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EX-31.2 - EXHIBIT 31.2 - IASIS Healthcare LLC | c96052exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - IASIS Healthcare LLC | c96052exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
OR
o | 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)
DELAWARE | 20-1150104 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
DOVER CENTRE | ||
117 SEABOARD LANE, BUILDING E | ||
FRANKLIN, TENNESSEE | 37067 | |
(Address of principal executive offices) | (Zip Code) |
(615) 844-2747
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES 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 whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO þ
As
of February 12, 2010, 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.
Table of Contents
PART I.
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Item 1. | Financial Statements |
IASIS HEALTHCARE LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 197,075 | $ | 206,528 | ||||
Accounts receivable, less allowance for doubtful accounts of
$127,501 and $126,132 at December 31, 2009 and September 30,
2009, respectively |
234,802 | 230,198 | ||||||
Inventories |
51,553 | 50,492 | ||||||
Deferred income taxes |
37,768 | 39,038 | ||||||
Prepaid expenses and other current assets |
43,907 | 49,453 | ||||||
Total current assets |
565,105 | 575,709 | ||||||
Property and equipment, net |
986,482 | 997,353 | ||||||
Goodwill |
717,920 | 717,920 | ||||||
Other intangible assets, net |
29,250 | 30,000 | ||||||
Other assets, net |
35,611 | 36,222 | ||||||
Total assets |
$ | 2,334,368 | $ | 2,357,204 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 66,466 | $ | 68,552 | ||||
Salaries and benefits payable |
30,924 | 42,548 | ||||||
Accrued interest payable |
2,105 | 12,511 | ||||||
Medical claims payable |
111,325 | 113,519 | ||||||
Other accrued expenses and other current liabilities |
55,886 | 65,701 | ||||||
Current portion of long-term debt and capital lease obligations |
6,683 | 8,366 | ||||||
Total current liabilities |
273,389 | 311,197 | ||||||
Long-term debt and capital lease obligations |
1,049,703 | 1,051,471 | ||||||
Deferred income taxes |
108,704 | 106,425 | ||||||
Other long-term liabilities |
50,722 | 54,222 | ||||||
Non-controlling interests with redemption rights |
72,527 | 72,527 | ||||||
Equity: |
||||||||
Members equity |
768,915 | 750,932 | ||||||
Non-controlling interests |
10,408 | 10,430 | ||||||
Total equity |
779,323 | 761,362 | ||||||
Total liabilities and equity |
$ | 2,334,368 | $ | 2,357,204 | ||||
See accompanying notes.
1
Table of Contents
IASIS HEALTHCARE LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands)
Quarter Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Net revenue: |
||||||||
Acute care revenue |
$ | 424,660 | $ | 398,447 | ||||
Premium revenue |
204,297 | 163,177 | ||||||
Total net revenue |
628,957 | 561,624 | ||||||
Costs and expenses: |
||||||||
Salaries and benefits |
170,482 | 162,136 | ||||||
Supplies |
65,409 | 59,826 | ||||||
Medical claims |
178,567 | 137,002 | ||||||
Other operating expenses |
84,592 | 79,350 | ||||||
Provision for bad debts |
47,949 | 47,131 | ||||||
Rentals and leases |
10,275 | 9,479 | ||||||
Interest expense, net |
16,732 | 18,978 | ||||||
Depreciation and amortization |
23,877 | 24,996 | ||||||
Management fees |
1,250 | 1,250 | ||||||
Total costs and expenses |
599,133 | 540,148 | ||||||
Earnings from continuing operations before gain on disposal of assets and income taxes |
29,824 | 21,476 | ||||||
Gain on disposal of assets, net |
104 | 1,293 | ||||||
Earnings from continuing operations before income taxes |
29,928 | 22,769 | ||||||
Income tax expense |
10,591 | 8,811 | ||||||
Net earnings from continuing operations |
19,337 | 13,958 | ||||||
Earnings (loss) from discontinued operations, net of income taxes |
46 | (711 | ) | |||||
Net earnings |
19,383 | 13,247 | ||||||
Net earnings attributable to non-controlling interests |
(2,028 | ) | (1,597 | ) | ||||
Net earnings attributable to IASIS Healthcare LLC |
$ | 17,355 | $ | 11,650 | ||||
See accompanying notes.
2
Table of Contents
IASIS HEALTHCARE LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Quarter Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities |
||||||||
Net earnings |
$ | 19,383 | $ | 13,247 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
Loss (earnings) from discontinued operations |
(46 | ) | 711 | |||||
Depreciation and amortization |
23,877 | 24,996 | ||||||
Amortization of loan costs |
775 | 743 | ||||||
Deferred income taxes |
2,652 | 1,050 | ||||||
Income tax benefit from parent company interest |
2,224 | | ||||||
Gain on disposal of assets, net |
(104 | ) | (1,293 | ) | ||||
Stock compensation costs |
121 | 141 | ||||||
Changes in operating assets and liabilities, net of the effect of dispositions: |
||||||||
Accounts receivable, net |
(4,332 | ) | (8,724 | ) | ||||
Inventories, prepaid expenses and other current assets |
4,486 | (1,139 | ) | |||||
Accounts payable, other accrued expenses and other accrued liabilities |
(39,373 | ) | 12,551 | |||||
Net cash provided by operating activities continuing operations |
9,663 | 42,283 | ||||||
Net cash provided by (used in) operating activities discontinued operations |
(125 | ) | 1,004 | |||||
Net cash provided by operating activities |
9,538 | 43,287 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment, net |
(12,282 | ) | (29,452 | ) | ||||
Proceeds from sale of assets |
31 | 4,880 | ||||||
Change in other assets, net |
659 | 878 | ||||||
Net cash used in investing activities continuing operations |
(11,592 | ) | (23,694 | ) | ||||
Net cash provided by investing activities discontinued operations |
| 7 | ||||||
Net cash used in investing activities |
(11,592 | ) | (23,687 | ) | ||||
Cash flows from financing activities |
||||||||
Payment of debt and capital lease obligations |
(3,452 | ) | (4,429 | ) | ||||
Distributions to non-controlling interests |
(3,934 | ) | (1,686 | ) | ||||
Costs paid for the repurchase of partnership interest, net |
(13 | ) | (1,384 | ) | ||||
Net cash used in financing activities |
(7,399 | ) | (7,499 | ) | ||||
Change in cash and cash equivalents |
(9,453 | ) | 12,101 | |||||
Cash and cash equivalents at beginning of period |
206,528 | 80,738 | ||||||
Cash and cash equivalents at end of period |
$ | 197,075 | $ | 92,839 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid for interest |
$ | 26,393 | $ | 26,888 | ||||
Cash paid for income taxes, net |
$ | 4,000 | $ | | ||||
See accompanying notes.
3
Table of Contents
IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements as of and for the quarters ended
December 31, 2009 and 2008, reflect the financial position, results of operations and cash flows of
IASIS Healthcare LLC (IASIS or the Company). The Companys sole member and parent company is
IASIS Healthcare Corporation (Holdings or IAS).
IASIS owns and operates medium-sized acute care hospitals in high-growth urban and suburban
markets. At December 31, 2009, the Company owned or leased 15 acute care hospital facilities and
one behavioral health hospital facility, with a total of 2,848 beds in service, located in six
regions:
| Salt Lake City, Utah; |
| Phoenix, Arizona; |
| Tampa-St. Petersburg, Florida; |
| three cities in Texas, including San Antonio; |
| Las Vegas, Nevada; and |
| 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, Arizona.
The unaudited condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes
required by GAAP for complete financial statements. The condensed consolidated balance sheet of the
Company at September 30, 2009, has been derived from the audited consolidated financial statements
at that date, but does not include all of the information and footnotes required by GAAP for
complete financial statements. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended September 30, 2009.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all material adjustments (consisting of normal recurring items) necessary for a
fair presentation of results for the interim periods presented. The results of operations for any
interim period are not necessarily indicative of results for the full year.
Principles of Consolidation
The unaudited condensed 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 most 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 GAAP requires management to
make estimates and assumptions that affect the amounts reported in the accompanying unaudited
condensed consolidated financial statements and notes. Actual results could differ from those
estimates.
4
Table of Contents
IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 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 $9.0 million and $10.0 million for the quarters ended December 31, 2009 and 2008,
respectively.
Adoption of New Accounting Standards
Effective October 1, 2009, the Company adopted the new provisions of Financial Accounting
Standards Board (FASB) authoritative guidance regarding non-controlling interests in consolidated
financial statements. The guidance requires the Company to clearly identify and present ownership
interests in subsidiaries held by parties other than the Company in the consolidated financial
statements within the equity section. It also requires the amounts of consolidated net earnings
attributable to the Company and to the non-controlling interests to be clearly identified and
presented on the face of the consolidated statements of operations.
