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EX-99.2 - EX-99.2 - VANGUARD HEALTH SYSTEMS INC | g23915exv99w2.htm |
8-K - FORM 8-K - VANGUARD HEALTH SYSTEMS INC | g23915e8vk.htm |
Exhibit 99.1
The
Acquisition
On June 10, 2010, Vanguard Health Systems, Inc. (Vanguard) and certain of its consolidated
subsidiaries (collectively, the Vanguard acquisition
companies) entered into a definitive purchase and sale
agreement (the Purchase Agreement) with The Detroit
Medical Center, a Michigan non-profit corporation and certain of
its affiliates (collectively, DMC), pursuant to
which the Vanguard acquisition companies will acquire (the
Acquisition) substantially all of the assets of DMC
consisting primarily of eight acute care and specialty hospitals
in the Detroit, Michigan metropolitan area and related
healthcare facilities.
The Acquisition is subject to obtaining certain necessary
domestic regulatory approvals and satisfying other customary
closing conditions, including the receipt of material licenses
(and approval from the Michigan Attorney General in respect of
the sale of nonprofit assets to a for profit corporation). The
completion of this offering is not conditioned on the completion
of the Acquisition. We expect the Acquisition to close on or
around October 1, 2010 but not later than November 1,
2010. However we, cannot assure you that the Acquisition will be
completed. If the Acquisition is not consummated, the net
proceeds of this offering will be used for general corporate
purposes, including other acquisitions.
The estimated sources and uses of the funds for the Acquisition,
assuming the Acquisition had closed on March 31, 2010 are
shown in the table below. Actual amounts will vary from
estimated amounts depending on several factors.
Sources of Funds
|
Uses of Funds
|
|||||||||
(Dollars in millions) | ||||||||||
Cash on hand(1)
|
$ | 146.4 |
DMC consideration(3)
|
$ | 360.3 | |||||
Notes offered hereby(2)
|
225.0 |
Transaction fees and expenses(4)
|
11.1 | |||||||
Total sources of funds
|
$ | 371.4 |
Total uses of funds
|
$ | 371.4 | |||||
(1) | To the extent that additional funds are needed to fund the DMC consideration, the additional funds will be provided by borrowings under the New Revolving Credit Facility. | |
(2) | Does not give effect to any original issue discount. | |
(3) | Net of cash acquired from DMC of $56.3 million. | |
(4) | Reflects our estimate of fees and expenses, including financing fees, placement fees, and other transaction and Acquisition-related costs and professional fees. |
Recent
Developments
On June 10, 2010, the Vanguard acquisition companies and
DMC entered into the Purchase Agreement pursuant to which we
will acquire substantially all of the assets of DMC consisting
primarily of eight acute care and specialty hospitals in the
Detroit, Michigan metropolitan area and related healthcare
facilities. DMC operates eight hospitals in the Detroit
metropolitan area, including Childrens Hospital of
Michigan, Detroit Receiving Hospital, Harper University
Hospital, Huron Valley-Sinai Hospital, Hutzel Womens
Hospital, Rehabilitation Institute of Michigan, Sinai-Grace
Hospital and DMC Surgery Hospital, with 1,734 licensed beds and
total revenues for its last reported fiscal year ended
December 31, 2009 of approximately $2.1 billion.
For the year ended December 31, 2009, DMC had discharges of 75,000 and emergency room visits of 370,000, in each case in the aggregate.
Under the Purchase Agreement, the Vanguard acquisition companies
will acquire all of DMCs assets (other than donor
restricted assets and certain other assets) and will assume all
of its liabilities (other than its outstanding bonds and similar
debt and certain other liabilities) for an estimated cash
purchase price of approximately $417 million. The cash
purchase price is subject to adjustment up or down based upon
the changes in the amounts of DMCs debt instruments to be
repaid and certain DMC assets and liabilities to be excluded
from the transaction. The assumed liabilities include a pension
liability under a frozen defined benefit pension
plan of DMC (approximately $184 million at
December 31, 2009), which liability we anticipate that the
Vanguard acquisition companies will fund over seven years after
closing based upon current actuarial assumptions and estimates
(such assumptions and estimates are subject to periodic
adjustment).
