer of HCA from 1992 until 1994. Prior to
1992, Mr. Bovender held several senior level positions with HCA.
David G. Anderson has served as Vice President--Finance of the Company since
September 1993 and was elected to the additional position of Treasurer in
November 1996. From March 1993 until September 1993, Mr. Anderson served as
Vice President Finance and Treasurer of Galen Health Care, Inc. From July 1988
to March 1993, Mr. Anderson served as Vice President Finance and Treasurer of
Humana Inc.
Richard M. Bracken has served as President--Western Group of the Company
since August 1997. From January 1995 to August 1997, Mr. Bracken served as
President of the Pacific Division of the Company. From July 1993 to December
1994, he served as President of Nashville Healthcare Network, Inc. From
December 1981 to June 1993, he served in various hospital Chief Executive
Officer and Administrator positions with HCA.
17
Victor L. Campbell has served as Senior Vice President of the Company since
February 1994. Prior to that time, Mr. Campbell served as HCA's Vice President
for Investor, Corporate, and Government Relations. Mr. Campbell joined HCA in
1972. Mr. Campbell is currently a director of the Federation of American
Health Systems and the American Hospital Association.
Kenneth C. Donahey has served as Senior Vice President and Controller of the
Company since April 1995. Prior to that time, Mr. Donahey served as Senior
Vice President and Controller of Healthtrust from April 1993 to April 1995.
Mr. Donahey served as Vice President and Controller of Healthtrust from 1987
to 1993.
W. Leon Drennan has served as President--Physician Services for the Company
since January 1998. Mr. Drennan served as Senior Vice President--Internal
Audit of the Company from February 1995 to December 1997. From February 1994
to January 1995, Mr. Drennan served as Vice President--Internal Audit of the
Company. Mr. Drennan served as Vice President--Internal Audit for HCA from
1987 until 1994.
Rosalyn S. Elton has served as Vice President--Financial Planning of the
Company since August 1993. From October 1990 to August 1993, Ms. Elton served
as Vice President--Financial Planning and Treasury.
James A. Fitzgerald, Jr. has served as Vice President--Operations Support of
the Company since 1994. From 1993 to 1994, he served as the Assistant Vice
President of Operations Support. From July 1981 to 1993, Mr. Fitzgerald served
as Director of Internal Audit for HCA.
James M. Fleetwood, Jr. has served as President--America Group of the
Company since January 1, 1998. Mr. Fleetwood served as President--Florida
Group of the Company from May 1996 to January 1998. Mr. Fleetwood served as
President of the Company's North Florida Division from April 1995 to May 1996.
From August 1992 to April 1995, Mr. Fleetwood was a Regional Vice President of
Healthtrust. Mr. Fleetwood served as the Administrator and Chief Executive
Officer of Plantation General Hospital in Plantation, Florida from July 1989
to August 1992.
V. Carl George has served as Vice President --Development of the Company
since April 1995. From August 1987 to April 1995, Mr. George served as
Director of Development for Healthtrust.
Jay F. Grinney has served as President--Eastern Group of the Company since
May 1996. From October 1993 to May 1996, Mr. Grinney served as President of
the Greater Houston Division of the Company. From November 1992 to October
1993, Mr. Grinney served as Chief Operating Officer of the Houston Region of
the Company. From June 1990 to November 1992, Mr. Grinney served as President
and Chief Executive Officer of Rosewood Medical Center in Houston, Texas.
Neil D. Hemphill has served as Senior Vice President--Human Resources of the
Company since February 1994. Mr. Hemphill served as Vice President--Human
Resources of the Company from June 1992 to February 1994. Mr. Hemphill was a
Director of Human Resources of Republic Health Corporation from January 1985
to June 1992.
Frank M. Houser, M.D. has served as Senior Vice President --Quality and
Medical Director of the Company since November 1997. Dr. Houser served as
President--Physician Management Services of the Company from May 1996 to
November 1997. Dr. Houser served as President of the Georgia Division of the
Company from December 1994 to May 1996. From May 1993 to December 1994, Dr.
Houser served as the Medical Director of External Operations at The Emory
Clinic, Inc. in Atlanta, Georgia. Dr. Houser served as State Public Health
Director, Georgia Department of Human Resources, from July 1991 to May 1993.