The Company has seven non-controlling interests that include third-party partners that own
limited partnership units with certain redemption features. These redeemable limited partnership
units include certain put rights which allow the units to be sold back to the Company, subject to
certain limitations, at the fair value of the units. According to the limited partnership
agreements for these seven non-controlling interests, the fair value
of the units is generally calculated as the product of the EBITDA (earnings before interest, taxes, depreciation,
amortization and management fees) and a fixed multiple, less any long-term debt of the entity. The
majority of these put rights require an initial holding period of six years after purchase, at
which point the holder of the redeemable limited partnership units may put back to the Company 20%
of such holders units. Each succeeding year, the number of vested redeemable units will increase
by 20% until the end of the tenth year after the initial investment, at which point 100% of the
units may be put back to the Company. Under no circumstances shall
the Company be required to repurchase more than 25% of the total
vested redeemable limited partnership units in any fiscal year. The equity attributable to these interests has been
classified as non-controlling interests with redemption rights in the accompanying unaudited
condensed consolidated balance sheets.
5
Table of Contents
IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following schedule presents the reconciliation of total equity, members equity
attributable to the Company, and equity attributable to the non-controlling interests as if the
provisions of the non-controlling interest authoritative guidance were adopted on the first day of
the quarter ended December 31, 2009 (in thousands):
Non-controlling | ||||||||||||||||
Interests with | Non- | |||||||||||||||
Redeemable | Members | controlling | ||||||||||||||
Rights | Equity | Interests | Total Equity | |||||||||||||
Balance at September 30, 2009 (as
previously reported) |
$ | | $ | 780,847 | $ | | $ | 780,847 | ||||||||
October 1, 2009 adjustment to
non-controlling interests from adoption of
authoritative guidance |
72,527 | (29,915 | ) | 10,430 | (19,485 | ) | ||||||||||
Balance at September 30, 2009 (as adjusted) |
72,527 | 750,932 | 10,430 | 761,362 | ||||||||||||
Net earnings |
1,984 | 17,355 | 44 | 17,399 | ||||||||||||
Distributions to, and repurchases of,
non-controlling interests |
(3,881 | ) | | (66 | ) | (66 | ) | |||||||||
Stock compensation costs |
| 121 | | 121 | ||||||||||||
Other
comprehensive income |
| 180 | | 180 | ||||||||||||
Contribution from parent related to tax
benefit from Holdings Senior PIK Loans
interest |
| 2,224 | | 2,224 | ||||||||||||
Adjustment to redemption value of
non-controlling interests with redeemable
rights |
1,897 | (1,897 | ) | | (1,897 | ) | ||||||||||
Balance at December 31, 2009 |
$ | 72,527 | $ | 768,915 | $ | 10,408 | $ | 779,323 | ||||||||
The
Company has adopted the new FASB 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 adoption of these provisions did not impact the Companys results of operations or financial position; however, it is anticipated to have a
material effect on the Companys accounting for future acquisitions.
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 quarterly report on Form 10-Q with the Securities
and Exchange Commission.
6
Table of Contents
IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Senior secured credit facilities |
$ | 574,678 | $ | 576,150 | ||||
Senior subordinated notes |
475,000 | 475,000 | ||||||
Capital leases and other obligations |
6,708 | 8,687 | ||||||
1,056,386 | 1,059,837 | |||||||
Less current maturities |
6,683 | 8,366 | ||||||
$ | 1,049,703 | $ | 1,051,471 | |||||
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, 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 0.50% 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. 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.
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
At December 31, 2009, amounts outstanding under the Companys senior secured credit facilities
consisted of a $426.9 million term loan and a $147.8 million delayed draw term loan. In addition,
the Company had $39.9 million and $25.3 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 3.4%
for the quarter ended December 31, 2009.
The Company has identified one defaulting lender, Lehman Brothers (Lehman), under the senior
secured revolving credit facility. Lehmans participation in the revolving credit facility is
approximately 8.9%, which represents $20.0 million of the total revolver capacity.
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% senior subordinated notes due 2014 (the 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.
Holdings Senior Paid-in-Kind Loans
IAS has outstanding Holdings Senior Paid-in-Kind (PIK) Loans, which were used to repurchase
certain preferred equity from its stockholders in fiscal 2007. The Holdings Senior PIK Loans mature
June 15, 2014, and bear interest at an annual rate equal to
LIBOR plus 5.25%. At December 31, 2009, the outstanding balance of the
Holdings Senior PIK Loans was $373.8 million, which includes $73.8 million of interest that has
accrued to the principal of these loans since the date of issuance.
In June 2012, the Holdings Senior
PIK Loans, which rank behind the Companys existing debt, will
convert to cash-pay, at which time all accrued interest becomes payable.
3. 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) | ||||
Expiring on February 28, 2011 |
$ | 225,000 | ||
Expiring on February 29, 2012 |
$ | 200,000 |
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 quarter ended December 31, 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
unaudited condensed consolidated statements of operations.
The Company applies the 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 December 31, 2009 and September 30,
2009, reflect liability balances of $4.4 million and $4.7 million, respectively, and are included
in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets.
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 unaudited condensed consolidated
balance sheets.
4.
ACCUMULATED OTHER COMPREHENSIVE LOSS
A summary of activity in the Companys accumulated other comprehensive loss consists of the
following (in thousands):
Balance at September 30, 2009 |
$ | (2,926 | ) | |
Change in fair value of interest rate swaps, net of income tax effect of $109 |
180 | |||
Balance at December 31, 2009 |
$ | (2,746 | ) | |
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. 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 Hospital and Biltmore are classified in the Companys accompanying condensed consolidated
statements of operations as discontinued operations. The following table sets forth the components
of discontinued operations for the quarters ended December 31, 2009 and 2008, respectively, (in
thousands):
Quarter ended | Quarter ended | |||||||
December 31, 2009 | December 31, 2008 | |||||||
Total net revenue |
$ | 93 | $ | 228 | ||||
Operating expenses |
19 | 1,363 | ||||||
Income tax expense (benefit) |
28 | (424 | ) | |||||
Earnings (loss) from
discontinued operations,
net of income taxes |
$ | 46 | $ | (711 | ) | |||
Income taxes allocated to discontinued operations resulted in related effective tax rates of
37.8% and 37.4% for the quarters ended December 31, 2009 and 2008, respectively.
6. 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 but not limited to 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 December 31, 2009 and September 30, 2009, the Companys professional and
general liability accrual for asserted and unasserted claims totaled $39.7 million and $41.7
million, respectively.
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.
10
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Arizona Health Care Cost
Containment System (AHCCCS) and the Centers for Medicare & Medicaid Services (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 December 31, 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 Health Choices 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. Oral argument in the Ninth Circuit
has been scheduled for March 9, 2010. 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.
11
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued authoritative guidance requiring additional information to be
disclosed with respect to Level 3 fair value measurements, as well as transfers to and from Level 1
and Level 2 measurements. In addition, enhanced disclosures are required concerning inputs and
valuation techniques used to determine Level 2 and Level 3 fair value measurements. The new
disclosures and clarifications of existing disclosures are effective for the quarter ending March
31, 2010, with the effective date for additional Level 3 related disclosures effective for periods
beginning after December 15, 2010. The Company does not anticipate the adoption of these
provisions to materially impact its results of operations, financial position or cash flows.