The Purchase Agreement includes customary representations,
warranties and covenants for a transaction of this size and
nature, provided, however, the representations and warranties do
not survive the closing of the transaction. Each of the Vanguard
acquisition companies and DMC may terminate the Purchase
Agreement, subject to certain exceptions, (i) by mutual
consent; (ii) in the event of an uncured breach of the
Purchase Agreement by the other party and (iii) if the
Closing has not occurred by November 1, 2010. Additionally,
the Vanguard acquisition companies may terminate the Purchase
Agreement at any time by payment of a $50 million
termination fee to DMC.
On March 17, 2010, we entered into an asset purchase
agreement with affiliates of Resurrection Health Care of
Chicago, Illinois to acquire the ownership of the assets of
Resurrections Westlake Hospital, its West Suburban Medical
Center and the outpatient facilities and other assets related to
each such hospital. Westlake Hospital is a 225-bed acute care
facility located in Melrose Park, Illinois. West Suburban
Medical Center is a 234-bed acute care facility located in Oak
Park, Illinois. The West Suburban facility is about five miles
from our MacNeal Hospital in Berwyn, Illinois and the Westlake
facility is about seven miles from our MacNeal facility. Our
purchase price for the hospitals is expected to be
$40 million, plus or minus the difference between the net
working capital of the hospitals as of the closing date and
$15 million. Closing is subject to receipt of all necessary
governmental approvals and licenses, approval by our board of
directors, completion of satisfactory schedules to the asset
purchase agreement and other customary conditions. No schedules
to the asset purchase agreement have yet been approved by us,
nor has our board of directors approved this proposed
transaction. There is no termination fee provided in the asset
purchase agreement should this proposed transaction fail to be
consummated. The unaudited revenues of these two Illinois
hospitals and related healthcare operations were approximately
$282 million for the year ended June 30, 2009.
2
Risks
Related to Our Indebtedness
Our
high level of debt and significant leverage may adversely affect
our operations and our ability to grow and otherwise execute our
business strategy.
We will continue to have substantial indebtedness after the
completion of the June 2010 offering of $225,000,000 aggregate principal
amount of our 8% Senior Notes due 2018 (the offering). As of March 31, 2010, we had
$1,751.6 million of outstanding debt, excluding letters of
credit and guarantees. As of March 31, 2010, on an as
adjusted basis after giving effect to the offering and the
Acquisition, we would have had approximately
$1,993.7 million of total indebtedness outstanding
(including the notes offered hereby), $815.0 million of
which would have been secured. We also have $229.8 million
of secured indebtedness available for borrowing under the New
Revolving Credit Facility, after taking into account
$30.2 million of outstanding letters of credit. In
addition, we may seek to increase the borrowing availability
under the New Revolving Credit Facility to an amount larger than
$260.0 million, subject to the receipt of lender
commitments and subject to certain other conditions. The amount
of our outstanding indebtedness is substantial compared to the
net book value of our assets.
Our substantial indebtedness could have important consequences
to you, including the following:
| our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to the notes offered hereby, including any repurchase obligations that may arise thereunder; | |
| limit our ability to obtain additional financing to fund future capital expenditures, working capital, acquisitions or other needs; | |
| increase our vulnerability to general adverse economic, market and industry conditions and limit our flexibility in planning for, or reacting to, these conditions; | |
| make us vulnerable to increases in interest rates since all (as of March 31, 2010 after giving effect to this offering and the Acquisition) of our borrowings under our New Credit Facilities are, and additional borrowings may be, at variable interest rates; | |
| our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited, and we may be more vulnerable to a downturn in general economic or industry conditions or be unable to carry out capital spending that is necessary or important to our growth strategy and our efforts to improve operating margins; | |
| limit our ability to use operating cash in other areas of our business because we must use a substantial portion of these funds to make principal and interest payments; and | |
| limit our ability to compete with others who are not as highly-leveraged. |
Our ability to make scheduled payments of principal and interest
or to satisfy our other debt obligations, to refinance our
indebtedness or to fund capital expenditures will depend on our
future operating performance. Prevailing economic conditions
(including interest rates) and financial, business and other
factors, many of which are beyond our control, will also affect
our ability to meet these needs. We may not be able to generate
sufficient cash flows from operations or realize anticipated
revenue growth or operating improvements, or obtain future
borrowings in an amount sufficient to enable us to pay our debt,
or to fund our other liquidity needs. We may need to refinance
all or a portion of our debt on or before maturity. We may not
be able to refinance any of our debt when needed on commercially
reasonable terms or at all.
