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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 1-10989
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VENCOR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-1055020
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3300 PROVIDIAN CENTER 40202
400 WEST MARKET STREET (ZIP CODE)
LOUISVILLE, KY
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(502) 596-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.25 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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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 periods 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 Rule
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 of this Form 10-K. [X]
As of March 1, 1996, there were 69,915,086 shares of the Registrant's Common
Stock, $.25 par value, outstanding. The aggregate market value of the shares
of Registrant held by non-affiliates of the Registrant, based on the closing
price of such stock on the New York Stock Exchange on March 1, 1996, was
approximately $2,491,379,000. For purposes of the foregoing calculation only,
all directors and executive officers of the Registrant have been deemed
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of Part III is incorporated by reference from the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on May 15,
1996. A portion of Part II is incorporated by reference from the Registrant's
Annual Report to Shareholders for the year ended December 31, 1995.
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TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 25
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 27
Item 8. Financial Statements and Supplementary Data................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 30
Item 11. Executive Compensation...................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 30
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 31
2
PART I
ITEM 1. BUSINESS
GENERAL
On September 28, 1995, The Hillhaven Corporation ("Hillhaven") merged into
Vencor, Inc. (the "Company") (the "Hillhaven Merger"), creating one of the
nation's largest providers of healthcare services primarily focusing on the
needs of the elderly. At December 31, 1995, the Company's operations included
36 long-term intensive care hospitals containing 3,263 licensed beds, 311
nursing centers containing 39,480 licensed beds, 55 retail and institutional
pharmacy outlets and 23 retirement housing communities with 3,122 apartments.
Healthcare services provided through this network of facilities included long-
term intensive hospital care, long-term nursing care, contract respiratory
therapy services, acute cardiopulmonary care, subacute and post-operative
care, inpatient and outpatient rehabilitation therapy, specialized care for
Alzheimer's disease, hospice care, pharmacy services and retirement and
assisted living. At December 31, 1995, the Company was providing subacute,
rehabilitation and respiratory therapy services to 2,008 nursing and subacute
care centers through its contract services business ("Vencare"). Through its
subsidiary, Ventech Systems, Inc. ("Ventech"), the Company is developing and
maintaining ProTouch(TM), a comprehensive paperless clinical information
system designed to increase the operating efficiencies of the Company's
facilities.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. It was reorganized as a Delaware corporation in
1987. The Company changed its name to Vencor, Incorporated in 1989 and to
Vencor, Inc. in 1993. Initially following the Hillhaven Merger in September
1995, the Company conducted business through its hospital, nursing center and
contract services divisions. During the first quarter of 1996, the Company
reorganized on the basis of regional integrated service areas.
This Report contains a number of forward-looking statements. These
statements are qualified by reference to the cautionary statements set forth
under "Business--Additional Company Information--Cautionary Statements."
VENCOR STRATEGY
The healthcare system of the United States remains in a period of
significant change. Factors affecting the healthcare system include cost
containment, the expansion of managed care, improved medical technology and an
increased focus on measurable medical outcomes. The Company believes that
these factors will lead to more patient-focused care in lower cost alternate
sites by providers who are able to demonstrate high quality, cost-effective
care.
At the same time, the Company believes that the need for long-term care is
increasing. Improved medical care and advancements in medical technology
increase the survival rates for victims of disease and trauma of all ages.
Many of these patients never fully recover and require long-term care. The
incidence of chronic problems increases with age, particularly in connection
with certain degenerative conditions. As the average age of the United States
population increases, the Company believes there will be an increase in the
need for long-term care at all levels of the continuum of care.
Accordingly, the Company is developing full-service integrated networks to
meet the needs of patients requiring long-term care. The Company's full-
service capability should enable it to match the appropriate acuity of care
with each patient's needs. The Company is continuing to integrate and expand
the operations of its intensive care hospitals and nursing centers. The
Company is also continuing to investigate and develop related healthcare
services. The Company is exploring other ways in which it can transfer its
expertise in the efficient delivery of cardiopulmonary and other long-term
care to other healthcare businesses. Such efforts may include affiliating with
or acquiring other healthcare businesses.
3
The Company's strategy for implementing full-service integrated networks for
long-term care is set forth below.
Focus on Long-Term Care Continuum. The Company intends to continue expanding
its long-term care network. The Company conducts market research prior to
entering new markets, which research may address (i) the need for placement of
long-term patients or residents, (ii) existing provider referral patterns,
(iii) the presence of competitors, (iv) payor mix and (v) the political and
regulatory environment. Although the Company is continually considering
opportunities for future growth and is actively negotiating to acquire
additional facilities and related healthcare businesses, as of March 21, 1996,
the Company had not entered into any agreements regarding future acquisitions.
From time to time, the Company may also sell all or a portion of its interest
in a facility or business where such disposition would be in the best interest
of the Company.
Expand Specialty Care Services. The Company intends to continue to expand
the specialty care programs and services at its nursing centers. These
services generally produce higher revenues than do routine nursing care
services and serve to differentiate the Company's facilities from others in a
given market. The Company is focusing on the expansion of its subacute,
medical and rehabilitation services, including physical, occupational and
speech therapies, wound care, oncology treatment, brain injury care, stroke
therapy and orthopedic therapy.
Expand Vencare Contract Services. In 1993, the Company initiated its Vencare
program of providing respiratory therapy and subacute care services in nursing
and hospital facilities owned by third parties. The Vencare program also
currently includes hospice care, management of cardiopulmonary hospital
departments and rehabilitation therapy services. Vencare services are provided
pursuant to contracts with nursing and subacute care centers and hospitals.
Vencare enables the Company to provide its services to lower acuity, subacute
patients in cost-efficient sites and facilitates patient referrals between its
hospitals and contract-affiliated nursing centers as medical conditions
warrant. The Company intends to continue to expand its Vencare program.
Implement Ventech Patient Information System. In 1993, the Company formed
Ventech Systems, Inc. ("Ventech") to develop the ProTouch(TM) electronic
patient medical record system. ProTouch(TM) is a software application which
allows nurses, physicians and other clinicians to access and manage clinical
information utilized in the delivery of patient care. The Company had
installed ProTouch(TM) in all of its hospitals as of the end of 1995 and plans
to complete the installation of ProTouch(TM) in its nursing centers by the end
of 1997.
HOSPITAL OPERATIONS
The Company's hospitals primarily provide long-term acute hospital care to
medically complex, chronically ill patients. The Company's hospitals have the
capability to treat patients who suffer from multiple systemic failures or
conditions such as neurological disorders, head injuries, brain stem and
spinal cord trauma, cerebral vascular accidents, chemical brain injuries,
central nervous system disorders, developmental anomalies and cardiopulmonary
disorders. Chronic patients are often dependent on technology for continued
life support, such as mechanical ventilators, total parenteral nutrition,
respiration or cardiac monitors and dialysis machines. Generally,
approximately 60% of the Company's chronic patients are ventilator-dependent
for some period of time during their hospitalization. The Company's patients
suffer from conditions which require a high level of monitoring and
specialized care, yet may not necessitate the continued services of an
intensive care unit. Due to their severe medical conditions, the Company's
hospital patients generally are not clinically appropriate for admission to a
skilled nursing facility or rehabilitation hospital. The medical condition of
most of the Company's hospital patients is periodically or chronically
unstable. By combining general acute care services with the ability to care
for chronic patients, the Company believes that its long-term hospitals
provide its patients with high quality, cost-effective care. During 1995, the
average length of stay for chronic patients in the Company's long-term
hospitals was approximately 55 days. Although the Company's patients range in
age from pediatric to geriatric, typically more than 70% of the Company's
chronic hospital patients are over 65 years of age.
4
HOSPITAL FACILITIES
The following table lists by state the number of hospitals and related
licensed beds owned and leased by the Company as of December 31, 1995:
NUMBER OF FACILITIES
LICENSED -----------------------
STATE BEDS OWNED LEASED TOTAL
----- -------- ------ ------- ------
Arizona.................................... 110 2 - 2
California................................. 544 6 - 6
Colorado................................... 68 1 - 1
Florida.................................... 278 3 1 4
Georgia.................................... 72 - 1 1
Illinois................................... 365 3 - 3
Indiana.................................... 121 2 - 2
Kentucky................................... 374 1 - 1
Massachusetts.............................. 40 1 - 1
Michigan................................... 160 1 - 1
Missouri................................... 227 2 - 2
North Carolina............................. 124 1 - 1
Oklahoma................................... 59 1 - 1
Pennsylvania............................... 101 2 - 2
Tennessee.................................. 49 1 - 1
Texas...................................... 365 5 1 6
Virginia................................... 206 1 - 1
----- ------ ------ ------
Total.................................... 3,263 33 3 36
===== ====== ====== ======
SERVICES PROVIDED BY COMPANY HOSPITALS
Chronic. The Company has devised a comprehensive program of care for its
chronic patients that draws upon the talents of interdisciplinary teams,
including licensed pulmonary specialists. The teams evaluate chronic patients
upon admission to determine an appropriate treatment plan. Where appropriate,
the treatment programs may involve the services of several disciplines, such
as pulmonary and physical therapy. Individual attention to patients who have
the cognitive and physical abilities to respond to therapy is emphasized.
Patients who successfully complete treatment programs are discharged to
skilled nursing facilities, rehabilitation hospitals or home care settings.
General Acute Care. The Company operates two general acute care hospitals.
Certain of the Company's long-term hospitals also provide general acute care
and outpatient services in support of their long-term care services. Certain
of the Company's hospitals maintain subacute units. General acute care and
outpatient services may include inpatient services, diagnostic services,
emergency services, CT scanning, one-day surgery, hospice services,
laboratory, X-ray, respiratory therapy, cardiology and physical therapy. The
Company may expand its general acute care and outpatient services as its long-
term hospitals mature.
Major factors contributing to the growth in demand for the Company's
intensive care hospital services include the following:
Increased Patient Population. Improved medical care and advancements in
medical technology have increased the survival rates for infants born with
severe medical problems, as well as victims of disease and trauma of all ages.
Many of these patients never fully recover and require long-term hospital
care. The incidence of chronic respiratory problems increases with age,
particularly in connection with certain degenerative conditions. As the
average age of the United States population increases, the Company believes
there will be an increase in the need for long-term hospital care. Typically
more than 70% of the Company's hospital patients are over 65 years of age.