12
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. 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 Quarter Ended December 31, 2009 | ||||||||||||||||
Acute Care | Health Choice | Eliminations | Consolidated | |||||||||||||
Acute care revenue |
$ | 424,660 | $ | | $ | | $ | 424,660 | ||||||||
Premium revenue |
| 204,297 | | 204,297 | ||||||||||||
Revenue between segments |
2,676 | | (2,676 | ) | | |||||||||||
Net revenue |
427,336 | 204,297 | (2,676 | ) | 628,957 | |||||||||||
Salaries and benefits |
165,890 | 4,592 | | 170,482 | ||||||||||||
Supplies |
65,362 | 47 | | 65,409 | ||||||||||||
Medical claims |
| 181,243 | (2,676 | ) | 178,567 | |||||||||||
Other operating expenses |
78,325 | 6,267 | | 84,592 | ||||||||||||
Provision for bad debts |
47,949 | | | 47,949 | ||||||||||||
Rentals and leases |
9,904 | 371 | | 10,275 | ||||||||||||
Adjusted EBITDA(1) |
59,906 | 11,777 | | 71,683 | ||||||||||||
Interest expense, net |
16,732 | | | 16,732 | ||||||||||||
Depreciation and amortization |
22,988 | 889 | | 23,877 | ||||||||||||
Management fees |
1,250 | | | 1,250 | ||||||||||||
Earnings from continuing
operations before gain on
disposal of assets and income
taxes |
18,936 | 10,888 | | 29,824 | ||||||||||||
Gain on disposal of assets, net |
104 | | | 104 | ||||||||||||
Earnings from continuing
operations before income
taxes |
$ | 19,040 | $ | 10,888 | $ | | $ | 29,928 | ||||||||
Segment assets |
$ | 2,085,057 | $ | 249,311 | $ | 2,334,368 | ||||||||||
Capital expenditures |
$ | 12,272 | $ | 10 | $ | 12,282 | ||||||||||
Goodwill |
$ | 712,163 | $ | 5,757 | $ | 717,920 | ||||||||||
For the Quarter Ended December 31, 2008 | ||||||||||||||||
Acute Care | Health Choice | Eliminations | Consolidated | |||||||||||||
Acute care revenue |
$ | 398,447 | $ | | $ | | $ | 398,447 | ||||||||
Premium revenue |
| 163,177 | | 163,177 | ||||||||||||
Revenue between segments |
1,697 | | (1,697 | ) | | |||||||||||
Net revenue |
400,144 | 163,177 | (1,697 | ) | 561,624 | |||||||||||
Salaries and benefits |
157,232 | 4,904 | | 162,136 | ||||||||||||
Supplies |
59,741 | 85 | | 59,826 | ||||||||||||
Medical claims |
| 138,699 | (1,697 | ) | 137,002 | |||||||||||
Other operating expenses |
73,785 | 5,565 | | 79,350 | ||||||||||||
Provision for bad debts |
47,131 | | | 47,131 | ||||||||||||
Rentals and leases |
9,101 | 378 | | 9,479 | ||||||||||||
Adjusted EBITDA(1) |
53,154 | 13,546 | | 66,700 | ||||||||||||
Interest expense, net |
18,978 | | | 18,978 | ||||||||||||
Depreciation and amortization |
24,125 | 871 | | 24,996 | ||||||||||||
Management fees |
1,250 | | | 1,250 | ||||||||||||
Earnings from continuing
operations before gain on
disposal of assets and income
taxes |
8,801 | 12,675 | | 21,476 | ||||||||||||
Gain on disposal of assets, net |
1,293 | | | 1,293 | ||||||||||||
Earnings from continuing
operations before income
taxes |
$ | 10,094 | $ | 12,675 | $ | | $ | 22,769 | ||||||||
Segment assets |
$ | 2,121,659 | $ | 208,895 | $ | 2,330,554 | ||||||||||
Capital expenditures |
$ | 28,818 | $ | 634 | $ | 29,452 | ||||||||||
Goodwill |
$ | 774,806 | $ | 5,757 | $ | 780,563 | ||||||||||
13
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(1) | Adjusted EBITDA represents net earnings from continuing operations before interest expense, income tax expense, depreciation and amortization, gain on disposal of assets 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, majority shareholder of IAS. 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 condensed 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. |
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The 8 3/4% notes described in Note 2 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.
Summarized condensed consolidating balance sheets at December 31, 2009 and September 30, 2009,
condensed consolidating statements of operations for the quarters ended December 31, 2009 and 2008,
and condensed consolidating statements of cash flows for the quarters ended December 31, 2009 and
2008, 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.
14
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Balance Sheet (unaudited)
December 31, 2009
(in thousands)
Condensed Consolidating Balance Sheet (unaudited)
December 31, 2009
(in thousands)
Subsidiary | Subsidiary | Condensed | ||||||||||||||||||
Parent Issuer | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 196,878 | $ | 197 | $ | | $ | 197,075 | ||||||||||
Accounts receivable, net |
| 91,814 | 142,988 | | 234,802 | |||||||||||||||
Inventories |
| 22,701 | 28,852 | | 51,553 | |||||||||||||||
Deferred income taxes |
37,768 | | | | 37,768 | |||||||||||||||
Prepaid expenses and other
current assets |
| 18,635 | 25,272 | | 43,907 | |||||||||||||||
Total current assets |
37,768 | 330,028 | 197,309 | | 565,105 | |||||||||||||||
Property and equipment, net |
| 343,768 | 642,714 | | 986,482 | |||||||||||||||
Intercompany |
| (221,597 | ) | 221,597 | | | ||||||||||||||
Net investment in and advances
to subsidiaries |
1,653,990 | | | (1,653,990 | ) | | ||||||||||||||
Goodwill |
17,331 | 67,445 | 633,144 | | 717,920 | |||||||||||||||
Other intangible assets, net |
| | 29,250 | | 29,250 | |||||||||||||||
Other assets, net |
14,407 | 17,248 | 3,956 | | 35,611 | |||||||||||||||
Total assets |
$ | 1,723,496 | $ | 536,892 | $ | 1,727,970 | $ | (1,653,990 | ) | $ | 2,334,368 | |||||||||
Liabilities and Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 20,892 | $ | 45,574 | $ | | $ | 66,466 | ||||||||||
Salaries and benefits payable |
| 16,622 | 14,302 | | 30,924 | |||||||||||||||
Accrued interest payable |
2,105 | (3,223 | ) | 3,223 | | 2,105 | ||||||||||||||
Medical claims payable |
| | 111,325 | | 111,325 | |||||||||||||||
Other accrued expenses and
other current liabilities |
| 37,724 | 18,162 | | 55,886 | |||||||||||||||
Current portion of long-term
debt and capital lease
obligations |
5,890 | 793 | 20,728 | (20,728 | ) | 6,683 | ||||||||||||||
Total current liabilities |
7,995 | 72,808 | 213,314 | (20,728 | ) | 273,389 | ||||||||||||||
Long-term debt and capital
lease obligations |
1,043,788 | 5,915 | 561,611 | (561,611 | ) | 1,049,703 | ||||||||||||||
Deferred income taxes |
108,704 | | | | 108,704 | |||||||||||||||
Other long-term liabilities |
| 50,080 | 642 | | 50,722 | |||||||||||||||
Total liabilities |
1,160,487 | 128,803 | 775,567 | (582,339 | ) | 1,482,518 | ||||||||||||||
Non-controlling interests with
redemption rights |
| 72,527 | | | 72,527 | |||||||||||||||
Equity: |
||||||||||||||||||||
Members equity |
563,009 | 325,154 | 952,403 | (1,071,651 | ) | 768,915 | ||||||||||||||
Non-controlling interests |
| 10,408 | | | 10,408 | |||||||||||||||
Total equity |
563,009 | 335,562 | 952,403 | (1,071,651 | ) | 779,323 | ||||||||||||||
Total liabilities and equity |
$ | 1,723,496 | $ | 536,892 | $ | 1,727,970 | $ | (1,653,990 | ) | $ | 2,334,368 | |||||||||
15
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Balance Sheet (unaudited)
September 30, 2009
(in thousands)
Condensed Consolidating Balance Sheet (unaudited)
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 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 | |||||||||||||||
Total liabilities |
1,171,627 | 147,320 | 791,962 | (587,594 | ) | 1,523,315 | ||||||||||||||
Non-controlling interests with redemption rights |
| 72,527 | | | 72,527 | |||||||||||||||
Equity: |
||||||||||||||||||||
Members equity |
590,051 | 292,789 | 970,625 | (1,102,533 | ) | 750,932 | ||||||||||||||
Non-controlling interests |
| 10,430 | | | 10,430 | |||||||||||||||
Total equity |
590,051 | 303,219 | 970,625 | (1,102,533 | ) | 761,362 | ||||||||||||||
Total liabilities and equity |
$ | 1,761,678 | $ | 523,066 | $ | 1,762,587 | $ | (1,690,127 | ) | $ | 2,357,204 | |||||||||
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Quarter Ended December 31, 2009 (unaudited)
(in thousands)
Condensed Consolidating Statement of Operations
For the Quarter Ended December 31, 2009 (unaudited)
(in thousands)
Subsidiary | Subsidiary | Condensed | ||||||||||||||||||
Parent Issuer | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net revenue: |
||||||||||||||||||||
Acute care revenue |
$ | | $ | 171,301 | $ | 256,035 | $ | (2,676 | ) | $ | 424,660 | |||||||||
Premium revenue |
| | 204,297 | | 204,297 | |||||||||||||||
Total net revenue |
| 171,301 | 460,332 | (2,676 | ) | 628,957 | ||||||||||||||
Costs and expenses: |
||||||||||||||||||||
Salaries and benefits |
| 86,609 | 83,873 | | 170,482 | |||||||||||||||
Supplies |
| 27,438 | 37,971 | | 65,409 | |||||||||||||||
Medical claims |
| | 181,243 | (2,676 | ) | 178,567 | ||||||||||||||
Other operating expenses |
