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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _________.
Commission File Number: 333-94521
IASIS HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0450619
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 844-2747
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days YES [x] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of December 15, 2000, there were 3,039,474.50 shares of the
Registrant's Common Stock outstanding.
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TABLE OF CONTENTS
PART I...........................................................................................................1
Item 1. Business.......................................................................................1
Item 2. Properties....................................................................................23
Item 3. Legal Proceedings.............................................................................24
Item 4. Submission of Matters to a Vote of Security Holders...........................................24
PART II.........................................................................................................24
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................24
Item 6. Selected Financial Data.......................................................................25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................38
Item 8. Financial Statements and Supplementary Data...................................................39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........73
PART III........................................................................................................73
Item 10. Directors and Executive Officers of the Registrant............................................73
Item 11. Executive Compensation........................................................................76
Item 12 Security Ownership of Certain Beneficial Owners and Management................................79
Item 13. Certain Relationships and Related Transactions................................................80
PART IV.........................................................................................................84
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................84
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IASIS HEALTHCARE CORPORATION
PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
We operate general, acute care hospitals, with a focus on developing
and operating networks of medium-sized hospitals with 100 to 400 beds in
mid-size urban and suburban markets. Currently, we own or lease 15 hospitals
with a total of 2,194 operating beds. These hospitals are located in four
regions: Salt Lake City, Utah; Phoenix, Arizona; Tampa-St. Petersburg, Florida;
and three markets within the State of Texas. We also operate five ambulatory
surgery centers and a Medicaid managed health plan in Phoenix called Health
Choice that serves over 43,000 members.
Our general, acute care hospitals offer a variety of inpatient medical
and surgical services commonly available in hospitals, including cardiology,
emergency services, general surgery, internal medicine, obstetrics and
orthopedics. In addition, our facilities provide outpatient and ancillary
services including outpatient surgery, physical therapy, radiation therapy,
radiology and respiratory therapy. Our corporate staff provides a variety of
management services to our healthcare facilities, including strategic planning,
designing and operating information systems, ethics and compliance programs,
contract negotiation and management, accounting, financial and clinical systems,
legal support, personnel and employee benefits management, supply and equipment
purchasing agreements and resource management.
Our principal executive offices are located at 113 Seaboard Lane, Suite
A-200, Franklin, Tennessee 37067 and our telephone number at that address is
(615) 844-2747. Our corporate website address is www.iasishealthcare.com.
Information contained on our website is not part of this annual report on Form
10-K.
FORMATION
Our company was formed in 1999 through a series of transactions that
were arranged by certain members of our management team and Joseph Littlejohn &
Levy, Inc., the New York based private equity firm that controls JLL Healthcare,
LLC, our single largest stockholder. The first of these transactions was
effective October 8, 1999, when JLL Healthcare, LLC and some of our stockholders
purchased $125.0 million of the common stock of a subsidiary of Paracelsus
Healthcare Corporation that owned five acute care hospitals in the Salt Lake
City, Utah market. Following the common stock purchase, the subsidiary was
recapitalized and Paracelsus retained a minority interest. Subsequent to the
common stock purchase and the recapitalization, the subsidiary of Paracelsus
changed its name to IASIS Healthcare Corporation.
The second of these transactions was effective October 15, 1999, when
we acquired ten acute care hospitals and other related facilities and assets
from Tenet Healthcare Corporation. Concurrent with the acquisition of the Tenet
hospitals, a management company, originally formed by certain members of our
management team, was merged with and into a subsidiary of our company.
BUSINESS STRATEGY
Our objective is to provide high-quality, cost-effective healthcare
services in the select communities we serve. The key elements of our business
strategy are:
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- - INCREASE REVENUE BY EXPANDING SERVICES. We intend to increase our
revenue by broadening the scope of services offered at our facilities,
updating our technology and equipment and, recognizing the shift from
inpatient to outpatient treatments, enhancing the convenience and
quality of our outpatient services. We believe that the expansion of
surgical capacity and the upgrading of specialty services, such as
women's services, cardiology, orthopedics, radiology and other
diagnostic services, represent particularly attractive opportunities to
increase patient visits, admissions and surgeries. We also seek to
increase the revenue generated by our emergency rooms by
differentiating between emergent care patients and non-urgent care
patients, which we believe alleviates patient flow bottlenecks and
results in more appropriate and expedient patient care, thereby
increasing patient volume and net revenue.
- - IMPROVE OPERATING EFFICIENCIES. We believe profitability at our
facilities can be improved through increased volume and implementation
of well-defined operating expense control initiatives. We continue to
standardize and upgrade management information systems, which will
allow us to optimize staffing levels according to patient volumes and
seasonal needs at each facility, reduce bad debt expense by effectively
managing each hospital's billing and collection processes and reduce
supply costs by concentrating our purchasing power and eliminating
waste and over-utilization. In addition, our emergency rooms fast-track
emergent care patients, which we believe allows us to optimize staffing
efficiencies, design protocols to match the acuity of medical cases and
more efficiently allocate our hospital resources.
- - STRENGTHEN PHYSICIAN RETENTION AND RECRUITING. We believe that the
retention and recruitment of physicians is critical to our goal of
increasing the quality and breadth of the services offered by our
hospitals. We intend to retain and recruit physicians by equipping our
hospitals with technologically advanced equipment, sponsoring training
programs to educate physicians on advanced medical procedures and
creating an environment within which physicians prefer to practice. We
also will use our existing physician relationships to recruit new
primary care physicians and specialists. We are creating local
physician advisory committees, comprised of leading area physicians,
who work closely with our local leadership teams to advise us
concerning facility and market-specific needs and strategies. We
believe that establishing such committees also will assist in
developing a long-term relationship between physicians and our local
leadership teams, enhance physician loyalty and improve the quality of
patient care.
- - IMPROVE MANAGED CARE POSITION THROUGH BETTER PAYOR RELATIONSHIPS. We
believe that establishing and maintaining strong relationships with
managed care payors is critical to our success. We plan to increase
utilization of our facilities by entering into contracts with new
payors and, over time, we expect to improve profitability by
negotiating more favorable terms with our existing payors. We believe
that understanding facility-specific issues and concerns, developing
relationships with local payors and strengthening our market presence
by establishing networks of hospitals to organize the delivery of
healthcare services will enable us to negotiate more favorable terms
with both new and existing payors.
- - RETAIN AND DEVELOP LOCAL LEADERSHIP TEAMS. A professional, competent,
attentive leadership team at each facility is integral to developing
and implementing strategic objectives at our hospitals. We recruit
experienced and capable senior managers in order to give each hospital
its own dedicated leadership team. We believe a stable local leadership
team, including a chief executive officer, chief financial officer and
chief nursing officer at each facility, enhances physician relations
and maintains continuity in the community. To incentivize local
leadership teams, we have developed a performance-based compensation
program for each local leadership team based upon the achievement of
the goals set forth in an operating plan for each facility and the
success of its network.
- - STRENGTHEN RETENTION AND RECRUITMENT OF NURSES AND MEDICAL SUPPORT
PERSONNEL. In certain markets, the availability of nurses and other
medical support personnel has become a significant operating issue for
hospitals and other providers of healthcare services. We believe that
retention and recruitment of nurses
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and medical support personnel is critical to our ability to provide
high quality, cost effective healthcare services to our patients. We
intend to retain and recruit nurses and medical support personnel by
creating a desirable, professional work environment, providing
competitive wages, benefits and long-term incentives and providing
career development opportunities and training programs. In order to
supplement our current employee base, we intend to expand our
relationships with colleges, universities and other medical education
institutions in our markets and recruit nurses and other medical
support personnel from abroad.
- - SELECTIVELY PURSUE STRATEGIC ACQUISITIONS AND PARTNERSHIPS. We intend
to selectively pursue hospital acquisitions in our existing markets
where we believe we can improve the financial and operational
performance of the acquired hospital and enhance our regional presence.
Additionally, we will focus our new market development efforts in
regions with a growing population base of greater than 100,000, a
stable or improving managed care environment and favorable
demographics. In addition, we will continue to identify opportunities
to expand our presence through strategic alliances with healthcare
providers and by partnering with physicians to develop additional
services.
HOSPITAL OPERATIONS
At each hospital we operate, we implement systematic policies and
procedures to improve the hospital's operating and financial performance. We
develop an operating plan designed to increase revenue through the expansion of
services offered by the hospital and the recruitment of physicians in each
community and to reduce costs by improving operating efficiency. Each hospital's
local leadership team is comprised of a chief executive officer, chief financial
officer and chief nursing officer. Each local leadership team, in consultation
with our corporate staff, develops an annual operating plan setting forth
revenue enhancement strategies and specific expense benchmarks. We believe that
the competence, skills, and experience of the leadership team at each hospital
is critical to the hospital's success, because of their role in executing the
hospital's operating plan. We have developed a performance-based compensation
program for each local management team based upon achievement of the goals set
forth in the annual operating plan.
Our hospital leadership teams are advised by boards of trustees that
include members of hospital medical staffs as well as community leaders. The
board of trustees establishes policies concerning medical, professional and
ethical practices, monitors such practices and is responsible for ensuring that
these practices conform to established standards. We maintain quality assurance
programs to support and monitor quality of care standards and to meet
accreditation and regulatory requirements. We monitor patient care evaluations
and other quality of care assessment activities on a continuing basis.
We believe that the ability of our hospitals to meet the healthcare
needs of their communities is determined by the quality, skills and compassion
of our employees, and the breadth of our services, level of technology, emphasis
on quality of care, level of physician support and convenience for patients and
physicians. Factors that impact demand for our services include the size of and
growth in local population, local economic conditions, the availability of
reimbursement programs such as Medicare and Medicaid and market penetration of
managed care programs. Improved treatment protocols as a result of advances in
medical technology and pharmacology also affect the nature and demand for
healthcare services across the industry, including at our hospitals.
