UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 333-117362
IASIS HEALTHCARE LLC
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction
of incorporation or organization)
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20-1150104
(I.R.S. Employer
Identification No.) |
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DOVER CENTRE
117 SEABOARD LANE, BUILDING E
FRANKLIN, TENNESSEE
(Address of principal executive offices)
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37067
(Zip Code) |
Registrants telephone number, including area code: (615) 844-2747
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. YES þ NO o
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 the filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of
accelerated filer, non-accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large Accelerated filer o
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Accelerated filer o
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Non-Accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES o NO þ
As
of November 25, 2009, 100% of the registrants common interests outstanding (all of which
are privately owned and are not traded on any public market) were owned by IASIS Healthcare
Corporation, its sole member.
IASIS HEALTHCARE LLC
PART I
Item 1. Business.
Company Overview
We are a leading owner and operator of medium-sized acute care hospitals in high-growth urban
and suburban markets. We operate our hospitals with a strong community focus by offering and
developing healthcare services targeted to the needs of the markets we serve, promoting strong
relationships with physicians and working with local managed care plans. As of September 30, 2009,
we owned or leased 15 acute care hospital facilities and one behavioral health hospital facility
with a total of 2,853 beds in service. Except for West Monroe, Louisiana, each of our hospital
facilities is located in a region that has a projected population growth rate in excess of the
national average. We operate in the following regions:
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Tampa-St. Petersburg, Florida; |
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three cities in Texas, including San Antonio; |
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West Monroe, Louisiana. |
Our general, acute care hospital facilities offer a variety of medical and surgical services
commonly available in hospitals, including emergency services, general surgery, internal medicine,
cardiology, obstetrics, orthopedics, psychiatry and physical rehabilitation. In addition, our
facilities provide outpatient and ancillary services including outpatient surgery, physical
therapy, radiation therapy, diagnostic imaging and respiratory therapy.
We also own and operate Health Choice Arizona, Inc. (Health Choice or the Plan), a
Medicaid and Medicare managed health plan in Phoenix that served over 190,000 members as of
September 30, 2009.
For the year ended September 30, 2009, we generated net revenue of $2.4 billion, of which
70.4% was derived from our acute care segment.
Our principal executive offices are located at Dover Centre, 117 Seaboard Lane, Building E,
Franklin, Tennessee 37067 and our telephone number at that address is (615) 844-2747. Our Internet
website address is www.iasishealthcare.com. Information contained on our website is not part of
this annual report on Form 10-K.
In this report, unless we indicate otherwise or the context requires, we, us, our or
our company refers to IASIS Healthcare LLC (IASIS) and its consolidated subsidiaries. Our
parent company, IASIS Healthcare Corporation (IAS), is our sole member.
Business Strategy
Our objective is to provide high-quality, cost-effective healthcare services in the
communities we serve. The key elements of our business strategy are:
1
Focus on Operational Excellence. Our management team has extensive multi-facility operating
experience and focuses on operational excellence at each of our facilities. We intend to continue
to improve our operations and profitability by:
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using our advanced information systems platform across all of our hospitals to provide
us with accurate, real-time and cost-effective financial and clinical information; |
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expanding our profitable product lines and improving our business mix; |
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focusing on efficient staffing, outsourcing programs and supply utilization; |
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capitalizing on purchasing efficiencies and reducing operating costs through monitoring
compliance with our national group purchasing contract; and |
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improving our processes for patient registration, including patient qualification for
financial assistance and point-of-service collections, billing, collections, managed care
contract compliance and all other aspects of our revenue cycle. |
Provide High-Quality Services. We strive to provide high-quality services at each of our
facilities. This includes monitoring and tracking clinical performance and patient safety, which is
a focus of all our hospitals. We believe that the measurement of quality of care has become an
increasingly important factor in third-party reimbursement, as well as in negotiating preferred
managed care contracting rates. Reflecting our commitment to the quality of care and in an effort
to maximize our reimbursement, we have implemented an advanced clinical information system at all
of our hospitals, providing us with more timely availability of key clinical care data. We believe
that this system helps us enhance patient safety, reduce medical errors through bar coding,
increase staff time available for direct patient care and continue to meet or exceed desired
patient care outcomes and quality of care indicators for reimbursement. Our commitment and success
at delivering high-quality services are evidenced by items such as:
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dedicated corporate and hospital resources; |
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on-going training and education of both medical and non-medical personnel; |
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utilizing our hospital medical management quality program to drive
improvements in case management and allocation of resources, as well as quality and safety
of care; |
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leveraging our information systems to enhance clinical operations; |
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either Det Norske Veritas (DNV) or The Joint Commission accreditation at all
hospitals; |
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regulatory achievement and continuous compliance from numerous organizations such as
the College of American Pathologists and the Society of Chest Pain Centers; |
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centers of excellence within our hospitals, across many different service lines; |
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HealthGrades 5-Star, Top 5% and Top 10% ratings at numerous hospitals; and |
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various other independent ratings. |
Strategically Invest in Our Markets to Expand Services and Increase Revenue. We are
continually engaged in strategic investments in our markets to expand services and increase
revenue. Over the past three years, we have invested over $250.0 million in growth capital
expenditures at our existing facilities, which includes various expansion and renovation projects,
along with upgrades in imaging and other diagnostic equipment. We opened Mountain Vista Medical
Center (Mountain Vista) in Mesa, Arizona, in July 2007, which has become a leading acute care
hospital in this high growth service area. During 2009, we opened patient tower expansions at
Jordan Valley Medical Center and Davis Hospital and Medical Center, which we believe will further
enhance our presence in the Salt Lake City, Utah area. Additionally, we have invested over $100.0
million in capital to upgrade hardware and software related to our advanced clinicals and other
information systems.
2
Our disciplined approach to investing our capital includes analyzing demographic data, using
our advanced information systems to identify the profitability of our
product lines, improving the patient care experience and consulting
with physicians and payors to prioritize the healthcare needs of the communities we serve. Recent
investments have increased our revenue and local presence by focusing on:
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upgrading and expanding specialty services and surgical capacity, including cardiology,
orthopedics, womens services and sub-acute care; |
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expanding emergency room capacity; |
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updating our technology in surgery, such as robotic surgery, diagnostic imaging and
other medical equipment; |
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improving clinical and operating efficiencies through installation of automated
laboratory systems at certain of our hospitals; |
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increasing capacity and utilization of inpatient services at
certain of our hospitals;
and |
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enhancing the convenience and quality of our outpatient services, including expansion
of outpatient surgery, imaging and other specialty services. |
Employing Physicians to Meet Community Needs in Certain Markets. In response to the
competitive environment in certain of our growing markets and based on the needs of those
communities, we have implemented a strategy of employing primary care and specialty physicians.
This strategy has required significant investment in labor costs, as well as corporate and
information systems infrastructure associated with physician practice management. This strategy has
provided greater physician specialty coverage in our primary service areas, as well as expanded
physician coverage for our emergency departments.
Recruit and Retain Quality Physicians. Consistent with community needs and regulatory
requirements, we intend to continue to recruit and retain quality physicians for our medical staffs
and maintain their loyalty to our facilities by:
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dedicating corporate personnel and resources to physician recruitment; |
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equipping our hospitals with technologically advanced equipment; |
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enhancing physician convenience and access, including the development of medical office
space on or near our hospital campuses; |
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sponsoring training programs to educate physicians on advanced medical procedures; and |
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allowing physicians to remotely access clinical data through our advanced information
systems, facilitating more convenient and timely patient care. |
Continue to Develop Reasonable Managed Care Relationships. Managed care rate increases have
moderated over the recent past as a result of pricing pressures from payors. In addition, the
consolidation of payors in certain of our markets, as well as general economic conditions impacting
enrollment in managed care plans, will continue to affect reimbursement from managed care
organizations in future periods. While more difficult than in previous years, we believe that by
maintaining market-based relationships, we will be able to continue to negotiate reasonable terms
with managed care plans, enter into contracts with additional managed care plans and align
reimbursement with acuity of services. Additionally, our advanced information systems improve our
hospitals ability to administer managed care contracts, helping to ensure that claims are
adjudicated correctly. We believe that the broad geographic coverage of our hospitals in certain of
the regions in which we operate increases our attractiveness to managed care plans in those areas.
3
Selectively Pursue Acquisitions and Strategic Alliances. We intend to selectively pursue
acquisitions that allow us to enhance our presence, both regionally and nationally. These
acquisitions may include the acquisition of individual hospitals, groups of hospitals or health
systems. We will also continue to identify opportunities to expand our presence through strategic
alliances with other healthcare providers.
Implement Operational Initiatives in Response to Healthcare Reform. Congress is currently
considering proposed legislation intended to decrease the number of uninsured
individuals and reduce healthcare costs. In addition, many states, including the states in which
we operate, have experienced budget constraints and are considering,
or may in the future consider,
measures designed to reduce or provide alternative funding
for their healthcare programs.
We believe that our consistent focus on quality and patient satisfaction programs, coupled with the
significant investments we have made in information systems, positions us to respond promptly and
effectively to any changes resulting from the enactment of legislation at both the federal and
state levels.
Although we expect our business strategy to increase our patient volumes and reimbursement and
allow us to control costs, certain risk factors could offset those increases to our net revenue and
profitability. Please see Item 1A., Risk Factors
beginning on page 29 for a discussion of risk
factors affecting our business.
Our Markets
Our hospitals are located in regions with some of the fastest growing populations in the
United States.
Salt Lake City, Utah
We operate four acute care hospital facilities with a total of 681 licensed beds in the Salt
Lake City area. The population in this area is projected to grow by
8.8% from 2009 to 2014, which
is approximately 1.3 times above the projected national average growth rate. We believe our
hospitals in Utah benefit from attractive strategic locations. We also believe the reimbursement
environment in Utah is favorable, with the majority of our net patient revenue derived from managed
care payors. For the year ended September 30, 2009, we generated approximately 27.1% of our total
acute care revenue in this market.
Over the past five fiscal years, we have completed capital projects totaling $110.0 million at
our existing facilities in this market. These projects have provided additional capacity for
womens and neonatal services, inpatient and outpatient surgery, including cardiac catheterization
services, intensive care, emergency rooms, pediatric services, inpatient psychiatric and various
diagnostic services, along with upgraded imaging technology. Our significant capital investments
in our Salt Lake City area facilities are yielding strong returns. Most recently, we have invested
in the following capital projects in our Utah market:
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An expansion project at Davis Hospital and Medical Center, which included opening the
majority of a new patient tower in June 2009. This expansion project includes: 67
additional beds; a conversion to all private rooms; a new 20 bed psychiatric unit; a new 14
bed intensive care unit; a womens surgical services unit; and expanded pediatric,
medical/surgical and inpatient services; |
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An expansion project at Jordan Valley Medical Center, including the patient tower which
opened in January 2009. The expansion project consists of three new hospital patient floors,
including: 10 additional critical care beds; 88 new inpatient beds; 15 new beds in the
emergency room; a new, fully automated laboratory system; a redesigned outpatient cardiology
center; and a Level III neonatal intensive care unit; and |
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Emergency room and intensive care unit expansions at Salt Lake Regional Medical Center. |
As a result of strong competition for patients in the Salt Lake City area, managed care
organizations have aligned themselves with certain provider networks in this market. In response to
this and other competitive factors, we have implemented a strategy to employ physicians in general
and specialty practices. This strategy is allowing our hospitals to more effectively meet the needs
of the communities we serve in this market. While we anticipate that our physician employment
strategy will help us compete more effectively in this market, we are unable to provide any
assurance regarding the success of our strategy.
4
Phoenix, Arizona
We operate three acute care hospital facilities and one behavioral health hospital facility
with a total of 621 licensed beds in the Phoenix area. The population in this area is projected to
grow by 14.8% from 2009 to 2014, which is nearly 3.1 times the projected national average growth
rate. The population in the primary service area for Mountain Vista is projected to grow 20.7% from
2007 to 2012. While we anticipate continued growth at elevated levels in this market, the prolonged
economic recession has negatively impacted tourism and property values, which could have the effect
of slowing the long-term population growth in this area.
Although Mountain Vistas operations and medical staff continue to mature since its opening in
July 2007, it has already become a state-of-the-art market leader. With the expanded capacity
provided by Mountain Vista, as well as our continued focus on profitable product lines in our other
facilities, such as outpatient imaging, psychiatric and orthopedic services, we believe we can
continue to achieve growth in this market. For the year ended September 30, 2009, exclusive of
Health Choice, we generated approximately 19.8% of our total acute care revenue in this market.
In
connection with the growing operations at Mountain Vista over the past two years, we have
implemented a physician employment strategy in our Arizona market. This strategy, which primarily
benefits our Mountain Vista facility, focuses on enhancing our physician specialty and emergency
room coverage, and is allowing our hospitals to more effectively meet the needs of the communities
we serve. While we anticipate that our physician employment strategy will help us compete more
effectively in this market, we are unable to provide any assurance regarding the success of our
strategy.
Tampa-St. Petersburg, Florida
We operate three acute care hospital facilities with a total of 688 licensed beds in the
Tampa-St. Petersburg area. The population in this area is projected
to grow by 9.0% from 2009 to
2014, which is approximately 1.8 times the projected national average growth rate. While we
anticipate continued growth in this market, the prolonged economic recession has negatively
impacted tourism and property values, which could have the effect of slowing the long-term
population growth in this area. Additionally, Florida has a large Medicare population and high
managed care penetration, which can create a business
environment that can be more challenging than other markets in which
we operate. For the year ended
September 30, 2009, we generated approximately 12.7% of our total acute care revenue in this
market.
Certain material capital projects, including the addition of new beds or services, require
regulatory approval under Floridas certificate of need program. Our ability to expand operations
in this market is restricted by such requirements, as well as the impact of the prolonged economic
recession in the area. However, we believe we can maintain our competitive position in the
Tampa-St. Petersburg market through maintaining and improving quality of services and focusing on
profitable product lines, such as orthopedic, psychiatric, bariatric, outpatient imaging and
non-invasive radiosurgery services.
Texas
We operate three acute care hospital facilities with a total of 773 licensed beds in San
Antonio, Odessa, and Port Arthur, Texas. The weighted average projected population growth rate for
these cities from 2009 to 2014 is 8.0%, which is approximately 1.4 times the projected national
average growth rate. We believe our facilities in Texas benefit from favorable reimbursement rates
and the lack of a single dominant competitor in their service areas. For the year ended September
30, 2009, we generated approximately 27.0% of our total acute care revenue in this market.
During fiscal 2008, we completed various capital projects at Southwest General Hospital, which
focused on higher acuity service lines, including neurosurgery, the expansion of our cardiology
program to include cardio-thoracic services, and the expansion of obstetric, neonatology and other
surgical services. Our focus on expanding product lines with higher acuity services has allowed us
to increase profitability and diversify our payor mix at this
hospital.
5
Effective May 31, 2007, we acquired Alliance Hospital (Alliance) in Odessa, Texas, with a
total of 50 licensed beds. Upon acquisition, the operations of Alliance were immediately merged
into Odessa Regional Hospital
(Odessa) to form Odessa Regional Medical Center, which allowed us to combine the expertise
of these two facilities into a comprehensive medical center, located on one campus. The
integration of these two facilities has positioned Odessa Regional Medical Center in its community
as a highly regarded full service hospital that provides general acute, emergency and womens
services, cardiovascular care, orthopedics, vascular and urology services. Since the acquisition
and integration of Alliance, Odessa has focused on improving its operations through the expansion
of its neonatal intensive care unit and the opening of a primary care clinic in the community
served by Odessa.
We believe our strategic decisions, including the Alliance acquisition and capital projects
completed over the recent years, have positioned each of our Texas hospitals for future success.
Las Vegas, Nevada
We operate North Vista Hospital, with a total of 178 licensed beds, in Las Vegas. While
historically a high growth area, the prolonged economic recession has negatively impacted tourism,
property values and the gaming industry, which could affect the long-term
population growth in this area. In addition, significant declines in
state tax revenue, budgetary shortfalls and reductions in state
Medicaid and local indigent care programs may potentially impact our
revenue. For the year ended September 30, 2009, we generated approximately
6.6% of our total acute care revenue in this market.
In response to these challenges, we plan to continue improvements in the operating performance
of North Vista Hospital by maintaining our focus on operational excellence and managed care
contracting, as well as expanding profitable product lines, including bariatric, psychiatric and
other services.
West Monroe, Louisiana
We operate Glenwood Regional Medical Center (Glenwood) with a total of 221 licensed beds, in
West Monroe, Louisiana, which we acquired effective January 31, 2007. Glenwood has a growing
service area with a population of approximately 150,000. Medical services provided by Glenwood and
its physicians cover many specialties and subspecialties, including
cardiology and orthopedic services. For the year ended September 30, 2009, we generated approximately 6.8% of our total acute
care revenue in this market.
During our first three years of ownership, we have spent over $18.0 million in renovations,
expansion and other various capital projects at Glenwood, with an emphasis on expanding the
hospitals cardiovascular program, expanding and renovating operating rooms, and purchasing new
diagnostic imaging, automated laboratory systems and other equipment. In addition to our capital
projects, as part of our effort to more effectively serve the community in which Glenwood operates,
we have improved the facilitys hospitalist program, expanded emergency room coverage and re-opened
the inpatient psychiatric program.
Effective February 1, 2008, we purchased a majority ownership interest in Ouachita Community
Hospital (Ouachita), a ten-bed surgical hospital located in West Monroe, Louisiana. The purchase
price for the majority ownership interest was approximately $16.8 million. We believe this
strategic acquisition has provided additional surgical capacity and allowed us to expand our market
presence.
We believe that with these strategic initiatives and future strategic capital investments, our
Louisiana market will yield a strong return on capital.
6
Our Properties
We operate 15 acute care hospital facilities and one behavioral health hospital facility. As
of September 30, 2009, we owned 14 and leased one of our hospital facilities. Seven of our acute
care hospitals have third-party investors. The following table contains information concerning our
hospitals.
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Licensed |
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Hospitals |
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City |
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Beds |
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Utah |
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Davis Hospital & Medical Center (1) |
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Layton |
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191 |
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Jordan Valley Medical Center (2) |
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West Jordan |
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183 |
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Pioneer Valley Hospital (3) |
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West Valley City |
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139 |
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Salt Lake Regional Medical Center (4) |
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Salt Lake City |
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168 |
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Arizona |
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Mountain Vista Medical Center (5) |
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Mesa |
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178 |
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St. Lukes Medical Center (6) |
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Phoenix |
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232 |
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St. Lukes Behavioral Health Hospital |
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Phoenix |
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124 |
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Tempe St. Lukes Hospital (7) |
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Tempe |
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87 |
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Florida |
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Memorial Hospital of Tampa |
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Tampa |
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180 |
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Palms of Pasadena Hospital |
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St. Petersburg |
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307 |
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Town & Country Hospital |
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Tampa |
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201 |
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Nevada |
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North Vista Hospital |
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Las Vegas |
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178 |
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Texas |
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Odessa Regional Medical Center (8) |
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Odessa |
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222 |
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Southwest General Hospital (9) |
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San Antonio |
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327 |
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The Medical Center of Southeast Texas (10) |
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Port Arthur |
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224 |
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Louisiana |
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Glenwood Regional Medical Center (11) |
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West Monroe |
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221 |
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Total |
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3,162 |
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(1) |
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Owned by a limited partnership in which we own a 96.2% interest. |
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(2) |
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On July 1, 2007, Jordan Valley Medical Center acquired Pioneer Valley Hospital, a
wholly-owned subsidiary of IASIS. The combined entity is owned by a limited partnership in
which we own a 95.6% interest. |
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A separate campus of Jordan Valley Medical Center, which is leased under an agreement that
expires on January 31, 2019. We have options to extend the term of the lease through January
31, 2039. |
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(4) |
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Owned by a limited partnership in which we own an 98.0% interest. |
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(5) |
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Owned by a limited partnership in which we own an 90.8% interest. |
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(6) |
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On September 28, 2007, St. Lukes Medical Center acquired Tempe St. Lukes Hospital, a
wholly-owned subsidiary of IASIS. |
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A separate campus of St. Lukes Medical Center. |
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(8) |
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Owned by a limited partnership in which we own an 88.4% interest. |
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(9) |
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Owned by a limited partnership in which we own a 93.7% interest. |
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(10) |
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Owned by a limited partnership in which we own an 87.9% interest. |
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(11) |
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Includes Ouachita, a surgical hospital with 10 licensed beds. |
We also operate and lease medical office buildings in conjunction with our hospitals. These
office buildings are occupied primarily by physicians who practice at our hospitals.
7
Hospital Operations
Our senior management team has extensive multi-facility operating experience and focuses on
maintaining clinical and operational excellence at our facilities. At each hospital we operate, we
have implemented policies and
procedures to improve the hospitals operating and financial performance. A hospitals local
management team is generally comprised of a chief executive officer, chief financial officer and
chief nursing officer. Local management teams, in consultation with our corporate staff, develop
annual operating plans setting forth quality and patient satisfaction goals, revenue growth and
operating profit strategies. These strategies can include the expansion of services offered by the
hospital, the recruitment and employment of physicians in each community, plans to enhance quality
of care and improvements in operating efficiencies to reduce costs. We believe that the competence,
skills and experience of the management team at each hospital is critical to the hospitals success
because of its role in executing the hospitals operating plan. Our performance-based compensation
program for each local management team is based upon the achievement of qualitative and
quantitative goals set forth in the annual operating plan. Our hospital management teams are
advised by boards of trustees that include members of hospital medical staffs, as well as community
leaders. Each board of trustees establishes policies concerning medical, professional and ethical
practices, monitors such practices and is responsible for ensuring that these practices conform to
established standards.
Factors that affect demand for our services include:
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local economic conditions; |
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the geographic location of our hospital facilities and their convenience for patients
and physicians; |
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our participation in managed care programs; |
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utilization management practices of managed care plans; |
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consolidation of managed care payors; |
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capital investment at our facilities; |
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the quality of our medical staff; |
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competition from other healthcare providers; |
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the size of and growth in local population; and |
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improved treatment protocols as a result of advances in medical technology and
pharmacology. |
We believe that the ability of our hospitals to meet the healthcare needs of their communities
is determined by the:
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level of physician support; |
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availability of nurses and other healthcare professionals; |
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quality, skills and compassion of our employees; |
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breadth of our services; |
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physical capacity and level of technological advancement at our facilities; and |
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emphasis on quality of care. |
We continuously evaluate our services with the intention of improving quality of care,
expanding our profitable lines of business and improving our business mix. We use our advanced
information systems to perform detailed clinical process reviews, product line margin analyses and
monitor the profitability of the services provided at our facilities. We employ these analyses to
capitalize on price and volume trends through the expansion and improvement of certain services. We
use our information systems to monitor patient care and other quality of care
assessment activities on a continuing basis.
8
Sources of Acute Care Revenue
We receive payment for patient services primarily from:
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the federal government, primarily under the Medicare program; |
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state Medicaid programs, including managed Medicaid plans; |
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managed care payors, including health maintenance organizations, preferred provider
organizations and managed Medicare plans; and |
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individual patients and private insurers. |
The following table presents the approximate percentages of our hospitals net patient revenue
from these sources:
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Year Ended September 30, |
|
Payor Source |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Medicare |
|
|
22.7 |
% |
|
|
23.4 |
% |
|
|
22.2 |
% |
Managed Medicare |
|
|
8.0 |
|
|
|
7.7 |
|
|
|
6.8 |
|
Medicaid |
|
|
6.5 |
|
|
|
5.4 |
|
|
|
5.4 |
|
Managed Medicaid |
|
|
8.7 |
|
|
|
8.4 |
|
|
|
8.6 |
|
Managed care |
|
|
43.0 |
|
|
|
46.0 |
|
|
|
47.5 |
|
Self-pay |
|
|
11.1 |
|
|
|
9.1 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
Total(1) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the years ended September 30, 2009, 2008 and 2007, net patient revenue comprised 70.4%,
73.8% and 74.5%, respectively, of our consolidated net revenue. |
Our hospitals offer discounts from established charges to managed care plans if they are large
group purchasers of healthcare services. Additionally, we offer discounts to all uninsured patients
receiving healthcare services who do not qualify for assistance under state Medicaid, other federal
or state assistance plans or charity care. These discount programs generally limit our ability to
increase net patient revenue in response to increasing costs. Patients generally are not
responsible for any difference between established hospital charges and amounts reimbursed for such
services under Medicare, Medicaid, health maintenance organizations, preferred provider
organizations or private insurance plans. Patients generally are responsible for services not
covered by these plans, along with exclusions, deductibles or co-insurance features of their
coverage. Collecting amounts due from patients is more difficult than collecting from governmental
programs, managed care plans or private insurers. Increases in the population of uninsured
individuals, changes in the states indigent and Medicaid eligibility requirements, continued
efforts by employers to pass more out-of-pocket healthcare costs to employees in the form of
increased co-payments and deductibles, and the effects of a prolonged economic recession have
resulted in an increase in our provision for bad debts.
Medicare
Medicare is a federal program that provides hospital and medical insurance benefits to persons
age 65 and over, some disabled persons and persons with Lou Gehrigs Disease and end-stage renal
disease. All of our hospitals are certified as providers of Medicare services. Under the Medicare
program, acute care hospitals receive reimbursement under a prospective payment system for
inpatient and outpatient hospital services. Currently, certain types of facilities are exempt or
partially exempt from the prospective payment system methodology, including childrens hospitals
and cancer hospitals. Hospitals and units exempt from the prospective payment system are reimbursed
on a reasonable cost-based system, subject to cost limits.
9
Under the inpatient prospective payment system, a hospital receives a fixed payment based on
the patients assigned Medicare severity diagnosis-related group (MS-DRG). The Centers for
Medicare & Medicaid Services (CMS) recently completed a two-year transition to full
implementation of MS-DRGs to replace the previously used Medicare diagnosis related groups in an
effort to better recognize severity of illness in Medicare payment rates. The MS-DRG system
classifies categories of illnesses according to the estimated intensity of hospital resources
necessary to furnish care for each principal diagnosis. The MS-DRG rates for acute care hospitals
are based upon a statistically normal distribution of severity. The MS-DRG payments do not consider
a specific hospitals actual costs but are adjusted for geographic area wage differentials.
Inpatient capital costs for acute care hospitals are reimbursed on a prospective system based on
diagnosis related group weights multiplied by geographically adjusted federal weights. When
treatments for patients fall well outside the normal distribution, providers may receive additional
payments known as outlier payments. For federal fiscal year 2010, CMS has established an outlier
threshold of $23,140.
The MS-DRG rates are adjusted each federal fiscal year and have been affected by federal
legislation. The index used to adjust the MS-DRG rates, known as the market basket index, gives
consideration to the inflation experienced by hospitals and entities outside of the healthcare
industry in purchasing goods and services. However, in past years the percentage increases to the
MS-DRG rates have been lower than the percentage increases in the costs of goods and services
purchased by hospitals. Based on the historical adjustments to the market baskets, future
legislation or rulemaking may decrease the future rate of increase for diagnosis related group
payments or make other changes to the diagnosis related groups, but we are unable to predict the
amount of the reduction. For federal fiscal year 2010, CMS has issued a final rule updating the
MS-DRG rates by the full market basket of 2.1%.
In federal fiscal years 2008 and 2009, CMS reduced payments to hospitals through a
documentation and coding adjustment intended to account for coding and classification changes under
the new MS-DRG system that were unrelated to changes in patient case mix. In addition, Congress has
given CMS the ability to determine retrospectively whether the documentation and coding adjustment
levels for federal fiscal years 2008 and 2009 were adequate to account for changes in payments not
related to changes in patient case mix. CMS has not imposed an adjustment for federal fiscal year
2010, but has announced its intent to impose reductions to payments in federal fiscal years 2011
and 2012 because of what CMS has determined to be an inadequate adjustment in federal fiscal year
2008. Such payment adjustments may adversely affect the results of our operations.
Quality of care provided is becoming an increasingly important factor in Medicare
reimbursement. The Medicare Modernization Act provides for diagnosis related group rate increases
at the full market basket if the facility submits data for certain patient care indicators to the
Secretary of Health and Human Services. Initially, CMS required the reporting of ten quality
measures. As required by the Deficit Reduction Act of 2005 (DEFRA), CMS has expanded, through a
series of rulemakings, the number of patient care indicators that hospitals must report. Currently,
CMS requires hospitals to report 46 quality measures in order to qualify for the full market basket
update to the inpatient prospective payment system in fiscal year 2011. Those hospitals not
submitting the required data will receive an increase in payment equal to the market basket minus
two percentage points. We currently have the ability to monitor our compliance with the quality
indicators and intend to submit the quality data required to receive the full market basket pricing
update when appropriate.
For discharges occurring on or after October 1, 2008, Medicare no longer pays hospitals
additional amounts for the treatment of certain preventable adverse events, also known as
hospital-acquired conditions, unless the condition was present at admission. Currently, there are
ten categories of conditions on the list of hospital-acquired conditions. DEFRA provides that CMS
may revise the list of conditions from time to time. On January 15, 2009, CMS announced three
National Coverage Determinations (NCDs) that prohibit Medicare reimbursement for erroneous
surgical procedures performed on an inpatient or outpatient basis. These three erroneous surgical
procedures are in addition to the hospital-acquired conditions designated by regulation.
Additionally, the healthcare reform bill passed by the U.S. House of
Representatives and the bill currently under consideration by the
U.S. Senate include
several provisions addressing quality that attempt to reposition CMS as a value-based purchaser of
healthcare services. These measures include requiring reporting of healthcare associated
infections, reductions in payment for hospitals with excessive
readmissions or hospital acquired conditions and the study of and
proposal for the revision of CMS payment policies to promote high value healthcare. It is uncertain
whether the bill will become law or if these provisions will be included in any final healthcare
reform legislation.
10
CMS reimburses hospital outpatient services and certain Medicare Part B services furnished to
hospital
inpatients who have no Part A coverage on a prospective payment system basis. CMS uses fee
schedules to pay for physical, occupational and speech therapies, durable medical equipment,
clinical diagnostic laboratory services and nonimplantable orthotics and prosthetics.
All services paid under the prospective payment system for hospital outpatient services are
classified into groups called ambulatory payment classifications or APCs. Services in each APC
are similar clinically and in terms of the resources they require. A payment rate is established
for each APC. CMS increased the conversion factor by approximately 3.6% for calendar year 2009. CMS
has announced a final rule updating the conversion factor for calendar year 2010 using a market
basket of 2.1%. We anticipate that future legislation may decrease the future rate of increase for
APC payments, but we are unable to predict the amount of the reduction.
CMS requires hospitals to submit quality data regarding eleven measures relating to outpatient
care in order to receive the full market basket increase under the outpatient prospective payment
system in calendar year 2010. CMS will continue to require hospitals to report the existing eleven
quality measures to receive the full market basket increase under the outpatient prospective
payment system in calendar year 2011. Hospitals that fail to submit such data will receive the
market basket update minus two percentage points for the outpatient prospective payment system.
Hospitals that treat a disproportionately large number of low-income patients (Medicaid and
Medicare patients eligible to receive supplemental Social Security income) currently receive
additional payments from the federal government in the form of disproportionate share payments. CMS
is required by law to study the formula used to calculate these payments and could propose changes,
such as giving greater weight to the amount of uncompensated care provided by a hospital than to
the number of low-income patients treated.
Inpatient rehabilitation hospitals and designated units are reimbursed under a prospective
payment system. Under this prospective payment system, patients are classified into case mix groups
based upon impairment, age, co-morbidities and functional capability. Inpatient rehabilitation
facilities are paid a predetermined amount per discharge that reflects the patients case mix group
and is adjusted for area wage levels, low-income patients, rural areas and high-cost outliers. The
Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) provided for no update to the
conversion factor for fiscal year 2009. For fiscal year 2010, CMS issued a final rule setting the
market basket increase factor at 2.5%.
On May 7, 2004, CMS issued a final rule modifying the criteria for classification as an
inpatient rehabilitation facility as a result of data indicating that most facilities do not meet
the existing criteria. Under the previous requirements, in order for a facility to be considered an
inpatient rehabilitation facility, at least 75% of the facilitys inpatient population during the
most recent 12-month cost reporting period must have required intensive rehabilitation services for
one or more of ten specified conditions. A subsequent rule expanded the list of specified
conditions to 13, and subsequent legislation and regulations temporarily reduced the percentage of
the patient population who must have one of the specified conditions. For cost reporting periods
beginning on or after July 1, 2007, CMS required 65% of the patient population to have one of the
specified conditions. Currently, the percentage is set by statute at 60% of the patient population.
Effective January 1, 2010, inpatient rehabilitation facilities must meet additional coverage
criteria, including patient selection and care requirements relating to pre-admission screenings,
post-admission evaluations, ongoing coordination of care and involvement of rehabilitation
physicians. As of September 30, 2009, we operated eight inpatient rehabilitation units within our
hospitals.
Inpatient psychiatric facilities are paid based on a prospective payment system. Under this
prospective payment system, inpatient psychiatric facilities receive a federal per diem base rate
that is based on the sum of the average routine operating, ancillary and capital costs for each
patient day of psychiatric care in an inpatient psychiatric facility, adjusted for budget
neutrality. This federal per diem base rate is further adjusted to reflect certain patient and
facility characteristics, including patient age, certain diagnostic related groups, facility wage
index adjustment, and facility rural location. The payment rates are adjusted annually on a July 1
update cycle. Inpatient psychiatric facilities receive additional outlier payments for cases in
which estimated costs for the case exceed an adjusted threshold amount plus the total adjusted
payment amount for the stay. CMS updated payments for rate year 2010 by 2.1%. As of October 1,
2009, we operated one behavioral health hospital facility and four specially designated psychiatric
units that are subject to these rules.
11
Effective January 1, 2008, CMS issued final regulations that change payment for procedures
performed in an ambulatory surgery center (ASC). Under this rule, ASC payment groups increased
from nine clinically disparate payment groups to over 200 APCs used under the outpatient
prospective payment system for these surgical services. In addition, CMS significantly expanded the
types of procedures that may be performed in ASCs. More Medicare procedures that are now performed
in hospitals, such as ours, may be moved to ASCs, potentially reducing surgical volume in our
hospitals.
The Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Modernization Act) established the Recovery Audit Contractor (RAC) three-year
demonstration program. Under this program, CMS contracts with third-parties to conduct post-payment
reviews on a contingency fee basis to detect and correct improper payments in the fee-for-service
Medicare program. Beginning in 2005, CMS contracted with three different RACs to conduct these
reviews in California, Florida and New York. The program was expanded in August 2007 to include
Massachusetts and South Carolina. The Tax Relief and Health Care Act of 2006 made the RAC program
permanent and mandates its nationwide expansion by 2010. CMS has awarded contracts to four RACs
that will implement the permanent RAC program on a nationwide basis. The full impact of the
implementation of the RAC program cannot be predicted.
Managed Medicare
Managed Medicare plans represent arrangements where CMS contracts with private companies to
provide members with Medicare Part A, Part B and Part D benefits. Managed Medicare plans can be
structured as health maintenance organizations, preferred provider organizations, or private
fee-for-service plans. The Medicare program allows beneficiaries to choose enrollment in certain
managed Medicare plans. The Medicare Modernization Act increases reimbursement to managed Medicare
plans and includes provisions limiting, to some extent, the financial risk to the companies
offering the plans. Following these changes, the number of beneficiaries choosing to receive their
Medicare benefits through such plans has increased. However, several provisions of the Medicare
Improvements for Patients and Providers Act of 2008 addressed excess payments made to managed
Medicare plans. In addition, both the healthcare reform bill passed by the House of
Representatives and the healthcare reform bill currently under consideration by the Senate would
reduce payments to managed Medicare plans. In light of the prolonged economic recession and
political climate, managed Medicare plans may experience reduced premium payments, which may lead
to decreased enrollment in such plans.
Medicaid
Medicaid programs are jointly funded by federal and state governments and are administered by
states under an approved plan that provides hospital and other healthcare benefits to qualifying
individuals who are unable to afford care. All of our hospitals are certified as providers of
Medicaid services. State Medicaid programs may use a prospective payment system, cost-based or
other payment methodology for hospital services. Medicaid programs are required to take into
account and make additional payments to hospitals serving disproportionate numbers of low income
patients with special needs. Some of our hospitals receive such additional payments.
The federal government and many states from time to time consider altering the level of
Medicaid funding or expanding Medicaid benefits in a manner that could adversely affect future
levels of Medicaid reimbursement received by our hospitals. DEFRA, signed into law on February 8,
2006, included Medicaid cuts of approximately $4.8 billion over five years. CMS has published a
number of proposed and final regulations that, if implemented, would result in significant
additional reductions in Medicaid funding. These regulations have been subject to Congressional
moratoria, rescinded, invalidated by court order or otherwise delayed. However, CMS could pursue
implementation of these regulations or other regulatory measures that would further reduce Medicaid
funding in the future. Healthcare reform efforts may also impact Medicaid funding and coverage. In
November 2009, the U.S. House of Representatives passed a healthcare reform bill that, among other
things, would expand Medicaid eligibility for low-income individuals
and families. A separate healthcare reform bill under consideration in
the U.S. Senate would similarly expand Medicaid eligibility.
12
Additionally, the states in which we operate have experienced budget constraints as a result
of increased costs and lower than expected tax collections. For example, an Arizona legislative
committee has projected a $2.0 billion shortfall in the states budget this year. Current economic
conditions may increase these budget pressures. Health and human services programs, including
Medicaid and similar programs, represent a significant portion of
state budgets. Most of the states in
which we operate have responded to these budget concerns by decreasing funding for
healthcare programs or making structural changes that have resulted
or may result in a
reduction to Medicaid hospital revenues in fiscal years 2009 and 2010. For example, Arizona has
frozen hospital inpatient and outpatient reimbursements at the October 1, 2007 rates and
discontinued a state health benefits program for low-income parents. Louisiana reduced inpatient
hospital rates by 3.5% and 6.3% and outpatient hospital rates by 3.5% and 5.7% in fiscal years 2009
and 2010, respectively, but still projects a Medicaid program deficit in excess of $300.0 million
for the remainder of fiscal year 2010. In fiscal year 2009, Nevada cut inpatient hospital rates by
5.0% and eliminated rate enhancements for pediatric and obstetric care. Utah has cut hospital
rates for fiscal year 2010 by more than 11.0%. Florida has reduced hospital reimbursement rates
for fiscal years 2009 and 2010. Additional Medicaid spending cuts may be implemented in the future
in the states in which we operate.
The American Recovery and Reinvestment Act of 2009 (ARRA), which was signed into law on
February 17, 2009, included approximately $87.0 billion in additional federal Medicaid funding to
states through December 2010. As part of this legislation, Congress has temporarily increased the
share of program costs paid by the federal government to fund each states Medicaid program.
Although these funds have provided a benefit to state Medicaid programs by helping to avoid more
extensive program and reimbursement cuts, this increased federal funding is scheduled to end
December 31, 2010. State legislatures are anticipating that this termination in increased federal
funding could result in significant reductions to states Medicaid programs.
Through DEFRA, Congress has expanded the federal governments involvement in fighting fraud,
waste and abuse in the Medicaid program by creating the Medicaid Integrity Program. Among other
things, this legislation requires CMS to employ private contractors, referred to as Medicaid
Integrity Contractors (MICs), to perform reviews and post-payment audits of Medicaid claims and
identify overpayments. MICs have commenced audits of Medicaid providers in most jurisdictions, and
audits are anticipated to begin in the remaining jurisdictions by June 2010.
Changes in laws or regulations regarding government health programs or other changes in the
administration of government health programs could have a material, adverse effect on our financial
position and results of operations.
Managed Medicaid
Managed Medicaid programs represent arrangements in which states contract with one or more
entities for patient enrollment, care management and claims adjudication. The states usually do not
give up program responsibilities for financing, eligibility criteria and core benefit plan design.
We generally contract directly with one of the designated entities, usually a managed care
organization. The provisions of these programs are state-specific.
As state governments seek to control the cost of Medicaid programs, enrollment in managed
Medicaid plans, including states in which we operate, has increased in recent years. For example,
Florida legislation has established a goal of statewide implementation of Medicaid managed care
programs by 2011. Furthermore, Florida could lose $300.0 million of federal funding for hospital
charity care if this goal is not met. Louisiana has requested a section 1115 Medicaid waiver from
the federal government that, if approved, would result in an expansion of Medicaid managed care
plans. The Texas legislature and the Texas Health and Human Services Commission have recommended
expanding Medicaid managed care enrollment for certain Medicaid beneficiaries. However, fiscal
budgetary issues resulting from general economic conditions in the states in which we operate may
require reductions in premium payments to these plans.
Annual Cost Reports
All hospitals participating in the Medicare and Medicaid programs, whether paid on a
reasonable cost basis or under a prospective payment system, are required to meet specific
financial reporting requirements. Federal regulations require submission of annual cost reports
identifying medical costs and expenses associated with the services provided by each hospital to
Medicare beneficiaries and Medicaid recipients. These annual cost reports are subject to routine
audits, which may result in adjustments to the amounts ultimately determined to be due to us under
these reimbursement programs. The audit process may take several years to reach the final
determination of allowable amounts under the programs. Providers also have the right of appeal, and
it is common to contest issues raised in audits of prior years reports.
13
Cost reports filed by our facilities generally remain open for three years after the notice of
program reimbursement date. If any of our facilities are found to have been in violation of federal
or state laws relating to preparing and filing of Medicare or Medicaid cost reports, whether prior
to or after our ownership of these facilities, we and our facilities could be subject to
substantial monetary fines, civil and criminal penalties and exclusion from participation in the
Medicare and Medicaid programs. If an allegation is lodged against one of our facilities for a
violation occurring during the time period before we owned the facility, we may have
indemnification rights against the former owner of the facility for any damages we may incur based
on negotiated indemnification and hold harmless provisions in the transaction documents. However,
we offer no assurances that any such matter would be covered by indemnification, or if covered,
that such indemnification would be adequate to cover any potential losses, fines and penalties.
Additionally, we offer no assurances that the former owner would have the financial ability to
satisfy indemnification claims.
Managed Care
Managed care payors, including health maintenance organizations and preferred provider
organizations, are organizations that provide insurance coverage and a network of healthcare
providers to members for a fixed monthly premium. To control costs, these organizations typically
contract with hospitals and other providers for discounted prices, review medical services to
ensure that no unnecessary services are provided, and market providers within their networks to
patients. A significant percentage of our overall payor mix is commercial managed care. We
generally receive lower payments from commercial managed care payors than from traditional
commercial/indemnity insurers for similar services.
Commercial Insurance
Our hospitals provide services to a decreasing number of individuals covered by traditional
private healthcare insurance. Private insurance carriers make direct payments to hospitals or, in
some cases, reimburse their policy holders, based upon negotiated discounts from the particular
hospitals established charges and the particular coverage provided in the insurance policy.
Commercial insurers are continuing efforts to limit the payments for hospital services by
adopting discounted payment mechanisms, including prospective payment or diagnosis related
group-based payment systems, for more inpatient and outpatient services. In addition, commercial
insurers increasingly are implementing quality requirements and refusing to pay for serious adverse
events, similar to Medicare. To the extent that these efforts are successful, hospitals may
receive reduced levels of reimbursement, which would have a negative effect on operating results.
Charity Care
In the ordinary course of business, we provide care without charge to patients who are
financially unable to pay for the healthcare services they receive. Because we do not pursue
collection of amounts determined to qualify as charity care, they are not reported in net revenue.
We currently record revenue deductions for patient accounts that meet our guidelines for charity
care. We provide charity care to patients with income levels below 200% of the federal property
level. Additionally, at all of our hospitals, a sliding scale of reduced rates is offered to all
uninsured patients, who are not covered through federal, state or private insurance, with incomes
between 200% and 400% of the federal poverty level. As a result of the current economic environment
and growth in the uninsured population, our charity care has increased over the prior years. We
anticipate our charity care may continue to increase in the near term; however, we are unable to
predict the impact this will have on our results of operations and financial condition. Further, healthcare reform, if enacted, could
reduce the number of patients who are uninsured or under-insured.
14
Competition
Our facilities and related businesses operate in competitive environments. A number of factors
affect our competitive position, including:
|
|
|
the local economies in which we operate; |
|
|
|
|
decline in tourism in our service areas; |
|
|
|
our managed care contracting relationships; |
|
|
|
the number, availability, quality and specialties of physicians, nurses and other
healthcare professionals; |
|
|
|
the scope, breadth and quality of services; |
|
|
|
the reputation of our facilities and physicians; |
|
|
|
growth in hospital capacity in the markets we serve; |
|
|
|
the physical condition of our facilities and medical equipment; |
|
|
|
the location of our facilities and availability of physician office space; |
|
|
|
certificate of need restrictions, where applicable; |
|
|
|
the availability of parking or proximity to public transportation; |
|
|
|
accumulation, access and interpretation of publicly reported quality indicators; |
|
|
|
growth in outpatient service providers; |
|
|
|
charges for services; and |
|
|
|
the geographic coverage of our hospitals in the regions in which we operate. |
We currently face competition from established, not-for-profit healthcare companies,
investor-owned hospital companies, large tertiary care centers, specialty hospitals and outpatient
service providers, such as surgery centers and imaging centers. In addition, some of our hospitals
operate in regions with vertically integrated healthcare providers that include both payors and
healthcare providers, which could affect our ability to obtain managed care contracts. We continue
to encounter increased competition from specialty hospitals, outpatient service providers,
not-for-profit healthcare companies and companies, like ours, that consolidate hospitals and
healthcare companies in specific geographic markets. Continued consolidation in the healthcare
industry will be a leading contributing factor to increased competition in markets in which we
already have a presence and in markets we may enter in the future.
Another factor in the competitive position of a hospital is the ability of its management to
obtain contracts with purchasers of group healthcare services. The importance of obtaining managed
care contracts continues as private and government payors and others turn to managed care
organizations to help control rising healthcare costs. Most of our markets have experienced
significant managed care penetration, along with consolidation of major managed care plans. The
revenue and operating results of our hospitals are significantly affected by our hospitals ability
to negotiate reasonable contracts with managed care plans. Health maintenance organizations and
preferred provider organizations use managed care contracts to encourage patients to use certain
hospitals in exchange for discounts from the hospitals established charges. Traditional health
insurers also contain costs through similar contracts with hospitals.
An additional competitive factor is whether a hospital is part of a local hospital network, as
well as the scope and quality of services offered by the network compared to competing networks. A
hospital that is part of a network offering a broad range of services in a wide geographic area is
more likely to obtain more favorable managed care contracts, than a hospital that is not. On an
ongoing basis, we evaluate changing circumstances in each geographic area in which we operate. We
may position ourselves to compete in these managed care markets by forming our own, or joining with
others to form, local hospital networks.
15
As we continue to focus on our physician employment strategy, we face significant competition
for skilled
physicians in certain of our markets, as more providers are adopting a physician staffing
model approach, coupled with a general shortage of physicians across most specialties. This
increased competition has resulted in efforts by managed care organizations to align with certain
provider networks in the markets in which we operate. While we anticipate that our physician
employment strategy will help us compete more effectively in our markets, we are unable to provide
any assurance regarding the success of our strategy.
Employees And Medical Staff
As of September 30, 2009, we had 10,959 employees, including 3,131 part-time employees. We
consider our employee relations to be good. We recruit and retain nurses and medical support
personnel by creating a desirable, professional work environment, providing competitive wages,
benefits and long-term incentives, and providing career development and other training programs. In
order to supplement our current employee base, we have expanded our relationship with local
colleges and universities, including our sponsorship of nursing scholarship programs, in our
markets.
Our hospitals are staffed by licensed physicians who have been admitted to the medical staff
of our individual hospitals. Any licensed physician may apply to be admitted to the medical staff
of any of our hospitals, but admission to the staff must be approved by each hospitals medical
staff and the appropriate governing board of the hospital in accordance with established
credentialing criteria. In an effort to meet community needs in certain markets in which we
operate, we have implemented a strategy of employing physicians, with an emphasis on those
practicing within certain specialties. While we believe this strategy is consistent with industry
trends, we cannot be assured of the long-term success of such a strategy, which includes related
integration of physician practice management.
Compliance Program
Our compliance program is designed to ensure that we maintain high standards of conduct in the
operation of our business and implement policies and procedures so that employees act in compliance
with all applicable laws, regulations and company policies. The organizational structure of our
compliance program includes a compliance committee of our board of directors, a corporate
management compliance committee and local management compliance committees at each of our
hospitals. These committees have the oversight responsibility for the effective development and
implementation of our program. Our Vice President of Ethics and Business Practices, who reports
directly to our Chairman and Chief Executive Officer and to the compliance committee of our board
of directors, serves as Chief Compliance Officer and is charged with direct responsibility for the
development and implementation of our compliance program. Other features of our compliance program
include the designation of a Regional Compliance Officer for each of our hospitals, periodic ethics
and compliance training and effectiveness reviews, the development and implementation of policies
and procedures, including a mechanism for employees to report, without fear of retaliation, any
suspected legal or ethical violations.
Government Regulation and Other Factors
A framework of extremely complex federal and state laws, rules and regulations governs the
healthcare industry and, for many provisions, there is little history of regulatory or judicial
interpretation upon which to rely.
Licensure, Certification and Accreditation
Healthcare facility construction and operation is subject to federal, state and local
regulations relating to the adequacy of medical care, equipment, personnel, operating policies and
procedures, fire prevention, rate-setting and compliance with building codes and environmental
protection laws. Our facilities also are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary for licensing and
accreditation. We believe that all of our operating healthcare facilities are properly licensed
under appropriate state healthcare laws, but we cannot assure you that government agencies or other
entities enforcing licensure requirements would find our facilities in compliance with such
requirements.
16
All of our operating hospitals are certified under the Medicare program and are accredited by
either The Joint Commission or DNV, the effect of which is to permit the facilities to participate
in the Medicare and Medicaid programs. If any facility loses its accreditation by either The Joint
Commission or DNV, as applicable, or otherwise loses its certification under the Medicare program,
then the facility will be unable to receive reimbursement from the Medicare and Medicaid programs.
We intend to conduct our operations in compliance with current applicable
federal, state, local and independent review body regulations and standards, but we cannot
assure you that government agencies or other entities enforcing such requirements would find our
facilities in compliance with such requirements. The requirements for licensure, certification and
accreditation are subject to change and, in order to remain qualified, we may need to make changes
in our facilities, equipment, personnel and services.
Utilization Review
Federal law contains numerous provisions designed to ensure that services rendered by
hospitals to Medicare and Medicaid patients meet professionally recognized standards and are
medically necessary and that claims for reimbursement are properly filed. These provisions include
a requirement that a sampling of admissions of Medicare and Medicaid patients be reviewed by
quality improvement organizations that analyze the appropriateness of Medicare and Medicaid patient
admissions and discharges, quality of care provided, validity of diagnosis related group
classifications and appropriateness of cases of extraordinary length of stay or cost. Quality
improvement organizations may deny payment for services provided, assess fines and recommend to the
Department of Health and Human Services (the Department) that a provider not in substantial
compliance with the standards of the quality improvement organization be excluded from
participation in the Medicare program. Most non-governmental managed care organizations also
require utilization review.
Federal and State Fraud and Abuse Provisions
Participation in any federal healthcare program, like Medicare, is regulated heavily by
statute and regulation. If a hospital provider fails to substantially comply with the numerous
conditions of participation in the Medicare or Medicaid program or performs specific prohibited
acts, the hospitals participation in the Medicare and Medicaid programs may be terminated or civil
or criminal penalties may be imposed upon it under provisions of the Social Security Act and other
statutes.
Among these statutes is a section of the Social Security Act known as the federal
anti-kickback statute. This law prohibits providers and others from soliciting, receiving, offering
or paying, directly or indirectly, any remuneration with the intent of generating referrals or
orders for services or items covered by a federal healthcare program. Violation of this statute is
a felony.
The Office of Inspector General of the U.S. Department of Health and Human Services (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.
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 or business arrangement, however, does risk increased scrutiny by government
enforcement authorities. We may be less willing than some of our competitors to take actions or
enter into business arrangements that do not clearly satisfy the safe harbors. As a result, this
unwillingness may put us at a competitive disadvantage.
The 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 healthcare providers, the OIG has
from time to time issued fraud alerts that, although they do not have the force of law, identify
features of a transaction that may indicate that the transaction could violate the anti-kickback
statute or other federal healthcare laws. The OIG has identified several incentive arrangements as
potential violations, including:
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payment of any incentive by the hospital when a physician refers a patient to the
hospital; |
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use of free or significantly discounted office space or equipment for physicians in
facilities usually located close to the hospital;
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provision of free or significantly discounted billing, nursing, or other staff
services; |
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free training for a physicians office staff, including management and laboratory
techniques; |
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guarantees that provide that, if the physicians income fails to reach a predetermined
level, the hospital will pay any portion of the remainder; |
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low-interest or interest-free loans, or loans which may be forgiven if a physician
refers patients to the hospital; |
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payment of the costs of a physicians travel and expenses for conferences or a
physicians continuing education courses; |
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coverage on the hospitals group health insurance plans at an inappropriately low cost
to the physician; |
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rental of space in physician offices, at other than fair market value terms, by persons
or entities to which physicians refer; |
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payment of services which require few, if any, substantive duties by the physician, or
payment for services in excess of the fair market value of the services rendered; or |
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gainsharing, the practice of giving physicians a share of any reduction in a
hospitals costs for patient care attributable in part to the physicians efforts. |
In addition to issuing fraud alerts, the OIG from time to time issues compliance program
guidance for certain types of healthcare providers. In January 2005, the OIG issued supplemental
compliance program guidance for hospitals. In the supplemental compliance guidance, the OIG
identifies areas of potential risk of liability under federal fraud and abuse statutes and
regulations. These areas of risk include compensation arrangements with physicians, recruitment
arrangements with physicians and joint venture relationships with physicians. The OIG recommends
structuring arrangements to fit squarely within a safe harbor.
We have a variety of financial relationships with physicians who refer patients to our
hospitals. Physicians currently own interests in seven of our full service acute care hospitals. We
may sell ownership interests in certain other of our facilities to physicians and other qualified
investors in the future. We also have other joint venture relationships with physicians and
contracts with physicians providing for a variety of financial arrangements, including employment
contracts, leases and professional service agreements. We provide financial incentives to recruit
physicians to relocate to communities served by our hospitals, including minimum cash collections
guarantees and forgiveness of repayment obligations. Although we have established policies and
procedures to ensure that our arrangements with physicians comply with current law and available
interpretations, we cannot assure you that regulatory authorities that enforce these laws will not
determine that some of these arrangements violate the anti-kickback statute or other applicable
laws. This determination could subject us to liabilities under the Social Security Act, including
criminal penalties of imprisonment or fines, civil penalties up to $50,000, damages up to three
times the total amount of the improper payment to the referral source and exclusion from
participation in Medicare, Medicaid or other federal healthcare programs, any of which could have a
material adverse effect on our business, financial condition or results of operations.
The Social Security Act also imposes criminal and civil penalties for submitting false claims
to Medicare and Medicaid. False claims include, but are not limited to, billing for services not
rendered, misrepresenting actual services rendered in order to obtain higher reimbursement and cost
report fraud. Like the anti-kickback statute, these provisions are very broad. Further, the Social
Security Act contains civil penalties for conduct including improper coding and billing for
unnecessary goods and services. To avoid liability, providers must, among other things, carefully
and accurately code claims for reimbursement, as well as accurately prepare cost reports.
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Some of these provisions, including the federal Civil Monetary Penalty Law, require a lower
burden of proof than other fraud and abuse laws, including the federal anti-kickback statute. Civil
monetary penalties that may be imposed under the federal Civil Monetary Penalty Law range from
$10,000 to $50,000 per act, and in some cases
may result in penalties of up to three times the remuneration offered, paid, solicited or
received. In addition, a violator may be subject to exclusion from federal and state healthcare
programs. Federal and state governments increasingly use the federal Civil Monetary Penalty Law,
especially where they believe they cannot meet the higher burden of proof requirements under the
federal anti-kickback statute.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) broadened the scope
of the fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses
that apply to all health benefit programs. 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 healthcare fraud.