18
Daniel J. Moen has served as President--Columbia Sponsored Networks since
March 1996, and served as President of the Company's Florida Group from
February 1994 until March 1996. Mr. Moen was President of the Company's South
Florida Division from October 1991 until February 1994.
A. Bruce Moore, Jr. has served as Vice President--Operations Administration
of the Company since September 1997. From October 1996 to September 1997
Mr. Moore served as Vice President--Benefits of the Company. Mr. Moore served
as Vice President of Compensation of the Company from March 1995 until October
1996. From February 1994 to March 1995, Mr. Moore served as Director--
Compensation of the Company. Mr. Moore also served as Director--Compensation
for HCA from November 1987 until February 1994.
Richard A. Schweinhart has served as Senior Vice President--Columbia
Sponsored Networks of the Company since March 1996. From April 1995 until
March 1996, Mr. Schweinhart served as Senior Vice President--Nonhospital
Operations, and from September 1993 until April 1995 as Senior Vice
President--Finance of the Company. Mr. Schweinhart served as Senior Vice
President--Finance for both Galen and Humana from November 1991 to September
1993.
James D. Shelton has served as President--Pacific Group since January 1,
1998. Mr. Shelton served as President--Central Group of the Company from June
1994 until January 1998. From May 1993 to June 1994, Mr. Shelton was employed
by National Medical Enterprises, Inc. ("NME") (presently called Tenet
Healthcare Corporation) as Executive Vice President of the Central Division.
Mr. Shelton served as Senior Vice President of Operations for NME from August
1986 until May 1993.
Joseph N. Steakley has served as Vice President--Audit and Consulting
Services since November 1997. From December 1975 until October 1997, Mr.
Steakley worked for Ernst & Young LLP where he served as a partner from
October 1989.
Robert A. Waterman has served as Senior Vice President and General Counsel
of the Company since November 1997. Mr. Waterman served as a partner in the
law firm of Latham & Watkins from September 1993 to October 1997; he was also
Chair of the firm's healthcare group during 1997. Prior to September 1993, Mr.
Waterman was a partner in the law firm of McCutchen, Doyle, Brown & Enersen.
David R. White has served as President--Atlantic Group since January 1,
1998. Mr. White joined the Company in March 1994 and served as President--
Mid-America Group of the Company since June 1995. Before this period, he
served as Executive Vice President and Chief Operating Officer with Community
Health Systems, Inc. for eight years.
Noel Brown Williams has served as Senior Vice President and Chief
Information Officer of the Company since October 1997. From October 1996 to
September 1997, Ms. Williams served as Chief Information Officer for American
Services Group/Prison Health Services, Inc. From September 1995 to September
1996, Ms. Williams worked as an independent consultant. From June 1993 to June
1995, Ms. Williams served as Vice President, Information Services for
Columbia/HCA Information Services. From February 1979 to June 1993, she held
various positions with HCA Information Services.
Alan R. Yuspeh has served as Senior Vice President--Ethics, Compliance and
Corporate Responsibility of the Company since October 1997. From September
1991 until October 1997, Mr. Yuspeh was a partner with the law firm of Howrey
& Simon. As a part of his law practice, Mr. Yuspeh served from 1987 to 1997 as
Coordinator of the Defense Industry Initiative on Business Ethics and Conduct.
19
ITEM 2. PROPERTIES.
The following table lists, by state, the number of hospitals owned, managed
or operated by the Company as of December 31, 1997:
LICENSED
STATE HOSPITALS BEDS
----- --------- --------
Alabama................................................ 9 1,303
Alaska................................................. 1 254
Arizona................................................ 5 789
Arkansas............................................... 4 909
California............................................. 16 3,006
Colorado............................................... 9 2,226
Florida................................................ 52 12,105
Georgia................................................ 19 3,193
Idaho.................................................. 2 462
Illinois............................................... 8 2,584
Indiana................................................ 2 460
Kansas................................................. 5 1,707
Kentucky............................................... 13 2,505
Louisiana.............................................. 20 3,093
Massachusetts.......................................... 2 501
Mississippi............................................ 2 284
Missouri............................................... 3 767
Nevada................................................. 2 808
New Hampshire.......................................... 2 295
New Mexico............................................. 2 381
North Carolina......................................... 7 996
Ohio................................................... 4 1,617
Oklahoma............................................... 8 1,532
Oregon................................................. 2 198
South Carolina......................................... 5 932
Tennessee.............................................. 29 4,271
Texas.................................................. 66 13,150
Utah................................................... 7 951
Virginia............................................... 15 3,534
Washington............................................. 1 119
West Virginia.......................................... 7 1,284
Wyoming................................................ 1 70
INTERNATIONAL
-------------
Spain.................................................. 1 110
Switzerland............................................ 1 185
United Kingdom......................................... 4 517
--- ------
336 67,098
=== ======
In addition to the hospitals listed in the above table, the Company operates
145 outpatient surgery centers. The Company also operates medical office
buildings in conjunction with its hospitals. These office buildings are pri-
marily occupied by physicians who practice at the Company's hospitals.