| 29,889 | 54,703 | | 84,592 | |||||||||||||||
Provision for bad debts |
| 22,323 | 25,626 | | 47,949 | |||||||||||||||
Rentals and leases |
| 4,426 | 5,849 | | 10,275 | |||||||||||||||
Interest expense, net |
16,732 | | 9,744 | (9,744 | ) | 16,732 | ||||||||||||||
Depreciation and
amortization |
| 9,910 | 13,967 | | 23,877 | |||||||||||||||
Management fees |
1,250 | (5,564 | ) | 5,564 | | 1,250 | ||||||||||||||
Equity in earnings of
affiliates |
(36,212 | ) | | | 36,212 | | ||||||||||||||
Total costs and expenses |
(18,230 | ) | 175,031 | 418,540 | 23,792 | 599,133 | ||||||||||||||
Earnings (loss) from
continuing operations before
gain on disposal of assets and
income taxes |
18,230 | (3,730 | ) | 41,792 | (26,468 | ) | 29,824 | |||||||||||||
Gain on disposal of assets, net |
| 76 | 28 | | 104 | |||||||||||||||
Earnings (loss) from
continuing operations before
income taxes |
18,230 | (3,654 | ) | 41,820 | (26,468 | ) | 29,928 | |||||||||||||
Income tax expense |
10,591 | | | | 10,591 | |||||||||||||||
Net earnings (loss) from
continuing operations |
7,639 | (3,654 | ) | 41,820 | (26,468 | ) | 19,337 | |||||||||||||
Earnings (loss) from
discontinued operations, net
of income taxes |
(28 | ) | 75 | (1 | ) | | 46 | |||||||||||||
Net earnings (loss) |
7,611 | (3,579 | ) | 41,819 | (26,468 | ) | 19,383 | |||||||||||||
Net earnings attributable to
non-controlling interests |
| (2,028 | ) | | | (2,028 | ) | |||||||||||||
Net earnings (loss)
attributable to IASIS
Healthcare LLC |
$ | 7,611 | $ | (5,607 | ) | $ | 41,819 | $ | (26,468 | ) | $ | 17,355 | ||||||||
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Quarter Ended December 31, 2008 (unaudited)
(in thousands)
Condensed Consolidating Statement of Operations
For the Quarter Ended December 31, 2008 (unaudited)
(in thousands)
Subsidiary | Subsidiary | Condensed | ||||||||||||||||||
Parent Issuer | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net revenue: |
||||||||||||||||||||
Acute care revenue |
$ | | $ | 161,758 | $ | 238,386 | $ | (1,697 | ) | $ | 398,447 | |||||||||
Premium revenue |
| | 163,177 | | 163,177 | |||||||||||||||
Total net revenue |
| 161,758 | 401,563 | (1,697 | ) | 561,624 | ||||||||||||||
Costs and expenses: |
||||||||||||||||||||
Salaries and benefits |
| 80,594 | 81,542 | | 162,136 | |||||||||||||||
Supplies |
| 25,074 | 34,752 | | 59,826 | |||||||||||||||
Medical claims |
| | 138,699 | (1,697 | ) | 137,002 | ||||||||||||||
Other operating expenses |
| 29,098 | 50,252 | | 79,350 | |||||||||||||||
Provision for bad debts |
| 24,080 | 23,051 | | 47,131 | |||||||||||||||
Rentals and leases |
| 4,047 | 5,432 | | 9,479 | |||||||||||||||
Interest expense, net |
18,978 | | 13,844 | (13,844 | ) | 18,978 | ||||||||||||||
Depreciation and
amortization |
| 11,268 | 13,728 | | 24,996 | |||||||||||||||
Management fees |
1,250 | (5,139 | ) | 5,139 | | 1,250 | ||||||||||||||
Equity in earnings of
affiliates |
(26,421 | ) | | | 26,421 | | ||||||||||||||
Total costs and expenses |
(6,193 | ) | 169,022 | 366,439 | 10,880 | 540,148 | ||||||||||||||
Earnings (loss) from
continuing operations before
gain on disposal of assets and
income taxes |
6,193 | (7,264 | ) | 35,124 | (12,577 | ) | 21,476 | |||||||||||||
Gain on disposal of assets, net |
| 1,271 | 22 | | 1,293 | |||||||||||||||
Earnings (loss) from
continuing operations before
income taxes |
6,193 | (5,993 | ) | 35,146 | (12,577 | ) | 22,769 | |||||||||||||
Income tax expense |
8,811 | | | | 8,811 | |||||||||||||||
Net earnings (loss) from
continuing operations |
(2,618 | ) | (5,993 | ) | 35,146 | (12,577 | ) | 13,958 | ||||||||||||
Earnings (loss) from
discontinued operations, net
of income taxes |
424 | (1,150 | ) | 15 | | (711 | ) | |||||||||||||
Net earnings |
(2,194 | ) | (7,143 | ) | 35,161 | (12,577 | ) | 13,247 | ||||||||||||
Net earnings attributable to
non-controlling interests |
| (1,597 | ) | | | (1,597 | ) | |||||||||||||
Net earnings (loss)
attributable to IASIS
Healthcare LLC |
$ | (2,194 | ) | $ | (8,740 | ) | $ | 35,161 | $ | (12,577 | ) | $ | 11,650 | |||||||
18
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
For the Quarter Ended December 31, 2009 (unaudited)
(in thousands)
Condensed Consolidating Statement of Cash Flows
For the Quarter Ended December 31, 2009 (unaudited)
(in thousands)
Subsidiary | Subsidiary | Condensed | ||||||||||||||||||
Parent Issuer | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net earnings (loss) |
$ | 9,639 | $ | (3,579 | ) | $ | 41,819 | $ | (28,496 | ) | $ | 19,383 | ||||||||
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities: |
||||||||||||||||||||
Loss (earnings) from discontinued
operations |
28 | (75 | ) | 1 | | (46 | ) | |||||||||||||
Depreciation and amortization |
| 9,910 | 13,967 | | 23,877 | |||||||||||||||
Amortization of loan costs |
775 | | | | 775 | |||||||||||||||
Deferred income taxes |
2,652 | | | | 2,652 | |||||||||||||||
Income tax benefit from parent company
interest |
2,224 | | | | 2,224 | |||||||||||||||
Gain on disposal of assets, net |
| (76 | ) | (28 | ) | | (104 | ) | ||||||||||||
Stock compensation costs |
121 | | | | 121 | |||||||||||||||
Equity in earnings of affiliates |
(38,240 | ) | | | 38,240 | | ||||||||||||||
Changes in operating assets and
liabilities, net of the effect of
dispositions: |
||||||||||||||||||||
Accounts receivable, net |
| (659 | ) | (3,673 | ) | | (4,332 | ) | ||||||||||||
Inventories, prepaid expenses and
other current assets |
| (3,409 | ) | 7,895 | | 4,486 | ||||||||||||||
Accounts payable, other accrued
expenses and other accrued liabilities |
(10,406 | ) | (13,783 | ) | (15,184 | ) | | (39,373 | ) | |||||||||||
Net cash provided by (used in) operating
activities continuing operations |
(33,207 | ) | (11,671 | ) | 44,797 | 9,744 | 9,663 | |||||||||||||
Net cash provided by (used in) operating
activities discontinued operations |
(28 | ) | (97 | ) | | | (125 | ) | ||||||||||||
Net cash provided by (used in) operating
activities |
(33,235 | ) | (11,768 | ) | 44,797 | 9,744 | 9,538 | |||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchases of property and equipment, net |
| (5,620 | ) | (6,662 | ) | | (12,282 | ) | ||||||||||||
Proceeds from sale of assets |
| 3 | 28 | | 31 | |||||||||||||||
Change in other assets, net |
| 414 | 245 | | 659 | |||||||||||||||
Net cash used in investing activities |
| (5,203 | ) | (6,389 | ) | | (11,592 | ) | ||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Payment of debt and capital lease obligations |
(3,016 | ) | (34 | ) | (402 | ) | | (3,452 | ) | |||||||||||
Distribution to non-controlling interests |
| (66 | ) | (3,868 | ) | | (3,934 | ) | ||||||||||||
Costs paid for partnership interests, net |
| (13 | ) | | | (13 | ) | |||||||||||||
Change in intercompany balances with
affiliates, net |
36,251 | 7,631 | (34,138 | ) | (9,744 | ) | | |||||||||||||
Net cash provided by (used in) financing
activities |
33,235 | 7,518 | (38,408 | ) | (9,744 | ) | (7,399 | ) | ||||||||||||
Decrease in cash and cash equivalents |
| (9,453 | ) | | | (9,453 | ) | |||||||||||||
Cash and cash equivalents at beginning of
period |
| 206,331 | 197 | | 206,528 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 196,878 | $ | 197 | $ | | $ | 197,075 | ||||||||||
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IASIS HEALTHCARE LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
For the Quarter Ended December 31, 2008 (unaudited)
(in thousands)
Condensed Consolidating Statement of Cash Flows
For the Quarter Ended December 31, 2008 (unaudited)
(in thousands)
Subsidiary | Subsidiary | Condensed | ||||||||||||||||||
Parent Issuer | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net earnings (loss) |
$ | (2,194 | ) | $ | (7,143 | ) | $ | 35,161 | $ | (12,577 | ) | $ | 13,247 | |||||||
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities: |
||||||||||||||||||||
Loss (earnings) from discontinued
operations |
(424 | ) | 1,150 | (15 | ) | | 711 | |||||||||||||
Depreciation and amortization |
| 11,268 | 13,728 | | 24,996 | |||||||||||||||
Amortization of loan costs |
743 | | | | 743 | |||||||||||||||
Deferred income taxes |
1,050 | | | | 1,050 | |||||||||||||||
Gain on disposal of assets, net |
| (1,271 | ) | (22 | ) | | (1,293 | ) | ||||||||||||
Stock compensation costs |
141 | | | | 141 | |||||||||||||||
Equity in earnings of affiliates |
(26,421 | ) | | | 26,421 | | ||||||||||||||
Changes in operating assets and
liabilities, net of the effect of
dispositions: |
||||||||||||||||||||
Accounts receivable, net |
| (2,670 | ) | (6,054 | ) | | (8,724 | ) | ||||||||||||
Inventories, prepaid expenses and