Additionally, this act establishes a violation for the payment of inducements to Medicare or
Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from
a particular provider or practitioner.
The Social Security Act also includes a provision commonly known as the Stark Law. This law
prohibits physicians from referring Medicare and Medicaid patients to entities with which they or
any of their immediate family members have a financial relationship for the provision of certain
designated health services that are reimbursable by Medicare or Medicaid, including inpatient and
outpatient hospital services. The law also prohibits the entity from billing the Medicare program
for any items or services that stem from a prohibited referral. Sanctions for violating the Stark
Law include civil monetary penalties up to $15,000 per item or service improperly billed and
exclusion from the federal healthcare programs. There are a number of exceptions to the
self-referral prohibition, including an exception for a physicians ownership interest in an entire
hospital as opposed to an ownership interest in a hospital department. There are also exceptions
for many of the customary financial arrangements between physicians and providers, including
employment contracts, leases, professional services agreements, non-cash gifts having a value less
than $355 (effective January 1, 2009) and recruitment agreements.
Through a series of rulemakings, CMS has issued final regulations implementing the Stark Law.
Additional changes to these regulations, which became effective October 1, 2009, further restrict
the types of arrangements that hospitals and physicians may enter, including restrictions on
certain leases, percentage compensation arrangements, and agreements under which a hospital
purchases services under arrangements. While these regulations help clarify the requirements of the
exceptions to the Stark Law, it is unclear how the government will interpret many of these
exceptions for enforcement purposes. CMS has indicated that it is considering additional changes to
the Stark Law regulations. We cannot assure you that the arrangements entered into by us and our
hospitals will be found to be in compliance with the Stark Law, as it ultimately may be implemented
or interpreted.
The Department has proposed to collect information from 400 hospitals regarding their
ownership, investment and compensation arrangements with physicians. It has indicated that at
least three of our hospitals would be among the 400 hospitals. The Department has indicated that it
intends to use the data to monitor compliance with the Stark Law and that it may share the
information with other government agencies. Many of these agencies have not previously analyzed
this information and have the authority to bring enforcement actions against hospitals filing such
reports. The survey instrument, which is referred to as the Disclosure of Financial Relationships
Report, is under review by the Office of Management and Budget, and it is unclear when, or if, it
will be finalized.
In 2003, Congress passed legislation that modified the hospital ownership exception to the
Stark Law by creating a moratorium on allowing physicians to own interests in new specialty
hospitals. The moratorium was extended by regulatory and legislative action and expired on August
8, 2006. In December 2004, the Medicare Payment Advisory Commission considered, but did not adopt,
a recommendation that Congress eliminate the exception for physician ownership in an entire
hospital, including whole hospitals or non-specialty hospitals (the whole hospital exception). In
recent years, both houses of the U.S. Congress have passed bills that would have eliminated or
significantly restricted the whole hospital exception, but these bills did not become law. In
November 2009, the House of Representatives passed a healthcare reform bill that would eliminate
the whole hospital exception subject to a grandfathering provision for most hospitals that
currently have physician ownership. In order to fall within this grandfathering provision, a
hospital would have to abide by a number of restrictions, including limits on future expansion and
reporting and disclosure requirements. The Senate healthcare reform bill currently under
consideration contains a similar prohibition on physician-owned hospitals. If Congress enacts
legislation that
eliminates or alters the whole hospital exception, we could be required to unwind the
physician ownership of some of our hospitals or our physician-owned hospitals could be subject to
disclosure and reporting requirements and significant restrictions on their ability to expand
current operations.
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Physician-owned hospitals that receive referrals from physician owners must disclose in
writing to patients that such hospitals are owned by physicians and that patients may receive a
list of the hospitals physician investors upon request. Additionally, a physician-owned hospital
must require all physician owners who are members of the hospitals medical staff to agree, as a
condition of continued medical staff membership or admitting privileges, to disclose in writing to
all patients whom they refer to the hospital their (or an immediate family members) ownership
interest in the hospital. A hospital is considered to be physician-owned if any physician, or an
immediate family member of a physician, holds debt, stock or other types of investment in the
hospital or in any owner of the hospital, excluding physician ownership through publicly traded
securities that meet certain conditions. If a hospital fails to comply with these provisions, the
hospital could lose its Medicare provider agreement and be unable to participate in Medicare.
Evolving interpretations of current, or the adoption of new, federal or state laws or
regulations could affect many of the arrangements entered into by each of our hospitals. In
addition, law enforcement authorities, including the OIG, the courts and Congress are increasing
scrutiny of arrangements between healthcare providers and potential referral sources to ensure that
the arrangements are not designed as a mechanism to improperly pay for patient referrals and or
other business. Investigators also have demonstrated a willingness to look behind the formalities
of a business transaction to determine the underlying purpose of payments between healthcare
providers and potential referral sources.
Many of the states in which we operate also have adopted laws that prohibit payments to
physicians in exchange for referrals similar to the federal anti-kickback statute or that otherwise
prohibit fraud and abuse activities. Many states also have passed self-referral legislation similar
to the Stark Law, prohibiting the referral of patients to entities with which the physician has a
financial relationship. Often these state laws are broad in scope and they may apply regardless of
the source of payment for care. These statutes typically provide criminal and civil penalties, as
well as loss of licensure. Little precedent exists for the interpretation or enforcement of these
state laws.
Our operations could be adversely affected by the failure of our arrangements to comply with
the anti-kickback statute, the Stark Law, billing laws and regulations, current state laws or other
legislation or regulations in these areas adopted in the future. We are 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 how they may affect our operations.
We are 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. We cannot assure you,
however, that governmental officials responsible for enforcing these laws or whistleblowers will
not assert that we are in violation of them or that such statutes or regulations ultimately will be
interpreted by the courts in a manner consistent with our interpretation.
The Federal False Claims Act and Similar State Laws
Another trend affecting the healthcare industry today is the increased use of the federal
False Claims Act (FCA) and, in particular, actions being brought by individuals on the
governments behalf under the FCAs 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. If the government intervenes in the action and prevails, the
party filing the initial complaint may share in any settlement or judgment. If the government does
not intervene in the action, the whistleblower plaintiff may pursue the action independently, and
may receive a larger share of any settlement or judgment. When a private party brings a qui tam
action under the FCA, the defendant generally will not be made aware of the lawsuit until the
government commences its own investigation or makes a determination whether it will intervene.
Further, every entity that receives at least $5.0 million annually in Medicaid payments must have
written policies for all employees, contractors or agents, providing detailed information about
false claims, false statements and whistleblower protections under certain federal laws, including
the FCA, and similar state laws.
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When a defendant is determined by a court of law to be liable under the FCA, the defendant
must pay three times the actual damages sustained by the government, plus mandatory civil penalties
of between $5,500 to $11,000 for each separate false claim. Settlements entered into prior to
litigation usually involve a less severe calculation of
damages. There are many potential bases for liability under the FCA. Liability often arises
when an entity knowingly submits a false claim for reimbursement to the federal government. The FCA
defines the term knowingly broadly. Although simple negligence will not give rise to liability
under the FCA, submitting a claim with reckless disregard to its truth or falsity can constitute
knowingly submitting a false claim and result in liability. In some cases, whistleblowers, the
federal government and some courts have taken the position that providers who allegedly have
violated other statutes, such as the anti-kickback statute or the Stark Law, have thereby submitted
false claims under the FCA. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of
the FCA by, among other things, creating liability for knowingly and improperly avoiding repayment
of an overpayment received from the government and broadening protections for whistleblowers.
A number of states, including states in which we operate, 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. DEFRA creates an incentive for states to enact false claims laws that are
comparable to the FCA. From time to time, companies in the healthcare industry, including ours, may
be subject to actions under the FCA or similar state laws.
Corporate Practice of Medicine/Fee Splitting
The states in which we operate have laws that prohibit unlicensed persons or business
entities, including corporations, from employing physicians or laws that prohibit certain direct or
indirect payments or fee-splitting arrangements between physicians and unlicensed persons or
business entities. Possible sanctions for violations of these restrictions include loss of a
physicians license, civil and criminal penalties and rescission of business arrangements that may
violate these restrictions. These statutes vary from state to state, are often vague and seldom
have been interpreted by the courts or regulatory agencies. Although we exercise care to structure
our arrangements with healthcare providers to comply with relevant state laws, we cannot assure you
that governmental officials responsible for enforcing these laws will not assert that we, or
transactions in which we are involved, are in violation of such laws, or that such laws ultimately
will be interpreted by the courts in a manner consistent with our interpretations.
HIPAA Administrative Simplification and Privacy and Security Requirements
HIPAA requires the use of uniform electronic data transmission standards for healthcare claims
and payment transactions submitted or received electronically. These provisions are intended to
encourage electronic commerce in the healthcare industry. The Department has established electronic
data transmission standards that all healthcare providers must use when submitting or receiving
certain healthcare transactions electronically. In addition, HIPAA requires that each provider use
a National Provider Identifier. In January 2009, CMS published a final rule making changes to the
formats used for certain electronic transactions and requiring the use of updated standard code
sets for certain diagnoses and procedures known as ICD-10 code sets. Although use of the ICD-10
code sets is not mandatory until October 1, 2013, we will be modifying our payment systems and
processes to prepare for their implementation. Use of the ICD-10 code sets will require significant
changes; however, we believe that the cost of compliance with these regulations has not had and is
not expected to have a material adverse effect on our business, financial position or results of
operations.
As required by HIPAA, the Department has issued privacy and security regulations that
extensively regulate the use and disclosure of individually identifiable health-related information
and require healthcare providers to implement administrative, physical and technical practices to
protect the security of individually identifiable health information that is electronically
maintained or transmitted. ARRA broadens the scope of the HIPAA privacy and security regulations.
In addition, ARRA extends the application of certain provisions of the security and privacy
regulations to business associates (entities that handle identifiable health-related information on
behalf of covered entities) and subjects business associates to civil and criminal penalties for
violation of the regulations. We have developed and utilize a HIPAA compliance plan as part of our
effort to comply with HIPAA privacy and security requirements. The privacy regulations and security
regulations have and will continue to impose significant costs on our facilities in order to comply
with these standards.
As required by ARRA, the Department published an interim final rule on August 24, 2009, that
requires covered entities to report breaches of unsecured protected health information to affected
individuals without unreasonable delay, but not to exceed 60 days of discovery of the breach by the
covered entity or its agents. Notification must also be made to the Department and, in certain
situations involving large breaches, to the media. Various state laws
and regulations may also require us to notify affected individuals in the event of a data
breach involving individually identifiable information.
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Violations of the HIPAA privacy and security regulations may result in civil and criminal
penalties, and ARRA has strengthened the enforcement provisions of HIPAA, which may result in
increased enforcement activity. Under ARRA, the Department is required to conduct periodic
compliance audits of covered entities and their business associates. ARRA broadens the
applicability of the criminal penalty provisions to employees of covered entities and requires the
Department to impose penalties for violations resulting from willful neglect. ARRA significantly
increases the amount of the civil penalties, with penalties of up to $50,000 per violation for a
maximum civil penalty of $1,500,000 in a calendar year for violations of the same requirement.
Further, ARRA authorizes state attorneys general to bring civil actions seeking either injunction
or damages in response to violations of HIPAA privacy and security regulations that threaten the
privacy of state residents. Our facilities also are subject to any federal or state
privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA.
These laws vary and could impose additional penalties.
There are numerous other laws and legislative and regulatory initiatives at the federal and
state levels addressing privacy and security concerns. For example, in October 2007, the Federal
Trade Commission issued a final rule requiring financial institutions and creditors, which may
include hospitals and other healthcare providers, to implement written identity theft prevention
programs to detect, prevent, and mitigate identity theft in connection with certain accounts. The
enforcement date for this rule has been postponed until June 1, 2010.
The Emergency Medical Treatment and Active Labor Act
The Federal Emergency Medical Treatment and Active Labor Act (EMTALA) was adopted by
Congress in response to reports of a widespread hospital emergency room practice of patient
dumping. At the time of the enactment, patient dumping was considered to have occurred when a
hospital capable of providing the needed care sent a patient to another facility or simply turned
the patient away based on such patients inability to pay for his or her care. The law imposes
requirements upon physicians, hospitals and other facilities that provide emergency medical
services. Such requirements pertain to what care must be provided to anyone who comes to such
facilities seeking care before they may be transferred to another facility or otherwise denied
care. The government broadly interprets the law to cover situations in which patients do not
actually present to a hospitals emergency department, but present to a hospital-based clinic that
treats emergency medical conditions on an urgent basis or are transported in a hospital-owned
ambulance, subject to certain exceptions. At least one court has interpreted the law also to apply
to a hospital that has been notified of a patients pending arrival in a non-hospital owned
ambulance. Sanctions
for violations of this statute include termination of a hospitals Medicare provider agreement,
exclusion of a physician from participation in Medicare and Medicaid programs and civil money
penalties. In addition, the law creates private civil remedies that enable an individual who
suffers personal harm as a direct result of a violation of the law, and a medical facility that
suffers a financial loss as a direct result of another participating hospitals violation of the
law, to sue the offending hospital for damages and equitable relief. We can give no assurance that
governmental officials responsible for enforcing the law, individuals or other medical facilities
will not assert from time to time that our facilities are in violation of this statute.
Healthcare Reform
National healthcare reform is a focus at the federal level. This focus on healthcare reform
may increase the likelihood of significant changes affecting the healthcare industry. On November
7, 2009, the House of Representatives passed the Affordable Health Care for America Act (the House
Reform Bill). The House Reform Bill would reduce the number of uninsured persons by requiring
most individuals to obtain health insurance, expanding Medicaid eligibility, limiting preexisting
conditions exclusions and creating a temporary national high risk pool for coverage of currently
uninsured individuals with medical conditions. The House Reform Bill would also create a National
Health Insurance Exchange for individuals and small employers to obtain health insurance. This
exchange would include a public health insurance option to be administered by the Secretary of the
Department, who would negotiate payment rates with providers.
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The House Reform Bill also would modify the Medicare program, including changes to delivery
and payment systems. For example, hospitals could experience productivity-based reductions to
market basket updates and decreased payments in the event of excessive readmissions. The House
Reform Bill also would increase funding for fighting fraud and abuse, require the return of
overpayments within 60 days of their discovery, create new penalties for fraud and abuse violations
and restrict physician ownership of hospitals.
Currently, the U.S. Senate is considering, but
has not yet passed, a reform bill that is also designed to decrease
the number of uninsured individuals and reduce healthcare costs. It is not possible to
predict whether federal healthcare reform legislation will be enacted or the impact of any enacted
federal healthcare reform legislation. For example, the creation of a public health insurance
option could result in a migration of enrollees from higher paying commercial health plans, which
could have a negative impact on hospital revenues. Similarly, payment reductions or other changes
to the Medicare program that may be enacted as part of federal reform legislation could negatively
impact hospital revenues. However, these negative impacts could be offset by a reduction in bad
debt and charity care as a result of the creation of a public health insurance option and other
aspects of healthcare reform.
In addition to the provisions found in the House Reform Bill and the U.S. Senate bill, the Medicaid program has been
subject, in recent years and currently, to federal and state efforts to reduce expenditures but
also to expand eligibility. For example, DEFRA, signed into law on February 8, 2006, includes
Medicaid cuts of approximately $4.8 billion over five years. CMS has published a number of proposed
and final regulations that, if implemented, would result in significant additional reductions in
Medicaid funding. These regulations have been subject to Congressional moratoria, rescinded,
invalidated by court order or otherwise delayed. However, CMS could pursue implementation of these
regulations or other regulatory measures that would further reduce Medicaid funding in the future.
Most states, including the states in which we operate, have applied for and been granted
federal waivers from current Medicaid regulations to allow them to serve some or all of their
Medicaid participants through managed care providers. Most of the states in which we operate have experienced budget constraints as a result of
increased costs and lower than expected tax collections. Current economic conditions have increased
these budget pressures.
Medicaid spending cuts or structural changes that
may have the affect of decreasing reimbursement may be implemented in the future in the states in
which we operate. In addition, from time to time, states in which we operate may enact measures
that impact private healthcare insurance, which may result in insurers reducing coverage or
negotiating lower rates or otherwise have an indirect adverse effect on providers.
Creation of a National Health Insurance Exchange, including a public health insurance option,
changes in the Medicare, Medicaid and other programs, hospital cost-containment initiatives by
public and private payors, proposals to limit payments and healthcare spending and industry-wide
competitive factors are highly significant to the healthcare industry. We are unable to predict
the future course of federal, state or local healthcare legislation. Further changes in the law or
regulatory framework that reduce our revenue or increase our costs could have a material adverse
effect on our business, financial condition or results of operations.
Conversion Legislation
Many states have enacted or are considering enacting laws affecting the conversion or sale of
not-for-profit hospitals. These laws generally include provisions relating to attorney general
approval, advance notification and community involvement. In addition, attorneys general in states
without specific conversion legislation may exercise authority over these transactions based upon
existing law. In many states, there has been an increased interest in the
oversight of not-for-profit conversions. The adoption of conversion legislation and the
increased review of not-for-profit hospital conversions may increase the cost and difficulty or
prevent the completion of transactions with or acquisitions of not-for-profit organizations in
various states.
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Healthcare Industry Investigations
Significant media and public attention has focused in recent years on the hospital industry.
Recently, increased attention has been paid by government investigators as well as private parties
pursuing civil lawsuits to the amounts charged by hospitals to uninsured and indigent patients and
the related collection practices of hospitals. Other current areas of interest include hospitals
with high Medicare outlier payments and recruitment arrangements with physicians. Further, there
are numerous ongoing federal and state investigations regarding multiple issues. These
investigations have targeted hospital companies as well as their executives and managers. We have
substantial Medicare, Medicaid and other governmental billings, which could result in heightened
scrutiny of our operations. We continue to monitor these and all other aspects of our business and
have developed a compliance program to assist us in gaining comfort that our business practices are
consistent with both legal principles and current industry standards. However, because the law in
this area is complex and constantly evolving, we cannot assure you that government investigations
will not result in interpretations that are inconsistent with industry practices, including ours.
In public statements surrounding current investigations, governmental authorities have taken
positions on a number of issues, including some for which little official interpretation previously
has been available, that appear to be inconsistent with practices that have been common within the
industry and that previously have not been challenged in this manner. In some instances, government
investigations that have in the past been conducted under the civil provisions of federal law may
now be conducted as criminal investigations. Additionally, the federal government has recently
indicated that it plans to expand its use of civil monetary penalties and Medicare program
exclusions to focus on those in the healthcare industry who accept kickbacks or present false
claims, in addition to the federal governments continuing efforts to focus on the companies that
offer or pay kickbacks. Failure to comply with applicable laws and regulations could subject us to
significant regulatory action, including fines, penalties and exclusion from the Medicare and
Medicaid programs.
Many current healthcare investigations are national initiatives in which federal agencies
target an entire segment of the healthcare industry. One example is the federal governments
initiative regarding hospital providers improper requests for separate payments for services
rendered to a patient on an outpatient basis within three days prior to the patients admission to
the hospital, where reimbursement for such services is included as part of the reimbursement for
services furnished during an inpatient stay. In particular, the government has targeted all
hospital providers to ensure conformity with this reimbursement rule. Further, the federal
government continues to investigate Medicare overpayments to prospective payment hospitals that
incorrectly report transfers of patients to other prospective payment system hospitals as
discharges. We are aware that prior to our acquisition of them, several of our hospitals were
contacted in relation to certain government investigations that were targeted at an entire segment
of the healthcare industry. Although we take the position that, under the terms of the acquisition
agreements, the prior owners of these hospitals retained any liability resulting from these
government investigations, we cannot assure you that the prior owners resolution of these matters
or failure to resolve these matters, in the event that any resolution was deemed necessary, will
not have a material adverse effect on our operations.
On March 31, 2008, the United States District Court for the District of Arizona (the District
Court) dismissed with prejudice the qui tam complaint against IAS, our parent company. The qui tam
action sought monetary damages and civil penalties under the FCA and included allegations that
certain business practices related to physician relationships and the medical necessity of certain
procedures resulted in the submission of claims for reimbursement in violation of the FCA. The case
dates back to March 2005 and became the subject of a subpoena by the OIG in September 2005. In
August 2007, the case was unsealed and became a private lawsuit after the Department of Justice
declined to intervene. The United States District Judge dismissed the case from the bench at the
conclusion of oral arguments on IAS motion to dismiss. On April 21, 2008, the court issued a
written order dismissing the case with prejudice and entering formal judgment for IAS. On May 7,
2008, the qui tam relators counsel filed a Notice of Appeal to the United States Court of Appeals
for the Ninth Circuit to appeal the District Courts dismissal of the case. On May 21, 2008, IAS
filed a Notice of Cross-Appeal to the United States Court of Appeals for the Ninth Circuit from a
portion of the April 21, 2008 Order and, on July 22, 2008, IAS filed a Motion to Disqualify
relators counsel related to their misappropriation of information subject to a claim of
attorney-client privilege by IAS. On August 21, 2008, the court issued a written order denying IAS
Motion to Disqualify and
resetting the briefing schedule associated with the Ninth Circuit appellate proceedings. On
October 21, 2008, the relator filed his appeal brief with the United States Court of Appeals for
the Ninth Circuit. IAS filed its cross-appeal brief on January 20, 2009. Currently, the Ninth
Circuit appeal is expected to take another six to nine months to complete.
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Certificates of Need
In some states, the construction of new facilities, acquisition of existing facilities or
addition of new beds or services may be subject to review by state regulatory agencies under a
certificate of need program. Florida and Nevada are the only states in which we currently operate
that require approval of acute care hospitals under a certificate of need program. These laws
generally require appropriate state agency determination of public need and approval prior to the
addition of beds or services or other capital expenditures. Failure to obtain necessary state
approval can result in the inability to expand facilities, add services and complete an acquisition
or change ownership. Further, violation may result in the imposition of civil sanctions or the
revocation of a facilitys license.
Health Choice
Health Choice is a prepaid Medicaid and Medicare managed health plan in the Phoenix, Arizona
area. For the years ended September 30, 2009, 2008 and 2007, premium revenue comprised
approximately 29.6%, 26.2% and 25.5%, respectively, of our consolidated net revenue. Premium
revenue is generated through capitated contracts whereby the Plan provides healthcare services in
exchange for fixed periodic payments from the Arizona Health Care Cost Containment System
(AHCCCS) and CMS. Capitation payments received by Health Choice are recognized as revenue in the
month that members are entitled to healthcare services.
Effective October 1, 2008, Health Choice began its current contract with AHCCCS, which
provides for a three-year term, with AHCCCS having the option to renew for two additional one-year
periods. The contract, which continues our state-wide presence, covers Medicaid members in the
following Arizona counties: Apache, Coconino, Maricopa, Mohave, Navajo, Pima, Yuma, La Paz and
Santa Cruz. As of September 30, 2009, Health Choices enrollment exceeded 187,000 members, compared
to over 142,000 members in the prior year. While we anticipate that our membership in the near term
will continue to exceed prior year amounts, we cannot guarantee the continued growth of our
membership.
In connection with our contract effective October 1, 2008, AHCCCS implemented a risk-based or
severity-adjusted payment methodology for all health plans, which resulted in a reduction to our
premium revenue on a per member per basis during the year ended September 30, 2009. Implementation
of this new payment methodology was retroactive to October 1, 2008, and is also expected to
negatively impact premium rates paid to Health Choice going forward. Based upon the risk score
adjustment factors provided by AHCCCS, we have estimated slight reductions in our future capitation
premium rates.
Effective January 1, 2006, pursuant to a contract with CMS, Health Choice began providing
coverage as a Medicare Advantage Prescription Drug (MAPD) Special Needs Plan (SNP) to its
Medicare enrollees in Maricopa, Pima, Pinal, Coconino, Apache and Navajo counties. The SNP allows
Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible
members, or those that are eligible for Medicare and Medicaid. The contract with CMS includes
successive one-year renewal options at the discretion of CMS. CMS has notified Health Choice that
it is exercising its option to extend the contract through December 31, 2010. Although
legislation has been proposed to extend Congressional authority for SNPs, under current law, CMS
authority to designate SNPs expires on December 31, 2010. Unless this law is changed, CMS may not
be able to renew Health Choices SNP contract after December 31, 2010. Additionally, federal law
prohibits CMS from designating additional disproportionate percentage SNPs through December 31,
2010, and prohibits existing SNPs from enrolling individuals outside of their existing geographic
areas through December 31, 2009.
The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs
that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in
excess of stated levels of up to $50,000 per claim, depending on the eligibility classification of
the member. Qualified costs must be incurred during the contract year and are the lesser of the
amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the
contract with AHCCCS when healthcare costs exceed stated amounts as
provided under the contract, including estimates of such costs at the end of each accounting
period.
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Premiums received from AHCCCS and CMS to provide services to our members have been impacted by
moderating rate increases. Additionally, the state of Arizona is currently facing significant
budgetary concerns. As a result, the state legislature passed a fiscal 2010 budget on July 1, 2009,
that includes AHCCCS funding at a lower rate of growth than in prior years, but does include
funding for medical cost inflation and increased enrollment in the program.
In regards to the fiscal 2010 year, depending on member mix, we generally believe Health Choice could experience
flat to slightly declining rates received on a per member per month basis, which may negatively impact our
premium revenue. In addition, there are a number of alternatives being considered to address Arizonas budget concerns,
including increases in sales and property taxes, a reduction in AHCCCS total expenditures, a reduction in rates paid by AHCCCS to
facilities, and elimination of KidsCare, Arizonas Childrens Health Insurance Program. If
additional budgetary measures such as these were to occur, we anticipate it would negatively impact
our premium revenue in the future; however, we are unable to predict the impact on our results of
operations and cash flows.
As of September 30, 2009, we provided a performance guaranty in the form of letters of credit
totaling $43.2 million for the benefit of AHCCCS to support our obligations under our contract to
provide and pay for the healthcare services. The amount of the performance guaranty is based
primarily upon the membership in the Plan and the related capitation paid to us.
Health Choice is subject to state and federal laws and regulations, and CMS and AHCCCS have
the right to audit Health Choice to determine the plans compliance with such standards. Health
Choice is required to file periodic reports with CMS and AHCCCS and to meet certain financial
viability standards. Health Choice also must provide its enrollees with certain mandated benefits
and must meet certain quality assurance and improvement requirements. Health Choice must also
comply with the electronic transactions regulations and privacy and security standards of HIPAA.
The federal anti-kickback statute has been interpreted to prohibit the payment, solicitation,
offering or receipt of any form of remuneration in return for the referral of federal healthcare
program patients or any item or service that is reimbursed, in whole or in part, by any federal
healthcare program. Similar anti-kickback statutes have been adopted in Arizona, which apply
regardless of the source of reimbursement. The Department has adopted safe harbor regulations
specifying the following relationships and activities that are deemed not to violate the federal
anti-kickback statute that specifically relate to managed care:
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waivers by health maintenance organizations of Medicare and Medicaid beneficiaries
obligation to pay cost-sharing amounts or to provide other incentives in order to attract
Medicare and Medicaid enrollees; |
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certain discounts offered to prepaid health plans by contracting providers; |
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certain price reductions offered to eligible managed care organizations; and |
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certain price reductions offered by contractors with substantial financial risk to
managed care organizations. |
We believe that the incentives offered by Health Choice to its Medicaid and Medicare enrollees
and the discounts it receives from contracting healthcare providers satisfy the requirements of the
safe harbor regulations. However, failure to satisfy each criterion of the applicable safe harbor
does not mean that the arrangement constitutes a violation of the law; rather the safe harbor
regulations provide that the arrangement must be analyzed on the basis of its specific facts and
circumstances. We believe that Health Choices arrangements comply in all material respects with
the federal anti-kickback statute and similar Arizona statutes.
Environmental Matters
We are subject to various federal, state and local environmental laws and regulations,
including those relating to the protection of human health and the environment. The principal
environmental requirements applicable to our operations relate to:
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the proper handling and disposal of medical waste, hazardous waste and low-level
radioactive medical waste; |
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the proper use, storage and handling of mercury and other hazardous materials; |
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underground and above-ground storage tanks; |
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management of hydraulic fluid or oil associated with elevators, chiller units or other
equipment; |
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management of asbestos-containing materials or lead-based paint present or likely to be
present at some locations; and |
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air emission permits and standards for boilers or other equipment. |
We do not expect our obligations under these or other applicable environmental laws and
requirements to have a material effect on us. In the course of our operations, we may also identify
other circumstances at our facilities, such as water intrusion or the presence of mold or fungus,
which warrant action, and we can and do incur additional costs to address those circumstances.
Under various environmental laws, we may also be required to clean up or contribute to the cost of
cleaning up substances that have been released to the environment either at properties owned or
operated by us or our predecessors or at properties to which substances from our operations were
sent for off-site treatment or disposal. These remediation obligations may be imposed without
regard to fault, and liability for environmental remediation can be substantial. While we cannot
predict whether or to what extent we might be held responsible for such cleanup costs in the
future, at present we have not identified any significant cleanup costs or liabilities that are
expected to have a material effect on us.
Professional and General Liability Insurance
As is typical in the healthcare industry, we are subject to claims and legal actions by
patients in the ordinary course of business. To cover these claims, we maintain professional
malpractice liability insurance and general liability insurance in amounts that we believe to be
sufficient for our operations, including our employed physicians, although some claims may exceed
the scope of the coverage in effect. We also maintain umbrella coverage. Losses up to our
self-insured retentions and any losses incurred in excess of amounts maintained under such
insurance will be funded from working capital.
The cost of malpractice and other liability insurance, and the premiums and self-retention
limits of such insurance, have moderated as a result of tort reform legislation limiting the size
of malpractice judgments in certain states such as Florida and Texas, as well as improvements in
our claims experience. For fiscal 2010, our self-insured retention for professional and general
liability coverage is $5.0 million per claim, with an excess aggregate limit of $55.0 million. The
maximum coverage under our insurance policies remains unchanged at $75.0 million. Our
self-insurance reserves for estimated claims incurred but not yet reported is based upon estimates
determined by third-party actuaries. Funding for the self-insured retention of such claims is
derived from operating cash flows. We cannot assure you that this insurance will continue to be
available at reasonable prices that will allow us to maintain adequate levels of coverage. We also
cannot assure you that our cash flow will be adequate to provide for professional and general
liability claims in the future. Additionally, the negative impact of the current economic downturn
on insurance companies investment portfolios may result in an increase in premiums for future
policy renewal periods.
Our Information Systems
We use a common information systems platform across all of our hospitals. We use McKessons
clinical, patient accounting, laboratory, radiology and decision support software and Lawsons
financial application and enterprise resource planning software. We use other vendors for
specialized information systems needs for our decision support, emergency and radiology
departments.
Our information systems are essential to the following areas of our business operations, among
others:
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patient accounting, including billing and collection of net revenue; |
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financial, accounting, reporting and payroll; |
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laboratory, radiology and pharmacy systems; |
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materials and asset management; |
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negotiating, pricing and administering our managed care contracts; and |
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monitoring of quality of care and collecting data on quality measures necessary for
full Medicare payment updates. |
Utilizing a common information systems platform across all our hospitals allows us to:
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enhance patient safety, automate medication administration and increase staff time
available for direct patient care; |
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optimize staffing levels according to patient volumes, acuity and seasonal needs at
each facility; |
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perform product line analyses; |
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continue to meet or exceed quality of care indicators on a current basis; |
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effectively monitor registration, billing, collections, managed care contract
compliance and all other aspects of our revenue cycle; |
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control supply costs by complying with our group purchasing organization contract; and |
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effectively monitor financial results. |
The cost of maintaining our information systems has increased significantly in recent years.
Information systems maintenance expense increased $1.1 million to $8.0 million for the fiscal year
ended September 30, 2009, as compared to the prior year. We expect the trend of increased
maintenance costs in this area to continue in the future. In addition, we expect to spend
approximately $8.0 million on various hardware and software upgrades during 2010.
The ARRA included approximately $21.0 billion
in funding for various healthcare information technology (IT) initiatives, including incentives
for hospitals and physicians to implement systems supporting
electronic health records (EHRs). Though additional
investments in hardware and software will be required, we believe our historical capital
investments in advanced clinicals and other information systems, as well as quality of
care programs, provides a solid platform to
build upon for timely compliance with the healthcare IT requirements of the ARRA.
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Item 1A. Risk Factors.
Servicing Our Indebtedness Requires A Significant Amount of Cash. Our Ability To Generate
Sufficient Cash Depends On Numerous Factors Beyond Our Control, And We May Be Unable To Generate
Sufficient Cash Flow To Service Our Debt Obligations, Including Making Payments On Our 8 3/4% Notes
And Term Loans.
We have issued $475.0 million in aggregate principal amount of 8 3/4% senior subordinated notes
due 2014, that have been registered under the Securities Act of 1933, as amended, (the 8 3/4%
notes). We have also entered into our senior secured credit facilities, which includes a $439.0
million senior secured term loan and a $150.0 million senior secured delayed draw term loan, both
maturing on March 15, 2014. We cannot assure you that our business will generate sufficient cash
flow from operations or that future borrowing will be available to us under our senior secured
credit facilities in an amount sufficient to enable us to pay the principal, if any, and interest
on our indebtedness, including the 8 3/4% notes and term loans, or to fund our other liquidity needs.
Our ability to fund these payments is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We may need to refinance all
or a portion of our indebtedness, including the 8 3/4% notes and term loans, on or before maturity.
We cannot assure you that we will be able to refinance any of our indebtedness, on commercially
reasonable terms or at all. In addition, the terms of existing or future debt agreements, including
the amended and restated credit agreement governing the senior secured credit facilities and the
indenture governing the 8 3/4% notes, may restrict us from affecting any of these alternatives.
The senior secured credit facilities also include a senior secured revolving credit facility
of $225.0 million, with a $100.0 million sub-limit for letters of credit that matures on April 27,
2013. Our ability to borrow funds under our revolving credit facility is subject to the financial
viability of the participating financial institutions. Currently, we have identified one
defaulting lender, Lehman Brothers (Lehman), who has been unable to fund its proportionate share
of borrowings under our revolving credit facility since September 2008. Lehmans participation in
our revolving credit facility is approximately 8.9%, or $20.0 million of our total revolver
capacity. We are currently working to replace this lender with a financially viable institution;
however, we are unable to provide any assurance that this will be possible. If any of our remaining
creditors were to suffer similar financial difficulties, or if the credit markets were to
deteriorate as they did towards the end of calendar 2008, our ability to access available funds
under our revolving credit facility could be limited.
During the next twelve months, along with interest on our senior secured credit
facilities, we are required to repay $5.9 million in principal under our senior secured credit
facilities, $41.6 million in interest under the 8 3/4% notes and $2.7 in principal under our capital
lease and other obligations. If we cannot make scheduled payments on our debt, we will be in
default and, as a result:
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our debt holders could declare all outstanding principal and interest to be due and
payable; |
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our secured debt lenders could terminate their commitments and commence foreclosure
proceedings against our assets; and |
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we could be forced into bankruptcy or liquidation. |
Our Substantial Level Of Indebtedness Could Adversely Affect Our Financial Condition And
Prevent Us From Fulfilling Our Obligations Under The 8 3/4% Notes And Senior Secured Credit
Facilities.
We have a significant amount of indebtedness. At September 30, 2009, we had $475.0 million of
outstanding 8 3/4% notes and $584.8 million of other indebtedness (of which $576.2 million consisted
of borrowings under our senior secured credit facilities, and $8.7 million consisted of capital
lease obligations and other debt). All of our other indebtedness ranks senior to the 8 3/4% notes. In
addition, subject to restrictions in the indenture governing the 8 3/4% notes and the amended and
restated credit agreement governing the senior secured credit facilities, we may incur additional
indebtedness.
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Our substantial indebtedness could have important consequences to our financial condition and
results of operations, including the following:
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it may be more difficult for us to satisfy our obligations, including debt service
requirements under our outstanding debt; |
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our ability to obtain additional financing for working capital, acquisitions, capital
expenditures, debt service requirements, or other general corporate purposes may be
impaired; |
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we must use a substantial portion of our cash flow to pay principal and interest on our
8 3/4% notes, senior secured credit facilities, and other indebtedness which will reduce the
funds available to us for other purposes; |
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we are more vulnerable to economic downturns and adverse industry conditions; |
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our ability to capitalize on business opportunities and to react to competitive
pressures as compared to our competitors may be compromised due to our high level of
indebtedness; and |
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our ability to borrow additional funds or to refinance indebtedness may be limited. |
Our senior secured credit facilities are rated by Moodys and Standard & Poors. If these
ratings were ever downgraded, our access to and cost of future capital could be adversely affected.
In addition, our ability to borrow additional funds may be reduced and the risks related to our
substantial indebtedness would intensify.
An Increase In Interest Rates Would Increase The Cost Of Servicing Our Debt And Could Reduce
Our Profitability.
Borrowings under our senior secured credit facilities bear interest at variable rates. As of
September 30, 2009, we had outstanding variable rate debt of $576.2 million. We have managed our
market exposure to changes in interest rates by converting $425.0 million of this variable rate
debt to fixed rate debt through the use of interest rate swap agreements, effectively leaving
$151.2 million in debt subject to variable rates. As a result, an increase in interest rates,
whether because of an increase in market interest rates or an increase in our own cost of
borrowing, would increase the cost of servicing our debt and could materially reduce our
profitability. For more discussion on the effect of changes in interest rates, see Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
We Are Controlled By Our Principal Equity Sponsors.
We are controlled by our principal equity sponsors who have the ability to control our
financial-related policies and decisions. For example, our principal equity sponsors could cause us
to enter into transactions that, in their judgment, could enhance their equity investment, even
though such transactions might reduce our cash flows or capital reserves. So long as our principal
equity sponsors continue to own a significant amount of our equity interests, they will continue to
be able to strongly influence and effectively control the decisions related to our company.
Additionally, our principal equity sponsors may from time to time acquire and hold interests in
businesses that compete directly or indirectly with us and, therefore, have interests that may
conflict with the interests of our company.
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If We Are Unable To Retain And Negotiate Reasonable Contracts With Managed Care Plans, Our Net
Revenue May Be Reduced.
Our ability to obtain reasonable contracts with health maintenance organizations, preferred
provider organizations and other managed care plans significantly affects the revenue and operating
results of our hospitals. Revenue derived from health maintenance organizations, preferred provider
organizations and other managed care plans accounted for 43.0%, 46.0% and 47.5% of our hospitals
net patient revenue for the years ended September 30, 2009, 2008 and 2007, respectively. Our
hospitals have over 300 managed care contracts with no one commercial payor representing more than
10.0% of our net patient revenue. In most cases, we negotiate our managed care contracts annually
as they come up for renewal at various times during the year. Further, many of these contracts are
terminable by either party on relatively short notice. Our future success will depend, in
part, on our ability to retain and renew our managed care contracts and enter into new managed care
contracts on terms favorable to us. Other healthcare providers, including some with integrated
health systems, provider networks, greater geographic coverage or a wider range of services, may
impact our ability to enter into managed care contracts or negotiate increases in our reimbursement
and other favorable terms and conditions. For example, some of our competitors may negotiate
exclusivity provisions with managed care plans or otherwise restrict the ability of managed care
companies to contract with us. In one region in which we operate, the largest healthcare provider
organization controls one of the largest payor organizations and operates it primarily as a closed
network. The patients enrolled in this integrated health system are largely unavailable to us. In
addition, consolidation among managed care companies and organizations may reduce our ability to
negotiate favorable contracts with such payors.
In addition, the House Reform Bill, which has passed the U.S. House of Representatives but is
not yet law, includes a public health insurance option to be administered by the Secretary of the
Department, who would negotiate payment rates with providers. The healthcare reform bill currently
under consideration by the U.S. Senate also includes a public health insurance option. The creation
of a public health insurance option could result in a migration of enrollees from higher paying
commercial health plans, which could have a negative impact on hospital revenues. However, this
negative impact could be offset by a reduction in bad debt and charity care as a result of the
creation of a public health insurance option and other aspects of healthcare reform that are intended to provide insurance coverage
for most uninsured individuals.
Healthcare Reform and Other Changes In Governmental Programs May Significantly Reduce
Government Healthcare Spending And Our Revenue.
National healthcare reform is a focus at the federal level. The House Reform Bill has passed
the U.S. House of Representatives, but has not yet been approved by
the U.S. Senate. The House Reform
Bill would reduce the number of uninsured persons by requiring most individuals to obtain health
insurance, expanding Medicaid eligibility, limiting preexisting conditions exclusions and creating
a temporary national high risk pool for coverage of currently uninsured individuals with medical
conditions. The House Reform Bill would also create a National Health Insurance Exchange for
individuals and small employers to obtain health insurance. This exchange would include a public
health insurance option to be administered by the Secretary of the Department, who would negotiate
payment rates with providers.
The House Reform Bill also would modify the Medicare program, including changes to delivery
and payment systems. For example, hospitals could experience productivity-based reductions to
market basket updates and decreased payments in the event of excessive readmissions. The House
Reform Bill also would increase funding for fighting fraud and abuse, require the return of
overpayments within 60 days of their discovery, create new penalties for fraud and abuse violations
and restrict physician ownership of hospitals.
Currently, the U.S. Senate is considering a reform bill, entitled the Patient Protection and
Affordable Care Act, which is also designed to decrease the number of uninsured
individuals and reduce healthcare costs. It is not possible to predict whether federal healthcare
reform legislation will be enacted or the impact of any enacted federal healthcare reform
legislation. For example, the creation of a public health insurance option could result in a
migration of enrollees from higher paying commercial health plans, which could have a negative
impact on hospital revenues. Similarly, reductions in the market basket update for hospitals or
other changes to the Medicare program that may be enacted as part of federal reform legislation
could negatively impact hospital revenues. However, these negative impacts could be offset by a
reduction in bad debt and charity care as a result of the creation of a public health insurance
option and other aspects of healthcare reform that are intended to provide insurance coverage
for most uninsured individuals. Federal healthcare reform may reduce our revenue,
increase our costs, or otherwise have a material adverse effect on our business, financial
condition or results of operations. We are unable to predict the course of federal, state, or
local healthcare legislation.
The focus on healthcare reform may also increase the likelihood of significant changes
affecting existing government healthcare programs. A significant portion of our patient volumes is
derived from government healthcare programs. Governmental healthcare programs, principally
Medicare and Medicaid, including managed Medicare and managed Medicaid, accounted for 45.9%, 44.9%
and 43.0% of our hospitals net patient revenue for the years ended September 30, 2009, 2008 and
2007, respectively. In recent years, legislative changes have resulted in limitations on and, in
some cases, reductions in levels of, payments to healthcare providers for certain services under
many of these government programs. Further, legislative and regulatory changes have altered the
method of
payment for various services under the Medicare, Medicaid and other federal healthcare
programs. For example, CMS has significantly expanded the number of procedures that Medicare
reimburses if performed in an ASC. More Medicare procedures that are now performed in hospitals,
such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. Possible future
changes in the Medicare, Medicaid and other state programs may reduce reimbursements to healthcare
providers and may also increase our operating costs, which could reduce our profitability.
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CMS has recently completed a two-year transition to full implementation of the MS-DRG. Changes
to the MS-DRG system could impact the margins we receive for certain services. For federal fiscal
year 2010, CMS has provided a 2.1% market basket update for hospitals that submit certain quality
patient care indicators and a 0.1% update for hospitals that do not submit this data. While we will
endeavor to comply with all quality data submission requirements, our submissions may not be deemed
timely or sufficient to entitle us to the full market basket adjustment for all of our hospitals.
Medicare payments to hospitals in federal fiscal years 2008 and 2009 were reduced to eliminate what
CMS estimated to be the effect of coding or classifications changes as a result of hospitals
implementing the MS-DRG system. If CMS retrospectively determines that adjustment levels for
federal fiscal years 2008 and 2009 were inadequate, CMS may impose additional adjustments in future
years. Although CMS has not imposed an adjustment for federal fiscal year 2010, CMS has announced
its intent to impose payment adjustments in federal fiscal years 2011 and 2012 because of what CMS
has determined to be an inadequate adjustment in federal fiscal year 2008. Additionally, Medicare
payments to hospitals are subject to a number of other adjustments, and the actual impact on
payments to specific hospitals may vary. In some cases, commercial third-party payors and other
payors such as some state Medicaid programs rely on all or portions of the Medicare MS-DRG system
to determine payment rates, and adjustments that negatively impact Medicare payments may also
negatively impact payments from Medicaid programs or commercial third-party payors and other
payors.
We believe that hospital operating margins across the country, including ours, have been and
may continue to be under pressure because of limited pricing flexibility and growth in operating
expenses in excess of the increase in prospective payments under the Medicare program. Further,
DEFRA, signed into law on February 8, 2006, includes Medicaid cuts of approximately $4.8 billion
over five years. CMS has published a number of proposed and final regulations that, if implemented,
would result in significant additional reductions in Medicaid funding. These regulations have been
subject to Congressional moratoria, rescinded, invalidated by court order or otherwise delayed.
However, CMS could pursue implementation of these regulations or other regulatory measures that
would further reduce Medicaid funding in the future.
In addition, from time to time, state legislatures consider healthcare reform measures or
changes to the regulation of private healthcare insurance. Because of economic conditions and
other factors, a number of states are experiencing budget problems and have adopted or are
considering legislation designed to reduce their Medicaid expenditures and to provide universal
coverage and additional care, including enrolling Medicaid recipients in managed care programs and
imposing additional taxes on hospitals to help finance or expand states Medicaid systems. The
states in which we operate have decreased funding for healthcare programs or made other structural
changes resulting in a reduction in Medicaid hospital rates for fiscal years 2009 and 2010. For
example, Arizona has frozen hospital inpatient and outpatient reimbursements at the October 1, 2007
rates and discontinued a state health benefits program for low-income parents. Louisiana reduced
inpatient hospital rates by 3.5% and 6.3% and outpatient hospital
rates by 3.5% and 5.7% in fiscal
years 2009 and 2010, respectively, but still projects a Medicaid program deficit in excess of $300
million for the remainder of fiscal year 2010. In fiscal year 2009, Nevada cut inpatient hospital
rates by 5% and eliminated rate enhancements for pediatric and obstetric care. Utah has cut
hospital rates for fiscal year 2010 by more than 11%. Florida has reduced hospital reimbursement
rates for fiscal years 2009 and 2010. Additional Medicaid spending cuts may be implemented in the
future in the states in which we operate, including reductions in supplemental Medicaid
reimbursement programs. Our Texas hospitals participate in private supplemental Medicaid
reimbursement programs that are structured to expand the community safety net by providing indigent
healthcare services and result in additional revenues for participating hospitals. We cannot
predict whether the Texas private supplemental Medicaid reimbursement programs will continue or
guarantee that revenues recognized from the programs will not decrease.
Changes in laws or regulations regarding government health programs or other changes in the
administration of government health programs could have a material, adverse effect on our financial
position and results of operations.
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Our Hospitals Face Competition For Patients From Other Hospitals And Healthcare Providers That
Could Impact Patient Volume.
In general, the hospital industry is highly competitive. Our hospitals face competition for
patients from other hospitals in our markets, large vertically integrated providers, large tertiary
care centers and outpatient service providers that provide similar services to those provided by
our hospitals. All of our facilities are located in geographic areas in which at least one other
hospital provides services comparable to those offered by our hospitals. Some of the hospitals that
compete with ours are owned by governmental agencies or not-for-profit corporations supported by
endowments and charitable contributions and can finance capital expenditures and operations on a
tax-exempt basis. In addition, the number of freestanding specialty hospitals, outpatient surgery
centers and outpatient diagnostic centers has increased significantly in the areas in which we
operate. Some of our competitors also have greater geographic coverage, offer a wider range of
services or invest more capital or other resources than we do. If our competitors are able to
achieve greater geographic coverage, improve access and convenience to physicians and patients,
recruit physicians to provide competing services at their facilities, expand or improve their
services or obtain more favorable managed care contracts, we may experience a decline in patient
volume.
CMS publicizes performance data relating to quality measures that hospitals submit in
connection with their Medicare reimbursement. If any of our hospitals should achieve poor results
(or results that are lower than our competitors) on these quality criteria, patient volumes could
decline. In the future, other trends toward clinical transparency and value-based purchasing of
healthcare services may have an adverse impact on our competitive position and patient volume.
If We Continue To Experience Growth In Volume And Revenue Related To Uncompensated Care, Our
Financial Condition Or Results Of Operations Could Be Adversely Affected.
Like others in the hospital industry, we have experienced an increase in our uncompensated
care, including charity care and our provision for bad debts. Our provision for bad debts and
charity care as a percentage of acute care revenue has increased due to a growth in self-pay volume
and revenue resulting in large part from an increase in the number of uninsured patients, along
with an increase in the amount of co-payments and deductibles passed on by employers to employees.
In addition, as a result of the prolonged economic recession and rising levels of unemployment, we
believe that our hospitals may continue to experience growth in bad debts and charity care.
Although we continue to seek ways of improving point of service collection efforts and implementing
appropriate payment plans with our patients, if we continue to experience growth in self-pay volume
and revenue, our results of operations could be adversely affected. Further, our ability to improve
collections for self-pay patients may be limited by regulatory and investigatory initiatives,
including private lawsuits directed at hospital charges and collection practices for uninsured and
underinsured patients.
If We Are Unable To Attract And Retain Quality Medical Staffs, Our Financial Condition Or
Results Of Operations Could Be Adversely Affected.
The success of our hospitals depends on the following factors, among others:
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the number and quality of the physicians on the medical staffs of our hospitals; |
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the admitting practices of those physicians; and |
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our maintenance of good relations with those physicians. |
Our efforts to attract and retain physicians are affected by our managed care contracting
relationships, national shortages in some specialties, such as anesthesiology and radiology, the
adequacy of our support personnel, the condition of our facilities and medical equipment, the
availability of suitable medical office space and federal and state laws and regulations
prohibiting financial relationships that may have the effect of inducing patient referrals.
In an effort to meet community needs in certain markets in which we operate, we have
implemented a strategy to employ physicians in certain specialties. The deployment of a physician
employment strategy includes increased salary costs, potential malpractice insurance coverage costs, risks of successful physician integration and
difficulties associated with physician practice
management. While we believe this strategy is consistent with industry trends, we cannot be
assured of the long-term success of such a strategy.
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Our Hospitals Face Competition For Staffing, Which May Increase Our Labor Costs And Reduce
Profitability.
We compete with other healthcare providers in recruiting and retaining qualified management
and staff personnel responsible for the day-to-day operations of each of our hospitals, including
nurses and other non-physician healthcare professionals. In the past, the limited supply of nurses
and other medical support personnel presented a significant operating issue. In part, due to the
prolonged economic recession, we have seen an improvement in the availability of nursing personnel
and other skilled labor. If such a shortage were to occur again, it may require us to enhance
wages and benefits to recruit and retain nurses and other medical support personnel, and contract
with more expensive temporary personnel. We also depend on the available labor pool of semi-skilled
and unskilled employees in each of the markets in which we operate. Because a significant
percentage of our revenue consists of fixed, prospective payments, our ability to pass along
increased labor costs to third-party payors is constrained. Our failure to recruit and retain
qualified management, nurses and other medical support personnel, or to control our labor costs
could have a material adverse effect on our financial condition or results of operations.
If We Fail To Continually Enhance Our Hospitals With The Most Recent Technological Advances In
Diagnostic And Surgical Equipment, Our Ability To Maintain And Expand Our Markets May Be Adversely
Affected.
Technological advances with respect to computed axial tomography (CT), magnetic resonance
imaging (MRI) and positron emission tomography (PET) equipment, as well as other equipment used in
our facilities, are continually evolving. In an effort to compete with other healthcare providers,
we must constantly be evaluating our equipment needs and upgrading equipment as a result of
technological improvements. Such equipment costs typically range from $1.0 million to $3.0 million,
exclusive of construction or build-out costs. If we fail to remain current with the technological
advancements of the medical community, our volumes and revenue may be negatively impacted.
If We Fail To Comply With Extensive Laws And Government Regulations, We Could Suffer
Penalties, Be Required To Alter Arrangements With Investors In Our Hospitals Or Be Required To Make
Significant Changes To Our Operations.
The healthcare industry, including our company, is required to comply with extensive and
complex laws and regulations at the federal, state and local government levels relating to, among
other things:
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relationships with physicians and other referral sources; |
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adequacy of medical care; |
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quality of medical equipment and services; |
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qualifications of medical and support personnel; |
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confidentiality, maintenance, data breach, identity theft and security issues
associated with individually identifiable information and medical records; |
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the screening, stabilization and transfer of patients who have emergency medical
conditions; |
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licensure and certification; |
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operating policies and procedures;
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34
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addition of facilities and services; |
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provider-based reimbursement, including complying with requirements allowing multiple
locations of a hospital to be billed under the hospitals Medicare provider number; and |
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disclosures to patients, including disclosure of any physician ownership in a hospital. |
Because many of these laws and regulations are relatively new, we do not always have the
benefit of significant regulatory or judicial interpretation of these laws and regulations. For
that reason and because these laws and regulations are so complex, hospital companies face a risk
of inadvertent violations. In the future, different interpretations or enforcement of these laws
and regulations could subject our current or past practices to allegations of impropriety or
illegality or could require us to make changes in our facilities, equipment, personnel, services,
capital expenditure programs and operating expenses.
If we fail to comply with applicable laws and regulations, we could be subjected to
liabilities, including:
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civil penalties, including the loss of our licenses to operate one or more of our
facilities; and |
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exclusion of one or more of our facilities from participation in the Medicare, Medicaid
and other federal and state healthcare programs. |
Congress Is Considering And May Enact Legislation That Would Impose Significant Restrictions
On Hospitals That Have Physician Owners, Including Our Hospitals That Have Physician Owners.
In recent years, both houses of the U.S. Congress have passed bills that included provisions
that would have eliminated or significantly restricted the whole hospital exception, the exception
under the Stark Law that allows for direct physician ownership in hospitals. While the whole
hospital exception provisions in these bills did not become law, this issue continues to attract
significant interest in Congress. In November 2009, the House of Representatives passed a
healthcare reform bill that would eliminate the whole hospital exception subject to a
grandfathering provision for most hospitals that currently have physician ownership. In order to
fall within this grandfathering provision, a hospital would have to abide by a number of
restrictions, including limits on future expansion and reporting and disclosure requirements. The
Senate healthcare reform bill currently under consideration contains a similar prohibition on
physician-owned hospitals.
We are unable to predict whether Congress will enact legislation that eliminates or alters the
whole hospital exception. If legislation restricting or eliminating the whole hospital exception
becomes law, we could be required to unwind the physician ownership of seven of our hospitals,
resulting in a repurchase of minority partners interests, or such hospitals could be subject to
significant restrictions on their current operations or future expansion, among other areas.
Some Of Our Hospitals May Be Required To Submit To The Department Information On Their
Relationships With Physicians, Including Information Regarding Physician Investors, And This
Submission Could Subject Such Hospitals And Us To Liability.
The Department has proposed to collect information on ownership, investment, and compensation
arrangements with physicians from 400 hospitals by requiring these hospitals to submit Disclosure
of Financial Relationship Reports (DFRR). The Department has indicated that at least three of our
hospitals would be among these 400 hospitals required to submit a DFRR. The DFRR and its
supporting documentation are currently under review by the Office of Management and Budget, and it
is unclear when, or if, it will be finalized. The Department intends to use this data to monitor
compliance with the Stark Law, and the Department may share the information with other government
agencies. Many of these agencies have not previously analyzed this information and have the
authority to bring enforcement actions against the partnership and the hospital. As currently
proposed by the Department, once a hospital receives this request, the hospital would have a
limited amount of time to compile a significant amount of information relating to its financial
relationships with physicians, including any ownership by physicians.