The Company owns and maintains its headquarters in approximately 580,000
square feet of space in five office buildings in Nashville, Tennessee.
20
The Company's headquarters, hospitals and other facilities are suitable for
their respective uses and are, in general, adequate for the Company's present
needs.
ITEM 3. LEGAL PROCEEDINGS.
FEDERAL AND STATE INVESTIGATIONS
In March 1997, various facilities of the Company's El Paso, Texas operations
were searched by federal authorities pursuant to search warrants, and the
government removed various records and documents. In February 1998, an
additional warrant was executed and a single computer was seized. The Company
believes it may be a target in this investigation.
In July 1997, various Company affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District
Court in several states. During July, September and November 1997, the Company
was also served with subpoenas requesting records and documents related to
laboratory billing, diagnosis related group ("DRG") coding and home health
operations in various states. In January 1998, the Company received a subpoena
which requested records and documents relating to physician relationships.
Also, in July 1997, the United States District Court for the Middle District
of Florida, in Fort Myers, issued an indictment against three employees of a
subsidiary of the Company. The indictment relates to the alleged false
characterization of interest payments on certain debt resulting in Medicare
and CHAMPUS overpayments since 1986 to Columbia Fawcett Memorial Hospital, a
Port Charlotte, Florida hospital that was acquired by the Company in 1992. The
Company has been served with subpoenas for various records and documents.
The Company is cooperating in these investigations and understands it is a
target in these investigations.
In addition, several hospital facilities affiliated with the Company have
received individual governmental inquiries, both informal and formal,
requesting information related to reimbursement from government programs.
While it is too early to predict the outcome of any of the ongoing
investigations or the initiation of any additional investigations, were the
Company to be found in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, the Company 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 the Company's financial position and results
of operations. See NOTE 15 of the notes to consolidated financial statements.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission (the "Commission"). The Company understands
that the investigation includes the anti-fraud, periodic reporting and
internal accounting control provisions of the federal securities laws.
QUI TAM ACTIONS
Several qui tam actions have been brought by private parties ("relators") on
behalf of the United States of America. To the best of the Company's
knowledge, the actions allege, in general, that the Company and certain
subsidiaries and/or affiliated partnerships violated the False Claims Act for
improper claims submitted to the government for reimbursement. The government
has declined to intervene in any qui tam actions filed to date.
21
The matter of United States of America, ex rel. Scott Pogue v. American
Healthcorp, Inc., et al. (Civil Action No. 3-94-0515) was filed under seal on
June 23, 1994, in the United States District Court for the Middle District of
Tennessee. On February 6, 1995, the United States filed its Notice of Non-
Intervention and on that same date, the District Court ordered the Complaint
unsealed. The relator contends that sums paid to Medical Directors by the
Diabetes Treatment Centers of America and those who served as Medical
Directors at a hospital or facility affiliated with the Company, were, in
fact, unlawful payments for the referrals of their patients.
A lawsuit captioned United States of America ex rel. James Thompson v.