3
A breach of any of the restrictions or covenants in our debt
agreements could cause a cross-default under other debt
agreements. A significant portion of our indebtedness then may
become immediately due and payable. We are not certain whether
we would have, or be able to obtain, sufficient funds to make
these accelerated payments. If any senior debt is accelerated,
our assets may not be sufficient to repay in full such
indebtedness and our other indebtedness.
Despite
our current leverage, we may still be able to incur
substantially more debt. This could further exacerbate the risks
that we and our subsidiaries face.
We and our subsidiaries may be able to incur substantial
additional indebtedness in the future. The terms of the
indenture and the New Credit Facilities do not fully prohibit us
or our subsidiaries from doing so. Our New Revolving Credit
Facility provides lender commitments of up to
$260.0 million (not giving effect to any outstanding
letters of credit, which would reduce the amount available under
our New Revolving Credit Facility), of which $229.8 million was
available for future borrowings as of March 31, 2010, on an
as adjusted basis after giving effect to this offering. In
addition, we may seek to increase the borrowing availability
under the New Revolving Credit Facility and to increase the
amount of our outstanding term loans as previously described.
Also, upon the occurrence of certain events and satisfaction of
a maximum senior secured leverage ratio test, we may request an
incremental term loan facility or facilities in an unlimited
amount in the aggregate, subject to receipt of commitments by
existing lenders or other financing institutions and to the
satisfaction of certain other conditions. All of those
borrowings would be senior and secured, and as a result, would
be effectively senior to the notes and the guarantees of the
notes by the guarantors. If we incur any additional indebtedness
that ranks equally with the notes, the holders of that debt will
be entitled to share ratably with the holders of the notes in
any proceeds distributed in connection with any insolvency,
liquidation, reorganization, dissolution or other
winding-up
of us. This may have the effect of reducing the amount of
proceeds paid to you. If new debt is added to our current debt
levels, the related risks that we and our subsidiaries now face
could intensify.
An
increase in interest rates would increase the cost of servicing
our debt and could reduce our profitability.
All of the borrowings under the New Credit Facilities bear
interest at variable rates. As a result, an increase in interest
rates, whether because of an increase in market interest rates
or an increase in our own cost of borrowing, would increase the
cost of servicing our debt and could materially reduce our
profitability. A 0.25% increase in the expected rate of interest
under the New Credit Facilities would increase our annual
interest expense by approximately $2.0 million. The impact
of such an increase would be more significant than it would be
for some other companies because of our substantial debt.
4
Risks
Related to Our Business and Structure
The
current challenging economic environment, along with difficult
and volatile conditions in the capital and credit markets, could
materially adversely affect our financial position, results of
operations or cash flows, and we are unsure whether these
conditions will improve in the near future.
The U.S. economy and global credit markets remain volatile.
Declining consumer confidence and increased unemployment have
increased concerns of prolonged economic weakness. While certain
healthcare spending is considered non-discretionary and may not
be significantly impacted by economic downturns, other types of
healthcare spending may be significantly adversely impacted by
such conditions. When patients are experiencing personal
financial difficulties or have concerns about general economic
conditions, they may choose to defer or forego elective
surgeries and other non-emergent procedures, which are generally
more profitable lines of business for hospitals. We are unable
to determine the specific impact of the current economic
conditions on our business at this time, but we believe that
further deterioration or a prolonged period of recession will
have an adverse impact on our operations. Other risk factors
discussed in this offering memorandum describe some significant
risks that may be magnified by the current economic conditions
such as the following:
| Our concentration of operations in a small number of regions, and the impact of economic downturns in those communities. To the extent the communities in and around San Antonio, Texas; Phoenix, Arizona; Chicago, Illinois or certain communities in Massachusetts experience a greater degree of economic weakness than average, the adverse impact on our operations could be magnified. | |
| Our revenues may decline if federal or state programs reduce our Medicare or Medicaid payments or managed care companies (including managed Medicare and managed Medicaid payers) reduce our reimbursement. Current economic conditions have accelerated and increased the budget deficits for most states, including those in which we operate. These budgetary pressures may result in healthcare payment reductions under state Medicaid plans or reduced |
5
benefits to participants in those plans. Also, governmental, managed Medicare or managed Medicaid payers may defer payments to us to conserve cash. Managed care companies may also seek to reduce payment rates or limit payment rate increases to hospitals in response to reductions in enrolled participants. |
| Our hospitals face a growth in uncompensated care as the result of the inability of uninsured patients to pay for healthcare services and difficulties in collecting patient portions of insured accounts. Higher unemployment, Medicaid benefit reductions and employer efforts to reduce employee healthcare costs may increase our exposure to uncollectible accounts for uninsured patients or those patients with higher co-pay and deductible limits. | |
| Under extreme market conditions, there can be no assurance that funds necessary to run our business will be available to us on favorable terms or at all. Most of our cash and borrowing capacity under our New Credit Facilities will be held with a limited number of financial institutions, which could increase our liquidity risk if one or more of those institutions become financially strained or are no longer able to operate. |
We are unable to predict if the condition of the
U.S. economy, the local economies in the communities we
serve or global credit conditions will improve in the near
future or when such improvements may occur.
