Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 1-11239
---------------------
HCA - THE HEALTHCARE COMPANY
(Exact Name of Registrant as Specified in its Charter)
---------------------
DELAWARE 75-2497104
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE PARK PLAZA 37203
NASHVILLE, TENNESSEE (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (615) 344-9551
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $.01 Par Value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2001, there were outstanding 522,461,600 shares of the
Registrant's Voting Common Stock and 21,000,000 shares of the Registrant's
Nonvoting Common Stock. As of February 28, 2001 the aggregate market value of
the Common Stock held by non-affiliates was approximately $19.5 billion. For
purposes of the foregoing calculation only, the Registrant's directors and
executive officers, the HCA 401(k) Plan, the EPIC Profit Sharing Plan and the
Healthtrust 401(k) Retirement Program have been deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
INDEX
PAGE
REFERENCE
---------
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 34
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 35
Item 6. Selected Financial Data..................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 38
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 52
Item 8. Financial Statements and Supplementary Data................. 52
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 53
Item 11. Executive Compensation...................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 53
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 54
2
3
PART I
ITEM 1. BUSINESS
GENERAL
HCA - The Healthcare Company is one of the leading health care services
companies in the United States. At December 31, 2000, the Company operated 196
hospitals, comprised of 179 general, acute care hospitals, 8 psychiatric
hospitals, and 9 hospitals included in joint ventures, which are accounted for
using the equity method. In addition, the Company operated 78 freestanding
surgery centers, 3 of which are accounted for using the equity method. The
Company's facilities are located in 24 states, England and Switzerland. The
terms "Company" and "HCA" as used herein refer to HCA - The Healthcare Company
and its affiliates unless otherwise stated or indicated by context. The term
"affiliates" means direct and indirect subsidiaries of HCA - The Healthcare
Company and partnerships and joint ventures in which such subsidiaries are
partners.
HCA's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost-effective
manner possible. HCA's general, acute care hospitals usually provide a full
range of services to accommodate such medical specialties as internal medicine,
general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics,
as well as diagnostic and emergency services. Outpatient and ancillary health
care services are provided by HCA's general, acute care hospitals and through
HCA's freestanding outpatient surgery and diagnostic centers, and rehabilitation
facilities. HCA's psychiatric hospitals provide a full range of mental health
care services through inpatient, partial hospitalization and outpatient
settings. HCA also operates preferred provider organizations in 47 states and
the District of Columbia.
The Company, through various predecessor entities, began operations on July
1, 1988. The Company was incorporated in Nevada in January 1990 and
reincorporated in Delaware in September 1993. HCA's principal executive offices
are located at One Park Plaza, Nashville, Tennessee 37203, and its telephone
number is (615) 344-9551.
Prior to 1997, the Company grew substantially through a series of corporate
mergers and acquisitions of individual facilities. In September 1993, the
Company, then known as Columbia Healthcare Corporation, acquired Galen Health
Care, Inc. ("Galen") in a merger accounted for as a pooling of interests. In
February 1994, the Company acquired HCA-Hospital Corporation of America in a
merger accounted for as a pooling of interests and changed its name to
Columbia/HCA Healthcare Corporation. In September 1994, the Company acquired
Medical Care America, Inc. ("MCA") in a transaction accounted for as a purchase,
and in April 1995, the Company acquired Healthtrust, Inc. - The Hospital Company
("Healthtrust") in a merger accounted for as a pooling of interests. During the
1993-1996 time period, the Company also completed numerous joint ventures and
other acquisitions of health care assets.
In July 1997, following the inception of a Federal investigation into its
business practices, the Company made substantial changes to its executive
management and initiated a plan to restructure its operations to create a
smaller and more focused company. Since July 1997, the Company has reduced the
number of hospitals it operates by more than 42%, or 144 hospitals, and the
number of surgery centers by 48%, or 71 centers. In addition, the Company sold
substantially all of its home health operations and various other non-core
assets, including three of the four units acquired in the August 1997
acquisition of Value Health, Inc. ("Value Health"). Included in the reduction of
hospitals and surgery centers were the spin-offs of LifePoint Hospitals, Inc.
("LifePoint") and Triad Hospitals, Inc. ("Triad") creating two independent
publicly traded companies, which together operated 57 hospitals at the time of
the spin-offs in May 1999. In May 2000, Columbia/HCA Healthcare Corporation
changed its name to HCA - The Healthcare Company. In December 2000, HCA
completed the sale of 116 medical office buildings to MedCap Properties, LLC, in
which HCA maintains a minority interest.
The Company continues to be the subject of governmental investigations into
and litigation relating to its business practices. In 2000, the Company agreed
to settle all criminal and certain civil claims relating to these matters. The
Company continues to work closely with the appropriate governmental authorities
to resolve the remaining civil matters. The Company is also named in various
other legal proceedings, which include qui tam
3
4
actions, shareholder derivative and class action suits filed in Federal court,
shareholder derivative actions filed in state courts, patient/payer actions and
general liability claims. The Company is defending these actions vigorously. See
Item 3 -- "Legal Proceedings."
BUSINESS STRATEGY
HCA's business strategy is to be a comprehensive provider of quality health
care services in the most cost-effective manner and consistent with the
Company's ethics and compliance program, Corporate Integrity Agreement and
governmental regulations. HCA also seeks to enhance financial performance by
increasing utilization of, and improving operating efficiencies in, the
Company's facilities. To achieve these objectives, HCA pursues the following
strategies:
- emphasize a "patients first" philosophy and a commitment to ethics and
compliance;
- focus on strong assets in select, core communities;
- develop comprehensive local health care networks with a broad range of
health care services;
- grow through increased patient volume, expansion of specialty and
outpatient services and selective acquisitions;
- improve operating efficiencies through enhanced cost management and
resource utilization, and the implementation of shared services
initiatives;
- recruit and develop and maintain relationships with physicians;
- streamline and decentralize management, consistent with HCA's local
focus; and
- effectively allocate capital to maximize return on investments.
HCA and the health care industry, in general, are facing many challenges,
including the growing number of uninsured, the availability and rising cost of
labor, reimbursement pressures from government and non-government payers and the
increasing costs of supplies, pharmaceuticals and new technologies. As a
response to these challenges, HCA is implementing a shared services initiative.
This initiative is a company-wide program designed to reduce operating costs and
provide additional resources for patient care by consolidating hospitals'
back-office functions such as billing and collections and standardizing and
upgrading financial services. In addition, HCA is implementing company-wide
supply improvement and distribution programs that include consolidating
purchasing functions regionally, combining warehouses and developing division-
based procurement programs. The Company has also undertaken both company-wide
and market-based initiatives to enhance recruitment and retention efforts.
HEALTH CARE FACILITIES
HCA currently owns, manages or operates hospitals, ambulatory surgery
centers, diagnostic centers, radiation and oncology therapy centers,
comprehensive outpatient rehabilitation and physical therapy centers and various
other facilities.
At December 31, 2000, HCA operated 179 general, acute care hospitals with
40,105 licensed beds and an additional 9 hospitals with 2,715 licensed beds that
are operated through joint ventures which are accounted for using the equity
method. Most of HCA's general, acute care hospitals provide medical and surgical
services, including inpatient care, intensive care, cardiac care, diagnostic
services and emergency services. The general, acute care hospitals also provide
outpatient services such as outpatient surgery, laboratory, radiology,
respiratory therapy, cardiology and physical therapy. Each hospital has an
organized medical staff and a local board of trustees or governing board, made
up of members of the local community.
Like most hospitals, HCA's hospitals do not engage in extensive medical
research and education programs. However, some of HCA's hospitals are affiliated
with medical schools and may participate in the clinical rotation of medical
students and other education programs.
4
5
At December 31, 2000, HCA operated 8 psychiatric hospitals with 904
licensed beds. HCA's psychiatric hospitals provide therapeutic programs
including child, adolescent and adult psychiatric care, adult and adolescent
alcohol and drug abuse treatment and counseling.
Other outpatient health care facilities operated by HCA include ambulatory
surgery centers, diagnostic centers, comprehensive outpatient rehabilitation and
physical therapy centers, outpatient radiation and oncology therapy centers and
various other facilities. These outpatient services are an integral component of
the Company's strategy to develop a comprehensive health care network in select
communities.
In addition to providing capital resources, HCA makes available a variety
of management services to its health care facilities, including ethics and
compliance programs; national supply contracts; equipment purchasing and leasing
contracts; accounting, financial and clinical systems; governmental
reimbursement assistance; construction planning and coordination; information
technology systems and solutions; legal counsel; personnel management and
internal audit.
SOURCES OF REVENUE
Hospital revenues depend upon inpatient occupancy levels, the ancillary
services and therapy programs ordered by physicians and provided to patients,
the volume of outpatient procedures and the charges or negotiated payment rates
for such services. Charges and reimbursement rates for inpatient services vary
significantly depending on the type of service (e.g., medical/surgical,
intensive care or psychiatric) and the geographic location of the hospital.
HCA receives payment for patient services from the Federal government
primarily under the Medicare program, state governments under their respective
Medicaid or similar programs, HMOs, PPOs and private insurers, as well as
directly from patients. The approximate percentages of patient revenues from
continuing operations of the Company's facilities from such sources were as
follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
----- ----- -----
Medicare.................................................... 28% 29% 30%
Medicaid.................................................... 7% 7% 6%
Managed care................................................ 40% 37% 32%
Other sources............................................... 25% 27% 32%
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and persons
with end-stage renal disease. Medicaid is a Federal-state program, administered
by the states, which provides hospital benefits to qualifying individuals who
are unable to afford care. Substantially all of HCA's hospitals are certified as
health care services providers for persons covered under Medicare and Medicaid
programs. Amounts received under the Medicare and Medicaid programs are
generally significantly less than the hospital's established charges for the
services provided.
To attract additional volume, most of HCA's hospitals offer discounts from
established charges to certain large group purchasers of health care services,
including Blue Cross, other private insurance companies, employers, HMOs, PPOs
and other managed care plans. Blue Cross is a private health care program that
funds hospital benefits through independent plans that vary in each state. These
discount programs limit HCA's ability to increase charges in response to
increasing costs. See "Competition." Patients are generally not responsible for
any difference between established hospital charges and amounts reimbursed for
such services under Medicare, Medicaid, some Blue Cross plans, HMOs or PPOs, but
are responsible to the extent of any exclusions, deductibles or co-insurance
features of their coverage. The amount of such exclusions, deductibles and
co-insurance has been increasing each year. Collection of amounts due from
individuals is typically more difficult than from governmental or third-party
payers.