Columbia/HCA Healthcare Corporation, et al, was filed on March 10, 1995 in the
United States District Court for the Southern District of Texas, Corpus
Christi Division (Civil Action No. C-95-110). The relator claims that the
defendants (the Company and certain subsidiaries and affiliated partnerships)
engaged in a widespread strategy to pay physicians money for referrals and
engaged in other conduct to induce referrals, such as: (i) offering physicians
equity interests in hospitals; (ii) offering loans to physicians; (iii) paying
money under the guise of "consultation fees" to physicians to guarantee their
capital investment; (iv) paying consultation fees, rent or other monies to
physicians; (v) providing free or reduced rate rents for office space; (vi)
providing free or reduced-rate vacations and trips; (viii) providing income
guarantees; and (ix) granting physicians exclusive rights to perform
procedures in particular fields of practice. The lawsuit is premised on
alleged violations of the False Claims Act, 31 U.S.C. (S)3729 et seq. The
complaint seeks damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the federal
government, a civil penalty of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. Although
expressly permitted to do so, the United States has thus far declined to
intervene in the case and assume prosecution of the claims asserted by the
relator. The defendants filed a Motion to Dismiss the Second Amended Complaint
on November 29, 1995, which was granted by the Court on July 22, 1996. On
August 20, 1996, the relator appealed to the United States Court of Appeals
for the Fifth Circuit and, on October 23, 1997, the Fifth Circuit affirmed in
part and vacated and remanded in part the Trial Court's rulings.
On or around December 21, 1995, a matter entitled United States of America,
ex rel. Roy Meidinger v. Lee Memorial Health Systems, Case No. 95-423-FTM-99D,
was filed in the United States District Court for the Middle District Court of
Florida, Fort Myers Division. In this matter, the plaintiff filed under seal,
a False Claims Act case against approximately 2,500 health care providers and
insurance companies, including Columbia Southwest Regional Medical Center. On
December 16, 1996, the United States declined to intervene. In June 1997, the
District Court entered an order directing plaintiff to serve the defendants.
In late November and early December 1997, each of the six defendants moved to
dismiss the Complaint. On January 20, 1998, plaintiff filed his opposition to
the defendant's motion to dismiss. The Court has not yet ruled on the
defendant's motions.
The matter of United States of American, ex rel. Sandra Russell; and Sandra
Russell in her own right v. EPIC Healthcare Management Group, and Hearthstone
Home Health, Inc. d/b/a Continue Care Health Services, No. H-95-00151, was
filed in the United States District Court for the Southern District of Texas,
Houston Division, in January, 1995. This matter was filed under seal. The
Complaint alleges that the relator was required to submit claims, records
and/or statements for Medicare reimbursement which were false. The government
declined to intervene in May 1996, and the defendant moved to dismiss in May
1997. No ruling has been made on the motion to dismiss.
The Company intends to pursue the defense of the Qui Tam actions vigorously.
22
SHAREHOLDER DERIVATIVE AND CLASS ACTION COMPLAINTS FILED IN THE U.S.
DISTRICT COURTS
Since April 8, 1997, numerous securities class action and derivative
lawsuits have been filed in the United States District Court for the Middle
District of Tennessee against the Company and a number of its current and
former directors, officers and employees.
On August 26, 1997, the Court entered an order consolidating all of the
securities class action claims into a single-captioned case, Morse v.
McWhorter, Case No. 3-97-0370. All of the other individual securities class
action lawsuits were administratively closed by the Court. The consolidated
Morse lawsuit is a purported class action seeking the certification of a class
of persons or entities who acquired the Company's common stock from April 9,
1994 to September 9, 1997. The consolidated lawsuit is brought against the
Company, Richard Scott, David Vandewater, Thomas Frist, Jr., R. Clayton
McWhorter, Carl E. Reichardt, Magdalena Averhoff, M.D., T. Michael Long, and
Donald S. MacNaughton. The lawsuit alleges, among other things, that the
defendants committed violations of the federal securities laws by materially
inflating the Company's revenues and earnings through a number of practices,
including upcoding, maintaining reserve cost reports, disseminating false and
misleading statements, cost shifting, illegal reimbursements, improper
billing, unbundling, and violating various Medicare laws. The lawsuit seeks
compensatory damages, costs, and expenses. Plaintiffs filed their Motion for
Class Certification on February 11, 1998. The defendants' motions to dismiss
and motion for oral argument have been referred to the Magistrate Judge for
consideration.
On August 26, 1997, the Court entered an order consolidating all of the
derivative law claims into a single-captioned case, McCall v. Scott, No. 3-97-
0838. All of the other derivative lawsuits were administratively closed by the
Court. The consolidated McCall lawsuit is brought against the Company, Thomas
Frist, Jr., Richard L. Scott, David T. Vandewater, R. Clayton McWhorter,
Magdalena Averhoff, M.D., Frank S. Royal, M.D., T. Michael Long, William T.