5
Medically Displaced Patients. The Company's hospital patients require a high
level of monitoring and specialized care, yet may not require the continued
services of an intensive care unit. Due to their extended recovery period, the
Company's hospital patients generally would not receive specialized
multidisciplinary treatment focused on the unique aspects of a long-term
recovery program in a general acute care hospital and yet cannot qualify for
admission to a skilled nursing facility or rehabilitation hospital.
Economically Displaced Patients. Historically, reimbursement policies and
practices designed to control healthcare costs have made it difficult to place
medically complex, chronically ill patients in an appropriate healthcare
setting. Under the Medicare program, general acute care hospitals are
reimbursed under the prospective payment system ("PPS"), a fixed payment
system which provides an economic incentive to general acute care hospitals to
minimize the length of patient stay. As a result, these hospitals generally
receive less than full cost for providing care to patients with extended
lengths of stay. Furthermore, PPS does not provide for reimbursement more
frequently than once every 60 days, placing an additional economic burden on a
general acute care hospital providing long-term care. The Company's long-term
hospitals, however, are exempt from PPS and thus receive reimbursement on a
more favorable basis for providing long-term hospital care to Medicare
patients. Commercial reimbursement sources, such as insurance companies and
health maintenance organizations ("HMOs"), some of which pay based on
established hospital charges, typically seek the most economical source of
care available. The Company believes that its emphasis on long-term hospital
care allows it to provide high quality care to chronic patients on a cost-
effective basis.
HOSPITAL PATIENT ADMISSION
Substantially all of the chronic patients admitted to the Company's
hospitals are transferred from other healthcare providers. Patients are
referred from general acute care hospitals, rehabilitation hospitals, skilled
nursing facilities and home care settings. Referral sources include discharge
planners, case managers of managed care plans, social workers, physicians,
third-party administrators, HMOs and insurance companies.
The Company employs case managers who educate healthcare professionals from
other hospitals as to the unique nature of the services provided by the
Company's long-term hospitals. The case managers develop an annual admission
plan for each hospital, with assistance from the hospital's administrator. To
identify specific service opportunities, the admission plan for each hospital
is based on a variety of factors, including population characteristics,
physician characteristics and incidence of disability statistics. Admission
plans involve ongoing education of local physicians, utilization review and
case management personnel, HMOs, acute care hospitals and preferred provider
organizations ("PPOs"). The Company maintains a centralized pre-admission
certification system at its corporate headquarters to assess certain clinical
and other information in determining the appropriateness of each patient
referral to its hospitals.
PROFESSIONAL STAFF
Each of the Company's hospitals is staffed with a multidisciplinary team of
healthcare professionals, including nurses, therapists and physicians. A
professional nursing staff trained to care for the long-term acute patient is
on duty 24 hours each day in the Company's hospitals. Other professional staff
includes respiratory therapists, physical therapists, occupational therapists
and registered dietitians.
The physicians at the Company's hospitals generally are not employees of the
Company and may also be members of the medical staff of other hospitals. Each
of the Company's hospitals has a fully credentialled, multispecialty medical
staff to meet the needs of the patients. Each patient is visited at least once
a day by a staff physician. Typically, the Company does not enter into
exclusive contracts with physicians to provide services to
6
its hospital patients. The Company's hospitals and physicians enter into
service contracts providing for pulmonary, radiology, pathology, infection
control and anesthesiology services, most of which are cancellable on no more
than 90 days' notice.
The Company believes that its future success will depend in large part upon
its continued ability to hire and retain qualified personnel. The Company
seeks the highest quality of professional staff within each market.
CENTRALIZED MANAGEMENT AND OPERATIONS
A hospital administrator supervises and is responsible for the day-to-day
operations at each of the Company's hospitals. Each hospital also employs a
controller who monitors the financial matters of each hospital, including the
measurement of actual operating results compared to goals established by the
Company. In addition, each hospital employs an assistant administrator to
oversee the clinical operations of the hospital and a quality assurance
manager to direct an integrated quality assurance program. The Company's
corporate headquarters provides services in the areas of system design and
development, training, human resource management, reimbursement expertise,
legal advice, technical accounting support, purchasing and facilities
management. Financial control is maintained through fiscal and accounting
policies that are established at the corporate level for use at each hospital.
The Company has standardized operating procedures and monitors its hospitals
to assure consistency of operations.
MANAGEMENT INFORMATION SYSTEM
The financial information for each Company hospital is centralized at the
corporate headquarters through its management information system. The Company
uses a customized hospital financial reporting system which enables it to
monitor, on a daily basis, certain key financial data at each hospital such as
payor mix, admissions and discharges, cash collections, revenues and staffing.
In addition, the financial reporting system provides monthly budget analysis,
financial comparisons to prior periods and comparisons among the Company's
hospitals.
The Company has installed an electronic patient medical record system in all
of its hospitals and intends to complete such installations in its nursing
centers by the end of 1997. See "Ventech Systems, Inc."
QUALITY ASSESSMENT AND IMPROVEMENT
The Company maintains a strategic outcomes program which includes a
centralized pre-admission evaluation program and concurrent review for all of
its patient population against utilization and quality screens, as well as
quality of life outcomes data collection and patient and family satisfaction
surveys. In addition, each hospital has an integrated quality assessment and
improvement program administered by a quality review manager which encompasses
utilization review, quality improvement, infection control and risk
management. The objective of these programs is to ensure that patients are
appropriately admitted to the Company's hospitals and that quality healthcare
is rendered to them in a cost-effective manner.
The Company has implemented a program whereby its hospitals will be reviewed
annually by internal quality auditors for compliance with standards of the
Joint Commission on Accreditation of Health Care Organizations ("JCAHO"). The
purposes of this internal review process are to (i) ensure ongoing compliance
with industry recognized standards for hospitals, (ii) assist management in
analyzing each hospital's operations and (iii) provide consulting and
educational opportunities for each hospital to identify opportunities to
improve patient care.
7
SELECTED HOSPITAL OPERATING DATA
The following table sets forth certain operating data for the Company's
hospitals:
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
Hospitals in operation at end of period........... 36 33 26
Number of licensed beds at end of period.......... 3,263 2,511 2,198
Patient days...................................... 489,612 403,623 293,367
Average daily census.............................. 1,341 1,123 875
Occupancy percentage.............................. 47.6% 48.8% 44.1%
As used in the above table, the term "licensed beds" refers to the maximum
number of beds permitted in the hospital under its license regardless of
whether the beds are actually available for patient care. "Patient days"
refers to the total number of days of patient care provided by the Company's
hospitals for the periods indicated. "Average daily census" is computed by
dividing each hospital's patient days by the number of calendar days the
respective hospital is in operation. "Occupancy percentage" is computed by
dividing average daily census by the number of licensed beds, adjusted for the
length of time each facility was in operation during each respective period.
SOURCES OF HOSPITAL REVENUES
The Company receives payment for hospital services from third-party payors,
including government reimbursement programs such as Medicare and Medicaid and
nongovernment sources such as commercial insurance companies, HMOs, PPOs and
contracted providers. Payments from government programs are generally based
upon cost and payments from nongovernment payors are generally based upon
charges. Patients covered by nongovernment payors are generally more
profitable to the Company than those covered by Medicare and Medicaid
programs. The following table sets forth the approximate percentages of the
Company's hospital revenues derived from the specified payor sources
indicated:
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
Medicare....................................... 57% 56% 51%
Medicaid....................................... 12 11 9
Private and other.............................. 31 33 40
For the year ended December 31, 1995, hospital revenues totaled
approximately $456 milion, or 19.6% of the Company's consolidated revenues.
HOSPITAL COMPETITION
As of December 31, 1995, the hospitals owned or leased by the Company were
located in 32 geographic markets in 17 states. In each geographic market,
there are general acute care hospitals which provide services comparable to
those offered by the Company's hospitals. In addition, as of February 6, 1996,
there were 180 hospitals in the United States certified by Medicare as general
long-term hospitals, some of which provide similar cardiopulmonary services to
those provided by the Company's hospitals. Many of these short-term and long-
term hospitals are larger and more established than the Company's hospitals.
Certain hospitals that compete with the Company's hospitals are operated by
not-for-profit, nontaxpaying or governmental agencies, which can finance
capital expenditures on a tax-exempt basis, and which receive funds and
charitable contributions unavailable to the Company's hospitals. Cost
containment efforts by federal and state governments and other third-party
payors designed to encourage more efficient utilization of hospital services
have generally resulted in lower hospital industry occupancy rates in recent
years. As a result of these efforts, a number of acute care hospitals have
converted to specialized care facilities. Some hospitals are developing step-
down units which attempt to serve the needs of patients who require care at a
level between that provided by an intensive care unit
8
and a general medical/surgical unit. This trend is expected to continue due to
the current oversupply of acute care hospital beds and the increasing
consolidation and affiliation of free-standing hospitals into larger systems.
As a result, the Company may experience increased competition from existing
hospitals and converted facilities.
Competition for patients covered by nongovernment reimbursement sources is
intense. The primary competitive factors in the long-term intensive care
business include quality of services, charges for services and responsiveness
to the needs of patients, families, payors and physicians. Other companies
have entered the long-term intensive care market with licensed hospitals that
compete with the Company's hospitals.
Some skilled nursing facilities, while not licensed as hospitals, have
developed units which provide a greater intensity of care than that typically
provided by a skilled nursing facility. The condition of patients in these
skilled nursing facility units is less acute than the condition of patients
cared for in the Company's hospitals.
The competitive position of any hospital, including the Company's hospitals,
is also affected by the ability of its management to negotiate contracts with
purchasers of group healthcare services, including private employers, PPOs and
HMOs. Such organizations attempt to obtain discounts from established hospital
charges. The importance of obtaining contracts with PPOs, HMOs and other
organizations which finance healthcare, and its effect on a hospital's
competitive position, vary from market to market, depending on the number and
market strength of such organizations.
The Company also competes with other healthcare companies for hospital and
other healthcare acquisitions.
HOSPITAL REGULATION
The healthcare industry is subject to regulation by a number of government
and private agencies. Regulatory activities affect the Company's business
activities by controlling its growth, requiring licensure and certification
for its hospitals, regulating the use of its properties and controlling
reimbursement to the Company for services provided.