We are
unable to predict the impact of the Health Reform Law, which
represents significant change to the healthcare
industry.
The recently enacted Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the
Health Reform Law) will change how healthcare services are
covered, delivered, and reimbursed through expanded coverage of
uninsured individuals, reduced growth in Medicare program
spending, reductions in Medicare and Medicaid DSH payments and
the establishment of programs where reimbursement is tied to
quality and integration. In addition, the new law reforms
certain aspects of health insurance, expands existing efforts to
tie Medicare and Medicaid payments to performance and quality,
and contains provisions intended to strengthen fraud and abuse
enforcement.
The expansion of health insurance coverage under the Health
Reform Law may result in a material increase in the number of
patients using our facilities who have either private or public
program coverage. In addition, a disproportionately large
percentage of the new Medicaid coverage is likely to be in
states that currently have relatively low income eligibility
requirements. Two such states are Texas and Illinois, where over
50% of our licensed beds are located. Further, the Health Reform
Law provides for a value-based purchasing program, the
establishment of Accountable Care Organizations
(ACOs) and bundled payment pilot programs, which
will create possible sources of additional revenue.
However, it is difficult to predict the size of the potential
revenue gains to us as a result of these elements of the Health
Reform Law, because of uncertainty surrounding a number of
material factors, including the following:
| how many previously uninsured individuals will obtain coverage as a result of the Health Reform Law (while the Congressional Budget Office (CBO) estimates 32 million, the Centers for Medicare & Medicaid Services (CMS) estimates almost 34 million; both agencies made a number of assumptions to derive that figure, including how many individuals will ignore substantial subsidies and decide to pay the penalty rather than obtain health insurance and what percentage of people in the future will meet the new Medicaid income eligibility requirements); | |
| what percentage of the newly insured patients will be covered under the Medicaid program and what percentage will be covered by private health insurers; | |
| the extent to which states will enroll new Medicaid participants in managed care programs; | |
| the pace at which insurance coverage expands, including the pace of different types of coverage expansion; |
6
| the change, if any, in the volume of inpatient and outpatient hospital services that are sought by and provided to previously uninsured individuals; | |
| the rate paid to hospitals by private payers for newly covered individuals, including those covered through the newly created American Health Benefit Exchanges (Exchanges) and those who might be covered under the Medicaid program under contracts with the state; | |
| the rate paid by state governments under the Medicaid program for newly covered individuals; | |
| how the value-based purchasing and other quality programs will be implemented; | |
| the percentage of individuals in the Exchanges who select the high deductible plans, since health insurers offering those kinds of products have traditionally sought to pay lower rates to hospitals; | |
| whether the net effect of the Health Reform Law, including the prohibition on excluding individuals based on pre-existing conditions, the requirement to keep medical costs lower than a specified percentage of premium revenue, other health insurance reforms and the annual fee applied to all health insurers, will be to put pressure on the bottom line of health insurers, which in turn might cause them to seek to reduce payments to hospitals with respect to both newly insured individuals and their existing business; and | |
| the possibility that implementation of provisions expanding health insurance coverage will be delayed or even blocked due to court challenges or revised or eliminated as a result of efforts to repeal or amend the new law. |
On the other hand, the Health Reform Law provides for
significant reductions in the growth of Medicare spending,
reductions in Medicare and Medicaid DSH payments and the
establishment of programs where reimbursement is tied to quality
and integration. Since approximately 56% and 57% of our revenues
in our fiscal year ended June 30, 2009 and the nine months
ended March 31, 2010, respectively, were from Medicare and
Medicaid (including Medicare and Medicaid managed plans),
reductions to these programs may significantly impact us and
could offset any positive effects of the Health Reform Law. It
is difficult to predict the size of the revenue reductions to
Medicare and Medicaid spending, because of uncertainty regarding
a number of material factors, including the following:
| the amount of overall revenues we will generate from Medicare and Medicaid business when the reductions are implemented; | |
| whether reductions required by the Health Reform Law will be changed by statute prior to becoming effective; | |