Young and Donald S. MacNaughton. The lawsuit alleges, among other things,
derivative claims against the individual defendants that they intentionally or
negligently breached their fiduciary duties to the Company by authorizing,
permitting, or failing to prevent the Company from engaging in various schemes
to improperly increase revenue, upcoding, improper cost reporting, improper
referrals, improper acquisition practices, and overbilling. In addition, the
lawsuit asserts a derivative claim against some of the individual defendants
for breaching their fiduciary duties by engaging in insider trading. The
lawsuit seeks restitution, damages, recoupment of fines or penalties paid by
the Company, restitution and pre-judgment interest against the alleged insider
trading defendants, and costs and disbursements. In addition, the lawsuit
seeks orders: (i) prohibiting the Company from paying individual defendants
employment benefits, (ii) terminating all improper business relationships with
individual defendants, and (iii) requiring the Company to implement effective
corporate governance and internal control mechanisms designed to monitor
compliance with federal and state laws and ensure reports to the Board of
Material Violations.
The matter of Landgraff v. Columbia/HCA Healthcare Corporation was filed on
November 7, 1997, in the United States District Court for the Northern
District of Georgia, Atlanta Division, Civil Action No. 97-CV-3381. The suit
seeks certification of a class of all participants in the Columbia/HCA Stock
Bonus Plan, alleging violations of ERISA. The suit alleges the Company
breached its fiduciary duty to plan participants, fraudulently concealed
information from the public and fraudulently inflated the Company's stock
price through billing fraud and illegal kickbacks for physician referrals. On
January 9, 1998, the parties stipulated to transfer venue of the case to the
United States District Court for the Middle District of Tennessee. Defendants
filed a Motion to Dismiss on March 6, 1998.
The Company intends to pursue the defense of these Shareholder Derivative
and Class Action Complaints vigorously.
23
SHAREHOLDER DERIVATIVE ACTIONS FILED IN STATE COURTS
Several derivative actions have been filed in State Court by certain
purported stockholders of the Company against certain of the Company's current
and former officers and directors alleging breach of fiduciary duty, and
failure to take reasonable steps to ensure that the Company did not engage in
illegal practices thereby exposing the Company to significant damages. The
Company intends to pursue the defense of these shareholder derivative actions
vigorously.
Two purported derivative actions entitled Evelyn Barron, et al. v. Magdalena
Averhoff, et al. (Civil Action No. 15822NC) and John Kovalchick v. Magdalena
Averhoff, et al. (Civil Action No. 15829NC) have been filed in the Court of
Chancery of the State of Delaware in and for New Castle County. The actions
were brought on behalf of the Company by certain purported shareholders of the
Company against certain of the Company's current and former officers and
directors. On approximately August 14, 1997, a similar purported derivative
action entitled State Board of Administration of Florida v. Magdalena
Averhoff, et al. (No. 97-2729) was filed in the Circuit Court in Davidson
County, Tennessee on behalf of the Company by certain purported shareholders
of the Company against certain of the Company's current and former directors
and officers.
The matter of Louisiana State Employees Retirement System v. Averhoff, et al
and Columbia/HCA Healthcare Corporation, another derivative action, was filed
on March 20, 1998, in the Circuit Court of the Eleventh Judicial Circuit, Dade
County, Florida, General Jurisdiction Division, Case No. 98-6050 CA04. The
Louisiana State Employees Retirement System is the public pension fund of the
State of Louisiana. The suit alleges breach of fiduciary duties resulting in
damage to the Company's good will, business reputation and the ability to
consummate future mergers and acquisitions.
PATIENT/PAYER ACTIONS
The Company has from time to time received several purported class action
lawsuits which have been filed by patients or payers against the Company
and/or certain of its current and former officers and directors alleging, in
general, improper and fraudulent billing, coding and physician referrals, as
well as other violations of law.