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The following table presents certain pro forma combined operating
statistics for our hospitals:
2000 1999
------- -------
Number of hospitals at end of period 15 15
Number of operating beds at end of period 2,194(1) 2,144
Admissions(2) 76,306 70,443
Adjusted admissions(3) 124,211 112,966
Patient days(4) 340,386 324,274
Adjusted patient days(5) 537,929 513,055
Average daily census(6) 930 888
Average length of stay(7) 4.46 4.60
- -------------------------
Note: For 2000, the above table includes data for our company for the year
ended September 30 and data for the Tenet hospitals for the period from
October 1, 1999 through October 15, 1999. For 1999, the above table
includes data for the Paracelsus hospitals and the Tenet hospitals for
the year ended September 30, 1999. Statistics do not include Health
Choice.
(1) Includes 71 beds at Rocky Mountain Medical Center, formerly named PHC
Regional Hospital and Medical Center, which closed in June 1997 and
reopened April 10, 2000.
(2) Represents the total number of patients admitted to our hospitals for
stays in excess of 23 hours. Management and investors use this number
as a general measure of inpatient volume.
(3) This computation equates outpatient revenue to the volume measure
(admissions) used to measure inpatient volume, resulting in a general
measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by
the sum of gross inpatient revenue and gross outpatient revenue and
then dividing the resulting amount by gross inpatient revenue.
Management and investors use this number as a general measure of
inpatient and outpatient volume.
(4) Represents the number of days beds were occupied over the period.
(5) This computation equates outpatient revenue to the volume measure
(patient days) used to measure inpatient days, resulting in a general
measure of combined inpatient days and outpatient volume. Adjusted
patient days are computed by multiplying patient days (inpatient
volume) by the sum of gross inpatient revenue and gross outpatient
revenue and then dividing the resulting amount by gross inpatient
revenue. Management and investors use this number as a general measure
of inpatient days and outpatient volume.
(6) Represents the average number of inpatients in our hospitals each day.
(7) Represents the average number of days that a patient stayed in our
hospitals.
Our hospitals continue to experience shifts from inpatient to
outpatient care as well as reductions in average lengths of inpatient stay,
primarily as a result of improvements in technology, pharmacology and clinical
practices and hospital payment changes by Medicare and insurance carriers. In
response to this shift toward outpatient care, we are reconfiguring some
hospitals to more effectively accommodate outpatient services and restructuring
existing surgical and diagnostic capacity to permit additional outpatient volume
and a greater variety of outpatient services.
Our facilities will continue to deliver those outpatient services that
can be provided on a quality, cost-effective basis and that we believe will be
in increased demand. The patient volumes and net operating revenue at our
hospitals and outpatient surgery centers are subject to seasonal variations and
generally are greater during the quarters ending December 31 and March 31 than
other quarters. These seasonal variations are caused by a number of factors,
including seasonal cycles of illness, climate and weather conditions, vacation
patterns of both patients and physicians and other factors relating to the
timing of elective procedures.
In addition, inpatient care is shifting increasingly to sub-acute care
when a less-intensive, lower cost level of care is appropriate. We have been
proactive in the development of a variety of sub-acute inpatient services to
utilize a portion of our available capacity. By offering cost-effective
sub-acute services in appropriate circumstances, we are able to provide a
continuum of care when the demand for such services exists. For example, some of
our hospitals have developed rehabilitation units. These units utilize less
intensive staffing levels with corresponding lower costs to provide a range of
services sought by physicians, patients and payors.
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SOURCES OF REVENUE
We receive payment for patient services from the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, health maintenance organizations, preferred provider
organizations, other private insurers and directly from patients. The
approximate percentages of pro forma net patient service revenue from continuing
operations of our facilities from these sources during the periods specified
below were as follows:
2000 1999 1998
------ ------ ------
Medicare 29.6% 31.5% 35.8%
Medicaid 7.4 6.7 6.9
Private Payors 63.0 61.8 57.3
------ ------ ------
Total 100.0% 100.0% 100.0%
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Note: For 2000, the above table includes data for our company for the year
ended September 30 and data for the Tenet hospitals for the period from
October 1, 1999 through October 15, 1999. For 1999, the above table
includes data for the Paracelsus hospitals for the nine months ended
September 30, 1999 and the Tenet hospitals for the nine months ended
August 31, 1999. For 1998, the above table includes data for the
Paracelsus hospitals for the year ended December 31, 1998 and the Tenet
hospitals for the year ended May 31, 1998. Statistics do not include
Health Choice.
Medicare is a federal program that provides hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and persons
with end-stage renal disease. Medicaid programs are jointly funded by federal
and state governments and are administered by states under an approved plan that
provides hospital and other healthcare benefits to qualifying individuals who
are unable to afford care. All of our hospitals are certified as providers of
Medicare and Medicaid services.
Private payors include health maintenance organizations, preferred
provider organizations, private insurance companies and individual patients.
During the year ended September 30, 2000, 37.6% of our net patient service
revenue was from private managed care payors. Most of our hospitals offer
discounts from established charges to private payors if they are large group
purchasers of healthcare services. These discount programs limit our ability to
increase charges in response to increasing costs. Patients generally are not
responsible for any difference between established hospital charges and amounts
reimbursed for such services under Medicare, Medicaid, some private insurance
plans, health maintenance organizations or preferred provider organizations, but
are generally responsible for services not covered by these plans, and
exclusions, deductibles or co-insurance features of their coverage. The amount
of such exclusions, deductibles and co-insurance generally has been increasing
each year. Collecting amounts due from individual patients is typically more
difficult than collecting from governmental or private payors.
COMPETITION
Our facilities and related businesses operate in competitive
environments. A number of factors affect our competitive position within a
geographic area, including: the scope, breadth and quality of services; number,
quality and specialties of physicians, nurses and other healthcare
professionals; reputation; managed care contracting relationships; physical
condition of facilities and medical equipment; location; availability of parking
or proximity to public transportation; ability to form local hospital networks;
tenure in the community; and charges for services. We currently face competition
from established, not-for-profit healthcare corporations, as well as
investor-sponsored hospital corporations. In the future, we expect to encounter
increased competition from companies, like ours, that consolidate hospitals and
healthcare companies in specific geographic markets. Continued consolidation in
the healthcare industry will be a leading contributing factor to increased
competition in markets in which we already have a presence and in markets we may
enter in the future.
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A significant factor in the competitive position of a hospital is the
number and quality of physicians affiliated with the hospital. In large part, a
hospital's revenue, whether from managed care payors, traditional health
insurance payors or directly from patients, depend on the quality and scope of
physicians' practices associated with the hospital. Physicians refer patients to
hospitals on the basis of the quality of services provided by the hospital, the
quality of the medical staff and employees affiliated with the hospital, the
quality and age of the hospital's facilities and equipment, and the hospital's
location. We intend to retain and recruit physicians by equipping our hospitals
with technologically advanced equipment, sponsoring training programs to educate
physicians on advanced medical procedures and creating an environment within
which physicians prefer to practice. While physicians may terminate their
association with a hospital operated by us at any time, our hospitals seek to
retain physicians of varied specialties on the hospitals' medical staffs and to
recruit other qualified physicians. Accordingly, we strive to maintain and
improve the level of care at our hospitals, uphold ethical and professional
standards and provide quality facilities, equipment, employees and services for
physicians and their patients.
Another factor in the competitive position of a hospital is the ability
of its management to negotiate contracts with purchasers of group healthcare
services. The importance of obtaining managed care contracts has increased in
recent years and is expected to continue to increase as private and government
payors and others turn to managed care organizations to help control rising
healthcare costs. Some of our markets, including Salt Lake City, have
experienced significant managed care penetration. The revenue and operating
results of our hospitals are significantly affected by the hospitals' ability to
negotiate favorable contracts with managed care payors. Health maintenance
organizations and preferred provider organizations use managed care contracts to
direct patients to, and manage the use of, hospital services in exchange for
discounts from the hospitals' established charges. Traditional health insurers
also are interested in containing costs through similar contracts with
hospitals.
An additional competitive factor is whether a hospital is part of a
local hospital network and, if so, the scope and quality of services offered by
the network and by competing networks. A hospital that is part of a network that
offers a broad range of services in a wide geographic area is more likely to
obtain more favorable managed care contracts than a hospital that is not. We
intend to evaluate changing circumstances in each geographic area in which we
operate on an ongoing basis and to position ourselves to compete in these
managed care markets by forming our own, or joining with others to form, local
hospital networks.
State certificate of need laws, which place limitations on a hospital's
ability to expand hospital services and add new equipment, also may have the
effect of restricting competition. The application process for approval of
covered services, facilities, changes in operations and capital expenditures is
highly competitive. In those states that have no certificate of need laws or
that set relatively high thresholds before expenditures become reviewable by
state authorities, competition in the form of new services, facilities and
capital spending may be more prevalent. Florida is the only state in which we
currently operate that requires compliance with certificate of need laws.
The hospital industry and our hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
inpatient occupancy rates continue to be negatively affected by
pre-authorization and utilization review, medical and pharmacological advances,
and payment mechanisms that maximize outpatient and alternative healthcare
delivery services for less acutely ill patients. We expect admissions
constraints, payor pressures and increased competition to continue. We will
endeavor to meet these challenges by expanding our facilities' outpatient
services, offering appropriate discounts to private payor groups, upgrading
facilities and equipment and offering new programs and services.
One element of our business strategy is expansion through the
acquisition of general, acute care hospitals in growing markets. The competition
to acquire hospitals is significant, and we cannot assure you that suitable
acquisitions for which other healthcare companies, including those with greater
financial resources than ours, may be competing, will be available to us.
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EMPLOYEES AND MEDICAL STAFF
We have approximately 8,100 employees, including approximately 2,800
part-time employees. Our employees are not subject to collective bargaining
agreements. We consider our employee relations to be good.
Our hospitals are staffed by licensed physicians who have been admitted
to the medical staff of our individual hospitals. Any licensed physician may
apply to be admitted to the medical staff of any of our hospitals, but admission
to the staff must be approved by each hospital's medical staff and the
appropriate governing board of the hospitals in accordance with established
credentialing criteria. With exceptions, physicians generally are not employees
of our hospitals. However, some physicians provide services in our hospitals in
exchange for a fair market value fee.
In certain markets, there currently is a shortage of nurses and other
medical support personnel. We recruit and retain nurses and medical support
personnel by creating a desirable, professional work environment, providing
competitive wages, benefits and long-term incentives, and providing career
development and other training programs. In order to supplement our current
employee base, we intend to expand our relationship with colleges, universities
and other medical education institutions in our markets and recruit nurses and
other medical support personnel from abroad.