5
6
Medicare
Under the Medicare program, HCA receives reimbursement under a prospective
payment system ("PPS") for inpatient and outpatient hospital services.
Psychiatric, long-term care, rehabilitation, specially designated children's
hospitals and certain designated cancer research hospitals, as well as
psychiatric or rehabilitation units that are distinct parts of a hospital and
meet Health Care Financing Administration ("HCFA") criteria for exemption, are
currently exempt from PPS and are reimbursed on a cost-based system, subject to
certain cost limits.
Under inpatient PPS, fixed payment amounts per inpatient discharge are
established based on the patient's assigned diagnosis related group ("DRG").
DRGs classify treatments for illnesses according to the estimated intensity of
hospital resources necessary to furnish care for each principal diagnosis. DRG
weights are based upon a statistically normal distribution of severity. When the
cost of treatment for certain patients falls well outside the normal
distribution, providers typically receive additional "outlier" payments. DRG
payments do not consider a specific hospital's cost, but are adjusted for area
wage differentials. The majority of inpatient capital costs for acute care
facilities are reimbursed on a prospective payment system based on DRG weights
multiplied by a geographically adjusted Federal rate.
DRG rates are updated and DRG weights are recalibrated each Federal fiscal
year and have been affected by several recent Federal enactments. The index used
to adjust the DRG rates (the "market basket") gives consideration to the
inflation experienced by hospitals and entities outside of the health care
industry in purchasing goods and services. However, for several years the
percentage increases to the DRG rates have been lower than the percentage
increases in the costs of goods and services purchased by hospitals. In Federal
fiscal year 2000, the DRG rate increase was 1.1%. The Medicare, Medicaid, and
SCHIP Benefit Improvement and Protection Act of 2000 ("BIPA") was enacted in
December 2000. Under BIPA, the DRG update for discharges from October 1, 2000
through April 1, 2001 will be market basket minus 1.1% (or 2.3%), and for
discharges from April 1, 2001 through September 30, 2001 will be market basket
plus 1.1% (or 4.5%). BIPA provides for DRG rate updates in Federal fiscal years
2002 and 2003 of market basket minus 0.55%.
Historically, the Medicare program has set aside 5.1% of Medicare inpatient
payments to pay for outlier cases. During Federal fiscal years 1999 and 2000,
Medicare has projected that payments for cost outlier cases have exceeded the
5.1% and has increased the cost threshold for Federal fiscal years 2000 and
2001, which will reduce total payments for outlier cases.
Traditionally, outpatient services provided at general, acute care
hospitals typically were reimbursed by Medicare at the lower of customary
charges, a blend of fee schedule amounts and costs that are subject to limits,
or actual costs, subject to limits. On August 1, 2000, HCFA began reimbursing
hospital outpatient services (and certain Medicare Part B services furnished to
hospital inpatients who have no Part A coverage) on a PPS basis. All services
paid under the new PPS for hospital outpatient services 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. Depending on the services provided, a hospital
may be paid for more than one APC for a patient visit. The APC rates are based
on the rates that would have been in effect January 1, 1999, updated by the rate
of increase in the hospital market basket minus one percentage point, or 1.9%.
Under BIPA, the update to the outpatient PPS rates for calendar year 2001 will
be market basket, or 3.4%, to be achieved by an update of market basket plus
0.32% for services on or after April 1, 2001. The update scheduled for 2002 as
provided for under BIPA will be market basket minus 1%. While the rules and
implementation of outpatient PPS are complex, the Company does not anticipate a
material financial impact as a result of the implementation of outpatient PPS.
HCFA 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.
Freestanding ambulatory surgery centers are reimbursed on a fee schedule.
Payments to PPS-exempt hospitals and units (e.g., inpatient psychiatric,
rehabilitation and long-term hospital services) are currently based upon
reasonable cost, subject to a cost per discharge target (the TEFRA limits).
These limits are updated annually by a market basket index. The update to a
hospital's target amount for its cost reporting period beginning in fiscal year
2000 was one of 0%, 0.4% or 2.9%. The update to a
6
7
hospital's target amount for its cost reporting period beginning in fiscal year
2001 will be one of 0%, 0.9%, 3.15% or 3.4%, depending on the hospital's or
unit's costs in relation to its rate-of-increase limit. Furthermore, limits have
been established for the cost per discharge target at the 75th percentile for
each category of PPS-exempt hospitals and hospital units. In addition, the cost
per discharge for new hospitals and hospital units cannot exceed 110% of the
national median target rate for hospitals in the same category.
The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999
("BBRA") required HCFA to develop and implement budget-neutral PPS systems for
both psychiatric and long-term hospitals for cost reporting periods beginning on
or after October 1, 2002. As of December 31, 2000, the Company had 58
psychiatric units, eight psychiatric hospitals and one long-term care hospital.
Historically, Medicare reimbursed skilled nursing facilities ("SNF") on the
basis of actual costs, subject to certain limits. The Balanced Budget Act of
1997 ("BBA-97") required the establishment of a prospective payment system for
Medicare skilled nursing facilities under which facilities will be paid a 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. BBRA and BIPA made changes to the
SNF payment rates, which should impact the BBA-97 provisions in a manner
favorable to the Company. As of December 31, 2000, the Company had 82 skilled
nursing units.
BBA-97 mandates a prospective payment system for inpatient rehabilitation
services for Medicare cost reporting periods beginning after September 30, 2000;
however, implementation has been delayed. Implementation is not anticipated
until later in 2001. Further, BIPA made changes to inpatient rehabilitation
payment rates, which should impact the BBA-97 provisions in a manner favorable
to the Company. As of December 31, 2000, the Company had 58 rehabilitation
hospitals and hospital units.
Medicaid
Medicaid programs are funded jointly by the Federal government and the
states and are administered by states under an approved plan. Most state
Medicaid program payments are made under a PPS or are based on negotiated
payment levels with individual hospitals. Medicaid reimbursement is often less
than a hospital's cost of services. The Federal government and many states are
currently considering significant reductions in the level of Medicaid funding
while at the same time expanding Medicaid benefits, which could adversely affect
future levels of Medicaid reimbursement received by the Company's hospitals. As
permitted by law, certain states in which the Company operates have adopted
broad-based provider taxes to fund their Medicaid programs. The impact of these
taxes upon the Company has not been materially adverse. However, the Company is
unable to predict whether any additional broad-based provider taxes will be
adopted by the states in which it operates and, accordingly, is unable to assess
the effect of such additional taxes on its results of operations or financial
position.
Annual Cost Reports
All hospitals participating in the Medicare and Medicaid programs, whether
paid on a reasonable cost basis or under a PPS, are required to meet certain
financial reporting requirements. Federal and, where applicable, state
regulations require the submission of annual cost reports covering the revenue,
costs and expenses associated with the services provided by each hospital to
Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to the Company under these reimbursement
programs. These audits often require several years to reach the final
determination of amounts due to the Company under these programs. Providers also
have rights of appeal, and it is common to contest issues raised in audits of
prior years' reports. While the annual audits of many of the Company's cost
reports had been previously delayed, the audits have been resumed. The Company
believes these audits have been, and are anticipated to be, more intensive as a
result of the governmental investigations and litigation pertaining to the
Company. Although the final outcomes of these audits and the nature and amounts
of any adjustments are difficult to predict, HCA believes that adequate
provisions have been made in its financial statements for
7
8
adjustments that may result from these audits and that final resolution of the
contested issues will not have a material adverse effect upon its results of
operations or financial position.
Reviews of previously submitted annual cost reports and the cost report
preparation process are areas included in the ongoing governmental
investigations and litigation relating to these issues. The Company remains
unable to predict the outcome of these investigations and litigation; however,
if the Company or any of its facilities were found to be in violation of Federal
or state laws relating to Medicare, Medicaid or similar programs, the Company
could be subject to substantial monetary fines, civil penalties and exclusion
from participation in the Medicare and Medicaid programs. Any such sanctions
could have a material adverse effect on the financial position and results of
operations of the Company. See Item 3 -- "Legal Proceedings."
Managed Care
Pressures to control the costs of health care have resulted in increases in
the percentage of admissions and revenues attributable to managed care payers.
The percentage of HCA's admissions attributable to managed care payers increased
from 41% for the year ended December 31, 1999 to 42% for the year ended December
31, 2000. The percentage of HCA's revenues attributable to managed care payers
increased from 37% for the year ended December 31, 1999 to 40% for the year
ended December 31, 2000. HCA expects that the trend toward increasing
percentages of admissions and revenues related to managed care payers will
continue in the future. HCA generally receives lower payments for similar
services from managed care payers than from traditional commercial/indemnity
insurers. Managed care contracts are typically negotiated for one to two year
terms. While HCA has generally received average price increases of five to six
percent from managed care payers during the previous two years, there can be no
assurance that the Company will continue to receive increases in the future.
Commercial Insurance
HCA's hospitals provide services to individuals covered by traditional
private health care insurance. Private insurance carriers make direct payments
to such hospitals or, in some cases, reimburse their policyholders 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 costs of hospital
services by adopting discounted payment mechanisms, including prospective
payment or DRG-based payment systems for more inpatient and outpatient services.
To the extent that such efforts are successful, reduced levels of reimbursement
may have a negative impact on the operating results of HCA's hospitals.
Future health care legislation or other changes in the administration or
interpretation of governmental health programs or reductions in the price
increases or amounts received from managed care, commercial insurance or other
payers could have a material adverse effect on the financial position and
results of operations of the Company.
HOSPITAL UTILIZATION
HCA believes that the most important factors relating to the overall
utilization of a hospital are the quality and market position of the hospital
and the number and quality of physicians providing patient care within the
facility. Generally, HCA believes that the ability of a hospital to be a market
leader is determined by its breadth of services, level of technology, emphasis
on quality of care and convenience for patients and physicians. Other factors
which impact utilization include the growth in local population, local economic
conditions and market penetration of managed care programs.