| the size of the Health Reform Laws annual productivity adjustment to the market basket beginning in 2012 payment years; | |
| the amount of the Medicare DSH reductions that will be made, commencing in federal fiscal year 2014; | |
| the allocation to our hospitals of the Medicaid DSH reductions, commencing in federal fiscal year 2014; | |
| what the losses in revenues will be, if any, from the Health Reform Laws quality initiatives; | |
| how successful ACOs, in which we participate, will be at coordinating care and reducing costs; | |
| the scope and nature of potential changes to Medicare reimbursement methods, such as an emphasis on bundling payments or coordination of care programs; | |
| whether the Companys revenues from its upper payment limit (UPL) program will be adversely affected, because there may be fewer indigent, non-Medicaid patients for whom the Company provides services pursuant to its UPL program; and | |
| reductions to Medicare payments CMS may impose for excessive readmissions. |
7
Because of the many variables involved, we are unable to predict
the net effect on us of the expected increases in insured
individuals using our facilities, the reductions in Medicare
spending, reductions in Medicare and Medicaid DSH funding, and
numerous other provisions in the Health Reform Law that may
affect us.
If we
are unable to enter into favorable contracts with managed care
plans, our operating revenues may be reduced.
Our ability to negotiate favorable contracts with health
maintenance organizations, insurers offering preferred provider
arrangements and other managed care plans significantly affects
the revenues and operating results of our hospitals. Revenues
derived from health maintenance organizations, insurers offering
preferred provider arrangements and other managed care plans,
including managed Medicare and managed Medicaid plans, accounted
for approximately 58% and 59% of our net patient revenues for
the year ended June 30, 2009 and the nine months ended
March 31, 2010, respectively. Managed care organizations
offering prepaid and discounted medical services packages
represent a significant portion of our admissions, a general
trend in the industry which has limited hospital revenue growth
nationwide and a trend that may continue. In addition, private
payers are increasingly attempting to control healthcare costs
through direct contracting with hospitals to provide services on
a discounted basis, increased utilization review and greater
enrollment in managed care programs such as health maintenance
organizations and preferred provider organizations.
Additionally, the trend towards consolidation among private
managed care payers tends to increase their bargaining prices
over fee structures. In most cases, we negotiate our managed
care contracts annually as they come up for renewal at various
times during the year. As various provisions of the Health
Reform Law are implemented, including the establishment of the
exchanges, nongovernment payers increasingly may demand reduced
fees. Our future success will depend, in part, on our ability to
renew existing managed care contracts and enter into new managed
care contracts on terms favorable to us. Other healthcare
companies, including some with greater financial resources,
greater geographic coverage or a wider range of services, may
compete with us for these opportunities. For example, some of
our competitors may negotiate exclusivity provisions with
managed care plans or otherwise restrict the ability of managed
care companies to contract with us. It is not clear what impact,
if any, the increased obligations on managed care payers and
other payers imposed by the Health Reform Law will have on our
ability to negotiate reimbursement increases. If we are unable
to contain costs through increased operational efficiencies or
to obtain higher reimbursements and payments from managed care
payers, our results of operations and cash flows will be
materially adversely affected.
Our
revenues may decline if federal or state programs reduce our
Medicare or Medicaid payments or managed care companies reduce
our reimbursements.
Approximately 56% and 57% of our net patient revenues for the
year ended June 30, 2009 and the nine months ended
March 31, 2010, respectively, came from the Medicare and
Medicaid programs, including Medicare and Medicaid managed
plans. In recent years, federal and state governments have made
significant changes in the Medicare and Medicaid programs. Some
of those changes adversely affect the reimbursement we receive
for certain services. In addition, due to budget deficits in
many states, significant decreases in state funding for Medicaid
programs have occurred or are being proposed.
On August 22, 2007, CMS issued a final rule for federal
fiscal year 2008 for the hospital inpatient prospective payment
system. This rule adopted a two-year implementation of Medicare
severity-adjusted diagnosis-related groups
(MS-DRGs), a severity-adjusted diagnosis-related
group (DRG) system. This change represented a
refinement to the DRG system, and its impact on our revenues has
not been significant. Realignments in the DRG system could
impact the margins we receive for certain services.