Certificates of Need and State Licensing. Certificate of Need ("CON")
regulations control the development and expansion of healthcare services and
facilities in certain states. CON laws generally provide that approval must be
obtained from the designated state health planning agency prior to the
expansion of existing facilities, construction of new facilities, addition of
beds, acquisition of major items of equipment or introduction of new services.
The stated objective of the CON process is to promote quality healthcare at
the lowest possible cost and avoid unnecessary duplication of services,
equipment and facilities. Recently, some states (including Florida,
Massachusetts and Tennessee) have amended their CON regulations to require CON
approval prior to the conversion of a hospital from a general short-term
facility to a general long-term facility. Of the seventeen states in which the
Company's hospitals were located as of December 31, 1995, Florida, Georgia,
Illinois, Kentucky, Massachusetts, Michigan, Missouri, North Carolina,
Pennsylvania, Tennessee and Virginia have CON programs. With one exception,
the Company was not required to obtain a CON in connection with its previous
acquisitions, due to relatively low renovation costs and the absence of
additional licensed beds or changes in services. CONs may be required in
connection with the Company's future hospital and contract services expansion.
There can be no assurance that the Company will be able to obtain the CONs
necessary for any or all such projects. If the Company is unable to obtain the
requisite CONs, its growth and business could be adversely affected.
State licensing of hospitals is a prerequisite to the operation of each
hospital and to participation in government programs. Once a hospital becomes
licensed and operational, it must continue to comply with federal, state and
local licensing requirements in addition to local building and life-safety
codes. All of the Company's hospitals in operation have obtained the necessary
licenses to conduct business.
9
Medicare and Medicaid. Medicare is a federal program that provides certain
hospital and medical insurance benefits to persons age 65 and over and certain
disabled persons. Medicaid is a medical assistance program administered by
each state pursuant to which hospital benefits are available to certain
indigent patients. Within the Medicare and Medicaid statutory framework, there
are substantial areas subject to administrative rulings, interpretations and
discretion which may affect payments made under Medicare and Medicaid. A
substantial portion of the Company's hospital revenues is derived from
patients covered by Medicare and Medicaid. See "Hospital Operations--Sources
of Hospital Revenues."
In order to receive Medicare reimbursement, each hospital must meet the
applicable conditions of participation set forth by the Department of Health
and Human Services ("HHS") relating to the type of hospital, its equipment,
personnel and standard of medical care, as well as comply with state and local
laws and regulations. The Company has developed a management system to ensure
compliance with the various standards and requirements. Each of the Company's
hospitals employs a person who is responsible for an on-going quality
assessment and improvement program. Hospitals undergo periodic on-site
Medicare certification surveys, which are generally limited if the hospital is
accredited by JCAHO. As of December 31, 1995, all the Company's hospitals were
certified as Medicare providers, and thirty-three of its hospitals were also
certified by their respective state Medicaid programs. Applications are
pending for Medicaid certification with respect to the Company's other
hospitals. A loss of certification could adversely affect a hospital's ability
to receive payments under the Medicare and Medicaid programs.
Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect cost of the services provided to beneficiaries. The Social Security
Amendments of 1983 implemented PPS as a means of controlling healthcare costs.
Under PPS, Medicare inpatient costs are reimbursed based upon a fixed payment
amount per discharge using diagnosis related groups ("DRGs"). The DRG payment
under PPS is based upon the national average cost of treating a Medicare
patient's condition. Although the average length of stay varies for each DRG,
the average stay for all Medicare patients subject to PPS is approximately six
days. An additional outlier payment is made for patients with unusually
extended lengths of stay or higher treatment costs. Outlier payments are only
designed to cover marginal costs. Additionally, PPS payments can only be made
once every 60 days. Thus, PPS creates an economic incentive for general short-
term hospitals to discharge chronic Medicare patients as soon as clinically
possible. Hospitals that are certified by Medicare as general long-term
hospitals are excluded from PPS. Management believes that the incentive for
short-term hospitals to discharge chronic medical patients as soon as
clinically possible creates a substantial referral source for the Company's
general long-term hospitals.
The Social Security Amendments of 1983 exempted psychiatric, rehabilitation,
cancer, children's and general long-term hospitals from PPS. A general long-
term hospital is defined as a hospital which has an average length of stay
greater than 25 days. Inpatient operating costs for general long-term
hospitals are reimbursed under the cost-based reimbursement system, subject to
a computed target rate (the "Target") per discharge for inpatient operating
costs established by the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). Until October 1991, Medicare operating costs per discharge in
excess of the Target were not reimbursed. Effective October 1, 1991, Medicare
operating costs in excess of the Target are reimbursed at the rate of 50% of
the excess up to 10% of the Target. Hospitals whose operating costs are lower
than the Target are reimbursed their actual costs plus an incentive. The
incentive is equal to 50% of the difference between their actual costs and the
Target and may not exceed 5% of the Target. New hospitals may apply for an
exemption from the TEFRA Target provisions. For hospitals certified prior to
October 1, 1992, the exemption was optional and, if granted, lasted for three
years. For certifications after October 1, 1992, the exemption is automatic
and is effective for two years. As of December 31, 1995, twenty-seven of the
Company's hospitals were subject to TEFRA Target provisions. The Company's
other hospitals were not subject to TEFRA because they had qualified for the
new hospital exemptions described above. During 1996, five more of the
Company's hospitals will become subject to TEFRA Target provisions. The TEFRA
limits have not had a material adverse effect on the Company's results of
operations, and the Company does not expect that the TEFRA limits will have a
material effect on the Company's results of operations in 1996.
10
Medicare and Medicaid reimbursements are generally determined from annual
cost reports filed by the Company which are subject to audit by the respective
agency administering the programs. Management believes that adequate
provisions for loss have been recorded to reflect any adjustments which could
result from audits of these cost reports. Adjustments to the Company's cost
reports have not had a material adverse effect on the Company's hospital
operating results.
Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients must be reviewed by peer review
organizations ("PROs") in order to ensure efficient utilization of hospitals
and services. A PRO may conduct such review either prospectively or
retroactively and may, as appropriate, recommend denial of payments for
services provided to a patient. Such review is subject to administrative and
judicial appeal. Each of the Company's hospitals employs a clinical
professional to administer the hospital's integrated quality assurance and
improvement program, including its utilization review program. PRO denials
have not had a material adverse effect on the Company's hospital operating
results.
Medicare and Medicaid antifraud and abuse amendments codified under Section
1128B(b) of the Social Security Act (the "Antifraud Amendments") prohibit
certain business practices and relationships that might affect the provision
and cost of healthcare services reimbursable under Medicare and Medicaid.
Sanctions for violating the Antifraud Amendments include criminal and civil
penalties and exclusion from the Medicare and Medicaid programs. Pursuant to
the Medicare and Medicaid Patient and Program Protection Act of 1987, HHS and
the Office of the Inspector General ("OIG") specified certain "safe harbors"
which describe conduct and business relationships permissible under the
Antifraud Amendments. These "safe harbor" regulations may result in more
aggressive enforcement of the Antifraud Amendments by HHS and the OIG.
Section 1877 of the Social Security Act (commonly known as "Stark I") states
that a physician who has a financial relationship with a clinical laboratory
is generally prohibited from referring patients to that laboratory. The
Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark II")
amending Section 1877 to greatly expand the scope of Stark I. Effective
January 1995, Stark II broadened the referral limitations of Stark I to
include, among other designated health services, inpatient and outpatient
hospital services. Under Stark I and Stark II (collectively referred to as the
"Stark Provisions"), a "financial relationship" is defined as an ownership
interest or a compensation arrangement. If such a financial relationship
exists, the entity is generally prohibited from claiming payment for such
services under the Medicare or Medicaid programs. Compensation arrangements
are generally exempted from the Stark Provisions if, among other things, the
compensation to be paid is set in advance, does not exceed fair market value
and is not determined in a manner that takes into account the volume or value
of any referrals or other business generated between the parties. The Company
expects that business practices of providers and financial relationships
between providers will be subject to increased scrutiny as healthcare reform
efforts continue at federal and state levels.
Healthcare Reform. In recent years, an increasing number of legislative
proposals have been introduced or proposed in Congress and in some state
legislatures which could effect major changes in the healthcare system. In
October 1993, the Clinton Administration submitted comprehensive healthcare
reform legislation to Congress designed to provide, among other things, for
universal access to healthcare. Neither the Clinton Administration's plan nor
other healthcare reform legislation was enacted by Congress. More recently, a
significant effort has been initiated in Congress and the Clinton
Administration to balance the federal budget in seven years. This effort could
result in significant reductions in Medicare and Medicaid spending, which may
be achieved through restrictions on growth of healthcare costs, implementation
of various aggregate cost limits, or a restructuring of Medicaid through block
grants to the states. The Company believes that implementation of block grants
to the states could add incentives to provide an increased amount of
healthcare services through managed care health plans.
A number of legislative proposals have included a moratorium on the
designation of additional long-term hospitals for Medicare reimbursement
purposes. However, the Company cannot predict the form of any healthcare or
budget reform legislation which may be proposed in Congress or in state
legislatures in the future,
11
and whether such legislation, if any, will be adopted. Accordingly, the
Company is unable to assess the effect of any such legislation on its
business. There can be no assurance that any such legislation will not have a
material adverse impact on the Company's future growth, revenues and earnings.
Gramm-Rudman. The Company's Medicare revenues may be adversely affected by
the Balanced Budget and Emergency Deficit Control Act of 1985, as amended
("Gramm-Rudman"). Under Gramm-Rudman, if the Office of Management and Budget
and the Congressional Budget Office determines that the federal deficit will
exceed certain specified levels for a federal fiscal year through 1998,
sufficient reductions in federal spending must be made to remove the excess
deficit. One-half of these reductions must be made in nondefense programs.
Although Medicaid funding is exempt from reductions under Gramm-Rudman, the
Medicare program is not. If reductions are made in the Medicare program, each
payment to providers that is paid on a reasonable cost basis may be reduced.
Payment reductions under Gramm-Rudman in federal fiscal years through 1998
could have an adverse effect on the Company's revenues and earnings. However,
because the actual amount of the reduction for any fiscal year may vary
according to the federal deficit, the financial impact of Gramm-Rudman on the
Company's results of operations cannot be predicted.