8
9
The following table sets forth certain operating statistics for hospitals
owned by HCA. Hospital operations are subject to certain seasonal fluctuations,
including decreases in patient utilization during holiday periods and increases
in the cold weather months.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Number of hospitals at end of period(a)........ 187 195 281 309 319
Number of licensed beds at end of period (b)... 41,009 42,484 53,693 60,643 61,931
Weighted average licensed beds(c).............. 41,659 46,291 59,104 61,096 62,708
Admissions(d).................................. 1,553,500 1,625,400 1,891,800 1,915,100 1,895,400
Equivalent admissions(e)....................... 2,300,800 2,425,100 2,875,600 2,901,400 2,826,000
Average length of stay (days)(f)............... 4.9 4.9 5.0 5.0 5.1
Average daily census(g)........................ 20,952 22,002 25,719 26,006 26,583
Occupancy rate (h)............................. 50% 48% 44% 43% 42%
- ---------------
(a) Excludes 9 facilities in 2000, 12 facilities in 1999, 24 facilities in 1998,
27 facilities in 1997 and 22 facilities in 1996 that are not consolidated
(accounted for using the equity method) for financial reporting purposes.
(b) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(c) Represents the average number of licensed beds, weighted based on periods
owned.
(d) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to HCA's hospitals and is used by management
and certain investors as a general measure of inpatient volume.
(e) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions 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.
(f) Represents the average number of days admitted patients stay in HCA's
hospitals.
(g) Represents the average number of patients in HCA's hospital beds each day.
(h) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms.
Hospitals have experienced shifts from inpatient to outpatient care as well
as decreases in average lengths of inpatient stay, primarily as a result of
improvements in technology and clinical practices and hospital payment changes
by Medicare, insurance carriers, managed care programs and self-insured
employers. These changes generally encourage the utilization of outpatient,
rather than inpatient, services whenever possible, and shorter lengths of stay
for inpatient care.
COMPETITION
Generally, other hospitals in the local communities served by most of HCA's
hospitals provide services similar to those offered by HCA's hospitals.
Additionally, in the past several years the number of freestanding outpatient
surgery and diagnostic centers in the geographic areas in which HCA operates has
increased significantly. As a result, most of HCA's hospitals operate in an
increasingly competitive environment. The rates charged by HCA's hospitals are
intended to be competitive with those charged by other local hospitals for
similar services. In some cases, competing hospitals are more established than
HCA's hospitals. Some competing hospitals are owned by tax-supported government
agencies and many others by not-for-profit entities which may be supported by
endowments and charitable contributions and are exempt from sales, property and
income taxes. Such exemptions and support are not available to HCA's hospitals.
In addition, in certain localities served by HCA there are large teaching
hospitals that provide highly specialized facilities, equipment and services
which may not be available at most of HCA's hospitals. Psychiatric hospitals
9
10
frequently attract patients from areas outside their immediate locale and,
therefore, HCA's psychiatric hospitals compete with both local and regional
hospitals, including the psychiatric units of general, acute care hospitals.
HCA believes that its hospitals compete within local communities on the
basis of many factors, including the quality of care, ability to attract and
retain quality physicians, location, breadth of services, technology offered and
prices charged. HCA's strategies are designed, and management believes that its
hospitals are positioned, to be competitive.
One of the most significant factors in the competitive position of a
hospital is the number and quality of physicians affiliated with the hospital.
Although physicians may at any time terminate their affiliation with a hospital
operated by HCA, the Company's hospitals seek to retain physicians of varied
specialties on the hospitals' medical staffs and to attract other qualified
physicians. HCA believes that physicians refer patients to a hospital primarily
on the basis of the quality and scope of services it renders to patients and
physicians, the quality of physicians on the medical staff, the location of the
hospital and the quality of the hospital's facilities, equipment and employees.
Accordingly, HCA strives to maintain quality facilities, equipment, employees
and services for physicians and their patients.
Another major factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services. HMOs and PPOs attempt to direct and control the use of
hospital services through managed care programs and to obtain discounts from
hospitals' established charges. In addition, employers and traditional health
insurers are increasingly interested in containing costs through negotiations
with hospitals for managed care programs and discounts from established charges.
Generally, hospitals compete for service contracts with group health care
services purchasers on the basis of price, market reputation, geographic
location, quality and range of services, quality of the medical staff and
convenience. The importance of obtaining contracts with managed care
organizations varies from community to community depending on the market
strength of such organizations.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and facilities, make capital
expenditures and otherwise make changes in operations, may also have the effect
of restricting competition. In those states which have no CON laws or which set
relatively high levels of expenditures before they become reviewable by state
authorities, competition in the form of new services, facilities and capital
spending is more prevalent. HCA has not experienced, and does not expect to
experience, any material adverse effects from state CON requirements or from the
imposition, elimination or relaxation of such requirements. See "Regulation and
Other Factors."
HCA, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs and
strong competition for patients. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
HCA's operations in the future.
The hospital industry and HCA's hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
occupancy rates continue to be negatively affected by payer-required
pre-admission authorization, utilization review and by payer pressure to
maximize outpatient and alternative health care delivery services for less
acutely ill patients. Increased competition, admissions constraints and payer
pressures are expected to continue. To meet these challenges, HCA intends to
expand many of its facilities to better enable the provision of a comprehensive
array of outpatient services, offer discounts to private payer groups, upgrade
facilities and equipment and offer new programs and services.
REGULATION AND OTHER FACTORS
Licensure, Certification and Accreditation
Health care facility construction and operation are subject to Federal,
state and local regulations relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, maintenance of adequate records,
fire prevention, rate-setting and compliance with building codes and
environmental protection laws. Facilities are subject to periodic inspection by
governmental and other authorities to assure
10
11
continued compliance with the various standards necessary for licensing and
accreditation. HCA believes that its health care facilities are properly
licensed under appropriate state laws. Substantially all of HCA's general, acute
care hospitals are certified for participation in the Medicare program and are
accredited by the Joint Commission on Accreditation of Healthcare Organizations
("Joint Commission"). Certain of HCA's psychiatric hospitals do not participate
in these programs. If any facility were to lose its Joint Commission
accreditation or otherwise loses its certification under the Medicare program,
the facility would be unable to receive reimbursement from the Medicare and
Medicaid programs. Management believes that HCA's facilities are in substantial
compliance with current applicable Federal, state, local and independent review
body regulations and standards. The requirements for licensure, certification
and accreditation are subject to change and, in order to remain qualified, it
may be necessary for HCA to make changes in its facilities, equipment, personnel
and services.
Certificates of Need
In some states in which HCA operates hospitals, the construction of new
facilities, the acquisition of existing facilities and the addition of new beds
or services may be subject to review by state regulatory agencies under a CON
program. Such laws generally require appropriate state agency determination of
public need and approval prior to the addition of beds or services or certain
other capital expenditures. Failure to obtain necessary state approval can
result in the inability to expand facilities, complete an acquisition or change
ownership. Further, violation may result in the imposition of civil or, in some
cases, criminal sanctions, the denial of Medicare or Medicaid reimbursement or
the revocation of a facility's license.
State Rate Review
Some states in which HCA operates hospitals have adopted legislation
mandating rate or budget review for hospitals or have adopted taxes on hospital
revenues, assessments or licensure fees to fund indigent health care within the
state. In the aggregate, state rate or budget review and indigent tax provisions
have not materially adversely affected HCA's results of operations. HCA is
unable to predict whether any additional state rate or budget review or indigent
tax provisions will be adopted and, accordingly, is unable to assess the effect
thereof on its results of operations or financial position.
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 must be reviewed by
peer review organizations ("PROs"), to assess the appropriateness of Medicare
and Medicaid patient admissions and discharges, the quality of care provided,
the validity of DRG classifications and the appropriateness of cases of
extraordinary length of stay or cost. PROs may deny payment for services
provided, may assess fines and also have the authority to recommend to the
Department of Health and Human Services ("HHS") that a provider, which is in
substantial noncompliance with the appropriate standards, be excluded from
participating in the Medicare program. Most non-governmental managed care
organizations also require utilization review.
Federal Health Care Program Regulations
Participation in any Federal health care program, including the Medicare
and Medicaid programs, is heavily regulated by statute and regulation. If a
hospital fails to substantially comply with the numerous conditions of
participation in the Medicare and Medicaid programs or performs certain
prohibited acts, the hospital's participation in the Federal health care
programs may be terminated, or civil or criminal penalties may be imposed under
certain provisions of the Social Security Act.
Among these provisions 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 health
11
12
care program. Courts have interpreted this statute broadly. Violations of the
Anti-kickback Statute may be punished by a criminal fine of up to $50,000 for
each violation or imprisonment, civil money penalties of up to $50,000 and
damages of up to three times the total amount of the remuneration, and exclusion
from participation in Federal health care programs, including Medicare and
Medicaid.
The Office of Inspector General at the Department of Health and Human
Services ("OIG"), among other regulatory agencies, is responsible for
identifying and eliminating fraud, abuse and waste. The OIG carries out this
mission through a nationwide program of audits, investigations and inspections.
In order to provide guidance to health care providers, the OIG has from time to
time issued "Special Fraud Alerts" that do not have the force of law, but
identify features of transactions that may indicate that the transactions
violate the Anti-kickback Statute or other Federal health care laws. The OIG has
identified several incentive arrangements as suspect practices, including: (a)
payment of any incentive by the hospital each time a physician refers a patient
to the hospital, (b) the use of free or significantly discounted office space or
equipment in facilities usually located close to the hospital, (c) provision of
free or significantly discounted billing, nursing or other staff services, (d)
free training for a physician's office staff in areas such as management
techniques and laboratory techniques, (e) guarantees which provide that, if the
physician's income fails to reach a predetermined level, the hospital will pay
any portion of the remainder, (f) low-interest or interest-free loans, or loans
which may be forgiven if a physician refers patients to the hospital, (g)
payment of the costs of a physician's travel and expenses for conferences, (h)
coverage on the hospital's group health insurance plans at an inappropriately
low cost to the physician, (i) payment for services (which may include
consultations at the hospital) which require few, if any, substantive duties by
the physician, or payment for services in excess of the fair market value of
services rendered, (j) purchasing goods or services from physicians at prices in
excess of their fair market value, or (k) "gainsharing," the practice of giving
physicians a share of any reduction in a hospital's costs for patient care
attributable in part to the physician's efforts. The OIG has encouraged persons
having information about hospitals who offer the above types of incentives to
physicians to report such information to the OIG.
As authorized by Congress, the OIG 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. Certain of the
Company's current arrangements, including joint ventures, do not qualify for
safe harbor protection.