The matter of Boysen v. Columbia/HCA Healthcare Corporation was filed
September 8, 1997, in the United States District Court for the Middle District
of Tennessee, Nashville Division, (Civil Action No. 3-97-0936). The lawsuit,
which seeks certification of a national class comprised of all persons or
entities who have paid for medical services provided by the Company, alleges,
among other things, that the Company has engaged in a pattern and practice of
(i) inflating diagnosis and medical treatments of its patients to receive
larger payments from the purported class members; (ii) providing unnecessary
medical care; and (iii) billing for services never rendered. The lawsuit seeks
equitable relief in the form of an accounting, as well as damages, attorneys'
fees and costs of suit. The Company filed its Answer on November 17, 1997.
Plaintiff has filed a Motion for Class Certification, and the Company's
opposition to this motion was filed in March 1998.
The matter of Brown v. Columbia/HCA Healthcare Corporation was filed on
November 28, 1995, in the Circuit Court of Palm Beach County, Florida, Case
No. 95-9102 AD. This suit alleges that the hospital has charged excessive
amounts for pharmaceuticals, medical supplies, laboratory tests, medical
equipment and related medical services such as x-rays. The suit seeks
certification of a nationwide class, and damages for patients who have paid
bills containing allegedly excessive amounts for the allegedly unreasonable
portion of the charges and attorneys' fees. The Company filed a Motion to
Dismiss on December 18, 1995, and an Amended Motion to Dismiss on January 3,
1996. Plaintiff amended the Complaint and the Company filed an Answer and
defenses on June 19, 1996. On October 15, 1997, Harald Jackson moved to
intervene in the lawsuit. The Court denied Jackson's Motion on December 19,
1997. No class has been certified. Discovery is ongoing.
24
On October 27, 1997, Colville v. Columbia/Palm Drive Hospital was filed in
the Sonoma County Superior Court, California, Case No. 217646. The suit seeks
certification of a class comprised of uninsured patients treated at the
Company's hospitals and entities in California who have been treated and
charged different fees than any other patient. The suit alleges that the
Company fraudulently overcharged the plaintiffs and that it unlawfully charges
uninsured patients at a higher rate for the same services, compared to
patients with insurance or Medicare. On March 6, 1998, the Company filed a
Demurrer Motion and Motion to Quash. A hearing is set for May 13, 1998.
Doe v. HCA Health Services of Tennessee, Inc. dba Donelson Hospital fka
Summit Medical Center is a class action suit filed on August 17, 1992 in the
First Circuit Court for Davidson County, Tennessee. This suit claims the
Company's charges for hospital services and supplies for medical services (a
hysterectomy in the plaintiff's case) exceeded the reasonable costs of its
goods and services, that the overcharges constitute a breach of contract and
an unfair or deceptive trade practice within the meaning of the Tennessee
Consumer Protection Act, and a breach of the duty of good faith and fair
dealing under Tennessee statute and common law. In 1997, this case was
certified as a class action consisting of all past, present and future
patients at Summit Medical Center. Defendant filed a Motion for Summary
Judgment relying upon the favorable decision of another Nashville Circuit
Judge in a factually similar case. In March 1997, the Court denied the Motion
for Summary Judgment and has ordered the parties into mediation.
The matter of Douglas v. Columbia/HCA Healthcare Corporation is a class
action filed on March 5, 1998, in the Circuit Court of Cook County, Illinois,
County Department, Chancery Division, Case No. 98 02942. This suit alleges
that defendants were involved in fraudulent and deceptive acts including
wrongful billing, unnecessary treatment and wrongful diagnosis of patients
with illnesses that necessitate higher medical fees for financial gain. This
matter was served on March 18, 1998 and no answer has been filed at this time.
Ferguson v. Columbia/HCA Healthcare Corporation was filed on September 16,
1997, in the Circuit Court for Washington County, Tennessee, Civil Action No.
18679. This lawsuit seeks certification of a national class comprised of all
those who paid or were responsible for payment of any portion of a bill for
medical care or treatment provided by the Company and alleges, among other
things, that the Company engaged in billing fraud by excessively billing
patients for services rendered, billing patients for services not rendered or
not medically necessary, uniformly using improper codes to report patient
diagnosis, and improperly and illegally recruiting doctors to refer patients
to the Company's hospitals. Plaintiff filed a Motion for Class Certification
on September 16, 1997. On December 15, 1997, the Company filed a Motion for
Summary Judgment. On January 28, 1998, plaintiff filed a Motion for Leave to
File a Second Amended Class Action Complaint to Add an Additional Class
Representative.