JCAHO Accreditation. Hospitals receive accreditation from JCAHO, a
nationwide commission which establishes standards relating to the physical
plant, administration, quality of patient care and operation of medical staffs
of hospitals. Generally, hospitals and certain other healthcare facilities are
required to have been in operation at least six months in order to be eligible
for accreditation by JCAHO. After conducting on-site surveys, JCAHO awards
accreditation for up to three years to hospitals found to be in substantial
compliance with JCAHO standards. Accredited hospitals are periodically
resurveyed, at the option of JCAHO, upon a major change in facilities or
organization and after merger or consolidation. As of December 31, 1995,
thirty-three of the Company's hospitals were accredited by JCAHO. The Company
intends to apply for JCAHO accreditation for its other hospitals within the
next year. The Company intends to seek and obtain JCAHO accreditation for any
additional facilities it may purchase or lease and convert into long-term
hospitals. The Company does not believe that the failure to obtain JCAHO
accreditation at any hospital would have a material adverse effect on its
results of operations.
State Regulatory Environment. The Company currently operates four hospitals
and manages a chronic unit in Florida, a state which regulates hospital rates.
These operations contribute a significant portion of the Company's revenues
and operating income from its hospitals. Accordingly, the Company's hospital
revenues and operating income could be materially adversely affected by
Florida rate setting laws or other cost containment efforts. The Company also
operates six hospitals in Texas and six hospitals in California which
contribute a significant portion of the Company's revenues and operating
income from its hospitals. Although Texas and California do not currently
regulate hospital rates, the adoption of such legislation or other cost
containment measures in these or other states could have a material adverse
effect on the Company's hospital revenues and operating income. The Company is
unable to predict whether and in what form any such legislation will be
adopted. The Company's revenues and operating income could be adversely
affected by other state rate setting laws. Certain other states in which the
Company operates hospitals require hospitals to disclose specified financial
information. In evaluating markets for expansion, the Company considers the
regulatory environment, including but not limited to, any mandated rate
setting.
VENCARE OPERATIONS
In 1993, the Company initiated its Vencare contract services business.
Through Vencare, the Company has expanded the scope of its cardiopulmonary
care by providing subacute care, rehabilitation therapy and respiratory care
services and supplies to nursing and subacute care centers. The Company also
manages cardiopulmonary departments for other hospitals. The Company provides
hospice services to nursing center patients, hospital patients and persons in
private residences. For the year ended December 31, 1995, revenues from
Vencare totaled approximately $110 million, or 4.7% of the Company's
consolidated revenues.
12
RESPIRATORY CARE SERVICES
The Company provides respiratory care services and supplies to nursing and
subacute center patients pursuant to contracts between the Company and the
nursing center or subacute center. The services are provided by respiratory
therapists based at the Company's hospitals. These respiratory therapists
perform a wide variety of procedures, including oxygen therapy, bronchial
hygiene, nebulizer and aerosol treatments, tracheostomy care, ventilator
management and patient respiratory education. Pulse oximeters and arterial
blood gas machines are used to evaluate the patient's condition, as well as
the effectiveness of the treatment. The Company also provides respiratory
equipment and supplies to nursing and subacute centers.
The Company receives payments from the nursing centers and subacute centers
for services rendered and these facilities, in turn, receive payments from the
appropriate provider. Respiratory therapy and supplies are covered under the
Medicare program and reimbursed as an ancillary service when the service is
provided by hospital-based respiratory therapists. Many commercial insurers
and managed care providers are seeking hospital discharge options for lower
acuity respiratory patients. Management believes that the Company's pricing
and successful clinical outcomes make its respiratory care program attractive
to commercial insurers and managed care providers.
At December 31, 1995, the Company had entered into contracts to provide
contract respiratory therapy services and supplies to 1,590 nursing and
subacute care centers.
SUBACUTE SERVICES
At December 31, 1995, the Company had entered into contracts to provide
subacute care services to 13 nursing and subacute care centers. These
services, which are also an extension of the cardiopulmonary services provided
by the Company's hospitals, may include ventilator management, tracheostomy
care, continuation of airway restoration programs, enteral and parenteral
nutritional support, IV therapy for hydration and medication administration,
progressive wound care, chronic chest tube management, laboratory, radiology,
pharmacy and dialysis services and customized rehabilitation services.
Subacute patients generally require assisted ventilation through mechanical
devices.
REHABILITATION THERAPY SERVICES
The Company provides physical, occupational and speech therapies to nursing
and subacute care center patients. At December 31, 1995, the Company had
entered into contracts to provide rehabilitation therapy services to patients
at 405 facilities.
HOSPICE SERVICES
The Company provides hospice services to nursing center patients, hospital
patients and persons in private residences.
CONTRACT SERVICES COMPETITION
Although the respiratory therapy services, rehabilitation services, subacute
services and hospice care markets are fragmented, significant competition
exists for the Company's contract services. The primary competitive factors
for the contract services business are quality of services, charges for
services and responsiveness to the needs of patients, families and the
facilities in which the services are provided. Certain hospitals are
establishing and managing their own step-down and subacute facilities. Other
hospital companies have entered the contract services market through
affiliation agreements and management contracts.
13
VENTECH SYSTEMS, INC.
In 1993, the Company formed Ventech to develop the ProTouch(TM) electronic
patient medical records system. ProTouch(TM) is a software application which
allows nurses, physicians and other clinicians to manage clinical information
utilized in the patient care delivery process.
Among the features of ProTouch(TM) are on-line access and update of an
electronic patient chart, on-line trend analysis using electronic flowsheets
and graphs, and remote access for authorized users. The system is designed to
decrease administrative time, reduce paper and support the delivery of quality
patient care.
The Company completed the installation of ProTouch(TM) in all of its
hospitals during 1995, and plans to install ProTouch(TM) in all of its nursing
centers by the end of 1997.
NURSING CENTER, PHARMACY AND RETIREMENT HOUSING COMMUNITY OPERATIONS
The Company's nursing center operations provide long-term care and subacute
medical and rehabilitation services in 311 nursing centers containing 39,480
licensed beds located in thirty-three states. At December 31, 1995, the
Company owned 216 nursing centers and leased 79 nursing centers. The Company
also managed 16 nursing centers, including 7 centers owned by Tenet Healthcare
Corporation ("Tenet"), which holds a greater than 10% interest in the Company.
The Company is a leading provider of rehabilitation services, including
physical, occupational and speech therapies. The majority of patients in
rehabilitation programs stay for eight weeks or less. Patients in
rehabilitation programs generally provide for higher revenues than other
nursing center patients because they require a higher level of ancillary
services. In addition, management believes that the Company is one of the
leading providers of care for patients with Alzheimer's disease. At December
31, 1995, the Company offered treatment in approximately 2,239 beds in 71
nursing centers for patients suffering from Alzheimer's disease. Most of these
patients reside in separate units within the nursing centers and are cared for
by teams of professionals specializing in the unique problems experienced by
Alzheimer's patients.
NURSING CENTER MARKETING
The factors which affect consumers' selection of a nursing center vary by
community and include a nursing center's competitive position and its
relationships with local referral sources. Competition creates the standards
against which nursing centers in a given market are judged by various referral
sources, which include physicians, hospital discharge planners, community
organizations and families. Therefore, the Company's nursing center sales
efforts are conducted at the local market level by the nursing center
administrators, admissions coordinators and others. Nursing center personnel
are assisted in carrying out their marketing strategies by regional marketing
staffs. The Company's sales efforts are directed toward improving the payor
mix at the nursing centers by increasing the census of private pay patients,
patients covered by managed care contracts and Medicare patients. Accordingly,
the Company's sales efforts focus on the value of its nursing centers as a
lower cost alternative for subacute medical and rehabilitation services
compared to similar care provided by acute care and rehabilitation hospitals.
NURSING CENTER OPERATIONS
Each nursing center is managed by a state-licensed administrator who is
supported by other professional personnel, including a director of nursing,
staff development professional (responsible for employee training), activities
director, social services director, licensed dietician, business office
manager and, in general, physical, occupational and speech therapists. The
directors of nursing are state-licensed nurses who supervise nursing staffs
which include registered nurses, licensed practical nurses and nursing
assistants. Staff size and composition
14
vary depending on the size and occupancy of each nursing center and on the
level of care provided by the nursing center. The nursing centers contract
with physicians who serve as medical directors and serve on quality assurance
committees.
The nursing centers are supported by regional staff in the areas of nursing,
dietary and rehabilitation services, maintenance, sales and financial
services. In addition, corporate staff provide other services in the areas of
sales assistance, human resource management, state and federal reimbursement,
state licensing and certification, legal, finance and accounting support.
Financial control is maintained principally through fiscal and accounting
policies established at the corporate level for use at the nursing centers.
Quality of care is monitored and enhanced by quality assurance committees
and family satisfaction surveys. The quality assurance committees oversee
patient healthcare needs and resident and staff safety. Additionally,
physicians serve on the quality assurance committees as medical directors and
advise on healthcare policies and practices. Nursing professionals visit each
nursing center periodically to review practices and recommend improvements
where necessary in the level of care provided and to assure compliance with
requirements under applicable Medicare and Medicaid regulations. Surveys of
residents' families are conducted from time to time in which the families are
asked to rate various aspects of service and the physical condition of the
nursing centers. These surveys are reviewed by nursing center administrators
to help ensure quality care.
The Company provides training programs for nursing center administrators,
managers, nurses and nursing assistants. These programs are designed to
provide career opportunities for employees and to maintain high levels of
quality patient care.
Substantially all of the nursing centers are currently certified to provide
services under the Medicare and Medicaid programs. A nursing center's
qualification to participate in such programs depends upon such factors as
accommodations, equipment, services, safety, personnel, physical environment
and adequate policies and procedures.
SELECTED NURSING CENTER OPERATING DATA
The following table sets forth certain operating data for the Company's
owned and leased nursing centers:
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
Number of nursing centers in operation at
end of period............................ 295 294 308
Number of licensed beds at end of period.. 37,383 37,336 38,496
Patient days.............................. 12,770,435 12,654,016 12,569,600
Average daily census...................... 34,987 34,669 34,437
Occupancy percentage...................... 92.2% 92.9% 93.3%
SOURCES OF NURSING CENTER REVENUES
Nursing center revenues are derived principally from Medicare and Medicaid
programs and from private pay patients. Consistent with the nursing home
industry generally, changes in the mix of the Company's patient population
among these three categories significantly affect the profitability of the
Company's operations. Although the level of cost reimbursement for Medicare
and other high acuity patients generally produces the most revenue per patient
day, profitability is reduced by the costs associated with the higher level of
nursing care and other services required by such patients. The Company
believes that private pay patients generally constitute the most profitable
and Medicaid patients generally constitute the least profitable category.