other current assets |
| (1,160 | ) | 21 | | (1,139 | ) | |||||||||||||
Accounts payable, other accrued
expenses and other accrued liabilities |
(10,199 | ) | 14,973 | 7,777 | | 12,551 | ||||||||||||||
Net cash provided by (used in) operating
activities continuing operations |
(37,304 | ) | 15,147 | 50,596 | 13,844 | 42,283 | ||||||||||||||
Net cash provided by (used in) operating
activities discontinued operations |
(424 | ) | 1,544 | (116 | ) | | 1,004 | |||||||||||||
Net cash provided by (used in) operating
activities |
(37,728 | ) | 16,691 | 50,480 | 13,844 | 43,287 | ||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchases of property and equipment, net |
| (6,654 | ) | (22,798 | ) | | (29,452 | ) | ||||||||||||
Proceeds from sale of assets |
| 2,650 | 2,230 | | 4,880 | |||||||||||||||
Change in other assets, net |
| (597 | ) | 1,475 | | 878 | ||||||||||||||
Net cash used in investing activities
continuing operations |
| (4,601 | ) | (19,093 | ) | | (23,694 | ) | ||||||||||||
Net cash provided by investing activities
discontinued operations |
| 7 | | | 7 | |||||||||||||||
Net cash used in investing activities |
| (4,594 | ) | (19,093 | ) | | (23,687 | ) | ||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Payment of debt and capital lease obligations |
(3,734 | ) | (149 | ) | (546 | ) | | (4,429 | ) | |||||||||||
Distribution to non-controlling interests |
| (80 | ) | (1,606 | ) | | (1,686 | ) | ||||||||||||
Costs paid for partnership interests, net |
| (1,384 | ) | | | (1,384 | ) | |||||||||||||
Change in intercompany balances with
affiliates, net |
41,462 | 1,356 | (28,974 | ) | (13,844 | ) | | |||||||||||||
Net cash provided by (used in) financing
activities continuing operations |
37,728 | (257 | ) | (31,126 | ) | (13,844 | ) | (7,499 | ) | |||||||||||
Net cash provided by financing activities
discontinued operations |
| | | | | |||||||||||||||
Net cash provided by (used in) financing
activities |
37,728 | (257 | ) | (31,126 | ) | (13,844 | ) | (7,499 | ) | |||||||||||
Increase in cash and cash equivalents |
| 11,840 | 261 | | 12,101 | |||||||||||||||
Cash and cash equivalents at beginning of
period |
| 80,336 | 402 | | 80,738 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 92,176 | $ | 663 | $ | | $ | 92,839 | ||||||||||
10. SUBSEQUENT EVENT
On January 19, 2010, the Company announced the repurchase by its parent company, IAS, of
$120.0 million of outstanding preferred stock. The holder of the corporations preferred stock is
represented by an investor group led by TPG, JLL Partners and Trimaran Fund Management. The
repurchase, which included accrued and outstanding dividends, was funded by excess cash on hand of
the Company.
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Item 2. 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 unaudited condensed consolidated financial statements, the notes to
our unaudited condensed consolidated financial statements and the other financial information
appearing elsewhere in this report. Data for the quarters ended December 31, 2009 and 2008, has
been derived from our unaudited condensed consolidated financial statements. References herein to
we, our and us are to IASIS Healthcare LLC and its subsidiaries.
FORWARD LOOKING STATEMENTS
Some of the statements we make in this report 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 related to our ability to generate sufficient cash to service our existing
indebtedness, our substantial level of indebtedness that could adversely affect our financial
condition, the possibility of an increase in interest rates, which would increase the cost of
servicing our debt and could reduce profitability, the fact that we are controlled by our private
equity sponsor, our ability to retain and negotiate reasonable contracts with managed care plans,
healthcare reform and other changes in legislation and regulations that may significantly reduce
government healthcare spending and our revenue and may require us to make changes to our
operations, our hospitals competition for patients from other hospitals and healthcare providers,
our hospitals facing a growth in volume and revenue related to uncompensated care, our ability to
recruit and retain quality physicians, our hospitals competition for staffing which may increase
our labor costs and reduce profitability, our failure to continually enhance our hospitals with the
most recent technological advances in diagnostic and surgical equipment that may adversely affect
our ability to maintain and expand our markets, our failure to comply with extensive laws and
government regulations, the possible enactment of legislation that would impose significant
restrictions on hospitals that have physician owners, the potential of exposure to liability from
some of our hospitals being required to submit to the Department of Health and Human Services
information on their relationships with physicians, expenses incurred in connection with an appeal
of the court order dismissing with prejudice the qui tam litigation, the possibility that we may
become subject to federal and state investigations in the future, our ability to satisfy regulatory
requirements with respect to our internal controls over financial reporting under Section 404 of
the Sarbanes-Oxley Act of 2002, a failure of our information systems that would adversely affect
our ability to properly manage our operations, an economic downturn or other material change in any
one of the regions in which we operate, potential liabilities because of claims brought against our
facilities, increasing insurance costs that may reduce our cash flows and net earnings, the impact
of certain factors, including severe weather conditions and natural disasters, on operations at our
hospitals, our ability to control costs at Health Choice Arizona, Inc. (Health Choice or the
Plan), the impact of any significant alteration to the Arizona Health Care Cost Containment
System (AHCCCS) payment structure of its contracts, the possibility of Health Choices contract
with the AHCCCS being discontinued, significant competition from other healthcare companies and
state efforts to regulate the sale of not-for-profit hospitals that may affect our ability to
acquire hospitals, difficulties with the integration of acquisitions that may disrupt our ongoing
operations, the significant capital expenditures that would be involved in the construction of
current or new projects or other new hospitals that could have an adverse effect on our liquidity,
state efforts to regulate the construction or expansion of hospitals that could impair our ability
to operate and expand our operations, our dependence on key personnel, the loss of one or more of
which could have a material adverse effect on our business, potential responsibilities and costs
under environmental laws that could lead to material expenditures or liability, the possibility of
a decline in the fair value of our reporting units that could result in a material non-cash charge
to earnings and those risks, uncertainties and other matters detailed in our Annual Report on Form
10-K for the fiscal year ended September 30, 2009, and in our subsequent filings with the
Securities and Exchange Commission (the SEC).
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.
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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 December 31, 2009, we
owned or leased 15 acute care hospital facilities and one behavioral health hospital facility, with
a total of 2,848 beds in service, located in six regions:
| Salt Lake City, Utah; |
| Phoenix, Arizona; |
| Tampa-St. Petersburg, Florida; |
| three cities in Texas, including San Antonio; |
| Las Vegas, Nevada; and |
| West Monroe, Louisiana. |
We also own and operate Health Choice, a Medicaid and Medicare managed health plan in Phoenix,
Arizona, that serves over 198,000 members.
Revenue and Volume Trends
Net revenue for the quarter ended December 31, 2009 increased 12.0% to $629.0 million,
compared to $561.6 million in the prior year quarter. Net revenue is comprised of acute care and
premium revenue. Acute care revenue contributed $26.2 million to the increase in total net revenue,
while premium revenue at Health Choice contributed $41.1 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. The 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.
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
Centers for Medicare & Medicaid Services (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 quarter ended December 31, 2009, was $15.9
million, compared to $13.9 million in the prior year quarter.