The matter of Hoop v. Columbia/HCA Healthcare Corporation was filed on
August 18, 1997, in the District Court of Johnson County, Texas, Civil Action
No. 249-171-97. This suit seeks certification of a class in Texas comprised of
persons who paid for any portion of an improper or fraudulent bill for medical
services rendered by any Texas facility owned or operated by the Company. The
lawsuit alleges the Company perpetrated a fraudulent scheme that consisted of
systematic and routine overbilling through false and inaccurate bills,
including padding, billing for services never provided, and exaggerating the
seriousness of patients' illnesses. The lawsuit alleges the Company
systematically entered into illegal kickback schemes with doctors for patient
referrals. The Company filed its answer on November 7, 1997.
The matter of Jackson v. Columbia/HCA Healthcare Corporation was filed on
December 23, 1997, in the Circuit Court, Palm Beach County, Florida, Civil
Action No. 97-011419. The suit seeks certification of a national class of
persons or entities that have paid for medical services,
25
alleging the Company systematically and unlawfully inflated prices, concealed
its practice of inflating prices and engaged in and concealed a uniform
practice of overbilling.
The matter of Johnson v. Plantation General Hospital was filed on August 5,
1991, in the Circuit Court for the Seventeenth Judicial Circuit, State of
Florida, Broward County, Case No. 92-06823 Div. 2. The suit alleges the
hospital charged excessive amounts for pharmaceuticals, medical supplies and
laboratory tests. The suit sought certification of a class, a price reduction
on all outstanding bills in the amount of the allegedly excessive portion of
the charges, damages for patients who have paid bills containing allegedly
excessive amounts for the alleged unreasonable portion of the charges and
attorneys' fees. On September 18, 1995, the trial court certified the class
and the Fourth District Court of Appeal affirmed. On October 22, 1996, the
hospital filed a Motion for Summary Judgment on Counts II and III on the basis
of the voluntary payment defense. The Court granted the motion on November 19,
1997. Count I is still pending. Trial has been set for June 29, 1998.
The matter of Operating Engineers Local No. 312 Health & Welfare Fund v.
Columbia/HCA Healthcare Corporation was filed on October 6, 1997 in the United
States District Court for the Eastern District of Texas, Civil Action No.
597CV203. The suit alleges four counts of violations of RICO. The alleged RICO
violations are based on allegations that the Company has employed one or more
schemes or artifices to defraud the plaintiff and purported class members
through fraudulent billing for services not performed, fraudulent overcharging
in excess of correct rates and fraudulent concealment and misrepresentation.
On October 22, 1997, the Company filed a Motion to Transfer Venue and to
Dismiss the Lawsuit on Jurisdiction and Venue Grounds because the RICO claims
are deficient. The motion to transfer was denied on January 23, 1998. The
motion to dismiss has not yet been ruled upon.
The Company denies the aforementioned allegations and intends to pursue the
defense of these actions vigorously.
While it is premature to predict the outcome of the qui tam, shareholder
derivative and class action lawsuits, the amounts claimed may be substantial.
It is possible that an adverse resolution, individually or in the aggregate,
could have a materially adverse impact on the Company's liquidity, financial
position and results of operations. See NOTE 15 of the notes to consolidated
financial statements.
The Company believes the ongoing investigations, qui tam, shareholder cases,
class action overcharging cases and related media coverage are having a
negative effect on the Company's financial position and results of operations.
However, the Company is unable to measure the effect or predict the magnitude
that these matters and the related media coverage could have on the Company's
future results of operations and financial position.
GENERAL LIABILITY CLAIMS
The Company is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or for wrongful restriction
of, or interference with, physicians' staff privileges. In certain of these
actions the claimants have asked for punitive damages against the Company,
which are usually not covered by insurance. In the opinion of management, the
ultimate resolution of these pending claims and legal proceedings will not
have a material adverse effect on the Company's results of operations or
financial position.
A class action styled Mary Forsyth, et al v. Humana, Inc., et al, Case No.