15
The following table sets forth certain percentages related to the payor mix
of the Company's owned and leased nursing centers:
MEDICARE MEDICAID PRIVATE AND OTHER
--------------------- --------------------- ---------------------
YEAR PATIENT DAYS REVENUES PATIENT DAYS REVENUES PATIENT DAYS REVENUES
- ---- ------------ -------- ------------ -------- ------------ --------
1995......... 12% 27% 65% 45% 23% 28%
1994......... 11 25 65 46 24 29
1993......... 8 18 68 53 24 29
The following table sets forth certain percentages related to the mix of
patient services of the Company's owned and leased nursing centers:
SUBACUTE MEDICAL LONG-
AND REHABILITATION SERVICES TERM NURSING CARE
--------------------------------- ---------------------
YEAR PATIENT DAYS REVENUES PATIENT DAYS REVENUES
- ---- --------------- ------------- ------------ --------
1995............... 14% 31% 86% 69%
1994............... 12 27 88 73
1993............... 8 19 92 81
For the year ended December 31, 1995, nursing center revenues totaled
approximately $1.5 billion, or 66.3% of the Company's consolidated revenues.
Both governmental and private third-party payors have employed cost
containment measures designed to limit payments made to healthcare providers.
Those measures include the adoption of initial and continuing recipient
eligibility criteria which may limit payment for services, the adoption of
coverage criteria which limit the services that will be reimbursed and the
establishment of payment ceilings which set the maximum reimbursement that a
provider may receive for services. Furthermore, government reimbursement
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all
of which may materially increase or decrease the rate of program payments to
the Company for its services. There can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs. In
addition, there can be no assurance that facilities owned, leased or managed
by the Company, or the provision of services and supplies by the Company, will
meet the requirements for participation in such programs. The Company could be
adversely affected by the continuing efforts of governmental and private
third-party payors to contain the amount of reimbursement for healthcare
services. In an attempt to limit the federal budget deficit, there have been,
and the Company expects that there will continue to be, a number of proposals
to limit Medicare and Medicaid reimbursement for healthcare services.
Medicare. The Medicare Part A program provides reimbursement for extended
care services furnished to Medicare beneficiaries who are admitted to skilled
nursing centers after at least a three-day stay in an acute care hospital.
Covered services include nursing care, room and board, social services,
physical and occupational therapies, pharmaceuticals, supplies and other
necessary services provided by skilled nursing centers.
Under the Medicare program, skilled nursing center reimbursement is based
upon reasonable direct and indirect costs of services provided to
beneficiaries. Routine costs are subject to a routine cost limit ("RCL"). The
RCL is a national average cost per patient day which is adjusted for
variations in local wages. Revenues under this program are subject to audit
and retroactive adjustment. Management believes that adequate provisions for
loss have been recorded to reflect any adjustments which could result from
such audits. Settlements of Medicare audits have not had a material adverse
effect on the Company's nursing center operating results.
Medicaid. Medicaid is a state-administered program financed by state funds
and matching federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Although administered under broad
federal regulations, states are given flexibility to construct programs and
payment methods consistent with their individual goals. Accordingly, these
programs differ from state to state in many respects.
16
Federal law requires Medicaid programs to pay rates that are reasonable and
adequate to meet the costs incurred by an efficiently and economically
operated nursing center providing quality care and services in conformity with
all applicable laws and regulations. However, despite these federal
requirements, disagreements frequently arise between nursing centers and
states regarding the adequacy of Medicaid payments. In addition, the Medicaid
programs are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy by the state agencies and certain
government funding limitations, all of which may materially increase or
decrease the level of program payments to nursing centers operated by the
Company. Management believes that the payments under these programs are not
sufficient on an overall basis to cover the costs of serving residents
participating in these programs. Furthermore, OBRA mandates an increased
emphasis on ensuring quality patient care, which has resulted in additional
expenditures by nursing centers.
There can be no assurance that the payments under Medicaid programs will
remain at levels comparable to current levels or, in the future, will be
sufficient to cover the costs incurred in serving residents participating in
such programs. The Company provides to eligible individuals Medicaid-covered
services consisting of nursing care, room and board and social services. In
addition, states may at their option cover other services such as physical,
occupational and speech therapies and pharmaceuticals.
Private Pay and Managed Care. The Company's nursing centers seek to increase
the number of private pay patients and those covered under private insurance
and managed care health plans. Such patients typically have financial
resources to pay for their monthly services and do not rely generally on
government programs for support.
NURSING CENTER COMPETITION
The Company's nursing centers compete on a local and regional basis with
other nursing centers. The Company's competitive position varies within each
community served. The Company believes that the quality of care provided,
reputation, location and physical appearance of its nursing centers and, in
the case of private pay patients, the charges for services, are significant
competitive factors. Although there is limited, if any, price competition with
respect to Medicare and Medicaid patients (since revenues received for
services provided to such patients are based on fixed rates or cost
reimbursement regulations), there is significant competition for both private
pay and Medicare patients.
The long-term care industry is divided into a variety of competitive areas
which market similar services. These competitors include nursing centers,
hospitals, extended care centers, retirement housing facilities and
communities, home health agencies and similar institutions. The industry
includes government-owned, church-owned, secular not-for-profit and for-profit
institutions.
17
NURSING CENTER FACILITIES
The following table lists by state the number of nursing centers and related
licensed beds operated by the Company as of December 31, 1995:
NUMBER OF FACILITIES
LICENSED --------------------------
STATE BEDS OWNED LEASED MANAGED TOTAL
- ----- -------- ----- ------ ------- -----
Alabama(1).................................. 447 3 - - 3
Arizona..................................... 970 5 2 - 7
Arkansas.................................... 174 1 - - 1
California.................................. 4,473 21 16 3 40
Colorado.................................... 935 4 3 - 7
Connecticut(1).............................. 716 6 - - 6
Florida(1).................................. 2,011 12 1 3 16
Georgia(1).................................. 370 3 - - 3
Hawaii...................................... 60 1 - - 1
Idaho....................................... 903 7 2 - 9
Indiana(1).................................. 4,071 15 13 - 28
Kentucky(1)................................. 2,014 13 3 - 16
Louisiana................................... 258 - - 2 2
Maine(1).................................... 882 11 - - 11
Massachusetts(1)............................ 4,246 33 3 2 38
Minnesota................................... 159 1 - - 1
Mississippi................................. 120 - 1 - 1
Montana(1).................................. 456 2 1 - 3
Nebraska.................................... 167 - 1 - 1
Nevada(1)................................... 314 3 - - 3
New Hampshire............................... 622 3 - 1 4
North Carolina(1)........................... 3,241 20 9 - 29
Ohio(1)..................................... 1,935 9 4 1 14
Oklahoma(1)................................. 226 1 - 1 2
Oregon(1)................................... 468 2 2 - 4
Tennessee(1)................................ 2,669 5 11 - 16
Texas....................................... 180 - - 1 1
Utah........................................ 740 5 - 1 6
Vermont(1).................................. 260 1 - 1 2
Virginia(1)................................. 764 4 1 - 5
Washington.................................. 1,521 10 3 - 13
Wisconsin(1)................................ 2,657 11 3 - 14
Wyoming(1).................................. 451 4 - - 4
------ --- --- --- ---
Total(2).................................... 39,480 216 79 16 311
====== === === === ===
- --------
(1) These states have CON regulations. See "Governmental Regulation of Nursing
Centers, Retirement Centers and Pharmacies."
(2) Of the 39,480 nursing center licensed beds operated by the Company at
December 31, 1995, 26,933 were owned, 10,450 were leased and 2,097 were
managed by the Company.
PHARMACIES
Through its subsidiary, Medisave Pharmacies, Inc. ("Medisave"), the Company
provides institutional and retail pharmacy services. As of December 31, 1995,
Medisave operated 35 institutional pharmacies and 20 retail pharmacies in 18
states. For the year ended December 31, 1995, Medisave revenues totaled
approximately $178 million, or 7.7% of the Company's consolidated revenues.
The institutional pharmacy division focuses on providing a full array of
pharmacy services to approximately 735 nursing centers and specialized care
centers. Institutional pharmacy sales encompass a wide variety of
18
products including prescription medication, prosthetics, respiratory and
infusion services and enteral therapies. In addition, Medisave provides a
variety of pharmaceutical consulting services designed to assist nursing
centers in program administration. Institutional pharmacy operations accounted
for substantially all of Medisave's pharmacy revenues and operating income in
1995.
Medisave's retail pharmacy operations consist of discount retail pharmacy
and optical stores in leased facilities. In 1993 and 1994, the Company
terminated leases of 36 retail outlets in Wal-Mart stores. The leases of the
remaining 14 Wal-Mart outlets were terminated in the first quarter of 1995.
The termination of these leases has not had a material effect on pharmacy
operating income.
The following table lists by state the number of pharmacies operated by
Medisave as of December 31, 1995:
STATE INSTITUTIONAL RETAIL TOTAL
----- ------------- ------ -----
Arizona......................................... 1 - 1
California...................................... 14 - 14
Florida......................................... 2 - 2
Idaho........................................... 1 - 1
Illinois........................................ - 3 3
Kansas.......................................... - 2 2
Louisiana....................................... - 3 3
Massachusetts................................... 1 - 1
Mississippi..................................... - 6 6
Missouri........................................ 1 - 1
Nevada.......................................... 2 - 2
North Carolina.................................. 4 - 4
Ohio............................................ 1 1 2
Tennessee....................................... 2 - 2
Texas........................................... - 5 5
Utah............................................ 1 - 1
Virginia........................................ 2 - 2
Wisconsin....................................... 3 - 3
--- --- ---
Total......................................... 35 20 55
=== === ===
RETIREMENT HOUSING COMMUNITIES
As of December 31, 1995, the Company's retirement housing operations
consisted of 23 retirement housing communities. These centers included 3,122
apartment units and were located in 15 states. Of the total number of
retirement housing centers, 11 are owned by the Company, one is leased by the
Company, three are managed by the Company for a third party and eight are
owned by partnerships in which the Company has an equity interest. For the
year ended December 31, 1995, retirement housing community revenues totaled
approximately $46 million, or 2% of the Company's consolidated revenues.