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Admissions and adjusted admissions increased 4.6% and 3.3%, respectively, for the quarter
ended December 31, 2009, compared to the prior year quarter. Our volume has benefitted from the
continued improvements at Mountain Vista Medical Center in Mesa, Arizona, our newest hospital which
opened in July 2007, as well as the recent
opening of the patient tower projects at Davis Hospital and Medical Center and Jordan Valley
Medical Center, in Utah. Additionally, we believe that volume in the prior year quarter was
negatively impacted, in part, by the effect of the economic climate in our markets, including the
impact of rising unemployment and patient decisions to defer or cancel general primary care and
non-emergent healthcare procedures until their conditions became more acute. This trend has been
partially facilitated by the increase in the number of higher deductible employer sponsored health
plans. Historically, we have experienced a shift in our service mix to more outpatient procedures
as a result of advances in pharmaceutical and medical technologies, where services once performed
on an inpatient basis are being converted to outpatient procedures.
While we believe this industry trend will continue, for the reasons
previously discussed,
we experienced higher growth in inpatient volume, including higher
acuity services such as inpatient surgeries, which increased 13.7% in
the current year quarter,
compared to the prior year quarter. We believe our volumes over the long-term will continue to grow as a
result of our business strategies, including our recent capital investments, and the general aging
of the population.
The following table provides the sources of our gross patient revenue by payor for the
quarters ended December 31, 2009 and 2008.
Quarter | ||||||||
Ended December 31, | ||||||||
2009 | 2008 | |||||||
Medicare |
30.4 | % | 31.8 | % | ||||
Managed Medicare |
11.2 | % | 10.8 | % | ||||
Medicaid |
8.9 | % | 7.7 | % | ||||
Managed Medicaid |
11.9 | % | 10.7 | % | ||||
Managed care
and other |
32.8 | % | 33.9 | % | ||||
Self-pay |
4.8 | % | 5.1 | % | ||||
Total |
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 from Medicare beneficiaries to continue this shift in coverage as a result
of incentives put in place by the federal government to move more beneficiaries to managed Medicare
plans. As well, 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 prolonged economic downturn and the 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 3.7% for the quarter ended December 31,
2009, compared to the prior year quarter. While our net patient revenue per adjusted admission
continues to increase, industry pressures have recently resulted in reduced rates of growth,
including
increases in Medicaid and
managed Medicaid volumes, declines in commercial and managed care volumes and the impact of
reimbursement pressure from managed care and other third-party payors, which has resulted in
moderating rate increases. 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.
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. Medicare payments to hospitals in fiscal years 2008 and 2009 were reduced to eliminate
what CMS estimates will be the effect of coding or classifications changes as a result of hospitals
implementing the Medicare severity diagnosis-related group
(MS-DRG) system. 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. If CMS retrospectively determines that adjustment levels for
federal fiscal years 2008 and 2009 were inadequate, CMS may impose additional adjustments in future
years.
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
MS-DRG system to determine payment
rates, and adjustments that negatively impact Medicare payments may also negatively impact
payments from these other payors.
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Premium Revenue
Premium revenue generated under the AHCCCS and CMS contracts with Health Choice represented
32.5% of our consolidated net revenue for the quarter ended December 31, 2009, compared to 29.1% in
the prior year quarter. 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
Medicare Advantage Prescription Drug (MAPD) Special Needs Plan (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). 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.
Beginning January 1, 2010, new SNPs for dual eligibles and existing SNPs for dual eligibles
seeking to expand their service areas must have a contract with the respective state Medicaid
agency. Also effective for plan year 2010, SNPs are required to meet additional CMS requirements,
including requirements relating to model of care, cost-sharing, disclosure of information, and
reporting of quality measures.
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 maintains our state-wide presence by covering 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 the impact of a prolonged economic downturn,
Health Choices enrollment through its AHCCCS contract at December 31, 2009, exceeded 194,000
members, compared to over 187,000 members at September 30, 2009.
While we anticipate our enrollment
will continue to increase in the near term, we cannot guarantee the continued growth of our
membership.
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 to facilities, and elimination of
KidsCare, Arizonas Childrens Health Insurance Program.
Significant Industry Trends
The following sections 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 these trends, if any, will
have on us.
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Table of Contents
General Economic Environment
The
U.S. economy has continued to experience the impact of a prolonged economic
downturn. 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 significant job losses that have produced shifts in
patient mix from commercial and managed care payors to Medicaid and
managed Medicaid programs, as well as increases in the uninsured and under-insured population.
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. On November 7, 2009,
the House of Representatives passed the Affordable Health Care for America Act (the House Reform
Bill). On December 24, 2009, the Senate passed the Patient Protections And Affordable Health Care
Act (the Senate Reform Bill). Both the House Reform Bill
and the Senate Reform Bill would expand
value-based purchasing initiatives. We expect programs of this type to become more common in the
healthcare industry.
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
National Coverage Determinations 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, both the House Reform
Bill and the Senate Reform Bill would codify limitations of payment for health-care acquired
conditions as well as address quality and value based purchasing through a variety of initiatives.
For example, the House Reform Bill would require public reporting and posting of healthcare associated
infections and would reduce payments to hospitals with excessive inpatient readmissions. It is
uncertain if and how these bills will be reconciled and 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.
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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.
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 prolonged economic downturn and rising unemployment, we
believe that our hospitals may experience continued growth in bad
debts and charity care. Self-pay admissions as a percentage of total
admissions were 6.4% for the quarter ended December 31, 2009,
compared to 5.7% in the prior year quarter. While the
volume of patients registered as uninsured continues to increase, we
continue to be successful at qualifying many of these uninsured
patients for Medicaid or other third-party coverage, which has helped
to reduce our uncompensated care margin in the current quarter,
compared to the prior year quarter. Despite the
recent improvement, our provision for bad debts continues to be 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 December 31, 2009, self-pay
balances after insurance were $37.1 million, compared to $37.3 million at September 30, 2009, and
$35.9 million at December 31, 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 further 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:
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Insured receivables |
62.9 | % | 62.0 | % | ||||
Uninsured receivables |
37.1 | % | 38.0 | % | ||||
Total |
100.0 | % | 100.0 | % | ||||
The percentages in the table above are calculated using gross receivable balances. Uninsured
receivables 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 4.1% and 3.2% of gross hospital receivables at
December 31, 2009 and September 30, 2009, respectively.
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The approximate percentages of gross hospital receivables in summarized aging categories are
as follows:
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
0 to 90 days |
69.3 | % | 69.4 | % | ||||
91 to 180 days |
17.8 | % | 18.1 | % | ||||
Over 180 days |
12.9 | % | 12.5 | % | ||||
Total |
100.0 | % | 100.0 | % | ||||
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of significant accounting policies is disclosed in Note 2 to the consolidated
financial statements included in our Annual Report on Form 10-K for the year ended September 30,
2009. Our critical accounting policies are further described under the caption Critical Accounting
Policies and Estimates in Managements Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended September 30, 2009. There have
been no changes in the nature of our critical accounting policies or the application of those
policies since September 30, 2009.
SELECTED OPERATING DATA
The following table sets forth certain unaudited operating data for each of the periods
presented.
Quarter | ||||||||
Ended December 31, | ||||||||
2009 | 2008 | |||||||
Acute Care: |
||||||||
Number of acute care hospital facilities at end of period |
15 | 15 | ||||||
Beds in service at end of period (1) |
2,848 | 2,659 | ||||||
Average length of stay (days) (2) |
4.8 | 4.7 | ||||||
Occupancy rates (average beds in service) |
46.0 | % | 46.5 | % | ||||
Admissions (3) |
25,253 | 24,150 | ||||||
Adjusted admissions (4) |
42,067 | 40,734 | ||||||
Patient days (5) |
120,551 | 113,697 | ||||||
Adjusted patient days (4) |
193,223 | 183,831 | ||||||
Net patient revenue per adjusted admission |
$ | 10,026 | $ | 9,667 | ||||
Health Choice: |
||||||||
Medicaid covered lives |
194,195 | 161,511 | ||||||
Dual-eligible lives (6) |
3,997 | 3,356 | ||||||
Medical loss ratio (7) |
88.7 | % | 85.0 | % |
(1) | Includes St. Lukes Behavioral Hospital. | |
(2) | Represents the average number of days that a patient stayed in our hospitals. | |
(3) | 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. | |
(4) | 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. | |
(5) | Represents the number of days our beds were occupied by inpatients over the period. | |
(6) | Represents members eligible for Medicare and Medicaid benefits under Health Choices contract with CMS to provide coverage as a MAPD SNP. | |
(7) | Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals. |
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RESULTS OF OPERATIONS SUMMARY
Consolidated
The following table and discussion sets forth, for the periods presented, our results of
consolidated operations expressed in dollar terms and as a percentage of net revenue. Such
information has been derived from our unaudited condensed consolidated statements of operations.