CV-S-89-249-DWH, was filed on March 29, 1989, in the United States District
Court for the District of Nevada (the "Forsyth" case). Plaintiffs are two
classes of individuals who paid for, or received coverage under, group
insurance policies sold in the State of Nevada by Humana Insurance. They
allege violations
26
of antitrust laws, ERISA and RICO which arise from the sale of the policies
and from incentives provided under the policies for insureds to use Humana
Sunrise Hospital in Las Vegas. In 1993, the United States District Court
granted summary judgment dismissing most of plaintiff's claims but granted
plaintiffs judgment on one claim that the client assesses as having a maximum
exposure of under $4 million, plus attorney's fees. Plaintiffs appealed to the
United States Court of Appeals for the Ninth Circuit which, on May 23, 1997,
affirmed the judgment on the ERISA claims; reversed as to the antitrust
claims; and reversed in part as to the RICO claims, but affirmed the District
Court's grant of summary judgment limiting RICO damages to three times the
ERISA damages, with exposure assessed at under $12 million. Plaintiffs claim
approximately $133 million in antitrust damages that is subject to statutory
trebling. Humana has petitioned the Supreme Court for a Writ of Certiorari on
the RICO claims, which is pending. The antitrust claims have been remanded to
the United States District Court in Nevada. Trial of these claims is stayed
pending a decision on the Petition for Writ of Certiorari. Humana has filed a
Motion for Summary Judgment on all remaining antitrust claims raising issues
that were not reached by the District Court. The court vacated the February
trial date and set oral argument for January 30, 1998. The Court has ordered
that a status report be filed on March 23, 1998.
On December 4, 1997, a lawsuit captioned Florida Software Systems, Inc., a
Florida corporation v. Columbia/HCA Healthcare Corporation, a Delaware
corporation, was filed in the United States District Court for the Middle
District of Florida (Civil Action No. 97-2866-C.V.-T-17b). The lawsuit alleges
that the Company breached an agreement under which Florida Software Systems,
Inc. was allegedly granted the exclusive right to provide medical claims
management for certain claims made by the Company for payment to any third
party payors in connection with the rendition of medical care or services. The
lawsuit alleges claims for fraud, breach of implied contract, and breach of
contract. The lawsuit seeks compensatory and punitive damages, attorney's fees
and costs of the suit. The Company believes that the allegations in the
Complaint are without merit and intends to pursue the defense of this action
vigorously.
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 1997.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange, Inc.
(the "NYSE") (symbol "COL"). The table below sets forth, for the calendar
quarters indicated, the high and low sales prices per share reported on the
NYSE Composite Tape for the Company's Common Stock. All prices have been
adjusted to reflect a 3-for-2 stock split in the form of a stock dividend
effective October 15, 1996.
HIGH LOW
------ ------
1997:
First Quarter................................................ $44.88 $31.25
Second Quarter............................................... 40.00 30.38
Third Quarter................................................ 40.44 26.63
Fourth Quarter............................................... 32.13 25.75
1996:
First Quarter................................................ $39.08 $33.42
Second Quarter............................................... 38.17 32.92
Third Quarter................................................ 39.25 31.67
Fourth Quarter............................................... 41.88 34.50
At the close of business on March 23, 1998, there were approximately 18,700
holders of record of the Company's Common Stock and one holder of record of
the Company's Nonvoting Common Stock.
The Company currently pays a regular quarterly dividend of $.02 per share.
While it is the present intention of the Company's Board of Directors to
continue paying a quarterly dividend of $.02 per share, the declaration and
payment of future dividends by the Company will depend upon many factors,
including the Company's earnings, financial condition, business needs, capital
and surplus and regulatory considerations.
28
ITEM 6. SELECTED FINANCIAL DATA
COLUMBIA/HCA HEALTHCARE CORPORATION
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
SUMMARY OF OPERATIONS:
Revenues........................................................... $ 18,819 $ 18,786 $ 17,132 $ 14,543 $ 12,678
Salaries and benefits.............................................. 7,631 7,205 6,779 5,963 5,202
Supplies........................................................... 2,722 2,655 2,536 2,144 2,015
Other operating expenses........................................... 4,263 3,689 3,203 2,661 2,286
Provision for doubtful accounts.................................... 1,420 1,196 994 853 699
Depreciation and amortization...................................... 1,238 1,143 976 804 689
Interest expense................................................... 493 488 458 387 415
Equity in earnings of affiliates................................... (68) (173) (28) (8) (9)
Restructuring of operations and investigation related costs........ 140 -- -- -- --
Impairment of long-lived assets.................................... 442 -- -- -- --
Merger, facility consolidation and other