The hospital may be subject to substantial penalties if it is unable to assemble and report
this information within the required timeframe or if the Department or any other government agency
determines that the submission is inaccurate or incomplete. The hospital may be the subject of
investigations or enforcement actions if a government agency determines that any of the information
indicates a potential violation of law. In addition, a whistleblower acting pursuant to the FCA or
similar state laws may assert that the hospital has submitted false claims based on allegations
that the DFRR submission is inaccurate or incomplete or that material disclosed in the submission
constitutes a violation of applicable laws. Any such investigation, enforcement action, or
whistleblower allegation could materially adversely affect the results of our operations.
35
We May Incur Material Fees, Costs And Expenses In Connection With An Appeal Of The Court Order
Dismissing With Prejudice the Qui Tam Action And Investigation of IAS.
On March 31, 2008, the District Court dismissed with prejudice the qui tam complaint against
IAS, our parent company. The qui tam action sought monetary damages and civil penalties under the
FCA and included allegations that certain business practices related to physician relationships and
the medical necessity of certain procedures resulted in the submission of claims for reimbursement
in violation of the FCA. The case dates back to March 2005 and became the subject of a subpoena by
the OIG in September 2005. In August 2007, the case was unsealed and became a private lawsuit after
the Department of Justice declined to intervene. The United States District Judge dismissed the
case from the bench at the conclusion of oral arguments on IAS motion to dismiss. On April 21,
2008, the court issued a written order dismissing the case with prejudice and entering formal
judgment for IAS. On May 7, 2008, the qui tam relators counsel filed a Notice of Appeal to the
United States Court of Appeals for the Ninth Circuit to appeal the District Courts dismissal of
the case. On May 21, 2008, IAS filed a Notice of Cross-Appeal to the United States Court of Appeals
for the Ninth Circuit from a portion of the April 21, 2008 Order and, on July 22, 2008, IAS filed a
Motion to Disqualify relators counsel related to their misappropriation of information subject to
a claim of attorney-client privilege by IAS. On August 21, 2008, the court issued a written order
denying IAS Motion to Disqualify and resetting the briefing schedule associated with the Ninth
Circuit appellate proceedings. On October 21, 2008, the relator filed his appeal brief with the
United States Court of Appeals for the Ninth Circuit. IAS filed its cross-appeal brief on January
20, 2009. Currently, the Ninth Circuit appeal is expected to take another six to nine months to
complete. If the appeal of the order dismissing the qui tam action with prejudice was to be
resolved in a manner unfavorable to us, it could have a material adverse effect on our business,
financial condition and results of operations, including exclusion from the Medicare and Medicaid
programs. In addition, we may incur material fees, costs and expenses in connection with an appeal
of the court order dismissing with prejudice the qui tam litigation, or in defending the qui tam
action should the dismissal be reversed.
Providers In The Healthcare Industry Have Been The Subject Of Federal And State
Investigations, And We May Become Subject To Additional Investigations In The Future That Could
Result In Significant Liabilities Or Penalties To Us.
Both federal and state government agencies have increased their focus on and coordination of
civil and criminal enforcement efforts in the healthcare area. As a result, there are numerous
ongoing investigations of hospital companies, as well as their executives and managers. The OIG and
the Department of Justice have, from time to time, established national enforcement initiatives
that focus on specific billing practices or other suspected areas of abuse. Further, under the FCA,
private parties have the right to bring qui tam whistleblower lawsuits against companies that
submit false claims for payments to, or improperly retain overpayments from, the government. Some
states have adopted similar state whistleblower and false claims provisions.
Federal and state investigations relate to a wide variety of routine healthcare operations
including:
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cost reporting and billing practices; |
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financial arrangements with referral sources; |
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physician recruitment activities; |
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physician joint ventures; and |
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hospital charges and collection practices for self-pay patients. |
We engage in many of these and other activities which could be the subject of governmental
investigations or
inquiries from time to time. For example, we have significant Medicare and Medicaid billings,
we have numerous financial arrangements with physicians who are referral sources to our hospitals,
we have seven hospitals that have physician investors, and we may sell ownership interests in
certain other of our facilities to physicians and other qualified investors in the future. In
addition, our executives and managers, many of whom have worked at other healthcare companies that
are or may become the subject of federal and state investigations and private litigation, may be
included in governmental investigations or named as defendants in private litigation. Any
additional investigations of us, our executives or managers could result in significant liabilities
or penalties to us, as well as adverse publicity.
36
In addition, governmental agencies and their agents, such as the Medicare Administrative
Contractors, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid
programs, conduct audits of our healthcare operations. Private payors may conduct similar
post-payment audits, and we also perform internal audits and monitoring. Depending on the nature of
the conduct found in such audits and whether the underlying conduct could be considered systemic,
the resolution of these audits could have a material, adverse effect on our financial position,
results of operations and liquidity.
CMS is in the process of implementing a nationwide RAC program as required by the Tax Relief
and Health Care Act of 2006, following a three-year demonstration RAC program conducted in a
limited number of states pursuant to the Medicare Modernization
Act. Under the RAC program, CMS engages private contractors to conduct post-payment
reviews to detect and correct improper payments in the fee-for-service Medicare program, and the
contractors receive a contingency fee based on the amount of corrected, improper payments.
In addition, through DEFRA, Congress has expanded the federal governments involvement in
fighting fraud, waste and abuse in the Medicaid program by creating the Medicaid Integrity Program.
Under this program, CMS engages private contractors, referred to as MICs, to perform post-payment
audits of Medicaid claims and identify overpayments. MICs have commenced audits of Medicaid
providers in most jurisdictions, and audits are anticipated to begin in the remaining jurisdictions
by June 2010.
Any such audit or investigation could have a material adverse effect on the results of our
operations.
Compliance With Section 404 Of The Sarbanes-Oxley Act May Negatively Impact Our Results Of
Operations And Failure To Comply May Subject The Company To Regulatory Scrutiny And A Loss Of
Investors Confidence In Our Internal Control Over Financial Reporting.
We are required to perform an annual evaluation of our internal control over financial
reporting and file managements attestation with our annual report to comply with Section 404 of
the Sarbanes-Oxley Act of 2002. In October 2009, the SEC extended the requirement of the auditors
attestation on internal control over financial reporting for non-accelerated filers until fiscal
years ending on or after June 15, 2010.
Compliance with all requirements and interpretive guidance associated with Section 404 of the
Sarbanes-Oxley Act of 2002, and any changes in our internal control over financial reporting in
response to our internal evaluations, may be expensive and time-consuming and may negatively impact
our results of operations. In addition, we cannot assure you that we will be able to meet the
annual required deadlines for compliance with Section 404. Any failure on our part to meet the
required compliance deadlines may subject us to regulatory scrutiny and a loss of public confidence
in our internal control over financial reporting.
A Failure Of Our Information Systems Would Adversely Affect Our Ability To Properly Manage Our
Operations.
We rely on our advanced information systems and our ability to successfully use these systems
in our operations. These systems are essential to the following areas of our business operations,
among others:
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patient accounting, including billing and collection of net revenue; |
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financial, accounting, reporting and payroll;
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laboratory, radiology and pharmacy systems; |
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materials and asset management; |
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negotiating, pricing and administering managed care contracts; and |
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monitoring quality of care and collecting data on quality measures necessary for full
Medicare payment updates. |
If we are unable to use these systems effectively, we may experience delays in collection of
net revenue and may not be able to properly manage our operations or oversee the compliance with
laws or regulations.
If Any One Of The Regions In Which We Operate Experiences Or Continues To Experience An
Economic Downturn Or Other Material Change, Our Overall Business Results May Suffer.
The U.S. economy is experiencing the effects of a prolonged economic recession. Tight credit
markets, depressed consumer spending and high unemployment rates continue to pressure many
industries. During economic downturns, governmental entities often experience budgetary constraints
as a result of increased costs and lower than expected tax collections. These budgetary constraints
may result in decreased spending for health and human service programs, including Medicare,
Medicaid and similar programs, which represent significant payor sources for our hospitals. Many
states, including states in which we operate, have decreased funding for state healthcare programs
or made other structural changes resulting in a reduction in Medicaid spending. Additional
Medicaid spending cuts may be implemented in the future in the states in which we operate. Other
risks we face from general economic weakness include patient decisions to postpone or cancel
elective and non-emergent healthcare procedures, increases in the uninsured population and further
difficulties in our collection of patient co-payment and deductible receivables.
Of our 15 acute care hospital facilities, four are located in Salt Lake City, three are
located in Phoenix, three are located in Tampa-St. Petersburg, three are located in the state of
Texas, one is located in Las Vegas and one is located in West Monroe, Louisiana. In addition, our
health plan, Health Choice, and our behavioral health hospital facility are located in Phoenix. For
the year ended September 30, 2009, our net revenue was generated as follows:
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Health Choice |
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29.6 |
% |
Salt Lake City, Utah |
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19.1 |
% |
Phoenix, Arizona (excluding Health Choice) |
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13.9 |
% |
Three cities in Texas, including San Antonio |
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19.0 |
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Tampa-St. Petersburg, Florida |
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8.9 |
% |
Other |
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9.5 |
% |
Any material change in the current demographic, economic, competitive or regulatory conditions
in any of these regions could adversely affect our overall business results because of the
significance of our operations in each of these regions to our overall operating performance.
Moreover, our business is not as diversified as some competing multi-facility healthcare companies
and, therefore, is subject to greater market risks. The projected population growth rates in these
regions are based on assumptions beyond our control. Such projected growth may not be realized.
We May Be Subject To Liabilities Because Of Claims Brought Against Our Facilities.
Plaintiffs frequently bring actions against hospitals and other healthcare providers, alleging
malpractice, product liability or other legal theories. Many of these actions involve large claims
and significant defense costs. For example, certain other hospital companies have been subject to
class-action claims in connection with their billing practices relating to uninsured patients.
We maintain professional malpractice liability insurance and general liability insurance in
amounts we believe are sufficient to cover claims arising out of the operations of our facilities.
Some of the claims could exceed the
scope of the coverage in effect or coverage of particular claims or damages could be denied.
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The volatility of professional liability insurance and, in some cases, the lack of
availability of such insurance coverage, for physicians with privileges at our hospitals increases
our risk of vicarious liability in cases where both our hospital and the uninsured or underinsured
physician are named as co-defendants. As a result, we are subject to greater self-insured risk and
may be required to fund claims out of our operating cash flow to a greater extent than during 2009.
We cannot assure you that we will be able to continue to obtain insurance coverage in the future or
that such insurance coverage, if it is available, will be available on acceptable terms.
Our fiscal 2010 self-insured retention for professional and general liability coverage is $5.0
million per claim, with an excess aggregate limit of $55.0 million. The maximum coverage under our
insurance policies is unchanged at $75.0 million.
Our Hospitals May Face Increasing Insurance Costs That May Reduce Our Cash Flows And Net
Earnings.
The cost of liability insurance has moderated as a result of tort reform legislation limiting
the size of malpractice judgments in certain states such as Florida and Texas, as well as
improvements in our claims experience. However, there is no assurance that the recent moderation in
insurance costs will continue. Furthermore, we cannot assure you that we will be able to continue
to obtain insurance coverage in the future or that, such insurance coverage, if it is available,
will be available on acceptable terms. Additionally, the negative impact of the economic downturn
on insurance companies investment portfolios may result in an increase in premiums for future
policy renewal periods.
Operations At Our Hospitals Have Been And May Be Negatively Impacted By Certain Factors,
Including Severe Weather Conditions And The Impact Of Natural Disasters.
Our revenue and volume trends can be affected by many factors, including severe weather
conditions and the impact of natural disasters, including hurricanes and tornados. These factors
could have a material adverse effect on our operations, including revenue and volume trends, and
will be outside of our control. Damages incurred by us and other companies with operations in the
Gulf Coast area as a result of past catastrophic hurricanes have resulted in significant property
loss claims and settlements for the insurance industry. Our current policy for property insurance
provides maximum coverage of $500.0 million per occurrence with a $50,000 deductible, except in the
occurrence of earthquakes and named wind and storms, which carries a 5% deductible based on insured
value of each property or business damaged. Damage from past hurricanes, as well as the occurrence
of future natural disasters, could continue to drive the cost of property insurance higher, as well
as have an adverse economic impact on the regions we serve. We cannot be certain that any losses
from business interruption or property damage, along with increases in property insurance costs,
will not have a material effect on our results of operations and cash flows.
If Health Choices Contract With AHCCCS Was Discontinued, Our Net Revenue And Profitability
Would Be Adversely Affected.
Effective October 1, 2008, Health Choice began its current contract with AHCCCS, which
provides for a three-year term, with AHCCCS having the option to renew for two additional one-year
periods. The contract is terminable without cause on 90 days written notice or for cause upon
written notice if we fail to comply with any term or condition of the contract or fail to take
corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can
terminate our contract in the event of the unavailability of state or federal funding. If our
contract with AHCCCS is terminated, our financial condition, cash flows and results of operations
would be adversely affected.
39
If We Are Unable To Control Healthcare Costs At Health Choice, Our Profitability May Be
Adversely Affected.
Health Choice derives its premium revenue through a contract with AHCCCS, which is the state
agency that administers Arizonas Medicaid program, and a contract with CMS for the MAPD SNP. For
the years ended September 30, 2009, 2008 and 2007, we derived 27.8%, 24.2% and 23.1%, respectively,
of our consolidated net revenue from our contract with AHCCCS. AHCCCS and CMS set the capitated
rates we receive at Health Choice which, in turn, subcontracts with physicians, hospitals and other
healthcare providers to provide services to its
enrollees. If we fail to effectively manage healthcare costs, these costs may exceed the
payments we receive. Historically, our medical claims expense as a percentage of premium revenue
has fluctuated. Our medical loss ratio for the years ended September 30, 2009, 2008 and 2007, was
86.1%, 85.2% and 85.2%, respectively. Relatively small changes in these medical loss ratios can
create significant changes in the profitability of Health Choice. Many factors can cause actual
healthcare costs to exceed the capitated rates set by AHCCCS and CMS, including:
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our ability to contract with cost-effective healthcare providers; |
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the increased cost of individual healthcare services; |
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the type and number of individual healthcare services delivered; and |
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the occurrence of catastrophes, epidemics or other unforeseen occurrences. |
Although we have been able to manage medical claims expense through a variety of techniques,
we may not be able to continue to effectively manage medical claims expense in the future.
Additionally, any future growth in members increases the risk associated with effectively managing
health claims expense. If our medical claims expense increases, our financial condition or results
of operations may be adversely affected.
If AHCCCS Significantly Alters The Payment Structure
Of Its Contracts Or The Amount Of Premiums Paid To Us, Our Net Revenue And
Profitability Would Be Adversely Affected.
In connection with our contract effective October 1, 2008, AHCCCS implemented a risk-based or
severity-adjusted payment methodology for all health plans, which resulted in a reduction to our
premium revenue on a per member per month basis during the year ended September 30, 2009.
Implementation of this new payment methodology was retroactive to October 1, 2008, and is also
expected to negatively impact premium rates paid to Health Choice going forward. Based upon the
risk score adjustment factors provided by AHCCCS, we have estimated slight reductions in our future
capitation premium rates. If our estimates are incorrect or if AHCCCS makes further alterations to
the payment structure of its contracts, our results of operations and cash flows could be
materially impacted.
Significant Competition From Other Healthcare Companies And State Efforts To Regulate The Sale
Of Not-For-Profit Hospitals May Affect Our Ability To Acquire Hospitals.
One element of our business strategy is to expand through selective acquisitions of hospitals
in our existing markets and in new growing markets. We compete for acquisitions with other
healthcare companies, some of which have greater competitive advantages or financial resources than
us. Therefore, we may not be able to acquire hospitals on terms favorable to us or at all.
Additionally, many states, including some where we have hospitals and others where we may in the
future acquire hospitals, have adopted legislation regarding the sale or other disposition of
hospitals operated by not-for-profit entities. In other states that do not have specific
legislation, the attorneys general have demonstrated an interest in these transactions under their
general obligations to protect charitable assets from waste. These legislative and administrative
efforts focus primarily on the appropriate valuation of the assets divested and the use of the
proceeds of the sale by the not-for-profit seller. These review and approval processes can add time
to the closing of an acquisition of a not-for-profit hospital and future actions on the state level
could seriously delay or even prevent our ability to acquire not-for-profit hospitals in the
future.
Difficulties With The Integration Of Acquisitions May Disrupt Our Ongoing Operations.
The process of integrating acquired hospitals may require a disproportionate amount of
managements time and attention, potentially distracting management from its other day-to-day
responsibilities. In addition, poor integration of acquired facilities could cause interruptions to
our business activities, including those of the acquired facilities. As a result, we may not
realize all or any of the anticipated benefits of an acquisition and we may incur significant costs
related to the acquisitions or integration of these facilities. In addition, we may acquire
hospitals that have unknown or contingent liabilities, including liabilities for failure to comply
with healthcare laws and regulations. Although we seek indemnification from prospective sellers
covering these matters, we may nevertheless have material liabilities for past activities of
acquired hospitals.
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Difficulties With Current Construction Projects Or New Construction Projects Would Involve
Significant Capital Expenditures Which Could Have An Adverse Impact On Our Liquidity.
As part of our business strategy, we are currently involved or may decide to continue
expanding capacity at our existing hospitals, as well as construct an additional hospital or
hospitals in the future. Our ability to complete construction of projects on our anticipated budget
and schedule would depend on a number of factors, including, but not limited to:
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our ability to control construction costs; |
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the ability of general contractors or subcontractors to perform under their contracts; |
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adverse weather conditions; |
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shortages of labor or materials; |
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our ability to obtain necessary licensing and other required governmental
authorizations; and |
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other unforeseen problems and delays. |
As a result of these and other factors, we cannot assure you that we would not experience
increased construction costs, or that we would be able to construct any current or future projects
as originally planned. In addition, the construction of a new hospital would involve a significant
commitment of capital with no revenue associated with the hospital during construction, which could
have an adverse impact on our liquidity.
State Efforts To Regulate The Construction Or Expansion Of Hospitals Could Impair Our Ability
To Operate And Expand Our Operations.
Some states require healthcare providers to obtain prior approval, known as certificates of
need, for:
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the purchase, construction or expansion of healthcare facilities; |
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capital expenditures exceeding a prescribed amount; or |
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changes in services or bed capacity. |
In giving approval, these states consider the need for additional or expanded healthcare
facilities or services. Florida and Nevada are the only states in which we currently operate
hospitals that have certificate of need laws applicable to acute care hospitals. The failure to
obtain any required certificate of need could impair our ability to operate or expand operations.
We Are Dependent On Key Personnel And The Loss Of One Or More Of Our Senior Management Team Or
Local Management Personnel Could Have A Material Adverse Effect On Our Business.
Our business strongly depends upon the services and management experience of our senior
management team. We depend on the ability of our senior management team and key employees to manage
growth successfully and on our ability to attract and retain skilled employees. If any of our
executive officers resign or otherwise are unable to serve, our management expertise and ability to
deliver healthcare services efficiently and to effectively execute our business strategy could be
diminished. If we fail to attract and retain managers at our hospitals and related facilities, our
operations could be adversely effected. Moreover, we do not maintain key man life insurance
policies on any of our officers.
41
Our Hospitals Are Subject To Potential Responsibilities And Costs Under Environmental Laws
That Could Lead To Material Expenditures Or Liability.
We are subject to various federal, state and local environmental laws and regulations,
including those relating to the protection of human health and the environment. We could incur
substantial costs to maintain compliance with these laws and regulations. To our knowledge, we have
not been and are not currently the subject of any investigations relating to noncompliance with
environmental laws and regulations. We could become the subject of future investigations, which
could lead to fines or criminal penalties if we are found to be in violation of these laws and
regulations. The principal environmental requirements and concerns applicable to our operations
relate to proper management of hazardous materials, hazardous waste and medical waste, above-ground
and underground storage tanks, operation of boilers, chillers and other equipment, and management
of building conditions, such as the presence of mold, lead-based paint or asbestos. Our hospitals
engage independent contractors for the transportation and disposal of hazardous waste, and we
require that our hospitals be named as additional insureds on the liability insurance policies
maintained by these contractors. In addition, we maintain insurance coverage for third-party
liability related to the storage tanks located at our facilities in the amount $2.0 million per
claim and $25.0 million in the aggregate.
We also may be subject to requirements related to the remediation of substances that have been
released into the environment at properties owned or operated by us or our predecessors or at
properties where substances were sent for off-site treatment or disposal. These remediation
requirements may be imposed without regard to fault, and liability for environmental remediation
can be substantial.
If The Fair Value Of Our Reporting Units Declines, A Material Non-Cash Charge To Earnings From
Impairment Of Our Goodwill Could Result.
As a result of our annual impairment test during the year ended September 30, 2009, we
recorded a $64.6 million non-cash charge to pre-tax earnings related to the impairment of goodwill
in our Florida market. We have experienced limitations on our ability to expand in our Florida market as a result of CON restrictions, along with high Medicare utilization and expanded managed care penetration. In addition, we have experienced changes in
market conditions and the business mix in our Florida market,
which have negatively impacted operating results, producing trends that may not be temporary
in nature. As a result, we have written off all goodwill associated with the Florida market,
resulting in $717.9 million of remaining goodwill recorded in our financial statements at September 30, 2009.
We expect to recover the carrying value of the remaining goodwill through our future cash flows. On
an ongoing basis, we evaluate, based on the fair value of our reporting units, whether the carrying
value of our goodwill is impaired. If the carrying value of our goodwill is impaired, we may incur
additional material non-cash charges to earnings.
Item 2. Properties.
Information with respect to our hospitals and other healthcare related properties can be found
in Item 1 of this report under the caption, BusinessOur Properties.
Additionally, our principal executive offices in Franklin, Tennessee are located in
approximately 58,000 square feet of office space. Our office space is leased pursuant to two
contracts which both expire on December 31, 2010. Our principal executive offices, hospitals and
other facilities are suitable for their respective uses and generally are adequate for our present
needs.
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Item 3. Legal Proceedings.
On March 31, 2008, the District Court dismissed with prejudice the qui tam complaint against
IAS, our parent company. The qui tam action sought monetary damages and civil penalties under the
FCA and included allegations that certain business practices related to physician relationships and
the medical necessity of certain procedures resulted in the submission of claims for reimbursement
in violation of the FCA. The case dates back to March 2005 and became the subject of a subpoena by
the OIG in September 2005. In August 2007, the case was unsealed and became a private lawsuit after
the Department of Justice declined to intervene. The United States District Judge dismissed the
case from the bench at the conclusion of oral arguments on IAS motion to dismiss. On April 21,
2008, the court issued a written order dismissing the case with prejudice and entering formal
judgment for IAS. On May 7, 2008, the qui tam relators counsel filed a Notice of Appeal to the
United States Court of Appeals for the Ninth Circuit to appeal the District Courts dismissal of
the case. On May 21, 2008, IAS filed a Notice of Cross-Appeal to the United States Court of Appeals
for the Ninth Circuit from a portion of the April 21, 2008 Order and, on July 22, 2008, IAS filed a
Motion to Disqualify relators counsel related to their misappropriation of information
subject to a claim of attorney-client privilege by IAS. On August 21, 2008, the court issued a
written order denying IAS Motion to Disqualify and resetting the briefing schedule associated with
the Ninth Circuit appellate proceedings. On October 21, 2008, the relator filed his appeal brief
with the United States Court of Appeals for the Ninth Circuit. IAS filed its cross-appeal brief on
January 20, 2009. Currently, the Ninth Circuit appeal is expected to take another six to nine
months to complete.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter ended
September 30, 2009.
43
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
There is no established public trading market for our common interests. At September 30, 2009,
all of our common interests were owned by IASIS Healthcare Corporation, a Delaware corporation,
referred to as IAS.
See Item 12., Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, included elsewhere in this report for information regarding our equity
compensation plans.
Item 6. Selected Financial Data.
The following table presents selected historical financial data for the fiscal years ended
September 30, 2009, 2008, 2007, 2006 and 2005, and was derived from the audited consolidated
financial statements.
Our audited consolidated financial statements referenced above, together with the related
report of the independent registered public accounting firm, are included elsewhere in this report.
The selected financial information and other data presented below should be read in conjunction
with the information contained in Managements Discussion and Analysis of Financial Condition and
Results of Operations and the consolidated financial statements and the related notes thereto
included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Statement of Operations Data (1)(6): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
2,361,972 |
|
|
$ |
2,065,536 |
|
|
$ |
1,766,079 |
|
|
$ |
1,539,577 |
|
|
$ |
1,429,429 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
660,921 |
|
|
|
632,109 |
|
|
|
533,792 |
|
|
|
439,349 |
|
|
|
410,119 |
|
Supplies |
|
|
250,573 |
|
|
|
231,259 |
|
|
|
194,915 |
|
|
|
167,616 |
|
|
|
166,159 |
|
Medical claims |
|
|
592,760 |
|
|
|
452,055 |
|
|
|
376,505 |
|
|
|
347,217 |
|
|
|
302,204 |
|
Other operating expenses |
|
|
325,735 |
|
|
|
283,123 |
|
|
|
266,263 |
|
|
|
223,946 |
|
|
|
191,538 |
|
Provision for bad debts |
|
|
192,563 |
|
|
|
161,936 |
|
|
|
136,233 |
|
|
|
134,614 |
|
|
|
123,728 |
|
Rentals and leases |
|
|
39,127 |
|
|
|
36,633 |
|
|
|
31,546 |
|
|
|
30,277 |
|
|
|
28,502 |
|
Interest expense, net |
|
|
67,890 |
|
|
|
75,665 |
|
|
|
71,206 |
|
|
|
67,124 |
|
|
|
63,398 |
|
Depreciation and amortization |
|
|
97,462 |
|
|
|
96,741 |
|
|
|
75,388 |
|
|
|
69,137 |
|
|
|
68,358 |
|
Management fees |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
4,746 |
|
|
|
4,189 |
|
|
|
3,791 |
|
Impairment of goodwill (3) |
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related property damage (2) |
|
|
938 |
|
|
|
3,589 |
|
|
|
|
|
|
|
|
|
|
|
4,762 |
|
Business interruption insurance
recoveries (4) |
|
|
|
|
|
|
|
|
|
|
(3,443 |
) |
|
|
(8,974 |
) |
|
|
|
|
Loss on extinguishment of debt (5) |
|
|
|
|
|
|
|
|
|
|
6,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
2,297,608 |
|
|
|
1,978,110 |
|
|
|
1,693,380 |
|
|
|
1,474,495 |
|
|
|
1,362,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before gain (loss) on disposal of
assets, minority interests and income
taxes |
|
|
64,364 |
|
|
|
87,426 |
|
|
|
72,699 |
|
|
|
65,082 |
|
|
|
66,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of assets, net |
|
|
1,465 |
|
|
|
(75 |
) |
|
|
(1,359 |
) |
|
|
913 |
|
|
|
(231 |
) |
Minority interests |
|
|
(9,987 |
) |
|
|
(4,437 |
) |
|
|
(4,496 |
) |
|
|
(3,546 |
) |
|
|
(2,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
|
55,842 |
|
|
|
82,914 |
|
|
|
66,844 |
|
|
|
62,449 |
|
|
|
63,748 |
|
Income tax expense |
|
|
27,576 |
|
|
|
35,325 |
|
|
|
25,909 |
|
|
|
22,515 |
|
|
|
25,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
28,266 |
|
|
|
47,589 |
|
|
|
40,935 |
|
|
|
39,934 |
|
|
|
38,346 |
|
Earnings (loss) from discontinued
operations, net of income taxes |
|
|
(176 |
) |
|
|
(11,275 |
) |
|
|
669 |
|
|
|
(385 |
) |
|
|
2,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
28,090 |
|
|
$ |
36,314 |
|
|
$ |
41,604 |
|
|
$ |
39,549 |
|
|
$ |
40,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
206,528 |
|
|
$ |
80,738 |
|
|
$ |
|
|
|
$ |
95,415 |
|
|
$ |
89,097 |
|
Total assets |
|
$ |
2,357,204 |
|
|
$ |
2,308,147 |
|
|
$ |
2,186,422 |
|
|
$ |
1,967,835 |
|
|
$ |
1,852,724 |
|
Long-term debt and capital lease
obligations (including current
portion) |
|
$ |
1,059,837 |
|
|
$ |
1,114,622 |
|
|
$ |
1,031,657 |
|
|
$ |
896,945 |
|
|
$ |
904,808 |
|
Members equity |
|
$ |
780,847 |
|
|
$ |
727,769 |
|
|
$ |
691,514 |
|
|
$ |
656,496 |
|
|
$ |
616,947 |
|
|
|
|
(1) |
|
The results of Glenwood and Alliance are included from
January 31, 2007 and May 31, 2007, respectively, their dates of acquisition. |
44
|
|
|
(2) |
|
Results for the years ended September 30, 2009 and 2008, include an adverse financial impact
totaling $938,000 and $3.6 million, respectively, before income taxes related to property damage
sustained at The Medical Center of Southeast Texas, as a result of Hurricane Ike. Results for
the year ended September 30, 2005, include an adverse financial impact totaling $4.8 million
before income taxes related to property damage sustained at The Medical Center of Southeast
Texas, as a result of Hurricane Rita. |
|
(3) |
|
Results for the year ended September 30, 2009, include a $64.6 million non-cash charge
($43.2 million after taxes) related to the impairment of goodwill in our Florida market. |
|
(4) |
|
Results for the years ended September 30, 2007 and 2006, include $3.4 million and $9.0
million, respectively, of business interruption insurance recoveries received in connection
with the temporary closure and disruption of operations at The Medical Center of Southeast
Texas, as a result of Hurricane Rita. Cumulative business interruption insurance recoveries of
$12.4 million received through fiscal 2007 were reduced by related insurance deductibles of
$4.6 million. |
|
(5) |
|
Results for the year ended September 30, 2007, include a $6.2 million loss on extinguishment
of debt related to the refinancing of our senior secured credit facilities. |
|
(6) |
|
Excludes Mesa General Hospital and Biltmore Surgery Center, where operations were
discontinued effective May 31, 2008 and April 30, 2008, respectively. |
Selected Operating Data
The following table sets forth certain unaudited operating data for each of the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Acute Care (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Number of acute care hospital facilities at end of period (2) |
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
Beds in service at end of period |
|
|
2,853 |
|
|
|
2,644 |
|
|
|
2,565 |
|
Average length of stay (days) (3) |
|
|
4.7 |
|
|
|
4.7 |
|
|
|
4.6 |
|
Occupancy rates (average beds in service) |
|
|
47.0 |
% |
|
|
48.9 |
% |
|
|
49.5 |
% |
Admissions (4) |
|
|
101,083 |
|
|
|
101,302 |
|
|
|
92,198 |
|
Adjusted admissions (5) |
|
|
169,721 |
|
|
|
165,819 |
|
|
|
150,774 |
|
Patient days (6) |
|
|
473,601 |
|
|
|
471,853 |
|
|
|
427,244 |
|
Adjusted patient days (5) |
|
|
762,234 |
|
|
|
741,466 |
|
|
|
669,999 |
|
Net patient revenue per adjusted admission |
|
$ |
9,703 |
|
|
$ |
9,101 |
|
|
$ |
8,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Choice: |
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid covered lives |
|
|
187,104 |
|
|
|
142,193 |
|
|
|
122,437 |
|
Dual-eligible lives (7) |
|
|
3,659 |
|
|
|
3,300 |
|
|
|
3,482 |
|
Medical loss ratio (8) |
|
|
86.1 |
% |
|
|
85.2 |
% |
|
|
85.2 |
% |
|
|
|
(1) |
|
Excludes Mesa General Hospital, which discontinued services effective May 31, 2008. |
|
(2) |
|
Excludes St. Lukes Behavioral Hospital. |
|
(3) |
|
Represents the average number of days that a patient stayed in our hospitals. |
|
(4) |
|
Represents the total number of patients admitted to our hospitals for stays in excess of 23
hours. Management and investors use this number as a general measure of inpatient volume. |
|
(5) |
|
Adjusted admissions and adjusted patient days are general measures of combined inpatient and
outpatient volume. We compute adjusted admissions/patient days by multiplying
admissions/patient days by gross patient revenue and then dividing that number by gross
inpatient revenue. |
|
(6) |
|
Represents the number of days our beds were occupied by inpatients over the period. |
|
(7) |
|
Represents members eligible for Medicare and Medicaid benefits under Health Choices contract
with CMS to provide coverage as a MAPD SNP. |
|
(8) |
|
Represents medical claims expense as a percentage of premium revenue, including claims paid
to our hospitals. |
45
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion and analysis of financial condition and results of operations should
be read in conjunction with our audited consolidated financial statements, the notes to our audited
consolidated financial statements, and the other financial information appearing elsewhere in this
report. We intend for this discussion to provide you with information that will assist you in
understanding our financial statements, the changes in certain key items in those financial
statements from year to year, and the primary factors that accounted for those changes. It includes
the following sections:
|
|
|
Forward Looking Statements; |
|
|
|
Critical Accounting Policies and Estimates; |
|
|
|
Results of Operations Summary; |
|
|
|
Liquidity and Capital Resources; |
|
|
|
Off-Balance Sheet Arrangements; and |
|
|
|
Recent Accounting Pronouncements. |
Data for the fiscal years ended September 30, 2009, 2008 and 2007, has been derived from our
audited consolidated financial statements. References herein to we, us, our and our company
are to IASIS Healthcare LLC and its subsidiaries, unless indicated otherwise.
FORWARD LOOKING STATEMENTS
Some of the statements we make in this annual report on Form 10-K are forward-looking within
the meaning of the federal securities laws, which are intended to be covered by the safe harbors
created thereby. Those forward-looking statements include all statements that are not historical
statements of fact and those regarding our intent, belief or expectations including, but not
limited to, the discussions of our operating and growth strategy (including possible acquisitions
and dispositions), financing needs, projections of revenue, income or loss, capital expenditures
and future operations. Forward-looking statements involve known and unknown risks and uncertainties
that may cause actual results in future periods to differ materially from those anticipated in the
forward-looking statements.
Those risks and uncertainties include, among others, the risks and uncertainties discussed
under Item 1A, Risk Factors in this Annual Report on Form 10-K. Although we believe that the
assumptions underlying the forward-looking statements contained in this report are reasonable, any
of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included in this report, you
should not regard the inclusion of such information as a representation by us or any other person
that our objectives and plans will be achieved. We undertake no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated events.
46
EXECUTIVE OVERVIEW
We are a leading owner and operator of medium-sized acute care hospitals in high-growth urban
and suburban markets. We operate our hospitals with a strong community focus by offering and
developing healthcare services targeted to the needs of the markets we serve, promoting strong
relationships with physicians and working with local managed care plans. At September 30, 2009, we
owned or leased 15 acute care hospital facilities and one behavioral health hospital facility, with
a total of 2,853 beds in service, located in six regions:
|
|
|
Tampa-St. Petersburg, Florida; |
|
|
|
three cities in Texas, including San Antonio; |
|
|
|
West Monroe, Louisiana. |
We also own and operate Health Choice, a Medicaid and Medicare managed health plan in Phoenix.
Revenue and Volume Trends
Net revenue is comprised of acute care and premium revenue. Net revenue for the year ended
September 30, 2009, increased 14.4% to $2.4 billion, compared to $2.1 billion in the prior year.
Acute care revenue contributed $138.7 million to the increase in total net revenue for the year
ended September 30, 2009, while premium revenue contributed $157.8 million.
Acute Care Revenue
Acute care revenue is comprised of net patient revenue and other revenue. A large percentage
of our hospitals net patient revenue consists of fixed payment, discounted sources, including
Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services
are often fixed regardless of the cost incurred or the level of services provided. Similarly, a
greater percentage of the managed care companies we contract with reimburse providers on a fixed
payment basis regardless of the costs incurred or the level of services provided. Net patient
revenue is reported net of discounts and contractual adjustments. Contractual adjustments
principally result from differences between the hospitals established charges and payment rates
under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual
adjustments result from our uninsured discount and charity care programs. Other revenue includes
medical office building rental income and other miscellaneous revenue.
Admissions decreased 0.2% and adjusted admissions increased 2.4%, respectively, for the year
ended September 30, 2009, compared to the prior year. While our volume has benefitted from the
continued improvements at Mountain Vista in Mesa, Arizona, our newest hospital which
opened in July 2007, as well as the recent opening of the patient tower projects at Jordan Valley
Medical Center and Davis Hospital and Medical Center, in our Utah market, we believe that volume
has been negatively impacted, in part, by the effect of the prolonged economic recession. Along
with impact of rising unemployment, we believe the economic recession resulted in patient decisions to defer
or cancel elective and non-emergent healthcare procedures until their conditions became more acute,
particularly in the first half of our fiscal year. Volume growth has
improved in the second half of our fiscal year, as compared to the first half.
Additionally, we have experienced a shift in our service mix to
more outpatient procedures, particularly in service lines such as cardiology, bariatrics and
diagnostic imaging, as well as other services. The shift in our service mix is part of an industry
trend, as a result of advances in pharmaceutical and medical technologies, where services once
performed on an inpatient basis are being converted to outpatient procedures. Given the shift in
our service mix and the current economic environment, we anticipate our inpatient volumes could
continue to be negatively impacted over the near term. Despite the near term impact from these
factors, we believe our volumes over the long-term will grow as a result of our business
strategies, including our recent capital investments, and the general aging of the population.
47
The following table provides the sources of our gross patient revenue by payor for the years
ended September 30, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Medicare |
|
|
31.1 |
% |
|
|
31.9 |
% |
|
|
30.7 |
% |
Managed Medicare |
|
|
11.5 |
|
|
|
10.9 |
|
|
|
9.4 |
|
Medicaid |
|
|
8.4 |
|
|
|
7.2 |
|
|
|
7.2 |
|
Managed Medicaid |
|
|
11.2 |
|
|
|
10.6 |
|
|
|
10.4 |
|
Managed care |
|
|
32.8 |
|
|
|
34.7 |
|
|
|
37.1 |
|
Self-pay |
|
|
5.0 |
|
|
|
4.7 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Since the implementation of the Medicare Advantage program, including Medicare Part D
coverage, we have experienced a shift of traditional Medicare beneficiaries to managed Medicare. We
expect patient volumes in Medicare and managed Medicare to increase over the long-term due to the
general aging of the population. In addition, as a result of the current economic climate and
related increase in unemployment, we expect patient volumes and revenue from Medicaid and managed
Medicaid, as well as self-pay, to increase over the near term. Conversely, the economic downturn
has resulted in a decline in commercial and managed care enrollment and volumes.
Net patient revenue per adjusted admission increased 6.6% for the year ended September 30,
2009, compared to the prior year. Our net patient revenue per adjusted admission has benefited from
increases in managed care rates,
the increase in supplemental Medicaid reimbursement in our Texas market, as well as improvements in
acuity and pricing at Mountain Vista. While our net patient revenue per adjusted
admission continues to increase, the reduced rates of growth we have experienced compared to the
prior years are the result of recent industry pressures, including the shift in our service mix to
more outpatient procedures, a decline in commercial and managed care volumes, moderating rate
increases from commercial and managed care payors, frozen or state cuts in Medicaid reimbursement rates and
as a result of the current economic environment, the impact of an increasing uninsured and indigent
population on charity care and Medicaid enrollment. These general industry pricing pressures, along
with the consolidation of payors in certain markets, may result in reduced reimbursement from
managed care organizations in future periods. Such consolidation of managed care organizations has
resulted in a greater focus on case management, as well as increased efforts by payors to align
themselves with networks of providers in certain markets in which we operate.
Certain of our acute care hospitals receive supplemental Medicaid reimbursement, including
reimbursement from programs for participating private hospitals that enter into indigent care
affiliation agreements with public hospitals or county governments in the state of Texas. Under the
CMS approved programs, affiliated hospitals, including our Texas
hospitals, have expanded the
community healthcare safety net by providing indigent healthcare
services. Participation in indigent care affiliation agreements by
our Texas hospitals has resulted in an increase in acute care
revenue by virtue of the hospitals entitlement to supplemental
Medicaid inpatient reimbursement. Revenue recognized
under these Texas private supplemental Medicaid reimbursement programs for the year ended September
30, 2009, was $57.2 million, compared to $22.4 million in the prior year.
We offer discounts to all uninsured patients receiving healthcare services who do not qualify
for assistance under state Medicaid, other federal or state assistance plans, or charity care. We
provided uninsured discounts totaling $69.7 million, $57.9 million and $50.3 million for the years
ended September 30, 2009, 2008 and 2007, respectively.
Premium Revenue
Premium revenue generated under the AHCCCS and CMS contracts with Health Choice represented
29.6%, 26.2% and 25.5% of our consolidated net revenue for the years ended September
30, 2009, 2008 and 2007, respectively. Most premium revenue at Health Choice is derived through a
contract with AHCCCS to provide specified health services to qualified Medicaid enrollees through
contracted providers. AHCCCS is the state agency that administers Arizonas Medicaid program. The
contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients
in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and
supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a
MAPD SNP. This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to
new and existing dual-eligible members (i.e. those that are eligible for Medicare and Medicaid).
48
Effective October 1, 2008, Health Choice began its current contract with AHCCCS, which
provides for a three-year term, with AHCCCS having the option to renew for two additional one-year
periods. The new contract, which continues our state-wide presence, covers Medicaid members in the
following Arizona counties: Apache, Coconino, Maricopa, Mohave, Navajo, Pima, Yuma, La Paz and
Santa Cruz. As a result of our current contract and increasing enrollment in the state program
attributable to a rising indigent population resulting from the prolonged economic recession,
Health Choices enrollment through its AHCCCS contract at September 30, 2009, exceeded 187,000 members, compared to over
142,000 members in the prior year. While we anticipate our membership will continue to increase in
the near term, we cannot guarantee the continued growth of our membership.
In connection with our contract effective October 1, 2008, AHCCCS implemented a risk-based or
severity-adjusted payment methodology for all health plans, which resulted in a reduction to our
premium revenue on a per member per month basis during the year ended September 30, 2009.
Implementation of this new payment methodology was retroactive to October 1, 2008, and is also
expected to negatively impact premium rates paid to Health Choice going forward. Based upon the
risk score adjustment factors provided by AHCCCS, we have estimated slight reductions in our future
capitation premium rates.
Premiums received from AHCCCS and CMS to provide services to our members have been impacted by
moderating rate increases. Additionally, the state of Arizona has faced and is currently facing
significant budgetary concerns. As a result, the state legislature passed a fiscal 2010 budget on
July 1, 2009, that includes AHCCCS funding at a lower rate of growth than in prior years, but does
include funding for medical cost inflation and increased enrollment in the program.
In regards to the fiscal 2010 year, depending on member mix,
we generally believe Health Choice could
experience flat to slightly declining rates received on a per member per month basis, which may negatively
impact our premium revenue. In addition, there are a number of alternatives being considered to address Arizonas
budget concerns, including increases in sales and property taxes, a reduction in AHCCCS total
expenditures, a reduction in rates paid
by AHCCCS to facilities, and elimination of KidsCare, Arizonas Childrens Health Insurance
Program.
Significant Industry Trends
The following paragraphs discuss recent trends that we believe are significant factors in our
current and/or future operating results and cash flows. Certain of these trends apply to the entire
acute care hospital industry while others may apply to us more specifically. These trends could be
short-term in nature or could require long-term attention and resources. While these trends may
involve certain factors that are outside of our control, the extent to which these trends affect
our hospitals and our ability to manage the impact of these trends play vital roles in our current
and future success. In many cases, we are unable to predict what impact, if any, these trends will
have on us.
General Economic Environment
The U.S. economy has weakened significantly as a result of the effects of a prolonged economic
recession. Tightened credit markets, depressed consumer spending and higher unemployment rates
continue to pressure many industries, including the healthcare industry. During economic downturns,
governmental entities often experience budgetary constraints as a result of increased costs and
lower than expected tax collections. These budgetary constraints may result in decreased spending
for health and human service programs, including Medicare, Medicaid and similar programs, which
represent significant payor sources for our hospitals. Other risks we face from the general
economic weakness include patient decisions to defer or cancel elective and non-emergent healthcare
procedures until their conditions become more acute. These economically challenging times have
resulted in increases in the uninsured and under-insured population, often as a result of job
losses and continued shifts in healthcare payment responsibility from employers to employees,
resulting in further difficulties in our ability to collect patient co-payment and deductible
receivables.
Value-Based Reimbursement
There is a trend in the healthcare industry towards value-based purchasing of healthcare
services. These value-based purchasing programs include both public reporting and financial
incentives tied to the quality and efficiency of care provided by facilities.
The House Reform Bill and the reform bill under consideration in the U.S. Senate
would expand value-based purchasing
initiatives as well. We expect programs of this type to become more common in the healthcare
industry.
49
Since 2003, Medicare has required providers to report certain quality measures in order to
receive full reimbursement increases that previously were awarded automatically. CMS has expanded,
through a series of rulemakings, the number of patient care indicators that hospitals must report.
CMS currently requires hospitals to report 46 quality measures in order to qualify for the full
market basket update to the inpatient prospective payment system for fiscal year 2011. CMS also
requires hospitals to submit quality data regarding eleven measures relating to outpatient care in
order to receive the full market basket increase under the outpatient prospective payment system in
calendar year 2011. We anticipate that CMS will continue to expand the number of inpatient and
outpatient quality measures. We have invested significant capital in the implementation of our
advanced clinical system that assists us in reporting these quality measures. CMS makes the data
submitted by hospitals, including our hospitals, public on its website.
For discharges on or after October 1, 2008, Medicare no longer pays hospitals additional
amounts for the treatment of certain preventable adverse events, also known as hospital-acquired
conditions, unless the condition was present at admission. Currently, there are ten categories of
conditions on the list of hospital-acquired conditions. On January 15, 2009, CMS announced three
NCDs that prohibit Medicare reimbursement for erroneous surgical procedures performed on an
inpatient or outpatient basis. These three erroneous surgical procedures are in addition to the
hospital-acquired conditions designated by CMS by regulation. DEFRA provides that CMS may revise
the list of hospital-acquired conditions from time to time. Additionally, the House Reform Bill
passed by the U.S. House of Representatives in November 2009 would codify limitations of payment
for health-care acquired conditions. The House Reform Bill addresses quality and value based
purchasing through a variety of initiatives, including requiring public reporting and posting of
healthcare associated infections, reducing payments to hospitals with excessive inpatient
readmissions, establishing a process for adding and evaluating quality measures to be reported to
CMS, and establishing a Center for Quality Improvement that would be charged with implementing best
practices for healthcare delivery. The House Reform Bill also commissions the Institute of
Medicine to study spending and high value healthcare in order to issue a proposal by 2011 of how to
revise the Medicare payment system to encourage value based purchasing of healthcare services.
Currently, the U.S. Senate is considering a reform bill, which would require implementation of a value-based
purchasing system for hospitals. It is uncertain whether these or other quality-related
provisions will become law.
Many large commercial payors currently require providers to report quality data. Several
commercial payors have announced that they will stop reimbursing hospitals for certain preventable
adverse events. A number of state hospital associations have also announced policies addressing the
waiver of patient bills for care related to a serious adverse event. In addition, managed care
organizations may begin programs that condition payment on performance against specified measures.
The quality measurement criteria used by commercial payors may be similar to or even more stringent
than Medicare requirements.
We expect these trends towards value-based purchasing of healthcare services by Medicare and
other payors to continue. Because of these trends, our ability to demonstrate quality of care in
our facilities could significantly impact our operating results in the future.
Physician Integration
In an effort to meet community needs and address coverage issues, we continue to recruit and
employ physicians with primary emphasis on family practice and internal medicine, general surgery,
hospitalists, obstetrics and gynecology, cardiology, neurology and orthopedics. Our ability to
attract and retain skilled physicians to our hospitals is critical to our success and is affected
by the quality of care at our hospitals. This is one reason we have taken significant steps in
implementing our expanded quality of care initiatives. We believe intense efforts focusing on
quality of care will enhance our ability to recruit and retain the skilled physicians necessary to
make our hospitals successful.
We experience certain risks associated with the integration of medical staffs at our
hospitals. As we continue to focus on our physician employment strategy, we face significant
competition for skilled physicians in certain of our markets as more providers adopt a physician
staffing model approach, coupled with a general shortage of physicians across most specialties.
This increased competition has resulted in efforts by managed care organizations to align with
certain provider networks in the markets in which we operate. We expect that employing physicians
should
provide relief on cost pressures associated with on-call coverage and other professional fees.
However, we anticipate incurring additional labor and other start-up related costs as we continue
the integration of employed physicians.
50
We also face risk from competition for outpatient business. We expect to mitigate this risk
through continued focus on our physician employment strategy, our commitment to capital investment
in our hospitals, including updated technology and equipment, and our commitment to our quality of
care initiatives that some competitors, including individual physicians or physician groups, may
not be equipped to implement.
Growth in Uncompensated Care
Like others in the hospital industry, we continue to experience increases in our uncompensated
care, including charity care and our provision for bad debts. This increase is driven by growth in
the number of uninsured patients seeking care at our hospitals, as well as increases in the amount
of co-payments and deductibles as employers continue to pass more of these costs on to their
employees. In addition, as a result of the effects of a prolonged economic recession and rising
unemployment, we believe that our hospitals may continue to experience growth in bad debts and
charity care. While the volume of patients registered as uninsured continues to increase, we
continue to be successful in qualifying many of these uninsured patients for Medicaid or other
third-party coverage. More recently, our provision for bad debts has been increasingly affected by
the volume of under-insured patients or patient balances after insurance. As a result of rising
unemployment, increasing healthcare costs and other factors beyond our control, collections of
these patient balances may become more difficult. Accordingly, we continue to monitor our self-pay
admissions on a daily basis and continue to focus on the efficiency of our emergency rooms,
point-of-service cash collections, Medicaid eligibility automation and process-flow improvements.
At September 30, 2009, our accounts receivable included self-pay balances after insurance
of $37.3 million, as compared to $36.4
million at September 30, 2008. We anticipate that if we experience further growth in self-pay
volume and revenue, along with continued increases in co-payments and deductibles for insured
patients, our provision for bad debts will continue to increase and our results of operations could
be adversely affected.
The percentages of insured and uninsured gross hospital receivables (prior to allowances for
contractual adjustments and doubtful accounts) are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Insured receivables |
|
|
62.0 |
% |
|
|
64.8 |
% |
Uninsured receivables |
|
|
38.0 |
% |
|
|
35.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The percentages in the table above are calculated using gross receivable balances. Uninsured
and insured receivables are net of discounts and contractual adjustments recorded at the time of
billing. Included in insured receivables are accounts that are pending approval from Medicaid.
These receivables were approximately 3.2% and 3.0% of gross hospital receivables at September 30,
2009 and 2008, respectively.
The percentages of gross hospital receivables in summarized aging categories are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
0 to 90 days |
|
|
69.4 |
% |
|
|
67.5 |
% |
91 to 180 days |
|
|
18.1 |
% |
|
|
17.9 |
% |
Over 180 days |
|
|
12.5 |
% |
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Sub-Acute Care Services
Inpatient care is expanding to include sub-acute care when a less intensive, lower cost level
of care is appropriate. We have been proactive in the development of a variety of sub-acute
inpatient services to utilize a portion of our available capacity. By offering cost-effective
sub-acute services in appropriate circumstances, we are able to provide a continuum of care when
the demand for such services exists. We have identified opportunities to expand sub-acute services
within our facilities as appropriate, including inpatient psychiatric and rehabilitation.
51
Changes in Patient Service Mix
From an industry trend perspective, a number of procedures once performed only on an inpatient
basis have been and will continue to be converted to outpatient procedures, as a result of advances
in pharmaceutical and medical technologies. We have continued to experience a shift in our patient
service mix to more outpatient procedures, in areas such as cardiovascular, bariatrics, diagnostic
imaging and other services. Generally, the payments we receive for outpatient procedures are less
than those for similar procedures performed in an inpatient setting.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. In preparing our financial statements, we make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
We have determined an accounting estimate to be critical if: (1) the accounting estimate
requires us to make assumptions about matters that were highly uncertain at the time the accounting
estimate was made and (2) changes in the estimate would have a material impact on our financial
condition or results of operations. There are other items within our financial statements that
require estimation but are not deemed critical as defined herein. Changes in estimates used in
these and other items could have a material impact on our financial statements.
Allowance for Doubtful Accounts. Our ability to collect outstanding receivables from
third-party payors and patients is critical to our operating performance and cash flows. The
primary collection risk lies with uninsured patient accounts or patient accounts for which primary
insurance has paid but a patient portion remains outstanding. The provision for bad debts and the
allowance for doubtful accounts relate primarily to amounts due directly from patients. Our
estimation of the allowance for doubtful accounts is based primarily upon the type and age of the
patient accounts receivable and the effectiveness of our collection efforts. Our policy is to
reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts
related to co-payments and deductibles, as these charges are recorded. We monitor our accounts
receivable balances and the effectiveness of our reserve policies on a monthly basis and review
various analytics to support the basis for our estimates. These efforts primarily consist of
reviewing the following:
|
|
|
Historical write-off and collection experience using a hindsight or look-back approach; |
|
|
|
Revenue and volume trends by payor, particularly the self-pay components; |
|
|
|
Changes in the aging and payor mix of accounts receivable, including increased focus on
accounts due from the uninsured and accounts that represent co-payments and deductibles due
from patients; |
|
|
|
Cash collections as a percentage of net patient revenue less bad debt expense; |
|
|
|
Trending of days revenue in accounts receivable; and |
|
|
|
Various allowance coverage statistics. |
We regularly perform hindsight procedures to evaluate historical write-off and collection
experience throughout the year to assist in determining the reasonableness of our process for
estimating the allowance for doubtful accounts. We do not pursue collection of amounts related to
patients who qualify for charity care under our guidelines. Charity care accounts are deducted from
gross revenue and do not affect the provision for bad debts.
At September 30, 2009, our self-pay receivables, including amounts due from uninsured patients
and co-payment and deductible amounts due from insured patients, were $162.4 million and our
allowance for doubtful accounts was $126.1 million. Excluding third-party settlement balances, days
revenue in accounts receivable were 49 days at
September 30, 2009, compared to 53 days at September
30, 2008. For the year ended September 30, 2009, the provision for bad debts increased to 11.5% of
acute care revenue, compared to 10.6% in the prior year. Significant changes in payor mix or
business office operations could have a significant impact on the provision for bad debts, as well
as our results of operations and cash flows.
52
Allowance for Contractual Discounts and Settlement Estimates. We derive a significant portion
of our net patient revenue from Medicare, Medicaid and managed care payors that receive discounts
from our standard charges. For the years ended September 30, 2009, 2008 and 2007, Medicare,
Medicaid and managed care revenue together accounted for 88.9%, 90.9% and 90.5%, respectively, of
our hospitals net patient revenue.
We estimate contractual discounts and allowances based upon payment terms outlined in our
managed care contracts, by federal and state regulations for the Medicare and various Medicaid
programs, and in accordance with terms of our uninsured discount program. Contractual discounts for
most of our patient revenue are determined by an automated process that establishes the discount on
a patient-by-patient basis. The payment terms or fee schedules for most payors have been entered
into our patient accounting systems. Automated (system-generated) contractual discounts are
recorded, at the time a patient account is billed, based upon the
system-loaded payment terms. In
certain instances for payors that are not significant or who have not entered into a contract with
us, we make manual estimates in determining contractual allowances based upon historical collection
rates. At the end of each month, we estimate contractual allowances for all unbilled accounts based
on payor-specific six-month average contractual discount rates.
For governmental payors such as Medicare and Medicaid, we determine contractual discounts or
allowances based upon the programs reimbursement (payment) methodology (i.e. either prospectively
determined or retrospectively determined based on costs as defined by the government payor). These
contractual discounts are determined by an automated process in a manner similar to the process
used for managed care revenue. Under prospective payment programs, we record contractual discounts
based upon predetermined reimbursement rates. For retrospective cost-based revenues, which are less
prevalent, we estimate contractual allowances based upon historical and current factors which are
adjusted as necessary in future periods, when final settlements of filed cost reports are received.