REGULATORY COMPLIANCE PROGRAM
Our policy is to conduct our business with integrity and in compliance
with the law. Our regulatory compliance program is designed to ensure that we
maintain high standards of conduct in the operation of our business and
implement policies and procedures so that employees act in compliance with all
applicable laws, regulations and company policies. The organizational structure
of our compliance program includes compliance committees for the board of
directors, our corporate management and the local leadership teams at each of
our facilities, which have oversight supervision responsibility for effective
development and implementation of our program. Our Vice President for Ethics and
Business Practices, who reports directly to our Chief Executive Officer, serves
as Chief Compliance Officer and is charged with direct responsibility for the
development and implementation of our compliance program. We also have a
designated Facility Compliance Officer for each facility. Other features of our
compliance program include initial and periodic legal compliance and ethics
training, development and implementation of policies and procedures, and a
mechanism for employees to report, without fear of retaliation, any suspected
legal or ethical violations. We have also engaged a nationally recognized law
firm to periodically provide independent assessments of the effectiveness of our
compliance program.
REIMBURSEMENT
Medicare
Under the Medicare program, acute care hospitals receive reimbursement
under a prospective payment system for inpatient hospital services. Currently,
hospitals exempt from the prospective payment system methodology include
psychiatric, long-term care, rehabilitation hospitals, children's hospitals and
cancer hospitals. Specially designated psychiatric or rehabilitation units that
are distinct parts of an acute care hospital and that meet Health Care Financing
Administration criteria for exemption are reimbursed on a reasonable cost-based
system, subject to cost limits. Under the Balanced Budget Act of 1997,
prospective payment system-exempt hospitals and hospital units may receive
reduced reimbursement. Effective for cost reporting periods beginning on or
after April 1, 2001, inpatient rehabilitation services will be paid through a
prospective payment system methodology.
Under the current hospital prospective payment system, a hospital
receives a fixed payment based on the patient's assigned diagnosis related
group. This diagnosis related group classifies categories of illnesses according
to the estimated intensity of hospital resources necessary to furnish care for
each principal diagnosis. The diagnosis related group rates for acute care
hospitals are based upon a statistically normal distribution of severity. When
treatments for patients fall well outside the normal distribution, providers may
request and receive additional
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payments. The diagnosis related group payments do not consider a specific
hospital's actual costs but are adjusted for geographic area wage differentials.
The diagnosis related group rates are adjusted annually and have been
affected by federal legislation. The index used to adjust the diagnosis related
group rates, known as the "market basket index," gives consideration to the
inflation experienced by hospitals and entities outside of the healthcare
industry in purchasing goods and services. However, for several years the
percentage increases to the diagnosis related group rates have been lower than
the percentage increases in the costs of goods and services purchased by
hospitals. The diagnosis related group rates are adjusted each federal fiscal
year. We anticipate that future legislation may decrease the future rate of
increase for diagnosis related group payments, but we are unable to predict the
amount of the reduction.
Outpatient services traditionally have been paid at the lower of
established charges or on a reasonable cost basis. On August 1, 2000, the Health
Care Financing Administration began reimbursing hospital outpatient services and
certain Medicare Part B services furnished to hospital inpatients who have no
Part A coverage on a prospective payment system basis. The Health Care Financing
Administration will continue to use existing fee schedules to pay for physical,
occupational and speech therapies, durable medical equipment, clinical
diagnostic laboratory services and nonimplantable orthotics and prosthetics.
All services paid under the new prospective payment system are
classified into groups called ambulatory payment classifications (APCs).
Services in each APC are similar clinically and in terms of the resources they
require. A payment rate is established for each APC. The fee schedule for the
outpatient prospective payment system is to be updated by the market basket
index minus 1.0% for each of the federal fiscal years 2000 through 2002.
Depending on the services provided, a hospital may be paid for more than one APC
for an encounter. Based upon our preliminary assessment of the recently released
final regulations implementing Medicare's new prospective payment system for
outpatient hospital care, we currently do not expect such prospective payment
system to have a material adverse effect on our future operating results. We
have been negatively impacted to some extent by delays in processing our claims
under the new prospective payment system for outpatient hospital care subsequent
to its implementation in August 2000.
Medicare historically has reimbursed skilled nursing units within
hospitals on the basis of actual costs, subject to limits. The Balanced Budget
Act of 1997 requires the establishment of a prospective payment system for
Medicare skilled nursing units, under which units will be paid a federal per
diem rate for virtually all covered services. The new payment system is being
phased in over three cost reporting periods, starting with cost reporting
periods beginning on or after July 1, 1998. The impact of the new payment system
generally has been to significantly reduce reimbursement for skilled nursing
services, which has led many hospitals to close such units. We will monitor
closely and evaluate the few remaining skilled nursing units in our hospitals
and related facilities to determine whether it is feasible to continue to offer
such services under the new reimbursement regime.
Medicaid
Medicaid programs are funded jointly by federal and state governments
and are administered by states under an approved plan. State Medicaid programs
may use a prospective payment system, cost-based or other payment methodology
for hospital services. Medicaid programs are required to take into account and
make payments to hospitals serving disproportionate numbers of low income
patients with special needs. Medicaid reimbursement often is less than a
hospital's cost of services. The federal government and many states currently
are considering significant reductions in the level of Medicaid funding while at
the same time expanding Medicaid benefits, which could adversely affect future
levels of Medicaid reimbursements received by our hospitals.
Annual Cost Reports
All hospitals participating in the Medicare and Medicaid programs,
whether paid on a reasonable cost basis or under a prospective payment system,
are required to meet specific financial reporting requirements. Federal
regulations require submission of annual cost reports identifying medical costs
and expenses associated with the services provided by each hospital to Medicare
beneficiaries and Medicaid recipients. Annual cost reports
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required under the Medicare and Medicaid programs are subject to routine audits,
which may result in adjustments to the amounts ultimately determined to be due
to us under these reimbursement programs. The audit process, particularly in the
case of Medicaid, takes several years to reach the final determination of
allowable amounts under the programs. Providers also have the right of appeal,
and it is common to contest issues raised in audits of prior years' reports.
Many prior year cost reports of our facilities are still open. In the
recapitalization transaction with Paracelsus Healthcare Corporation and the
Tenet transaction, we negotiated customary indemnification and hold harmless
provisions for any damages we may incur relating to any cost report
reimbursements, settlements, repayments or fines to the extent they relate to
periods prior to the respective closing dates of those transactions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources." We believe we have complied with
all federal and state regulations in preparing and filing cost reports since the
date of the recapitalization transaction and the acquisition of the Tenet
hospitals. However, if any of our facilities are found to be in violation of
federal or state laws relating to Medicare or Medicaid that are our
responsibility, our facilities and we could be subject to substantial monetary
fines, civil and criminal penalties and exclusion from participation in the
Medicare and Medicaid programs. Any such sanctions could have a material adverse
effect on our financial position and results of operations.
Managed Care
The percentage of admissions and net revenue attributable to managed
care payors has increased as a result of pressures to control the cost of
healthcare services. We expect that the trend toward increasing percentages
related to managed care payors will continue in the future. Generally, we
receive lower payments from managed care payors than from traditional
commercial/indemnity insurers; however, as part of our business strategy, we
intend to take steps to improve our managed care position.
Commercial Insurance
Our hospitals provide services to some individuals covered by
traditional private healthcare insurance. Private insurance carriers make direct
payments to hospitals or, in some cases, reimburse their policy holders, based
upon the particular hospital's established charges and the particular coverage
provided in the insurance policy.
Commercial insurers are continuing efforts to limit the payments for
hospital services by adopting discounted payment mechanisms, including
prospective payment or diagnosis related group-based payment systems, for more
inpatient and outpatient services. To the extent that these efforts are
successful, hospitals may receive reduced levels of reimbursement, which may
have a negative impact on operating results.
GOVERNMENT REGULATION AND OTHER FACTORS
Licensure, Certification and Accreditation
Healthcare facility construction and operation is subject to federal,
state and local regulations relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, fire prevention, rate-setting and
compliance with building codes and environmental protection laws. Our facilities
also are subject to periodic inspection by governmental and other authorities to
assure continued compliance with the various standards necessary for licensing
and accreditation. We believe that all of our operating healthcare facilities
are properly licensed under appropriate state laws. All of our operating
hospitals are certified under the Medicare program and are accredited by the
Joint Commission on Accreditation of Healthcare Organizations, the effect of
which is to permit the facilities to participate in the Medicare and Medicaid
programs. If any facility loses its accreditation by this Joint Commission, or
otherwise loses its certification under the Medicare program, then the facility
will be unable to receive reimbursement from the Medicare and Medicaid programs.
We intend to conduct our operations in compliance with current applicable
federal, state, local and independent review body regulations and standards.
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The requirements for licensure, certification and accreditation are subject to
change and, in order to remain qualified, we may need to make changes in our
facilities, equipment, personnel and services.
Certificates of Need
In some states, the construction of new facilities, acquisition of
existing facilities and addition of new beds or services may be subject to
review by state regulatory agencies under a certificate of need program. Florida
is the only state in which we currently operate that requires approval under a
certificate of need program. These laws generally require appropriate state
agency determination of public need and approval prior to the addition of beds
or services or other capital expenditures. Failure to obtain necessary state
approval can result in the inability to expand facilities, add services,
complete an acquisition or change ownership. Further, violation may result in
the imposition of civil sanctions or the revocation of a facility's license.
Utilization Review
Federal law contains numerous provisions designed to ensure that
services rendered by hospitals to Medicare and Medicaid patients meet
professionally recognized standards and are medically necessary and that claims
for reimbursement are properly filed. These provisions include a requirement
that a sampling of admissions of Medicare and Medicaid patients be reviewed by
peer review organizations that analyze the appropriateness of Medicare and
Medicaid patient admissions and discharges, quality of care provided, validity
of diagnosis related group classifications and appropriateness of cases of
extraordinary length of stay or cost. Peer review organizations may deny payment
for services provided, assess fines and recommend to the Department of Health
and Human Services that a provider that is in substantial noncompliance with the
standards of the peer review organization be excluded from participation in the
Medicare program. Most nongovernmental managed care organizations also require
utilization review.