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. Although the
Company believes that its arrangements with physicians have been structured to
comply with current law and available interpretations, there can be no assurance
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 the Company to liabilities
under the Social Security Act, including criminal penalties, civil monetary
penalties and exclusion from participation in Medicare, Medicaid or other
Federal health care programs, any of which could have a material adverse effect
on its business, financial condition or results of operations.
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 for the provision of certain designated health
services that are reimbursable by Medicare, including inpatient and outpatient
hospital services. Sanctions for violating the Stark Law include civil monetary
penalties of up to $15,000 per prohibited service provided, assessments equal to
twice the dollar value of each such service provided and exclusion from the
Medicare and Medicaid programs. The statute also provides for a penalty of up to
$100,000 for a circumvention scheme. There are exceptions to the self-referral
prohibition, including an exception for a physician's ownership interest in an
12
13
entire hospital, as opposed to an ownership interest in a hospital department.
There are also exceptions for many of the customary financial arrangements
between physicians and providers, including employment contracts, leases and
recruitment agreements.
On January 4, 2001, HHS issued final regulations, subject to comment,
intended to clarify parts of the Stark Law and some of the exceptions to it.
These regulations are considered the first phase of a two-phase process, with
the remaining regulations to be published at an unknown future date. The Company
cannot predict the final form that these regulations will take or the effect
that the final regulations will have on its operations.
Many states in which HCA operates also have laws that prohibit payments to
physicians for patient referrals similar to the Anti-kickback Statute and
self-referral legislation similar to the Stark Law. The scope of these state
laws is broad, since they often apply regardless of the source of payment for
care, and little precedent exists for their interpretation or enforcement. These
statutes typically provide for criminal and civil penalties as well as loss of
licensure.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
broadened the scope of certain fraud and abuse laws by adding several criminal
provisions for health care fraud offenses that apply to all health benefit
programs. This Act also created new enforcement mechanisms to 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 health care fraud, even if the
officer or managing employee had no knowledge of the fraud. HIPAA also
established 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. HIPAA was followed
by BBA-97, which created additional fraud and abuse provisions, including civil
penalties for contracting with an individual or entity that the provider knows
or should know is excluded from a Federal health care program.
The Social Security Act also imposes criminal and civil penalties for
making false claims to Medicare and Medicaid. False claims include, but are not
limited to, billing for services not rendered or for misrepresenting actual
services rendered in order to obtain higher reimbursement, billing for
unnecessary goods and services, and cost report fraud. Like the Anti-kickback
Statute, these provisions are very broad. Careful and accurate coding of claims
for reimbursement, including cost reports, must be performed to avoid liability.
The Company's operations could be adversely affected by the failure of its
arrangements to comply with the Anti-kickback Statute, the Stark Law, billing
laws and regulations, current state laws or other legislation or regulation in
these areas adopted in the future. The Company is unable to predict whether
other legislation or regulations at the Federal or state level in any of these
areas will be adopted, what form such legislation or regulations may take or
their impact on the Company. The Company is continuing to enter into new
financial arrangements with physicians and other providers in a manner
structured to comply in all material respects with these laws. There can be no
assurance, however, that (i) governmental officials charged with the
responsibility for enforcing these laws will not assert that the Company is in
violation thereof or (ii) such statutes will ultimately be interpreted by the
courts in a manner consistent with the Company's interpretation.
Medicare Regulations and Fraud and Abuse are areas included in the ongoing
government investigation of the Company. See Item 3 -- "Legal Proceedings."
The Federal False Claims Act and Similar State Laws
A factor affecting the health care industry today is the use of the Federal
False Claims Act and, in particular, actions brought by individuals on the
government's behalf under the False Claims Act's "qui tam" or whistleblower
provisions. Whistleblower provisions allow private individuals to bring actions
on behalf of the government alleging that the defendant has defrauded the
Federal government. Qui tam actions are among the types of lawsuits faced by the
Company. See Item 3 -- "Legal Proceedings."
13
14
When a defendant is determined by a court of law to be liable under the
False Claims Act, the defendant may be required to pay three times the actual
damages sustained by the government, plus mandatory civil penalties of between
$5,500 and $11,000 for each separate false claim. Settlements entered into prior
to litigation usually involve a less severe damages methodology. There are many
potential bases for liability under the False Claims Act. Liability often arises
when an entity knowingly submits a false claim for reimbursement to the Federal
government. The False Claims Act defines the term "knowingly" broadly. Thus,
although simple negligence will not give rise to liability under the 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. A number of states in which
the Company operates have adopted their own false claims provisions as well as
their own whistleblower provisions whereby a private party may file a civil
lawsuit in state court.
Administrative Simplification and Privacy Requirements
The Administrative Simplification Provisions of HIPAA require the use of
uniform electronic data transmission standards for health care claims and
payment transactions submitted or received electronically. These provisions are
intended to encourage electronic commerce in the health care industry. On August
17, 2000, HHS published final regulations establishing electronic data
transmission standards that all health care providers must use when submitting
or receiving certain health care transactions electronically. Compliance with
these regulations is required by October 16, 2002. The Company cannot predict
the impact that these regulations, when fully implemented, will have on its
operations.
The Administrative Simplification Provisions also require HHS to adopt
standards to protect the security and privacy of health-related information. HHS
proposed regulations containing security standards on August 12, 1998. These
proposed security regulations have not been finalized, but as proposed would
require health care providers to implement organizational and technical
practices to protect the security of electronically maintained or transmitted
health-related information. In addition, HHS released final regulations
containing privacy standards in December 2000. These privacy regulations are
scheduled to become effective April 2001 and compliance with these regulations
is required by April 2003. Therefore, these privacy regulations could be further
amended prior to the compliance date. However, as currently drafted, the privacy
regulations will extensively regulate the use and disclosure of individually
identifiable health-related information, whether communicated electronically, on
paper or orally. The regulations also provide patients with significant new
rights related to understanding and controlling how their health information is
used or disclosed. The security regulations, as proposed, and the privacy
regulations could impose significant costs on HCA's facilities in order to
comply with these standards. The Company cannot predict the final form that
these regulations will take or the impact that final regulations, when fully
implemented, will have on its operations.
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, there are
numerous legislative and regulatory initiatives at the Federal and state levels
addressing patient privacy concerns. Facilities will continue to remain subject
to any Federal or state laws that are more restrictive than the privacy
regulations issued under the Administrative Simplification Provisions. These
statutes vary and could impose additional penalties.
EMTALA
All of HCA's hospitals are subject to the Emergency Medical Treatment and
Active Labor Act ("EMTALA"). This Federal law requires any hospital that
participates in the Medicare program to conduct an appropriate medical screening
examination of every person who presents to the hospital's emergency room and,
if the patient is suffering from an emergency medical condition, to either
stabilize that condition or make an appropriate transfer of the patient to a
facility that can handle the condition. The obligation to screen and stabilize
emergency medical conditions exists regardless of a patient's ability to pay for
treatment. There are
14
15
severe penalties under EMTALA if a hospital refuses to screen or appropriately
stabilize or transfer a patient or if the hospital delays appropriate treatment
in order to first inquire about the patient's ability to pay. Penalties for
violations of EMTALA include civil monetary penalties and exclusion from
participation in the Medicare program. In addition, an injured patient, the
patient's family or a medical facility that suffers a financial loss as a direct
result of another hospital's violation of the law can bring a civil suit against
the hospital.
The government broadly interprets EMTALA to cover situations in which
patients do not actually present to a hospital's emergency room but present to a
hospital-based clinic or are transported in a hospital-owned ambulance. The
government also has expressed its intent to investigate and enforce EMTALA
violations actively in the future. Moreover, patients are increasingly including
EMTALA violation allegations in malpractice lawsuits. Management believes HCA's
hospitals operate in substantial compliance with EMTALA. However, there can be
no assurance that the regulatory authorities empowered to investigate a Company
hospital will not conclude that it has violated EMTALA, or that a patient or
other party will not sue a hospital alleging a violation of EMTALA.
Corporate Practice of Medicine/Fee Splitting
Some of the states in which HCA operates have laws that prohibit
corporations and other entities from employing physicians and practicing
medicine for a profit or that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of,
particular providers for medical products and services. Possible sanctions for
violation of these restrictions include loss of license and civil and criminal
penalties. These statutes vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies. Although HCA
exercises care in an effort to structure its arrangements with health care
providers to comply with the relevant state statutes, and although management
believes that HCA is in substantial compliance with these laws, there can be no
assurance that (i) governmental officials charged with responsibility for
enforcing these laws will not assert that HCA or certain transactions in which
it is involved are in violation of such laws and (ii) such state laws will
ultimately be interpreted by the courts in a manner consistent with the
practices of HCA.
Health Care Industry Investigations
Significant media and public attention has focused in recent years on the
hospital industry. The Company is currently the subject of various Federal and
state investigations and litigation. See Item 3 -- "Legal Proceedings."
The Company's substantial Medicare, Medicaid and other governmental
billings result in heightened scrutiny of its operations. The Company continues
to monitor these and all other aspects of its business and has developed a
comprehensive ethics and compliance program that is designed to meet or exceed
applicable Federal guidelines and industry standards. However, because the law
in this area is complex and constantly evolving, the Company cannot give
assurances that ongoing or future governmental investigations or litigation will
not result in interpretations that are inconsistent with industry practices,
including the Company's.
It is possible that governmental entities could initiate investigations or
litigation in the future at facilities operated by HCA and that such matters
could result in significant penalties to the Company, as well as adverse
publicity. It is also possible that HCA's executives and managers could be
included in governmental investigations or litigation or named as defendants in
private litigation. The positions taken by authorities in any such matters
relating to the Company, its executives or managers or other health care
providers and the liabilities or penalties that may be imposed could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Health Care Reform
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. In recent
years, various legislative proposals have been introduced or proposed in
15
16
Congress and in some state legislatures that would effect major changes in the
health care system, either nationally or at the state level. Many states have
enacted or are considering enacting measures designed to reduce their Medicaid
expenditures and change private health care insurance. Most states, including
the states in which the Company operates, 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. The Company
is unable to predict the future course of Federal, state or local health care
legislation. There can be no assurance that future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have a material adverse effect on HCA's business,
financial condition or results of operations.
Compliance Program and Corporate Integrity Agreement
The Company maintains a comprehensive ethics and compliance program that is
designed to meet or exceed applicable Federal guidelines and industry standards.