Net adjustments to estimated third-party payor settlements, also known as prior year contractuals,
resulted in an increase in acute care revenue of $3.2 million, $1.0 million and $365,000 for the
years ended September 30, 2009, 2008 and 2007, respectively.
Management continually reviews the contractual estimation process to consider and incorporate
updates to laws and regulations and the frequent changes in managed care contractual terms that
result from contract renegotiations and renewals. All contractual adjustments, regardless of type
of payor or method of calculation, are reviewed and compared to actual payment experience on an
individual patient account basis. Discrepancies between expected and actual payments are reviewed,
and as necessary, appropriate corrections to the patient accounts are made to reflect actual
payments received. If a discrepancy exists between the payment terms loaded into the contract
management system and the actual discount based on payments received, the system is updated
accordingly to ensure appropriate discounting of future charges.
Additionally, we rely on other analytical tools to ensure our contractual discounts are
reasonably estimated. These include, but are not limited to, monitoring of collection experience by
payor, reviewing total patient collections as a percentage of net patient revenue (adjusted for the
provision for bad debts) on a trailing twelve-month basis, gross to net patient revenue
comparisons, contractual allowance metrics, etc. As well, patient accounts are continually reviewed
to ensure all patient accounts reflect either system-generated discounts or estimated contractual
allowances, as necessary.
Medicare and Medicaid regulations and various managed care contracts are often complex and may
include multiple reimbursement mechanisms for different types of services provided in our
healthcare facilities, requiring complex calculations and assumptions
which are subject to interpretation.
Additionally, the services authorized and provided and resulting reimbursement are often subject to
interpretation. These interpretations sometimes result in payments that differ from our estimates.
Additionally, updates to regulations and contract renegotiations occur frequently, necessitating
continual review and assessment of the estimation process by management. We have made significant
investments in our patient accounting information systems, human resources and internal controls,
which we believe greatly reduces the likelihood of a significant variance occurring between the
recorded and estimated contractual discounts. Given that most of our contractual discounts are
pre-defined or contractually based, and as a result of continual internal monitoring processes and
our use of analytical tools, we believe the aggregate differences between amounts recorded for
initial contractual discounts and final contractual discounts resulting from payments received are
not significant. Finally, we believe that having a wide variety and large number of managed care
contracts that are subject to review and administration on a hospital-by-hospital basis minimizes
the impact on the Companys net revenue of any imprecision in recorded contractual discounts caused
by the system-load of payment terms of a
particular payor. We believe that our systems and processes, as well as other items discussed,
provide reasonable assurance that any change in estimate related to
contractual discounts is
immaterial to our financial position, results of operations and cash flows.
53
Insurance Reserves. Given the nature of our operating environment, we may become subject to
medical malpractice or workers compensation claims or lawsuits. We maintain third-party insurance
coverage for individual malpractice and workers compensation claims to mitigate a portion of this
risk. In addition, we maintain excess coverage limiting our exposure to an aggregate annual amount
for claims. We estimate our reserve for self-insured professional and general liability and workers
compensation risks using historical claims data, demographic factors, severity factors, current
incident logs and other actuarial analysis. At September 30, 2009 and 2008, our professional and
general liability accrual for asserted and unasserted claims was $41.7 million and $34.3 million,
respectively. For the year ended September 30, 2009, our total premiums and self-insured retention
cost for professional and general liability insurance was $25.5 million, compared with $15.9
million in the prior year.
The estimated accrual for medical malpractice and workers compensation claims could be
significantly affected should current and future occurrences differ from historical claims trends.
The estimation process is also complicated by the complexity and changing nature of tort reform in
the states in which we operate. While we monitor current claims closely and consider outcomes when
estimating our insurance accruals, the complexity of the claims and wide range of potential
outcomes often hampers timely adjustments to the assumptions used in the estimates.
Valuations from our independent actuary for professional and general liability losses resulted
in a change in related estimates for prior years which decreased professional and general liability
expense by the following amounts (in millions):
|
|
|
|
|
Year ended September 30, 2009 |
|
$ |
(1.2 |
) |
Year ended September 30, 2008 |
|
$ |
(6.8 |
) |
Year ended September 30, 2007 |
|
$ |
(6.6 |
) |
Our estimate of the reserve for professional and general liability claims is based upon
actuarial calculations that are completed semi-annually. The changes in estimates noted above were
recognized in the periods in which the independent actuarial calculations were received. The key
assumptions underlying the development of our estimate (loss development, trends and increased
limits factors) have not changed materially, as they are largely based upon professional liability
insurance industry data published by the Insurance Services Office (ISO), a leading provider of
data, underwriting, risk management and legal/regulatory services. The reductions in professional
and general liability expense related to changes in prior year estimates reflected above for the
years ended September 30, 2009, 2008 and 2007, are the result of better than expected claims
experience as compared to the industry benchmarks for loss development included in the original
actuarial estimate.
Sensitivity in the estimate of our professional and general liability claims reserve is
reflected in various actuarial confidence levels. We utilize a statistical confidence level of 50%
in developing our best estimate of the reserve for professional and general liability claims.
Higher statistical confidence levels, while not representative of our best estimate, provide a
range of reasonably likely outcomes upon resolution of the related claims. The following table
outlines our reported reserve amounts compared to reserve levels established at the higher
statistical confidence levels.
|
|
|
|
|
As reported at September 30, 2009 |
|
$ |
41.7 |
|
75% Confidence Level |
|
$ |
48.9 |
|
90% Confidence Level |
|
$ |
60.8 |
|
54
Valuations from our independent actuary for workers compensation losses resulted in a change
in related estimates for prior years which increased (decreased) workers compensation expense by
the following amounts (in millions):
|
|
|
|
|
Year ended September 30, 2009 |
|
$ |
(0.5 |
) |
Year ended September 30, 2008 |
|
$ |
0.8 |
|
Year ended September 30, 2007 |
|
$ |
(1.0 |
) |
Medical Claims Payable. Medical claims expense, including claims paid to our hospitals, was
$602.1 million, $461.6 million and $384.0 million, or 86.1%, 85.2% and 85.2% of premium revenue,
for the years ended September 30, 2009, 2008 and 2007, respectively. For the years ended September
30, 2009, 2008 and 2007, $9.3 million, $9.6 million and $7.5 million, respectively, of health plan
payments made to hospitals and other healthcare entities owned by us for services provided to our
enrollees were eliminated in consolidation.
The following table shows the components of the change in medical claims payable for the years
ended September 30, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Medical claims payable as of October 1 |
|
$ |
97,343 |
|
|
$ |
81,309 |
|
Medical claims expense incurred during the year: |
|
|
|
|
|
|
|
|
Related to current year |
|
|
620,153 |
|
|
|
464,055 |
|
Related to prior years |
|
|
(18,077 |
) |
|
|
(2,406 |
) |
|
|
|
|
|
|
|
Total expenses |
|
|
602,076 |
|
|
|
461,649 |
|
|
|
|
|
|
|
|
Medical claims payments during the year: |
|
|
|
|
|
|
|
|
Related to current year |
|
|
(508,299 |
) |
|
|
(368,392 |
) |
Related to prior years |
|
|
(77,601 |
) |
|
|
(77,223 |
) |
|
|
|
|
|
|
|
Total payments |
|
|
(585,900 |
) |
|
|
(445,615 |
) |
|
|
|
|
|
|
|
Medical claims payable as of September 30 |
|
$ |
113,519 |
|
|
$ |
97,343 |
|
|
|
|
|
|
|
|
As reflected in the table above, medical claims expense for the year ended September 30,
2009, includes an $18.1 million reduction of medical costs related to
prior years resulting from favorable development in the Medicaid and
Medicare product lines of $15.5 million and $2.6 million,
respectively. The favorable development is attributable to lower
than anticipated medical costs and is offset, in part, by $10.8 million in reductions in
premium revenue associated with settlements of various prior year program receivables.
We estimate our medical claims payable using historical claims experience (including
severity and payment lag time) and other actuarial analysis including number of enrollees, age
of enrollees and certain enrollee health indicators to predict the cost of healthcare services
provided to enrollees during any given period. While management believes that its estimation
methodology effectively captures trends in medical claims costs, actual payments could differ
significantly from our estimates given changes in healthcare costs or adverse experience. For
example, our medical claims payable is primarily composed of estimates related to the most
recent three months and periods prior to the most recent three months. The claims trend factor,
which is developed through a comprehensive analysis of claims incurred in prior months, is the
most significant component used in developing the claims liability estimates for the most recent
three months. The completion factor is an actuarial estimate, based upon historical experience,
of the percentage of incurred claims during a given period that have been adjudicated as of the
date of estimation. The completion factor is the most significant component used in developing
the claims liability estimates for the periods prior to the most recent three months. The
following table illustrates the sensitivity of our medical claims payable at September 30, 2009,
and the estimated potential impact on our results of operations, to changes in these factors
that management believes are reasonably likely based upon our historical experience and
currently available information (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims Trend Factor |
|
|
Completion Factor |
|
|
|
|
|
|
|
Increase (Decrease) in |
|
|
|
|
|
|
Increase (Decrease) in |
|
Increase (Decrease) in |
|
|
|
|
Medical Claims |
|
|
Increase (Decrease) in |
|
|
Medical Claims |
|
Factor |
|
|
|
|
Payable |
|
|
Factor |
|
|
Payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.0 |
)% |
|
|
|
$ |
(4,661 |
) |
|
|
1.0 |
% |
|
$ |
(5,560 |
) |
|
(2.0 |
) |
|
|
|
|
(3,103 |
) |
|
|
0.5 |
|
|
|
(2,787 |
) |
|
(1.0 |
) |
|
|
|
|
(1,552 |
) |
|
|
(0.5 |
) |
|
|
2,845 |
|
|
1.0 |
|
|
|
|
|
1,564 |
|
|
|
(1.0 |
) |
|
|
5,705 |
|
55
Goodwill and Other Intangibles. The accounting policies and estimates related to goodwill and
other intangibles are considered critical because of the significant impact that impairment could
have on our operating results. We record all assets and liabilities acquired in purchase
acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair
value as required by Financial Accounting Standards Board
(FASB) authoritative guidance regarding business
combinations. Goodwill, which was $717.9 million at September 30, 2009, is not amortized but is
subject to tests for impairment annually or more often if events or circumstances indicate it may
be impaired. The initial recording of goodwill and other intangibles requires subjective judgments
concerning estimates of the fair value of the acquired assets. An impairment loss is recorded to
the extent that the carrying amount of goodwill exceeds its implied fair value. During the year
ended September 30, 2009, we recorded a $64.6 million
non-cash charge ($43.2 million after tax) related
to the impairment of goodwill in our Florida market. Other identifiable intangible assets, net of
accumulated amortization, were $30.0 million at September 30, 2009, compared to $33.0 million in
the prior year. These are amortized over their estimated useful lives and are evaluated for
impairment if events and circumstances indicate a possible impairment. Such evaluation of other
intangible assets is based on undiscounted cash flow projections. Estimated cash flows may extend
far into the future and, by their nature, are difficult to determine over an extended timeframe.
Factors that may significantly affect the estimates include, among others, competitive forces,
customer behaviors and attrition, changes in revenue growth trends, cost structures and technology,
and changes in discount rates and specific industry or market sector conditions. Other key
judgments in accounting for intangibles include useful life and classification between goodwill and
indefinite-lived intangibles or other intangibles which require amortization. See Goodwill and
Other Intangibles Assets in the Notes to Consolidated Financial Statements for additional
information regarding intangible assets. To assist in assessing the impact of a goodwill or
intangible asset impairment charge at September 30, 2009, we have $747.9 million of goodwill and
intangible assets. The impact of a 5% impairment charge would result in a reduction in pre-tax
income of approximately $37.4 million.
Income Taxes. Certain tax matters require interpretations of tax law that may be subject to
future challenge and may not be upheld under tax audit. Significant judgment is required in
determining and assessing the impact of such tax-related contingencies. We establish accruals when,
despite our belief that our tax return positions are fully supportable, it is probable that we have
incurred a loss related to tax contingencies and the loss or range of loss can be reasonably
estimated. We adjust the accruals related to tax contingencies based upon changing facts and
circumstances, including the progress of tax audits and legislative, regulatory or judicial
developments. Additionally, we estimate and record a valuation allowance to reduce deferred tax
assets to the amount we believe is more likely than not to be realized in future periods based on
all relevant information. We believe that future income as well as the reversal of deferred tax
liabilities will enable us to realize the deferred tax assets we have recorded, net of the
valuation allowance we have established.
Effective
October 1, 2007, we adopted the provisions of FASB authoritative
guidance regarding accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of all tax positions accounted for in
accordance with provisions of FASB authoritative guidance regarding
accounting for income taxes. In addition, the provisions related to accounting for uncertainty in income taxes provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. We applied these
provisions to all tax positions upon initial adoption of this guidance. Only tax
positions that meet the more-likely-than-not recognition threshold at the effective date, October
1, 2007, have been recognized in connection with these provisions.
As
a result of adopting the provision regarding accounting for
uncertainty in income taxes, we recorded a liability for unrecognized tax benefits of $8.1
million, including accrued interest of $83,000. The adjustment was comprised of a cumulative effect
decrease to members equity of $59,000, and a decrease to net noncurrent deferred tax
liabilities of $8.1 million. An additional $9.9 million of unrecognized tax benefits
are reflected as a reduction to deferred tax assets for federal and state net operating losses
generated by uncertain tax deductions.
The provision regarding accounting for
uncertainty in income taxes permits interest and penalties on underpayments of income taxes to be classified as
interest expense, income tax expense, or another appropriate expense classification based on the
accounting election of the company. Our policy is to classify interest and penalties as a component
of income tax expense.
56
The estimates, judgments and assumptions used by us under Allowance for Doubtful Accounts,
Allowance
for Contractual Discounts and Settlement Estimates, Insurance Reserves, Medical Claims
Payable, Goodwill and Other Intangibles and Income Taxes are, we believe, reasonable, but
involve inherent uncertainties as described above, which may or may not be controllable by
management. As a result, the accounting for such items could result in different amounts if
management used different assumptions or if different conditions occur in future periods.
RESULTS OF OPERATIONS SUMMARY
Consolidated
The following table sets forth, for the periods indicated, results of consolidated operations
expressed in dollar terms and as a percentage of net revenue. Such information has been derived
from our audited consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
($ in thousands) |
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
1,662,469 |
|
|
|
70.4 |
% |
|
$ |
1,523,790 |
|
|
|
73.8 |
% |
|
$ |
1,315,438 |
|
|
|
74.5 |
% |
Premium revenue |
|
|
699,503 |
|
|
|
29.6 |
% |
|
|
541,746 |
|
|
|
26.2 |
% |
|
|
450,641 |
|
|
|
25.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
2,361,972 |
|
|
|
100.0 |
% |
|
|
2,065,536 |
|
|
|
100.0 |
% |
|
|
1,766,079 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
660,921 |
|
|
|
28.0 |
% |
|
|
632,109 |
|
|
|
30.6 |
% |
|
|
533,792 |
|
|
|
30.2 |
% |
Supplies |
|
|
250,573 |
|
|
|
10.6 |
% |
|
|
231,259 |
|
|
|
11.2 |
% |
|
|
194,915 |
|
|
|
11.0 |
% |
Medical claims |
|
|
592,760 |
|
|
|
25.1 |
% |
|
|
452,055 |
|
|
|
21.9 |
% |
|
|
376,505 |
|
|
|
21.3 |
% |
Other operating expenses |
|
|
325,735 |
|
|
|
13.8 |
% |
|
|
283,123 |
|
|
|
13.7 |
% |
|
|
266,263 |
|
|
|
15.1 |
% |
Provision for bad debts |
|
|
192,563 |
|
|
|
8.2 |
% |
|
|
161,936 |
|
|
|
7.8 |
% |
|
|
136,233 |
|
|
|
7.7 |
% |
Rentals and leases |
|
|
39,127 |
|
|
|
1.7 |
% |
|
|
36,633 |
|
|
|
1.8 |
% |
|
|
31,546 |
|
|
|
1.8 |
% |
Interest expense, net |
|
|
67,890 |
|
|
|
2.9 |
% |
|
|
75,665 |
|
|
|
3.7 |
% |
|
|
71,206 |
|
|
|
4.0 |
% |
Depreciation and
amortization |
|
|
97,462 |
|
|
|
4.1 |
% |
|
|
96,741 |
|
|
|
4.7 |
% |
|
|
75,388 |
|
|
|
4.3 |
% |
Management fees |
|
|
5,000 |
|
|
|
0.2 |
% |
|
|
5,000 |
|
|
|
0.2 |
% |
|
|
4,746 |
|
|
|
0.3 |
% |
Impairment of goodwill |
|
|
64,639 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related property
damage |
|
|
938 |
|
|
|
0.0 |
% |
|
|
3,589 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
Loss on extinguishment of
debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,229 |
|
|
|
0.4 |
% |
Business interruption
insurance recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,443 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
2,297,608 |
|
|
|
97.3 |
% |
|
|
1,978,110 |
|
|
|
95.8 |
% |
|
|
1,693,380 |
|
|
|
95.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before gain
(loss) on disposal of
assets, minority interests
and income taxes |
|
|
64,364 |
|
|
|
2.7 |
% |
|
|
87,426 |
|
|
|
4.2 |
% |
|
|
72,699 |
|
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of
assets, net |
|
|
1,465 |
|
|
|
0.1 |
% |
|
|
(75 |
) |
|
|
(0.0 |
)% |
|
|
(1,359 |
) |
|
|
(0.1 |
)% |
Minority interests |
|
|
(9,987 |
) |
|
|
(0.4 |
)% |
|
|
(4,437 |
) |
|
|
(0.2 |
)% |
|
|
(4,496 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before income
taxes |
|
|
55,842 |
|
|
|
2.4 |
% |
|
|
82,914 |
|
|
|
4.0 |
% |
|
|
66,844 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
27,576 |
|
|
|
1.2 |
% |
|
|
35,325 |
|
|
|
1.7 |
% |
|
|
25,909 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing
operations |
|
|
28,266 |
|
|
|
1.2 |
% |
|
|
47,589 |
|
|
|
2.3 |
% |
|
|
40,935 |
|
|
|
2.3 |
% |
Earnings (loss) from
discontinued operations, net
of income taxes |
|
|
(176 |
) |
|
|
(0.0 |
)% |
|
|
(11,275 |
) |
|
|
(0.5 |
)% |
|
|
669 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
28,090 |
|
|
|
1.2 |
% |
|
$ |
36,314 |
|
|
|
1.8 |
% |
|
$ |
41,604 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Acute Care
The following table sets forth, for the periods indicated, results of our acute care
operations expressed in dollar terms and as a percentage of net revenue. Such information has been
derived from our audited consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
($ in thousands) |
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
1,662,469 |
|
|
|
99.4 |
% |
|
$ |
1,523,790 |
|
|
|
99.4 |
% |
|
$ |
1,315,438 |
|
|
|
99.4 |
% |
Revenue between segments |
|
|
9,316 |
|
|
|
0.6 |
% |
|
|
9,594 |
|
|
|
0.6 |
% |
|
|
7,540 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue (1) |
|
|
1,671,785 |
|
|
|
100.0 |
% |
|
|
1,533,384 |
|
|
|
100.0 |
% |
|
|
1,322,978 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
641,893 |
|
|
|
38.4 |
% |
|
|
614,442 |
|
|
|
40.1 |
% |
|
|
518,989 |
|
|
|
39.2 |
% |
Supplies |
|
|
250,310 |
|
|
|
15.0 |
% |
|
|
231,001 |
|
|
|
15.1 |
% |
|
|
194,630 |
|
|
|
14.7 |
% |
Other operating expenses |
|
|
302,804 |
|
|
|
18.1 |
% |
|
|
264,814 |
|
|
|
17.3 |
% |
|
|
251,167 |
|
|
|
19.0 |
% |
Provision for bad debts |
|
|
192,563 |
|
|
|
11.5 |
% |
|
|
161,936 |
|
|
|
10.6 |
% |
|
|
136,233 |
|
|
|
10.3 |
% |
Rentals and leases |
|
|
37,563 |
|
|
|
2.2 |
% |
|
|
35,466 |
|
|
|
2.3 |
% |
|
|
30,384 |
|
|
|
2.3 |
% |
Interest expense, net |
|
|
67,890 |
|
|
|
4.1 |
% |
|
|
75,665 |
|
|
|
4.9 |
% |
|
|
71,206 |
|
|
|
5.4 |
% |
Depreciation and amortization |
|
|
94,014 |
|
|
|
5.6 |
% |
|
|
93,003 |
|
|
|
6.0 |
% |
|
|
71,828 |
|
|
|
5.4 |
% |
Management fees |
|
|
5,000 |
|
|
|
0.3 |
% |
|
|
5,000 |
|
|
|
0.3 |
% |
|
|
4,746 |
|
|
|
0.4 |
% |
Impairment of goodwill |
|
|
64,639 |
|
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related property damage |
|
|
938 |
|
|
|
0.1 |
% |
|
|
3,589 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,229 |
|
|
|
0.5 |
% |
Business interruption insurance
recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,443 |
) |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,657,614 |
|
|
|
99.2 |
% |
|
|
1,484,916 |
|
|
|
96.8 |
% |
|
|
1,281,969 |
|
|
|
96.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before gain (loss) on disposal of
assets, minority interests and income
taxes |
|
|
14,171 |
|
|
|
0.8 |
% |
|
|
48,468 |
|
|
|
3.2 |
% |
|
|
41,009 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of assets, net |
|
|
1,616 |
|
|
|
0.1 |
% |
|
|
(75 |
) |
|
|
(0.0 |
)% |
|
|
(1,359 |
) |
|
|
(0.1 |
)% |
Minority interests |
|
|
(9,987 |
) |
|
|
(0.6 |
)% |
|
|
(4,437 |
) |
|
|
(0.3 |
)% |
|
|
(4,496 |
) |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
$ |
5,800 |
|
|
|
0.3 |
% |
|
$ |
43,956 |
|
|
|
2.9 |
% |
|
$ |
35,154 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Revenue between segments is eliminated in our consolidated results. |
Years Ended September 30, 2009 and 2008
Acute care revenue Acute care revenue from our hospital operations for the year ended
September 30, 2009, was $1.7 billion, an increase of $138.4 million, or 9.0%, compared to $1.5
billion in the prior year. Approximately 2.1% of this increase is attributable to the increase in
revenue associated with the supplemental Medicaid reimbursement programs in our Texas market. The
remaining increase in acute care revenue of 6.9% is comprised of an increase in adjusted admissions
of 2.4% and an increase in net patient revenue per adjusted admission of 4.4%, excluding the impact
of supplemental Medicaid reimbursement.
Salaries and benefits Salaries and benefits expense from our hospital operations for the
year ended September 30, 2009, was $641.9 million, or 38.4% of acute care revenue, compared to
$614.4 million, or 40.1% of acute care revenue in the prior year. The decline in salaries and
benefits expense as a percentage of acute care revenue is attributable to a reduction in employee
medical and pharmacy claims experience, primarily resulting from changes in our employee health
plan design. Additionally, our nursing contract labor as a percentage
of acute care revenue declined to
0.8% for the year ended September 30, 2009, compared to 1.2% in the prior year.
Other operating expenses Other operating expenses from our hospital operations for the year
ended September 30, 2009, were $302.8 million, or 18.1% of acute care revenue, compared to $264.8
million, or 17.3% of acute care revenue in the prior year. The increase in other operating expenses
as a percentage of acute care revenue was the result of additional
professional fees incurred at our Texas hospitals to
provide indigent care services during the current year, compared to the prior year.
58
Provision for bad debts Provision for bad debts from our hospital operations for the year
ended September 30, 2009, was $192.6 million, or 11.5% of acute care revenue, compared to $161.9
million, or 10.6% of acute care revenue in the prior year. We believe, as a result of the prolonged economic
recession and rising unemployment, we continue to experience an increase in self-pay volume and
revenue, as well as increases in the amount of co-payments and deductibles passed on by employers
to employees. For the year ended September 30, 2009, our self-pay admissions as a percentage of
total admissions were 6.0%, compared to 5.2% in the prior year. These trends continue to be the
main driver behind the increase in our provision for bad debts.
Interest expense, net Interest expense, net of interest income, for the year ended September
30, 2009, was $67.9 million, compared to $75.7 million in the prior year. This decrease of $7.8
million was primarily due to the impact of lower LIBOR interest rates in the current year, compared
to the prior year. The weighted average interest rate of outstanding borrowings under our senior
secured credit facilities was 3.6% for the year ended September 30, 2009, compared to 5.6% in the
prior year.
Impairment
of goodwill Impairment of goodwill for the year ended
September 30, 2009, includes a $64.6 million non-cash charge related
to our Florida market. We have experienced other than temporary changes in market conditions and the business mix of our Florida operations,
which have negatively impacted operating results in this market. Accordingly, we have written off the goodwill associated with
our Florida market.
Earnings from continuing operations before income taxes Earnings from continuing operations
before income taxes decreased $38.2 million to $5.8 million for the year ended September 30, 2009,
compared to $44.0 million in the prior year. Earnings from continuing operations before income
taxes for the year ended September 30, 2009, included the impact of a $64.6 million non-cash charge
related to the impairment of goodwill in our Florida market.
Years Ended September 30, 2008 and 2007
Acute care revenue Acute care revenue from our hospital operations for the year ended
September 30, 2008, was $1.5 billion, an increase of $210.4 million, or 15.9%, compared to $1.3
billion in the prior year. The increase in acute care revenue is due to an increase in
admissions and adjusted admissions of 9.9% and 10.0%, respectively, compared to the prior year,
along with an increase in net patient revenue per adjusted admission of 5.4% for the year ended
September 30, 2008, compared to the prior year.
On a same-facility basis, acute care revenue from our hospital operations increased 6.6% for
the year ended September 30, 2008, compared to the prior year. Same-facility admissions and
adjusted admissions increased by 0.8% and 2.0%, respectively, for the year ended September 30,
2008, compared to the prior year.
Salaries and benefits Salaries and benefits expense from our hospital operations for the
year ended September 30, 2008, was $614.4 million, or 40.1% of acute care revenue, compared to
$519.0 million, or 39.2% of acute care revenue in the prior year. The increase in salaries and
benefits as a percentage of acute care revenue is the result of the implementation of our
physician employment strategy. The increase in salaries and benefits as a percentage of acute care
revenue was partially offset by the prior year impact of a $3.1 million special compensation
payment related to our April 2007 refinancing and recapitalization transaction.
Supplies Supplies
expense from our hospital operations for the year ended September 30,
2008, was $231.0 million, or 15.1% of acute care revenue, compared
to $194.6 million, or 14.7% of
acute care revenue in the prior year. The increase in supply cost as a percentage of acute care
revenue was driven by growth in higher acuity and supply utilization
services, such as
inpatient and outpatient surgical procedures.
Other operating expenses Other operating expenses from our hospital operations for the year
ended September 30, 2008, were $264.8 million, or 17.3% of acute care revenue, compared to $251.2
million, or 19.0% of acute care revenue in the prior year. The decline in other operating expenses
as a percentage of acute care revenue included a 0.4% reduction in the use of purchased services
due to changes in service mix, and a 0.4% decrease in expenses related to professional and general
liability insurance costs resulting from continued improvements in claims experience. Other
operating expenses for the years ended September 30, 2008 and 2007, include $3.8 million and $10.5
million, respectively, in qui tam related legal fees and other expenses.
Provision for bad debts Provision for bad debts from our hospital operations for the year
ended September 30, 2008, was $161.9 million, or 10.6% of acute care revenue, compared to $136.2
million, or 10.3% of acute care revenue in the prior year. The increase in the provision for bad
debts as a percentage of acute care revenue is the result of continued growth in
self-pay volume and revenue, including an increase in volume of under-insured patients or patient
balances after insurance, which are increasingly difficult to collect, often as a result of
economic factors beyond our control.
59
Interest expense, net Interest expense, net of interest income, for the year ended September
30, 2008, was $75.7 million, compared to $71.2 million in the prior year. This increase of $4.5
million was primarily due to increased borrowings under our senior secured credit facilities, which
includes the outstanding balance under our delayed draw term loan and use of our revolving credit
facility, during the year ended September 30, 2008, compared to the prior year. The increased
interest expense resulting from additional debt balances was partially mitigated by declining
interest rates, as borrowings under our senior secured credit facilities are subject to interest at
variable rates. The weighted average interest rate of outstanding borrowings under the senior
secured credit facilities was 5.6% for the year ended September 30, 2008, compared to 7.5% in the
prior year.
Depreciation and amortization Depreciation and amortization expense for the year ended
September 30, 2008, was $93.0 million, compared to $71.8 million in the prior year. The increase of
$21.2 million was related to depreciation and amortization expense resulting from new
assets being placed into service, including the acquisitions of Glenwood and Alliance, as well as
additions to property and equipment made in connection with the opening of Mountain Vista.
Earnings from continuing operations before income taxes Earnings from continuing operations
before income taxes increased $8.8 million to $44.0 million for the year ended September 30, 2008,
compared to $35.2 million in the prior year. Earnings from continuing operations before income
taxes included the impact of $3.6 million in hurricane-related property damage sustained by The
Medical Center of Southeast Texas, as a result of Hurricane Ike in September 2008. Earnings from
continuing operations before income taxes in the year ended September 30, 2007, included a $6.2
million loss on extinguishment of debt, a $3.1 million special compensation payment related to our
April 2007 refinancing and recapitalization transaction, and $3.4 million in business interruption
insurance recoveries related to the temporary closure and disruption of operations at The Medical
Center of Southeast Texas, as a result of Hurricane Rita.
Health Choice
The following table sets forth, for the periods indicated, results of our Health Choice
operations expressed in dollar terms and as a percentage of premium revenue. Such information has
been derived from our audited consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
Health Choice ($ in thousands) |
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue |
|
$ |
699,503 |
|
|
|
100.0 |
% |
|
$ |
541,746 |
|
|
|
100.0 |
% |
|
$ |
450,641 |
|
|
|
100.0 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
19,028 |
|
|
|
2.7 |
% |
|
|
17,667 |
|
|
|
3.3 |
% |
|
|
14,803 |
|
|
|
3.3 |
% |
Supplies |
|
|
263 |
|
|
|
0.0 |
% |
|
|
258 |
|
|
|
0.0 |
% |
|
|
285 |
|
|
|
0.1 |
% |
Medical claims (1) |
|
|
602,076 |
|
|
|
86.1 |
% |
|
|
461,649 |
|
|
|
85.2 |
% |
|
|
384,045 |
|
|
|
85.2 |
% |
Other operating expenses |
|
|
22,931 |
|
|
|
3.3 |
% |
|
|
18,309 |
|
|
|
3.4 |
% |
|
|
15,096 |
|
|
|
3.3 |
% |
Rentals and leases |
|
|
1,564 |
|
|
|
0.2 |
% |
|
|
1,167 |
|
|
|
0.2 |
% |
|
|
1,162 |
|
|
|
0.3 |
% |
Depreciation and amortization |
|
|
3,448 |
|
|
|
0.5 |
% |
|
|
3,738 |
|
|
|
0.7 |
% |
|
|
3,560 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
649,310 |
|
|
|
92.8 |
% |
|
|
502,788 |
|
|
|
92.8 |
% |
|
|
418,951 |
|
|
|
93.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before loss on disposal of assets |
|
|
50,193 |
|
|
|
7.2 |
% |
|
|
38,958 |
|
|
|
7.2 |
% |
|
|
31,690 |
|
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets, net |
|
|
(151 |
) |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
50,042 |
|
|
|
7.2 |
% |
|
$ |
38,958 |
|
|
|
7.2 |
% |
|
$ |
31,690 |
|
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Medical claims paid to our hospitals of $9.3 million, $9.6 million and $7.5 million for the
years ended September 30, 2009, 2008 and 2007, respectively, are eliminated in our
consolidated results. |
Years Ended September 30, 2009 and 2008
Premium revenue - Premium revenue from Health Choice was $699.5 million for the year ended
September 30, 2009, an increase of $157.8 million or 29.1%, compared to $541.7 million in the prior
year. The growth in premium revenue was attributable to a 31.6% increase in Medicaid
enrollees, resulting from Health Choices new contract with AHCCCS and increased enrollment in the
state program. In addition, Health Choice has implemented
successful outreach efforts, especially in its new counties, which have helped to increase the
number of covered lives.
60
Medical claims Prior to eliminations, medical claims expense was $602.1 million for the year
ended September 30, 2009, compared to $461.6 million in the prior year. Medical claims expense
represents the amounts paid by Health Choice for healthcare services provided to its members.
Medical claims expense as a percentage of premium revenue was 86.1% for the year ended September
30, 2009, compared to 85.2% in the prior year. The increase in medical claims
expense as a percentage of premium revenue is the result of AHCCCS implementation of a new risk
based payment methodology, which has negatively affected premium revenue on a per member per month
basis in the current year.
Years Ended September 30, 2008 and 2007
Premium revenue - Premium revenue from Health Choice was $541.7 million for the year ended
September 30, 2008, an increase of $91.1 million or 20.2%, compared to $450.6 million in the prior
year. The increase in premium revenue was the result of increases in premium rates in our Medicaid
and Medicare product lines, as well as a 16.1% increase in our Medicaid enrollees.
Medical claims Prior to eliminations, medical claims expense was $461.6 million for the year
ended September 30, 2008, compared to $384.0 million in the prior year. Medical claims expense as a
percentage of premium revenue was 85.2% for the year ended September 30, 2008, which was consistent
with the prior year.
Income Taxes
The following discussion sets forth, for the periods indicated, the impact of income taxes on
our consolidated results. Such information has been derived from our audited consolidated
statements of operations.
Years Ended September 30, 2009 and 2008
Income tax expense We recorded a provision for income taxes from continuing operations of
$27.6 million, resulting in an effective tax rate of 49.4% for the year ended September 30, 2009,
compared to $35.3 million, for an effective tax rate of 42.6% in the prior year. The increase in
our effective tax rate is the result of the impact of a non-deductible component of the $64.6
million non-cash charge related to the impairment of goodwill in our Florida market.
Years Ended September 30, 2008 and 2007
Income tax expense We recorded a provision for income taxes from continuing operations of
$35.3 million, resulting in an effective tax rate of 42.6% for the year ended September 30, 2008,
compared to $25.9 million, for an effective tax rate of 38.8% in the prior year. The increase in
the effective tax rate was primarily the result of losses generated by subsidiaries that are
excluded from the consolidated federal and state tax returns. A valuation allowance was recorded
against these federal net operating loss carry forwards. The losses did not generate state tax
benefits. In addition, our effective tax rate in the prior year was impacted by an adjustment to
our state income taxes for fiscal 2006, which was recorded in the year ended September 30, 2007, as
the tax returns were filed.
61
Summary of Operations by Quarter
The following table presents unaudited quarterly operating results for the years ended
September 30, 2009 and 2008. We believe that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in conjunction with the
consolidated financial statements. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
Sept. 30, |
|
|
June 30, |
|
|
March 31, |
|
|
Dec. 31, |
|
|
|
2009(1) |
|
|
2009 |
|
|
2009(2) |
|
|
2008 |
|
|
|
(in thousands) |
|
Net revenue |
|
$ |
620,056 |
|
|
$ |
601,618 |
|
|
$ |
578,674 |
|
|
$ |
561,624 |
|
Earnings (loss) from continuing operations
before income taxes |
|
|
(41,446 |
) |
|
|
34,277 |
|
|
|
41,839 |
|
|
|
21,172 |
|
Net earnings (loss) from continuing operations |
|
|
(30,047 |
) |
|
|
20,562 |
|
|
|
25,390 |
|
|
|
12,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
Sept. 30, |
|
|
June 30, |
|
|
March 31, |
|
|
Dec. 31, |
|
|
|
2008(3) |
|
|
2008 |
|
|
2008(4) |
|
|
2007 |
|
|
|
(in thousands) |
|
Net revenue |
|
$ |
515,419 |
|
|
$ |
532,560 |
|
|
$ |
524,820 |
|
|
$ |
492,737 |
|
Earnings from continuing operations before income taxes |
|
|
12,491 |
|
|
|
24,492 |
|
|
|
26,681 |
|
|
|
19,250 |
|
Net earnings from continuing operations |
|
|
5,446 |
|
|
|
14,964 |
|
|
|
15,885 |
|
|
|
11,294 |
|
|
|
|
(1) |
|
Results for the quarter ended September 30, 2009,
include a $64.6 million non-cash charge ($43.2 million after taxes) related to the impairment of
goodwill in our Florida market, and a $2.0
million and a $326,000 increase in prior year estimates for professional and general liability
losses and workers compensation claims, respectively, as a result of our semi-annual
actuarial studies. |
|
(2) |
|
Results for the quarter ended March 31, 2009, include a $3.2 million and an $852,000
reduction in prior year estimates for professional and general liability losses and workers
compensation claims, respectively, as a result of our semi-annual actuarial studies. Results
for the quarter ended March 31, 2009, also include $938,000 in costs associated with property
damage sustained at The Medical Center of Southeast Texas, as a result of Hurricane Ike. |
|
(3) |
|
Results for the quarter ended September 30, 2008,
include a $2.9 million and a $44,000
reduction in prior year estimates for professional and general liability losses and workers
compensation claims, respectively, as a result of our semi-annual actuarial studies, and $3.6
million in costs associated with property damage sustained at The Medical Center of Southeast
Texas, as a result of Hurricane Ike in September 2008. |
|
(4) |
|
Results for the quarter ended March 31, 2008, include a $3.9 million reduction and an
$803,000 increase in prior year estimates for professional and general liability losses and
workers compensation claims, respectively, as a result of our semi-annual actuarial studies. |
LIQUIDITY AND CAPITAL RESOURCES
Overview of Cash Flow Activities for the Years Ended September 30, 2009 and 2008
For the years ended September 30, 2009 and 2008, our cash flows are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities continuing operations |
|
$ |
270,499 |
|
|
$ |
141,063 |
|
Cash flows from investing activities continuing operations |
|
|
(82,586 |
) |
|
|
(149,263 |
) |
Cash flows from financing activities continuing operations |
|
|
(63,605 |
) |
|
|
88,144 |
|
Operating Activities
Our primary sources of liquidity are cash flow provided by our continuing operations and our
senior secured revolving credit facility. The increase in operating cash flows is primarily the
result of increased earnings before the non-cash impairment of goodwill, improved collections on accounts
receivable, the timing of accounts payable and accrued expenses, payments received related to the
supplemental Medicaid reimbursement programs in our Texas market, the impact of significant
enrollment growth and the timing of cash flows related to the Medicaid product line at Health
Choice and reduced interest costs resulting from lower interest rates.
62
At
September 30, 2009, we had $264.5 million in net working capital, compared to $187.4
million at September 30, 2008. Net accounts receivable increased $6.1 million
to $230.2 million at
September 30, 2009, from $224.1
million at September 30, 2008. Our days revenue in
accounts receivable at September 30, 2009,
were 49, compared to 53 at September 30, 2008.
Investing Activities
Capital expenditures for the year ended September 30, 2009, were $87.7 million, which included
$25.8 million for the construction of two patient tower expansion projects in our Utah market,
compared to $137.4 million in the prior year. The decline in capital expenditures reflects, in
part, our efforts to effectively and efficiently manage our capital resources during the current
economic environment.
Investing activities during the year ended September 30, 2008, included the acquisition of
Ouachita Community Hospital for $16.8 million.
Financing Activities
During the year ended September 30, 2009, pursuant to the terms of our senior secured credit
facilities, we made net payments totaling $53.7 million, including $47.8 million used to pay the
outstanding balance of our revolving credit facility, compared to net borrowings of $82.0 million
in the prior year. Additionally, we made payments totaling $1.8 million on capital leases and other
debt obligations during the year ended September 30, 2009.
Financing activities during the year ended September 30, 2009, included payments of $1.4
million for the repurchase of partnership interests, compared to proceeds received from the sale of
partnership interests, net of costs, of $15.1 million in the prior year.
Capital Resources
As of September 30, 2009, we had two separate debt arrangements:
|
|
|
$854.0 million in senior secured credit facilities; and |
|
|
|
$475.0 million in 8 3/4% senior subordinated notes due 2014. |
$854.0 Million Senior Secured Credit Facilities
The $854.0 million senior secured credit facilities include: (i) a senior secured term loan of
$439.0 million; (ii) a senior secured delayed draw term loan of $150.0 million; (iii) a senior
secured revolving credit facility of $225.0 million, with a $100.0 million sub-limit for letters of
credit; and (iv) a senior secured synthetic letter of credit facility of $40.0 million. All
facilities mature on March 15, 2014, except for the revolving credit facility, which matures on
April 27, 2013. The term loans bear interest at an annual rate of LIBOR plus 2.00% or, at our
option, the administrative agents base rate plus 1.00%. The revolving loans bear interest at an
annual rate of LIBOR plus an applicable margin ranging from 1.25% to 1.75% or, at our option, the
administrative agents base rate plus an applicable margin ranging from 0.25% to 0.75%, such rate
in each case depending on our senior secured leverage ratio. A commitment fee ranging from 0.375%
to 0.50% per annum is charged on the undrawn portion of the senior secured revolving credit
facility and is payable in arrears.
Principal under the senior secured term loan is due in 24 consecutive equal quarterly
installments in an aggregate annual amount equal to 1.0% of the original principal amount ($439.0
million) during the first six years thereof, with the balance payable in four equal installments in
year seven. Principal under the senior secured delayed draw term loan is due in equal quarterly
installments in an aggregate annual amount equal to 1.0% of the original principal amount ($150.0
million) until March 31, 2013, with the balance payable in four equal installments during the final
year of the loan. Unless terminated earlier, the senior secured revolving credit facility has a
single maturity of six years. The senior secured credit facilities are also subject to mandatory
prepayment under specific circumstances, including a portion of excess cash flow, a portion of the
net proceeds from an initial public offering, asset sales, debt issuances and specified casualty
events, each subject to various exceptions.
63
The senior secured credit facilities are (i) secured by a first mortgage and lien on our real
property and related personal and intellectual property and pledges of equity interests in the
entities that own such properties and (ii) guaranteed by certain of our subsidiaries.
In addition, the senior secured credit facilities contain certain covenants which, among other
things, limit the incurrence of additional indebtedness, investments, dividends, transactions with
affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other
matters customarily restricted in such agreements.
At September 30, 2009, amounts outstanding under our senior secured credit facilities
consisted of a $428.0 million term loan and a $148.1 million delayed draw term loan. In addition,
we had $39.9 million and $24.7 million in letters of credit outstanding under the synthetic letter
of credit facility and the revolving credit facility, respectively. The weighted average interest
rate of outstanding borrowings under the senior secured credit facilities was 3.6% for the year
ended September 30, 2009.
$475.0 Million 8 3/4% Senior Subordinated Notes Due 2014
We and our wholly-owned subsidiary, IASIS Capital Corporation, a holding company with no
assets or operations, as issuers, have outstanding $475.0 million aggregate principal amount of 8
3/4% notes. Our 8 3/4% notes are general unsecured senior subordinated obligations of the issuers, are
subordinated in right of payment to their existing and future senior debt, are pari passu in right
of payment with any of their future senior subordinated debt and are senior in right of payment to
any of their future subordinated debt. Our existing domestic subsidiaries, other than certain
non-guarantor subsidiaries, which include Health Choice and our non-wholly owned subsidiaries, are
guarantors of our 8 3/4% notes. Our 8 3/4% notes are effectively subordinated to all of the issuers
and the guarantors secured debt to the extent of the value of the assets securing the debt and are
structurally subordinated to all liabilities and commitments (including trade payables and capital
lease obligations) of our subsidiaries that are not guarantors of our 8 3/4% notes. Our 8 3/4% notes
require semi-annual interest payments in June and December. The indenture related to the 8 3/4%
notes contains a customary restricted payments covenant, which, among others restrictions, limits
the amount of dividends or other cash payments to IAS, including
payments to fund the interest
on the Holdings Senior Paid-in-Kind (PIK) Loans, which becomes cash pay in June 2012. As of September
30, 2009, we have $187.0 million available to expend free of any such restrictions pursuant to the
restricted payment basket provisions set forth in this covenant.
$300.0 Million Holdings Senior PIK Loans
In fiscal 2007, IAS borrowed $300.0 million in Holdings Senior PIK Loans, which mature June
15, 2014. Proceeds were used to repurchase certain preferred equity from the stockholders of IAS.
The Holdings Senior PIK Loans bear interest at an annual rate equal to LIBOR plus 5.25%. The
Holdings Senior PIK Loans rank behind our existing debt and will convert to cash-pay after five
years, at which time accrued interest becomes payable. At September 30, 2009, the outstanding
balance of the Holdings Senior PIK Loans was $368.5 million, which includes $68.5 million of
interest that has accrued to the principal of these loans since the date of issuance. The credit
agreement related to the Holdings Senior PIK Loans includes a restricted payment covenant, which,
among other restrictions, limits the amount of dividends that can be paid to the stockholders of
IAS. As of September 30, 2009, we have $120.0 million available to expend free of any such
restrictions pursuant to the restricted payment basket provisions set forth in this covenant.
Other
Effective March 2, 2009, we executed interest rate swap transactions with Citibank, N.A.
(Citibank) and Wachovia Bank, N.A. (Wachovia), as counterparties, with notional amounts
totaling $425.0 million, in an effort to manage exposure to floating interest rate risk on a
portion of our variable rate debt. The arrangements with each counterparty include two interest
rate swap agreements, one with a notional amount of $112.5 million maturing on February 28, 2011
and one with a notional amount of $100.0 million maturing on February 29, 2012. Under these
agreements, we are required to make monthly interest payments to our counterparties at fixed annual
interest rates ranging from 1.5% to 2.0%, depending upon the agreement. Our counterparties are
obligated to make monthly interest payments to us based upon the one-month LIBOR rate in effect
over the term of each agreement.
As of September 30, 2009, we provided a performance guaranty in the form of letters of credit
totaling $43.2 million for the benefit of AHCCCS to support our obligations under the Health Choice
contract to provide and pay for healthcare services. The amount of the performance guaranty is
based in part upon the membership in the plan and the related capitation revenue paid to us.
64
Capital Expenditures
We plan to finance our proposed capital expenditures with cash generated from operations,
borrowings under our senior secured credit facilities and other capital sources that may become
available. We expect our capital expenditures for fiscal 2010 to be $125.0 million to $135.0
million, including the following significant expenditures:
|
|
|
$60.0 million to $65.0 million for other growth and new business projects; |
|
|
|
$45.0 million to $50.0 million in replacement or maintenance related projects at our
hospitals; |
|
|
|
$12.0 million related to healthcare IT stimulus funds; and |
|
|
|
$8.0 million in hardware and software costs related to other information systems
projects. |
Liquidity
We rely on cash generated from our internal operations as our primary source of liquidity, as
well as available credit facilities, project and bank financings and the issuance of long-term
debt. From time to time, we have also utilized operating lease transactions that are sometimes
referred to as off-balance sheet arrangements. We expect that our future funding for working
capital needs, capital expenditures, long-term debt repayments and other financing activities will
continue to be provided from some or all of these sources. Each of our existing and projected
sources of cash is impacted by operational and financial risks that influence the overall amount of
cash generated and the capital available to us. For example, cash generated by our business
operations may be impacted by, among other things, economic downturns, weather-related catastrophes
and adverse industry conditions. Our future liquidity will be impacted by our ability to access
capital markets, which may be restricted due to our credit ratings, general market conditions, and
by existing or future debt agreements. For a further discussion of risks that can impact our
liquidity, see Item 1A., Risk Factors, beginning on page 29.
Including our senior secured credit facilities at September 30, 2009, we had available
liquidity as follows (in millions):
|
|
|
|
|
Available cash |
|
$ |
206.5 |
|
Available capacity under our senior secured revolving credit facility |
|
|
200.3 |
|
|
|
|
|
Net available liquidity at September 30, 2009 |
|
$ |
406.8 |
|
|
|
|
|
Available capacity under our revolving credit facility assumes 100% participation from all
lenders currently participating in our senior secured revolving credit facility. Currently, we have
identified one defaulting lender, Lehman, who has been unable to fund its proportionate share of
borrowings under our revolving credit facility since September 2008. Lehmans participation in our
revolving credit facility is approximately 8.9%, or $20.0 million of our total revolver capacity.
Assuming Lehman continues to default under the terms of the agreement, our net available liquidity
at September 30, 2009, would be reduced to $386.8 million. In addition to our available liquidity,
we expect to generate significant operating cash flow in fiscal 2010. We will also utilize proceeds
from our financing activities as needed.
Based upon our current level of operations and anticipated growth, we believe we have
sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over
the next three years. In evaluating the sufficiency of our liquidity for both the short-term and
long-term, we considered the expected cash flow to be generated by our operations, cash on hand and
the available borrowings under our senior secured credit facilities compared to our anticipated
cash requirements for debt service, working capital, capital expenditures and the payment of taxes,
as well as funding requirements for long-term liabilities.
65
As a result of this evaluation, we believe that we will have sufficient liquidity for the next
three years to fund the cash required for the payment of taxes and the capital expenditures
required to maintain our facilities during this period of time. We are unable at this time to
extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you,
however, that our operating performance will generate sufficient cash flow from operations or that
future borrowings will be available under our senior secured credit facilities, or otherwise, to
enable us to grow our business, service our indebtedness, including the senior secured credit
facilities and the 8 3/4% notes, or make anticipated capital expenditures. For more information, see
Item 1A., Risk Factors, beginning on page 29.
One element of our business strategy is to selectively pursue acquisitions and strategic
alliances in existing and new markets. Any acquisitions or strategic alliances may result in the
incurrence of, or assumption by us, of additional indebtedness. We continually assess our capital
needs and may seek additional financing, including debt or equity as considered necessary to fund
capital expenditures and potential acquisitions or for other corporate purposes. Our future
operating performance, ability to service or refinance our 8 3/4% notes and ability to service and
extend or refinance the senior secured credit facilities will be subject to future economic
conditions and to financial, business and other factors, many of which are beyond our control. For
more information, see Item 1A., Risk Factors, beginning on page 29.
OFF-BALANCE SHEET ARRANGEMENTS
We are a party to certain rent shortfall agreements, master lease agreements and other similar
arrangements with non-affiliated entities and an unconsolidated entity in the ordinary course of
business. We do not believe we have engaged in any transaction or arrangement with an
unconsolidated entity that is reasonably likely to materially affect liquidity.
We do not have any relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities, established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit
risk that could arise if we had engaged in such relationships.
Tabular Disclosure of Contractual Obligations
The following table reflects a summary of obligations and commitments outstanding including
both the principal and interest portions of long-term debt and capital lease obligations at
September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
Total |
|
|
|
(in millions) |
|
Contractual Cash Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, with interest (1) |
|
$ |
69.5 |
|
|
$ |
135.4 |
|
|
$ |
1,129.6 |
|
|
$ |
|
|
|
$ |
1,334.5 |
|
Capital lease obligations, with interest |
|
|
1.1 |
|
|
|
1.6 |
|
|
|
1.1 |
|
|
|
5.2 |
|
|
|
9.0 |
|
Medical claims |
|
|
113.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113.5 |
|
Operating leases |
|
|
21.8 |
|
|
|
33.0 |
|
|
|
28.1 |
|
|
|
42.3 |
|
|
|
125.2 |
|
Estimated self-insurance liabilities |
|
|
12.6 |
|
|
|
16.0 |
|
|
|
14.1 |
|
|
|
15.1 |
|
|
|
57.8 |
|
Purchase obligations |
|
|
23.0 |
|
|
|
9.0 |
|
|
|
1.6 |
|
|
|
0.1 |
|
|
|
33.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
241.5 |
|
|
$ |
195.0 |
|
|
$ |
1,174.5 |
|
|
$ |
62.7 |
|
|
$ |
1,673.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
Total |
|
|
|
(in millions) |
|
Other Commitments(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and improvement commitments |
|
$ |
13.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13.7 |
|
Guarantees of surety bonds |
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
Letters of credit |
|
|
|
|
|
|
39.9 |
|
|
|
24.7 |
|
|
|
|
|
|
|
64.6 |
|
Minimum revenue guarantees |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7 |
|
Other commitments |
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
19.6 |
|
|
|
39.9 |
|
|
|
24.7 |
|
|
|
|
|
|
|
84.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations and commitments |
|
$ |
261.1 |
|
|
$ |
234.9 |
|
|
$ |
1,199.2 |
|
|
$ |
62.7 |
|
|
$ |
1,757.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We used 3.6%, the weighted average interest rate incurred on our senior secured credit
facilities in fiscal
2009, which accrues actual interest at a variable rate. Actual interest will vary based on
changes in interest rates. Included in the weighted average interest rate is the effect of
our interest rate swap arrangements, which effectively converts $425.0 million of variable
rate debt to fixed rate debt. |
|
(2) |
|
Excludes $7.8 million of unrecognized tax benefits and related interest that could
result in a cash settlement, of which $6.2 million relates to timing differences between
book and taxable income that may be offset by a reduction of cash tax obligations in future
periods. We have not included these amounts in the above table as we cannot reliably
estimate the amount and timing of payments related to these liabilities. |
66
Seasonality
The patient volumes and net revenue at our healthcare operations are subject to seasonal
variations and generally are greater during the quarter ended March 31 than other quarters. These
seasonal variations are caused by a number of factors, including seasonal cycles of illness,
climate and weather conditions in our markets, vacation patterns of both patients and physicians
and other factors relating to the timing of elective procedures.
RECENT
ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued
new authoritative guidance regarding business combinations, which applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. This new guidance establishes principles and requirements for recognition and
measurement of items acquired during a business combination, as well as certain disclosure
requirements in the financial statements. We do not believe the adoption of this new guidance
will have a material impact on our results of operations or financial position; however, it is anticipated
to have a material effect on our accounting for future acquisitions.
In December 2007, the FASB issued new authoritative guidance regarding
noncontrolling interests in consolidated financial statements,
which is effective for fiscal years beginning after December 15,
2008. The objective of this guidance is to improve the relevance, comparability, and transparency
of financial information, specifically noncontrolling interests, that is provided in consolidated
financial statements. We do not believe the adoption of this new guidance will have a material
impact on our results of operations or financial position; however, it could potentially have a
material effect on the presentation of our financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to market risk from exposure to changes in interest rates based on our
financing, investing, and cash management activities. The following components of our senior
secured credit facilities bear interest at variable rates at specified margins above either the
agent banks alternate base rate or the LIBOR rate: (i) a $439.0 million, seven-year term loan;
(ii) a $150.0 million senior secured delayed draw term loan; and (iii) a $225.0 million, six-year
senior secured revolving credit facility. As of September 30, 2009, we had outstanding variable
rate debt of $576.2 million. We have managed our market exposure to changes in interest rates by
converting $425.0 million of this variable rate debt to fixed rate debt through the use of interest
rate swap agreements. Our interest rate swaps provide for $425.0 million of fixed rate debt under
our senior secured credit facilities through February 28, 2011 and $200.0 million from March 1,
2011 through February 29, 2012, at rates ranging from 1.5% to 2.0% depending upon the terms of the
specific agreement.
67
Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds
borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in
interest rates on our remaining variable rate debt or our consolidated financial position, results
of operations or cash flows would not be material. Holding other variables constant, including
levels of indebtedness and interest rate swaps, a 0.125% increase in interest rates would have an
estimated impact on pre-tax earnings and cash flows for the next twelve month period of $189,000.
Our interest rate swap agreements expose us to credit risk in the event of non-performance by
our counter parties, Citibank and Wachovia. However, we do not anticipate non-performance by
Citibank or Wachovia.
We have $475.0 million in senior subordinated notes due December 15, 2014, with interest
payable semi-annually at the rate of 8 3/4% per annum. At September 30, 2009,
the fair market value of the outstanding 8 3/4% notes was $473.8 million,
based upon quoted market prices as of that date.