Federal Healthcare Program Regulations and Fraud and Abuse
Participation in any federal healthcare program, like Medicare, is
regulated heavily by statute and regulation. If a hospital provider fails to
substantially comply with the numerous conditions of participation in the
Medicare or Medicaid program or performs specific prohibited acts, the
hospital's participation in the Medicare program may be terminated or civil or
criminal penalties may be imposed upon it under provisions of the Social
Security Act.
Among these statutes is a section of the Social Security Act known as
the anti-kickback statute. This law prohibits providers and others from
soliciting, receiving, offering or paying, directly or indirectly, any
remuneration with the intent of generating referrals or orders for services or
items covered by a federal healthcare program. Violations of this statute
constitute a felony and can result in imprisonment or fines, civil penalties up
to $50,000, damages up to three times the total amount of remuneration and
exclusion from participation in federal healthcare programs, including Medicare
and Medicaid.
As authorized by Congress, the Office of the Inspector General has
published final safe harbor regulations that outline categories of activities
that are deemed protected from prosecution under the anti-kickback statute.
Currently there are safe harbors for various activities, including the
following: investment interests, space rental, equipment rental, practitioner
recruitment, personal services and management contracts, sale of practice,
referral services, warranties, discounts, employees, group purchasing
organizations, waiver of beneficiary coinsurance and deductible amounts, managed
care arrangements, obstetrical malpractice insurance subsidies, investments in
group practices, ambulatory surgery centers, and referral agreements for
specialty services.
The fact that conduct or a business arrangement does not fall within a
safe harbor does not automatically render the conduct or business arrangement
illegal under the anti-kickback statute. The conduct and business arrangements,
however, do risk increased scrutiny by government enforcement authorities. We
may be less willing than some of our competitors to enter into conduct or
business arrangements that do not clearly satisfy the safe harbors. As a result,
this unwillingness may put us at a competitive disadvantage.
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The Office of the Inspector General at the Department of Health and
Human Services, among other regulatory agencies, is responsible for identifying
and eliminating fraud, abuse and waste. The Office of the Inspector General
carries out this mission through a nationwide program of audits, investigations
and inspections. In order to provide guidance to healthcare providers, the
Office of the Inspector General has from time to time issued "fraud alerts"
that, although they do not have the force of law, identify features of a
transaction that may indicate that the transaction could violate the
anti-kickback statute or other federal healthcare laws. The Office of the
Inspector General has identified the following incentive arrangements as
potential violations:
- - payment of any incentive by the hospital when a physician refers a
patient to the hospital;
- - use of free or significantly discounted office space or equipment for
physicians in facilities usually located close to the hospital;
- - provision of free or significantly discounted billing, nursing, or
other staff services;
- - free training for a physician's office staff, including management and
laboratory techniques;
- - guaranties that provide that if the physician's income fails to reach a
predetermined level, the hospital will pay any portion of the
remainder;
- - low-interest or interest-free loans, or loans which may be forgiven if
a physician refers patients to the hospital;
- - payment of the costs of a physician's travel and expenses for
conferences;
- - payment of services which require few, if any, substantive duties by
the physician, or payment for services in excess of the fair market
value of the services rendered; or
- - purchasing goods or services from physicians at prices in excess of
their fair market value.
We have a variety of financial relationships with physicians who refer
patients to our hospitals. Physicians own interests in a few of our facilities.
We also have contracts with physicians providing for a variety of financial
arrangements, including employment contracts, leases and professional service
agreements. We provide financial incentives to recruit physicians to relocate to
communities served by our hospitals, including minimum revenue guaranties and
loans. We believe that our arrangements with physicians have been structured to
comply with current law. Some of our arrangements do not expressly meet
requirements for safe harbor protection under the anti-kickback statute. We
cannot assure you that regulatory authorities that enforce these laws will not
determine that these financial arrangements violate the anti-kickback statute or
other applicable laws. This determination could subject us to liabilities under
the Social Security Act, including criminal penalties, civil monetary penalties
and exclusion from participation in Medicare, Medicaid or other federal
healthcare programs, any of which could have a material adverse effect on our
business, financial condition or results of operations.
The Social Security Act also imposes criminal and civil penalties for
submitting false claims to Medicare and Medicaid. False claims include, but are
not limited to, billing for services not rendered, misrepresenting actual
services rendered in order to obtain higher reimbursement and cost report fraud.
Like the anti-kickback statute, these provisions are very broad. Further, the
Health Insurance Portability and Accountability Act of 1996 created civil
penalties for conduct such as upcoding and billing for unnecessary goods and
services. Careful and accurate preparation and submission of claims for
reimbursement must be performed in order to avoid liability.
The Health Insurance Portability and Accountability Act also broadened
the scope of the fraud and abuse laws by adding several criminal provisions for
healthcare fraud offenses that apply to all health benefit programs, whether or
not they are reimbursed under a federal program. This act also created new
enforcement mechanisms to
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combat fraud and abuse, including the Medicare Integrity Program and an
incentive program under which individuals can receive up to $1,000 for providing
information on Medicare fraud and abuse that leads to the recovery of at least
$100 of Medicare funds. In addition, federal enforcement officials now have the
ability to exclude from Medicare and Medicaid any investors, officers and
managing employees associated with business entities that have committed
healthcare fraud, even if the investor, officer or employee had no knowledge of
the fraud. It also establishes a new violation for the payment of inducements to
Medicare or Medicaid beneficiaries in order to influence those beneficiaries to
order or receive services from a particular provider or practitioner.
The Social Security Act also includes a provision commonly known as the
"Stark Law." This law prohibits physicians from referring Medicare and Medicaid
patients to entities with which they or any of their immediate family members
have a financial relationship if these entities provide certain designated
health services that are reimbursable by Medicare, including inpatient and
outpatient hospital services. Sanctions for violating the Stark Law include
civil money penalties up to $15,000 per prohibited service provided, assessments
equal to twice the dollar value of each such service provided and exclusion from
the federal healthcare programs. There are a number of exceptions to the
self-referral prohibition, including an exception for a physician's ownership
interest in an entire hospital as opposed to an ownership interest in a hospital
department. There are also exceptions for many of the customary financial
arrangements between physicians and providers, including employment contracts,
leases and recruitment agreements.
The federal government has not finalized regulations that will set
forth exceptions and interpret provisions of the Stark Law. We have structured
our financial arrangements with physicians to comply with the statutory
exceptions to the Stark Law. However, when the federal government finalizes
these regulations, it may interpret the Stark Law differently than we have
interpreted it. We cannot predict the final form that these regulations will
take or the effect that the final regulations will have on us.
Evolving interpretations of current, or the adoption of new, federal or
state laws or regulations could affect many of the arrangements entered into by
each of our hospitals. Law enforcement authorities, including the Office of the
Inspector General, the courts and Congress are increasing scrutiny of
arrangements between healthcare providers and potential referral sources to
ensure that the arrangements are not designed as a mechanism to exchange
remuneration for patient care referrals and opportunities. Investigators also
have demonstrated a willingness to look behind the formalities of a business
transaction to determine the underlying purpose of payments between healthcare
providers and potential referral sources.
Many of the states in which we operate also have adopted, or are
considering adopting, laws that prohibit payments to physicians in exchange for
referrals similar to the anti-kickback statute, some of which apply regardless
of the source of payment for care. These statutes typically provide criminal and
civil penalties as well as loss of licensure. Many states also have passed
self-referral legislation similar to the Stark Law, prohibiting the referral of
patients to entities with which the physician has a financial relationship
regardless of the source of payment for care. Little precedent exists for the
interpretation or enforcement of these state laws.
The Federal False Claims Act
Another trend impacting the healthcare industry today is the increased
use of the federal False Claims Act, and, in particular, actions being brought
by individuals on the government's behalf under the False Claims Act
whistleblower provisions. Whistleblower provisions allow private individuals to
bring actions on behalf of the government alleging that the defendant has
defrauded the federal government. If the government intervenes in the action and
prevails, the party filing the initial complaint may share in any settlement or
judgment. If the government does not intervene in the action, the whistleblower
plaintiff may pursue the action independently.
When a defendant is determined to be liable under the False Claims Act,
it must pay three times the actual damages sustained by the government, plus
mandatory civil penalties of between $5,000 to $10,000 for each separate false
claim. There are many potential bases for liability under the False Claims Act.
Liability often arises when an entity knowingly submits a false claim for
reimbursement to the federal government. The False Claims Act defines the term
"knowingly" broadly. Thus, although simple negligence will not give rise to
liability under the
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False Claims Act, submitting a claim with reckless disregard to its truth or
falsity constitutes "knowing" submission under the False Claims Act and,
therefore, will qualify for liability. In some cases, whistleblowers or the
federal government have taken the position that providers who allegedly have
violated other statutes, such as the anti-kickback statute and the Stark Law,
have thereby submitted false claims under the False Claims Act. From time to
time, companies in the healthcare industry, including ours, may be subject to
actions under the False Claims Act. We currently are not aware of any actions
against us under the False Claims Act.
Corporate Practice of Medicine/Fee Splitting
The states in which we operate have laws that prohibit unlicensed
persons or business entities, including corporations, from employing physicians
or laws that prohibit direct or indirect payments or fee-splitting arrangements
between physicians and unlicensed persons or business entities. Possible
sanctions for violations of these restrictions include loss of a physician's
license, civil and criminal penalties and rescission of business arrangements
that may violate these restrictions. These statutes vary from state to state,
are often vague and seldom have been interpreted by the courts or regulatory
agencies. Although we exercise care to structure our arrangements with
healthcare providers to comply with the relevant state law, and believe these
arrangements comply with applicable laws in all material respects, we cannot
assure you that governmental officials charged with responsibility for enforcing
these laws will not assert that we, or transactions in which we are involved,
are in violation of such laws, or that such laws ultimately will be interpreted
by the courts in a manner consistent with our interpretations.
Administrative Simplification
The Administrative Simplification Provisions of the Health Insurance
Portability and Accountability Act require the use of uniform electronic data
transmission standards for healthcare claims and payment transactions submitted
or received electronically. These provisions are intended to encourage
electronic commerce in the healthcare industry. On August 17, 2000, the Health
Care Financing Administration published final regulations establishing
electronic data transmission standards that all healthcare providers must use
when submitting or receiving certain healthcare transactions electronically.