DRG rates are updated and MS-DRG weights are recalibrated each
federal fiscal year. The index used to update the market basket
gives consideration to the inflation experienced by hospitals
and entities outside the healthcare industry in purchasing goods
and services. The Medicare Inpatient Hospital Prospective System
Final Rule for federal fiscal year 2010 provides for 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. The Health Reform
8
Law provides for a 0.25% reduction in this 2.1% market basket
update for discharges occurring on or after April 1, 2010.
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 our hospitals. Medicare payments to hospitals
in federal fiscal year 2009 were reduced by 0.9% to eliminate
what CMS estimates will be the effect of coding or
classification changes as a result of hospitals implementing the
MS-DRG system. After earlier proposing an increase in the
documentation and coding adjustment to 1.9% for
federal fiscal year 2010, on July 31, 2009 CMS announced
that it had decided not to make any adjustment in federal fiscal
year 2010 since it did not know whether federal fiscal year 2009
spending from documentation and coding is more or less than
earlier projected. However, the U.S. Congress has given CMS
the ability to continue to retrospectively determine if the
documentation and coding adjustment levels for federal fiscal
years 2008 and 2009 were adequate to account for changes in
payments not related to changes in case mix. If the levels are
found to have been inadequate, CMS could impose an adjustment to
payments for federal fiscal years 2011 and 2012. This evaluation
of changes in case-mix based on actual claims data may yield a
higher documentation and coding adjustment thereby potentially
reducing our revenues and impacting our results of operations in
ways that cannot be quantified at this time. 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 payers
and other payers such as some state Medicaid programs rely on
all or portions of the Medicare DRG system to determine payment
rates. The change from traditional Medicare DRGs to MS-DRGs
could adversely impact those payment rates if any other payers
adopt MS-DRGs.
Further, the Health Reform Law provides for material reductions
in the growth of Medicare program spending, including reductions
in Medicare market basket updates and DSH funding. Reductions to
our reimbursement under the Medicare and Medicaid programs by
the Health Reform Law could adversely affect our business and
results of operations to the extent such reductions are not
offset by anticipated increases in revenues from providing care
to previously uninsured individuals.
The federal government and many states have recently adopted or
are currently considering reducing the level of Medicaid funding
(including upper payment limits) or program eligibility that
could adversely affect future levels of Medicaid reimbursement
received by our hospitals. Since states must operate with
balanced budgets and since the Medicaid program is often a
states largest program, a number of states have adopted,
or are considering adopting, legislation designed to reduce
their Medicaid expenditures. The Deficit Reduction Act of 2005
(DRA) includes cuts to the federal Medicaid and
State Childrens Health Insurance Programs of approximately
$21.6 billion over the next five years. Additionally, on
May 29, 2007, CMS published a final rule entitled
Medicaid Program; Cost Limit for Providers Operated by
Units of Government and Provisions to Ensure the Integrity of
Federal-State Financial Partnership which is estimated to
reduce federal Medicaid funding from $12 billion to
$20 billion over five years. The U.S. Congress enacted
two moratoria in respect of this rule that delayed six of seven
proposed Medicaid regulations in this final CMS rule until
July 1, 2009. On June 30, 2009, three more of the
Medicaid regulations that had been under a congressional
moratorium set to expire July 1, 2009 were officially
rescinded, all or in part, by CMS, and CMS also delayed until
June 30, 2010 the enforcement of the fourth of the six
regulations. As a result of these changes in implementing the
final rule, the impact on us of the final rule cannot be
quantified. States in which we operate have also adopted, or are
considering adopting, legislation designed to reduce coverage
and program eligibility, enroll Medicaid recipients in managed
care programs
and/or
impose additional taxes on hospitals to help finance or expand
the states Medicaid systems. For example, Arizona has
frozen hospital inpatient and outpatient reimbursements at the
October 1, 2008 rates and discontinued a state health
benefits program for low-income parents. 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. Effective March 23, 2010, the Health
Reform Law requires states to at least maintain Medicaid
eligibility standards established prior to the enactment of the
law for adults until January 1, 2014 and for children until
October 1, 2019. However, states with budget deficits may
seek exceptions from this requirement to address eligibility
standards that apply to adults making more than 133% of
9
the federal poverty level. The Health Reform Law also provides
for significant expansions to the Medicaid program, but these
changes are not required until 2014. In addition, the Health
Reform Law will result in increased state legislative and
regulatory changes in order for states to comply with new
federal mandates, such as the requirement to establish health
insurance exchanges, and to participate in grants and other
incentive opportunities. Future legislation or other changes in
the administration or interpretation of government health
programs could have a material adverse effect on our financial
position and results of operations.