The program is intended to monitor and raise awareness of various regulatory
issues among employees and to emphasize the importance of complying with
governmental laws and regulations. As part of the ethics and compliance program,
the Company provides annual ethics and compliance training to its employees and
encourages all employees to report any violations to their supervisor, an ethics
and compliance officer or a toll-free telephone ethics line.
In December 2000, the Company entered into a Corporate Integrity Agreement
("CIA") with the OIG. The CIA is structured to assure the Federal government of
the Company's overall Medicare compliance and specifically covers DRG coding,
outpatient laboratory billing, outpatient PPS billing and physician relations.
The CIA resulted in a waiver of the government's discretionary right to exclude
any of the Company's operations from participation in the Medicare program for
matters settled in the Civil and Administrative Settlement Agreement with the
Civil Division of the Department of Justice. The CIA will be effective for eight
years. See Item 3 -- "Legal Proceedings." Breach of the CIA could subject the
Company to substantial monetary penalties and exclusion from participation in
the Medicare and Medicaid programs. Any such sanctions could have a material
adverse effect on the Company's financial position and results of operations.
Conversion Legislation
Many states have enacted or are considering enacting laws affecting the
conversion or sale of not-for-profit hospitals. These laws, in general, include
provisions relating to attorney general approval, advance notification and
community involvement. In addition, state attorneys general in states without
specific conversion legislation may exercise authority over these transactions
based upon existing law. In many states there has been an increased interest in
the oversight of not-for-profit conversions. The adoption of conversion
legislation and the increased review of not-for-profit hospital conversions may
limit HCA's ability to grow through acquisitions of not-for-profit hospitals.
Revenue Ruling 98-15
In March 1998, the IRS issued guidance regarding the tax consequences of
joint ventures between for-profit and not-for-profit hospitals. As a result of
the tax ruling, the IRS has proposed and may in the future propose to revoke the
tax-exempt or public charity status of certain not-for-profit entities which
participate in such joint ventures or to treat joint venture income as unrelated
business taxable income. HCA is continuing to review the impact of the tax
ruling on its existing joint ventures, or the development of future ventures,
and is consulting with its joint venture partners and tax advisers to develop
appropriate courses of action. In January 2001, a not-for-profit entity which
participates in a joint venture with HCA filed a refund suit in Federal District
Court seeking to recover taxes, interest and penalties assessed by the IRS in
connection with the IRS's proposed revocation of the not-for-profit entity's
tax-exempt status. In the event that the not-for-profit entity's tax-exempt
status is upheld, the IRS has proposed to treat the not-for-profit entity's
share of joint venture income as unrelated business taxable income. HCA is not a
party to this lawsuit.
The tax ruling or any adverse determination by the IRS or the courts
regarding the tax-exempt or public charity status of a not-for-profit partner or
the characterization of joint venture income as unrelated business
16
17
taxable income could limit joint venture development with not-for-profit
hospitals, require the restructuring of certain existing joint ventures with
not-for-profits and influence the exercise of "put agreements" (that require HCA
to purchase the partner's interest in the joint venture) by certain existing
joint venture partners.
ENVIRONMENTAL MATTERS
HCA is subject to various Federal, state and local statutes and ordinances
regulating the discharge of materials into the environment. Management does not
believe that HCA will be required to expend any material amounts in order to
comply with these laws and regulations or that compliance will materially affect
its capital expenditures, results of operations or financial position.
INSURANCE
As is typical in the health care industry, HCA is subject to claims and
legal actions by patients in the ordinary course of business. Through a
wholly-owned insurance subsidiary, HCA insures a substantial portion of its
professional and general liability risks. The Company's health care facilities
are insured by the insurance subsidiary for losses of up to $25 million per
occurrence, a portion of which is reinsured with unrelated commercial carriers.
The Company also maintains professional and general liability insurance with
unrelated commercial carriers for losses in excess of amounts insured by its
insurance subsidiary.
The Company and its insurance subsidiary maintain allowances for
professional liability risks which totalled $1.4 billion at December 31, 2000.
Management considers such allowances, which are based on actuarially determined
estimates, to be adequate for such liability risks. Any losses incurred in
excess of the established allowances for loss will be reflected as a charge to
HCA's earnings. Any losses incurred in excess of amounts funded and maintained
with commercial excess liability insurance carriers will be funded from HCA's
working capital. While HCA's cash flow has been adequate to provide for
professional and general liability claims in the past, there can be no assurance
that such amounts will continue to be adequate. If payments for professional and
general liability claims exceed actuarily determined estimates, the results of
operations and financial condition of HCA could be adversely affected.
EMPLOYEES AND MEDICAL STAFFS
At December 31, 2000, HCA had approximately 164,000 employees, including
approximately 11,000 part-time employees. The Company is subject to various
state and Federal laws that regulate wages, hours, benefits and other terms and
conditions relating to employment. Employees at 11 hospitals are represented by
various labor unions. HCA considers its employee relations to be satisfactory.
While HCA's hospitals experience union organizational activity from time to
time, HCA does not expect such efforts to materially affect its future
operations. HCA's hospitals, like most hospitals, have experienced labor costs
rising faster than the general inflation rate. In some markets nurse and medical
support personnel availability has become a significant operating issue to
health care providers. This shortage may require the Company to enhance wages
and benefits to recruit and retain nurses and other medical personnel or to hire
more expensive temporary personnel. There can be no assurance as to future
availability and cost of qualified medical personnel. References herein to
"employees" refer to employees of affiliates of HCA.
HCA's hospitals are staffed by licensed physicians who have been accepted
to the medical staff of individual hospitals. With certain exceptions,
physicians generally are not employees of HCA's hospitals. However, some
physicians provide services in HCA's hospitals under contracts, which generally
describe a term of service, provide and establish the duties and obligations of
such physicians, require the maintenance of certain performance criteria and fix
compensation for such services. Any licensed physician may apply to be accepted
to the medical staff of any of HCA's hospitals, but acceptance to the staff must
be approved by the hospital's medical staff and the appropriate governing board
of the hospital in accordance with established credentialling criteria. Members
of the medical staffs of HCA's hospitals often also serve on the medical staffs
of other hospitals and may terminate their affiliation with a hospital at any
time.
17
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of HCA as of February 28, 2001, were as follows:
NAME AGE POSITION(S)
---- --- -----------
Thomas F. Frist, Jr., M.D............ 62 Chairman of the Board
Jack O. Bovender, Jr................. 55 President, Chief Executive Officer and Director
David G. Anderson.................... 53 Senior Vice President -- Finance and Treasurer
Richard M. Bracken................... 48 President -- Western Group
Victor L. Campbell................... 54 Senior Vice President
Rosalyn S. Elton..................... 39 Senior Vice President -- Operations Finance
James A. Fitzgerald, Jr.............. 46 Senior Vice President -- Contracts and Operations
Support
V. Carl George....................... 57 Senior Vice President -- Development
Jay Grinney.......................... 49 President -- Eastern Group
Samuel N. Hazen...................... 40 Chief Financial Officer -- Western Group
Frank M. Houser, M.D................. 60 Senior Vice President -- Quality and Medical
Director
R. Milton Johnson.................... 44 Senior Vice President and Controller
Patricia T. Lindler.................. 53 Senior Vice President -- Government Programs
A. Bruce Moore, Jr................... 41 Senior Vice President -- Operations Administration
Philip R. Patton..................... 48 Senior Vice President -- Human Resources
Gregory S. Roth...................... 44 President -- Ambulatory Surgery Group
William B. Rutherford................ 37 Chief Financial Officer -- Eastern Group
Joseph N. Steakley................... 46 Senior Vice President -- Internal Audit & Consulting
Services
Beverly B. Wallace................... 50 Senior Vice President -- Revenue Cycle Operations
Management
Robert A. Waterman................... 47 Senior Vice President and General Counsel
Noel Brown Williams.................. 46 Senior Vice President and Chief Information Officer
Alan R. Yuspeh....................... 51 Senior Vice President -- Ethics, Compliance and
Corporate Responsibility
Thomas F. Frist, Jr., M.D. serves as Chairman of our Board of Directors and
remains an executive officer of the Company after stepping down as Chief
Executive Officer in January 2001. Dr. Frist served as our Chief Executive
Officer and Chairman from July 1997 to January 2001. Previously, he served as
Vice Chairman of the Board of the Company from April 1995 until July 1997. From
February 1994 to April 1995, he was Chairman of the Board of the Company. Dr.
Frist was Chairman of the Board, President and Chief Executive Officer of
HCA-Hospital Corporation of America from 1988 to February 1994.
Jack O. Bovender, Jr. was appointed our President and Chief Executive
Officer on January 8, 2001. Mr. Bovender served as President and Chief Operating
Officer of the Company from August 1997 to January 2001. Mr. Bovender was
appointed as a Director of the Company in July 1999. From April 1994 to August
1997, he was retired after serving as Chief Operating Officer of HCA-Hospital
Corporation of America from 1992 until 1994. Prior to 1992, Mr. Bovender held
several senior level positions with HCA-Hospital Corporation of America.
David G. Anderson has served as Senior Vice President -- Finance and
Treasurer of the Company since July 1999. Mr. Anderson served as Vice
President -- Finance of the Company from September 1993 to July 1999 and was
elected to the additional position of Treasurer in November 1996. From March
1993 until September 1993, Mr. Anderson served as Vice President -- Finance and
Treasurer of Galen Health Care, Inc. From July 1988 to March 1993, Mr. Anderson
served as Vice President -- Finance and Treasurer of Humana Inc.
Richard M. Bracken has served as President -- Western Group of the Company
since August 1997. From January 1995 to August 1997, Mr. Bracken served as
President of the Pacific Division of the Company. From July 1993 to December
1994, he served as President of Nashville Healthcare Network, Inc. From
18
19
December 1981 to June 1993, he served in various hospital Chief Executive
Officer and Administrator positions with HCA-Hospital Corporation of America.
Victor L. Campbell has served as Senior Vice President of the Company since
February 1994. Prior to that time, Mr. Campbell served as HCA-Hospital
Corporation of America's Vice President for Investor, Corporate and Government
Relations. Mr. Campbell joined HCA-Hospital Corporation of America in 1972. Mr.
Campbell is currently a director of the Federation of American Health Systems
and serves on the operations committee of the American Hospital Association.