Compliance with these regulations is required by October 16, 2002.
The Administrative Simplification Provisions also require the Health
Care Financing Administration to adopt standards to protect the security and
privacy of health-related information. The Health Care Financing Administration
proposed regulations containing security standards on August 12, 1998. These
proposed security regulations have not been finalized, but as proposed, would
require healthcare providers to implement organizational and technical practices
to protect the security of electronically maintained or transmitted
health-related information. In addition, the Health Care Financing
Administration released final regulations containing privacy standards on
December 20, 2000. These privacy regulations could be further amended or delayed
prior to their current effective date of March 25, 2001. However, if they become
effective as currently drafted, the privacy regulations will extensively
regulate the use and disclosure of individually identifiable health-related
information. The security regulations, as proposed, and the privacy regulations,
if they become effective, could impose significant costs on our facilities in
order to comply with these standards. Healthcare providers will have two years
to come into compliance with any final regulations once they become effective.
We cannot predict the final form that these regulations will take or the impact
that final regulations, when effective, will have on us.
Violations of the Administrative Simplification Provisions could result
in civil penalties of up to $25,000 per type of violation in each calendar year
and criminal penalties of up to $250,000 per violation. In addition, our
facilities will continue to remain subject to any state laws that are more
restrictive than the regulations issued under the Administrative Simplification
Provisions. These statutes vary by state and could impose additional penalties.
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The Emergency Medical Treatment and Active Labor Act
The Federal Emergency Medical Treatment and Active Labor Act was
adopted by Congress in response to reports of a widespread hospital emergency
room practice of "patient dumping." At the time of the enactment, patient
dumping was considered to have occurred when a hospital capable of providing the
needed care sent a patient to another facility or simply turned the patient away
based on such patient's inability to pay for his or her care. The law imposes
requirements upon physicians, hospitals and other facilities that provide
emergency medical services. Such requirements pertain to what care must be
provided to anyone who comes to such facilities seeking care before they may be
transferred to another facility or otherwise denied care. Regulations recently
have been adopted, but not yet implemented, that expand the areas within a
facility that must provide emergency treatment. Sanctions for violations of this
statute include termination of a hospital's Medicare provider agreement,
exclusion of a physician from participation in Medicare and Medicaid programs
and civil money penalties. In addition, the law creates private civil remedies
that enable an individual who suffers personal harm as a direct result of a
violation of the law, and a medical facility that suffers a financial loss as a
direct result of another participating hospital's violation of the law, to sue
the offending hospital for damages and equitable relief. Although we believe
that our practices are in material compliance with the law, we can give no
assurance that governmental officials responsible for enforcing the law will not
assert that our facilities are in violation of this statute.
Healthcare Reform
The healthcare industry attracts much legislative interest and public
attention. Changes in the Medicare, Medicaid and other programs, hospital
cost-containment initiatives by public and private payors, proposals to limit
payments and healthcare spending and industry-wide competitive factors are
highly significant to the healthcare industry. In addition, a framework of
extremely complex federal and state laws, rules and regulations governs the
healthcare industry and, for many provisions, there is little history of
regulatory or judicial interpretation to rely on.
The Balanced Budget Act of 1997 has the effect of reducing payments to
hospitals and other healthcare providers under the Medicare and Medicaid
programs. This law has had, and we expect it to continue to have, an impact on
our revenue under the Medicare and Medicaid programs. In addition, there
continue to be federal and state proposals that would, and actions that do,
impose more limitations on payments to providers like ourselves and proposals to
increase co-payments and deductibles from patients.
Many states have enacted or are considering enacting measures designed
to reduce their Medicaid expenditures and change private healthcare insurance.
Most states, including the states in which we operate, have applied for and been
granted federal waivers from current Medicaid regulations to allow them to serve
some or all of their Medicaid participants through managed care providers. We
are unable to predict the future course of federal, state or local healthcare
legislation. Further changes in the law or regulatory framework that reduce our
revenue or increase our costs could have a material adverse effect on our
business, financial condition or results of operations.
Conversion Legislation
Many states have enacted or are considering enacting laws affecting the
conversion or sale of not-for-profit hospitals. These laws generally include
provisions relating to attorney general approval, advance notification and
community involvement. In addition, state attorneys general in states without
specific conversion legislation may exercise authority over these transactions
based upon existing law. In many states, there has been an increased interest in
the oversight of not-for-profit conversions. The adoption of conversion
legislation and the increased review of not-for-profit hospital conversions may
increase the cost and difficulty or prevent the completion of transactions with
not-for-profit organizations in various states.
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Healthcare Industry Investigations
Significant media and public attention has focused in recent years on
the hospital industry. There are numerous ongoing federal and state
investigations regarding multiple issues including, but not limited to, cost
reporting and billing practices relating to clinical laboratory test claims and
home health agency costs, physician recruitment practices, and physician
ownership of healthcare providers and joint ventures with hospitals. We have
substantial Medicare, Medicaid and other governmental billings, which could
result in heightened scrutiny of our operations. We continue to monitor these
and all other aspects of our business and have developed a compliance program to
assist us in gaining comfort that our business practices are consistent with
current industry standards. However, because the law in this area is complex and
constantly evolving, we cannot assure you that government investigations will
not result in interpretations that are inconsistent with industry practices,
including ours. In public statements surrounding current investigations,
governmental authorities have taken positions on a number of issues, including
some for which little official interpretation previously has been available,
that appear to be inconsistent with practices that have been common within the
industry and that previously have not been challenged in this manner. In some
instances, government investigations that have in the past been conducted under
the civil provisions of federal law may now be conducted as criminal
investigations.
Many current healthcare investigations are national initiatives in
which federal agencies target an entire segment of the healthcare industry. One
example is the federal government's initiative regarding hospital providers'
improper requests for separate payments for services rendered to a patient on an
outpatient basis within three days prior to the patient's admission to the
hospital, where reimbursement for such services is included as part of the
reimbursement for services furnished during an inpatient stay. In particular,
the government has targeted all hospital providers, including several of our
hospitals, to ensure conformity with this reimbursement rule. Another example
involves the federal government's initiative regarding healthcare providers
"unbundling" and separately billing for laboratory tests that should have been
billed as a "bundled unit." The federal government also has launched a national
investigative initiative targeting the billing of claims for inpatient services
related to bacterial pneumonia, as the government has found that many hospital
providers have attempted to bill for pneumonia cases under more complex and
expensive reimbursement codes, such as diagnosis related groups codes. Further,
the federal government continues to investigate Medicare overpayments to
prospective payment hospitals that incorrectly report transfers of patients to
other prospective payment system hospitals as discharges. We are aware that
prior to our acquisition of them, several of our hospitals were contacted in
relation to certain government investigations that were targeted at an entire
segment of the healthcare industry. Although we take the position that, under
the terms of the acquisition agreements, the prior owners of these hospitals
retained any liability resulting from these government investigations, we cannot
assure you that the prior owners' resolution of these matters or failure to
resolve these matters, in the event that any resolution was deemed necessary,
will not have a material adverse effect on our operations.
It is possible that governmental entities may initiate similar
investigations in the future at hospitals operated by us and that such
investigations may result in significant penalties to us. In some instances,
indemnity insurers and other non-governmental payors of hospitals under
investigation or the subject of litigation have sought repayment from hospitals
for alleged wrongful conduct that was identified by government attorneys or
investigators. These insurers and other non-government payors may not have had
any more information than their review of the government's investigation or
court actions. Therefore, governmental investigation of us or entities with whom
we do business could result in adverse publicity concerning us and could limit
our ability to make acquisitions.
The positions taken by authorities in the current investigations or any
future investigations of us or other providers and the liabilities or penalties
that may be imposed could have a material adverse effect on our business,
financial condition or results of operations.
HEALTH CHOICE
Health Choice is a prepaid Medicaid managed health plan in the Phoenix,
Arizona area that was acquired in connection with the acquisition of the Tenet
hospitals. Health Choice derives approximately 100% of its
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revenue through a contract with the Arizona Health Care Cost Containment System
to provide specified health services to qualified Medicaid enrollees through
contracts with providers. The contract requires us to provide healthcare
services in exchange for fixed periodic payments and supplemental payments from
the Arizona Health Care Cost Containment System. These services are provided
regardless of the actual costs incurred to provide these services. We receive
reinsurance and other supplemental payments from the Arizona Health Care Cost
Containment System to cover certain costs of healthcare services that exceed
certain thresholds. Health Choice is reimbursed for healthcare costs that exceed
stated amounts at a rate of 75% (85% for catastrophic cases) of qualified
healthcare costs in excess of stated levels of $5,000 to $35,000 depending on
the rate code assigned to the member. Qualified costs are the lesser of the
amount paid by Health Choice or the Arizona Health Care Cost Containment System
fee schedule. We have provided performance guaranties in the form of a surety
bond in the amount of $9.4 million and a letter of credit in the amount of $1.6
million for the benefit of the Arizona Health Care Cost Containment System to
support our obligations under the contract to provide and pay for the healthcare
services. The amount of the performance guaranty that the Arizona Health Care
Cost Containment System requires is based upon the membership in the plan and
the related capitation paid to us. We currently do not expect a material
increase in the amount of the performance guaranties during the 2001 fiscal
year. The term of the current contract with the Arizona Health Care Cost
Containment System is five years, with annual renewal options, and expires on
September 30, 2002. In the event the contract with the Arizona Health Care Cost
Containment System were to be discontinued, our financial condition and results
of operations could be adversely affected.
Health Choice is subject to state and federal laws and regulations, and
the Health Care Financing Administration and the Arizona Health Care Cost
Containment System have the right to audit Health Choice to determine the plan's
compliance with such standards. Health Choice is required to file periodic
reports with the Arizona Health Care Cost Containment System and to meet certain
financial viability standards. Health Choice also must provide its members with
certain mandated benefits and must meet certain quality assurance and
improvement requirements. As of October 16, 2002, Health Choice must comply with
the standardized formats for electronic transactions set forth in the
Administrative Simplification Provisions of the Health Insurance Portability and
Accountability Act, and when final regulations become effective, Health Choice
will be required to comply with federal security and privacy standards for
health-related information. We cannot predict the final form that these
regulations will take or the impact that the final regulations, when effective,
will have on us.