We currently believe we have adequate liquidity to fund operations during the near term
through the generation of operating cash flows, cash on hand and access to our revolving credit
facility, despite the current conditions in the financial and capital markets. However, our ability
to borrow funds under our revolving credit facility is subject to the financial viability of the
participating financial institutions. Since September 2008, we have identified one defaulting
lender, Lehman, who has been unable to fund its proportionate share of borrowings under our
revolving credit facility. Lehmans participation in our revolving credit facility is approximately
8.9%, or $20.0 million of our total revolver capacity. We are currently working to replace this
lender with a financially viable institution; however, we are unable to provide any assurance that
this will be possible. Any further deterioration in the credit markets could limit our ability to
access available funds under our revolving credit facility.
68
Item 8. Financial Statements and Supplementary Data.
IASIS Healthcare LLC
Index to Consolidated Financial Statements
69
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
IASIS Healthcare Corporation, sole member of IASIS Healthcare LLC
We have audited the accompanying consolidated balance sheets of IASIS Healthcare LLC as of
September 30, 2009 and 2008, and the related consolidated statements of operations, members equity
and cash flows for each of the three years in the period ended September 30, 2009. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of IASIS Healthcare LLC at September 30, 2009 and
2008, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended September 30, 2009, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
November 25, 2009
70
IASIS HEALTHCARE LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
206,528 |
|
|
$ |
80,738 |
|
Accounts receivable, less allowance for doubtful accounts of
$126,132 and $108,500 at September 30, 2009 and 2008,
respectively |
|
|
230,198 |
|
|
|
224,138 |
|
Inventories |
|
|
50,492 |
|
|
|
49,454 |
|
Deferred income taxes |
|
|
39,038 |
|
|
|
38,860 |
|
Prepaid expenses and other current assets |
|
|
49,453 |
|
|
|
60,053 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
575,709 |
|
|
|
453,243 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
997,353 |
|
|
|
1,004,248 |
|
Goodwill |
|
|
717,920 |
|
|
|
780,599 |
|
Other intangible assets, net |
|
|
30,000 |
|
|
|
33,000 |
|
Other assets, net |
|
|
36,222 |
|
|
|
37,057 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,357,204 |
|
|
$ |
2,308,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
68,552 |
|
|
$ |
64,851 |
|
Salaries and benefits payable |
|
|
42,548 |
|
|
|
31,807 |
|
Accrued interest payable |
|
|
12,511 |
|
|
|
12,460 |
|
Medical claims payable |
|
|
113,519 |
|
|
|
97,343 |
|
Other accrued expenses and other current liabilities |
|
|
65,701 |
|
|
|
51,802 |
|
Current portion of long-term debt and capital lease obligations |
|
|
8,366 |
|
|
|
7,623 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
311,197 |
|
|
|
265,886 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
1,051,471 |
|
|
|
1,106,999 |
|
Deferred income taxes |
|
|
106,425 |
|
|
|
111,092 |
|
Other long-term liabilities |
|
|
54,222 |
|
|
|
44,526 |
|
Minority interests |
|
|
53,042 |
|
|
|
51,875 |
|
|
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
Members equity |
|
|
780,847 |
|
|
|
727,769 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
2,357,204 |
|
|
$ |
2,308,147 |
|
|
|
|
|
|
|
|
71
IASIS HEALTHCARE LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
1,662,469 |
|
|
$ |
1,523,790 |
|
|
$ |
1,315,438 |
|
Premium revenue |
|
|
699,503 |
|
|
|
541,746 |
|
|
|
450,641 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
2,361,972 |
|
|
|
2,065,536 |
|
|
|
1,766,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
660,921 |
|
|
|
632,109 |
|
|
|
533,792 |
|
Supplies |
|
|
250,573 |
|
|
|
231,259 |
|
|
|
194,915 |
|
Medical claims |
|
|
592,760 |
|
|
|
452,055 |
|
|
|
376,505 |
|
Other operating expenses |
|
|
325,735 |
|
|
|
283,123 |
|
|
|
266,263 |
|
Provision for bad debts |
|
|
192,563 |
|
|
|
161,936 |
|
|
|
136,233 |
|
Rentals and leases |
|
|
39,127 |
|
|
|
36,633 |
|
|
|
31,546 |
|
Interest expense, net |
|
|
67,890 |
|
|
|
75,665 |
|
|
|
71,206 |
|
Depreciation and amortization |
|
|
97,462 |
|
|
|
96,741 |
|
|
|
75,388 |
|
Management fees |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
4,746 |
|
Impairment of goodwill |
|
|
64,639 |
|
|
|
|
|
|
|
|
|
Hurricane-related property damage |
|
|
938 |
|
|
|
3,589 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
6,229 |
|
Business interruption insurance recoveries |
|
|
|
|
|
|
|
|
|
|
(3,443 |
) |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
2,297,608 |
|
|
|
1,978,110 |
|
|
|
1,693,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
gain (loss) on disposal of assets, minority
interests and income taxes |
|
|
64,364 |
|
|
|
87,426 |
|
|
|
72,699 |
|
Gain (loss) on disposal of assets, net |
|
|
1,465 |
|
|
|
(75 |
) |
|
|
(1,359 |
) |
Minority interests |
|
|
(9,987 |
) |
|
|
(4,437 |
) |
|
|
(4,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
income taxes |
|
|
55,842 |
|
|
|
82,914 |
|
|
|
66,844 |
|
Income tax expense |
|
|
27,576 |
|
|
|
35,325 |
|
|
|
25,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
28,266 |
|
|
|
47,589 |
|
|
|
40,935 |
|
Earnings (loss) from discontinued
operations, net of income taxes |
|
|
(176 |
) |
|
|
(11,275 |
) |
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
28,090 |
|
|
$ |
36,314 |
|
|
$ |
41,604 |
|
|
|
|
|
|
|
|
|
|
|
72
IASIS HEALTHCARE LLC
CONSOLIDATED STATEMENTS OF MEMBERS EQUITY
(In thousands)
|
|
|
|
|
|
|
Members |
|
|
|
Equity |
|
|
Balance at September 30, 2006 |
|
$ |
656,496 |
|
Distribution to parent for debt financing costs |
|
|
(6,586 |
) |
Net earnings |
|
|
41,604 |
|
|
|
|
|
Balance at September 30, 2007 |
|
$ |
691,514 |
|
Cumulative effect of the adoption of FASB income tax guidance |
|
|
(59 |
) |
Net earnings |
|
|
36,314 |
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
727,769 |
|
Income tax benefit resulting from exercise of employee stock options |
|
|
9 |
|
Stock compensation costs |
|
|
561 |
|
Other comprehensive loss |
|
|
(2,926 |
) |
Contribution from parent related to tax benefit
from Holdings Senior PIK Loans interest |
|
|
27,344 |
|
Net earnings |
|
|
28,090 |
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
780,847 |
|
|
|
|
|
73
IASIS HEALTHCARE LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
28,090 |
|
|
$ |
36,314 |
|
|
$ |
41,604 |
|
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss (earnings) from discontinued operations |
|
|
176 |
|
|
|
11,275 |
|
|
|
(669 |
) |
Depreciation and amortization |
|
|
97,462 |
|
|
|
96,741 |
|
|
|
75,388 |
|
Amortization of loan costs |
|
|
3,029 |
|
|
|
2,913 |
|
|
|
2,942 |
|
Minority interests |
|
|
9,987 |
|
|
|
4,437 |
|
|
|
4,496 |
|
Deferred income taxes |
|
|
(5,572 |
) |
|
|
19,368 |
|
|
|
24,103 |
|
Income tax benefit from parent company interest |
|
|
27,344 |
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets, net |
|
|
(1,465 |
) |
|
|
75 |
|
|
|
1,359 |
|
Impairment of goodwill |
|
|
64,639 |
|
|
|
|
|
|
|
|
|
Hurricane-related property damage |
|
|
938 |
|
|
|
3,589 |
|
|
|
|
|
Stock compensation costs |
|
|
561 |
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
5,091 |
|
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(7,302 |
) |
|
|
17,131 |
|
|
|
(52,749 |
) |
Inventories, prepaid expenses and other current assets |
|
|
6,728 |
|
|
|
(21,361 |
) |
|
|
(5,894 |
) |
Accounts payable, other accrued expenses and other
accrued liabilities |
|
|
45,884 |
|
|
|
(29,419 |
) |
|
|
26,002 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities continuing operations |
|
|
270,499 |
|
|
|
141,063 |
|
|
|
121,673 |
|
Net cash provided by operating activities discontinued
operations |
|
|
1,472 |
|
|
|
2,313 |
|
|
|
4,661 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
271,971 |
|
|
|
143,376 |
|
|
|
126,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(87,720 |
) |
|
|
(137,415 |
) |
|
|
(194,043 |
) |
Cash paid for acquisitions |
|
|
(1,941 |
) |
|
|
(16,821 |
) |
|
|
(141,585 |
) |
Proceeds from sale of assets |
|
|
5,252 |
|
|
|
360 |
|
|
|
1,026 |
|
Change in other assets |
|
|
1,823 |
|
|
|
4,613 |
|
|
|
5,893 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing operations |
|
|
(82,586 |
) |
|
|
(149,263 |
) |
|
|
(328,709 |
) |
Net cash provided by (used in) investing activities
discontinued operations |
|
|
10 |
|
|
|
(1,017 |
) |
|
|
(929 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(82,576 |
) |
|
|
(150,280 |
) |
|
|
(329,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations |
|
|
(55,476 |
) |
|
|
(306,611 |
) |
|
|
(650,305 |
) |
Proceeds from debt borrowings |
|
|
|
|
|
|
384,978 |
|
|
|
778,800 |
|
Debt financing costs incurred |
|
|
|
|
|
|
|
|
|
|
(8,200 |
) |
Distribution to parent for debt financing costs |
|
|
|
|
|
|
|
|
|
|
(6,586 |
) |
Distribution of minority interests |
|
|
(6,750 |
) |
|
|
(5,485 |
) |
|
|
(4,850 |
) |
Proceeds received from sale (costs paid for repurchase) of
partnership interests, net |
|
|
(1,379 |
) |
|
|
15,070 |
|
|
|
(495 |
) |
Other |
|
|
|
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities continuing
operations |
|
|
(63,605 |
) |
|
|
88,144 |
|
|
|
108,364 |
|
Net cash used in financing activities discontinued operations |
|
|
|
|
|
|
(502 |
) |
|
|
(475 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(63,605 |
) |
|
|
87,642 |
|
|
|
107,889 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
125,790 |
|
|
|
80,738 |
|
|
|
(95,415 |
) |
Cash and cash equivalents at beginning of period |
|
|
80,738 |
|
|
|
|
|
|
|
95,415 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
206,528 |
|
|
$ |
80,738 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
66,136 |
|
|
$ |
83,126 |
|
|
$ |
80,647 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for income taxes, net |
|
$ |
4,104 |
|
|
$ |
(925 |
) |
|
$ |
7,710 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid in loss on extinguishment of debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations resulting from acquisitions |
|
$ |
|
|
|
$ |
4,849 |
|
|
$ |
5,037 |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment in accounts payable |
|
$ |
1,184 |
|
|
$ |
4,788 |
|
|
$ |
6,401 |
|
|
|
|
|
|
|
|
|
|
|
Partnership interests issued for acquisition |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,517 |
|
|
|
|
|
|
|
|
|
|
|
74
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
IASIS Healthcare LLC (IASIS) owns and operates medium-sized acute care hospitals in
high-growth urban and suburban markets. At September 30, 2009, the Company owned or leased 15 acute
care hospital facilities and one behavioral health hospital facility, with a total of 2,853 beds in
service, located in six regions:
|
|
|
Tampa-St. Petersburg, Florida; |
|
|
|
three cities in Texas, including San Antonio; |
|
|
|
West Monroe, Louisiana. |
The Company also owns and operates Health Choice Arizona, Inc. (Health Choice or the
Plan), a Medicaid and Medicare managed health plan in Phoenix.
Principles of Consolidation
The consolidated financial statements include all subsidiaries and entities under common
control of the Company. Control is generally defined by the Company as ownership of a majority of
the voting interest of an entity. In addition, control is demonstrated in instances when the
Company is the sole general partner in a limited partnership. Significant intercompany transactions
have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) requires management to make estimates and assumptions that affect
the amounts reported in the accompanying audited consolidated financial statements and notes.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
These reclassifications have no impact on the Companys total assets, liabilities, or members
equity.
General and Administrative
The majority of the Companys expenses are cost of revenue items. Costs that could be
classified as general and administrative by the Company would include the IASIS corporate office
costs, which were $45.6 million, $50.5 million and $55.0 million, for the years ended September 30,
2009, 2008 and 2007, respectively.
Subsequent Events Consideration
The Company has evaluated its financial statements and disclosures for the impact of
subsequent events up to the date of filing its annual report on Form 10-K with the Securities and
Exchange Commission.
75
2. SIGNIFICANT ACCOUNTING POLICIES
Net Revenue
Acute Care Revenue
The Companys healthcare facilities have entered into agreements with third-party payors,
including government programs and managed care health plans, under which the facilities are paid
based upon established charges, the cost of providing services, predetermined rates per diagnosis,
fixed per diem rates or discounts from established charges. Additionally, the Company offers
discounts through its uninsured discount program to all uninsured patients receiving healthcare
services who do not qualify for assistance under state Medicaid, other federal or state assistance
plans, or charity care.
Net patient revenue is reported at the estimated net realizable amounts from third-party
payors and others for services rendered, including estimated retroactive adjustments under
reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and are adjusted, if necessary, in
future periods when final settlements are determined. Net adjustments to estimated third-party
payor settlements (prior year contractuals) resulted in an increase in net revenue of $3.2
million, $1.0 million and $365,000 for the years ended September 30, 2009, 2008 and 2007,
respectively.
In the ordinary course of business, the Company provides care without charge to patients who
are financially unable to pay for the healthcare services they receive. Because the Company does
not pursue collection of amounts determined to qualify as charity care, they are not reported in
net revenue. The Company currently records revenue deductions for patient accounts that meet its
guidelines for charity care. The Company provides charity care to patients with income levels below
200% of the federal property level. Additionally, at all of the Companys hospitals, a sliding
scale of reduced rates is offered to uninsured patients, who are not covered through federal, state
or private insurance, with incomes between 200% and 400% of the federal poverty level. Charity care
deductions based on gross charges for the years ended September 30, 2009, 2008 and 2007 were $38.6
million, $37.7 million and $31.3 million, respectively.
Premium Revenue
Health Choice is a prepaid Medicaid and Medicare managed health plan that derives most of its
revenue through a contract with the Arizona Health Care Cost Containment System (AHCCCS) to
provide specified health services to qualified Medicaid enrollees through contracted providers.
AHCCCS is the state agency that administers Arizonas Medicaid program. The contract requires the
Plan to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed
monthly premiums, based upon negotiated per capita member rates, and supplemental payments from
AHCCCS. Capitation payments received by Health Choice are recognized as revenue in the month that
members are entitled to healthcare services.
Effective October 1, 2008, Health Choice began its current contract with AHCCCS, which
provides for a three-year term, with AHCCCS having the option to renew for two additional one-year
periods. The contract is terminable without cause on 90 days written notice or for cause upon
written notice if the Company fails to comply with any term or condition of the contract or fails
to take corrective action as required to comply with the terms of the contract. Additionally,
AHCCCS can terminate the contract in the event of the unavailability of state or federal funding.
The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs
that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in
excess of stated levels of up to $50,000 per claim, depending on the eligibility classification of
the member. Qualified costs must be incurred during the contract year and are the lesser of the
amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the
contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract,
including estimates of such costs at the end of each accounting period.
Health Choice also provides coverage as a Medicare Advantage Prescription Drug (MAPD)
Special Needs Plan (SNP) provider pursuant to its contract with the Centers for Medicare and
Medicaid Services (CMS). The SNP allows Health Choice to offer Medicare and Part D drug benefit
coverage for new and existing dual-eligible members, or those that are eligible for Medicare and
Medicaid. The contract with CMS includes successive one-year
renewal options at the discretion of CMS and is terminable without cause on 90 days written
notice or for cause upon written notice if the Company fails to comply with any term or condition
of the contract or fails to take corrective action as required to comply with the terms of the
contract. Health Choice has received notification that CMS is exercising its option to extend its
contract through December 31, 2010.
76
The Plan subcontracts with hospitals, physicians and other medical providers within
Arizona and surrounding states to provide services to its Medicaid enrollees in Apache, Coconino,
Maricopa, Mohave, Navajo, Pima, Yuma, LaPaz and Santa Cruz counties, and to its Medicare enrollees
in Maricopa, Pima, Pinal, Coconino, Apache and Navajo counties. These services are provided
regardless of the actual costs incurred to provide these services.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or
less to be cash equivalents. The Company maintains its cash and cash equivalents balances primarily
with high credit quality financial institutions. The Company manages its credit exposure by placing
its investments in United States Treasury securities or other high quality securities, and by
periodically evaluating the relative credit standing of the financial institution.
Accounts Receivable
The Company receives payments for services rendered from federal and state agencies (under the
Medicare, Medicaid and TRICARE programs), managed care health plans, including Medicare and
Medicaid managed health plans, commercial insurance companies, employers and patients. During the
years ended September 30, 2009, 2008 and 2007, 43.0%, 46.0% and 47.5%, respectively,
of the Companys net patient revenue related to patients participating in the Medicare and Medicaid
programs, including managed Medicare and managed Medicaid. The Company recognizes that revenue and
receivables from government agencies are significant to its operations, but does not believe that
there is significant credit risks associated with these government agencies. The Company believes
that concentration of credit risk from other payors is limited due to the number of patients and
payors.
Net Medicare settlement receivables estimated at September 30, 2009 and 2008, totaled $6.3
million and $2.9 million, respectively, are included in accounts receivable in the accompanying
consolidated balance sheets.
Allowance for Doubtful Accounts
The Companys estimation of the allowance for doubtful accounts is based primarily upon the
type and age of the patient accounts receivable and the effectiveness of the Companys collection efforts.
The Companys policy is to reserve a portion of all self-pay receivables, including amounts due
from the uninsured and amounts related to co-payments and deductibles, as these charges are
recorded. On a monthly basis, the Company reviews its accounts receivable balances, the
effectiveness of the Companys reserve policies and various analytics to support the basis for its
estimates. These efforts primarily consist of reviewing the following:
|
|
|
Historical write-off and collection experience using a hindsight or look-back
approach; |
|
|
|
|
Revenue and volume trends by payor, particularly the self-pay components; |
|
|
|
|
Changes in the aging and payor mix of accounts receivable, including increased
focus on accounts due from the uninsured and accounts that represent co-payments and
deductibles due from patients; |
|
|
|
|
Cash collections as a percentage of net patient revenue less bad debt expense; |
|
|
|
|
Trending of days revenue in accounts receivable; and |
|
|
|
|
Various allowance coverage statistics. |
The Company regularly performs hindsight procedures to evaluate historical write-off and
collection experience throughout the year to assist in determining the reasonableness of its
process for estimating the allowance for doubtful accounts.
77
Inventories
Inventories, principally medical supplies, implants and pharmaceuticals, are stated at the
lower of average cost or market.
Long-lived Assets
The primary components of the Companys long-lived assets are discussed below. When events,
circumstances or operating results indicate that the carrying values of certain long-lived assets
and related identifiable intangible assets (excluding goodwill) that are expected to be held and
used might be impaired under the provisions of Financial Accounting
Standards Board (FASB) authoritative guidance regarding accounting for
the impairment or disposal of long-lived assets, the Company considers the recoverability of assets
to be held and used by comparing the carrying amount of the assets to the undiscounted value of
future net cash flows expected to be generated by the assets. If assets are identified as impaired,
the impairment is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets as determined by independent appraisals or estimates of discounted future
cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs are charged to
expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized.
Buildings and improvements are depreciated over estimated useful lives ranging generally from 14 to
40 years. Estimated useful lives of equipment vary generally from 3 to 25 years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the terms of the respective
leases or their estimated useful lives. Depreciation expense, including amortization of assets
capitalized under capital leases, is computed using the straight-line method and was $94.5 million,
$93.7 million and $72.4 million for the years ended September 30, 2009, 2008 and 2007,
respectively. In connection with certain construction projects, the Company capitalized interest
totaling $1.2 million, $1.4 million and $6.9 million for the years ended September 30, 2009, 2008
and 2007, respectively.
Goodwill and Other Intangible Assets
See Note 9 for the values of goodwill and other intangible assets assigned to each business
segment. Intangible assets are evaluated for impairment if events and circumstances indicate a
possible impairment.
Goodwill is not amortized but is subject to annual tests for impairment or more often if
events or circumstances indicate it may be impaired. An impairment loss is recorded to the extent
that the carrying amount of goodwill exceeds its implied fair value. The Company completed its
annual impairment test of goodwill during fiscal 2009. Results of the Companys testing indicated
impairment of goodwill associated with its Florida market. No other impairment was identified.
See Note 9 for more details.
Other Assets
Other assets consist primarily of costs associated with the issuance of debt, which are
amortized over the life of the related debt. Amortization of deferred financing costs is included
in interest expense and totaled $3.0 million, $2.9 million and $2.9 million for the years ended
September 30, 2009, 2008 and 2007, respectively. Deferred financing costs, net of accumulated
amortization, totaled $15.2 million and $18.2 million at September 30, 2009 and 2008, respectively.
Insurance Reserves
The Company estimates its reserve for self-insured professional and general liability and
workers compensation risks using historical claims data, demographic factors, severity factors,
current incident logs and other actuarial analysis.
78
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with
FASB authoritative guidance regarding accounting for income taxes and
its related uncertainty. This approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply when the temporary differences are expected
to reverse. The Company assesses the likelihood that deferred tax assets will be recovered from
future taxable income to determine whether a valuation allowance should be established.
Minority Interest in Consolidated Entities
The consolidated financial statements include all assets, liabilities, revenue and expenses of
less than 100% owned entities controlled by the Company. Accordingly, management has recorded
minority interests in the earnings and equity of such consolidated entities.
Medical Claims Payable
Monthly capitation payments made by Health Choice to physicians and other healthcare providers
are expensed in the month services are contracted to be performed. Claims expense for non-capitated
arrangements is accrued as services are rendered by hospitals, physicians and other healthcare
providers during the year.
Medical claims payable related to Health Choice include claims received but not paid and an
estimate of claims incurred but not reported. Incurred but not reported claims are estimated using
a combination of historical claims experience (including severity and payment lag time) and other
actuarial analysis, including number of enrollees, age of enrollees and certain enrollee health
indicators, to predict the cost of healthcare services provided to enrollees during any given
period. While management believes that its estimation methodology effectively captures trends in
medical claims costs, actual payments could differ significantly from estimates given changes in
the healthcare cost structure or adverse experience.
The following table shows the components of the change in medical claims payable for the years
ended September 30, 2009, 2008 and 2007, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Medical claims payable as of October 1 |
|
$ |
97,343 |
|
|
$ |
81,309 |
|
|
$ |
81,822 |
|
Medical claims expense incurred during the year: |
|
|
|
|
|
|
|
|
|
|
|
|
Related to current year |
|
|
620,153 |
|
|
|
464,055 |
|
|
|
396,152 |
|
Related to prior years |
|
|
(18,077 |
) |
|
|
(2,406 |
) |
|
|
(12,107 |
) |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
602,076 |
|
|
|
461,649 |
|
|
|
384,045 |
|
|
|
|
|
|
|
|
|
|
|
Medical claims payments during the year: |
|
|
|
|
|
|
|
|
|
|
|
|
Related to current year |
|
|
(508,299 |
) |
|
|
(368,392 |
) |
|
|
(317,798 |
) |
Related to prior years |
|
|
(77,601 |
) |
|
|
(77,223 |
) |
|
|
(66,760 |
) |
|
|
|
|
|
|
|
|
|
|
Total payments |
|
|
(585,900 |
) |
|
|
(445,615 |
) |
|
|
(384,558 |
) |
|
|
|
|
|
|
|
|
|
|
Medical claims payable as of September 30 |
|
$ |
113,519 |
|
|
$ |
97,343 |
|
|
$ |
81,309 |
|
|
|
|
|
|
|
|
|
|
|
As reflected in the table above, medical claims expense for the year ended September 30,
2009, includes an $18.1 million reduction of medical costs related to
prior years resulting from favorable development in the Medicaid and
Medicare product lines of $15.5 million and $2.6 million,
respectively. The favorable development is attributable to lower
than anticipated medical costs and is offset, in part, by $10.8 million in reductions in
premium revenue associated with settlements of various prior year program receivables.
Health Choice has experienced an increase in the number of lives served by the plan.
Enrollment in Health Choice at September 30, 2009 and 2008, was 190,763 and 145,493, respectively.
Stock Based Compensation
Although IASIS has no stock option plan or outstanding stock options, the Company, through its
parent, IASIS Healthcare Corporation (IAS), grants stock options for a fixed number of common
shares to employees. The Company accounts for this stock-based
incentive plan under the measurement and recognition provisions of
FASB authoritative guidance regarding share-based payments (Share-Based Payments Guidance). Accordingly, the Company has not recognized any compensation
expense for the stock options granted prior to October 1, 2006, as the exercise price of the
options equaled, or was greater than, the market value of the underlying stock on the date of
grant.
79
For stock options granted on or after October 1, 2006, the Company applies the fair value recognition
provisions of the Share-Based Payments Guidance, requiring all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their
fair values. In accordance with the provisions of the Share-Based Payments Guidance, the Company uses the
Black-Scholes-Merton model in determining the fair value of its share-based payments. The fair
value of compensation costs will be amortized on a straight-line basis over the requisite service
periods of the awards, generally equal to the awards vesting periods.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are
reflected in the accompanying consolidated financial statements at amounts that approximate fair
value because of the short-term nature of these instruments. The fair value of the Companys
capital lease obligations also approximate carrying value as they bear interest at current market
rates. The estimated fair values of the Companys 8 3/4% senior subordinated notes due 2014 (the 8
3/4% notes) and senior secured credit facilities were $473.8 million and $540.1 million,
respectively, at September 30, 2009, based upon quoted market prices at that date.
Management Services Agreement
The Company is party to a management services agreement with
affiliates of TPG, JLL Partners Inc. and Trimaran Fund Management, L.L.C. The
management services agreement provides that in exchange for consulting and management advisory
services that will be provided to the Company by the investors, the Company will pay an aggregate
monitoring fee of 0.25% of budgeted net revenue up to a maximum of $5.0 million per fiscal year to
these parties (or certain of their respective affiliates) and reimburse them for their reasonable
disbursements and out-of-pocket expenses. This monitoring fee is divided among the parties in
proportion to their relative ownership percentages in IASIS Investment LLC, parent company and majority
stockholder of IAS. The monitoring fee will be subordinated to the senior subordinated notes in the
event of a bankruptcy of the Company. The management services agreement does not have a stated
term. Pursuant to the provisions of the management services agreement, the Company has agreed to
indemnify the investors (or certain of their respective affiliates) in certain situations arising
from or relating to the agreement, the investors investment in the securities of IAS or any
related transactions or the operations of the investors, except for losses that arise on account of
the investors negligence or willful misconduct. For the years ended September 30, 2009, 2008 and
2007, the Company paid $5.0 million, $5.0 million and $4.7 million, respectively, in monitoring
fees under the management services agreement.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued
new authoritative guidance regarding business combinations, which applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. This new guidance establishes principles and requirements for recognition and
measurement of items acquired during a business combination, as well as certain disclosure
requirements in the financial statements. The Company does not believe the adoption of this new guidance
will have a material impact on its results of operations or financial position; however, it is anticipated
to have a material effect on the Companys accounting for future acquisitions.
80
In December 2007, the FASB issued new authoritative guidance regarding
noncontrolling interests in consolidated financial statements,
which is effective for fiscal years beginning after December 15,
2008. The objective of this guidance is to improve the relevance, comparability, and transparency
of financial information, specifically noncontrolling interests, that is provided in consolidated
financial statements. The Company does not believe the adoption of this new guidance will have a material
impact on its results of operations or financial position; however, it could potentially have a
material effect on the presentation of its financial statements.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Senior secured credit facilities |
|
$ |
576,150 |
|
|
$ |
629,818 |
|
Senior subordinated notes |
|
|
475,000 |
|
|
|
475,000 |
|
Capital leases and other obligations |
|
|
8,687 |
|
|
|
9,804 |
|
|
|
|
|
|
|
|
|
|
|
1,059,837 |
|
|
|
1,114,622 |
|
|
|
|
|
|
|
|
|
|
Less current maturities |
|
|
8,366 |
|
|
|
7,623 |
|
|
|
|
|
|
|
|
|
|
$ |
1,051,471 |
|
|
$ |
1,106,999 |
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
In fiscal 2007, the Company completed the refinancing of its bank credit facility to provide
for $854.0 million in senior secured credit facilities. In connection with the refinancing, the
Company wrote-off $5.1 million in deferred financing costs and paid an additional $1.1 million in
creditor fees, which are included in the loss on extinguishment of debt in the accompanying
consolidated statement of operations for the year ended September 30, 2007.
The $854.0 million senior secured credit facilities include: (i) a senior secured term loan of
$439.0 million; (ii) a senior secured delayed draw term loan of $150.0 million; (iii) a senior
secured revolving credit facility of $225.0 million, which includes a $100.0 million sub-limit for
letters of credit; and (iv) a senior secured synthetic letter of credit facility of $40.0 million.
All facilities mature on March 15, 2014, except for the revolving credit facility, which matures on
April 27, 2013. The term loans bear interest at an annual rate of LIBOR plus 2.00% or, at the
Companys option, the administrative agents base rate plus 1.00%. The revolving loans bear
interest at an annual rate of LIBOR plus an applicable margin ranging from 1.25% to 1.75% or, at
the Companys option, the administrative agents base rate plus an applicable margin ranging from
0.25% to 0.75%, such rate in each case depending on the Companys senior secured leverage ratio. A
commitment fee ranging from 0.375% to 0.5% per annum is charged on the undrawn portion of the
senior secured revolving credit facility and is payable in arrears.
Principal under the senior secured term loan is due in 24 consecutive equal quarterly
installments in an aggregate annual amount equal to 1.0% of the original principal amount ($439.0
million) during the first six years thereof, with the balance payable in four equal installments in
year seven. Principal under the senior secured delayed draw term loan is due in equal quarterly
installments in an aggregate annual amount equal to 1.0% of the original principal amount ($150.0
million) until March 31, 2013, with the balance payable in four equal installments during the final
year of the loan. Unless terminated earlier, the senior secured revolving credit facility has a
single maturity of six years. The senior secured credit facilities are also subject to mandatory
prepayment under specific circumstances, including a portion of excess cash flow, a portion of the
net proceeds from an initial public offering, asset sales, debt issuances and specified casualty
events, each subject to various exceptions.
The senior secured credit facilities are (i) secured by a first mortgage and lien on the real
property and related personal and intellectual property of the Company and pledges of equity
interests in the entities that own such properties and (ii) guaranteed by certain of the Companys
subsidiaries.
In addition, the senior secured credit facilities contain certain covenants which, among other
things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates,
asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other matters
customarily restricted in such agreements.
81
At September 30, 2009, amounts outstanding under the Companys senior secured credit
facilities consisted of a $428.0 million term loan and a $148.1 million delayed draw term loan. In
addition, the Company had $39.9 million and $24.7 million in letters of credit outstanding under
the synthetic letter of credit facility and the revolving credit facility, respectively. The
weighted average interest rate of outstanding borrowings under the senior secured credit facilities
was 3.6% and 5.6% for the years ended September 30, 2009 and 2008, respectively.
8 3/4% Senior Subordinated Notes
The Company, together with its wholly-owned subsidiary, IASIS Capital Corporation, a holding
company with no assets or operations, as issuers, have outstanding $475.0 million aggregate
principal amount of 8 3/4% notes. The 8 3/4% notes are general unsecured senior subordinated
obligations and are subordinated in right of payment to all existing and future senior debt of the
Company. The Companys existing domestic subsidiaries, other than certain non-guarantor
subsidiaries, which include Health Choice and the Companys non-wholly owned subsidiaries, are
guarantors of the 8 3/4% notes. The 8 3/4% notes are effectively subordinated to all of the issuers
and the guarantors secured debt to the extent of the value of the assets securing the debt and are
structurally subordinated to all liabilities and commitments (including trade payables and capital
lease obligations) of the Companys subsidiaries that are not guarantors of the 8 3/4% notes.
$300.0 Million Holdings Senior Paid-in-Kind Loans
In fiscal 2007, IAS issued $300.0 million in Holdings Senior Paid-in-Kind (PIK) Loans, which
were used to repurchase certain preferred equity from its stockholders. The $300.0 million Holdings
Senior PIK Loans mature June 15, 2014, and bear interest at an annual rate equal to LIBOR plus
5.25%. The Holdings Senior PIK Loans rank behind the Companys existing debt and will convert to
cash-pay after five years, at which time accrued interest becomes payable. At September 30, 2009,
the outstanding balance of the Holdings Senior PIK Loans was $368.5 million, which includes $68.5
million of interest that has accrued to the principal of these loans since the date of issuance.
4. INTEREST RATE SWAPS
Effective March 2, 2009, the Company executed interest rate swap transactions with Citibank,
N.A. and Wachovia Bank, N.A., as counterparties, with notional amounts totaling $425.0 million. The
arrangements with each counterparty include two interest rate swap agreements, one with a notional
amount of $112.5 million maturing on February 28, 2011 and one with a notional amount of $100.0
million maturing on February 29, 2012. The Company entered into these interest rate swap
arrangements to mitigate the floating interest rate risk on a portion of its outstanding variable
rate debt. Under these agreements, the Company is required to make monthly fixed rate payments to
the counterparties, as calculated on the applicable notional amounts, at annual fixed rates, which
range from 1.5% to 2.0% depending upon the agreement. The counterparties are obligated to make
monthly floating rate payments to the Company based on the one-month LIBOR rate for the same
referenced notional amount.
|
|
|
|
|
|
|
Total Notional |
|
Date Range |
|
Amounts |
|
|
|
(in thousands) |
|
|
|
|
|
|
March 2, 2009 to February 28, 2011 |
|
$ |
225,000 |
|
March 2, 2009 to February 29, 2012 |
|
$ |
200,000 |
|
The Company accounts for its interest rate swaps in accordance with the provisions of
FASB authoritative guidance regarding accounting for derivative instruments and hedging activities, which also includes
enhanced disclosure requirements. In accordance with these provisions, the Company has designated its interest rate swaps as cash flow hedge
instruments. The Company assesses the effectiveness of these cash flow hedges on a quarterly basis,
with any ineffectiveness being measured using the hypothetical derivative method. The Company
completed an assessment of its cash flow hedge instruments during the year ended September 30,
2009, and determined its hedging instruments to be highly effective. Accordingly, no gain or loss
resulting from hedging ineffectiveness is reflected in the Companys accompanying consolidated statements of
operations.
82
On October 1, 2008, the Company adopted the new
provisions of FASB authoritative guidance regarding fair value measurements, which provides a single definition of fair value, establishes a
framework for measuring fair value, and expands disclosures concerning fair value measurements. The
Company applies these provisions to the valuation and disclosure of its interest rates
swaps. This authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices in active
markets that can be accessed at the measurement date; (ii) Level 2, which is defined as inputs
other than quoted prices in active markets that are observable, either directly or indirectly; and
(iii) Level 3, which is defined as unobservable inputs resulting from the existence of little or no
market data, therefore potentially requiring an entity to develop its own assumptions.
The Company determines the fair value of its interest rate swaps in a manner consistent with
that used by market participants in pricing hedging instruments, which includes using a discounted
cash flow analysis based upon the terms of the agreements, the impact of the one-month forward
LIBOR curve and an evaluation of credit risk. Given the use of observable market assumptions and
the consideration of credit risk, the Company has categorized the valuation of its interest rate
swaps as Level 2.
The fair value of the Companys interest rate swaps at September 30, 2009, reflects a
liability balance of $4.7 million and is included in other long-term liabilities in the
accompanying consolidated balance sheet. The fair value of the Companys interest rate swaps
reflects a liability because the effect of the forward LIBOR curve on future interest payments
results in less interest due to the Company under the variable rate component included in the
interest rate swap agreements, as compared to the amount due the Companys counterparties under the
fixed interest rate component. Any change in the fair value of the Companys interest rate swaps,
net of income taxes, is included in other comprehensive loss as a component of members equity in
the accompanying consolidated balance sheet.
5. OTHER COMPREHENSIVE LOSS
A summary of activity in the Companys accumulated other comprehensive loss consists of the
following (in thousands):
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
|
|
|
|
|
|
|
Change in fair value of interest rate swaps, net of income tax effect of $1,734 |
|
|
(2,926 |
) |
|
|
|
|
Balance at September 30, 2009 |
|
$ |
(2,926 |
) |
|
|
|
|
6. DISCONTINUED OPERATIONS
The Companys lease agreements to operate Mesa General
Hospital (Mesa Hospital), located in Mesa, Arizona, and
Biltmore Surgery Center (Biltmore), located in Phoenix, Arizona, expired by their terms on July 31, 2008 and September 30,
2008, respectively. The Company discontinued services at Mesa General on May 31, 2008, and Biltmore
on April 30, 2008. The operating results of Mesa General and Biltmore are classified in the
Companys accompanying consolidated financial statements as discontinued operations. The following table sets forth the components of discontinued operations for the
years ended September 30, 2009, 2008 and 2007, respectively, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
Year ended |
|
|
Year ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
974 |
|
|
$ |
49,974 |
|
|
$ |
88,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,256 |
|
|
|
64,648 |
|
|
|
87,254 |
|
Loss on disposal of assets |
|
|
|
|
|
|
3,928 |
|
|
|
|
|
Income tax expense (benefit) |
|
|
(106 |
) |
|
|
(7,327 |
) |
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning (loss) from
discontinued operations,
net of income taxes |
|
$ |
(176 |
) |
|
$ |
(11,275 |
) |
|
$ |
669 |
|
|
|
|
|
|
|
|
|
|
|
83
The Company allocated to discontinued operations interest expense of $2.5 million for each of
the years ended September 30, 2008 and 2007. The allocation of interest expense to discontinued
operations was based on the ratio of disposed net assets of Mesa General and Biltmore to the sum of
total net assets of the Company plus the Companys total outstanding debt.
Income taxes allocated to the discontinued operations resulted in related effective tax rates
of 37.6%, 39.4% and 38.2% for the years ended September 30, 2009, 2008 and 2007, respectively.
7. ACQUISITIONS
Acquisition of Glenwood Regional Medical Center
Effective January 31, 2007, the Company acquired substantially all of the assets of Glenwood
Regional Medical Center (Glenwood) in West Monroe, Louisiana. The purchase price for the 237-bed
hospital was $78.2 million, which was funded by cash on hand and borrowings under the Companys
revolving credit facility. The results of operations of Glenwood are included in the accompanying
consolidated statements of operations from the effective date of the acquisition.
The purchase price for the Glenwood acquisition, including direct transaction costs, has been
allocated as follows (in thousands):
|
|
|
|
|
Fair value of assets acquired and liabilities assumed: |
|
|
|
|
Assets acquired |
|
|
|
|
Accounts receivable, net |
|
$ |
13,727 |
|
Inventory, prepaid expenses and other current assets |
|
|
4,354 |
|
Property and equipment |
|
|
66,640 |
|
Other long-term assets |
|
|
1,529 |
|
|
|
|
|
Total assets acquired |
|
$ |
86,250 |
|
|
|
|
|
Liabilities assumed |
|
$ |
8,004 |
|
|
|
|
|
Acquisition of Alliance Hospital
Effective May 31, 2007, the Company acquired substantially all of the assets of Alliance
Hospital (Alliance) in Odessa, Texas. The purchase price for the 50-bed hospital was $66.7
million, which was funded in part by the Companys senior secured credit facilities, as well as
units of limited partnership interest of Odessa Regional Hospital, LP, and the assumption of
certain liabilities of Alliance. Upon acquisition, the operations of Alliance were immediately
merged into Odessa Regional Hospital to form Odessa Regional Medical Center. The results of
operations of Alliance are included in the accompanying consolidated statements of operations from
the effective date of the acquisition.
The purchase price for the Alliance acquisition, including direct transaction costs, has been
allocated as follows (in thousands):
|
|
|
|
|
Fair value of assets acquired and liabilities assumed: |
|
|
|
|
Assets acquired |
|
|
|
|
Accounts receivable, net |
|
$ |
4,230 |
|
Inventory, prepaid expenses and other current assets |
|
|
1,873 |
|
Property and equipment |
|
|
60,965 |
|
Goodwill |
|
|
10,593 |
|
|
|
|
|
Total assets acquired |
|
$ |
77,661 |
|
|
|
|
|
Liabilities assumed |
|
$ |
10,932 |
|
|
|
|
|
Other
Effective February 1, 2008, IASIS Glenwood Regional Medical Center, LP, a wholly-owned
subsidiary of the Company, purchased a majority ownership interest in Ouachita Community Hospital, a ten-bed
surgical hospital located in West Monroe, Louisiana. The purchase price for the majority ownership
interest included approximately $16.8 million in cash.
84
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Land |
|
$ |
102,499 |
|
|
$ |
103,763 |
|
Buildings and improvements |
|
|
792,467 |
|
|
|
693,113 |
|
Equipment |
|
|
500,450 |
|
|
|
471,207 |
|
|
|
|
|
|
|
|
|
|
|
1,395,416 |
|
|
|
1,268,083 |
|
Less accumulated depreciation and amortization |
|
|
(414,572 |
) |
|
|
(325,560 |
) |
|
|
|
|
|
|
|
|
|
|
980,844 |
|
|
|
942,523 |
|
Construction-in-progress (estimated cost to
complete at September 30, 2009 $13.7 million) |
|
|
16,509 |
|
|
|
61,725 |
|
|
|
|
|
|
|
|
|
|
$ |
997,353 |
|
|
$ |
1,004,248 |
|
|
|
|
|
|
|
|
Included
in equipment are assets acquired under capital leases of
$4.6 million and $5.6
million, net of accumulated amortization of $3.4 million and $2.1 million, at September 30, 2009
and 2008, respectively.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill from September 30,
2007 through September 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute |
|
|
Health |
|
|
|
|
|
|
Care |
|
|
Choice |
|
|
Total |
|
Balance at September 30, 2007 |
|
$ |
750,836 |
|
|
$ |
5,757 |
|
|
$ |
756,593 |
|
Adjustments in deferred tax assets and liabilities |
|
|
(3,769 |
) |
|
|
|
|
|
|
(3,769 |
) |
Adjustment resulting from Ouachita Community Hospital |
|
|
17,134 |
|
|
|
|
|
|
|
17,134 |
|
Adjustments resulting from purchase price allocation
of Alliance Hospital |
|
|
10,593 |
|
|
|
|
|
|
|
10,593 |
|
Other purchase price adjustments |
|
|
48 |
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
|
774,842 |
|
|
|
5,757 |
|
|
|
780,599 |
|
Impairment of Florida market goodwill |
|
|
(64,639 |
) |
|
|
|
|
|
|
(64,639 |
) |
Other acquisitions |
|
|
1,960 |
|
|
|
|
|
|
|
1,960 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
712,163 |
|
|
$ |
5,757 |
|
|
$ |
717,920 |
|
|
|
|
|
|
|
|
|
|
|
As a result of the Companys annual impairment testing,
the Company has recorded a $64.6 million non-cash
charge ($43.2 million after tax) for the impairment of goodwill related to its Florida market. The
Company assesses the recoverability of goodwill at its market levels and has determined the
write-off of all Florida market goodwill to be appropriate. In connection with the analysis
resulting in the write-off of Florida market goodwill, the Company has determined all remaining
goodwill and long-lived assets to be recoverable, and therefore, no further impairment was deemed
necessary.
Other intangible assets consist solely of Health Choices contract with AHCCCS, which is
amortized over a period of 15 years, the contracts estimated useful life, including assumed
renewal periods. The gross intangible value originally assigned to the contract was $45.0 million.
The Company expects amortization expense for this intangible asset, to be $3.0 million per year
over the estimated life of the contract. Amortization of intangible assets is included in
depreciation and amortization expense and totaled $3.0 million for each of the years ended
September 30, 2009, 2008 and 2007. Net other intangible assets included in the accompanying
consolidated balance sheets at September 30, 2009 and 2008 totaled $30.0 million and $33.0 million,
respectively.
85
10. MEMBERS EQUITY
Common Interests of IASIS
As of September 30, 2009, all of the common interests of IASIS were owned by IAS, its sole
member.
11. STOCK OPTIONS
Management Rollover Options
In 2004, an investor group led by TPG acquired IAS, the parent company of IASIS. Prior to the
acquisition, IAS maintained the IASIS 2000 Stock Option Plan. In connection with the acquisition,
certain holders of 299,900 of in-the-money common stock options elected to rollover and convert
such options into options to purchase an aggregate 3,263 shares of preferred stock, with an
exercise price of $437.48 per share, and an aggregate 163,150 shares of common stock, with an
exercise price of $8.75 per share. The rollover options are fully vested and remain outstanding and
exercisable for the remainder of their original term. All of the other outstanding options under
the IASIS 2000 Stock Option Plan were cancelled upon consummation of the acquisition and the plan
was terminated.
In connection with the issuance of the $300.0 million Holdings Senior PIK Loans in fiscal
2007, the preferred rollover options were cancelled in exchange for a cash payment equal to the
excess of the accreted value of the preferred stock over the exercise price of $437.48 per share.
2004 Stock Option Plan
The IAS 2004 Stock Option Plan (the 2004 Stock Option Plan) was established to promote the
Companys interests by providing additional incentives to its key employees, directors, service
providers and consultants. The options granted under the plan represent the right to purchase IAS
common stock upon exercise. Each option shall be identified as either an incentive stock option or
a non-qualified stock option. The plan was adopted by the board of directors and majority
stockholder of IAS in June 2004. The maximum number of shares of IAS common stock that may be
issued pursuant to options granted under the 2004 Stock Option Plan is 2,340,650. In addition,
prior to an initial public offering, an additional 146,000 shares of common stock will be available
for grant in June of each year. The options become exercisable over a period not to exceed five
years after the date of grant, subject to earlier vesting provisions as provided for in the 2004
Stock Option Plan. All options granted under the 2004 Stock Option Plan expire no later than 10
years from the respective dates of grant. At September 30, 2009, there were 580,475 options
available for grant.
Information regarding the Companys stock option activity for the years ended September 30,
2007 through September 30, 2009, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Stock Option Plan |
|
|
Rollover Options |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Option Price |
|
|
Exercise |
|
|
|
|
|
|
Option Price |
|
|
Exercise |
|
|
|
Options |
|
|
Per Share |
|
|
Price |
|
|
Options |
|
|
Per Share |
|
|
Price |
|
Options outstanding at
September 30, 2006 |
|
|
1,595,485 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
22.28 |
|
|
|
166,413 |
|
|
$ |
8.75-$437.48 |
|
|
$ |
17.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
7,080 |
|
|
$ |
34.75-$35.68 |
|
|
$ |
35.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(111,440 |
) |
|
$ |
20.00-$35.68 |
|
|
$ |
25.61 |
|
|
|
(3,263 |
) |
|
$ |
437.48 |
|
|
$ |
437.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
September 30, 2007 |
|
|
1,491,125 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
22.09 |
|
|
|
163,150 |
|
|
$ |
8.75 |
|
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,080 |
|
|
$ |
34.75 |
|
|
$ |
34.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(9,600 |
) |
|
$ |
20.00 |
|
|
$ |
20.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(80,720 |
) |
|
$ |
20.00-$35.68 |
|
|
$ |
26.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
September 30, 2008 |
|
|
1,401,885 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
21.82 |
|
|
|
163,150 |
|
|
$ |
8.75 |
|
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
477,700 |
|
|
$ |
34.75 |
|
|
$ |
34.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(119,410 |
) |
|
$ |
20.00-$35.68 |
|
|
$ |
31.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
September 30, 2009 |
|
|
1,760,175 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
24.70 |
|
|
|
163,150 |
|
|
$ |
8.75 |
|
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
September 30, 2009 |
|
|
1,252,436 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
21.11 |
|
|
|
163,150 |
|
|
$ |
8.75 |
|
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
The following table provides information regarding assumptions used in the fair value
measurement for options granted on or after October 1, 2006, and the weighted average assumptions
used in the fair value pro forma disclosures required for stock-options granted prior to October 1,
2006.
|
|
|
|
|
|
|
|
|
|
|
Options Granted |
|
|
Options Granted |
|
|
|
On or After |
|
|
Prior to |
|
|
|
October 1, 2006 |
|
|
October 1, 2006 |
|
Risk-free interest |
|
|
3.1 |
% |
|
|
4.6 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility |
|
|
35.0 |
% |
|
|
N/A |
|
Expected option life |
|
7.3 years |
|
|
9.8 years |
|
For options granted on or after October 1, 2006, the Company used the Black-Scholes-Merton
valuation model in determining the fair value measurement. Volatility for such options was
estimated based on the historical stock price information of certain peer group companies for a
period of time equal to the expected option life period.
12. INCOME TAXES
Income tax expense on earnings from continuing operations consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
28,220 |
|
|
$ |
12,631 |
|
|
$ |
132 |
|
State |
|
|
4,933 |
|
|
|
3,326 |
|
|
|
1,674 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(5,092 |
) |
|
|
15,522 |
|
|
|
23,172 |
|
State |
|
|
(485 |
) |
|
|
3,846 |
|
|
|
931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,576 |
|
|
$ |
35,325 |
|
|
$ |
25,909 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the federal statutory rate to the effective income tax rate applied to
earnings from continuing operations before income taxes for the years ended September 30, 2009,
2008 and 2007, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Federal statutory rate |
|
$ |
19,544 |
|
|
$ |
29,020 |
|
|
$ |
23,396 |
|
State income taxes, net of federal income tax benefit |
|
|
2,892 |
|
|
|
4,663 |
|
|
|
1,693 |
|
Nondeductible goodwill impairment charges |
|
|
2,470 |
|
|
|
|
|
|
|
|
|
Other non-deductible expenses |
|
|
550 |
|
|
|
418 |
|
|
|
328 |
|
Change in valuation allowance charged to federal tax
provision |
|
|
1,576 |
|
|
|
970 |
|
|
|
541 |
|
Other items, net |
|
|
544 |
|
|
|
254 |
|
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
27,576 |
|
|
$ |
35,325 |
|
|
$ |
25,909 |
|
|
|
|
|
|
|
|
|
|
|
87
A summary of the items comprising the deferred tax assets and liabilities is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
Depreciation and fixed asset basis differences |
|
$ |
|
|
|
$ |
77,743 |
|
|
$ |
|
|
|
$ |
67,317 |
|
Amortization and intangible asset basis differences |
|
|
|
|
|
|
55,721 |
|
|
|
|
|
|
|
64,742 |
|
Allowance for doubtful accounts |
|
|
30,769 |
|
|
|
|
|
|
|
29,958 |
|
|
|
|
|
Professional liability |
|
|
15,561 |
|
|
|
|
|
|
|
12,801 |
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
14,625 |
|
|
|
|
|
|
|
13,436 |
|
|
|
|
|
Deductible carryforwards and credits |
|
|
9,861 |
|
|
|
|
|
|
|
8,709 |
|
|
|
|
|
Other, net |
|
|
3,841 |
|
|
|
|
|
|
|
570 |
|
|
|
|
|
Valuation allowance |
|
|
(8,580 |
) |
|
|
|
|
|
|
(5,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
66,077 |
|
|
$ |
133,464 |
|
|
$ |
59,827 |
|
|
$ |
132,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets of $39.0 million and $38.9 million and net non-current
deferred tax liabilities of $106.4 million and $111.1 million are included in the accompanying
consolidated balance sheets at September 30, 2009 and 2008, respectively. The Company had a net
income tax payable of $3.4 million and $2.2 million included in other current liabilities at
September 30, 2009 and 2008, respectively.
The Company and some of its subsidiaries are included in IAS consolidated filing group for
U.S. federal income tax purposes, as well as in certain state and local income tax returns that
include IAS. With respect to tax returns for any taxable period in which the Company or any of its
subsidiaries are included in a tax return filing with IAS, the amount of taxes to be paid by the
Company is determined, subject to some adjustments, as if it and its subsidiaries filed their own
tax returns excluding IAS. As of September 30, 2009, members equity in the accompanying
consolidated balance sheet includes $27.3 million in capital contributions representing cumulative
tax benefits generated by IAS and utilized by the Company in the combined tax return filings, for
which IAS did not require cash settlement from the Company. At September 30, 2008, the net income
tax payable by the Company of $2.2 million was comprised of $3.2 million net taxes refundable from
taxing authorities and $5.4 million payable to IAS for tax benefits generated by IAS and utilized
by the Company in the combined tax return filings.
The Company maintains a valuation allowance for deferred tax assets it believes may not be
utilized. The valuation allowance increased by $2.9 million and $1.8 million during the years ended
September 30, 2009 and 2008, respectively. The increases in the valuation allowance for both years
relate to the generation of net operating loss carryforwards by certain subsidiaries excluded from
the IAS consolidated federal income tax return, as well as state net operating loss carryforwards
that may not ultimately be utilized.
As of September 30, 2009, federal net operating loss carryforwards were available to offset
$11.1 million of future taxable income generated by subsidiaries of the Company that are excluded
from the IAS consolidated return. A valuation allowance has been established against $8.8 million
of these carryforwards, which expire between 2026 and 2029. State net operating losses in the
amount of $146.2 million were also available, but largely offset by a valuation allowance. The state
net operating loss carryforwards expire between 2018 and 2029.
As a result of adopting the provisions of FASB authoritative
guidance regarding accounting for uncertainty in income taxes, on October 1, 2007, the Company recorded a liability
for unrecognized tax benefits of $8.1 million, including accrued interest of $83,000. The
adjustment was comprised of a cumulative effect decrease to members equity of $59,000, and
a decrease to net noncurrent deferred tax liabilities of $8.1 million.
An additional $9.9 million of unrecognized tax benefits were reflected as a reduction to deferred
tax assets for federal and state net operating losses generated by uncertain tax deductions as of
October 1, 2007.
FASB authoritative guidance regarding accounting for uncertainty
in income taxes permits interest and penalties on underpayments of income taxes to be classified as
interest expense, income tax expense, or another appropriate expense classification based on the
accounting election of the company. The Companys policy is to classify interest and penalties as a
component of income tax expense. Income tax expense for the year ended September 30, 2009, has been
reduced by $122,000 due to a decrease in accrued interest payable in connection with uncertain tax
positions (net of related tax benefits). Interest expense totaling $146,000 (net of related tax
benefits) is included in income tax expense for the year ended September 30, 2008.
88
The liability for unrecognized tax benefits included in the accompanying consolidated balance
sheets was $7.8 million, including accrued interest of $122,000 at September 30, 2009, and $9.9 million,
including accrued interest of $308,000 at September 30, 2008. An additional $5.9 million of
unrecognized tax benefits are reflected as a reduction to deferred tax assets for state net
operating losses generated by uncertain tax deductions as of September 30, 2009 and 2008. Of the
total unrecognized tax benefits at September 30, 2009, approximately $1.4 million (net of the tax
benefit on state taxes and interest) represents the amount of unrecognized tax and interest that,
if recognized, would favorably impact the Companys effective income tax rate. The remainder of the
unrecognized tax positions consist of items for which the uncertainty relates only to the timing of
the deductibility, and state net operating loss carryforwards for which ultimate recognition would
result in the creation of an offsetting valuation allowance due to the unlikelihood of future
taxable income in that state.