Rosalyn S. Elton has served as Senior Vice President -- Operations Finance
of the Company since July 1999. Ms. Elton served as Vice President -- Operations
Finance of the Company from August 1993 to July 1999. From October 1990 to
August 1993, Ms. Elton served as Vice President -- Financial Planning and
Treasury for the Company.
James A. Fitzgerald, Jr. has served as Senior Vice President -- Contracts
and Operations Support of the Company since July 1999. Mr. Fitzgerald served as
Vice President -- Contracts and Operations Support of the Company from 1994 to
July 1999. From 1993 to 1994, he served as the Vice President of Operations
Support for HCA-Hospital Corporation of America. From July 1981 to 1993, Mr.
Fitzgerald served as Director of Internal Audit for HCA-Hospital Corporation of
America.
V. Carl George has served as Senior Vice President -- Development of the
Company since July 1999. Mr. George served as Vice President -- Development of
the Company from April 1995 to July 1999. From September 1987 to April 1995, Mr.
George served as Director of Development for Healthtrust. Prior to working for
Healthtrust, Mr. George served with HCA-Hospital Corporation of America in
various positions.
Jay Grinney has served as President -- Eastern Group of the Company since
March 1996. From October 1993 to March 1996, Mr. Grinney served as President of
the Greater Houston Division of the Company. From November 1992 to October 1993,
Mr. Grinney served as Chief Operating Officer of the Houston Region of the
Company. From June 1990 to November 1992, Mr. Grinney served as President and
Chief Executive Officer of Rosewood Medical Center in Houston, Texas.
Samuel N. Hazen has served as Chief Financial Officer -- Western Group of
the Company since August 1995. Mr. Hazen served as Chief Financial
Officer -- North Texas Division of the Company from February 1994 to July 1995.
Prior to that time, Mr. Hazen served in various hospital and regional Chief
Financial Officer positions with Humana Inc. and Galen Health Care, Inc.
Frank M. Houser, M.D. has served as Senior Vice President -- Quality and
Medical Director of the Company since November 1997. Dr. Houser served as
President -- Physician Management Services of the Company from May 1996 to
November 1997. Dr. Houser served as President of the Georgia Division of the
Company from December 1994 to May 1996. From May 1993 to December 1994, Dr.
Houser served as the Medical Director of External Operations at The Emory
Clinic, Inc. in Atlanta, Georgia. Dr. Houser served as State Public Health
Director, Georgia Department of Human Resources from July 1991 to May 1993.
R. Milton Johnson has served as Senior Vice President and Controller of the
Company since July 1999. Mr. Johnson served as Vice President and Controller of
the Company from November 1998 to July 1999. Prior to that time, Mr. Johnson
served as Vice President -- Tax of the Company from April 1995 to October 1998.
Prior to that time, Mr. Johnson served as Director of Tax of Healthtrust from
September 1987 to April 1995.
Patricia T. Lindler has served as Senior Vice President -- Government
Programs of the Company since July 1999. Ms. Lindler served as Vice
President -- Reimbursement of the Company from September 1998 to July 1999.
Prior to that time, Ms. Lindler was the President of Health Financial
Directions, Inc. from March 1995 to November 1998. From September 1980 to
February 1995, Ms. Lindler served as Director of Reimbursement of the Company's
Florida Group.
A. Bruce Moore, Jr. has served as Senior Vice President -- Operations
Administration since July 1999. Mr. Moore served as Vice President -- Operations
Administration of the Company from September 1997 to July 1999. From October
1996 to September 1997, Mr. Moore served as Vice President -- Benefits of the
19
20
Company. Mr. Moore served as Vice President of Compensation of the Company from
March 1995 until October 1996. From February 1994 to March 1995, Mr. Moore
served as Director -- Compensation of the Company. Mr. Moore also served as
Director -- Compensation for HCA-Hospital Corporation of America from November
1987 until February 1994.
Philip R. Patton has served as Senior Vice President -- Human Resources of
the Company since September 1998. Mr. Patton served as Vice President of Human
Resources of Quorum Health Group, Inc. from 1996 to August 1998. From 1994 to
1996, Mr. Patton served as a part-time consultant and community volunteer after
serving as Senior Vice President of Human Resources of HCA-Hospital Corporation
of America from 1979 to 1994.
Gregory S. Roth has served as President -- Ambulatory Surgery Group of the
Company since July 1998. From May 1997 to July 1998, Mr. Roth served as Senior
Vice President -- Ambulatory Surgery Division of the Company. Mr. Roth served as
Chief Financial Officer -- Ambulatory Surgery Division of the Company from
January 1995 to May 1997. Prior to that time, Mr. Roth held various
multi-facility and hospital chief financial officer positions with OrNda
HealthCorp and EPIC Healthcare Group, Inc.
William B. Rutherford has served as Chief Financial Officer -- Eastern
Group of the Company since January 1996. From 1994 to January 1996, Mr.
Rutherford served as Chief Financial Officer -- Georgia Division of the Company.
Prior to that time, Mr. Rutherford held several positions with HCA-Hospital
Corporation of America, including Director of Internal Audit and Director of
Operations Support.
Joseph N. Steakley has served as Senior Vice President -- Internal Audit &
Consulting Services of the Company since July 1999. Mr. Steakley served as Vice
President -- Internal Audit & Consulting Services from November 1997 to July
1999. From December 1975 until October 1997, Mr. Steakley worked for Ernst &
Young LLP where he served as a partner from October 1989.
Beverly B. Wallace has served as Senior Vice President -- Revenue Cycle
Operations Management of the Company since July 1999. Ms. Wallace served as Vice
President -- Managed Care of the Company from July 1998 to July 1999. From 1997
to 1998, Ms. Wallace served as President -- Homecare Division of the Company.
From 1996 to 1997, Ms. Wallace served as Chief Financial Officer -- Nashville
Division of the Company. From 1994 to 1996, Ms. Wallace served as Chief
Financial Officer -- Mid-American Division of the Company.
Robert A. Waterman has served as Senior Vice President and General Counsel
of the Company since November 1997. Mr. Waterman served as a partner in the law
firm of Latham & Watkins from September 1993 to October 1997; he was also Chair
of the firm's healthcare group during 1997.
Noel Brown Williams has served as Senior Vice President and Chief
Information Officer of the Company since October 1997. From October 1996 to
September 1997, Ms. Williams served as Chief Information Officer for American
Service Group/Prison Health Services, Inc. From September 1995 to September
1996, Ms. Williams worked as an independent consultant. From June 1993 to June
1995, Ms. Williams served as Vice President, Information Services for HCA
Information Services. From February 1979 to June 1993, she held various
positions with HCA-Hospital Corporation of America Information Services.
Alan R. Yuspeh has served as Senior Vice President -- Ethics, Compliance
and Corporate Responsibility of the Company since October 1997. From September
1991 until October 1997, Mr. Yuspeh was a partner with the law firm of Howrey &
Simon. As a part of his law practice, Mr. Yuspeh served from 1987 to 1997 as
Coordinator of the Defense Industry Initiative on Business Ethics and Conduct.
20
21
ITEM 2. PROPERTIES
The following table lists, by state, the number of hospitals (general,
acute care and psychiatric), directly or indirectly, owned and operated by the
Company as of December 31, 2000:
LICENSED
STATE HOSPITALS BEDS
- ----- --------- --------
Alaska...................................................... 1 254
California.................................................. 8 2,103
Colorado.................................................... 6 2,063
Florida..................................................... 42 10,272
Georgia..................................................... 18 2,945
Idaho....................................................... 2 473
Illinois.................................................... 1 153
Indiana..................................................... 2 460
Kansas...................................................... 1 760
Kentucky.................................................... 3 732
Louisiana................................................... 13 2,132
Mississippi................................................. 1 130
Nevada...................................................... 2 880
New Hampshire............................................... 2 295
North Carolina.............................................. 1 60
Oklahoma.................................................... 6 1,236
South Carolina.............................................. 5 1,003
Tennessee................................................... 12 2,385
Texas....................................................... 40 9,508
Utah........................................................ 6 902
Virginia.................................................... 11 2,899
Washington.................................................. 1 119
West Virginia............................................... 4 1,020
INTERNATIONAL
Switzerland................................................. 2 220
United Kingdom.............................................. 6 720
--- ------
196 43,724
=== ======
In addition to the hospitals listed in the above table, HCA, directly or
indirectly operates 78 freestanding surgery centers. HCA also operates medical
office buildings in conjunction with some of its hospitals. These office
buildings are primarily occupied by physicians who practice at HCA's hospitals.
HCA owns and maintains its headquarters in approximately 580,000 square
feet of space in five office buildings in Nashville, Tennessee.
HCA's headquarters, hospitals and other facilities are suitable for their
respective uses and are, in general, adequate for HCA's present needs. The
Company's properties are subject to various Federal, state and local statutes
and ordinances regulating their operation. Management does not believe that
compliance with such statutes and ordinances will materially affect the
Company's financial position or results from operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is facing significant legal challenges. The Company is the
subject of various government investigations, qui tam actions, shareholder
derivative and class action suits filed in Federal court, shareholder derivative
actions filed in state court, patient/payer actions and general liability
claims.
21
22
GOVERNMENT INVESTIGATIONS AND LITIGATION
The Company continues to be the subject of governmental investigations and
litigation relating to its business practices. Additionally, the Company is a
defendant in several qui tam actions brought by private parties on behalf of the
United States of America, some of which have been unsealed and served on the
Company. The Company is aware of additional qui tam actions that remain under
seal. There could also be other sealed qui tam cases of which it is unaware.
On December 14, 2000, the Company announced that it had entered into a Plea
Agreement with the Criminal Division of the Department of Justice and various
U.S. Attorney's Offices (the "Plea Agreement") and a Civil and Administrative
Settlement Agreement with the Civil Division of the Department of Justice (the
"Civil Agreement"). As discussed below, the agreements resolve all Federal
criminal issues outstanding against the Company and, subject to court approval,
certain issues involving Federal civil claims by or on behalf of the government
against the Company relating to DRG coding, outpatient laboratory billing and
home health issues. The Company also entered into a Corporate Integrity
Agreement ("CIA") with the Office of Inspector General of the Department of
Health and Human Services.