The federal anti-kickback statute has been interpreted to prohibit the
payment, solicitation, offering or receipt of any form of remuneration in return
for the referral of federal healthcare program patients or any item or service
that is reimbursed, in whole or in part, by any federal healthcare program.
Similar anti-kickback statutes have been adopted in Arizona, which apply
regardless of the source of reimbursement. The Department of Health and Human
Services has adopted safe harbor regulations specifying certain relationships
and activities that are deemed not to violate the federal anti-kickback statute
that specifically relate to managed care: (i) waivers by health maintenance
organizations of Medicare and Medicaid beneficiaries' obligation to pay
cost-sharing amounts or to provide other incentives in order to attract Medicare
and Medicaid enrollees; (ii) certain discounts offered to prepaid health plans
by contracting providers; (iii) certain price reductions offered to eligible
managed care organizations; and (iv) certain price reductions offered by
contractors with substantial financial risk to managed care organizations. We
believe that the incentives offered by Health Choice to its Medicaid enrollees
and the discounts it receives from contracting healthcare providers should
satisfy the requirements of the safe harbor regulations. However, failure to
satisfy each criterion of the applicable safe harbor does not mean that the
arrangement constitutes a violation of the law; rather the safe harbor
regulations provide that the arrangement must be analyzed on the basis of its
specific facts and circumstances. We believe that Health Choice's arrangements
comply with the federal anti-kickback statute and similar Arizona statutes.
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local laws and regulations
relating to environmental protection. Our hospitals are not highly regulated
under environmental laws because we do not engage in any industrial activities
at those locations. The principal environmental requirements and concerns
applicable to our operations relate to the proper handling and disposal of small
quantities of hazardous and low level medical radioactive waste, ownership or
historical use of underground and above-ground storage tanks at some locations,
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management of potential past and future impacts from leaks of hydraulic fluid or
oil associated with elevators, chiller units or incinerators, appropriate
management of asbestos-containing materials present or likely to be present at
some locations, and potential acquisition of or maintenance of air emission
permits for boilers or other equipment. We do not expect the matters discussed
above and our compliance with environmental laws and regulations to have a
material impact on our capital expenditures, earnings or competitive position.
We also may be subject to requirements related to the remediation of, or the
liability for remediation of, substances that have been released to the
environment at properties owned or operated by us or at properties where
substances were sent for off-site treatment or disposal. These remediation
requirements may be imposed without regard to fault, and liability for
environmental remediation can be substantial.
INSURANCE
As is typical in the healthcare industry, we are subject to claims and
legal actions by patients in the ordinary course of business. To cover these
claims, we maintain professional malpractice liability insurance and general
liability insurance in amounts that we believe to be sufficient for our
operations, although some claims may exceed the scope of the coverage in effect.
We also maintain umbrella coverage. Losses up to our self-insured retentions and
any losses incurred in excess of amounts maintained under such insurance will be
funded from working capital. At various times in the past, the cost of
malpractice and other liability insurance has risen significantly. Therefore, we
cannot assure you that this insurance will continue to be available at
reasonable prices that will allow us to maintain adequate levels of coverage. We
also cannot assure you that our cash flow will be adequate to provide for
professional and general liability claims in the future.
RISK FACTORS
If We Are Unable to Enter Into Favorable Contracts with Managed Care
Payors, Our Operating Revenue May be Reduced
Our ability to negotiate favorable contracts with health maintenance
organizations, preferred provider organizations and other managed care payors
significantly affects the revenue and operating results of most of our
hospitals. If we lose any of these contracts or are unable to enter into new
contracts on favorable terms, our revenue derived from operations will be
reduced and our growth prospects will be diminished. Certain of our contracts
with managed care payors are capitated contracts, under which we receive
specific fixed periodic payments based on the number of members of the
organization we service, regardless of the actual costs incurred and services
provided. The payments we receive may not be adequate to cover the cost of
meeting the healthcare needs of the covered persons. Revenue derived from health
maintenance organizations, preferred provider organizations and other managed
care payors accounted for approximately 33% of our net revenue for the year
ended September 30, 2000. As such, our future success will depend, in part, on
our ability to renew existing managed care contracts and enter into new managed
care contracts on terms favorable to us. Other healthcare companies, including
some with greater financial resources or a wider range of services, also may be
competing for these opportunities.
Our Hospitals Face Competition for Patients From Other Hospitals and
Healthcare Providers
The hospital industry is highly competitive. Our hospitals face
competition for patients from other hospitals in our markets, large tertiary
care centers and outpatient service providers that provide similar services to
those provided by our hospitals. Some of the hospitals that compete with ours
are owned by governmental agencies or not-for-profit corporations supported by
endowments and charitable contributions and can finance capital expenditures and
operations on a tax-exempt basis. Some of our competitors are larger, are more
established, offer a wider range of services and have more capital and other
resources than we do. If our competitors are able to finance capital
improvements, expand services or obtain favorable managed care contracts at
their facilities, we may be unable to attract patients away from these
hospitals.
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Recent Legislative Changes Limiting Payments Provided by Governmental
Programs May Significantly Reduce Our Revenue
Government healthcare programs, such as Medicare and Medicaid,
accounted for approximately 37% of our net revenue, exclusive of revenue from
Health Choice, for the year ended September 30, 2000. Recent legislative
changes, including those enacted as part of the Balanced Budget Act of 1997,
have resulted in limitations on and, in some cases, reductions in levels of,
payments to healthcare providers under many of these government programs. Many
changes imposed by the Balanced Budget Act of 1997 are being phased in over a
period of years. Certain rate reductions resulting from the Balanced Budget Act
of 1997 are being mitigated by the Balanced Budget Refinement Act of 1999 and
will be mitigated by the Benefits Improvement Protection Act of 2000.
Nonetheless, the Balanced Budget Act of 1997 significantly changed the method of
payment under the Medicare and Medicaid programs, which has resulted, and we
expect will continue to result, in significant reductions in payments for our
inpatient, outpatient, home health and skilled nursing services, which may cause
our revenue to decline. Final regulations implementing Medicare's new
prospective payment system for outpatient hospital services were enacted
recently. To date, our cash flows have been negatively impacted to some extent
by the delays in processing our claims under the new system.
Our Future Revenue and Profitability May be Constrained by Future
Healthcare Cost Containment Initiatives Undertaken by Purchasers of Healthcare
Services
Efforts by major purchasers of healthcare, including federal and state
governments, managed care companies and insurance companies, to revise payment
methodologies and monitor healthcare expenditures in order to contain and reduce
healthcare costs may have a material adverse effect on our revenue and
profitability. As a result of these initiatives, organizations offering prepaid
and discounted medical services packages may represent an increasing portion of
our patient admissions and they may negotiate increased discounts or fixed
prospective payment contracts resulting in reduced hospital revenue growth. If
we are unable to lower costs by increasing operational efficiencies to offset
declining reimbursements and payments, our revenue and profitability will be
adversely affected.
We May Continue to Have Operating Losses at Rocky Mountain Medical
Center
The census levels and resulting net revenue at Rocky Mountain Medical
Center have been significantly lower than we expected prior to opening the
hospital, principally as a result of what we believe to be exclusionary
contracting practices pursued in the Salt Lake City market by a competitor. We
believe these exclusionary contracting practices have had a material adverse
effect on the business and operations of Rocky Mountain Medical Center by
precluding certain significant managed care companies from contracting with
Rocky Mountain Medical Center, thereby preventing certain physicians and
patients from using this facility. We filed a lawsuit against the competitor
seeking damages and other remedies, but were unable to obtain injunctive relief.
To improve census levels, we recently have executed managed care contracts that
are effective January 1, 2001 with two large payors in the Salt Lake City
market. These payors previously did not contract with Rocky Mountain Medical
Center because of the exclusionary contracting practices of our competitor. If
we are unsuccessful in growing revenue at Rocky Mountain Medical Center and
reducing operating losses, we may be forced to significantly alter our plans and
strategies with respect to this hospital.
Our Performance Depends on Our Ability to Recruit and Retain Quality
Physicians at Our Hospitals
The success of our hospitals depends on the following factors, among
others: the number and quality of the physicians on the medical staff of, or who
admit patients to, our hospitals; the admissions practices of those physicians;
and the maintenance of good relations between us and those physicians.
We generally do not employ physicians, and most of our staff physicians
have admitting privileges at other hospitals. Our inability to recruit and
retain physicians, or our inability to provide hospital staffing or services at
our hospitals that meet the needs of physicians, could make it more difficult to
attract patients to our hospitals and could affect our profitability.
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Our Hospitals Face Competition for Staffing, Which May Increase our
Labor Costs and Reduce Profitability
We compete with other healthcare providers with respect to attracting
and retaining qualified management personnel responsible for the day-to-day
operations of each of our hospitals, as well as nurses and other non-physician
healthcare professionals. In certain markets, the availability of nurses and
other medical support personnel has become a significant operating issue to
hospitals and other providers of healthcare services. This shortage of nurses or
trained personnel may require us to enhance our wage and benefits package in
order to attract and retain them or to hire more expensive temporary personnel.
We also depend on the available labor pool of semi-skilled and unskilled
employees in each of the markets in which we operate. If our labor costs
increase, we may not be able to raise our rates charged to payors to offset
these increased costs. Because a significant percentage of our revenue consists
of fixed, prospective payments, our ability to pass along increased labor costs
is constrained. Any significant failure to attract and retain qualified
management, nurses and other medical support personnel, control our labor costs,
or pass on any increased labor costs to payors through rate increases could have
a material adverse effect on our profitability.
Our Significant Indebtedness May Limit Our Ability to Grow and Compete
with Other Hospital Companies
The amount of our outstanding indebtedness is large compared to the net
book value of our assets, and we have substantial repayment obligations under
our outstanding debt. In addition, the outstanding indebtedness under our bank
credit facility bears interest at a floating rate plus a fixed margin.