Retirement housing communities serve more independent and self-sufficient
residents than do the nursing centers. A retirement housing community consists
of studio, one-bedroom and two-bedroom apartment units. Residents typically
receive weekly housekeeping and linen service, local transportation, 24-hour
emergency call service and daily food service.
Residents are responsible for monthly fees which typically are paid by the
resident or the resident's family members. Retirement housing operations do
not presently qualify for reimbursement under Medicare, Medicaid or Veterans
Administration healthcare programs because they do not offer the levels of
care required under such programs. Monthly fees paid by residents are based
upon the resident's apartment size, the number of meals the resident elects to
purchase and the level of personal care required by the resident.
19
The following table lists by state the number of retirement housing
communities and related apartments operated by the Company as of December 31,
1995:
NUMBER OF FACILITIES
NUMBER OF -----------------------------
STATE APARTMENTS OWNED(1) LEASED MANAGED TOTAL
----- ---------- -------- ------ ------- -----
Arizona.......................... 522 4 - - 4
California....................... 212 1 - - 1
Colorado......................... 99 1 - - 1
Florida.......................... 660 3 - 1 4
Idaho............................ 115 1 - - 1
Indiana.......................... 136 1 - 1 2
Kansas........................... 155 1 - - 1
Massachusetts.................... 555 1 - 1 2
Missouri......................... 173 1 - - 1
New Hampshire.................... 28 1 - - 1
Ohio............................. 80 - 1 - 1
Oklahoma......................... 35 1 - - 1
Oregon........................... 33 1 - - 1
Utah............................. 120 1 - - 1
Washington....................... 199 1 - - 1
----- --- --- --- ---
Total.......................... 3,122 19 1 3 23
===== === === === ===
- --------
(1) Includes retirement housing communities owned by partnerships in which the
Company has a limited and/or general partnership interest that are managed
by the Company for such partnerships.
GOVERNMENTAL REGULATION OF NURSING CENTERS, RETIREMENT CENTERS AND PHARMACIES
The federal government and all states in which the Company operates regulate
various aspects of the Company's nursing center business. In particular, the
development and operation of nursing centers and retirement communities and
the provision of healthcare services are subject to federal, state and local
laws relating to the adequacy of medical care, distribution of
pharmaceuticals, equipment, personnel, operating policies, fire prevention,
rate-setting and compliance with building codes and environmental laws.
Nursing centers are subject to periodic inspection by governmental and other
authorities to assure continued compliance with various standards, their
continued licensing under state law, certification under the Medicare and
Medicaid programs and continued participation in the Veterans Administration
program. Retirement communities and their owners are subject to periodic
inspection by governmental authorities to assure compliance with various
standards including standards relating to the financial condition of the
owners of such communities. The failure to obtain or renew any required
regulatory approvals or licenses could adversely affect the Company's
operations.
Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987, as
amended ("OBRA"), increased the enforcement powers of state and federal
certification agencies. Additional sanctions were authorized to correct
noncompliance with regulatory requirements, including fines, temporary
suspension of admission of new patients to nursing centers and, in extreme
circumstances, decertification from participation in the Medicare or Medicaid
programs.
Nursing centers managed and operated by the Company are licensed either on
an annual or bi-annual basis and certified annually for participation in
Medicare and Medicaid programs through various regulatory agencies which
determine compliance with federal, state and local laws. These legal
requirements relate to the quality of the nursing care provided, the
qualifications of the administrative personnel and nursing staff, the adequacy
of the physical plant and equipment and continuing compliance with the laws
and regulations governing the operation of nursing centers. From time to time
the Company's nursing centers receive statements of deficiencies
20
from regulatory agencies. In response, the Company implements plans of
correction with respect to these nursing centers to address the alleged
deficiencies. The Company believes that its nursing centers are in material
compliance with all applicable regulations or laws.
In certain circumstances, federal law mandates that conviction of certain
abusive or fraudulent behavior with respect to one nursing center may subject
other facilities under common control or ownership to disqualification for
participation in Medicare and Medicaid programs. In addition, some state
regulations provide that all nursing centers under common control or ownership
within a state are subject to delicensure if any one or more of such
facilities are delicensed.
Revised federal regulations under OBRA, which became effective in 1995,
affect the survey process for nursing centers and the authority of state
survey agencies and the Health Care Financing Administration to impose
sanctions on facilities based upon noncompliance with applicable requirements.
Available sanctions include imposition of civil monetary penalties, temporary
suspension of payment for new patient admissions, appointment of a temporary
manager, suspension of payment for eligible patients and suspension or
decertification from participation in the Medicare and/or Medicaid programs.
The process of implementing these regulatory changes has only recently been
addressed by the federal and state regulators. Each state will be allowed some
discretion in its implementation of the changes, but the scope of this
discretion is evolving through instructions issued by federal regulators and
is not yet finalized. The Company is unable to project how these regulatory
changes and their implementation will affect the Company.
In addition to license requirements, many states in which the Company
operates have statutes that require a CON to be obtained prior to the
construction of a new nursing center, the addition of new beds or services or
the incurring of certain capital expenditures. Certain states also require
regulatory approval prior to certain changes in ownership of a nursing center.
Certain states in which the Company operates have eliminated their CON
programs and other states are considering alternatives to their CON programs.
To the extent that CON or other similar approvals are required for expansion
of Company operations, either through facility acquisitions or expansion or
provision of new services or other changes, such expansion could be adversely
affected by the failure or inability to obtain the necessary approvals,
changes in the standards applicable to such approvals or possible delays and
expenses associated with obtaining such approvals.
Pharmaceutical operations are subject to regulation by the various states in
which the Company conducts its business as well as by the federal government.
The Company's pharmacies are regulated under the Food, Drug and Cosmetic Act
and the Prescription Drug Marketing Act, which are administered by the United
States Food and Drug Administration. Under the Comprehensive Drug Abuse
Prevention and Control Act of 1970, which is administered by the United States
Drug Enforcement Administration ("DEA"), dispensers of controlled substances
must register with the DEA, file reports of inventories and transactions and
provide adequate security measures. Failure to comply with such requirements
could result in civil or criminal penalties.
The Company's operations are also subject to federal and state laws which
govern financial and other arrangements between healthcare providers. These
laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between healthcare providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. Such laws include the anti-
kickback provisions of the federal Medicare and Medicaid Patients and Program
Protection Act of 1987. These provisions prohibit, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare and Medicaid patients. In addition, some states
restrict certain business relationships between physicians and pharmacies, and
many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of
licensure or eligibility to participate in reimbursement programs as well as
civil and criminal penalties. These laws vary from state to state and have
seldom been interpreted by the courts or regulatory agencies.
21
ADDITIONAL COMPANY INFORMATION
EMPLOYEES
As of December 31, 1995, the Company had approximately 43,643 full-time and
16,375 part-time and per diem employees. The Company was a party to 25
collective bargaining agreements covering approximately 3,700 employees as of
December 31, 1995.
LIABILITY INSURANCE
The Company maintains professional liability and general liability insurance
for substantially all its hospitals in amounts per hospital totaling up to $1
million per claim and $3 million in the aggregate. In addition, $25 million in
umbrella coverage is also maintained for hospital operations.
The nursing center, retirement housing community and pharmaceutical
operations are insured by the Company's wholly owned captive insurance company
for professional liability losses per facility up to $500,000 per claim and $8
million in the aggregate. Coverages for losses in excess of various limits are
maintained through unrelated commercial insurance carriers.
An additional $105 million of umbrella coverage is maintained for all
operations of the Company. The Company believes that its insurance is adequate
in amount and coverage. However, there can be no assurance that in the future
such insurance will be available to the Company at a reasonable cost or that
the Company will be able to maintain adequate levels of insurance coverages.
CAUTIONARY STATEMENTS
Information provided herein by the Company contains, and from time to time
the Company may disseminate materials and make statements which may contain
"forward-looking" information, as that term is defined by the Private
Securities Litigation Reform Act of 1995 (the "Act"). These cautionary
statements are being made pursuant to the provisions of the Act and with the
intention of obtaining the benefits of the "safe harbor" provisions of the
Act. The Company cautions investors that any forward-looking statements made
by the Company are not guarantees of future performance and that actual
results may differ materially from those in the forward-looking statements as
a result of various factors, including, but not limited to, the following:
(i) In recent years, an increasing number of legislative proposals have
been introduced or proposed by Congress and in some state legislatures
which would effect major changes in the healthcare system. However, the
Company cannot predict the form of healthcare reform legislation which may
be proposed or adopted by Congress or by state legislatures. Accordingly,
the Company is unable to assess the effect of any such legislation on its
business. There can be no assurance that any such legislation will not have
a material adverse impact on the future growth, revenues and net income of
the Company.
(ii) The Company derives substantial portions of its revenues from third-
party payors, including government reimbursement programs such as Medicare
and Medicaid, and nongovernment sources, such as commercial insurance
companies, HMOs, PPOs and contract services. Both government and
nongovernment payors have undertaken cost-containment measures designed to
limit payments to healthcare providers. There can be no assurance that
payments under governmental and nongovernmental payor programs will be
sufficient to cover the costs allocable to patients eligible for
reimbursement. The Company cannot predict whether or what proposals or
cost-containment measures will be adopted or, if adopted and implemented,
what effect, if any, such proposals might have on the operations of the
Company.
(iii) The Company is subject to extensive federal, state and local
regulations governing licensure, conduct of operations at existing
facilities, construction of new facilities, purchase or lease of existing
facilities, addition of new services, certain capital expenditures, cost-
containment and reimbursement for services rendered. The failure to obtain
or renew required regulatory approvals or licenses, the delicensing of
facilities owned, leased or operated by the Company or the disqualification
of the Company from
22
participation in certain federal and state reimbursement programs could
have a material adverse effect upon the operations of the Company.
(iv) There can be no assurance that the Company will be able to continue
its substantial growth or be able to fully implement its strategy to
develop and expand its long-term care networks.