Pursuant to the Plea Agreement, the Company and its affiliates received a
full release from criminal liability for conduct arising from or relating to
billing and reimbursement for services provided pursuant to Federal health care
benefit programs regarding: Medicare cost reports; violations of the
Anti-kickback Statute or the Physician Self-referral law, and any other conduct
involving relations with referral sources and those in a position to influence
referral sources; DRG billing; laboratory billing; the acquisition of home
health agencies; and the provision of services by home health agencies. In
addition, the government agreed not to prosecute the Company for other possible
criminal offenses which are or have been under investigation by the Department
of Justice arising from or relating to billing and reimbursement for services
provided pursuant to Federal health care benefit programs. The Plea Agreement
provided that the Company pay the government approximately $95 million, which
payment was made during the first quarter of 2001, and that two non-operating
subsidiaries enter certain criminal pleas, which pleas were entered in January
2001.
The Civil Agreement covers the following issues: DRG coding for calendar
years 1990-1997; outpatient laboratory billings for calendar years 1989-1997;
home health community education for Medicare cost report years 1994-1997; home
health billing for calendar years 1995-1998; and certain home health management
transactions for Medicare cost report years 1993-1998. The Civil Agreement
provides that in return for releases on these issues, the Company will pay the
government approximately $745 million, with interest accruing from May 18, 2000
to the payment date at a rate of 6.5%. The civil payment will be made upon
receipt of court approval of the Civil Agreement, which is expected to occur
during the second quarter of 2001. The civil issues that are not covered by the
Civil Agreement include claims related to cost reports and physician relations
issues.
Under the Civil Agreement, the Company's existing Letter of Credit
Agreement with the Department of Justice will be reduced from $1 billion to $250
million at the time of the settlement payment, which is expected to occur during
the second quarter of 2001. Any future civil settlement or court ordered
payments related to cost report or physician relations issues will reduce the
remaining amount of the letter of credit dollar for dollar. The amount of any
such future settlement or court ordered payments is not related to the remaining
amount of the letter of credit.
The CIA is structured to assure the government of the Company's overall
Medicare compliance and specifically covers DRG coding, outpatient laboratory
billing, outpatient PPS billing and physician relations. The CIA resulted in a
waiver of the government's discretionary right to exclude any of the Company's
operations from participation in the Medicare program for matters settled in the
Civil Agreement.
The Company remains the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
22
23
The Company continues to cooperate in government investigations. Given the
scope of the ongoing investigations and litigation, the Company expects other
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future.
While management remains unable to predict the outcome of any of the
ongoing investigations and litigation or the initiation of any additional
investigations or litigation, were the Company to be found in violation of
Federal or state laws relating to Medicare, Medicaid or similar programs or
breach of the CIA, the Company could be subject to substantial monetary fines,
civil and criminal penalties and/or exclusion from participation in the Medicare
and Medicaid programs. Any such sanctions could have a material adverse effect
on the Company's financial position, results of operations and liquidity. (See
Note 2 -- Investigations and Agreements to Settle Certain Government Claims and
Note 11 -- Contingencies in the Notes to Consolidated Financial Statements.)
LAWSUITS
Qui Tam Actions
Several qui tam actions have been brought by private parties ("relators")
on behalf of the United States and have been unsealed and served on the Company.
To the best of the Company's knowledge the actions allege, in general, that the
Company and certain affiliates violated the False Claims Act, 31 U.S.C.
sec. 3729 et seq., for improper claims submitted to the government for
reimbursement. The lawsuits generally seek damages of three times the amount of
all Medicare or Medicaid claims (involving false claims) presented by the
defendants to the Federal government, civil penalties of not less than $5,000 or
more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and
costs. In many instances there are additional common law claims. There are also
qui tam cases that have been unsealed but have not yet been served on the
Company. Finally, the Company is aware of additional qui tam actions that remain
under seal. There may be other sealed qui tam cases of which it is unaware.
On February 12, 1999, the United States filed a motion before the Judicial
Panel on Multidistrict Litigation ("MDL") seeking to transfer and consolidate,
pursuant to 28 U.S.C. sec. 1407, qui tam actions against the Company, including
those sealed and unsealed, for purposes of discovery and pretrial matters, to
the United States District Court for the District of Columbia. The MDL Panel
granted the motion and all of the qui tam cases subject to the motion have been
consolidated to the U.S. District Court of the District of Columbia. There are
some qui tam actions that remain outside of the consolidation.
On January 30, 2001, the District Court in the District of Columbia entered
an order establishing an initial schedule for the consolidated qui tam cases.
Among other things, the Court ordered that for those qui tam cases which will be
dismissed in full or in part pursuant to the Civil Agreement, the parties must
file motions to dismiss by February 14, 2001. The Court ordered that, by March
15, 2001, the government must make an intervention decision on the remaining
cases and file and serve a Complaint for those cases in which it intervenes. On
March 15, 2001, the government filed its notice of intervention or notice
declining intervention in each qui tam action in the MDL proceeding. In each
case where the government intervened, it served the complaint on the Company. In
those cases where the government declined intervention, the respective relators
were required to serve the complaint by March 15, 2001 or within 15 days after
the government's notice declining intervention, whichever is later.
The unsealed qui tam Complaints included in the consolidated MDL proceeding
include the following:
In October 1998, the U.S. District Court for the Middle District of Florida
unsealed United States ex rel. Alderson v. Columbia/HCA et al, Case No.
97-2-35-CIV-T-23E. The case had been pending under seal since 1992, and is a qui
tam action alleging various violations of the Federal False Claims Act
concerning the Company's claims for reimbursement under various Federal programs
including Medicare, Medicaid and other Federally funded programs. The complaint
focuses on the alleged creation of certain "cost reserves" in connection with
the preparation of hospital cost reports submitted for the purpose of Federal
reimbursement. On October 1, 1998, the government intervened in this case and on
March 15, 2001, served the amended complaint on the Company. In December 1998,
the U.S. District for the Middle District of Florida unsealed
23
24
United States, ex rel. Schilling v. Columbia/HCA, Civil Action No.
96-1264-CIV-T-23B. The case alleges violations of the False Claims Act, also
concerning cost reporting issues. On December 30, 1998, the government
intervened in this case and, on March 15, 2001, the government served the
amended complaint on the Company. Certain claims alleging home health issues
have been dismissed as being covered by the Civil Agreement.
On July 31, 1998, the U.S. District Court for the Western District of
Texas, unsealed United States ex rel. Sara Ortega v. Columbia/HCA Healthcare
Corp., et al. No. EP 95-CA-259H. The case had been pending under seal since
1995, and alleges various violations of the False Claims Act concerning
statements made to the Joint Commission in order to be eligible for Medicare
payments, thereby allegedly rending false the defendants' claims for Medicare
reimbursement. In 1997, the relator filed an amended complaint alleging other
issues, including DRG upcoding, physician referral violations and certain cost
reporting issues. In September 1998, the government intervened in some of these
allegations, but not the allegations relating to the Joint Commission issues.
The court has dismissed the DRG upcoding allegations as being covered by the
Civil Agreement. On March 15, 2001, the government moved to dismiss relator's
kickback allegations and certain of the relator's cost report allegations on
jurisdictional grounds. The government also withdrew its intervention on one
cost-shifting allegation. The government retained intervention in the surviving
cost-shifting allegations. The first amended complaint was served on the Company
on March 9, 2001.
The matter of United States ex rel. James Thompson v. Columbia/HCA
Healthcare Corp., et al., Civ. Action No. C-95-110 was filed on March 10, 1995
in the United States District Court for the Southern District of Texas. The
relator alleges that the Company engaged in improper financial arrangements with
physicians to induce referrals. The defendants filed a motion to dismiss the
second amended complaint in November 1995 which was granted by the court in July
1996. In August 1996, the relator appealed to the United States Court of Appeals
for the Fifth Circuit, and in October 1997, the Fifth Circuit affirmed in part
and vacated and remanded in part the trial court's rulings. Defendants filed a
Second Amended Motion to Dismiss which was denied on August 18, 1998. On August
21, 1998, relator filed a Third Amended Complaint. Discovery in this matter is
currently stayed. Effective February 16, 2001, the government intervened in this
case and, on March 15, 2001, served its amended complaint on the Company.
The matter of United States ex rel. Scott Pogue v. Diabetes Treatment
Centers of America, Inc., et al., Civil Action No. 3-94-0515, was filed under
seal on June 23, 1994 in the United States District Court for the Middle
District of Tennessee. On February 6, 1995, the United States filed its Notice
of Non-Intervention and on that same date, the District Court ordered the
complaint unsealed. In general, the relator contends that sums paid to
physicians by the Diabetes Treatment Centers of America, who served as medical
directors at a hospital affiliated with the Company, were unlawful payments for
the referrals of their patients. The relator filed a motion for partial summary
judgment. The court ordered the relator's motion for partial summary judgment
stricken. The relator did not file an amended motion for summary judgment. The
government has declined to intervene in this case.
In June 1998, the case United States ex rel. Joseph "Mickey" Parslow v.
Columbia/HCA Healthcare Corporation and Curative Health Services, Incorporated,
No 98-1260-CIV-T-23F, in the Middle District of Florida, Tampa Division, was
filed. The government intervened in this action on March 31, 1999. This action
alleges that the Company submitted false claims relating to contracts with
Curative for the management of certain wound care centers. The complaint further
alleges that management fees paid to Curative were excessive and not reasonable
and that the claims for reimbursement for these management fees violated the
Anti-kickback Statute. On March 15, 2001, the government withdrew its
intervention as to claims regarding alleged excessive management fees and filed
and served its complaint on the Company covering all remaining counts.
The case United States ex rel. Lanni v. Curative Health Services, et al.,
98 Civ. 2501 (S.D. N.Y.) was filed on April 8, 1998 in the United States
District Court for the Southern District of New York. The complaint makes
allegations similar to those in the Parslow case, and Company affiliated
entities are named in that suit. The government has intervened in the case, in
part, in order to seek dismissal of any outpatient
24
25
laboratory claims covered by the Civil Agreement and has dismissed those
allegations. On March 15, 2001, the government intervened in certain of the
remaining claims and served its complaint on the Company.
The matter of United States ex rel. McLendon v. Columbia/HCA, et al., Civ.
No. 1 97 CV 0890, was filed under seal on April 4, 1997 in the U.S. District
Court for the Northern District of Georgia, Atlanta Division. On July 19, 1999,
the court unsealed this action. The complaint alleges that the Company acted to
illegally obtain Medicare reimbursement for costs incurred in purchasing home
health agencies. The complaint also alleges that the Company illegally billed
Medicare for certain sales and marketing activities and for certain home care
visits. The government has intervened in this action and has served the
complaint. On February 16, 2001, the court dismissed this case as released under
the Civil Agreement.