Quarter Ended | Quarter Ended | |||||||||||||||
December 31, 2009 | December 31, 2008 | |||||||||||||||
($ in thousands) | Amount | Percentage | Amount | Percentage | ||||||||||||
Net revenue: |
||||||||||||||||
Acute care revenue |
$ | 424,660 | 67.5 | % | $ | 398,447 | 70.9 | % | ||||||||
Premium revenue |
204,297 | 32.5 | % | 163,177 | 29.1 | % | ||||||||||
Total net revenue |
628,957 | 100.0 | % | 561,624 | 100.0 | % | ||||||||||
Costs and expenses: |
||||||||||||||||
Salaries and benefits |
170,482 | 27.1 | % | 162,136 | 28.9 | % | ||||||||||
Supplies |
65,409 | 10.4 | % | 59,826 | 10.7 | % | ||||||||||
Medical claims |
178,567 | 28.4 | % | 137,002 | 24.4 | % | ||||||||||
Other operating expenses |
84,592 | 13.4 | % | 79,350 | 14.1 | % | ||||||||||
Provision for bad debts |
47,949 | 7.6 | % | 47,131 | 8.4 | % | ||||||||||
Rentals and leases |
10,275 | 1.7 | % | 9,479 | 1.7 | % | ||||||||||
Interest expense, net |
16,732 | 2.7 | % | 18,978 | 3.4 | % | ||||||||||
Depreciation and amortization |
23,877 | 3.8 | % | 24,996 | 4.4 | % | ||||||||||
Management fees |
1,250 | 0.2 | % | 1,250 | 0.2 | % | ||||||||||
Total costs and expenses |
599,133 | 95.3 | % | 540,148 | 96.2 | % | ||||||||||
Earnings from continuing operations
before gain on disposal of assets and
income taxes |
29,824 | 4.7 | % | 21,476 | 3.8 | % | ||||||||||
Gain on disposal of assets, net |
104 | 0.1 | % | 1,293 | 0.2 | % | ||||||||||
Earnings from continuing operations
before income taxes |
29,928 | 4.8 | % | 22,769 | 4.0 | % | ||||||||||
Income tax expense |
10,591 | 1.7 | % | 8,811 | 1.6 | % | ||||||||||
Net earnings from continuing operations |
19,337 | 3.1 | % | 13,958 | 2.4 | % | ||||||||||
Earnings (loss) from discontinued
operations, net of income taxes |
46 | 0.0 | % | (711 | ) | (0.1 | )% | |||||||||
Net earnings |
19,383 | 3.1 | % | 13,247 | 2.3 | % | ||||||||||
Net earnings attributable to
non-controlling interests |
(2,028 | ) | (0.3 | )% | (1,597 | ) | (0.2 | )% | ||||||||
Net earnings attributable to IASIS
Healthcare LLC |
$ | 17,355 | 2.8 | % | $ | 11,650 | 2.1 | % | ||||||||
Income tax expense Income tax expense from continuing operations for the quarter ended
December 31, 2009, was $10.6 million, resulting in an effective tax rate of 35.4%, compared to $8.8
million, for an effective tax rate of 38.7% in the prior year quarter. The decrease in the
effective tax rate is primarily the result of a change in non-deductible expenses and a reduction
to the liability for unrecognized tax benefits during the current year quarter.
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Acute Care
The following table and discussion sets forth, for the periods presented, the results of our
acute care operations expressed in dollar terms and as a percentage of net revenue. Such
information has been derived from our unaudited condensed consolidated statements of operations.
Quarter Ended | Quarter Ended | |||||||||||||||
December 31, 2009 | December 31, 2008 | |||||||||||||||
($ in thousands) | Amount | Percentage | Amount | Percentage | ||||||||||||
Net revenue: |
||||||||||||||||
Acute care revenue |
$ | 424,660 | 99.4 | % | $ | 398,447 | 99.6 | % | ||||||||
Revenue between segments (1) |
2,676 | 0.6 | % | 1,697 | 0.4 | % | ||||||||||
Total net revenue |
427,336 | 100.0 | % | 400,144 | 100.0 | % | ||||||||||
Costs and expenses: |
||||||||||||||||
Salaries and benefits |
165,890 | 38.8 | % | 157,232 | 39.3 | % | ||||||||||
Supplies |
65,362 | 15.3 | % | 59,741 | 14.9 | % | ||||||||||
Other operating expenses |
78,325 | 18.3 | % | 73,785 | 18.4 | % | ||||||||||
Provision for bad debts |
47,949 | 11.2 | % | 47,131 | 11.8 | % | ||||||||||
Rentals and leases |
9,904 | 2.4 | % | 9,101 | 2.3 | % | ||||||||||
Interest expense, net |
16,732 | 3.9 | % | 18,978 | 4.8 | % | ||||||||||
Depreciation and amortization |
22,988 | 5.4 | % | 24,125 | 6.0 | % | ||||||||||
Management fees |
1,250 | 0.3 | % | 1,250 | 0.3 | % | ||||||||||
Total costs and expenses |
408,400 | 95.6 | % | 391,343 | 97.8 | % | ||||||||||
Earnings from continuing
operations before gain on
disposal of assets and income
taxes |
18,936 | 4.4 | % | 8,801 | 2.2 | % | ||||||||||
Gain on disposal of assets, net |
104 | 0.1 | % | 1,293 | 0.3 | % | ||||||||||
Earnings from continuing
operations before income taxes |
$ | 19,040 | 4.5 | % | $ | 10,094 | 2.5 | % | ||||||||
(1) | Revenue between segments is eliminated in our consolidated results. |
Acute care revenue Acute care revenue from our hospital operations for the quarter ended
December 31, 2009, was $427.3 million, an increase of $27.2 million or 6.8%, compared to $400.1
million in the prior year quarter. The increase in acute care revenue is comprised of an increase
in adjusted admissions of 3.3% and an increase in net patient revenue per adjusted admission of 3.7%.
Net adjustments to estimated third-party payor settlements, also known as prior year
contractuals, resulted in an increase in net revenue of $1.9 million and $980,000 for the quarters
ended December 31, 2009 and 2008, respectively.
Salaries and benefits Salaries and benefits expense from our hospital operations for the
quarter ended December 31, 2009, was $165.9 million, or 38.8% of acute care revenue, compared to
$157.2 million, or 39.3% of acute care revenue in the prior year quarter. This decline was the
result of improved productivity management leveraged against growth
in acute care revenue.
Supplies Supplies expense from our hospital operations for the quarter ended December 31,
2009, was $65.4 million, or 15.3% of acute care revenue, compared to $59.7 million, or 14.9% of
acute care revenue in the prior year quarter. The increase in supplies as a percentage of acute
care revenue is primarily the result of growth in higher acuity and
supply utilization services,
such as inpatient surgical procedures which increased 13.7% compared
to the prior year quarter.
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Provision for bad debts Provision for bad debts from our hospital operations for the
quarter ended December 31, 2009, was $47.9 million, or 11.2% of acute care revenue, compared to
$47.1 million, or 11.8% of acute care revenue in the prior year
quarter. The decrease in the provision for bad debts as a percentage
of acute care revenue reflects our success at qualifying uninsured patients for coverage
under Medicaid. As a result of the prolonged economic downturn and
the related increase in the number of individuals eligible for Medicaid or similar programs, we have
experienced an increase in the number of patients qualifying for
such coverage.
Interest expense, net Interest expense, net of interest income, for the quarter ended
December 31, 2009, was $16.7 million, compared to $19.0 million in the prior year quarter. This
decrease of $2.3 million was primarily due to the impact of lower LIBOR interest rates in the
current year quarter, compared to the prior year quarter. The
weighted average interest rate for
outstanding borrowings under our senior secured credit facilities was 3.4% for the quarter ended
December 31, 2009, compared to 4.7% in the prior year quarter.
Health Choice
The following table and discussion sets forth, for the periods presented, the results of our
Health Choice operations expressed in dollar terms and as a percentage of premium revenue. Such
information has been derived from our unaudited condensed consolidated statements of operations.
Quarter Ended | Quarter Ended | |||||||||||||||
December 31, 2009 | December 31, 2008 | |||||||||||||||
($ in thousands) | Amount | Percentage | Amount | Percentage | ||||||||||||
Revenue: |
||||||||||||||||
Premium revenue |
$ | 204,297 | 100.0 | % | $ | 163,177 | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Salaries and benefits |
4,592 | 2.2 | % | 4,904 | 3.0 | % | ||||||||||
Supplies |
47 | 0.0 | % | 85 | 0.1 | % | ||||||||||
Medical claims (1) |
181,243 | 88.7 | % | 138,699 | 85.0 | % | ||||||||||
Other operating expenses |
6,267 | 3.1 | % | 5,565 | 3.4 | % | ||||||||||
Rentals and leases |
371 | 0.2 | % | 378 | 0.2 | % | ||||||||||
Depreciation and amortization |
889 | 0.5 | % | 871 | 0.5 | % | ||||||||||
Total costs and expenses |
193,409 | 94.7 | % | 150,502 | 92.2 | % | ||||||||||
Earnings before income taxes |
$ | 10,888 | 5.3 | % | $ | 12,675 | 7.8 | % | ||||||||
(1) | Medical claims paid to our hospitals of $2.7 million and $1.7 million for the quarters ended December 31, 2009 and 2008, respectively, are eliminated in our consolidated results. |
Premium revenue Premium revenue from Health Choice was $204.3 million for the quarter ended
December 31, 2009, an increase of $41.1 million or 25.2%, compared to $163.2 million in the prior
year quarter. The growth in premium revenue was impacted by a 20.2% increase in
Medicaid enrollees resulting from Health Choices expanded contract with AHCCCS and increased enrollment
in the state program. Additionally, as a result of a change in member
mix attributable to the Plans new enrollees, we experienced a 3.9% increase in our premium revenue on a per member
per month basis in the Medicaid line of business.