ITEM 2. PROPERTIES
Information related to the number, location and ownership of the Company's
hospitals, nursing centers, pharmacies and retirement housing communities is
included in "Hospital Operations" and "Nursing Center, Pharmacy and Retirement
Housing Community Operations." The Company believes that its facilities are
adequate for the Company's future needs in such locations.
ITEM 3. LEGAL PROCEEDINGS
On January 25, 1995, Horizon Healthcare Corporation ("Horizon") made a
proposal to acquire Hillhaven in a stock merger valued by Horizon at $28 per
share. On February 5, 1995, a Special Committee of Hillhaven's Board of
Directors (the "Special Committee") considered the proposal with its advisors
and concluded that the proposal was inadequate. On March 7, 1995, Horizon made
another offer to acquire Hillhaven in a stock merger valued by Horizon at $31
per share.
In light of the March 7, 1995 Horizon proposal and expressions of interest
received by Hillhaven from other parties desiring to explore an acquisition
transaction, on March 20, 1995, the Special Committee instructed Merrill
Lynch, Pierce, Fenner and Smith Incorporated to explore strategic
alternatives, including the possible sale of Hillhaven to a third party. The
Special Committee established a process to evaluate all alternatives available
to Hillhaven.
As part of this process, Hillhaven engaged in discussions with certain
parties interested in acquiring Hillhaven, and invited Horizon to participate
in this process. Horizon announced that its proposal expired on March 21,
1995. On April 24, 1995, Hillhaven announced that it had entered into a
definitive merger agreement with the Company.
A number of legal actions resulted from Horizon's January and March
proposals to acquire Hillhaven, all of which have been resolved except as set
forth below.
Hillhaven and its directors are named as defendants in a number of putative
class action complaints filed on behalf of Hillhaven's stockholders in Nevada
state court (the "Nevada State Court Actions") and California state court (the
"California State Court Actions"). These complaints raise allegations that
Hillhaven and its directors have breached their fiduciary duties to
Hillhaven's stockholders in connection with the consideration of Horizon's
acquisition proposal and certain corporate actions also cited in Horizon's
counterclaim. These actions seek declaratory and injunctive relief and, in
California, compensatory damages in unspecified amounts. The Hillhaven Merger
rendered moot the issues raised in the Nevada State Court Actions and
California State Court Actions, with the exception of the plaintiffs' request
for an award of attorneys' fees and costs, which has yet to be decided by the
court.
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of business.
The Company believes that all such claims and actions currently pending
against it either are adequately covered by insurance or would not have a
material adverse effect on the Company if decided in a manner unfavorable to
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
23
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the present executive officers of the Company, their
ages (as of January 1, 1996), their positions with the Company and the year in
which they first became an executive officer of the Company:
FIRST ELECTED
NAME AGE POSITION EXECUTIVE OFFICER
---- --- -------- -----------------
Michael R. Barr......... 46 Chief Operating Officer and 1985(1)
Executive Vice President
Jill L. Force........... 43 Vice President, General Counsel and 1995(2)
Corporate Secretary
James H. Gillenwater, 38 Vice President, Planning and 1995(3)
Jr. ................... Development
Thomas T. Ladt.......... 45 Executive Vice President, Operations 1993(4)
Richard A. Lechleiter... 37 Vice President, Finance and 1995(5)
Corporate Controller
W. Bruce Lunsford....... 48 Chairman of the Board, President and 1985(6)
Chief Executive Officer
Carl J. Napoli.......... 58 Chief Executive Officer, Chief 1995(7)
Operating Officer and President of
Medisave Pharmacies, Inc.
W. Earl Reed, III....... 44 Chief Financial Officer and 1987(8)
Executive Vice President
- --------
(1) Mr. Barr, a founder of the Company, physical therapist and certified
respiratory therapist, has served as Chief Operating Officer and Executive
Vice President of the Company since February 1996. From November 1995 to
February 1996, he was Executive Vice President of the Company and Chief
Executive Officer of the Company's Hospital Division. Mr. Barr served as
Vice President of Operations for the Company from 1985 to November 1995.
(2) Ms. Force, a certified public accountant and attorney, has served as Vice
President, General Counsel and Corporate Secretary of the Company since
November 1995. From 1989 to 1995, she was General Counsel and Corporate
Secretary of the Company.
(3) Mr. Gillenwater has served as Vice President, Planning and Development of
the Company since November 1995. From 1989 to November 1995, he was
Director of Planning and Development of the Company.
(4) Mr. Ladt has served as Executive Vice President, Operations of the Company
since February 1996. From November 1995 to February 1996, he served as
President of the Company's Hospital Division. From 1993 to November 1995,
Mr. Ladt was Vice President of the Company's Hospital Division. From 1989
to December 1993, Mr. Ladt was a Regional Director of Operations for the
Company.
(5) Mr. Lechleiter, a certified public accountant, has served as Vice
President, Finance and Corporate Controller of the Company since November
1995. From June 1995 to November 1995, he was Director of Finance of the
Company. Prior thereto, Mr. Lechleiter served as Vice President and
Controller at each of (i) Columbia/HCA Healthcare Corporation (September
1993 to May 1995), (ii) Galen Health Care, Inc. (March 1993 to August
1993) and (iii) Humana Inc. (September 1990 to February 1993).
(6) Mr. Lunsford, a founder of the Company, certified public accountant and
attorney, has served in this position since the Company commenced
operations in 1985.
(7) Mr. Napoli has served as President, Chief Executive Officer and Chief
Operating Officer of Medisave Pharmacies, Inc., a subsidiary of the
Company, since July 1994. From May 1992 to July 1994, Mr. Napoli was
President and Chief Operating Officer of Medisave Pharmacies, Inc. He was
Executive Vice President of Operations of Medisave Pharmacies, Inc. from
September 1984 to May 1992.
(8) Mr. Reed, a certified public accountant, has served as Chief Financial
Officer and Executive Vice President of the Company since November 1995.
From 1987 to November 1995, Mr. Reed served as Vice President, Finance and
Development of the Company.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of this Report appears on the inside back
cover of the 1995 Annual Report to Shareholders and is incorporated by
reference in this Report.
25
ITEM 6. SELECTED FINANCIAL DATA
VENCOR, INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICS)
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
OPERATIONS:
Revenues................ $2,323,956 $2,032,827 $1,727,436 $1,575,225 $1,425,629
---------- ---------- ---------- ---------- ----------
Salaries, wages and
benefits............... 1,360,018 1,167,181 985,163 921,508 847,261
Supplies................ 188,754 162,053 126,473 117,940 110,566
Rent.................... 79,476 79,371 74,323 85,942 112,196
Other operating
expenses............... 416,969 366,621 330,014 299,813 268,465
Depreciation and
amortization........... 89,478 79,519 69,126 56,408 39,179
Interest expense........ 60,918 62,828 73,559 62,532 48,364
Investment income....... (13,444) (13,126) (16,056) (12,820) (17,013)
Non-recurring
transactions........... 109,423 (4,540) 5,769 113,265 -
---------- ---------- ---------- ---------- ----------
2,291,592 1,899,907 1,648,371 1,644,588 1,409,018
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations before
income taxes........... 32,364 132,920 79,065 (69,363) 16,611
Provision for income
taxes.................. 24,001 46,781 10,089 12,051 7,138
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. 8,363 86,139 68,976 (81,414) 9,473
Reinstatement of
discontinued
operations............. - - - 24,743 4,379
Extraordinary gain
(loss) on
extinguishment of debt,
net of
income taxes .......... (23,252) (241) (2,217) 380 -
Cumulative effect on
prior years of a change
in accounting
for income taxes....... - - (1,103) - -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ (14,889) $ 85,898 $ 65,656 $ (56,291) $ 13,852
========== ========== ========== ========== ==========
Earnings (loss) per
common and common
equivalent share:
Primary:
Income (loss) from
operations............ $ .21 $ 1.37 $ 1.22 $ (1.57) $ .19
Reinstatement of
discontinued
operations............ - - - .47 .09
Extraordinary gain
(loss) on
extinguishment of
debt.................. (.37) - (.04) .01 -
Cumulative effect on
prior years of a
change in accounting
for income taxes...... - - (.02) - -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ (.16) $ 1.37 $ 1.16 $ (1.09) $ .28
========== ========== ========== ========== ==========
Fully diluted:
Income (loss) from
operations............ $ .29 $ 1.28 $ 1.22 $ (1.57) $ .19
Reinstatement of
discontinued
operations............ - - - .47 .09
Extraordinary gain
(loss) on
extinguishment of
debt.................. (.32) - (.04) .01 -
Cumulative effect on
prior years of a
change in accounting
for income taxes...... - - (.02) - -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ (.03) $ 1.28 $ 1.16 $ (1.09) $ .28
========== ========== ========== ========== ==========
Shares used in
computing earnings
(loss) per common and
common equivalent
share:
Primary................ 62,318 57,037 54,555 52,820 49,138
Fully diluted.......... 71,967 69,014 60,640 52,820 49,138
FINANCIAL POSITION:
Working capital......... $ 239,666 $ 129,079 $ 114,339 $ 114,695 $ 150,392
Assets.................. 1,912,454 1,656,205 1,563,350 1,515,812 1,004,093
Long-term debt.......... 778,100 746,212 784,801 988,998 481,080
Stockholders' equity.... 772,064 596,454 485,550 283,791 302,074
OPERATING DATA:
Number of hospitals..... 36 33 26 18 14
Number of hospital
licensed beds.......... 3,263 2,511 2,198 1,717 1,250
Number of hospital
patient days........... 489,612 403,623 293,367 223,483 150,564
Number of nursing
centers................ 311 310 325 369 380
Number of nursing center
licensed beds.......... 39,480 39,423 40,759 45,419 46,808
Number of nursing center
patient days........... 12,569,600 12,654,016 12,770,435 13,709,222 14,563,082
Number of Vencare
contracts.............. 2,008 948 128 - -
Number of pharmacy
outlets................ 55 60 88 131 118
Number of retirement
centers................ 23 22 24 29 29
Number of retirement
center apartments...... 3,122 3,049 3,254 3,565 3,514
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Selected Financial Data in Item 6 and the consolidated financial
statements included in this Form 10-K set forth certain data with respect to
the financial position, results of operations and cash flows of Vencor, Inc.