Therefore, increases in prevailing interest rates will increase our interest
payment obligations. As a result of our substantial debt repayment obligations,
we are limited in our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to make
principal and interest payments. Our indebtedness increases our vulnerability to
general adverse economic and industry conditions because we must still meet our
significant debt service obligations, notwithstanding the fact that our revenue
may have decreased. This could affect our ability to develop as a company by
limiting our ability to obtain additional financing to fund future working
capital requirements, operations, including operating losses of Rocky Mountain
Medical Center, capital expenditures, acquisitions and other general corporate
requirements.
Our debt agreements contain significant financial covenants and
restrict our ability to incur additional indebtedness, make capital
expenditures, engage in mergers, acquisitions and asset sales, incur liens and
engage in sale-leaseback transactions. If we breach any of the restrictions in
our debt agreements, we may have to repay immediately a significant portion of
our indebtedness. In addition, substantially all of our outstanding common stock
has been pledged for the benefit of our lenders as security for our obligations
under our bank credit facility. In the event of a default under our bank credit
facility, our lenders would have the right to foreclose on the common stock.
We are Subject to Governmental Regulation and We May Be Subjected to
Allegations that We Failed to Comply with Governmental Regulations, Which May
Result in Sanctions that Reduce Our Revenue and Profitability
The healthcare industry is subject to extensive federal, state and
local laws, including regulations with respect to licensure, conduct of
operations, ownership of facilities, addition of facilities and services, and
prices for services. These laws and regulations are extremely complex and, in
many instances, the industry does not have the benefit of significant regulatory
or judicial interpretation of these laws. In particular, Medicare and Medicaid
fraud and abuse provisions, known as the "anti-kickback statute," prohibit
certain business practices and relationships related to items or services
reimbursable under Medicare, Medicaid and other federal healthcare programs,
including the payment or receipt of remuneration to induce or arrange for the
referral of patients covered by a federal or state healthcare program.
Federal government safe harbor regulations describe some of the conduct
and business relationships
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immune from prosecution under the anti-kickback statute. However, because there
are a limited number of safe harbors that often apply only to a very limited
scope of activity, not all legal arrangements fit within safe harbors. The fact
that a given business arrangement falls outside one of these safe harbors does
not render the arrangement illegal; however, business arrangements that fail to
satisfy a safe harbor risk scrutiny by enforcement authorities. We try to
structure our business arrangements to fit within or as close as possible to one
of these safe harbors. Enforcement authorities could determine that any of our
hospitals' arrangements that do not meet a safe harbor violate the anti-kickback
statute or other federal laws. Such a determination could subject us to
liabilities under the Social Security Act, including criminal penalties, civil
money penalties or exclusion from participation in Medicare, Medicaid or other
federal healthcare programs, any of which could impair our ability to operate
one or more of our hospitals or to operate profitably.
The Health Insurance Portability and Accountability Act of 1996, which
became effective January 1, 1997, added new fraud and abuse laws that include
all healthcare services, whether or not they are reimbursed under a federal or
state program, and created new enforcement mechanisms to combat fraud and abuse,
including an incentive program under which individuals can receive up to $1,000
for providing information on Medicare fraud and abuse that leads to the recovery
of at least $100 of Medicare funds. This statute also requires hospitals and
other providers to implement measures to ensure the privacy and security of
patients' medical records. Further, this statute requires healthcare providers
to comply with electronic data transmission standards when submitting or
receiving certain healthcare transactions electronically. We may incur
additional expenses in order to comply with the new standards, although we
cannot foresee the extent of our costs for implementing the requirements at this
stage.
In addition, the portion of the Social Security Act commonly known as
the "Stark Law" prohibits physicians from referring Medicare or Medicaid
patients to certain providers of designated health services if the physician or
a member of his immediate family has an ownership interest or compensation
arrangement with that provider. Sanctions for violating the Stark Law include
civil money penalties and possible exclusion from the Medicare program.
Many states have adopted or are considering similar anti-kickback and
physician self-referral legislation, some of which extends beyond the scope of
federal law to prohibit the payment or receipt of remuneration for the referral
of patients and physician self-referrals regardless of the source of payment for
care.
Some states require healthcare providers to receive prior approvals
known as certificates of need for the purchase, construction and expansion of
healthcare facilities, capital expenditures exceeding a prescribed amount,
changes in bed capacity or services and other matters. Such determinations are
based upon a state's determination of need for additional or expanded healthcare
facilities or services. Florida is the only state in which we currently own
hospitals that has certificate of need laws. The failure to obtain any required
certificate of need could impair our ability to operate or expand operations in
Florida.
The laws, rules and regulations described above are ever-changing,
complex and subject to interpretation. We exercise care in structuring
arrangements with physicians and other referral sources to comply in all
material respects with applicable laws. It is possible, however, that government
officials responsible for enforcing such laws could assert that we or
transactions in which we are involved, are in violation of such laws. It also is
possible that courts could interpret such laws in a manner inconsistent with our
interpretations. In the event of a determination that we are in violation of
such laws, or if further changes in the regulatory framework occur, any such
determination or changes could result in monetary or punitive sanctions or
exclusion from governmental programs, any of which could impair our ability to
operate profitably.
Providers in the Hospital Industry Have Been the Subject of Federal and
State Investigations, and We May Become Subject to Such Investigations in the
Future
Both federal and state government agencies have announced heightened
and coordinated civil and criminal enforcement efforts as part of their ongoing
investigations related to referral, cost reporting and billing practices,
laboratory and home healthcare services and physician ownership and joint
ventures involving hospitals.
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In addition, the Office of the Inspector General of the U.S. Department of
Health and Human Services and the Department of Justice have from time to time
established enforcement initiatives that focus on specific billing practices or
other suspected areas of abuse. Recent initiatives include a focus on hospital
billing for outpatient charges associated with inpatient services, as well as
hospital laboratory billing practices.
As part of our hospital operations, we operate laboratories and provide
some home healthcare services. We also have significant Medicare and Medicaid
billings. Although we monitor our billing practices and hospital practices to
maintain compliance with prevailing industry interpretations of applicable law
and believe that our current practices are consistent with current industry
practices, government investigations or interpretations inconsistent with
industry practices could occur. In public statements, governmental authorities
have taken positions on issues for which little official interpretation had been
available previously, such as the legality of physician ownership in healthcare
facilities in which they perform services and the propriety of including
marketing costs in the Medicare cost report of hospital-affiliated home health
agencies. Some of these positions appear to be inconsistent with practices that
have been common within the industry and which have not been challenged
previously in this manner. Moreover, some government investigations that have
been conducted in the past under the civil provisions of federal law are now
being conducted as criminal investigations under the Medicare fraud and abuse
laws. We have reviewed the current billing practices at all of our facilities in
light of these investigations and do not believe that any of our facilities are
taking positions on reimbursement issues that are contrary to the government's
position on these issues. Moreover, none of our hospitals currently have
physician investors, although our hospitals may have physician investors in the
future and some of our ambulatory surgery centers currently have physician
investors. Nevertheless, we cannot predict whether we or other hospital
operators will be the subject of future investigations or inquiries.
We Have a Limited Operating History
Our current management team began operating our hospitals in October
1999. As a result, although the individual members of our management team have
experience managing large groups of hospitals, they have limited experience
managing our hospitals and working together as a single management team.
Therefore, you should evaluate our business operations in view of the risks,
uncertainties, delays and difficulties associated with a new company.
If We Fail to Successfully Implement and Integrate Our Management
Information Systems at Our Hospitals, Our Expenses Could Increase, Our Cash
Flows Could Be Negatively Affected and Our Profitability Could Decline
Our success is dependent in part on our access to sophisticated
information systems and ability to successfully implement and integrate these
systems into our hospitals. We recently have converted and upgraded our
information systems in certain of our facilities in Utah, Florida and Texas, and
plan to complete conversions at our remaining hospitals no later than December
31, 2001. If we are unable to successfully implement and integrate these
systems, we may experience delays in collection of net revenue and may not be
able to realize anticipated cost savings and, as a result, our profitability
could be reduced. These systems are essential to the following areas of our
business operations, among others: patient accounting, including billing and
collection of accounts receivable, financial, accounting and reporting, coding,
payroll, compliance, laboratory systems, radiology and pharmacy systems, medical
records, document storage, materials management, asset management, and
negotiating, pricing and managing payor contracts.
Significant Competition From Other Healthcare Companies May Impact Our
Ability to Acquire Hospitals on Favorable Terms
One element of our business strategy is to expand through selective
acquisitions of hospitals in our existing markets and in new high growth
markets. We compete for acquisitions with other healthcare companies, some of
which have greater financial resources than us. Therefore, we may not be able to
acquire hospitals on terms favorable to us or at all.
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Difficulties with the Integration of Acquisitions May Disrupt Our
Ongoing Operations
If we are able to make acquisitions, we cannot guarantee that we will
be able to effectively integrate the acquired facilities with our existing
operations. The process of integrating acquired hospitals may require a
disproportionate amount of management's time and attention, potentially
distracting management from its day-to-day responsibilities. In addition, poor
integration of acquired facilities could cause interruptions to our business
activities, including those of the acquired hospitals. As a result, we may not
realize all or any of the anticipated benefits of an acquisition and we may
incur significant costs.
If Any One of the Regions in Which We Operate Experiences an Economic
Downturn or Other Material Changes, Our Overall Business Results May Suffer
Of our 15 general, acute care hospitals, five are located in Salt Lake
City, three are located in Phoenix, three are located in Tampa-St. Petersburg,
and four are located in the State of Texas. For the year ended September 30,
2000, our Salt Lake City hospitals generated 25% of our net revenue, our Phoenix
hospitals generated 22%, our Tampa-St. Petersburg hospitals generated 20%, our
Texas hospitals generated 21% and other operations, including Health Choice, our
Arizona-based managed care health plan, generated the remaining 12% of our net
revenue. Accordingly, any material change in the current demographic, economic,
competitive and regulatory conditions in our regions could adversely affect our
overall business results because of the significance of our operations in each
of these states to our overall operating performance. Moreover, due to the
concentration of our revenue in only four regions, our business is not
diversified and is, therefore, subject to greater market risks than some
competing multi-facility healthcare companies. Because each region in which we
do business may represent 20% or more of our revenue, our profitability also
could be diminished due to market volatility in any one of these markets or
negative changes in any of a number of market conditions.