Our ability to negotiate favorable contracts with managed care
plans significantly affects the revenues and operating results
of most of our hospitals. Managed care payers increasingly are
demanding discounted fee structures, and the trend toward
consolidation among managed care plans tends to increase their
bargaining power over fee structures. Reductions in price
increases or the amounts received from managed care plans could
have a material adverse effect on our financial position and
results of operations.
In recent years, both the Medicare program and several large
managed care companies have changed our reimbursement to link
some of their payments, especially their annual increases in
payments, to performance of quality of care measures. We expect
this trend to
pay-for-performance
to increase in the future. If we are unable to meet these
performance measures, our results of operations and cash flow
will be materially adversely affected.
We
conduct business in a heavily regulated industry, and changes in
regulations or violations of regulations may result in increased
costs or sanctions that could reduce our revenues and
profitability.
The healthcare industry is subject to extensive federal, state
and local laws and regulations relating to licensing, the
conduct of operations, the ownership of facilities, the addition
of facilities and services, financial arrangements with
physicians and other referral sources, confidentiality,
maintenance and security issues associated with medical records,
billing for services and prices for services. If a determination
were made that we were in material violation of such laws or
regulations, our operations and financial results could be
materially adversely affected.
In many instances, the industry does not have the benefit of
significant regulatory or judicial interpretations of these laws
and regulations. This is particularly true in the case of the
Medicare and Medicaid statute codified under
Section 1128B(b) of the Social Security Act and known as
the Anti-Kickback Statute. This statute prohibits
providers and other person or entities from soliciting,
receiving, offering or paying, directly or indirectly, any
remuneration with the intent to generate referrals of orders for
services or items reimbursable under Medicare, Medicaid and
other federal healthcare programs. Courts have interpreted this
statute broadly and held that there is a violation of the
Anti-Kickback Statute if just one purpose of the remuneration is
to generate referrals, even if there are other lawful purposes.
Furthermore, the Health Reform Law provides that knowledge of
the law or the intent to violate the law is not required. As
authorized by the U.S. Congress, the U.S. Department
of Health and Human Services has issued regulations which
describe certain conduct and business relationships immune from
prosecution under the Anti-Kickback Statute. The fact that a
given business arrangement does not fall within one of these
safe harbor provisions does not render the
arrangement illegal, but business arrangements of healthcare
service providers that fail to satisfy the applicable safe
harbor criteria risk increased scrutiny by enforcement
authorities.
The safe harbor requirements are generally detailed, extensive,
narrowly drafted and strictly construed. Many of the financial
arrangements that our facilities maintain with physicians do not
meet all of the requirements for safe harbor protection. The
regulatory authorities that enforce the Anti-Kickback Statute
may in the future determine that one or more of these
arrangements violate the Anti-Kickback Statute or other federal
or state laws. A determination that a facility has violated the
Anti-Kickback Statute or other federal laws could subject us to
liability under the Social Security Act, including criminal and
civil penalties, as well as exclusion of the facility from
participation in government programs such as Medicare and
Medicaid or other federal healthcare programs.
In addition, the portion of the Social Security Act commonly
known as the Stark Law prohibits physicians from
referring Medicare and (to an extent) Medicaid patients to
providers of certain designated
10
health services if the physician or a member of his or her
immediate family has an ownership or investment interest in, or
compensation arrangement with, that provider. In addition, the
provider in such arrangements is prohibited from billing for all
of the designated health services referred by the physician,
and, if paid for such services, is required to promptly repay
such amounts. Most of the services furnished by our facilities
are designated health services for Stark Law
purposes, including inpatient and outpatient hospital services.