("Vencor") which should be read in conjunction with the following discussion
and analysis.
HILLHAVEN AND NATIONWIDE MERGERS
The merger with The Hillhaven Corporation ("Hillhaven") (the "Hillhaven
Merger") was consummated on September 28, 1995. At the time of the Hillhaven
Merger, Hillhaven operated 311 nursing centers, 56 retail and institutional
pharmacies and 23 retirement communities with 3,122 apartments. Annualized
revenues approximated $1.7 billion.
Prior to its merger with Vencor, Hillhaven completed a merger with
Nationwide Care, Inc. ("Nationwide") (the "Nationwide Merger") on June 30,
1995. At the time of the Nationwide Merger, Nationwide operated 23 nursing
centers containing 3,257 licensed beds and four retirement communities with
442 apartments. Annualized revenues approximated $125 million.
As discussed in the Notes to Consolidated Financial Statements, the
Hillhaven and Nationwide Mergers have been accounted for by the pooling-of-
interests method. Accordingly, the accompanying consolidated financial
statements and financial and operating data included herein give retroactive
effect to these transactions and include the combined operations of Vencor,
Hillhaven and Nationwide for all periods presented.
ANTICIPATED MERGER SYNERGIES AND IMPLEMENTATION OF NETWORK STRATEGY
As a result of the Hillhaven Merger, Vencor has become one of the nation's
largest diversified healthcare providers, offering a broad continuum of
specialized respiratory, rehabilitation and pharmacy services through its
network of hospitals, nursing centers, Vencare contract services,
institutional and retail pharmacies, and retirement communities.
Management believes that Vencor will achieve significant operational
synergies in connection with the Hillhaven Merger through (i) growth in
revenues from increased patient referrals and expansion of ancillary services
within the integrated continuum of healthcare services and (ii) reductions in
operating costs from the elimination of duplicative services, improved
purchasing power of the combined entity, and refinancing of higher rate long-
term debt. The estimated effect of these synergies could increase pretax
income approximately $100 million per year by 1997.
There can be no assurances, however, that Vencor will successfully develop
and expand its long-term care networks. The Hillhaven Merger substantially
changed the nature, scope and size of Vencor's business, and significant
efforts required to integrate the operations and management of the combined
entity could have an adverse effect on Vencor's ability to realize the
operating synergies described above.
27
RESULTS OF OPERATIONS
A summary of revenues follows (dollars in thousands):
1995 1994
-------------------- -------------------- 1993
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT
---------- -------- ---------- -------- ----------
Hospitals................. $ 456,486 26.4 $ 361,111 29.5 $ 278,826
---------- ---------- ----------
Nursing centers:
Long-term care........... 1,073,413 5.5 1,017,592 3.1 987,271
Subacute medical and
rehabilitation care..... 492,912 28.7 383,097 64.3 233,133
---------- ---------- ----------
1,566,325 11.8 1,400,689 14.8 1,220,404
Non-recurring
transactions............ (24,500) - -
---------- ---------- ----------
1,541,825 10.1 1,400,689 14.8 1,220,404
---------- ---------- ----------
Ancillary services:
Vencare.................. 110,350 183.6 38,907 1,041.3 3,409
Pharmacies............... 178,363 (7.6) 193,104 (0.9) 194,935
Retirement communities... 46,371 17.7 39,390 31.9 29,862
---------- ---------- ----------
335,084 23.5 271,401 18.9 228,206
---------- ---------- ----------
Elimination............... (9,439) (374) -
---------- ---------- ----------
$2,323,956 14.3 $2,032,827 17.7 $1,727,436
========== ========== ==========
Hospital revenue increases in both 1995 and 1994 resulted from the
acquisition of facilities in each of the last two years and growth in same-
store patient days. Hospital patient days rose 21% to 489,612 in 1995 and 38%
to 403,623 in 1994.
Excluding the effect of non-recurring transactions, nursing center revenue
increases resulted primarily from significant growth in subacute medical and
rehabilitation therapy services. Patient days related to these services grew
16% to 1,699,500 in 1995 and 37% to 1,469,624 in 1994. Patient days related to
long-term and custodial care declined 3% to 10,870,100 in 1995 and 4% to
11,184,392 in 1994.
Growth in ancillary services revenues in both 1995 and 1994 was primarily
attributable to the expansion of the Vencare contract services business.
Vencare, which commenced operations in 1993, provides respiratory and
rehabilitation therapy services and subacute care primarily to nursing
centers. The number of Vencare contracts grew from 128 at the end of 1993 to
948 and 2,008 at December 31, 1994 and 1995, respectively.
In the third quarter of 1995, Vencor recorded pretax charges aggregating
$128.4 million ($89.9 million net of tax) primarily in connection with the
Hillhaven Merger. The charges included (i) $23.2 million of investment
advisory and professional fees, (ii) $53.8 million of employee benefit plan
and severance costs, (iii) $26.9 million of losses associated with the planned
disposition of certain nursing center properties and (iv) $24.5 million of
charges to reflect Vencor's change in estimates of accrued revenues recorded
in connection with certain prior-year nursing center third-party reimbursement
issues. Operating results for 1995 also include pretax charges of $5.5 million
($3.7 million net of tax) recorded in the second quarter related primarily to
the Nationwide Merger.
Non-recurring transactions related primarily to sales of assets and nursing
center restructuring activities increased pretax income by $4.5 million ($2.7
million net of tax) in 1994. Operating results in 1993 include a pretax charge
of $5.8 million ($3.7 million net of tax) related to the restructuring of
certain nursing centers held for sale. In addition, provision for income taxes
includes a credit of approximately $19 million related to deferred income
taxes.
Income from operations for 1995 totaled $8.3 million, compared to $86.1
million and $69 million for 1994 and 1993, respectively. Excluding the effect
of non-recurring transactions, 1995 income from operations increased 22% to
$101.9 million ($1.45 per share--fully diluted) and 55% to $83.4 million
($1.24 per share-- fully diluted) in 1994. The improvement in both periods
resulted primarily from growth in (i) hospital patient
28
days, (ii) Vencare contracts and (iii) higher margin subacute and
rehabilitation therapy services in the nursing center business.
For more information concerning the provision for income taxes as well as
information regarding differences between effective income tax rates and
statutory rates, see Note 6 of the Notes to Consolidated Financial Statements.
LIQUIDITY
Cash provided by operations totaled $113.6 million for 1995 compared to $133
million for 1994 and $105.2 million for 1993. Cash payments in 1995 related to
non-recurring transactions reduced cash flows from operations by approximately
$32 million. In addition, certain non-recurring transaction costs for employee
benefits and consolidation activities related to the Hillhaven Merger are
expected to reduce cash flows from operations in 1996. Growth in cash flows in
1994 was primarily attributable to growth in net income.
During each of the past three years, cash flows from operations have been
adversely impacted by growth in the outstanding days of revenues in accounts
receivable. Growth in accounts receivable has been primarily related to the
integration of acquired hospital facilities and delays in payments from
certain state Medicaid programs and managed care plans. Management believes
that these factors will continue to have an adverse effect on cash flows from
operations in 1996.
Concurrent with the consummation of the Hillhaven Merger, Vencor established
a $1 billion credit facility (the "Credit Facility") to finance the redemption
of Hillhaven preferred stock, repay certain Hillhaven higher rate debt and
borrowings under prior revolving credit agreements, and provide sufficient
credit for future expansion. At December 31, 1995, available borrowings under
the Credit Facility approximated $300 million.
Working capital totaled $239.7 million at December 31, 1995 compared to
$129.1 million at December 31, 1994. Management believes that cash flows from
operations and amounts available under the Credit Facility are sufficient to
meet future expected liquidity needs.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $136.9 million for 1995
compared to $111.5 million for 1994 and $74.1 million for 1993. Planned
capital expenditures in 1996 (excluding acquisitions) are expected to
approximate $175 million and include significant expenditures related to the
expansion of Vencor's retirement community and assisted living operations.
Management believes that its capital expenditure program is adequate to
expand, improve and equip existing facilities.
Vencor also expended $59.3 million, $36.4 million and $44.1 million for
acquisitions of new facilities (and related healthcare businesses) and
previously leased nursing centers during 1995, 1994 and 1993, respectively, of
which $44.2 million, $32.4 million and $25.1 million related to additional
hospital and related ancillary facilities. Management intends to acquire
additional hospitals, nursing centers and related healthcare businesses in the
future.
Capital expenditures during the last three years were financed primarily
through internally generated funds and, in 1995, from the public offering of
2.2 million shares of common stock, the proceeds from which aggregated $66.5
million. Vencor intends to finance a substantial portion of its capital
expenditures with internally generated and borrowed funds. Sources of capital
include available borrowings under the Credit Facility, public or private debt
and equity.
As discussed in Note 8 of the Notes to Consolidated Financial Statements,
Vencor called for redemption all of its outstanding convertible debt
securities in the fourth quarter of 1995, resulting in the issuance of
approximately 7,259,000 shares of common stock. Approximately $34.4 million of
the convertible securities were redeemed in exchange for cash equal to 104.2%
of face value plus accrued interest. These transactions had
29
no material effect on earnings per common and common equivalent share. Had
these transactions occurred on December 31, 1994, the ratio of debt to debt
plus stockholders' equity would have improved from approximately 57% to 46%.
As discussed in Note 8 of the Notes to Consolidated Financial Statements,
Vencor entered into certain interest rate swap agreements in the fourth quarter
of 1995 to eliminate the impact of changes in interest rates on $400 million of
floating rate debt outstanding under the Credit Facility. The agreements expire
in April 1997 ($100 million), October 1997 ($200 million) and April 1998 ($100
million) and provide for fixed rates at 5.7% plus 1/2% to 1 1/4%.
HEALTH CARE LEGISLATION
Congress is currently considering various proposals which could reduce
expenditures under certain government health and welfare programs, including
Medicare and Medicaid. Management cannot predict whether such proposals will be
adopted, or if adopted, what effect, if any, such proposals would have on its
business.
Medicare revenues as a percentage of consolidated revenues were 30%, 27% and
21% for 1995, 1994 and 1993, respectively, while Medicaid percentages of
revenues approximated 33%, 36% and 41% for the respective periods.
OTHER INFORMATION
Various lawsuits and claims arising in the ordinary course of business are
pending against Vencor. As discussed