A summary of activity of the Companys total amounts of unrecognized tax benefits is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Unrecognized tax benefits at October 1 |
|
$ |
15,550 |
|
|
$ |
17,942 |
|
Additions resulting from tax positions taken in a prior period |
|
|
14 |
|
|
|
937 |
|
Reductions resulting from tax positions taken in a prior period |
|
|
(3,171 |
) |
|
|
(6,258 |
) |
Additions resulting from tax positions taken in the current period |
|
|
1,965 |
|
|
|
2,929 |
|
Reductions resulting from lapse of statute of limitations |
|
|
(720 |
) |
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at September 30 |
|
$ |
13,638 |
|
|
$ |
15,550 |
|
|
|
|
|
|
|
|
During the year ended September 30, 2009, the IRS completed its examinations of the Companys
consolidated corporate tax return for the year ended September 30, 2006, and one of its
partnerships income tax return for the year ended September 30, 2005. The IRS proposed no
adjustments in either examination. The Companys tax years 2006 and beyond remain open to
additional examinations by U.S. federal and state taxing authorities. It is reasonably possible
that unrecognized tax benefits could significantly increase or decrease within the next twelve
months. However, the Company is currently unable to estimate the range of any possible change.
13. COMMITMENTS AND CONTINGENCIES
Net Revenue
The calculation of appropriate payments from the Medicare and Medicaid programs, including
supplemental Medicaid reimbursement, as well as terms governing agreements with other third-party
payors are complex and subject to interpretation. Final determination of amounts earned under the
Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered
because of audits by the programs, rights of appeal and the application of numerous technical
provisions. In the opinion of management, adequate provision has been made for adjustments that may
result from such routine audits and appeals.
Professional, General and Workers Compensation Liability Risks
The Company is subject to claims and legal actions in the ordinary course of business,
including claims relating to patient treatment and personal injuries. To cover these types of
claims, the Company maintains professional and general liability insurance in excess of
self-insured retentions through a commercial insurance carrier in amounts that the Company believes
to be sufficient for its operations, although, potentially, some claims may exceed the scope of
coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not
be covered by insurance. The Company is currently not a party to any such proceedings that, in the
Companys opinion, would have a material adverse effect on the Companys business, financial
condition or results of operations. The Company expenses an estimate of the costs it expects to
incur under the self-insured retention exposure for professional and general liability claims using
historical claims data, demographic factors, severity factors, current incident logs and other
actuarial analysis. At September 30, 2009 and 2008, the Companys professional and general
liability accrual for asserted and unasserted claims totaled $41.7 million and $34.3 million,
respectively. The semi-annual valuations from the Companys independent actuary for professional
and general liability losses resulted in a change related to estimates for prior years which
decreased professional and general liability expense by $1.2 million, $6.8 million and $6.6
million during the years ended September 30, 2009, 2008 and 2007, respectively.
89
The Company is subject to claims and legal actions in the ordinary course of business relative
to workers compensation and other labor and employment matters. To cover these types of claims, the
Company maintains workers compensation insurance coverage with a self-insured retention. The
Company accrues costs of workers compensation claims based upon estimates derived from its claims
experience. The semi-annual valuations from the Companys independent actuary for workers
compensation losses resulted in a change related to estimates for prior years which decreased
workers compensation expense by $526,000, during the year ended September 30, 2009, increased
workers compensation expense by $759,000 during the year ended September 30, 2008, and decreased
workers compensation expense by $1.0 million during the year ended September 30, 2007.
Health Choice
Health Choice has entered into capitated contracts whereby the Plan provides healthcare
services in exchange for fixed periodic and supplemental payments from the AHCCCS and CMS. These
services are provided regardless of the actual costs incurred to provide these services. The
Company receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of
healthcare services that exceed certain thresholds. The Company believes the capitated payments,
together with reinsurance and other supplemental payments are sufficient to pay for the services
Health Choice is obligated to deliver. As of September 30, 2009, the Company has provided a
performance guaranty in the form of letters of credit totaling $43.2 million for the benefit of
AHCCCS to support its obligations under the Health Choice contract to provide and pay for the
healthcare services. The amount of the performance guaranty is generally based in part upon the
membership in the Plan and the related capitation revenue paid to Health Choice.
Acquisitions
The Company has acquired and in the future may choose to acquire businesses with prior
operating histories. Such businesses may have unknown or contingent liabilities, including
liabilities for failure to comply with healthcare laws and regulations, such as billing and
reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures
designed to conform business practices to its policies following the completion of any acquisition,
there can be no assurance that the Company will not become liable for previous activities of prior
owners that may later be asserted to be improper by private plaintiffs or government agencies.
Although the Company generally seeks to obtain indemnification from prospective sellers covering
such matters, there can be no assurance that any such matter will be covered by indemnification, or
if covered, that such indemnification will be adequate to cover potential losses and fines.
Other
On March 31, 2008, the United States District Court for the District of Arizona (the District
Court) dismissed with prejudice the qui tam complaint against IAS, the Companys parent company.
The qui tam action sought monetary damages and civil penalties under the federal False Claims Act
(FCA) and included allegations that certain business practices related to physician relationships
and the medical necessity of certain procedures resulted in the submission of claims for
reimbursement in violation of the FCA. The case dates back to March 2005 and became the subject of
a subpoena by the Office of Inspector General (OIG) in September 2005. In August 2007, the case
was unsealed and became a private lawsuit after the Department of Justice declined to intervene.
The United States District Judge dismissed the case from the bench at the conclusion of oral
arguments on IAS motion to dismiss. On April 21, 2008, the court issued a written order dismissing
the case with prejudice and entering formal judgment for IAS. On May 7, 2008, the qui tam relators
counsel filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit to
appeal the District Courts dismissal of the case. On May 21, 2008, IAS filed a Notice of
Cross-Appeal to the United States Court of Appeals for the Ninth Circuit from a portion of the
April 21, 2008 Order and, on July 22, 2008, IAS filed a Motion to Disqualify relators counsel
related to their misappropriation of information subject to a claim of attorney-client privilege by
IAS. On August 21, 2008, the court issued a written order denying IAS Motion to Disqualify and
resetting the briefing schedule associated with the Ninth Circuit appellate proceedings. On October
21, 2008, the relator filed his appeal brief with the United States Court of Appeals for the Ninth
Circuit. IAS filed its cross-appeal brief on January 20, 2009. Currently, the Ninth Circuit appeal
is expected to take another six to nine months to complete. If the appeal of the order dismissing
the qui tam action with prejudice was to be resolved in a manner unfavorable to IAS, it could have
a material adverse effect on the Companys business, financial condition and results of operations,
including exclusion from the Medicare and Medicaid programs.
90
The Companys facilities obtain clinical and administrative services from a variety of
vendors. One vendor, a medical practice that furnished cardiac catheterization services under
contractual arrangements at Mesa General and St. Lukes Medical Center (St. Lukes) through March
31, 2008 and May 31, 2008, respectively, has claimed that, because of deferred fee adjustments that
it claims are due under these arrangements, it is owed additional amounts for services rendered
since April 1, 2006 at both facilities. The Company and the vendor have not reached agreement with
respect to the amount of the fee adjustment, if any, that is contractually required, nor with
respect to the methodology that may appropriately be used in determining such amount. On October 1,
2008, the vendor filed a complaint in arbitration for an aggregate adjustment in excess of amounts
accrued to date by the Company. Although the Company cannot currently estimate the amount of any
fee adjustment that Mesa General or St. Lukes ultimately may be required to pay, it believes that
the aggregate adjustment sought by the vendor is substantially in excess of any such amount.
Likewise, the vendor has also filed a state-court complaint asserting its fee adjustment claims and
also alleging certain tort claims that arise from the same fee dispute, as well as from the closure
of Mesa General preceding expiration of the Companys lease for the Mesa General property in July
2008. The majority of the vendors cardiac catheterization services were performed at the Mesa
General facility, which is included in discontinued operations in the accompanying consolidated
statements of operations. The Companys motion to compel arbitration was granted without oral
argument by the court in Phoenix on August 13, 2009 and the court ordered the parties to
either agree on an arbitrator or submit their respective party-appointed arbitrators to the court,
whereupon those appointed arbitrators would each submit a nominee for neutral third-party
arbitrator to the court for the courts selection. The parties are following the court-ordered
procedure for appointment of the arbitration panel, after which time, the three-person panel will
meet and set up a hearing among the parties to set the schedule and structure for the arbitration.
14. LEASES
The Company leases various buildings, office space and equipment under capital and operating
lease agreements. These leases expire at various times and have various renewal options.
The Company is a party to an amended facility lease with a 15 year term that expires in
January 31, 2019, and includes options to extend the term of the lease through January 31, 2039.
The annual cost under this agreement is $6.4 million, payable in monthly installments. Future
minimum lease payments at September 30, 2009, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
Leases |
|
|
Leases |
|
2010 |
|
$ |
1,118 |
|
|
$ |
21,839 |
|
2011 |
|
|
923 |
|
|
|
17,560 |
|
2012 |
|
|
647 |
|
|
|
15,401 |
|
2013 |
|
|
562 |
|
|
|
14,734 |
|
2014 |
|
|
562 |
|
|
|
13,353 |
|
Thereafter |
|
|
5,194 |
|
|
|
42,277 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
9,006 |
|
|
$ |
125,164 |
|
|
|
|
|
|
|
|
|
Amount representing interest (at rates ranging from 4.4% to 14.2%) |
|
|
3,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Present
value of net minimum lease payments (including $654 classified as current) |
|
$ |
5,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate future minimum rentals to be received under noncancellable subleases as of September
30, 2009, were $4.3 million.
15. RETIREMENT PLANS
Substantially all employees who are employed by the Company or its subsidiaries, upon
qualification, are eligible to participate in a defined contribution 401(k) plan (the Retirement
Plan). Employees who elect to participate generally make contributions from 1% to 20% of their
eligible compensation, and the Company matches, at its discretion, such contributions up to a
maximum percentage. Generally, employees immediately vest 100% in their own contributions and vest
in the employer portion of contributions over a period not to exceed five years. Company
contributions to the Retirement Plan were $5.7 million, $5.0 million and $4.3 million
for the years ended September 30, 2009, 2008 and 2007, respectively.
91
16. SEGMENT AND GEOGRAPHIC INFORMATION
The Companys acute care hospitals and related healthcare businesses are similar in their
activities and the economic environments in which they operate (i.e., urban and suburban markets). Accordingly,
the Companys reportable operating segments consist of (1) acute care hospitals and related
healthcare businesses, collectively, and (2) Health Choice. The following is a financial summary by
business segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2009 |
|
|
|
Acute Care |
|
|
Health Choice |
|
|
Eliminations |
|
|
Consolidated |
|
Acute care revenue |
|
$ |
1,662,469 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,662,469 |
|
Premium revenue |
|
|
|
|
|
|
699,503 |
|
|
|
|
|
|
|
699,503 |
|
Revenue between segments |
|
|
9,316 |
|
|
|
|
|
|
|
(9,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,671,785 |
|
|
|
699,503 |
|
|
|
(9,316 |
) |
|
|
2,361,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
641,893 |
|
|
|
19,028 |
|
|
|
|
|
|
|
660,921 |
|
Supplies |
|
|
250,310 |
|
|
|
263 |
|
|
|
|
|
|
|
250,573 |
|
Medical claims |
|
|
|
|
|
|
602,076 |
|
|
|
(9,316 |
) |
|
|
592,760 |
|
Other operating expenses |
|
|
302,804 |
|
|
|
22,931 |
|
|
|
|
|
|
|
325,735 |
|
Provision for bad debts |
|
|
192,563 |
|
|
|
|
|
|
|
|
|
|
|
192,563 |
|
Rentals and leases |
|
|
37,563 |
|
|
|
1,564 |
|
|
|
|
|
|
|
39,127 |
|
Hurricane-related property damage |
|
|
938 |
|
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1) |
|
|
245,714 |
|
|
|
53,641 |
|
|
|
|
|
|
|
299,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
67,890 |
|
|
|
|
|
|
|
|
|
|
|
67,890 |
|
Depreciation and amortization |
|
|
94,014 |
|
|
|
3,448 |
|
|
|
|
|
|
|
97,462 |
|
Impairment of goodwill |
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
64,639 |
|
Management fees |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
gain (loss) on disposal of assets, minority
interests and income taxes |
|
|
14,171 |
|
|
|
50,193 |
|
|
|
|
|
|
|
64,364 |
|
Gain (loss) on disposal of assets, net |
|
|
1,616 |
|
|
|
(151 |
) |
|
|
|
|
|
|
1,465 |
|
Minority interests |
|
|
(9,987 |
) |
|
|
|
|
|
|
|
|
|
|
(9,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
$ |
5,800 |
|
|
$ |
50,042 |
|
|
$ |
|
|
|
$ |
55,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
2,109,422 |
|
|
$ |
247,782 |
|
|
|
|
|
|
$ |
2,357,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures continuing operations |
|
$ |
86,875 |
|
|
$ |
845 |
|
|
|
|
|
|
$ |
87,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
712,163 |
|
|
$ |
5,757 |
|
|
|
|
|
|
$ |
717,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2008 |
|
|
|
Acute Care |
|
|
Health Choice |
|
|
Eliminations |
|
|
Consolidated |
|
Acute care revenue |
|
$ |
1,523,790 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,523,790 |
|
Premium revenue |
|
|
|
|
|
|
541,746 |
|
|
|
|
|
|
|
541,746 |
|
Revenue between segments |
|
|
9,594 |
|
|
|
|
|
|
|
(9,594 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,533,384 |
|
|
|
541,746 |
|
|
|
(9,594 |
) |
|
|
2,065,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
614,442 |
|
|
|
17,667 |
|
|
|
|
|
|
|
632,109 |
|
Supplies |
|
|
231,001 |
|
|
|
258 |
|
|
|
|
|
|
|
231,259 |
|
Medical claims |
|
|
|
|
|
|
461,649 |
|
|
|
(9,594 |
) |
|
|
452,055 |
|
Other operating expenses |
|
|
264,814 |
|
|
|
18,309 |
|
|
|
|
|
|
|
283,123 |
|
Provision for bad debts |
|
|
161,936 |
|
|
|
|
|
|
|
|
|
|
|
161,936 |
|
Rentals and leases |
|
|
35,466 |
|
|
|
1,167 |
|
|
|
|
|
|
|
36,633 |
|
Hurricane-related property damage |
|
|
3,589 |
|
|
|
|
|
|
|
|
|
|
|
3,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1) |
|
|
222,136 |
|
|
|
42,696 |
|
|
|
|
|
|
|
264,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
75,665 |
|
|
|
|
|
|
|
|
|
|
|
75,665 |
|
Depreciation and amortization |
|
|
93,003 |
|
|
|
3,738 |
|
|
|
|
|
|
|
96,741 |
|
Management fees |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
loss on disposal of assets, minority
interests and income taxes |
|
|
48,468 |
|
|
|
38,958 |
|
|
|
|
|
|
|
87,426 |
|
Loss on disposal of assets, net |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
(75 |
) |
Minority interests |
|
|
(4,437 |
) |
|
|
|
|
|
|
|
|
|
|
(4,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
$ |
43,956 |
|
|
$ |
38,958 |
|
|
$ |
|
|
|
$ |
82,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
2,123,069 |
|
|
$ |
185,078 |
|
|
|
|
|
|
$ |
2,308,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures continuing operations |
|
$ |
136,425 |
|
|
$ |
990 |
|
|
|
|
|
|
$ |
137,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
774,842 |
|
|
$ |
5,757 |
|
|
|
|
|
|
$ |
780,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2007 |
|
|
|
Acute Care |
|
|
Health Choice |
|
|
Eliminations |
|
|
Consolidated |
|
Acute care revenue |
|
$ |
1,315,438 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,315,438 |
|
Premium revenue |
|
|
|
|
|
|
450,641 |
|
|
|
|
|
|
|
450,641 |
|
Revenue between segments |
|
|
7,540 |
|
|
|
|
|
|
|
(7,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,322,978 |
|
|
|
450,641 |
|
|
|
(7,540 |
) |
|
|
1,766,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
518,989 |
|
|
|
14,803 |
|
|
|
|
|
|
|
533,792 |
|
Supplies |
|
|
194,630 |
|
|
|
285 |
|
|
|
|
|
|
|
194,915 |
|
Medical claims |
|
|
|
|
|
|
384,045 |
|
|
|
(7,540 |
) |
|
|
376,505 |
|
Other operating expenses |
|
|
251,167 |
|
|
|
15,096 |
|
|
|
|
|
|
|
266,263 |
|
Provision for bad debts |
|
|
136,233 |
|
|
|
|
|
|
|
|
|
|
|
136,233 |
|
Rentals and leases |
|
|
30,384 |
|
|
|
1,162 |
|
|
|
|
|
|
|
31,546 |
|
Business interruption insurance recoveries |
|
|
(3,443 |
) |
|
|
|
|
|
|
|
|
|
|
(3,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1) |
|
|
195,018 |
|
|
|
35,250 |
|
|
|
|
|
|
|
230,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
71,206 |
|
|
|
|
|
|
|
|
|
|
|
71,206 |
|
Depreciation and amortization |
|
|
71,828 |
|
|
|
3,560 |
|
|
|
|
|
|
|
75,388 |
|
Loss on extinguishment of debt |
|
|
6,229 |
|
|
|
|
|
|
|
|
|
|
|
6,229 |
|
Management fees |
|
|
4,746 |
|
|
|
|
|
|
|
|
|
|
|
4,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
loss on disposal of assets, minority
interests and income taxes |
|
|
41,009 |
|
|
|
31,690 |
|
|
|
|
|
|
|
72,699 |
|
Loss on disposal of assets, net |
|
|
(1,359 |
) |
|
|
|
|
|
|
|
|
|
|
(1,359 |
) |
Minority interests |
|
|
(4,496 |
) |
|
|
|
|
|
|
|
|
|
|
(4,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
$ |
35,154 |
|
|
$ |
31,690 |
|
|
$ |
|
|
|
$ |
66,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
2,035,386 |
|
|
$ |
151,036 |
|
|
|
|
|
|
$ |
2,186,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures continuing operations |
|
$ |
193,570 |
|
|
$ |
473 |
|
|
|
|
|
|
$ |
194,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
750,836 |
|
|
$ |
5,757 |
|
|
|
|
|
|
$ |
756,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted EBITDA represents net earnings before interest expense, income tax expense (benefit),
depreciation and amortization, impairment of goodwill, loss on extinguishment of debt, gain
(loss) on disposal of assets, minority interests and management fees. Management fees
represent monitoring and advisory fees paid to TPG, the Companys majority financial sponsor,
and certain other members of IASIS Investment LLC. Management routinely calculates and
communicates adjusted EBITDA and believes that it is useful to investors because it is
commonly used as an analytical indicator within the healthcare industry to evaluate hospital
performance, allocate resources and measure leverage capacity and debt service ability. In
addition, the Company uses adjusted EBITDA as a measure of performance for its business
segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as
a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are
significant components in understanding and assessing financial performance. Adjusted EBITDA
should not be considered in isolation or as an alternative to net earnings, cash flows
generated by operating, investing, or financing activities or other financial statement data
presented in the consolidated financial statements as an indicator of financial performance or
liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Companys
senior secured credit facilities and may not be comparable to similarly titled measures of
other companies. |
17. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Employee health insurance payable |
|
$ |
9,183 |
|
|
$ |
10,834 |
|
Accrued property taxes |
|
|
10,496 |
|
|
|
10,041 |
|
Health Choice program settlements payable |
|
|
13,720 |
|
|
|
|
|
Other |
|
|
32,302 |
|
|
|
30,927 |
|
|
|
|
|
|
|
|
|
|
$ |
65,701 |
|
|
$ |
51,802 |
|
|
|
|
|
|
|
|
93
18. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the Companys allowance for doubtful accounts is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written Off, |
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Provision for |
|
|
|
|
|
|
Net of |
|
|
|
|
|
|
Ending |
|
|
|
Balance |
|
|
Bad Debts |
|
|
Other (1) |
|
|
Recoveries |
|
|
Acquisitions |
|
|
Balance |
|
Year Ended
September 30, 2007 |
|
$ |
109,877 |
|
|
|
136,233 |
|
|
|
6,475 |
|
|
|
(167,900 |
) |
|
|
13,144 |
|
|
$ |
97,829 |
|
Year Ended
September 30, 2008 |
|
$ |
97,829 |
|
|
|
161,936 |
|
|
|
6,782 |
|
|
|
(158,092 |
) |
|
|
|
|
|
$ |
108,455 |
|
Year Ended
September 30, 2009 |
|
$ |
108,455 |
|
|
|
192,563 |
|
|
|
641 |
|
|
|
(175,527 |
) |
|
|
|
|
|
$ |
126,132 |
|
|
|
|
(1) |
|
Represents provision for bad debts recorded at facilities which are now included in
discontinued operations. |
The provision for bad debts increased $30.6 million during the year ended September 30, 2009,
primarily as a result of increases in self-pay volume and revenue. The provision for bad debts
increased $25.7 during the year end September 30, 2008, primarily as a result of increases in
self-pay volume and revenue, as well as the effect of a full year of operations at Mountain Vista
Medical Center, Alliance and Glenwood.
19. IMPACT OF HURRICANE ACTIVITY
The Medical Center of Southeast Texas, the Companys hospital located in Port Arthur, Texas,
was damaged during Hurricane Ike in September 2008. The hospital sustained roof and water intrusion
damage. The majority of services at the hospital became operational during October of 2008. The
Companys results from operations include hurricane-related property damage of $938,000 and $3.6
million for the years ended September 30, 2009 and 2008, respectively.
During the year ended September 30, 2007, the Company received business interruption insurance
recoveries of $3.4 million resulting from the temporary closure and disruption of operations at The
Medical Center of Southeast Texas, as a result of Hurricane Rita in 2005. Amounts received during
the year ended September 30, 2007, represent the final settlement of the Companys business
interruption insurance claim related to Hurricane Rita.
20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The 8 3/4% notes described in Note 3 are fully and unconditionally guaranteed on a joint and
several basis by all of the Companys existing domestic subsidiaries, other than non-guarantor
subsidiaries which include Health Choice and the Companys non-wholly owned subsidiaries.
Effective July 1, 2007, the operations of Pioneer Valley Hospital (Pioneer), formerly a
subsidiary guarantor under the 8 3/4% notes, merged into Jordan Valley Hospital, a non-wholly owned
subsidiary, to form Jordan Valley Medical Center. The Pioneer subsidiary was dissolved in
connection with this merger. As a result, the combined operations of Jordan Valley Medical Center
are included in the subsidiary non-guarantor information in the following summarized condensed
consolidating financial statements.
Effective February 1, 2008, Salt Lake Regional Medical Center, LP (Salt Lake) sold limited
partner units representing, in the aggregate, a 2.2% ownership interest in Salt Lake. As a result,
the Companys ownership interest in Salt Lake was reduced to 97.8%. Salt Lake is included in the
condensed consolidating financial statements as a subsidiary non-guarantor.
Summarized condensed consolidating balance sheets at September 30, 2009 and 2008, condensed
consolidating statements of operations and cash flows for the years ended September 30, 2009, 2008
and 2007, for the Company, segregating the parent company issuer, the subsidiary guarantors, the
subsidiary non-guarantors and eliminations, are found below. Prior year amounts have been
reclassified to conform to the current year presentation.
94
IASIS Healthcare LLC
Condensed Consolidating Balance Sheet
September 30, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
206,331 |
|
|
$ |
197 |
|
|
$ |
|
|
|
$ |
206,528 |
|
Accounts receivable, net |
|
|
|
|
|
|
90,883 |
|
|
|
139,315 |
|
|
|
|
|
|
|
230,198 |
|
Inventories |
|
|
|
|
|
|
22,405 |
|
|
|
28,087 |
|
|
|
|
|
|
|
50,492 |
|
Deferred income taxes |
|
|
39,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,038 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
15,521 |
|
|
|
33,932 |
|
|
|
|
|
|
|
49,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
39,038 |
|
|
|
335,140 |
|
|
|
201,531 |
|
|
|
|
|
|
|
575,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
347,657 |
|
|
|
649,696 |
|
|
|
|
|
|
|
997,353 |
|
Intercompany |
|
|
|
|
|
|
(243,956 |
) |
|
|
243,956 |
|
|
|
|
|
|
|
|
|
Net investment in and advances to subsidiaries |
|
|
1,690,127 |
|
|
|
|
|
|
|
|
|
|
|
(1,690,127 |
) |
|
|
|
|
Goodwill |
|
|
17,331 |
|
|
|
67,445 |
|
|
|
633,144 |
|
|
|
|
|
|
|
717,920 |
|
Other intangible assets, net |
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
30,000 |
|
Other assets, net |
|
|
15,182 |
|
|
|
16,780 |
|
|
|
4,260 |
|
|
|
|
|
|
|
36,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,761,678 |
|
|
$ |
523,066 |
|
|
$ |
1,762,587 |
|
|
$ |
(1,690,127 |
) |
|
$ |
2,357,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
25,269 |
|
|
$ |
43,283 |
|
|
$ |
|
|
|
$ |
68,552 |
|
Salaries and benefits payable |
|
|
|
|
|
|
25,008 |
|
|
|
17,540 |
|
|
|
|
|
|
|
42,548 |
|
Accrued interest payable |
|
|
12,511 |
|
|
|
(3,239 |
) |
|
|
3,239 |
|
|
|
|
|
|
|
12,511 |
|
Medical claims payable |
|
|
|
|
|
|
|
|
|
|
113,519 |
|
|
|
|
|
|
|
113,519 |
|
Other accrued expenses and other current
liabilities |
|
|
|
|
|
|
39,559 |
|
|
|
26,142 |
|
|
|
|
|
|
|
65,701 |
|
Current portion of long-term debt and
capital lease obligations |
|
|
7,431 |
|
|
|
935 |
|
|
|
20,614 |
|
|
|
(20,614 |
) |
|
|
8,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
19,942 |
|
|
|
87,532 |
|
|
|
224,337 |
|
|
|
(20,614 |
) |
|
|
311,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
1,045,260 |
|
|
|
6,211 |
|
|
|
566,980 |
|
|
|
(566,980 |
) |
|
|
1,051,471 |
|
Deferred income taxes |
|
|
106,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,425 |
|
Other long-term liabilities |
|
|
|
|
|
|
53,577 |
|
|
|
645 |
|
|
|
|
|
|
|
54,222 |
|
Minority interests |
|
|
|
|
|
|
53,042 |
|
|
|
|
|
|
|
|
|
|
|
53,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,171,627 |
|
|
|
200,362 |
|
|
|
791,962 |
|
|
|
(587,594 |
) |
|
|
1,576,357 |
|
Members equity |
|
|
590,051 |
|
|
|
322,704 |
|
|
|
970,625 |
|
|
|
(1,102,533 |
) |
|
|
780,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
1,761,678 |
|
|
$ |
523,066 |
|
|
$ |
1,762,587 |
|
|
$ |
(1,690,127 |
) |
|
$ |
2,357,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
IASIS Healthcare LLC
Condensed Consolidating Balance Sheet
September 30, 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
80,336 |
|
|
$ |
402 |
|
|
$ |
|
|
|
$ |
80,738 |
|
Accounts receivable, net |
|
|
|
|
|
|
101,291 |
|
|
|
122,847 |
|
|
|
|
|
|
|
224,138 |
|
Inventories |
|
|
|
|
|
|
21,236 |
|
|
|
28,218 |
|
|
|
|
|
|
|
49,454 |
|
Deferred income taxes |
|
|
38,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,860 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
19,688 |
|
|
|
40,365 |
|
|
|
|
|
|
|
60,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
38,860 |
|
|
|
222,551 |
|
|
|
191,832 |
|
|
|
|
|
|
|
453,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
363,106 |
|
|
|
641,142 |
|
|
|
|
|
|
|
1,004,248 |
|
Intercompany |
|
|
|
|
|
|
(190,870 |
) |
|
|
190,870 |
|
|
|
|
|
|
|
|
|
Net investment in and advances to subsidiaries |
|
|
1,717,907 |
|
|
|
|
|
|
|
|
|
|
|
(1,717,907 |
) |
|
|
|
|
Goodwill |
|
|
18,609 |
|
|
|
128,764 |
|
|
|
633,226 |
|
|
|
|
|
|
|
780,599 |
|
Other intangible assets, net |
|
|
|
|
|
|
|
|
|
|
33,000 |
|
|
|
|
|
|
|
33,000 |
|
Other assets, net |
|
|
18,210 |
|
|
|
12,944 |
|
|
|
5,903 |
|
|
|
|
|
|
|
37,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,793,586 |
|
|
$ |
536,495 |
|
|
$ |
1,695,973 |
|
|
$ |
(1,717,907 |
) |
|
$ |
2,308,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
24,708 |
|
|
$ |
40,143 |
|
|
$ |
|
|
|
$ |
64,851 |
|
Salaries and benefits payable |
|
|
|
|
|
|
16,819 |
|
|
|
14,988 |
|
|
|
|
|
|
|
31,807 |
|
Accrued interest payable |
|
|
12,460 |
|
|
|
(3,242 |
) |
|
|
3,242 |
|
|
|
|
|
|
|
12,460 |
|
Medical claims payable |
|
|
|
|
|
|
|
|
|
|
97,343 |
|
|
|
|
|
|
|
97,343 |
|
Other accrued expenses and other current
liabilities |
|
|
|
|
|
|
38,552 |
|
|
|
13,250 |
|
|
|
|
|
|
|
51,802 |
|
Current portion of long-term debt and
capital lease obligations |
|
|
6,042 |
|
|
|
1,581 |
|
|
|
15,255 |
|
|
|
(15,255 |
) |
|
|
7,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
18,502 |
|
|
|
78,418 |
|
|
|
184,221 |
|
|
|
(15,255 |
) |
|
|
265,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
1,098,928 |
|
|
|
8,071 |
|
|
|
588,172 |
|
|
|
(588,172 |
) |
|
|
1,106,999 |
|
Deferred income taxes |
|
|
111,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,092 |
|
Other long-term liabilities |
|
|
|
|
|
|
43,871 |
|
|
|
655 |
|
|
|
|
|
|
|
44,526 |
|
Minority interests |
|
|
|
|
|
|
51,875 |
|
|
|
|
|
|
|
|
|
|
|
51,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,228,522 |
|
|
|
182,235 |
|
|
|
773,048 |
|
|
|
(603,427 |
) |
|
|
1,580,378 |
|
Members equity |
|
|
565,064 |
|
|
|
354,260 |
|
|
|
922,925 |
|
|
|
(1,114,480 |
) |
|
|
727,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
1,793,586 |
|
|
$ |
536,495 |
|
|
$ |
1,695,973 |
|
|
$ |
(1,717,907 |
) |
|
$ |
2,308,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2009 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
|
|
|
$ |
656,913 |
|
|
$ |
1,014,872 |
|
|
$ |
(9,316 |
) |
|
$ |
1,662,469 |
|
Premium revenue |
|
|
|
|
|
|
|
|
|
|
699,503 |
|
|
|
|
|
|
|
699,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
656,913 |
|
|
|
1,714,375 |
|
|
|
(9,316 |
) |
|
|
2,361,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
|
|
|
|
336,687 |
|
|
|
324,234 |
|
|
|
|
|
|
|
660,921 |
|
Supplies |
|
|
|
|
|
|
103,587 |
|
|
|
146,986 |
|
|
|
|
|
|
|
250,573 |
|
Medical claims |
|
|
|
|
|
|
|
|
|
|
602,076 |
|
|
|
(9,316 |
) |
|
|
592,760 |
|
Other operating expenses |
|
|
|
|
|
|
121,597 |
|
|
|
204,138 |
|
|
|
|
|
|
|
325,735 |
|
Provision for bad debts |
|
|
|
|
|
|
94,662 |
|
|
|
97,901 |
|
|
|
|
|
|
|
192,563 |
|
Rentals and leases |
|
|
|
|
|
|
16,138 |
|
|
|
22,989 |
|
|
|
|
|
|
|
39,127 |
|
Interest expense, net |
|
|
67,890 |
|
|
|
|
|
|
|
43,063 |
|
|
|
(43,063 |
) |
|
|
67,890 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,492 |
|
|
|
54,970 |
|
|
|
|
|
|
|
97,462 |
|
Management fees |
|
|
5,000 |
|
|
|
(21,862 |
) |
|
|
21,862 |
|
|
|
|
|
|
|
5,000 |
|
Impairment of goodwill |
|
|
|
|
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
64,639 |
|
Hurricane-related property
damage |
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
|
|
|
|
938 |
|
Equity in earnings of affiliates |
|
|
(84,640 |
) |
|
|
|
|
|
|
|
|
|
|
84,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
(11,750 |
) |
|
|
757,940 |
|
|
|
1,519,157 |
|
|
|
32,261 |
|
|
|
2,297,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before gain (loss) on
disposal of assets, minority
interests and income taxes |
|
|
11,750 |
|
|
|
(101,027 |
) |
|
|
195,218 |
|
|
|
(41,577 |
) |
|
|
64,364 |
|
Gain (loss) on disposal of assets, net |
|
|
|
|
|
|
1,598 |
|
|
|
(133 |
) |
|
|
|
|
|
|
1,465 |
|
Minority interests |
|
|
|
|
|
|
(9,987 |
) |
|
|
|
|
|
|
|
|
|
|
(9,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes |
|
|
11,750 |
|
|
|
(109,416 |
) |
|
|
195,085 |
|
|
|
(41,577 |
) |
|
|
55,842 |
|
Income tax expense |
|
|
26,829 |
|
|
|
|
|
|
|
747 |
|
|
|
|
|
|
|
27,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing
operations |
|
|
(15,079 |
) |
|
|
(109,416 |
) |
|
|
194,338 |
|
|
|
(41,577 |
) |
|
|
28,266 |
|
Earnings (loss) from discontinued
operations, net of income taxes |
|
|
106 |
|
|
|
(310 |
) |
|
|
28 |
|
|
|
|
|
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(14,973 |
) |
|
$ |
(109,726 |
) |
|
$ |
194,366 |
|
|
$ |
(41,577 |
) |
|
$ |
28,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2008 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
|
|
|
$ |
637,773 |
|
|
$ |
895,611 |
|
|
$ |
(9,594 |
) |
|
$ |
1,523,790 |
|
Premium revenue |
|
|
|
|
|
|
|
|
|
|
541,746 |
|
|
|
|
|
|
|
541,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
637,773 |
|
|
|
1,437,357 |
|
|
|
(9,594 |
) |
|
|
2,065,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
|
|
|
|
319,243 |
|
|
|
312,866 |
|
|
|
|
|
|
|
632,109 |
|
Supplies |
|
|
|
|
|
|
104,698 |
|
|
|
126,561 |
|
|
|
|
|
|
|
231,259 |
|
Medical claims |
|
|
|
|
|
|
|
|
|
|
461,649 |
|
|
|
(9,594 |
) |
|
|
452,055 |
|
Other operating expenses |
|
|
|
|
|
|
111,781 |
|
|
|
171,342 |
|
|
|
|
|
|
|
283,123 |
|
Provision for bad debts |
|
|
|
|
|
|
80,139 |
|
|
|
81,797 |
|
|
|
|
|
|
|
161,936 |
|
Rentals and leases |
|
|
|
|
|
|
14,891 |
|
|
|
21,742 |
|
|
|
|
|
|
|
36,633 |
|
Interest expense, net |
|
|
75,665 |
|
|
|
|
|
|
|
54,716 |
|
|
|
(54,716 |
) |
|
|
75,665 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,721 |
|
|
|
54,020 |
|
|
|
|
|
|
|
96,741 |
|
Management fees |
|
|
5,000 |
|
|
|
(19,337 |
) |
|
|
19,337 |
|
|
|
|
|
|
|
5,000 |
|
Hurricane-related property
damage |
|
|
|
|
|
|
|
|
|
|
3,589 |
|
|
|
|
|
|
|
3,589 |
|
Equity in earnings of affiliates |
|
|
(91,476 |
) |
|
|
|
|
|
|
|
|
|
|
91,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
(10,811 |
) |
|
|
654,136 |
|
|
|
1,307,619 |
|
|
|
27,166 |
|
|
|
1,978,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before gain (loss) on
disposal of assets, minority
interests and income taxes |
|
|
10,811 |
|
|
|
(16,363 |
) |
|
|
129,738 |
|
|
|
(36,760 |
) |
|
|
87,426 |
|
Gain (loss) on disposal of assets, net |
|
|
|
|
|
|
(81 |
) |
|
|
6 |
|
|
|
|
|
|
|
(75 |
) |
Minority interests |
|
|
|
|
|
|
(4,437 |
) |
|
|
|
|
|
|
|
|
|
|
(4,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes |
|
|
10,811 |
|
|
|
(20,881 |
) |
|
|
129,744 |
|
|
|
(36,760 |
) |
|
|
82,914 |
|
Income tax expense |
|
|
34,996 |
|
|
|
|
|
|
|
329 |
|
|
|
|
|
|
|
35,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing
operations |
|
|
(24,185 |
) |
|
|
(20,881 |
) |
|
|
129,415 |
|
|
|
(36,760 |
) |
|
|
47,589 |
|
Earnings (loss) from discontinued
operations, net of income taxes |
|
|
5,783 |
|
|
|
(12,257 |
) |
|
|
(4,801 |
) |
|
|
|
|
|
|
(11,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(18,402 |
) |
|
$ |
(33,138 |
) |
|
$ |
124,614 |
|
|
$ |
(36,760 |
) |
|
$ |
36,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2007 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
|
|
|
$ |
577,891 |
|
|
$ |
745,087 |
|
|
$ |
(7,540 |
) |
|
$ |
1,315,438 |
|
Premium revenue |
|
|
|
|
|
|
|
|
|
|
450,641 |
|
|
|
|
|
|
|
450,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
577,891 |
|
|
|
1,195,728 |
|
|
|
(7,540 |
) |
|
|
1,766,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
|
|
|
|
284,520 |
|
|
|
249,272 |
|
|
|
|
|
|
|
533,792 |
|
Supplies |
|
|
|
|
|
|
97,043 |
|
|
|
97,872 |
|
|
|
|
|
|
|
194,915 |
|
Medical claims |
|
|
|
|
|
|
|
|
|
|
384,045 |
|
|
|
(7,540 |
) |
|
|
376,505 |
|
Other operating expenses |
|
|
|
|
|
|
115,542 |
|
|
|
150,721 |
|
|
|
|
|
|
|
266,263 |
|
Provision for bad debts |
|
|
|
|
|
|
68,824 |
|
|
|
67,409 |
|
|
|
|
|
|
|
136,233 |
|
Rentals and leases |
|
|
|
|
|
|
11,985 |
|
|
|
19,561 |
|
|
|
|
|
|
|
31,546 |
|
Interest expense, net |
|
|
71,206 |
|
|
|
|
|
|
|
34,684 |
|
|
|
(34,684 |
) |
|
|
71,206 |
|
Depreciation and amortization |
|
|
|
|
|
|
37,161 |
|
|
|
38,227 |
|
|
|
|
|
|
|
75,388 |
|
Management fees |
|
|
4,746 |
|
|
|
(16,030 |
) |
|
|
16,030 |
|
|
|
|
|
|
|
4,746 |
|
Loss on extinguishment of debt |
|
|
6,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,229 |
|
Business interruption insurance recoveries |
|
|
|
|
|
|
|
|
|
|
(3,443 |
) |
|
|
|
|
|
|
(3,443 |
) |
Equity in earnings of affiliates |
|
|
(117,212 |
) |
|
|
|
|
|
|
|
|
|
|
117,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
(35,031 |
) |
|
|
599,045 |
|
|
|
1,054,378 |
|
|
|
74,988 |
|
|
|
1,693,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
before loss on disposal of assets, minority
interests and income taxes |
|
|
35,031 |
|
|
|
(21,154 |
) |
|
|
141,350 |
|
|
|
(82,528 |
) |
|
|
72,699 |
|
Loss on disposal of assets, net |
|
|
|
|
|
|
(774 |
) |
|
|
(585 |
) |
|
|
|
|
|
|
(1,359 |
) |
Minority interests |
|
|
|
|
|
|
(4,496 |
) |
|
|
|
|
|
|
|
|
|
|
(4,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
before income taxes |
|
|
35,031 |
|
|
|
(26,424 |
) |
|
|
140,765 |
|
|
|
(82,528 |
) |
|
|
66,844 |
|
Income tax expense |
|
|
25,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
|
9,122 |
|
|
|
(26,424 |
) |
|
|
140,765 |
|
|
|
(82,528 |
) |
|
|
40,935 |
|
Earnings (loss) from discontinued operations,
net of income taxes |
|
|
(2,202 |
) |
|
|
6,314 |
|
|
|
(3,443 |
) |
|
|
|
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
6,920 |
|
|
$ |
(20,110 |
) |
|
$ |
137,322 |
|
|
$ |
(82,528 |
) |
|
$ |
41,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2009 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(14,973 |
) |
|
$ |
(109,726 |
) |
|
$ |
194,366 |
|
|
$ |
(41,577 |
) |
|
$ |
28,090 |
|
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (earnings) from discontinued operations |
|
|
(106 |
) |
|
|
310 |
|
|
|
(28 |
) |
|
|
|
|
|
|
176 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,492 |
|
|
|
54,970 |
|
|
|
|
|
|
|
97,462 |
|
Amortization of loan costs |
|
|
3,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,029 |
|
Minority interests |
|
|
|
|
|
|
9,987 |
|
|
|
|
|
|
|
|
|
|
|
9,987 |
|
Income tax benefit from parent company interest |
|
|
27,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,344 |
|
Deferred income taxes |
|
|
(5,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,572 |
) |
Loss (gain) on disposal of assets |
|
|
|
|
|
|
(1,598 |
) |
|
|
133 |
|
|
|
|
|
|
|
(1,465 |
) |
Impairment of goodwill |
|
|
|
|
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
64,639 |
|
Hurricane-related property damage |
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
|
|
|
|
938 |
|
Stock compensation costs |
|
|
561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561 |
|
Equity in earnings of affiliates |
|
|
(84,640 |
) |
|
|
|
|
|
|
|
|
|
|
84,640 |
|
|
|
|
|
Changes in operating assets and liabilities, net
of the effect of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
9,319 |
|
|
|
(16,621 |
) |
|
|
|
|
|
|
(7,302 |
) |
Inventories, prepaid expenses and other current
assets |
|
|
|
|
|
|
1,179 |
|
|
|
5,549 |
|
|
|
|
|
|
|
6,728 |
|
Accounts payable, other accrued expenses and
other accrued liabilities |
|
|
51 |
|
|
|
30,220 |
|
|
|
15,613 |
|
|
|
|
|
|
|
45,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities continuing operations |
|
|
(74,306 |
) |
|
|
46,822 |
|
|
|
254,920 |
|
|
|
43,063 |
|
|
|
270,499 |
|
Net cash provided by (used in) operating
activities discontinued operations |
|
|
(106 |
) |
|
|
1,739 |
|
|
|
(161 |
) |
|
|
|
|
|
|
1,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(74,412 |
) |
|
|
48,561 |
|
|
|
254,759 |
|
|
|
43,063 |
|
|
|
271,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
(24,965 |
) |
|
|
(62,755 |
) |
|
|
|
|
|
|
(87,720 |
) |
Cash paid for acquisitions |
|
|
|
|
|
|
(1,941 |
) |
|
|
|
|
|
|
|
|
|
|
(1,941 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
3,018 |
|
|
|
2,234 |
|
|
|
|
|
|
|
5,252 |
|
Change in other assets |
|
|
|
|
|
|
(654 |
) |
|
|
2,477 |
|
|
|
|
|
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing
operations |
|
|
|
|
|
|
(24,542 |
) |
|
|
(58,044 |
) |
|
|
|
|
|
|
(82,586 |
) |
Net cash provided by investing
activities discontinued operations |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(24,532 |
) |
|
|
(58,044 |
) |
|
|
|
|
|
|
(82,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations |
|
|
(55,015 |
) |
|
|
|
|
|
|
(461 |
) |
|
|
|
|
|
|
(55,476 |
) |
Distribution of minority interests |
|
|
|
|
|
|
(269 |
) |
|
|
(6,481 |
) |
|
|
|
|
|
|
(6,750 |
) |
Costs paid for repurchase of partnership interests |
|
|
|
|
|
|
(1,379 |
) |
|
|
|
|
|
|
|
|
|
|
(1,379 |
) |
Change in intercompany balances with affiliates, net |
|
|
129,427 |
|
|
|
103,614 |
|
|
|
(189,978 |
) |
|
|
(43,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
74,412 |
|
|
|
101,966 |
|
|
|
(196,920 |
) |
|
|
(43,063 |
) |
|
|
(63,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
125,995 |
|
|
|
(205 |
) |
|
|
|
|
|
|
125,790 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
80,336 |
|
|
|
402 |
|
|
|
|
|
|
|
80,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
206,331 |
|
|
$ |
197 |
|
|
$ |
|
|
|
$ |
206,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2008 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(18,402 |
) |
|
$ |
(33,138 |
) |
|
$ |
124,614 |
|
|
$ |
(36,760 |
) |
|
$ |
36,314 |
|
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (earnings) from discontinued operations |
|
|
(5,783 |
) |
|
|
12,257 |
|
|
|
4,801 |
|
|
|
|
|
|
|
11,275 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,721 |
|
|
|
54,020 |
|
|
|
|
|
|
|
96,741 |
|
Amortization of loan costs |
|
|
2,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,913 |
|
Minority interests |
|
|
|
|
|
|
4,437 |
|
|
|
|
|
|
|
|
|
|
|
4,437 |
|
Deferred income taxes |
|
|
19,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,368 |
|
Loss (gain) on disposal of assets |
|
|
|
|
|
|
81 |
|
|
|
(6 |
) |
|
|
|
|
|
|
75 |
|
Hurricane-related property damage |
|
|
|
|
|
|
|
|
|
|
3,589 |
|
|
|
|
|
|
|
3,589 |
|
Equity in earnings of affiliates |
|
|
(91,476 |
) |
|
|
|
|
|
|
|
|
|
|
91,476 |
|
|
|
|
|
Changes in operating assets and liabilities, net
of the effect of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
23,114 |
|
|
|
(5,983 |
) |
|
|
|
|
|
|
17,131 |
|
Inventories, prepaid expenses and other current
assets |
|
|
|
|
|
|
2,328 |
|
|
|
(23,689 |
) |
|
|
|
|
|
|
(21,361 |
) |
Accounts payable, other accrued expenses and
other accrued liabilities |
|
|
(10,947 |
) |
|
|
(13,040 |
) |
|
|
(5,432 |
) |
|
|
|
|
|
|
(29,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities continuing operations |
|
|
(104,327 |
) |
|
|
38,760 |
|
|
|
151,914 |
|
|
|
54,716 |
|
|
|
141,063 |
|
Net cash provided by (used in) operating
activities discontinued operations |
|
|
5,783 |
|
|
|
(884 |
) |
|
|
(2,586 |
) |
|
|
|
|
|
|
2,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(98,544 |
) |
|
|
37,876 |
|
|
|
149,328 |
|
|
|
54,716 |
|
|
|
143,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
(45,109 |
) |
|
|
(92,306 |
) |
|
|
|
|
|
|
(137,415 |
) |
Cash paid for acquisitions |
|
|
|
|
|
|
(16,799 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
(16,821 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
94 |
|
|
|
266 |
|
|
|
|
|
|
|
360 |
|
Change in other assets |
|
|
|
|
|
|
5,226 |
|
|
|
(613 |
) |
|
|
|
|
|
|
4,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing
operations |
|
|
|
|
|
|
(56,588 |
) |
|
|
(92,675 |
) |
|
|
|
|
|
|
(149,263 |
) |
Net cash provided by (used in) investing
activities discontinued operations |
|
|
|
|
|
|
(1,040 |
) |
|
|
23 |
|
|
|
|
|
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(57,628 |
) |
|
|
(92,652 |
) |
|
|
|
|
|
|
(150,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations |
|
|
(303,190 |
) |
|
|
(849 |
) |
|
|
(2,572 |
) |
|
|
|
|
|
|
(306,611 |
) |
Proceeds from debt borrowings |
|
|
384,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384,978 |
|
Distribution of minority interests |
|
|
|
|
|
|
(171 |
) |
|
|
(5,314 |
) |
|
|
|
|
|
|
(5,485 |
) |
Proceeds received from sale of partnership interests, net |
|
|
|
|
|
|
15,070 |
|
|
|
|
|
|
|
|
|
|
|
15,070 |
|
Other |
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192 |
|
Change in intercompany balances with affiliates, net |
|
|
16,564 |
|
|
|
90,592 |
|
|
|
(52,440 |
) |
|
|
(54,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing operations |
|
|
98,544 |
|
|
|
104,642 |
|
|
|
(60,326 |
) |
|
|
(54,716 |
) |
|
|
88,144 |
|
Net cash used in financing activities
discontinued operations |
|
|
|
|
|
|
(502 |
) |
|
|
|
|
|
|
|
|
|
|
(502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
98,544 |
|
|
|
104,140 |
|
|
|
(60,326 |
) |
|
|
(54,716 |
) |
|
|
87,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
84,388 |
|
|
|
(3,650 |
) |
|
|
|
|
|
|
80,738 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
(4,052 |
) |
|
|
4,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
80,336 |
|
|
$ |
402 |
|
|
$ |
|
|
|
$ |
80,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2007 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
6,920 |
|
|
$ |
(20,110 |
) |
|
$ |
137,322 |
|
|
$ |
(82,528 |
) |
|
$ |
41,604 |
|
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (earnings) from discontinued operations |
|
|
2,202 |
|
|
|
(6,314 |
) |
|
|
3,443 |
|
|
|
|
|
|
|
(669 |
) |
Depreciation and amortization |
|
|
|
|
|
|
37,161 |
|
|
|
38,227 |
|
|
|
|
|
|
|
75,388 |
|
Amortization of loan costs |
|
|
2,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,942 |
|
Minority interests |
|
|
|
|
|
|
4,496 |
|
|
|
|
|
|
|
|
|
|
|
4,496 |
|
Deferred income taxes |
|
|
24,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,103 |
|
Loss on disposal of assets |
|
|
|
|
|
|
774 |
|
|
|
585 |
|
|
|
|
|
|
|
1,359 |
|
Loss on extinguishment of debt |
|
|
5,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,091 |
|
Equity in earnings of affiliates |
|
|
(117,212 |
) |
|
|
|
|
|
|
|
|
|
|
117,212 |
|
|
|
|
|
Changes in operating assets and
liabilities, net of the effect of
acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
(37,182 |
) |
|
|
(15,567 |
) |
|
|
|
|
|
|
(52,749 |
) |
Inventories, prepaid expenses and other
current assets |
|
|
|
|
|
|
(3,204 |
) |
|
|
(2,690 |
) |
|
|
|
|
|
|
(5,894 |
) |
Accounts payable, other accrued expenses
and other accrued liabilities |
|
|
(1,100 |
) |
|
|
25,090 |
|
|
|
2,012 |
|
|
|
|
|
|
|
26,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities continuing operations |
|
|
(77,054 |
) |
|
|
711 |
|
|
|
163,332 |
|
|
|
34,684 |
|
|
|
121,673 |
|
Net cash provided by (used in) operating
activities discontinued operations |
|
|
(2,202 |
) |
|
|
9,306 |
|
|
|
(2,443 |
) |
|
|
|
|
|
|
4,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
|
(79,256 |
) |
|
|
10,017 |
|
|
|
160,889 |
|
|
|
34,684 |
|
|
|
126,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
(41,987 |
) |
|
|
(152,056 |
) |
|
|
|
|
|
|
(194,043 |
) |
Cash paid for acquisitions |
|
|
|
|
|
|
(78,083 |
) |
|
|
(63,502 |
) |
|
|
|
|
|
|
(141,585 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
1,026 |
|
|
|
|
|
|
|
|
|
|
|
1,026 |
|
Change in other assets |
|
|
|
|
|
|
4,272 |
|
|
|
1,621 |
|
|
|
|
|
|
|
5,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
continuing operations |
|
|
|
|
|
|
(114,772 |
) |
|
|
(213,937 |
) |
|
|
|
|
|
|
(328,709 |
) |
Net cash used in investing activities
discontinued operations |
|
|
|
|
|
|
(874 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
(929 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(115,646 |
) |
|
|
(213,992 |
) |
|
|
|
|
|
|
(329,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations |
|
|
(646,663 |
) |
|
|
(1,447 |
) |
|
|
(2,195 |
) |
|
|
|
|
|
|
(650,305 |
) |
Proceeds from debt borrowings |
|
|
778,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
778,800 |
|
Debt financing costs incurred |
|
|
(8,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,200 |
) |
Distribution to parent for debt financing costs |
|
|
(6,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,586 |
) |
Distribution of minority interests |
|
|
|
|
|
|
|
|
|
|
(4,850 |
) |
|
|
|
|
|
|
(4,850 |
) |
Costs paid for partnership interests |
|
|
|
|
|
|
(495 |
) |
|
|
|
|
|
|
|
|
|
|
(495 |
) |
Change in intercompany balances with
affiliates, net |
|
|
(38,095 |
) |
|
|
9,736 |
|
|
|
63,043 |
|
|
|
(34,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities continuing operations |
|
|
79,256 |
|
|
|
7,794 |
|
|
|
55,998 |
|
|
|
(34,684 |
) |
|
|
108,364 |
|
Net cash used in financing activities
discontinued operations |
|
|
|
|
|
|
(475 |
) |
|
|
|
|
|
|
|
|
|
|
(475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
79,256 |
|
|
|
7,319 |
|
|
|
55,998 |
|
|
|
(34,684 |
) |
|
|
107,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents |
|
|
|
|
|
|
(98,310 |
) |
|
|
2,895 |
|
|
|
|
|
|
|
(95,415 |
) |
Cash and cash equivalents at beginning of
period |
|
|
|
|
|
|
94,258 |
|
|
|
1,157 |
|
|
|
|
|
|
|
95,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
(4,052 |
) |
|
$ |
4,052 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
Item 9A(T). Controls and Procedures.
Evaluations of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended, as of September 30, 2009. Based on this
evaluation, the principal executive officer and principal accounting officer concluded that our
disclosure controls and procedures are effective in timely alerting them to material information
required to be included in our periodic reports.
Report of Management on Internal Control over Financial Reporting
The management of IASIS is responsible for the preparation, integrity and fair presentation of
the consolidated financial statements appearing in our periodic filings with the SEC. The
consolidated financial statements were prepared in conformity with U.S. generally accepted
accounting principles and, accordingly, include certain amounts based on our best judgments and
estimates.
Management is also responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Rules 13a-15(f) under the Securities and Exchange
Act of 1934. Internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of our financial reporting in accordance with U.S. generally accepted
accounting principles. Our internal control over financial reporting includes a program of internal
audits and appropriate reviews by management, written policies and guidelines, careful selection
and training of qualified personnel including a dedicated compliance department and a written Code
of Business Conduct and Ethics adopted by our board of directors, applicable to all of our
directors, officers and employees.
Internal control over financial reporting includes maintaining records that in reasonable
detail accurately and fairly reflect our transactions; providing reasonable assurance that
transactions are recorded as necessary for preparation of our financial statements; providing
reasonable assurance that receipts and expenditures of company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized acquisition, use or
disposition of company assets that could have a material effect on our financial statements would
be prevented or detected in a timely manner. Because of its inherent limitations, including the
possibility of human error and the circumvention or overriding of control procedures, internal
control over financial reporting is not intended to provide absolute assurance that a misstatement
of our financial statements would be prevented or detected. Therefore, even those internal controls
determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management
concluded that our internal control over financial reporting was effective as of September 30,
2009.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our independent registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only managements report in this annual report for the
year ended September 30, 2009.
Changes in Internal Control Over Financial Reporting
During the fourth fiscal quarter of the period covered by this report, there has been no
change in our internal control over financial reporting that has materially affected or is
reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information.
None.