In August 1999, the Company was made aware that the case of United States
ex rel. Tonya M. Atchison v. Col/HCA Healthcare, Inc., El Paso Healthcare
System, Ltd. Columbia West Radiology Group, P.A. West Texas Radiology Group, Rio
Grande Physicians' Services Inc., El Paso Nurses Unlimited inc., El Paso
Healthcare Systems Limited, and El Paso Healthcare Systems United Partnership,
No. EP 97-CA234, was unsealed in the U.S. District Court for the Western
District of Texas and the Company was served on or about September 16, 1999. In
general, the complaint alleges that the defendants submitted false claims
regarding the 72-hour rule, cost reports and central business office billings,
wrote off bad debt on international patients, inflated financial information on
the sale of a hospital, improperly billed pharmacy and radiology charges,
improperly billed skilled nursing facility charges, improperly accounted for
discounts and rebates, improperly billed certified first assistants in surgery,
home health visits, senior health centers, diabetic treatment and wound care
center. The Company has filed a motion to extend the time within which to
respond to the complaint. In 1997, the relator also filed a case, United States
ex rel. Atchison v. Columbia/HCA Healthcare, Inc., Civ. Action No. 3-97-0571
(M.D. Tenn.) in the United States District Court for the Middle District of
Tennessee alleging the same violations. The court has dismissed claims relating
to the home health issues as being covered by the Civil Agreement. On March 15,
2001, the government declined to intervene on both complaints.
In December 1997, United States ex rel. Michael R. Marine v. Columbia
Aventura Medical Center, et al., Case No. 97-4368 (S.D. Fla.) was filed in the
United States District Court for the Southern District of Florida. In general,
the case alleges that the Company engaged in improper cost shifting between
facilities to improperly maximize reimbursement and then filing false claims on
its cost reports. The government intervened on February 11, 2000. On March 15,
2001, the government withdrew its intervention on certain claims and served the
complaint on the Company.
In 1997, United States ex rel. Adams v. Columbia/HCA Healthcare Corp., Civ.
Action No. SA-97-CA-1230 (W.D. Tex.) was filed in the United States District
Court for the Western District of Texas. In general, the complaint alleges that
the Company engaged in improper financial arrangements with physicians to induce
referrals, in violation of the Anti-kickback Statute. On March 15, 2001, the
government declined to intervene in this case.
In August 1997, United States ex rel. Baker, Trent & Ekery v. Columbia/HCA
Healthcare Corp., et al., Civ. Action No. SA-97-CA-0955 (W.D. Tex.) was filed in
the United States District Court for the Western District of Texas. In general,
the case alleges that the Company engaged in improper financial arrangements
with physicians to induce referrals in violation of the Anti-kickback Statute as
well as engaging in improper cost shifting, allegedly creating the filing of
false cost report claims. On March 15, 2001, the government declined to
intervene in this case.
In 1996, United States ex rel. King v. Columbia/HCA Healthcare Corp., et
al., Civ. Action No. EP-96-CA-342 (W.D. Tex.) was filed in the United States
District Court for the Western District of Texas. In general, the case alleges
that the Company engaged in improper financial relationships with physicians to
induce referrals in violation of the Anti-kickback Statute as well as other
alleged improper cost reporting practices in violation of the False Claims Act,
including improper billing, laboratory fraud, falsification of records,
upcoding, and lack of certification to perform specific services. On March 15,
2001, the government intervened in part and declined to intervene as to the
billing fraud allegations. The government served the complaint on the Company.
25
26
On September 2, 1997, United States ex rel. Ann Mroz v. Columbia/HCA
Healthcare Corp., Civ. Action No. 97-2828 (S.D. Fla.) was filed in the United
States District Court for the Southern District of Florida. This case alleges
that a Company hospital engaged in improper arrangements with physicians to
induce referrals in violation of the Anti-kickback Statute. On March 15, 2001,
the government intervened in this case and served the complaint on the Company.
In 1998, United States ex rel Barrett and Goodwin v. Columbia/HCA
Healthcare Corp., et al., Civ. Action No. H-98-0861 (S.D. Tex.) was filed in the
United States District Court for the Southern District of Texas. In general, the
complaint alleges that the Company engaged in improper financial arrangements
with physicians to induce referrals in violation of the Anti-kickback Statute as
well as improper upcoding of DRG codes. On March 15, 2001, the government
declined to intervene in this case.
In 1996, United States ex rel Rappaport v. Hospital Corp. of America, et
al., Civ. Action No. CV 96-N-1491-S (A)(N.D. Ala.) was filed in the United
States District Court for the Northern District of Alabama. In general, the
complaint alleges the Company engaged in improper financial arrangements with
physicians to induce referrals in violation of the Anti-kickback Statute as well
as upcoding, improper lab billing, cost-shifting and other improper cost
reporting practices in violation of the False Claims Act. On February 16, 2001
the court dismissed the DRG upcoding claims. On March 9, 2000, the government
declined to intervene in this case.
In 1999, United States ex rel. Hampton v. Columbia/HCA Healthcare Corp., et
al., Civ. Action No. 5:99-CV-59-2 (M.D. Ga.) was filed in the United States
District Court for the Middle District of Georgia. In general, the case alleges
improper billing and improper practices with regard to home health agencies. The
government has intervened in this case for the purpose of dismissing the
relator's home health claims as being covered by the Civil Agreement. On March
15, 2001, the government moved to dismiss the claims. The government also
declined to intervene in the kickback allegations. The relator served the
complaint on the Company on March 15, 2001.
In 1998, United States ex rel. Buck v. St. Petersburg General Hospital, et
al., Civ. Action No. 98-1631-CIV-T26B (M.D. Fla.) was filed in United States
District Court for the Middle District of Florida. In general, the complaint
alleges that the Company improperly billed Medicare for private rooms for
patients when they were actually put in semi-private rooms. On December 27,
1999, the government declined to intervene in this case.
In 1997, United States ex rel. Hockett, Thompson & Staley v. Columbia/HCA
Healthcare Corp., et al., Civ. Action No. 97-MC-29-A (W.D. Va.) was filed in the
United States District Court for the Western District of Virginia. In general,
the case alleges that the Company filed false claims in connection with the
filing of its cost reports by improper inflation of cost basis relating to the
gero-psych ward. On March 15, 2001, the government declined to intervene in this
case.
In 1997, United States ex rel. Christian, Long & Kuhn v. Columbia Homecare
Group, Inc., et al., Civ. Action No. CA-H-97-3083 (S.D. Tex.) was filed in the
United States District Court for the Southern District of Texas. In general, the
complaint alleges improper billing with respect to home health agencies and
other false claims in connection with the filing of cost reports. On February
16, 2001, the court dismissed the case.
In 1998, United States ex rel. Scussel v. Patton Medical. Inc. et al, Civ.
Action No. 4:98-CV-145 (M.D. Ga.) was filed in the United States District Court
for the Middle District of Georgia. In general, the complaint alleges that the
Company entered into an improper referral arrangement with a durable medical
equipment supplier. On February 2, 2001, the government declined to intervene in
this case. On March 8, 2001, the Company was served with a complaint by the
relator.
In 1999, United States ex rel. McCready v. Columbia North Monroe Hospital,
Civil Action No. 99-1099M was filed in the United States District Court for the
Western District of Louisiana. In general, the case alleges that a Company
hospital failed to timely transfer patients to the rehabilitation unit, a
practice which allegedly resulted in improper cost allocation to the hospital's
acute care services and thus improperly increased reimbursement. On February 13,
2001, the government declined to intervene in this case.
26
27
In 1996, United States ex rel. Health Outcomes v. Columbia Medical Center
East, et al., Civ. Action No. 96-1552 (E.D. Pa.) was filed in the United States
District Court for the Eastern District of Pennsylvania. In general, the
complaint alleges improper upcoding of DRG codes. The government has intervened
for the purpose of dismissing the claims covered by the Civil Agreement. On
February 16, 2001, the court dismissed this case.
In 1999, United States ex rel. Cianci v. Columbia/HCA Healthcare Corp., et
al., was filed in United States District Court for the Middle District of
Florida. The complaint alleges improper upcoding of DRG codes. On February 13,
2001, the government intervened in this case for the purpose of dismissing the
claims in the complaint. The relator has objected to the dismissal.
In 1995, United States ex rel. Wyman & Rothfeder v. Healthtrust, Inc. et
al., Civ. Action No. 2:95CV-0079-K (D. Utah) was filed in the United States
District Court for the District of Utah. In general, the case alleges improper
billing of laboratory tests. On February 16, 2001, the court dismissed this
action in its entirety as being covered by the Civil Agreement.
In August 1997, United States ex rel. Boston v. Columbia/HCA Healthcare
Corp., No. 3-97-CV1943-R (N.D. Tex.), was filed in the United States District
Court for the Northern District of Texas. In general, the Complaint alleges
improper billing relating to home health agencies. The government has intervened
in this action for the purpose of dismissing the claims covered by the Civil
Agreement, and on February 16, 2001, the court dismissed the case.
Shareholder Derivative and Class Action Complaints Filed in the U.S. District
Courts
During the April 1997 to October 1997 period, numerous securities class
action and derivative lawsuits were filed in the United States District Court
for the Middle District of Tennessee against the Company and a number of its
current and former directors, officers and/or employees.
On October 10, 1997, the court entered an order consolidating the
above-mentioned securities class action claims into a single-captioned case,
Morse, Sidney, et al. v. R. Clayton McWhorter, et al., Case No. 3-97-0370. All
of the other individual securities class action lawsuits were administratively
closed by the court. The consolidated Morse lawsuit is a purported class action
seeking the certification of a class of persons or entities who acquired the
Company's common stock from April 9, 1994 to September 9, 1997. The consolidated
lawsuit was brought against the Company, Richard Scott, David Vandewater, Thomas
Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt, Magdalena Averhoff, M.D.,
T. Michael Long and Donald S. MacNaughton. The lawsuit alleges, among other
things, that the defendants committed violations of the Federal securities laws
by materially inflating the Company's revenues and earnings through a number of
practices, including upcoding, maintaining reserve cost reports, disse