We May be Subject to Liabilities Because of Claims Brought Against Our
Owned and Leased Hospitals
In recent years, plaintiffs have brought actions against hospitals and
other healthcare providers, alleging malpractice, product liability or other
legal theories. Many of these actions involved large claims and significant
defense costs. We maintain professional malpractice liability insurance and
general liability insurance in amounts that management believes are sufficient
for its operations to cover claims arising out of the operations of its
hospitals. Some of the claims, however, could exceed the scope of the coverage
in effect or coverage of particular claims could be denied. Although our
professional and other liability insurance has been adequate in the past to
provide for liability claims, we cannot assure you that adequate levels of
insurance will continue to be available on acceptable terms.
Our Inability to Control Healthcare Costs in Our Health Choice Plan May
Result in Premiums that Are Not Sufficient to Cover Medical Costs
During the year ended September 30, 2000, our Health Choice health plan
generated approximately 11% of our net revenue. The Arizona Health Care Cost
Containment System sets the premium payments we receive at Health Choice. If we
fail to effectively manage healthcare costs, the costs of healthcare services
and supplies that we provide to the members of Health Choice may exceed the
premiums we receive. This shortfall could significantly change our results of
operations and affect our profitability. Many factors can cause actual
healthcare costs to exceed the premiums set by the Arizona Health Care Cost
Containment System, including the increased cost of individual healthcare
services, the type and number of individual healthcare services delivered and
the occurrence of catastrophes or epidemics and other unforeseen occurrences.
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ITEM 2. PROPERTIES.
We operate 15 general, acute care hospitals and five ambulatory surgery
centers. Of the 15 hospitals we operate, we own 11 hospitals and lease four
hospitals pursuant to lease agreements. Three of the surgery centers we operate
are owned by joint ventures in which we own varying interests. The following
table contains information concerning our hospitals and ambulatory surgery
centers.
LICENSED
HOSPITALS CITY STATE BEDS
--------- ---- ----- ----
Davis Hospital and Medical Center Layton UT 126
Jordan Valley Hospital West Jordan UT 50
Pioneer Valley Hospital(1) West Valley City UT 139
Rocky Mountain Medical Center Salt Lake City UT 118
Salt Lake Regional Medical Center Salt Lake City UT 200
Mesa General Hospital Medical Center(2) Mesa AZ 143
St. Luke's Medical Center(3)(4) Phoenix AZ 350
Tempe St. Luke's Hospital(4) Tempe AZ 106
Memorial Hospital of Tampa Tampa FL 174
Palms of Pasadena Hospital St. Petersburg FL 307
Town & Country Hospital Tampa FL 201
Mid-Jefferson Hospital Nederland TX 138
Odessa Regional Hospital Odessa TX 100
Park Place Medical Center Port Arthur TX 244
Southwest General Hospital San Antonio TX 286
Surgery Centers
---------------
Davis Surgical Center(5) Layton UT --
Sandy City ASC(6) West Jordan UT --
Biltmore Surgery Center(7) Phoenix AZ --
Metro Surgery Center Mesa AZ --
Arizona Diagnostic and Surgery Center Mesa AZ --
- -------------------------
(1) Pioneer Valley Hospital is leased pursuant to a lease agreement that
expires on June 30, 2004. We have options to extend the term of the
lease through June 30, 2034.
(2) Mesa General Hospital Medical Center is leased pursuant to a lease
agreement that expires on July 31, 2003. We have options to extend the
term of the lease through July 31, 2023.
(3) Includes St. Luke's Behavioral Health Center.
(4) St. Luke's Medical Center, St. Lukes Behavioral Center and Tempe St.
Luke's Hospital are leased pursuant to a lease agreement that expires
on January 31, 2010. We have an option to extend the term of the lease
through January 31, 2015.
(5) Owned by a joint venture in which we own a 30% interest.
(6) Owned by a joint venture in which we own a 50% interest.
(7) Owned by a joint venture in which we own a 62.4% interest.
We also operate medical office buildings in conjunction with our
hospitals. These office buildings are occupied primarily by physicians who
practice at our hospitals.
Our principal executive offices in Franklin, Tennessee are located in
approximately 18,500 square feet of office space, subject to a lease that
expires in 2003 with respect to approximately 2,000 square feet and in 2005 with
respect to the remaining 16,500 square feet. We have an option to extend the
term of the lease for two additional five-year periods. Our principal executive
offices, hospitals and other facilities are suitable for their respective uses
and generally are adequate for our present needs.
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ITEM 3. LEGAL PROCEEDINGS.
On August 18, 2000, our subsidiary, Rocky Mountain Medical Center,
filed a Complaint and Motion for Preliminary Injunction in the Third Judicial
District Court for Salt Lake County, State of Utah against St. Mark's Hospital.
St. Mark's Hospital is owned by HCA-The Healthcare Company. The complaint
alleges certain state law violations by St. Mark's Hospital, including
exclusionary contracting practices constituting, among other things, a group
boycott under the Utah Antitrust Act, and seeks both injunctive relief and
unspecified monetary and punitive damages. A preliminary injunction hearing was
held on October 3, 2000, which resulted in the court denying our request for a
preliminary injunction. The case is still pending with a trial date currently
scheduled for May 2002. We intend to continue to vigorously pursue this
litigation.
We are involved in other litigation and proceedings in the ordinary
course of our business. We do not believe the outcome of any such litigation
will have a material adverse effect upon our business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth
quarter ended September 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for our common stock. At
September 30, 2000, there were 61 holders of record of our common stock.
We have not declared or paid a cash dividend on our common stock. It is
the present policy of our board of directors to retain all earnings to support
operations and finance expansion. Our senior credit facilities restrict our
ability to pay cash dividends on our common stock, and the indenture governing
our senior subordinated notes currently prohibits the payment of cash dividends
on our common stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected financial data for our company
for the year ended September 30, 2000 derived from our audited consolidated and
combined financial statements and include financial data for the Tenet hospitals
from October 15, 1999, their date of acquisition. The selected financial data
reflects all adjustments that, in the opinion of our management, are necessary
for a fair presentation of such information.
The following tables also present selected historical financial data
for the Paracelsus hospitals for each of the fiscal years in the three years
ended December 31, 1998, and for the nine months ended September 30, 1998 and
1999. We have derived the selected financial data for each of the three years
ended December 31, 1996, 1997 and 1998 and for the nine months ended September
30, 1999 from the combined financial statements of the Paracelsus hospitals,
which have been audited by Ernst & Young LLP, independent auditors for
Paracelsus Healthcare Corporation. We have derived the selected financial data
for the nine months ended September 30, 1998 from the unaudited combined
financial statements of the Paracelsus hospitals.
IASIS PARACELSUS HOSPITALS(1)
------------- ------------------------------------------------------------------------------
PREDECESSOR
COMPANY
PERIOD -----------
FROM DATE PERIOD
OF FROM
YEAR ENDED NINE MONTHS ENDED YEARS ENDED ACQUISITION JANUARY 1,
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, TO 1996
------------- ----------------------- ----------------------- DECEMBER 31, TO DATE OF
2000 1999 1998 1998 1997 1996 ACQUISITION
--------- --------- --------- --------- --------- --------- -------
(in thousands)
STATEMENT OF OPERATIONS DATA:
Net revenue $ 815,163 $ 137,397 $ 134,017 $ 178,309 $ 186,263 $ 98,249 $88,886
Costs and expenses:
Salaries and benefits 285,451 47,169 47,306 63,158 63,902 41,040 32,087
Supplies and other
operating expenses 357,552 56,846 55,073 71,346 71,609 43,343 32,377
Provision for bad debts 60,579 9,934 8,131 11,822 16,488 7,382 6,032
Interest, net 62,352 7,304 13,426 17,088 22,097 8,465 6,125
Depreciation and
amortization 47,559 9,620 8,606 11,770 11,122 6,863 4,031
Allocated management fees -- 5,027 4,940 6,587 7,519 3,839 2,822
Recapitalization costs(2) 3,478 -- -- -- -- -- --
Restructuring and
impairment charges(3) -- -- -- -- -- 52,492 --
Loss contract accrual(4) -- -- -- -- -- 38,082 --
Reversal of excess loss
contract accrual(4) -- -- (7,500) (7,500) (15,531) -- --
Cost of hospital
closure(5) -- -- -- -- 3,500 -- --
--------- --------- --------- --------- --------- --------- -------
Total costs and expenses 816,971 135,900 129,982 174,271 180,706 201,506 83,474
--------- --------- --------- --------- --------- --------- -------
Earnings (loss) from
continuing operations
before income taxes (1,808) 1,497 4,035 4,038 5,557 (103,257) 5,412
Minority interests 74 (140) 54 68 23 -- --
--------- --------- --------- --------- --------- --------- -------
Earnings (loss) from
continuing operations
before income taxes (1,882) 1,637 3,981 3,970 5,534 (103,257) 5,412
Income tax expense
(benefit) 2,219 -- -- -- -- (9,210) 2,116
--------- --------- --------- --------- --------- --------- -------
Net earnings (loss)
from continuing
operations $ (4,101) $ 1,637 $ 3,981 $ 3,970 $ 5,534 $ (94,047) $ 3,296
========= ========= ========= ========= ========= ========= =======
BALANCE SHEET DATA(6):
Total assets $ 873,839 $ 213,259 $ 222,458 $ 216,319 $ 232,943 $ 256,288
Long-term debt and capital
lease obligations
(including current
portion) 557,654 1,499 1,269 2,273 2,019 1,565
Stockholder's equity
(deficit)(7) 5,431 (84,585) (85,568) (85,635) (89,115) (93,879)
Working capital 65,018 3,687 17,433 10,350 16,028 11,112
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(1) The selected financial data includes financial data for the Paracelsus
hospitals for the following periods:
HOSPITAL PERIOD
-------------------------------- -------------------------------------
Davis Hospital and Medical Paracelsus Healthcare Corporation
Center acquired facility May 17, 1996
(predecessor company)
Pioneer Valley Hospital Paracelsus Healthcare Corporation
acquired facility May 17, 1996
(predecessor company)
Rocky Mountain Medical Center