103
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the name, age and position of the directors and executive
officers of IAS and executive officers of IASIS. See Certain Relationships and Related
Transactions.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
David R. White |
|
|
62 |
|
|
Chairman of the Board and Chief Executive Officer |
Sandra K. McRee |
|
|
53 |
|
|
President and Chief Operating Officer |
W. Carl Whitmer |
|
|
45 |
|
|
Chief Financial Officer |
Frank A. Coyle |
|
|
45 |
|
|
Secretary and General Counsel |
James Moake |
|
|
40 |
|
|
Operations Chief Financial Officer |
John M. Doyle |
|
|
49 |
|
|
Vice President and Chief Accounting Officer |
Paul Jenson |
|
|
61 |
|
|
Executive Vice President |
Kirk Olsen |
|
|
59 |
|
|
Executive Vice President Mountain Region |
Dorothy Sawyer |
|
|
59 |
|
|
President, Arizona Market |
Richard Gonzalez
|
|
|
58 |
|
|
President, Texas and Louisiana Markets |
Matt Tulin |
|
|
43 |
|
|
Chief Financial Officer, Utah Market |
Ruby Majhail |
|
|
42 |
|
|
Chief Financial Officer, Arizona and Nevada |
Joe Minissale |
|
|
45 |
|
|
Chief Financial Officer, Texas and Louisiana Markets |
Bashar Abunaser |
|
|
41 |
|
|
Chief Financial Officer, Florida Market |
Peter Stanos |
|
|
46 |
|
|
Vice President, Ethics and Business Practices |
Carolyn Rose |
|
|
60 |
|
|
Chief Executive Officer, Health Choice Arizona, Inc. |
Jonathan J. Coslet |
|
|
45 |
|
|
Director |
David Dupree |
|
|
56 |
|
|
Director |
Kirk E. Gorman |
|
|
59 |
|
|
Director |
Curtis S. Lane |
|
|
52 |
|
|
Director |
Todd B. Sisitsky |
|
|
38 |
|
|
Director |
Paul S. Levy |
|
|
62 |
|
|
Director |
Jeffrey C. Lightcap
|
|
|
50 |
|
|
Director |
Sharad Mansukani |
|
|
40 |
|
|
Director |
David R. White was non-executive Chairman of the Board of Directors of IAS from October 1999
until November 30, 2000. Mr. White was appointed Chief Executive Officer of IAS on December 1,
2000. He also served as President of IAS from May 2001 through May 2004. He was appointed Chief
Executive Officer of IASIS upon consummation of the Transactions. Mr. White served as President and
Chief Executive Officer of LifeTrust, an assisted living company, from November 1998 until November
2000. From June 1994 to September 1998, Mr. White served as President of the Atlantic Group at
Columbia/HCA, where he was responsible for 45 hospitals located in nine states. Previously, Mr.
White was Executive Vice President and Chief Operating Officer at Community Health Systems, Inc., a
for-profit hospital management company that operated approximately 20 acute-care hospitals.
Sandra K. McRee was appointed Chief Operating Officer of IAS in May 2001 and President in May
2004. She was appointed President and Chief Operating Officer of IASIS upon consummation of the
Transactions. Ms. McRee was a Regional Vice President for Province Healthcare Corporation from
April 1999 until May 2001, where she oversaw the operations of five facilities in Florida,
Louisiana and Mississippi. Ms. McRee also served as Vice President, Operations of Province
Healthcare Corporation from October 1998 through March 1999. From August 1997 through September
1998, she served as a Division President for Columbia/HCA. Ms. McRee also served as a Group Vice
President, Operations for Columbia/HCA from May 1995 through July 1997. Prior to joining
Columbia/HCA, Ms. McRee served as an Assistant Vice President for Community Health Systems Inc.
where she oversaw 36 facilities. Ms. McRee has spent her entire professional career in the
healthcare industry.
104
W. Carl Whitmer served as Vice President and Treasurer of IAS from March 2000 through October
2001, and was appointed Chief Financial Officer of IAS effective November 2001. He was appointed
Chief Financial Officer of IASIS upon consummation of the Transactions. Prior to joining our
company, Mr. Whitmer served various roles including Vice President of Finance and Treasurer and Chief Financial Officer of PhyCor Inc., where he was employed from July 1994
through February 2000. Mr. Whitmers responsibilities at PhyCor included acquisitions, capital
planning and management, investor relations, treasury management and external financial reporting.
Prior to joining PhyCor Inc., Mr. Whitmer served as a Senior Manager with the accounting firm of
KPMG LLP, where he was employed from July 1986 to July 1994. Mr. Whitmer also serves on the board
of directors, including the audit committee, of Fenwall, Inc.
Frank A. Coyle has been Secretary and General Counsel of IAS since October 1999. He was
appointed Secretary and General Counsel of IASIS upon consummation of the Transactions. From August
1998 until October 1999, Mr. Coyle served as Secretary and General Counsel of a company formed by
members of our management that was merged into one of our subsidiaries. Mr. Coyle served from May
1995 to August 1998 as Assistant Vice President Development in Physician Services and in-house
Development Counsel for Columbia/HCA. From May 1990 to May 1995, Mr. Coyle was an attorney with
Baker, Worthington, Crossley, Stansberry & Woolf where his work included mergers, acquisitions,
securities transactions, not-for-profit representation and formation of Tennessee health
maintenance organizations.
James Moake was appointed Operations Chief Financial Officer in February 2005. Previously, he
has served as a Division Chief Financial Officer of IASIS since March 2003. From November 2002 to
March 2003, Mr. Moake served as Operations Controller of IAS. Prior to joining the company, from
March 2000 to November 2002, he served as the Chief Financial Officer for two regional medical
centers of Province Healthcare Corporation. Mr. Moake served as the Chief Financial Officer of HMA,
Inc.s Community Hospital of Lancaster (PA) from July 1999 to March 2000 and the Assistant Chief
Financial Officer of HMA, Inc.s Biloxi Regional Medical Center (MS) from June 1998 to June 1999.
From December 1994 to May 1998, he served as the Chief Financial Officer of Grant Regional Health
Center, Inc. in Wisconsin.
John M. Doyle served as Vice President and Treasurer of IAS from April 2002 and was appointed
Vice President and Treasurer of IASIS upon consummation of the Transactions. He was appointed Vice
President and Chief Accounting Officer of IASIS effective July 2006. Mr. Doyle was a Senior Manager
at Ernst & Young LLP from February 1997 until March 2002 and at KPMG LLP from August 1994 to
January 1997, where he specialized in healthcare audit and business advisory services, including
mergers and acquisitions. In addition, from October 1991 to August 1994, Mr. Doyle was the Chief
Financial Officer for two community hospitals in East Tennessee and North Carolina.
Paul Jenson has served as the Executive Vice President Western Region since April 1, 2008.
Prior to that time, Mr. Jenson served as President of the Arizona Market from July 1, 2007 and had
also served as the President of the Nevada Market since October 1, 2007. From April 1, 2005 to July
1, 2007, his position was Chief Executive Officer of St. Lukes Medical Center, St. Lukes
Behavioral Health Center and Biltmore Surgery Center in Phoenix, Arizona. Prior to joining IAS, Mr.
Jenson worked for HCA Inc. for 14 years with his last position being Chief Executive Officer of
HCA-Brunswick Community Hospital from September 2002 until April 2005. Mr. Jenson has a background
of 40 years of experience in healthcare management in locations throughout the United States.
Kirk Olsen was named President of the Utah Market effective August 2007. From 1999 to 2007, he
served as a Corporate Vice President of Molina Healthcare Inc., where he was responsible for
national implementation of the Medicare Advantage program, and as President and Chief Executive
Officer of Molina Healthcare of Utah. Mr. Olsen has worked in state and national healthcare
regulatory roles, physician practice management, managed care and hospital administration since
1980.
Dorothy Sawyer has served as President of the Arizona Market since April 2008. Prior to
joining IASIS, Ms. Sawyer served as the Chief Executive Officer of Havasu Regional Medical Center
where she was responsible for a 138-bed acute care rural hospital and ambulatory surgery center.
From 2000 to 2004, Ms. Sawyer served as the Chief Executive Officer of Maryvale Hospital located in
Phoenix, Arizona where she had responsibility for the operations of a 238-bed acute care hospital
along with a freestanding emergency center located in Goodyear, Arizona. Ms. Sawyer was with
Hospital Corporation of America (HCA) from 1988 to 2000. During her tenure with HCA, Sawyer served
as the Regional Director for Quality and Resource Management and Chief Nursing Officer for
facilities in Tucson, Arizona and Denver, Colorado.
Richard Gonzalez has served as President of the Texas and Louisiana Markets since December 2008. In
addition, he has served as Chief Executive Officer of Southwest General Hospital since April 2003.
Prior to joining IASIS, Mr. Gonzalez held numerous healthcare leadership positions in the United States and Mexico since 1975,
including, most recently, as Chief Financial Officer of The Methodist Hospital in Houston, Texas.
105
Matt Tulin has served as Chief Financial Officer of the Utah Market since April 2009. Prior to
that time, Mr. Tulin served as Chief Financial Officer over finance and operations, from 2006 to
2009, for NEA Baptist Memorial Hospital, formally Triad Healthcare then Community Health Systems, a
joint venture syndication healthsystem over two acute care facilities. From 2004 to 2006, Mr. Tulin served as Chief Financial Officer
at two LifePoint Hospitals, Southern Tennessee Medical Center in Winchester, Tennessee and Emerald Hodgson Hospital in Sewanee, Tennessee.
Ruby Majhail has served as Chief Financial Officer of the Arizona and Nevada Markets since
December 2007. Ms. Majhail has also served as the Chief Financial Officer for Physicians Group of
Arizona, Inc. From November 2006 to September 2008, Ms. Majhail also served as the Chief
Financial Officer of St. Lukes Medical Center, St. Lukes Behavioral Health Center, Biltmore
Surgery Center and (until October 2007) Tempe St. Lukes in Phoenix, Arizona. From November 1997 to
October 2006, Ms. Majhail served as Vice President of Finance for Sun Health Corporation. Prior to
that time, Ms. Majhail served as a Senior Manager with the accounting firm of Plante & Moran, where
she specialized in healthcare audit and business advisory services.
Joe Minissale has served as Chief Financial Officer of the Texas and Louisiana Markets since
April 2008. Prior to that time, Mr. Minissale served as Chief Financial Officer and Vice President
Finance at Rockwall Hospitals, Inc., a hospital development and hospital management company based
in Richardson, Texas, from September 2006 to April 2008, Chief Financial Officer of Titus Regional
Medical Center in Mount Pleasant, Texas from February 2004 to September 2006 and Chief Financial
Officer of Hill Regional Hospital in Hillsboro, Texas from June 1998 to February 2004.
Bashar Abunaser has served as Chief Financial Officer of the Florida Market since December
2007. Prior to that time, Mr. Abunaser served as Director of Financial Operations at SunLink Health
Systems, Inc. from August 2006 to December 2007 and as Chief Financial Officer at two SunLink
hospitals, Chestatee Regional Hospital in Dahlonega, Georgia and Missouri Southern Healthcare in
Dexter, Missouri, from September 2003 to August 2006.
Peter Stanos served as Regional Director Clinical Operations, Utah Market of IAS from July
2002 until April 2003. Mr. Stanos was appointed Vice President, Ethics & Business Practices of IAS
in April 2003. He was appointed Vice President, Ethics & Business Practices of IASIS upon
consummation of the Transactions. From May 2000 until July 2002, Mr. Stanos was employed by
Province Healthcare Corporation as Chief Quality Officer of Havasu Regional Medical Center and as
Regional Director of Quality and Resource Management. From 1997 until 2000, Mr. Stanos was employed
by HCA and Triad Hospitals, Inc. as an Associate Administrator and Director of Quality and Resource
Management, Materials, Pharmacy and Risk Management. Prior to joining HCA, Mr. Stanos served as
Regional Director of several healthcare companies, as well as an independent healthcare consultant.
Carolyn Rose has served as Chief Executive Officer of Health Choice since 1999. From 1983 to
1999, Ms. Rose held a number of senior management positions in the managed health care industry.
Ms. Rose served as Executive Director/CEO for several large indigent practice associations as well
as serving as a principal and partner in a consulting firm specializing in managed care and
hospital consolidations.
Jonathan J. Coslet became a Director of IAS upon the consummation of the Transactions. Mr.
Coslet is a Senior Partner of TPG. Mr. Coslet is also a member of the firms Investment Committee and Management
Committee. Prior to joining TPG in 1993, Mr. Coslet was in the Investment Banking Department of
Donaldson, Lufkin & Jenrette, specializing in leveraged acquisitions and high yield finance from
1991 to 1993. Mr. Coslet serves on the boards of directors of The Neiman
Marcus Group, Inc., PETCO Animal Supplies, Inc., Biomet, Inc., Quintiles Transnational Corp. and
Harrahs Entertainment.
David Dupree became a director of IAS in April 2007. Mr. Dupree has been Managing Director and
Chief Executive Officer of The Halifax Group since 1999. Prior to co-founding Halifax, Mr. Dupree
was a managing director and partner with The Carlyle Group, where he was primarily responsible for
investments in healthcare and related sectors. Prior to joining The Carlyle Group in 1992, Mr.
Dupree was a principal in corporate finance with Montgomery Securities. Mr. Dupree also serves as a
director emeritus of Whole Foods Market, Inc., a natural and organic foods supermarket company.
106
Kirk E. Gorman was appointed a Director of IAS in August 2004. Mr. Gorman currently serves as
Senior Vice President and Chief Financial Officer of Jefferson Health System, a not-for-profit
health system based in Radnor, Pennsylvania, which he joined in October 2003. Prior to joining
Jefferson Health System, Mr. Gorman served as Senior Vice President and Chief Financial Officer of
Universal Health Services, Inc., a public hospital company based in Pennsylvania, from 1987 to
February 2003. Mr. Gorman also has 13 years of experience in the banking industry and served as
Senior Vice President of Mellon Bank prior to his work in the healthcare industry. Mr. Gorman
serves as a director of Cardionet Inc., the leading provider of mobile cardiac outpatient
telemetry.
Curtis S. Lane became a Director of IAS upon the consummation of the Transactions. Mr. Lane is
a Senior Managing Director of MTS Health Partners, L.P., a merchant banking firm focused on
healthcare advisory and investment opportunities. Prior to forming MTS Health Partners, L.P. in
2000, Mr. Lane founded and managed the healthcare investment banking group at Bear, Stearns & Co.
Inc. from its inception in 1986 until 1998. Mr. Lane is also on the board of Alliance HealthCare
Services, Inc., a leading national provider of outpatient diagnostic imaging services.
Todd B. Sisitsky became a Director of IAS upon the consummation of the Transactions. Mr.
Sisitsky is a partner of TPG Capital, L.P. where he leads the firms investment activities in the
healthcare services, pharmaceutical and medical device sectors. In addition to IASIS, he played key
roles in connection with TPGs investments in Axcan Pharma, Biomet, Inc., Fenwal Transfusion
Therapies and Surgical Care Affiliates, LLC and serves on the board of directors of each of these
companies. Prior to joining TPG in 2003, Mr. Sisitsky worked at Forstmann Little & Company and Oak
Hill Capital Partners.
Paul S. Levy has been a Director of IAS since October 1999. Mr. Levy is a Senior Managing
Director of JLL Partners, Inc., which he founded in 1988. Mr. Levy serves as a director of several
companies, including Builders FirstSource, Inc., FC Holdings, Inc., Patheon Inc., PGT Inc. and Pharmanet Development Group, Inc.
Jeffrey C. Lightcap has been a Director of IAS since October 1999. Since October 2006, Mr.
Lightcap has been a Senior Managing Director of HealthCor Group. Prior to joining HealthCor Group,
Mr. Lightcap was a Senior Managing Director at JLL Partners, which he joined in June 1997. From
February 1993 to May 1997, Mr. Lightcap was a managing director at Merrill Lynch & Co., Inc., where
he was the head of leveraged buyout firm coverage for the mergers and acquisitions group.
Sharad Mansukani became a Director of IAS in April 2005. Dr. Mansukani serves as a senior
advisor of TPG, and serves on the faculty at both the University of Pennsylvania and Temple
University School of Medicine. Dr. Mansukani is also Chief Strategic Officer for NationsHealth,
Inc., a supplier of prescription drugs. Dr. Mansukani previously served as a senior advisor to the
Administrator of CMS from 2003 to 2005, and as Senior Vice President and Chief Medical Officer of
Health Partners, a non-profit Medicaid and Medicare health plan owned at the time by
Philadelphia-area hospitals. Dr. Mansukani completed a residency and fellowship in ophthalmology at
the University of Pennsylvania School of Medicine and a fellowship in quality management and
managed care at the Wharton School of Business. Dr. Mansukani also serves as a director of
Healthspring, Inc.
The certificate of incorporation and by-laws of IAS provide that its board of directors will
consist of not less than three nor more than 15 members, the exact number of which shall be
determined by the board of directors in a resolution. The directors are elected at the annual
meeting of stockholders for one-year terms and until their successors are duly elected and
qualified. The executive officers serve at the discretion of the board of directors.
Pursuant to the limited liability company operating agreement of IASIS Investment, JLL is
entitled to nominate two directors to IAS board of directors. TPG is entitled to nominate the
remaining directors. Messrs. Levy and Lightcap serve on IAS board of directors as designees of
JLL. The remaining directors serve as designees of TPG.
Audit Committee Financial Expert
The current members of our audit committee are Messrs. Lane, Sisitsky, Lightcap and Gorman.
IAS board of directors has determined that Todd Sisitsky is an audit committee financial expert
as that term is defined in Item 401(h) of Regulation S-K promulgated by the SEC.
107
Code of Ethics
We have adopted a code of ethics for our principal executive officer, principal financial
officer, principal accounting officer, controller and persons performing similar functions, which
is Exhibit 14 to this annual report on Form 10-K and which also has been posted on our Internet
website at www.iasishealthcare.com. Please note that our Internet website address is provided as an
inactive textual reference only. We will make any legally required disclosures regarding amendments
to, or waivers of, provisions of our code of ethics on our Internet website.
Item 11. Executive Compensation.
COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
On June 22, 2004, an investor group led by TPG acquired IAS through a merger. In order to
effect the acquisition, the investor group established IASIS Investment LLC (IASIS Investment),
and a wholly owned subsidiary of IASIS Investment, which merged with and into IAS. In the merger,
IAS issued shares of common and preferred stock to IASIS Investment, which is the sole stockholder
of IAS after giving effect to the merger. Prior to the merger, IAS contributed substantially all of
its assets and liabilities to IASIS in exchange for all of the equity interests in IASIS. As a
result, IAS is a holding company, IASIS is a limited liability company consisting of 100% common
interests owned by IAS and IASs operations are conducted by IASIS and its subsidiaries. We refer
to the merger, the related financing transactions and the applications of the proceeds from the
financing transactions as the Transactions.
As discussed in more detail below, various aspects of named executive officer compensation
were negotiated and determined at the time of the Transactions. In addition, since the equity of
our company is owned entirely by a group of sophisticated investment funds who also control our
board of directors, our compensation structure is largely driven by these investment funds that
rely heavily upon their experience and expertise. Our Compensation Committee (the Committee) is
made up of three individuals, our Chief Executive Officer, two directors of IAS, one of whom serves
as a representative of JLL Partners and one of whom is a partner in the TPG group who represents
our equity investors and chairs the Committee.
The Committees compensation philosophy is to align the interests of the executive officers
with those of the investors while encouraging long-term executive retention. Furthermore, the
Committee believes that our ability to grow and be successful in the long-term is enhanced by a
comprehensive compensation program that includes different types of incentives for attracting,
motivating and retaining executives and rewarding outstanding service, including awards that link
compensation to applicable performance measures. Under the Committees direction and supervision,
we have developed and implemented compensation policies, plans and programs designed to enhance the
quality of healthcare services delivered by our hospitals and increase investor value by closely
aligning the financial interests of our named executive officers with those of our investors.
As discussed in more detail in the following pages, the compensation structure utilizes not
only base salary to compensate our executives competitively, but also heavily relies on annual and
long-term incentive compensation to attract and retain highly qualified executives and motivate
them to perform to the best of their abilities. In years of outstanding achievement, the Committee
believes that our named executive officers should be properly rewarded for their respective
contributions to our success through a combination of incentive-based cash and equity-based awards.
The Executive Compensation Process
The Compensation Committee
The Committee oversees our executive compensation program. The Committees responsibilities
include, but are not limited to, the following:
|
|
|
Reviewing and approving our compensation philosophy; |
|
|
|
|
Determining executive compensation levels; |
|
|
|
|
Annually reviewing and assessing performance goals and objectives for all
executive officers, with particular emphasis with respect to the Chief Executive
Officer, the Chief Operating Officer and the Chief Financial Officer; and |
|
|
|
|
Determining short-term and long-term incentive compensation for all executive
officers with particular emphasis with respect to the Chief Executive Officer, the Chief
Operating Officer and the Chief Financial Officer.
|
108
Mr. Coslet, the TPG partner on the Committee, makes all decisions with respect to the
compensation of Mr. White, the Chief Executive Officer. Annually, the non-executive directors of
the board of directors evaluate the performance of the Chief Executive Officer and that evaluation
is then communicated to the Chief Executive Officer by Mr. Coslet. Mr. White recommends to Mr.
Coslet compensation decisions for Ms. McRee and Mr. Whitmer, our President and Chief Operating
Officer and our Chief Financial Officer, respectively. Mr. White and Mr. Coslet discuss these
recommendations in detail before reaching a final decision. With respect to the other named
executive officers, Mr. White is generally responsible for conducting reviews and making
compensation decisions.
During our fiscal year ended September 30, 2009, the Committee did not rely on the advice or
reports of any external compensation consultant in making compensation decisions. As TPG has
substantial experience and expertise in executive compensation and in some cases internally employs
compensation experts, the Committee may from time to time rely upon such experience, expertise and
experts.
Our Chief Executive Officer, David R. White, a member of the board of directors of IAS, is
also a member of the Committee and, as discussed above, plays an important role in many
compensation decisions. Other named executive officers also attend the Committee meetings and
participate only as and if required by the Committee. As discussed above, Mr. White does not
participate on behalf of the Committee or the board of directors in decisions regarding his own
compensation. Any discussion by the Committee regarding compensation for Mr. White or other named
executive officers is conducted by the Committee in executive session without such persons in
attendance.
Benchmarking Process
The Committees process for determining executive compensation is straightforward and, in
part, involves consideration of the highly competitive market for executives in the healthcare
industry, including review of compensation levels of comparable companies. Management prepares for
the Committee informal schedules that compare our cash compensation to the cash compensation
offered by certain comparable companies in the acute hospital industry that file such information
with the SEC. These comparisons are part of the total mix of information used to annually evaluate
base salary, short-term incentive compensation and total cash compensation. The Committee may also,
from time to time, rely on analysis performed by TPG that compares the compensation of our
executive officers with that of other portfolio companies or private equity backed companies in
general. Since one of the objectives of our compensation program is to consistently reward and
retain top performers, compensation will also vary depending on individual and company performance.
Pay for Performance
The Company emphasizes aligning compensation with performance. With respect to our named
executive officers, the primary factor that is utilized in structuring annual compensation,
including payouts under the short-term incentive plan, is Adjusted EBITDA (as such term is defined
in Note 16 to our consolidated financial statements) compared to our company budget for the
previous year. Other factors that may in the Committees discretion be considered in certain years
include:
|
|
|
Adjusted EBITDA year over year growth; |
|
|
|
|
Free cash flow; |
|
|
|
|
Return on invested capital; |
|
|
|
|
Peer group comparisons including comparisons of net revenue growth, expense
margins and return on capital; |
109
|
|
|
Individual, company or division performance including certain core performance
measures; |
|
|
|
|
Promotion of an effective, company-wide program that fosters a culture of legal
compliance; and |
|
|
|
|
Response to unusual or extreme events. |
Another component of the Companys pay for performance compensation philosophy is the
significant equity holdings of the named executive officers. Messrs. White and Whitmer and Ms.
McRee were granted common stock options at the time of the Transactions and also rolled over
equity, of which the common rollover options remain outstanding. On April 27, 2007, in connection
with a refinancing and recapitalization transaction, $300.0 million in PIK Loans were issued by IAS
in order to repurchase certain preferred equity from its stockholders based upon accreted per share
value. This refinancing and recapitalization transaction was nearly three years after the
Transactions and constituted a return on capital event for the preferred equity holders.
Accordingly, Messrs. White and Whitmer and Ms. McRees rollover options on preferred stock were
canceled in exchange for a cash payment equal to the excess of the accreted per share value of the
preferred stock over the exercise price of such options.
Internal Pay Equity
Internal pay equity is not a material factor with respect to the Committees compensation
decisions. The Committee believes that the variation in compensation among the named executive
officers is reasonable in light of each executives experience, contribution and importance to the
Company.
Components of the Executive Compensation Program
Employment Agreements
During the process of completing the Transactions, TPG and the other equity investors entered
into negotiations regarding employment agreements with Mr. White, Ms. McRee and Mr. Whitmer. The
employment agreements that resulted were heavily negotiated and were largely influenced by the
experience and expertise of TPG and the other equity holders as well as the executives previous
performance and familiarity with the business. The resulting employment agreements established the
foundation of the Companys compensation structure with respect to Mr. White, Ms. McRee and Mr.
Whitmer. Ms. Rose entered into an agreement for severance benefits and restrictive convenants upon
being hired by IASIS in March 2001. Mr. Coyle does not have an employment agreement.
Base Salary
Base salary represents the fixed component of our named executive officers compensation and
is intended to compensate the executive for competence in the executive role. The Committee
attempts to maintain base salaries at competitive levels while also reserving a substantial portion
of compensation for the other compensation elements that are directly related to company
performance.
The Committee annually reviews and adjusts base salaries of the Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer. Mr. White approves all base salary increases for Mr.
Coyle and Ms. Rose with the input of Mr. Whitmer as it relates to Ms. Rose. Any base salary
increase during this annual process is generally intended to compensate the executive for
exceptional performance or contributions, cost of living increases, changes in responsibility, and
changes in the competitive landscape. Base salaries may also be adjusted at any time during the
year if Mr. Coslet, the Committee, or Mr. White, as relevant, finds it necessary or advisable to
maintain a competitive level or to compensate an individual for increased responsibility. Mr. White
did not receive a base compensation increase during the year. Effective January 1, 2009, Ms. McRee
and Mr. Whitmer each received base compensation increases of 2.5%. Mr. Coyle received an increase
of .07% and Ms. Rose received an increase of 2.1%. The 2.5% increases granted to each of Ms. McRee
and Mr. Whitmer were determined by the Committee to represent
the cost of living adjustment necessary for the executives base salaries to remain
competitive and to reflect a reasonable increase given the executives continued performance. Mr.
White approved the .07% increase granted to Mr. Coyle to reflect a cost of living adjustment. Mr.
White approved the 2.1% increase granted to Ms. Rose to reflect a cost of living adjustment and
after taking into consideration her continued performance.
110
Short-Term Incentive Compensation
Our named executive officers have the opportunity to earn cash incentive awards based upon the
level of achievement of financial performance metrics. The range of potential payouts for Mr.
White, Ms. McRee and Mr. Whitmer are set forth in their employment agreements and, as discussed
above, were highly negotiated during the Transactions. Mr. Coyle and Ms. Rose have only target
bonus levels that have been approved by Mr. White as representing a competitive level and
significantly aligning the interests of these executive officers with those of the investors.
Before the end of the first quarter of the relevant fiscal year, the Company, with the input
of members of the board of directors and the investors, establishes target levels for Adjusted
EBITDA (as such term is defined in Note 16 to our consolidated financial statements) and other
operating metrics such as free cash flow that are used both for compensation and budgeting
purposes. Our performance during the year versus the Adjusted EBITDA target levels is the primary
factor in calculating the short-term incentive compensation paid to the named executive officers.
The Committee has chosen Adjusted EBITDA as the primary financial metric used to calculate short
term incentive compensation payouts because it believes it provides an effective measure of our
companys financial health and the creation of long-term equity value.
Annual incentive target awards to our named executive officers vary depending on the Companys
performance against the target levels for Adjusted EBITDA and other operating metrics, as follows:
Annual Incentive Target Award Ranges (as a Percentage of Base Salary) for Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Threshold |
|
|
Target |
|
|
Maximum |
|
David R. White |
|
|
20 |
% |
|
|
100 |
% |
|
|
200 |
% |
Sandra K. McRee |
|
|
10 |
% |
|
|
50 |
% |
|
|
100 |
% |
W. Carl Whitmer |
|
|
10 |
% |
|
|
50 |
% |
|
|
100 |
% |
Frank A. Coyle |
|
|
|
|
|
|
35 |
% |
|
|
35 |
% |
Carolyn Rose |
|
|
|
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|
50 |
% |
|
|
75 |
% |
While the primary factor in calculating short-term incentive compensation payouts for Mr.
White, Ms. McRee and Mr. Whitmer is Adjusted EBITDA, Mr. Coslet or the Committee, as relevant, may
consider, in its discretion, other factors in awarding annual incentive compensation to these
individuals, including:
|
|
|
Adjusted EBITDA year over year growth; |
|
|
|
|
Free cash flow; |
|
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|
|
Return on invested capital; |
|
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|
Peer group comparisons including comparisons of net revenue growth, expense
margins and return on capital; |
|
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|
Individual, company or division performance including certain core performance
measures; |
|
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|
|
Promotion of an effective, company-wide program that fosters a culture of legal
compliance; and |
|
|
|
|
Response to unusual or extreme events. |
While the primary factor in calculating short-term incentive compensation payouts for Mr.
Coyle and Ms. Rose is also Adjusted EBITDA and the awards are generally either paid or not paid based
upon meeting the budgeted level, Mr. White, Ms. McRee and Mr. Whitmer may consider quality and
customer service metrics, cash collections, certain operational and individual goals, as well as
any of the factors listed above, in either adjusting the level of payout or whether a payout is
made.
111
In fiscal 2009, the Adjusted EBITDA target was the primary factor considered in awarding
payment under the short-term incentive plan to the named executive officers. However, Mr. Coslet
and the Committee, as relevant, also considered individual achievements, our companys free cash
flow financial performance to budget and the companys overall financial performance compared to
peer companies. As a result of the Company exceeding target levels for Adjusted EBITDA, free cash
flow and other factors, the Committee granted awards at the maximum levels to Mr. White, Ms. McRee
and Mr. Whitmer. The payment to Mr. Coyle under the short-term incentive plan was consistent with
the target incentive compensation level. The Committee granted an award to Ms. Rose based on
exceeding the targets and goals set for Health Choice.
Long-Term Incentive Compensation
Our executive officer compensation has a substantial equity component as we believe superior
equity investors returns are achieved through a culture that focuses on long-term performance by
our named executive officers and other key associates. By providing our executives with an equity
stake in the Company, we are better able to align the interests of our named executive officers and
our equity holders. As discussed above, at the time of the Transactions, Mr. White, Ms. McRee and
Mr. Whitmer each received common stock options granted under the 2004 Option Plan and rolled over
certain equity into fully vested preferred and common stock options. The preferred stock options
were cashed out during fiscal 2007 in conjunction with the equity repurchase from the proceeds of
the PIK loans which provided the named executive officers some return on their otherwise illiquid
equity holdings in our company.
IAS also maintains the IAS 2004 Stock Option Plan and from time to time may grant additional
options to the named executive officers pursuant to this plan. In making long-term equity incentive
grants to the named executive officers, certain factors are considered, including but not limited
to, the present ownership levels of the named executive officers and the level of the executives
total compensation package compared to peer companies. It is the responsibility of Mr. Coslet to
recommend grants to the Committee for Mr. White, Mr. White to recommend grants to the Committee for
Ms. McRee and Mr. Whitmer, and Mr. White, Ms. McRee or Mr. Whitmer to recommend grants to the
Committee for Mr. Coyle and Ms. Rose. There were grants made to all the named executive officers
in fiscal 2009. Mr. White was granted 11,500 options. Ms. McRee and Mr. Whitmer were both granted
5,500 options. Mr. Coyle was granted 5,000 options and Ms. Rose was granted 11,600 options.
Generally, the exercise price of an option grant is set at the fair market value of a share of
the common stock as of the grant date, as determined by the IAS board of directors in good faith
and, as necessary, supplemented and supported by an independent third party valuation. We have no
formal practices regarding the timing of option grants.
Due to our current equity structure, an optionee is expected at the time of grant to enter
into an agreement that will generally provide that for the 90-day period following the later of (i)
a termination of employment or (ii) six months and one day following the date that shares of common
stock were acquired pursuant to the exercise of the option, we have the right to repurchase each
share then owned by the participant at fair value, as determined in good faith by the IAS board of
directors.
Non-qualified Executive Savings Plan
We provide certain of our employees a non-qualified executive savings plan. The plan is a
voluntary, tax-deferred savings vehicle that is available to those employees earning a minimum base
salary ($110,000 in 2009). The executive savings plan was implemented in order to assist in the
recruitment and retention of key executives by providing the ability to defer additional pre-tax
compensation in excess of the limits allowed by the Companys 401(k) plan.
112
An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) plan in
order to participate in the non-qualified executive savings plan. There are two types of deferrals
available under the plan: excess deferrals and additional deferrals. Excess deferrals are
contributions that are deposited into the non-qualified executive savings plan because either (a)
the participants earnings have exceeded $245,000 and/or (b) the participants deferrals into the
401(k) plan have reached a dollar limit stipulated by the IRS ($16,500 in 2009). Excess deferrals
are automatically deposited into the nonqualified executive savings plan if these limits are
reached. Employed physician excess deferrals are not matched. Executive excess deferrals are
matched at the same rate as contributions to the 401(k) plan. There is a five-year service
requirement for participants to vest in the IASIS excess matching contributions. Currently, only
one of the named executive officers, Frank A. Coyle, participates in the plan and the companys
matching contribution with respect to his excess deferrals was $857 in fiscal 2009.
Additional deferrals are contributions to the non-qualified executive savings plan that are
independent of a participants
401(k) contribution election. These contributions are voluntary and
are capped according to applicable IRS guidelines for such a plan.
The non-qualified executive savings plan offers a range of investment options that act as
benchmark funds. Benchmark funds are defined as the investment fund or funds used to represent
the performance and current deemed balance of a participants non-qualified account, which is
considered a notional deferred compensation account. Contributions become part of our general
assets. Investment options under the non-qualified executive savings plan are the same as those
available under the IASIS 401(k) plan.
Severance and Change in Control Agreements
Messrs. White and Whitmer and Ms. McRee entered into employment agreements in connection with
the Transactions, which agreements provide, among other things, for each executives rights upon a
termination of employment. Ms. Rose entered into an agreement for severance benefits and
restrictive covenants in March 2001, which provides for her rights upon a termination of
employment. We believe that reasonable and appropriate severance and change in control benefits are
appropriate in order to be competitive in our executive retention efforts. In agreeing to these
benefits, the board of directors recognized that it may be difficult for such executives to find
comparable employment within a short period of time. In addition, the board of directors recognized
that formalized severance and change in control arrangements are common benefits offered by
employers competing for similar senior executive talent. For example, the tax gross-up feature of
Mr. Whites employment agreement was included because it was commonly offered by our peer companies
as part of their executive compensation upon termination of employment. Finally, while Mr. White
and Ms. McRee can unilaterally trigger their severance provisions by submitting their resignations
within twelve months following a change in control, these provisions were specifically negotiated
by Mr. White and Ms. McRee and the board of directors ultimately determined they were reasonable
given the importance of the executives to the company. Information regarding applicable payments
under such agreements for the named executive officers is provided under Narrative Disclosure to
Summary Compensation Table and Grants of Plan-Based Awards Table and Potential Payments Upon
Termination or Change in Control.
Perquisites
From time to time we agree to provide certain executives with perquisites. We provide these
perquisites on a limited basis in order to attract key talent and to enhance business efficiency.
We believe these perquisites are in line with market practice. For fiscal 2009, we provided the
named executive officers with the following perquisite:
Group term life insurance premiums. We paid insurance premiums with respect to group term life
insurance for the named executive officers.
The cost incurred for this perquisite is detailed in the footnotes to the Summary Compensation
Table.
113
Impact of Tax and Accounting Rules
The forms of our executive compensation are largely dictated by our capital structure and have
not been designed to achieve any particular accounting treatment. We do take tax considerations
into account, both to avoid tax disadvantages, and obtain tax advantages where reasonably possible
consistent with our compensation goals. Certain tax advantages for our executives benefit us by
reducing the overall compensation we must pay to provide the same after-tax income to our
executives. Thus, our severance pay plans are designed to take account of and avoid parachute
excise taxes under Section 280G of the Internal Revenue Code. Since we currently have no publicly
traded equity interests, we are not currently subject to the $1,000,000 limitation on deductions
for certain executive compensation under Section 162(m) of the Internal Revenue Code, though that
rule will be considered if our equity interests become publicly traded. Incentives paid to
executives under our annual incentive plan are taxable at the time paid to our executives.
The expenses associated with the stock options issued by IAS to executive officers and other
key employees are reflected in our consolidated financial statements. In the first quarter of the
fiscal year ended September 30, 2007, we began accounting for these stock-based payments in
accordance with the new requirements of FASB authoritative guidance
regarding accounting for share-based payments, which requires all share-based payments to employees, including grants of employee stock
options, to be recognized as expense in the consolidated financial statements based on their fair
values.
We
previously accounted for these awards under the former provisions of
FASB authoritative guidance regarding accounting for stock based
compensation, which allowed us to estimate the fair value of options using the minimum
value method.
Recovery of Certain Awards
We do not have a formal policy for recovery of annual incentives paid on the basis of
financial results which are subsequently restated. Under the Sarbanes-Oxley Act, our Chief
Executive Officer and Chief Financial Officer must forfeit incentive compensation paid on the basis
of previously issued financial statements for which they were responsible and which have to be
restated due to such officers actions. If the situation arises, we would consider our course of
action in light of the particular facts and circumstances, including the culpability of the
individuals involved.
Compensation Committee Conclusion
The Committees philosophy for executive pay for fiscal 2009 was intended to reflect the
unique attributes of our company and each employee individually in the context of our pay
positioning policies, emphasizing an overall analysis of the executives performance for the prior
year, projected role and responsibilities, required impact on execution of our strategy,
vulnerability to recruitment by other companies, external pay practices, total cash compensation
and equity positioning internally, current equity holdings, and other factors the Committee deemed
appropriate. We believe our approach to executive compensation emphasized significant time and
performance-based elements intended to promote long term investor value and strongly aligned the
interests of our executive officers with those of investors.
Compensation Committee Report
The Committee has reviewed and discussed the Compensation Discussion and Analysis with
management. Based upon the review and discussions, the Committee directed that the Compensation
Discussion and Analysis be included in this annual report on Form 10-K.
|
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Compensation Committee: |
|
|
|
|
|
Jonathan J. Coslet |
|
|
David R. White |
|
|
Jeffrey C. Lightcap |
114
Summary Compensation Table Fiscal 2009
The following table sets forth, for the fiscal year ended September 30, 2009, the compensation
earned by the Principal Executive Officer and Principal Financial Officer and our other three most
highly compensated executive officers during 2009. We refer to these persons as our named executive
officers. For 2009, Salary accounted for approximately 45% of the total compensation of the named
executives, Bonus accounted for approximately 54% of total compensation, and all other
compensation accounted for approximately 1% of total compensation. There are no above-market or
preferential earnings on deferred compensation. Consequently, the table does not include earnings
on deferred amounts. None of the named executive officers is eligible for pension benefits as we do
not have a defined benefit program.
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Change in |
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Pension Value |
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and |
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Non-Equity |
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Nonqualified |
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Option |
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Incentive Plan |
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Deferred |
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All Other |
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Name and Principal |
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Salary |
|
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Bonus |
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Awards |
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Compensation |
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Compensation |
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Compensation |
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Position |
|
Year |
|
|
($) |
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|
($)(1) |
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|
($)(2) |
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($)(3) |
|
|
Earnings ($) |
|
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($) (4) |
|
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Total ($) |
|
David R. White |
|
|
|
|
|
|
|
|
|
|
|
|
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Chairman of the Board &
Chief Executive
Officer |
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|
2009 |
|
|
|
808,500 |
|
|
|
|
|
|
|
16,374 |
|
|
|
1,617,000 |
|
|
|
|
|
|
|
9,628 |
|
|
|
2,451,502 |
|
|
|
|
2008 |
|
|
|
808,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,474 |
|
|
|
817,974 |
|
|
|
|
2007 |
|
|
|
786,042 |
|
|
|
1,000,000 |
|
|
|
|
|
|
|
1,169,063 |
|
|
|
|
|
|
|
1,164,462 |
|
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|
4,119,567 |
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Sandra K. McRee |
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
President and Chief
Operating Officer |
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|
2009 |
|
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|
600,000 |
|
|
|
|
|
|
|
6,264 |
|
|
|
600,000 |
|
|
|
|
|
|
|
7,242 |
|
|
|
1,213,506 |
|
|
|
|
2008 |
|
|
|
585,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,142 |
|
|
|
593,277 |
|
|
|
|
2007 |
|
|
|
525,525 |
|
|
|
800,000 |
|
|
|
|
|
|
|
525,525 |
|
|
|
|
|
|
|
853,940 |
|
|
|
2,704,990 |
|
|
W. Carl Whitmer |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Chief Financial Officer |
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|
2009 |
|
|
|
534,871 |
|
|
|
|
|
|
|
6,264 |
|
|
|
534,871 |
|
|
|
|
|
|
|
7,879 |
|
|
|
1,083,885 |
|
|
|
|
2008 |
|
|
|
521,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,638 |
|
|
|
530,258 |
|
|
|
|
2007 |
|
|
|
468,481 |
|
|
|
800,000 |
|
|
|
|
|
|
|
468,481 |
|
|
|
|
|
|
|
679,394 |
|
|
|
2,416,356 |
|
|
Frank A. Coyle |
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Secretary and General
Counsel |
|
|
2009 |
|
|
|
339,570 |
|
|
|
|
|
|
|
5,693 |
|
|
|
118,850 |
|
|
|
|
|
|
|
7,596 |
|
|
|
471,709 |
|
|
|
|
2008 |
|
|
|
337,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,098 |
|
|
|
344,195 |
|
|
|
|
2007 |
|
|
|
327,276 |
|
|
|
150,000 |
|
|
|
|
|
|
|
114,547 |
|
|
|
|
|
|
|
117,024 |
|
|
|
708,847 |
|
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Carolyn Rose |
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Chief Executive Officer
Health Choice |
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2009 |
|
|
|
245,000 |
|
|
|
|
|
|
|
13,208 |
|
|
|
158,400 |
|
|
|
|
|
|
|
8,498 |
|
|
|
425,106 |
|
|
|
|
2008 |
|
|
|
240,000 |
|
|
|
|
|
|
|
|
|
|
|
236,250 |
|
|
|
|
|
|
|
9,551 |
|
|
|
485,801 |
|
|
|
|
1. |
|
In connection with the refinancing and recapitalization transaction, certain executive
officers, including the named executive officers, received, in recognition of their efforts
associated with the increase in equity value of the Company since the Transactions, a special
compensation bonus. The named executive officers respective bonus is represented in this
column. |
|
2. |
|
Represents the proportionate amount of the total value of option awards recognized as an
expense during fiscal 2009 for financial accounting purposes under
the provision of FASB authoritative guidance
regarding accounting for share-based payments, disregarding
for this purpose estimated forfeitures related to service-based vesting conditions.
Compensation expense is equal to the grant date fair value of the options estimated using the
Black-Scholes-Merton model as amortized over the requisite service periods. See Note 2 to our
consolidated financial statements, Significant Accounting Policies for additional
information. |
|
3. |
|
Represents compensation for 2009 to the named executive officers made pursuant to the
Companys short-term incentive bonus plan. |
|
4. |
|
All other compensation in the Summary Compensation Table for fiscal 2009 consisted of the
following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David R. |
|
|
Sandra K. |
|
|
W. Carl |
|
|
Frank A. |
|
|
Carolyn |
|
|
|
White |
|
|
McRee |
|
|
Whitmer |
|
|
Coyle |
|
|
Rose |
|
|
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|
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|
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|
|
|
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|
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|
|
|
|
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|
|
Matching contributions (i) |
|
$ |
6,064 |
|
|
$ |
6,000 |
|
|
$ |
7,136 |
|
|
$ |
7,118 |
|
|
$ |
7,088 |
|
Group term life insurance premiums (ii) |
|
|
3,564 |
|
|
|
1,242 |
|
|
|
743 |
|
|
|
478 |
|
|
|
1,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
9,628 |
|
|
$ |
7,242 |
|
|
$ |
7,879 |
|
|
$ |
7,596 |
|
|
$ |
8,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
Represents total company contributions to each named executive officers accounts in the
IASIS 401(k) plan. With respect to Mr. Coyle, amount also includes $857 in company contributions to his
account in the companys non-qualified executive savings plan. |
|
(ii) |
|
Represents insurance premiums paid by our company with respect to group term life insurance
for the named executive officer. |
115
Grants of Plan-Based Awards in Fiscal Year 2009
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) |
|
|
|
Threshold |
|
|
Target |
|
|
Maximum |
|
Name of Executive |
|
($) |
|
|
($) |
|
|
($) |
|
David R White |
|
|
161,700 |
|
|
|
808,500 |
|
|
|
1,617,000 |
|
Sandra K. McRee |
|
|
60,000 |
|
|
|
300,000 |
|
|
|
600,000 |
|
W. Carl Whitmer |
|
|
53,487 |
|
|
|
267,436 |
|
|
|
534,871 |
|
Frank A. Coyle |
|
|
|
|
|
|
118,850 |
|
|
|
118,850 |
|
Carolyn Rose |
|
|
|
|
|
|
122,500 |
|
|
|
183,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under Equity Incentive Plan Awards |
|
|
|
All Other Option |
|
|
|
|
|
|
|
|
|
|
Awards: Number of |
|
|
|
|
|
|
Grant date fair |
|
|
|
Securities Underlying |
|
|
Exercise or Base Price |
|
|
value of stock and |
|
|
|
Options |
|
|
of Option Awards |
|
|
option awards |
|
Name of Executive |
|
(#) |
|
|
($/Sh) |
|
|
($) |
|
David R White |
|
|
11,500 |
|
|
|
34.75 |
|
|
|
78,131 |
|
Sandra K. McRee |
|
|
5,500 |
|
|
|
34.75 |
|
|
|
37,367 |
|
W. Carl Whitmer |
|
|
5,500 |
|
|
|
34.75 |
|
|
|
37,367 |
|
Frank A. Coyle |
|
|
5,000 |
|
|
|
34.75 |
|
|
|
33,970 |
|
Carolyn Rose |
|
|
11,600 |
|
|
|
34.75 |
|
|
|
78,810 |
|
|
|
|
1. |
|
Awards made under the 2009 Short Term Incentive Plan. |
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreements
On May 4, 2004, we entered into five-year employment agreements with Mr. White, Ms. McRee and
Mr. Whitmer that commenced upon the consummation of the Transactions. Mr. White is entitled to
receive an annual target bonus of up to 100% of his base salary and an annual maximum bonus of up
to 200% of his base salary based upon the achievement of certain performance objectives set
annually by the IAS board of directors. Ms. McRee and Mr. Whitmer also are entitled to receive an
annual target bonus of up to 50% of their base salaries and an annual maximum bonus of up to 100%
of their base salaries based upon the achievement of certain performance objectives set annually by
the IAS board of directors. The base salaries of Mr. White, Ms. McRee and Mr. Whitmer have been
increased over time from the initial amounts set forth in such agreements pursuant to the process
discussed below.
On March 1, 2001, we entered into an agreement for severance benefits and restrictive
covenants with Ms. Rose. Although Ms. Roses agreement does not provide for an initial base salary,
it does provide for amounts to be paid to her upon certain termination events. Ms. Rose is also
entitled to participate in a short-term compensation program on similar terms to the other
executive officers and as described below.
The 2004 Stock Option Plan
All outstanding options were granted pursuant to the IAS 2004 Stock Option Plan. Generally,
the exercise price of the options will equal the fair market value of a share of the common stock
as of the grant date as determined by the IAS board of directors. Upon a change in control, the
options will become 100% vested if the participants employment is terminated without cause or by
the participant for good reason within the 2-year period immediately following such change in
control. On a termination of a participants employment outside the change in control context,
unvested options automatically expire and vested options expire on the earlier of (i) the
commencement of business on the date the employment is terminated for cause; (ii) 90 days after
the date employment is terminated for any reason other than cause, death or disability; (iii) one
year after the date employment is terminated by reason of death or disability; or (iv) the 10th
anniversary of the grant date for such option.
116
In connection with the plan, each participant is expected to enter into an agreement that will
generally provide that for the 90-day period following the later of (i) a termination of employment
or (ii) six months and one day following the date that shares of common stock were acquired
pursuant to the exercise of the option, we have the right to repurchase each share then owned by
the participant at fair value, as determined in good faith by the IAS board of directors.
The maximum number of shares of IAS common stock that may be issued pursuant to options
granted under the plan is 2,340,650; provided, however, that on each anniversary of the closing of
the Transactions prior to an initial public offering, an additional 146,000 shares of common stock
will be available for grant.
The terms and conditions applicable to options are set forth by the Committee in each
individual option agreement. However, no option granted under this plan may expire later than ten
years from its date of grant. In addition, the Committee may not grant incentive stock options to
any person who is not our employee on the date of the grant, and the exercise price of an incentive
stock option cannot be less than the fair market value of a share of IAS common stock on the date
of its grant. The exercise price of an incentive stock option granted to a stockholder who owns at
the time of the grant shares of IAS common stock with more than 10% of the total combined voting
power of all classes of IAS capital stock cannot be less than 110% of the fair market value of a
share of IAS common stock on the date of the grant and the exercise period shall not exceed five
years from the date of the grant. Furthermore, the aggregate fair market value of the shares of IAS
common stock for which incentive stock options granted under this plan or any other stock option
plan, determined as of the date of grant, that become exercisable for the first time by any person
during any calendar year may not exceed $100,000. Any incentive stock options granted in excess of
this limitation will be treated for all purposes as non-qualified stock options. As of September
30, 2009, we had no incentive stock options outstanding under the 2004 Stock Option Plan.
The IAS board of directors may amend this plan at any time for any reason subject to the
stockholders approval to the extent necessary to meet the requirements of applicable law. However,
no amendment can adversely affect an optionees right under a previously granted option without the
consent of the optionee. Unless terminated earlier by the board of directors, this plan will
terminate by its terms effective June 22, 2014, although previously granted options may be
exercised after plan termination in accordance with the terms of the plan as in effect upon
termination.
As of September 30, 2009, options to purchase a total of 1,759,095 shares had been granted and
were outstanding under this plan, of which 1,252,436 were then vested and exercisable.
117
Outstanding Equity Awards at Fiscal 2009 Year-End
The following table summarizes the outstanding equity awards held by each named executive
officer at September 30, 2009.
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Option Awards |
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Number of |
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Number of |
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Securities |
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Securities |
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Underlying |
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Underlying |
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Unexercised Options |
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Unexercised Options |
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Option |
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(#) |
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(#) |
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Exercise Price |
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Option |
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Name |
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Exercisable |
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Unexercisable |
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($) |
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Expiration Date |
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(a) |
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(b) |
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(c) |
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(d) |
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(e) |
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David R. White |
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292,000 |
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20.00 |
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6/23/14 |
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194,000 |
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20.00 |
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3/22/15 |
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4,125 |
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1,375 |
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35.68 |
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4/1/16 |
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11,500 |
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34.75 |
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10/2/18 |
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30,826 |
(1) |
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8.75 |
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4/30/10 |
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29,832 |
(1) |
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8.75 |
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11/30/10 |
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Sandra K. McRee |
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116,800 |
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20.00 |
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6/23/14 |
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68,160 |
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17,040 |
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20.00 |
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3/22/15 |
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1,950 |
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1,300 |
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35.68 |
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4/1/16 |
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5,500 |
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34.75 |
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10/2/18 |
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44,501 |
(1) |
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8.75 |
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5/31/11 |
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W. Carl Whitmer |
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116,800 |
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20.00 |
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6/23/14 |
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68,160 |
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17,040 |
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20.00 |
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3/22/15 |
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1,950 |
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1,300 |
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35.68 |
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4/1/16 |
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5,500 |
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34.75 |
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10/2/18 |
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5,073 |
(1) |
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8.75 |
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11/30/10 |
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30,288 |
(1) |
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8.75 |
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10/31/11 |
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Frank A. Coyle |
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30,000 |
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20.00 |
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9/9/14 |
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24,000 |
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6,000 |
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20.00 |
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3/22/15 |
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6,000 |
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4,000 |
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35.68 |
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4/1/16 |
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5,000 |
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34.75 |
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10/2/18 |
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5,440 |
(1) |
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8.75 |
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4/30/10 |
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Carolyn Rose |
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7,000 |
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20.00 |
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9/9/14 |
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840 |
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560 |
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35.68 |
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4/1/16 |
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11,600 |
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34.75 |
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10/2/18 |
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1. |
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Represents fully vested options issued in connection with the Transactions. |
Option Award Vesting Schedule for David R. White
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Grant Date |
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Vesting Schedule |
6/23/2004
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25% vests each year for four years from date of grant |
3/22/2005
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25% vests each year for four years from date of grant |
4/1/2006
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25% vests each year for four years from date of grant |
10/2/2018
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25% vests each year for four years from date of grant |
Option Award Vesting Schedule
Named Executive Officers except David R. White
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Grant Date |
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Vesting Schedule |
6/23/2004
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20% vests each year for five years from date of grant |
9/9/2004
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20% vests each year for five years from date of grant |
3/22/2005
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20% vests each year for five years from date of grant |
4/1/2006
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20% vests each year for five years from date of grant |
10/2/2018
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20% vests each year for five years from date of grant |
118
Pension Benefits
We maintain a 401(k) plan as previously discussed in the Compensation Discussion and Analysis.
We do not maintain any defined benefit plans.
Nonqualified Deferred Compensation for Fiscal 2009
Amounts shown in the table below are attributable to our non-qualified executive savings plan
introduced on July 1, 2006.
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Executive |
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Registrant |
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Aggregate |
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Aggregate Balance |
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Contributions in |
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Contributions in |
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Aggregate Earnings |
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Withdrawals/ |
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at Last |
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Last FY |
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Last FY |
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in Last FY |
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Distributions |
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FYE |
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Name |
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($) |
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($) |
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($) |
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($) |
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($) |
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Frank A. Coyle |
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857 |
(1) |
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34 |
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92,919 |
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1. |
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Our contribution of $857 to the nonqualified deferred compensation plan in 2009 is included in
the Summary Compensation Table for 2009 in the All Other Compensation column. |
We introduced our non-qualified executive savings plan July 1, 2006. The plan is a voluntary,
tax-deferred savings vehicle that is available to those employees, including physicians, earning a
minimum base salary ($110,000 in 2009). The executive savings plan was implemented in order to
contribute to the recruitment and retention of key executives by providing the ability to defer
additional pre-tax compensation in excess of the limits allowed by our 401(k) plan.
An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) Retirement
Savings Plan in order to participate in the non-qualified executive savings plan. There are two
types of deferrals available under the plan: excess deferrals and additional deferrals. Excess
deferrals are contributions that are deposited into the non-qualified executive savings plan
because either (a) the participants earnings have exceeded $245,000 and/or (b) the participants
deferrals into the 401(k) retirement plan have reached a dollar limit stipulated by the IRS
($16,500 in 2009). Excess deferrals are automatically deposited into the nonqualified executive
savings plan if these limits are reached. Physician excess deferrals are not matched. Executive
excess deferrals are matched at the same rate as contributions to the 401(k) Retirement Savings
Plan. There is a five-year service requirement for participants to vest in the IASIS excess
matching contributions. Currently, only one of the named executive officers, Frank A. Coyle,
participates in the plan and the companys matching contribution with respect to his excess
deferrals was $857 in fiscal 2009.
Additional deferrals are contributions to the non-qualified executive savings plan that are
independent of a participants 401(k) contribution election. These contributions are voluntary and
are capped according to applicable IRS guidelines for such a plan.