Medical claims Prior to eliminations, medical claims expense was $181.2 million for the
quarter ended December 31, 2009, compared to $138.7 million in the prior year quarter. 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 88.7% for the quarter ended
December 31, 2009, compared to 85.0% in the prior year quarter. The increase is primarily the
result of an overall increase in medical utilization compared to the prior year
quarter, particularly as it relates to outpatient services, including
radiology procedures. This increased utilization and related costs are
generally attributable to the services provided to our new
members, which are presenting for treatment at higher acuity levels.
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LIQUIDITY AND CAPITAL RESOURCES
Overview of Cash Flow Activities for the Quarters Ended December 31, 2009 and 2008
Our cash flows are summarized as follows (in thousands):
Quarter | ||||||||
Ended December 31, | ||||||||
2009 | 2008 | |||||||
Cash flow from operating activities |
$ | 9,538 | $ | 43,287 | ||||
Cash flow from investing activities |
(11,592 | ) | (23,687 | ) | ||||
Cash flow from financing activities |
(7,399 | ) | (7,499 | ) |
Operating Activities
The decrease in operating cash flows for the quarter ended December 31, 2009, compared to the
prior year quarter, is primarily the result of changes in working
capital, which included certain timing differences related to accrued
salaries and wages and medical claims payable. Operating cash flows
in the prior year quarter benefitted from Health Choices
expanded contract with AHCCCS, beginning in October 2008,
which resulted in a significant growth in covered Medicaid lives and related claims payable. Other items impacting operating cash flows for the current quarter included increased cash taxes following the exhaustion of certain net operating losses for tax purposes.
At
December 31, 2009, we had $291.7 million in net working capital, compared to $264.5 million
at September 30, 2009. Net accounts receivable increased $4.6 million to $234.8 million at December
31, 2009, from $230.2 million at September 30, 2009. Our days revenue in accounts receivable at
December 31, 2009 were 49, compared to 49 at September 30, 2009, and 55 at December 31, 2008.
Investing Activities
Capital expenditures for the quarter ended December 31, 2009, were $12.3
million, compared to $29.5 million in the prior year quarter. The decline is primarily the result
of the completion of the tower projects in the Utah market during fiscal 2009, as well as continued
management of our capital expenditures.
Financing Activities
During the quarter ended December 31, 2009, pursuant to the terms of our senior secured credit
facilities, we made net payments of $1.5 million, compared to net payments of $3.7 million in the
prior year quarter. Additionally, we paid $2.0 million in capital leases and other debt obligations
during the quarter ended December 31, 2009.
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Capital Resources
$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. 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 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. The senior secured credit facilities agreement contains
a customary restricted payments covenant, which, among others restrictions, limits the amount of
dividends or other cash payments to IASIS Healthcare Corporation
("IAS"), our parent company. As of December 31, 2009, we have
$268.0 million available
to expend free of any such restrictions pursuant to the restricted payment basket provisions set
forth in this covenant.
At December 31, 2009, amounts outstanding under our senior secured credit facilities consisted
of $426.9 million under the term loan and $147.8 million under the delayed draw term loan. We also
had $39.9 million and $25.3 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 our senior secured credit facilities was 3.4% for the quarter ended
December 31, 2009.
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$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 December 31, 2009, we have $196.0 million available to expend free of any
such restrictions pursuant to the restricted payment basket provisions set forth in this covenant.
Holdings Senior PIK Loans
IAS, our parent company, has outstanding 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 in June 2012, at which time all accrued
interest becomes payable. At December 31, 2009, the outstanding balance of the Holdings Senior PIK
Loans was $373.8 million, which includes $73.8 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 December 31, 2009, we
have $130.0 million available to expend free of any such restrictions pursuant to the restricted
payment basket provisions set forth in this covenant.
Other
We are a party to interest rate swap agreements 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 December 31, 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.
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,
by existing or future debt agreements, and by potential transactions determined by our private equity sponsors that, in their judgment, could enhance their equity investment, even though such transactions might reduce our cash flows or capital reserves. For a further discussion of risks that can impact our
liquidity, see our risk factors beginning on page 25 of our Annual Report of Form 10-K for the
fiscal year ended September 30, 2009.
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Including available cash and our senior secured credit facilities at December 31, 2009, we had
available liquidity as follows (in millions):
Available cash and cash equivalents |
$ | 197.1 | ||
Available capacity under our senior secured revolving credit facility |
199.7 | |||
Net available liquidity at December 31, 2009 |
$ | 396.8 | ||
On
January 19, 2010, we announced the repurchase by IAS, our parent company,
of $120.0 million of its outstanding preferred stock. The
holder of the IAS
preferred stock is represented by an investor group led by TPG, JLL Partners and Trimaran Fund
Management. The repurchase, which included accrued and outstanding
dividends, was funded by our excess
cash on hand.
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 Brothers (Lehman), who has been unable to fund our
revolver borrowings 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 December 31, 2009,
would be reduced to $376.8 million. In addition to our available liquidity, we expect to generate
positive operating cash flows 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.
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% senior subordinated notes, or make anticipated capital
expenditures. For more information, see our risk factors beginning on page 25 of our Annual Report
on Form 10-K for the fiscal year ended September 30, 2009.
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% senior
subordinated notes and ability to service and extend or refinance our 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 our risk factors beginning
on page 25 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
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.
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SEASONALITY
The patient volumes and acute care revenue of 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 January 2010,
the Financial Accounting Standards Board issued authoritative guidance requiring additional information to be
disclosed with respect to Level 3 fair value measurements, as well as transfers to and from Level 1
and Level 2 measurements. In addition, enhanced disclosures are required concerning inputs and
valuation techniques used to determine Level 2 and Level 3 fair value measurements. The new
disclosures and clarifications of existing disclosures are effective for the quarter ending March
31, 2010, with the effective date for additional Level 3 related disclosures effective for periods
beginning after December 15, 2010. We anticipate the
adoption of these provisions will not materially impact our
results of operations, financial position or cash flows.
Item 3. 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 December 31, 2009, we had outstanding variable rate
debt of $574.7 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.
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 $187,000.
Our interest rate swap agreements expose us to credit risk in the event of non-performance by
our counterparties, Citibank and Wachovia. However, we do not anticipate non-performance by
these counterparties.
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 December 31, 2009,
the fair market value of the outstanding 8 3/4% notes was $484.5 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. However, our ability
to borrow funds under our revolving credit facility is subject to the financial viability of the
participating financial institutions. 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
future deterioration in the credit markets could limit our ability to access available funds under
our revolving credit facility.
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Item 4. 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 December 31, 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.
Changes in Internal Control Over Financial Reporting
During 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 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. Oral argument in the Ninth Circuit
has been scheduled for March 9, 2010. 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 our business, financial condition and results of operations, including
exclusion from the Medicare and Medicaid programs.
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Item 1A. Risk Factors
Reference is made to the factors set forth under the caption Forward-Looking Statements in
Part I, Item 2 of this Form 10-Q and other risk factors
described in our Annual Report on Form 10-K
for the year ended September 30, 2009, which are incorporated herein by reference. There have not
been any material changes to the risk factors previously disclosed in our annual report on Form
10-K for the year ended September 30, 2009, other than as set forth below.
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. In the final months of 2009, both
houses of the U.S. Congress passed separate bills intended to reform the healthcare system. While
neither of these bills has yet to become law, such laws or similar proposals have been, and we
anticipate may continue to be, a focus at the federal level. It is not possible to predict whether
federal healthcare reform legislation will be enacted or the impact of any enacted federal
healthcare reform legislation. If enacted, 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.
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.
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. In December 2009, the Senate passed a healthcare reform bill
containing a similar prohibition on physician-owned hospitals. It is uncertain if and how these
reform bills will be reconciled and whether these prohibitions will become law.
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.
Item 6. Exhibits
(a) List of Exhibits:
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. |
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SIGNATURES
Pursuant to the requirements 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: February 12, 2010 | By: | /s/ John M. Doyle | ||
John M. Doyle | ||||
Chief Accounting Officer |
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EXHIBIT INDEX
Exhibit No. | Description | |||
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. |
39