The non-qualified executive savings plan offers a range of investment options that act as
benchmark funds. Benchmark funds are defined as the investment fund or funds used to represent
the performance and current deemed balance of a participants non-qualified account, which is
considered a notional deferred compensation account. Contributions become part of our general
assets. Investment options under the non-qualified executive savings plan are the same as those
available under the IASIS 401(k) plan.
Employment Agreements
Messrs. White and Whitmer and Mrs. McRee entered into employment agreements in connection with
the Transactions. Ms. Rose entered into an agreement for severance benefits and restrictive
covenants in March, 2001. Mr. Coyle does not have an employment agreement. Information regarding
these employment agreements is provided under Narrative Disclosure to Summary Compensation Table
and Grants of Plan-Based Awards Table and Potential Payments Upon Termination or Change of
Control.
119
Potential Payments Upon Termination or Change in Control
The Employment Agreements
Messrs. White and Whitmer and Ms. McRee have employment agreements in place that require
payment upon certain termination events including, in certain circumstances, a change of control.
Ms. Rose has an agreement for severance benefits and restrictive covenants in place that require
payment upon certain termination events. As previously stated, Mr. Coyle does not have an
employment agreement.
Death
The employment agreements provide that the respective estates of Mr. White, Ms. McRee and Mr.
Whitmer will receive the following upon the death of such named executive officer:
(i) all base salary and benefits to be paid or provided to the executive through the date of
death;
(ii) a severance amount equal to the executives base salary at the then-current rate of base
salary;
(iii) to the extent applicable, an amount equal to the pro rata bonus;
(iv) in the event that the executives spouse or heirs are entitled to receive a payment with
respect to the pro rata bonus, they will also be entitled to an additional severance amount
equal to one hundred percent (100%) of the pro rata bonus;
(v) the company will also provide the executives eligible dependents continued health and
medical benefits through the date one year after the date of death; the company may satisfy
this obligation by paying such dependents health and medical continuation coverage (COBRA)
premium payments (with the dependents paying the portion of such COBRA payments that the
executive was required to pay with respect to such dependents prior to the date of death);
and
(vi) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of death but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of death, will immediately vest and become
exercisable while all remaining unvested options will terminate as of the date of death.
Where the executives spouse or heirs are entitled to receive a payment with respect to the
pro rata bonus, all of the vested options must be exercised by the executives spouse or
heirs within two years following the date of death or they will terminate. If the executives
spouse or heirs are not entitled to receive a payment with respect to the pro rata bonus, all
of the vested options must be exercised by the executives spouse or heirs within one year
following the date of death or they will terminate.
The agreement for severance benefits and restrictive covenants for Ms. Rose does not address
this scenario.
Disability
The employment agreements provide that Mr. White, Ms. McRee and Mr. Whitmer will receive the
following upon the disability of such named executive officer:
(i) all base salary and benefits to be paid or provided to the executive through the date of
disability;
(ii) a severance amount equal to the executives base salary at the then-current rate of base
salary provided, however, that in the event the date of termination is the date of delivery
of the final required physicians opinion that the executive will be disabled for 6
consecutive months, the payment with respect to base salary, together with all base salary
paid to the executive following the first date that the executive was disabled will equal one
hundred and fifty percent (150%) of the executives base salary and; provided, further, that
amounts payable to the executive must be reduced by the proceeds of any short or long-term disability payments to which the executive
may be entitled during such period under policies maintained at the expense of the Company;
120
(iii) to the extent applicable, an amount equal to the pro rata bonus; if the executive is
eligible for such a pro rata bonus, the executive is also entitled to an additional severance
amount equal to the pro rata bonus;
(iv) the Company will pay for the executive and his eligible dependents continued health and
medical benefits through the date one year after the date of termination (provided, however,
that in the event that the date of termination is the date of delivery of the final
physicians opinion referred to above, the Company will provide health and medical benefits
through the date that is eighteen (18) months following the first date that Executive was
unable to perform his duties; the Company may satisfy this obligation by paying COBRA premium
payments with respect to the executive and his eligible dependents (with the executive paying
the portion of such COBRA payments that executive was required to pay prior to the date of
termination); and
(v) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of termination but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of termination, will immediately vest and
become exercisable while all remaining unvested options will terminate as of the date of
termination. Where the executive is entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within two years
following the date of termination or the options will terminate. If the executive is not
entitled to receive a payment with respect to the pro rata bonus, all of the vested options
must be exercised by the executive within one year following the date of termination or the
options will terminate.
The agreement for severance benefits and restrictive covenants for Ms. Rose does not address
this scenario.
Termination by the Company for Cause
Upon termination for cause, the executive will be entitled to receive all base salary and
benefits to be paid or provided to the executive through the date of termination.
By the Company without Cause
The employment agreements provide that Mr. White, Ms. McRee and Mr. Whitmer will receive the
following upon the termination by the Company without cause of such named executive officer:
(i) all base salary and benefits to be paid or provided to the executive through the date of
termination;
(ii) a severance amount equal to two hundred percent (200%) of the executives base salary at
the then-current rate of base salary;
(iii) to the extent applicable, an amount equal to the pro rata bonus,
(iv) in the event that the executive is entitled to receive a payment with respect to the pro
rata bonus, an additional severance amount equal to two hundred percent (200%) of the pro
rata bonus;
(v) a lump sum payment equal to the then present value of all major medical, disability and
life insurance coverage through the date two years after the date of termination, provided
that under such circumstances the executive shall make all COBRA premium payments on his own
behalf; and
121
(vi) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of termination but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of termination, will immediately vest and become
exercisable while all remaining unvested options will terminate as of the date of
termination. Where the executive is entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within two years
following the date of termination or the options will terminate. If the executive is not
entitled to receive a payment with respect to the pro rata bonus, all of the vested options
must be exercised by the executive within one year following the date of termination or the
options will terminate.
The agreement for severance benefits and restrictive covenants for Ms. Rose provides that she
will receive the following upon her termination by the Company without cause:
(i) the monthly base salary at the time of termination for a period of nine consecutive
months;
(ii) an amount equal to all unused sick leave, vacation time and/or paid time off; and
(iii) additional consideration of $2,500 to provide with outplacement assistance.
By the Executive for Good Reason
The employment agreements provide that Mr. White, Ms. McRee and Mr. Whitmer will receive the
following upon the resignation by such executive for good reason:
(i) all base salary and benefits to be paid or provided to the executive through the date of
Termination;
(ii) an amount equal to two hundred percent (200%) of the executives base salary at the
then-current rate of base salary;
(iii) to the extent applicable, an amount equal to the pro rata bonus;
(iv) in the event that the executive is entitled to receive a payment with respect to the pro
rata bonus, an additional severance amount equal to two hundred percent (200%) of the pro
rata bonus;
(v) a lump sum payment equal to the then present value of all major medical, disability and
life insurance coverage through the date two years after the date of termination, provided
that under such circumstances the executive shall make all COBRA premium payments on his own
behalf; and
(vi) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of termination but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of termination, will immediately vest and
become exercisable while all remaining unvested options will terminate as of the date of
termination. Where the executive is entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within two years
following the date of termination or the options will terminate. If the executive is not
entitled to receive a payment with respect to the pro rata bonus, all of the vested options
must be exercised by the executive within one year following the date of termination or the
options will terminate.
Ms. Roses agreement for severance benefits and restrictive covenants provides that she will
receive the following upon the event of her resignation for good reason;
(i) the monthly base salary at the time of termination for a period of nine consecutive
months;
(ii) an amount equal to all unused sick leave, vacation time and/or paid time off; and
(iii) additional consideration of $2,500 to provide with outplacement assistance.
122
By the Executive without Good Reason or the Executives Failure to Extend the Employment Term
Upon termination for good reason, the executive will be entitled to receive all base salary
and benefits to be paid or provided to the executive through the date of termination.
Definition of Good Reason
Each of the following events shall constitute good reason for resignation for purposes of
the employment agreements of Mr. White, Ms. McRee and Mr. Whitmer:
(i) the one-year anniversary of the date of any Change of Control (as defined below) unless
the acquirer is in the healthcare facilities business, in which case the one-year anniversary
will be reduced to six months after the date of the Change of Control;
(ii) with respect to Mr. Whitmer only, any change of control;
(iii) the removal of the executive from or the failure to elect or re-elect the executive to
his or her respective positions within the company or on the board (other than a removal or
failure to elect Mr. White as Chairman after an initial public offering, and provided that
the appointment of a non-executive chairman following a transaction or a Change of Control
will not constitute grounds for good reason);
(iv) with respect to Mr. White only, the removal of or the failure to elect Mr. White to the
board of directors;
(v) any material reduction in duties of the respective executive or any assignment materially
inconsistent with his or her position;
(vi) any breach by the company of the respective employment agreement; and
(vii) with respect to Mr. Whitmer only, where Mr. Whitmer is elected or appointed Chief
Financial Officer of an a entity of similar size and operational scope as IASIS after such
entity acquires control of IASIS, such a change of control will not constitute good reason
for resignation.
Each of the following events shall constitute good reason for resignation for Ms. Rose only:
(i) the removal of or failure to re-elect Ms. Rose to the position of Chief Executive Officer
of Health Choice;
(ii) any material reduction by the Company of Ms. Roses duties or responsibilities or the
assignment to Ms. Rose of duties materially inconsistent with such position;
(iii) any material breach by the Company of the agreement for severance benefits and
restrictive covenants; and
(iv) resignation within 12 months after the date of any Change in Control (as defined below).
The Companys Failure to Extend the Employment Term
The employment agreements provide that Mr. White, Ms. McRee and Mr. Whitmer will receive the
following upon the Companys failure to the extend the employment term:
(i) all base salary and benefits to be paid or provided to the executive through the date of
death;
(ii) a severance amount equal to the executives base salary at the then-current rate of base
salary;
123
(iii) to the extent applicable, an amount equal to the pro rata bonus;
(iv) in the event that the executive is entitled to receive a payment with respect to the pro
rata bonus, an additional severance amount equal to one hundred percent (100%) of the pro
rata bonus;
(v) a lump sum payment equal to the then present value of all major medical, disability and
life insurance coverage through the date one year after the date of termination, provided
that under such circumstances the executive shall make all COBRA premium payments on his own
behalf; and
(vi) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of termination but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of termination, will immediately vest and
become exercisable while all remaining unvested options will terminate as of the date of
termination. Where the executive is entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within two years
following the date of termination or the options will terminate. If the executive is not
entitled to receive a payment with respect to the pro rata bonus, all of the vested options
must be exercised by the executive within one year following the date of termination or the
options will terminate.
Definition of Change of Control
The employment agreements of Mr. White, Ms. McRee and Mr. Whitmer define a change of control
as any transaction where a person or group of persons (other than the present private equity
investors in the Company or their affiliates):
(i) acquire a majority interest in IAS or IASIS Investment LLC, its parent; or
(ii) acquire all or substantially all of the assets of IAS or IASIS Investment LLC, its
parent; or
(iii) the initial public offering of IAS shares or any secondary offering of such shares will
not constitute a change of control.
The agreement for severance benefits and restrictive covenants for Ms. Rose defines a change
of control as any transaction where a person or group of persons other than IAS directly or
indirectly acquires beneficially or of record, more than 50% of the outstanding voting securities
of Health Choice or upon a sale of all or substantially all of the assets of Health Choice.
In addition, the employment agreements contain non-competition and non-solicitation provisions
pursuant to which Mr. White, Ms. McRee, and Mr. Whitmer will not compete with IAS or its
subsidiaries within 25 miles of the location of any hospital we manage for two years following the
date of termination of such persons employment. The agreements provide that during this time such
person will not solicit or recruit our business partners and employees, respectively. Ms. Roses
agreement for severance benefits and restrictive covenants contains non-competition provisions
pursuant to which Ms. Rose will not compete with Health Choice, without prior consent of the
Company, for a period of 15 months following a voluntary termination of Ms. Rose or a termination
by the Company for cause.
In certain circumstances following a change of control, IAS has agreed to compensate Mr. White
in the event any payment under his employment agreement is subject to an excise tax under Section
4999 of the Internal Revenue Code.
124
IAS 2004 Stock Option Plan
Vesting Date of Options
Each stock option grant agreement must indicate the date or conditions under which the option
will become exercisable. However, unless otherwise provided in a participants stock option grant
agreement, if within the two-year period following a Change of Control the executives employment
is:
(i) terminated by the company or its Affiliates without cause; or
(ii) terminated by the executive with good reason,
all of the executives options granted hereunder shall immediately become vested and exercisable.
Definition of Change of Control
The IAS 2004 Stock Option Plan defines Change of Control in substantially the same way as the
employment agreements of Messrs. White and Whitmer and Ms. McRee.
Definition of Good Reason
The IAS 2004 Stock Option Plan defines good reason as:
(i) a material reduction in an executives duties and responsibilities other than a change in
such executives duties and responsibilities that results from becoming part of a larger
organization following a Change of Control,
(ii) a decrease in an executives base salary or benefits other than a decrease in benefits
that applies to all employees of the company otherwise eligible to participate in the
affected plan, or
(iii) a relocation of an executives primary work location more than 50 miles from the
executives primary work location, as in effect immediately before a Change of Control,
without written consent.
Definition of Cause
The IAS 2004 Stock Option Plan defines termination with cause as the termination of the
executives employment because of:
(i) dishonesty in the performance of such executives duties;
(ii) the executives willful misconduct in connection with such executives duties or any act
or omission which is materially injurious to the financial condition or business reputation
of the Company or any of its subsidiaries or affiliates;
(iii) a breach by an executive of the participants duty of loyalty to the Company and its
affiliates;
(iv) the executives unauthorized removal from the premises of the Company of any document
(in any medium or form) relating to the company or the customers of the company; or
(v) the commission by the executive of any felony or other serious crime involving moral
turpitude.
125
Summary of Payments Made Upon Termination or a Change of Control
The following tables describe the potential payments and benefits under our compensation and
benefit plans and arrangements to which Messrs. White and Whitmer, Ms. McRee and Ms. Rose would be
entitled upon a termination of their employment under their employment agreements. In accordance
with SEC disclosure rules, dollar amounts below assume a termination of employment on September 30,
2009 (the last business day of our last completed fiscal year).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Termination |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
|
|
Without |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
David R. White |
|
Cause ($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Cash severance |
|
|
4,851,000 |
|
|
|
|
|
|
|
|
|
|
|
4,851,000 |
|
|
|
|
|
|
|
2,425,500 |
|
|
|
2,829,750 |
|
|
|
4,851,000 |
|
Health and welfare
continuation |
|
|
15,869 |
|
|
|
|
|
|
|
|
|
|
|
15,869 |
|
|
|
|
|
|
|
15,869 |
|
|
|
15,869 |
|
|
|
15,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,866,869 |
|
|
|
|
|
|
|
|
|
|
|
4,866,869 |
|
|
|
|
|
|
|
2,441,369 |
|
|
|
2,845,619 |
|
|
|
4,866,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Without |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
Sandra K. McRee |
|
Cause |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
Cash severance |
|
|
2,400,000 |
|
|
|
|
|
|
|
|
|
|
|
2,400,000 |
|
|
|
|
|
|
|
1,200,000 |
|
|
|
1,500,000 |
|
|
|
2,400,000 |
|
Health and welfare
continuation |
|
|
14,769 |
|
|
|
|
|
|
|
|
|
|
|
14,769 |
|
|
|
|
|
|
|
14,769 |
|
|
|
14,769 |
|
|
|
14,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,414,769 |
|
|
|
|
|
|
|
|
|
|
|
2,414,769 |
|
|
|
|
|
|
|
1,214,769 |
|
|
|
1,514,769 |
|
|
|
2,414,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Without |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
W. Carl Whitmer |
|
Cause |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
Cash severance |
|
|
2,139,484 |
|
|
|
|
|
|
|
|
|
|
|
2,139,484 |
|
|
|
|
|
|
|
1,069,742 |
|
|
|
1,337,178 |
|
|
|
2,139,484 |
|
Health and welfare
continuation |
|
|
21,569 |
|
|
|
|
|
|
|
|
|
|
|
21,569 |
|
|
|
|
|
|
|
21,569 |
|
|
|
21,569 |
|
|
|
21,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,161,053 |
|
|
|
|
|
|
|
|
|
|
|
2,161,053 |
|
|
|
|
|
|
|
1,091,311 |
|
|
|
1,358,747 |
|
|
|
2,161,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Without |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
Carolyn Rose |
|
Cause |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
Cash severance |
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,000 |
|
Health and welfare
continuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director Compensation for Fiscal 2009
The following table provides compensation information for the year ended September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Paid in |
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
Awards |
|
|
Option Awards |
|
|
All Other |
|
|
Total |
|
Name |
|
($) |
|
|
($)(1)(2) |
|
|
($)(1)(2) |
|
|
Compensation ($) |
|
|
($) |
|
Jonathan J. Coslet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Dupree |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kirk E. Gorman |
|
|
37,500 |
|
|
|
18,750 |
|
|
|
7,626 |
|
|
|
|
|
|
|
63,876 |
|
Curtis Lane |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd B. Sisitsky |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul S. Levy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey C. Lightcap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sharad Mansukani |
|
|
37,500 |
|
|
|
18,750 |
|
|
|
7,626 |
|
|
|
|
|
|
|
63,876 |
|
|
|
|
1. |
|
Using the prospective transition method upon adoption of FASB authoritative guidance
regarding accounting for share-based payments, we have implemented the
fair value recognition provisions requiring all share-based payments to employees granted on
or after October 1, 2006, including grants of employee stock options, to be recognized in the
income statement based on their fair values. In accordance with these provisions,
we have elected to use the Black-Scholes-Merton model in determining the fair value of its
share-based payments. The fair value of compensation costs will be amortized on a
straight-line basis over the requisite service periods of the awards, generally equal to the
awards vesting periods. |
126
|
|
|
2. |
|
Each option grant vests one year from date of grant. Similarly, the restrictions with respect
to the stock award are lifted one year from the date of grant. The date of grant for the stock
award and options award for Messrs. Gorman and Mansukani were February 14, 2009 and April 14,
2009, respectively. The options will vest and the restrictions on the stock will be lifted for
Messrs. Gorman and Mansukani on February 14, 2010 and April 14, 2010, respectively, provided that the individuals remain members
of the board of directors. |
|
|
|
|
|
|
|
|
|
|
|
Aggregate Options Held |
|
|
Aggregate Stock Awards Held |
|
Name |
|
at Fiscal Year End |
|
|
at Fiscal Year End |
|
Jonathan J. Coslet |
|
|
|
|
|
|
|
|
David Dupree |
|
|
|
|
|
|
|
|
Kirk E. Gorman |
|
|
3,319 |
|
|
|
3,319 |
|
Curtis Lane |
|
|
|
|
|
|
|
|
Todd B. Sisitsky |
|
|
|
|
|
|
|
|
Paul S. Levy |
|
|
|
|
|
|
|
|
Jeffrey C. Lightcap |
|
|
|
|
|
|
|
|
Sharad Mansukani |
|
|
3,082 |
|
|
|
3,082 |
|
On February 14, 2005, pursuant to a Director Compensation and Restricted Share Award
Agreement, IAS granted Kirk Gorman options to purchase 1,175 shares of IASs common stock and
committed to grant Mr. Gorman, on each of the first, second, third and fourth anniversaries of the
grant date, provided that he is still a director, options to purchase a number of shares valued at
$18,750 based on the fair market value of the common stock as determined on each such anniversary.
These grants were made pursuant to the form of stock option grant agreement under the IAS 2004
Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award
Agreement with Mr. Gorman on the grant date. Pursuant to such Director Compensation and Restricted
Share Award Agreement, IAS agreed to pay Mr. Gorman cash compensation of $9,375 for the fiscal
quarter ended December 31, 2004 and annual cash compensation of $37,500 for the remaining term
(five years or until the date on which, for any reason, Mr. Gorman no longer serves as a director
of the company) in equal quarterly installments, in consideration for his services as a member of
IASs board of directors. IAS also granted Mr. Gorman 1,175 shares of restricted common stock on
the grant date and committed to grant Mr. Gorman, on each of the first, second, third and fourth
anniversaries of the grant date, provided that he is still a director, restricted common stock
valued at $18,750 based on the fair market value of the common stock as determined on each such
anniversary.
On April 14, 2005, IAS granted Sharad Mansukani options to purchase 938 shares of IASs common
stock and committed to grant Dr. Mansukani, on each of the first, second, third and fourth
anniversaries of the grant date, provided that he is still a director, options to purchase a number
of shares of common stock valued at $18,750 based on the fair market value of the common stock on
each such anniversary. These grants were made pursuant to the form of stock option grant agreement
under the IAS 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and
Restricted Share Award Agreement with Dr. Mansukani on the grant date. Pursuant to such Director
Compensation and Restricted Share Award Agreement, IAS agreed to pay Dr. Mansukani annual cash
compensation of $37,500 for the term (five years or until the date on which, for any reason, Dr.
Mansukani no longer serves as a director of the Company) of the Director Compensation and
Restricted Share Award Agreement, payable in equal quarterly installments, in consideration for his
services as a member of IASs board of directors. IAS also granted Dr. Mansukani 938 shares of
restricted common stock on the grant date and committed to grant Dr. Mansukani, on each of the
first, second, third and fourth anniversaries of the grant date, provided that he is still a
director, restricted common stock valued at $18,750 based on the fair market value of the common
stock on each such anniversary.
Currently, IASs other directors do not receive any compensation for their services. IAS does,
however, reimburse them for travel expenses and other out-of-pocket costs incurred in connection
with attendance at board of directors and committee meetings.
Committee Interlocks and Insider Participation
During fiscal 2009, the Committee was composed of David R. White, Jonathan J. Coslet and
Jeffrey C. Lightcap. Mr. White currently serves as our Chief Executive Officer. Mr. Coslet has
never been an officer of IAS. Mr. Lightcap is currently a Director of IAS.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Equity Compensation Plans
The table below sets forth the following information as of September 30, 2009 with respect to
IAS compensation plans (including individual compensation arrangements) under which its equity
securities are authorized for issuance, aggregated by (i) all compensation plans previously
approved by IAS security holders and (ii) all compensation plans not previously approved by IAS
security holders:
|
|
|
the number of securities to be issued upon the exercise of outstanding options; |
|
|
|
the weighted-average exercise price of the outstanding options; and |
|
|
|
the number of securities remaining available for future issuance under the plans. |
The IAS 2004 Stock Option Plan has been approved by its stockholders. IAS has not issued any
warrants or other rights to purchase its equity securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Available |
|
|
|
|
|
|
|
|
|
|
|
for Future Issuance |
|
|
|
Number of |
|
|
|
|
|
|
Under Equity |
|
|
|
Securities to be |
|
|
|
|
|
|
Compensation Plans |
|
|
|
Issued Upon |
|
|
Weighted-average |
|
|
(excluding securities |
|
|
|
Exercise of |
|
|
Exercise Price of |
|
|
reflected in the |
|
Plan Category |
|
Outstanding Options |
|
|
Outstanding Options |
|
|
first column) |
|
Equity compensation
plans approved by
security holders
common stock(1) |
|
|
1,923,325 |
|
|
$ |
23.34 |
|
|
|
580,475 |
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,923,325 |
|
|
$ |
23.34 |
|
|
|
580,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of 163,150 shares of common stock to be issued upon exercise of rollover options
issued in connection with the Transactions, with an exercise price of $8.75 per share, and
1,760,175 shares of common stock to be issued upon exercise of options issued under IAS 2004
Stock Option Plan, with exercise prices ranging from $20.00 to $35.68 per share. Of the
2,340,650 shares of common stock currently authorized for issuance under the 2004 Stock Option
Plan, 580,475 shares remain available for future issuance. |
Beneficial Ownership of Common Stock
After giving effect to the Transactions, IASIS is a limited liability company consisting of
100% common interests owned by IAS. IAS outstanding shares consist of one class of common stock
and one class of preferred stock, and 99.9% of the outstanding common stock and 100% of the
outstanding preferred stock is owned by IASIS Investment. In addition, senior members of IAS
management converted a portion of their in-the-money options into options to purchase IAS common
and preferred shares in connection with the Transactions. The outstanding equity interest of IASIS
Investment is held 74.4% by TPG, 18.8% by JLL and approximately 6.8% by Trimaran.
The following table presents information as of November 25, 2009, regarding ownership of
shares of IAS common stock and preferred stock by each person known to be a holder of more than 5%
of IAS common stock and preferred stock, the members of the IAS board of directors, each executive officer named in
the summary compensation table and all current directors and executive officers as a group.
127
When reviewing the following table, you should be aware that the amounts and percentage of
common stock and preferred stock beneficially owned are reported on the basis of regulations of the
SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC,
a person is deemed to be a beneficial owner of a security if that person has or shares voting
power, which includes the power to vote or to direct the voting of such security, or investment
power, which includes the power to dispose of or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities of which that person has a right
to acquire beneficial ownership within 60 days.
Unless otherwise indicated, the address of each person listed below is 117 Seaboard Lane,
Building E, Franklin, Tennessee 37067.
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Percentage of |
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Percentage of |
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Preferred Shares |
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Common Shares |
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Preferred Shares |
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|
Common Shares |
|
Beneficial Owners |
|
Beneficially Owned |
|
|
Beneficially Owned (a) |
|
|
Beneficially Owned |
|
|
Beneficially Owned |
|
IASIS Investment (b)(c) |
|
|
80,784 |
|
|
|
14,600,000 |
|
|
|
100.0 |
% |
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|
99.9 |
% |
David R. White |
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553,658 |
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* |
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* |
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Sandra K. McRee |
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232,511 |
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* |
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* |
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W. Carl Whitmer |
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223,371 |
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* |
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* |
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Frank A. Coyle |
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65,440 |
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* |
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* |
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Carolyn Rose |
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10,160 |
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* |
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* |
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Percentage of |
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Percentage of |
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Preferred Shares |
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Common Shares |
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Preferred Shares |
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Common Shares |
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Beneficial Owners |
|
Beneficially Owned |
|
|
Beneficially Owned (a) |
|
|
Beneficially Owned |
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Beneficially Owned |
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Jonathan J. Coslet (c) |
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David Dupree |
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Kirk E. Gorman (c) |
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5,562 |
(d) |
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* |
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* |
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Curtis Lane |
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Todd B. Sisitsky (c) |
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Paul S. Levy (e) |
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15,187 |
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2,744,800 |
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18.8 |
% |
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18.8 |
% |
Jeffrey C. Lightcap |
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Sharad Mansukani (c) |
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5,088 |
(d) |
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* |
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* |
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Current directors and
executive officers as
a group (24 persons) |
|
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80,784 |
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1,210,159 |
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100.0 |
% |
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100.0 |
% |
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* |
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Less than 1%. |
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(a) |
|
The following shares of common stock subject to options currently exercisable or exercisable
within 60 days of November 25, 2009, include rollover options converted by management in
connection with the Transactions and are deemed outstanding for the purpose of computing the
percentage ownership of the person holding such options but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person: Mr. White, 553,658; Ms.
McRee, 232,511; Mr. Whitmer, 223,371; Mr. Coyle, 65,440; Ms. Rose, 10,160; and all current directors and executive
officers as a group (24 persons), 1,210,159. |
|
(b) |
|
The membership interests of IASIS Investment are owned as follows: TPG, 74.4%, JLL, 18.8%,
and Trimaran, 6.8%. TPG Advisors III, Inc. and TPG Advisors IV, Inc. through their ownership
of TPG, which owns a controlling interest in IASIS Investment, may be deemed to beneficially
own all of the shares of preferred stock and common stock owned by IASIS Investment. |
|
(c) |
|
David Bonderman and James G. Coulter are directors, executive officers
and the sole shareholders of TPG Advisors III, Inc. and TPG Advisors IV, Inc. TPG Advisors
III, Inc. and TPG Advisors IV, Inc., through their control of investment funds, parallel investment vehicles and co-investment vehicles that
own a controlling
interest in IASIS Investment, may be deemed to beneficially own all of the shares of preferred
stock and common stock owned by IASIS Investment.
Messrs. Bonderman and Coulter, by
virtue of their positions with TPG Advisors III, Inc. and TPG Advisors IV, Inc., may be deemed
to have investment power and beneficial ownership with respect to all of the shares of
preferred stock and common stock owned by IASIS Investment. None of
Messrs. Coslet, Sisitsky or Mansukani has investment power over any of the
shares of preferred stock and common stock owned by IASIS Investment. |
|
(d) |
|
Represents shares of restricted stock and options currently or exercisable within 60 days of
November 25, 2009, granted to Messrs. Gorman and Mansukani pursuant to Director Compensation
and Restricted Stock Award Agreements. |
|
(e) |
|
Mr. Levy is a senior managing director of JLL Partners, Inc. which, through its controlling
interest in JLL, which owns 18.8% of IASIS Investment, may be deemed to beneficially own 18.8%
of the shares of preferred stock and common stock owned by IASIS Investment. Accordingly, Mr.
Levy may be deemed to beneficially own 18.8% of the shares of preferred stock and common stock
owned by IASIS Investment. |
128
All of the membership interests in IASIS are pledged to our lenders as security for our
obligations under our senior secured credit facilities. In the event of a default under our senior
secured credit facilities, our lenders would have the right to foreclose on such membership
interests, which would result in a change of control of our company.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
IASIS Investment Limited Liability Company Operating Agreement
TPG is party to a limited liability company operating agreement of IASIS Investment LLC with
Trimaran and JLL. TPG, JLL and Trimaran hold approximately 74.4%, 18.8% and 6.8%, respectively, of
the equity interests of IASIS Investment LLC. TPG is the managing member of IASIS Investment LLC.
The board of directors has not made a determination as to whether each director is
independent because all of the members of our board have been appointed by our equity sponsors.
Pursuant to the limited liability company operating agreement of IASIS Investment LLC, JLL is
entitled to nominate two directors to the IAS board of directors. TPG is entitled to nominate the
remaining directors. Messrs. Levy and Lightcap serve on the IAS board of directors as designees of
JLL. The remaining directors serve as designees of TPG. The right of JLL to nominate two directors
is subject to its ownership percentage in IASIS Investment LLC remaining at or above 9.4%. In the
event JLLs ownership percentage in IASIS Investment LLC falls below 9.4%, but is at least 4.7%,
JLL will have the right to nominate one director. If JLLs ownership percentage falls below 4.7%,
it will not have the right to nominate any directors. The agreement also places certain
restrictions on the transfer of membership interests in IASIS Investment LLC. JLL and Trimaran have
the right to participate in certain dispositions by TPG and can be required to participate on the
same terms in any sale by TPG in excess of a specified percentage of its collective interest.
We have no securities listed for trading on a national securities exchange or in an automated
inter-dealer quotation system of a national securities association, which have requirements that a
majority of directors be independent. We do not believe any of our directors would be considered
independent under the New York Stock Exchanges definition of independence.
Investor Rights Agreement
After giving effect to the Transactions, IASIS Investment is the majority stockholder of IAS,
which owns 100% of the common interests of IASIS. IASIS Investment is party to an investor rights
agreement with IAS. Pursuant to this agreement, IASIS Investment can cause IAS to register its
interests in IAS under the Securities Act and to maintain a shelf registration statement effective
with respect to such interests. IASIS Investment is also entitled to participate on a pro rata
basis in any registration of our equity interests under the Securities Act that IAS may undertake.
The agreement also grants IASIS Investment preemptive rights over certain additional issuances of
equity securities by IAS.
Management Services Agreement
Upon the consummation of the Transactions, we entered into a management services agreement
with affiliates of TPG, JLL Partners Inc. and
Trimaran Fund Management, L.L.C. The management services agreement provides that in exchange for
consulting and management advisory services that will be provided to us by the investors, we will
pay an aggregate monitoring fee of 0.25% of budgeted net revenue up to a maximum of $5.0 million
per fiscal year to these parties (or certain of their respective affiliates) and reimburse them for
their reasonable disbursements and out-of-pocket expenses. This monitoring fee will be subordinated
to the senior subordinated notes in the event of a bankruptcy of the company. For the years ended
September 30, 2009, 2008 and 2007, we paid $5.0 million, $5.0 million and $4.7 million,
respectively, in monitoring fees under the management services agreement.
129
Income Tax Allocations
The Company and some of its subsidiaries are included in IAS consolidated filing group for
U.S. federal income tax purposes, as well as in certain state and local income tax returns that
include IAS. With respect to tax returns for any taxable period in which the Company or any of its
subsidiaries are included in a tax return filing with IAS, the amount of taxes to be paid by the
Company is determined, subject to some adjustments, as if it and its subsidiaries filed their own
tax returns excluding IAS.
Policy on Transactions with Related Persons
On an annual basis, each director, director nominee and executive officer is required to
complete a Director and Officers Questionnaire that requires disclosure of any transaction in
which the director or executive officer has a direct or indirect material interest and in which the
company participates and the amount involved exceeds $120,000. The board has not adopted a formal
policy for the review, approval or ratification of such transactions. However, pursuant to the
companys corporate code of ethics, executive officers may not participate in, or benefit from, a
related party transaction without the approval of the Companys compliance officer.
During fiscal year 2009, there were no transactions between our company and a related person
requiring disclosure under applicable securities laws.
Item 14. Principal Accountant Fees and Services.
The following table sets forth the aggregate fees for services related to fiscal years 2009
and 2008 provided by Ernst & Young LLP, our principal accountants:
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Fiscal |
|
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Fiscal |
|
|
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2009 |
|
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2008 |
|
|
|
|
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|
|
|
|
|
Audit Fees (a) |
|
$ |
1,022,500 |
|
|
$ |
1,218,000 |
|
Audit-Related Fees (b) |
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|
17,500 |
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|
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29,500 |
|
Tax Fees |
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2,100 |
|
|
|
87,900 |
|
All Other Fees (c) |
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|
|
|
|
|
24,500 |
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|
|
|
(a) |
|
Audit Fees represent fees billed for professional services rendered for the audit of our
annual financial statements and review of our quarterly financial statements, and audit
services provided in connection with other statutory or regulatory filings. |
|
(b) |
|
Audit-Related Fees represent fees billed for assurance services related to the audit of our
financial statements, as well as certain due diligence projects. |
|
(c) |
|
All Other Fees represent fees for services provided to us not otherwise included in the
categories above. |
During fiscal 2009, we reviewed our existing practices regarding the use of our independent
auditors to provide non-audit and consulting services, to ensure compliance with SEC proposals. Our
audit committee pre-approval policy provides that our independent auditors may provide certain
non-audit services which do not impair the auditors independence. In that regard, our audit
committee must pre-approve all audit services provided to our company, as well as all non-audit
services provided by our companys independent auditors. This policy is administered by our senior
corporate financial management, which reports throughout the year to our audit committee. Our audit
committee pre-approved all audit and non-audit services provided by Ernst & Young LLP during fiscal
years 2009 and 2008.
130
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) |
1. |
Financial Statements: See Item 8 |
|
2. |
|
Financial Statement Schedules: Not Applicable |
|
3. |
|
Management Contracts and Compensatory Plans and Arrangements |
|
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and David R. White (1) |
|
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and Sandra K. McRee (1) |
|
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and W. Carl Whitmer (1) |
|
|
|
First Amendment to Employment Agreement, dated January 31, 2008, by and between
IASIS Healthcare Corporation and Sandra K. McRee (11) |
|
|
|
Agreement for Severance Benefits and Restrictive Covenants, dated as of March 1,
2001, by and between IASIS Management Company and Carolyn Rose (17) |
|
|
|
|
Form of Roll-over Option Letter Agreement (1) |
|
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|
|
IASIS Healthcare Corporation 2004 Stock Option Plan (1) |
|
|
|
Form of Management Stockholders Agreement between IAS and each of David R. White,
Sandra K. McRee and W. Carl Whitmer (1) |
|
|
|
Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004
Stock Option Plan (1) |
|
|
|
Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
Form of Management Stockholders Agreement for Rollover Options (1) |
|
|
|
|
IASIS Corporate Incentive Plan (1) |
|
|
|
|
IASIS Market Executive Incentive Program (1) |
|
|
|
Director Compensation and Restricted Share Award Agreement, dated as of February
14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (12) |
|
|
|
First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (13) |
|
|
|
Director Compensation and Restricted Share Award Agreement, dated as of April 14,
2005, between IASIS Healthcare Corporation and Sharad Mansukani (14) |
|
|
|
IASIS Healthcare Non-Qualified Deferred Compensation Program (4) |
131
|
|
|
|
|
Exhibit No. |
|
Description |
|
2.1 |
|
|
Agreement and Plan of Merger, dated as of May 4, 2004, by and among IASIS Investment
LLC, Titan Merger Corporation and IASIS Healthcare Corporation (1) |
|
|
|
|
|
|
2.2 |
|
|
Indemnification Agreement dated as of May 4, 2004, by and among IASIS Investment LLC,
IASIS Healthcare Corporation, and the stockholders and option holders of IASIS
Healthcare Corporation listed on the signature pages thereof (2) |
|
|
|
|
|
|
3.1 |
|
|
Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State
of the State of Delaware on May 11, 2004 (1) |
|
|
|
|
|
|
3.2 |
|
|
Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (1) |
|
|
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|
|
|
4.1 |
|
|
Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC, IASIS Capital
Corporation, the Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as
Trustee (1) |
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|
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|
4.2 |
|
|
Form of Notation of Subsidiary Guarantee (1) |
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4.3 |
|
|
Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (1) |
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|
4.4 |
|
|
Supplemental Indenture, dated as of June 30, 2004, by and between IASIS Finance Texas
Holdings, LLC, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary
Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1) |
|
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|
4.5 |
|
|
Supplemental Indenture, effective as of August 1, 2005, by and among Cardiovascular
Specialty Centers of Utah, LP, IASIS Healthcare LLC, IASIS Capital Corporation, the
existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee
(3) |
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4.6 |
|
|
Supplemental Indenture, dated as of July 20, 2006, by and among IASIS Glenwood Regional
Medical Center, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing
Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (4) |
|
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4.7 |
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|
Supplemental Indenture, dated as of July 27, 2006, by and among The Heart Center of
Central Phoenix, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing
Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (4) |
|
|
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|
10.1 |
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|
Lease, dated as of July 29, 1977, by and between Sierra Equities, Inc., as Landlord,
and Mesa General Hospital, Inc., as Tenant (5) |
|
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|
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|
10.2 |
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|
Addendum to Lease entered into by and between Sierra Equities, Inc., as Landlord, and
Mesa General Hospital, Inc., as Tenant (5) |
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10.3 |
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|
Conforming Amendment to Lease, dated as of June 10, 1991, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (5) |
|
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|
10.4 |
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|
Amendment to Hospital Lease, dated as of October 31, 2000, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, L.P., as Tenant (5) |
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|
10.5 |
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|
Amendment to Lease, dated April 30, 2003, by and between Sierra Equities, Inc. and Mesa
General Hospital, L.P. (6) |
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10.6 |
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|
Letter Agreement effective May 6, 2005, amending Lease by and between Sierra Equities
Inc. and Mesa General Hospital, L.P. (7) |
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|
10.7 |
|
|
Amended and Restated Pioneer Hospital Lease, dated as of June 28, 2002, by and between
Health Care Property Investors, Inc. and Pioneer Valley Hospital, Inc. (8) |
132
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Exhibit No. |
|
Description |
|
10.8 |
|
|
Lease Agreement, dated as of October 6, 2003, between The Dover Centre, LLC and IASIS
Healthcare Corporation (9) |
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10.9 |
|
|
Form of Indemnification Agreement (1) |
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|
10.10 |
|
|
Contract between Arizona Health Care Cost Containment System and Health Choice Arizona
(including Amendment No. 1 thereto), effective as of October 1, 2008 (17) |
|
|
|
|
|
|
10.11 |
|
|
Amendment No. 2 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of January 15, 2009 |
|
|
|
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|
|
10.12 |
|
|
Amendment No. 3 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of May 1, 2009 |
|
|
|
|
|
|
10.13 |
|
|
Amendment No. 4 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of August 1, 2009 |
|
|
|
|
|
|
10.14 |
|
|
Amendment No. 5 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of August 1, 2009 |
|
|
|
|
|
|
10.15 |
|
|
Amendment No. 6 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.16 |
|
|
Amendment No. 7 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.17 |
|
|
Amendment No. 8 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.18 |
|
|
Amendment No. 9 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.19 |
|
|
Information System Agreement, dated February 23, 2000, between McKesson Information
Solutions LLC and IASIS Healthcare Corporation, as amended (1)** |
|
|
|
|
|
|
10.20 |
|
|
Amended and Restated Credit Agreement, dated as of April 27, 2007, by and among IASIS
Healthcare LLC, as Borrower, IASIS Healthcare Corporation, as Holdings, Bank of
America, N.A., as administrative agent, swingline lender revolving L/C issuer and
synthetic L/C issuer and each lender from time to time party thereto (19) |
|
|
|
|
|
|
10.21 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and David R. White (1) |
|
|
|
|
|
|
10.22 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and Sandra K. McRee (1) |
|
|
|
|
|
|
10.23 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and W. Carl Whitmer (1) |
133
|
|
|
|
|
Exhibit No. |
|
Description |
|
10.24 |
|
|
First Amendment to Employment Agreement, dated January 31, 2008, by and between IASIS
Healthcare Corporation and Sandra K. McRee (11) |
|
|
|
|
|
|
10.25 |
|
|
Agreement for Severance Benefits and Restrictive Covenants, dated as of March 1, 2001,
by and between IASIS Management Company and Carolyn Rose (17) |
|
|
|
|
|
|
10.26 |
|
|
Form of Roll-over Option Letter Agreement (1) |
|
|
|
|
|
|
10.27 |
|
|
IASIS Healthcare Corporation 2004 Stock Option Plan (1) |
|
|
|
|
|
|
10.28 |
|
|
Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare
LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital
L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners
Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS
Co-Invest II LLC (1) |
|
|
|
|
|
|
10.29 |
|
|
Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment
LLC and IASIS Healthcare Corporation (1) |
|
|
|
|
|
|
10.30 |
|
|
Form of Management Stockholders Agreement between IAS and each of David R. White,
Sandra K. McRee and W. Carl Whitmer (1) |
|
|
|
|
|
|
10.31 |
|
|
Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
|
|
10.32 |
|
|
Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
|
|
10.33 |
|
|
Form of Management Stockholders Agreement for Rollover Options (1) |
|
|
|
|
|
|
10.34 |
|
|
IASIS Corporate Incentive Plan (1) |
|
|
|
|
|
|
10.35 |
|
|
IASIS Market Executive Incentive Program (1) |
|
|
|
|
|
|
10.36 |
|
|
Director Compensation and Restricted Share Award Agreement, dated as of February 14,
2005, between IASIS Healthcare Corporation and Kirk Gorman (12) |
|
|
|
|
|
|
10.37 |
|
|
First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (13) |
|
|
|
|
|
|
10.38 |
|
|
Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005,
between IASIS Healthcare Corporation and Sharad Mansukani (14) |
|
|
|
|
|
|
10.39 |
|
|
Asset Purchase Agreement, dated July 20, 2006, by and among Glenwood Regional Medical
Center, Glenwood Health Services, Inc., Hospital Service District No. 1 of the Parish
of Ouachita, State of Louisiana, IASIS Glenwood Regional Medical Center, L.P. and IASIS
Healthcare, LLC (15) |
|
|
|
|
|
|
10.40 |
|
|
IASIS Healthcare Non-Qualified Deferred Compensation Program (4) |
|
|
|
|
|
|
10.41 |
|
|
Contribution Agreement, dated as of May 9, 2007, by and among Odessa Regional Hospital,
LP, Alliance Hospital, Ltd. and Sri-Sai Enterprises, Inc. (16) |
|
|
|
|
|
|
14 |
|
|
Code of Ethics (9) |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of IASIS Healthcare Corporation |
|
|
|
|
|
|
31.2 |
|
|
Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
** |
|
Portions of this exhibit have been omitted and filed separately with the Commission pursuant
to a grant of confidential treatment pursuant to Rule 24(b)-2 promulgated under the Securities
Exchange Act of 1934, as amended. |
|
(1) |
|
Incorporated by reference to the Companys Registration Statement on Form S-4 (Registration
No. 333-117362). |
134
|
|
|
(2) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2004. |
|
(3) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2006. |
|
(4) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2006. |
|
(5) |
|
Incorporated by reference to IASIS Healthcare Corporations Annual Report on Form 10-K for
the fiscal year ended September 30, 2000. |
|
(6) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2003. |
|
(7) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 12, 2005. |
|
(8) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2002. |
|
(9) |
|
Incorporated by reference to IASIS Healthcare Corporations Annual Report on Form 10-K for
the fiscal year ended September 30, 2003. |
|
(10) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 2, 2007. |
|
(11) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on February 5,
2008. |
|
(12) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on February 18,
2005. |
|
(13) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on March 22,
2005. |
|
(14) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on April 20,
2005. |
|
(15) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on July 24, 2006. |
|
(16) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 10, 2007. |
|
(17) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2008. |
135
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
IASIS HEALTHCARE LLC
|
|
Date: November 25, 2009 |
By: |
/s/ David R. White |
|
|
|
David R. White |
|
|
|
Chairman of the Board and Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ David R. White |
|
Chairman of the Board and |
|
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
November 25, 2009 |
|
|
|
|
|
/s/ W. Carl Whitmer |
|
Chief Financial Officer |
|
|
|
|
(Principal Financial Officer)
|
|
November 25, 2009 |
|
|
|
|
|
/s/ John M. Doyle |
|
Chief Financial Officer |
|
|
|
|
(Principal Accounting Officer)
|
|
November 25, 2009 |
|
|
|
|
|
/s/ Jonathan J. Coslet |
|
Director of IASIS Healthcare Corporation |
|
|
|
|
(sole member of IASIS Healthcare LLC)
|
|
November 25, 2009 |
|
|
|
|
|
/s/ David Dupree |
|
Director of IASIS Healthcare Corporation |
|
|
|
|
(sole member of IASIS Healthcare LLC)
|
|
November 25, 2009 |
|
|
|
|
|
/s/ Kirk E. Gorman |
|
Director of IASIS Healthcare Corporation |
|
|
|
|
(sole member of IASIS Healthcare LLC)
|
|
November 25, 2009 |
|
|
|
|
|
|
|
Director of IASIS Healthcare Corporation |
|
|
|
|
(sole member of IASIS Healthcare LLC)
|
|
|
|
|
|
|
|
|
|
Director of IASIS Healthcare Corporation |
|
|
|
|
(sole member of IASIS Healthcare LLC)
|
|
|
|
|
|
|
|
|
|
Director of IASIS Healthcare Corporation |
|
|
|
|
(sole member of IASIS Healthcare LLC)
|
|
|
|
|
|
|
|
/s/ Jeffrey C. Lightcap |
|
Director of IASIS Healthcare Corporation |
|
|
|
|
(sole member of IASIS Healthcare LLC)
|
|
November 25, 2009 |
|
|
|
|
|
/s/ Sharad Mansukani |
|
Director of IASIS Healthcare Corporation |
|
|
|
|
(sole member of IASIS Healthcare LLC)
|
|
November 25, 2009 |
136
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY
REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material has been sent to security holders.
137
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
2.1 |
|
|
Agreement and Plan of Merger, dated as of May 4, 2004, by and among IASIS Investment
LLC, Titan Merger Corporation and IASIS Healthcare Corporation (1) |
|
|
|
|
|
|
2.2 |
|
|
Indemnification Agreement dated as of May 4, 2004, by and among IASIS Investment LLC,
IASIS Healthcare Corporation, and the stockholders and option holders of IASIS
Healthcare Corporation listed on the signature pages thereof (2) |
|
|
|
|
|
|
3.1 |
|
|
Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State
of the State of Delaware on May 11, 2004 (1) |
|
|
|
|
|
|
3.2 |
|
|
Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (1) |
|
|
|
|
|
|
4.1 |
|
|
Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC, IASIS Capital
Corporation, the Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as
Trustee (1) |
|
|
|
|
|
|
4.2 |
|
|
Form of Notation of Subsidiary Guarantee (1) |
|
|
|
|
|
|
4.3 |
|
|
Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (1) |
|
|
|
|
|
|
4.4 |
|
|
Supplemental Indenture, dated as of June 30, 2004, by and between IASIS Finance Texas
Holdings, LLC, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary
Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1) |
|
|
|
|
|
|
4.5 |
|
|
Supplemental Indenture, effective as of August 1, 2005, by and among Cardiovascular
Specialty Centers of Utah, LP, IASIS Healthcare LLC, IASIS Capital Corporation, the
existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee
(3) |
|
|
|
|
|
|
4.6 |
|
|
Supplemental Indenture, dated as of July 20, 2006, by and among IASIS Glenwood Regional
Medical Center, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing
Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (4) |
|
|
|
|
|
|
4.7 |
|
|
Supplemental Indenture, dated as of July 27, 2006, by and among The Heart Center of
Central Phoenix, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing
Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (4) |
|
|
|
|
|
|
10.1 |
|
|
Lease, dated as of July 29, 1977, by and between Sierra Equities, Inc., as Landlord,
and Mesa General Hospital, Inc., as Tenant (5) |
|
|
|
|
|
|
10.2 |
|
|
Addendum to Lease entered into by and between Sierra Equities, Inc., as Landlord, and
Mesa General Hospital, Inc., as Tenant (5) |
|
|
|
|
|
|
10.3 |
|
|
Conforming Amendment to Lease, dated as of June 10, 1991, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (5) |
|
|
|
|
|
|
10.4 |
|
|
Amendment to Hospital Lease, dated as of October 31, 2000, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, L.P., as Tenant (5) |
|
|
|
|
|
|
10.5 |
|
|
Amendment to Lease, dated April 30, 2003, by and between Sierra Equities, Inc. and Mesa
General Hospital, L.P. (6) |
|
|
|
|
|
|
10.6 |
|
|
Letter Agreement effective May 6, 2005, amending Lease by and between Sierra Equities
Inc. and Mesa General Hospital, L.P. (7) |
|
|
|
|
|
|
10.7 |
|
|
Amended and Restated Pioneer Hospital Lease, dated as of June 28, 2002, by and between
Health Care Property Investors, Inc. and Pioneer Valley Hospital, Inc. (8) |
138
|
|
|
|
|
Exhibit No. |
|
Description |
|
10.8 |
|
|
Lease Agreement, dated as of October 6, 2003, between The Dover Centre, LLC and IASIS
Healthcare Corporation (9) |
|
|
|
|
|
|
10.9 |
|
|
Form of Indemnification Agreement (1) |
|
|
|
|
|
|
10.10 |
|
|
Contract between Arizona Health Care Cost Containment System and Health Choice Arizona
(including Amendment No. 1 thereto), effective as of October 1, 2008 (17) |
|
|
|
|
|
|
10.11 |
|
|
Amendment No. 2 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of January 15, 2009 |
|
|
|
|
|
|
10.12 |
|
|
Amendment No. 3 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of May 1, 2009 |
|
|
|
|
|
|
10.13 |
|
|
Amendment No. 4 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of August 1, 2009 |
|
|
|
|
|
|
10.14 |
|
|
Amendment No. 5 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of August 1, 2009 |
|
|
|
|
|
|
10.15 |
|
|
Amendment No. 6 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.16 |
|
|
Amendment No. 7 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.17 |
|
|
Amendment No. 8 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.18 |
|
|
Amendment No. 9 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.19 |
|
|
Information System Agreement, dated February 23, 2000, between McKesson Information
Solutions LLC and IASIS Healthcare Corporation, as amended (1)** |
|
|
|
|
|
|
10.20 |
|
|
Amended and Restated Credit Agreement, dated as of April 27, 2007, by and among IASIS
Healthcare LLC, as Borrower, IASIS Healthcare Corporation, as Holdings, Bank of
America, N.A., as administrative agent, swingline lender revolving L/C issuer and
synthetic L/C issuer and each lender from time to time party thereto (10) |
|
|
|
|
|
|
10.21 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and David R. White (1) |
|
|
|
|
|
|
10.22 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and Sandra K. McRee (1) |
|
|
|
|
|
|
10.23 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and W. Carl Whitmer (1) |
|
|
|
|
|
|
10.24 |
|
|
First Amendment to Employment Agreement, dated January 31, 2008, by and between IASIS
Healthcare Corporation and Sandra K. McRee (11) |
|
|
|
|
|
|
10.25 |
|
|
Agreement for Severance Benefits and Restrictive Covenants, dated as of March 1, 2001,
by and between IASIS Management Company and Carolyn Rose (17) |
|
|
|
|
|
|
10.26 |
|
|
Form of Roll-over Option Letter Agreement (1) |
|
|
|
|
|
|
10.27 |
|
|
IASIS Healthcare Corporation 2004 Stock Option Plan (1) |
|
|
|
|
|
|
10.28 |
|
|
Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare
LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital
L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners
Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS
Co-Invest II LLC (1) |
|
|
|
|
|
|
10.29 |
|
|
Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment
LLC and IASIS Healthcare Corporation (1) |
|
|
|
|
|
|
10.30 |
|
|
Form of Management Stockholders Agreement between IAS and each of David R. White,
Sandra K. McRee and W. Carl Whitmer (1) |
|
|
|
|
|
|
10.31 |
|
|
Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
|
|
10.32 |
|
|
Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
|
|
10.33 |
|
|
Form of Management Stockholders Agreement for Rollover Options (1) |
|
|
|
|
|
|
10.34 |
|
|
IASIS Corporate Incentive Plan (1) |
139
|
|
|
|
|
Exhibit No. |
|
Description |
|
10.35 |
|
|
IASIS Market Executive Incentive Program (1) |
|
|
|
|
|
|
10.36 |
|
|
Director Compensation and Restricted Share Award Agreement, dated as of February 14,
2005, between IASIS Healthcare Corporation and Kirk Gorman (12) |
|
|
|
|
|
|
10.37 |
|
|
First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (13) |
|
|
|
|
|
|
10.38 |
|
|
Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005,
between IASIS Healthcare Corporation and Sharad Mansukani (14) |
|
|
|
|
|
|
10.39 |
|
|
Asset Purchase Agreement, dated July 20, 2006, by and among Glenwood Regional Medical
Center, Glenwood Health Services, Inc., Hospital Service District No. 1 of the Parish
of Ouachita, State of Louisiana, IASIS Glenwood Regional Medical Center, L.P. and IASIS
Healthcare, LLC (15) |
|
|
|
|
|
|
10.40 |
|
|
IASIS Healthcare Non-Qualified Deferred Compensation Program (4) |
|
|
|
|
|
|
10.41 |
|
|
Contribution Agreement, dated as of May 9, 2007, by and among Odessa Regional Hospital,
LP, Alliance Hospital, Ltd. and Sri-Sai Enterprises, Inc. (16) |
|
|
|
|
|
|
14 |
|
|
Code of Ethics (9) |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of IASIS Healthcare Corporation |
|
|
|
|
|
|
31.1 |
|
|
Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
** |
|
Portions of this exhibit have been omitted and filed separately with the Commission pursuant
to a grant of confidential treatment pursuant to Rule 24(b)-2 promulgated under the Securities
Exchange Act of 1934, as amended. |
|
(1) |
|
Incorporated by reference to the Companys Registration Statement on Form S-4 (Registration
No. 333-117362). |
|
(2) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2004. |
|
(3) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2006. |
|
(4) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2006. |
140
|
|
|
(5) |
|
Incorporated by reference to IASIS Healthcare Corporations Annual Report on Form 10-K for
the fiscal year ended September 30, 2000. |
|
(6) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2003. |
|
(7) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 12, 2005. |
|
(8) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2002. |
|
(9) |
|
Incorporated by reference to IASIS Healthcare Corporations Annual Report on Form 10-K for
the fiscal year ended September 30, 2003. |
|
(10) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 2, 2007. |
|
(11) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on February 5,
2008. |
|
(12) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on February 18,
2005. |
|
(13) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on March 22,
2005. |
|
(14) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on April 20,
2005. |
|
(15) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on July 24, 2006. |
|
(16) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 10, 2007. |
|
(17) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2008. |
141