There are multiple exceptions to the Stark Law, among others,
for physicians having a compensation relationship with the
facility as a result of employment agreements, leases, physician
recruitment and certain other arrangements. However, each of
these exceptions applies only if detailed conditions are met. An
arrangement subject to the Stark Law must qualify for an
exception in order for the services to be lawfully referred by
the physician and billed by the provider. Although there is an
exception for a physicians ownership interest in an entire
hospital, the Health Reform Law prohibits newly created
physician-owned
hospitals from billing for Medicare patients referred by their
physician owners. As a result, the new law will effectively
prevent the formation of physician-owned hospitals after
December 31, 2010. While the new law grandfathers existing
physician-owned hospitals, it does not allow these hospitals to
increase the percentage of physician ownership and significantly
restricts their ability to expand services.
CMS has issued three phases of final regulations implementing
the Stark Law. Phases I and II became effective in January
2002 and July 2004, respectively, and Phase III became
effective in December 2007. While these regulations help clarify
the requirements of the exceptions to the Stark Law, it is
unclear how the government will interpret many of these
exceptions for enforcement purposes. In addition, in July 2007
CMS proposed far-reaching changes to the regulations
implementing the Stark Law that would further restrict the types
of arrangements that hospitals and physicians may enter,
including additional restrictions on certain leases, percentage
compensation arrangements, and agreements under which a hospital
purchases services under arrangements. On July 31, 2008,
CMS issued a final rule which, in part, finalized and responded
to public comments regarding some of its July 2007 proposed
major changes to the Stark Law regulations. The most
far-reaching of the changes made in this final July 2008 rule
effectively prohibit, as of a delayed effective date of
October 1, 2009, both under arrangements
ventures between a hospital and any referring physician or
entity owned, in whole or in part, by a referring physician and
unit-of-service-based
per click compensation and percentage-based
compensation in office space and equipment leases between a
hospital and any referring physician or entity owned, in whole
or in part, by a referring physician. We examined all of our
under arrangement ventures and space and equipment
leases with physicians to identify those arrangements which
would have failed to conform to these new Stark regulations as
of October 1, 2009, and we restructured or terminated all
such non-conforming arrangements so identified prior to
October 1, 2009. Because the Stark Law and its implementing
regulations are relatively new, we do not always have the
benefit of significant regulatory or judicial interpretation of
this law and its regulations. We attempt to structure our
relationships to meet an exception to the Stark Law, but the
regulations implementing the exceptions are detailed and
complex, and we cannot assure you that every relationship
complies fully with the Stark Law. In addition, in the July 2008
final Stark rule CMS indicated that it will continue to
enact further regulations tightening aspects of the Stark Law
that it perceives allow for Medicare program abuse, especially
those regulations that still permit physicians to profit from
their referrals of ancillary services. We cannot assure you that
the arrangements entered into by our hospitals with physicians
will be found to be in compliance with the Stark Law, as it
ultimately may be implemented or interpreted.
Additionally, if we violate the Anti-Kickback Statute or Stark
Law, or if we improperly bill for our services, we may be found
to violate the False Claims Act, either under a suit brought by
the government or by a private person under a qui tam, or
whistleblower, suit.
If we fail to comply with the Anti-Kickback Statute, the Stark
Law, the False Claims Act or other applicable laws and
regulations, or if we fail to maintain an effective corporate
compliance program, we could be subjected to liabilities,
including civil penalties (including the loss of our licenses to
operate one or more facilities), exclusion of one or more
facilities from participation in the Medicare, Medicaid and
other federal and state healthcare programs and, for violations
of certain laws and regulations, criminal penalties.
11
All of the states in which we operate have adopted or have
considered adopting similar anti-kickback and physician
self-referral legislation, some of which extends beyond the
scope of the federal law to prohibit the payment or receipt of
remuneration for the referral of patients and physician
self-referrals, regardless of the source of payment for the
care. Little precedent exists for the interpretation or
enforcement of these laws. Both federal and state government
agencies have announced heightened and coordinated civil and
criminal enforcement efforts.
Government officials responsible for enforcing healthcare laws
could assert that one or more of our facilities, or any of the
transactions in which we are involved, are in violation of the
Anti-Kickback Statute or the Stark Law and related state law
exceptions. It is also possible that the courts could ultimately
interpret these laws in a manner that is different from our
interpretations. Moreover, other healthcare companies, alleged
to have violated these laws, have paid significant sums to
settle such allegations and entered into corporate
integrity agreements because of concern that the
government might exercise its authority to exclude those
providers from governmental payment programs (e.g., Medicare,
Medicaid, TRICARE). A determination that one or more of our
facilities has violated these laws, or the public announcement
that we are being investigated for possible violations of these
laws, could have a material adverse effect on our business,
financial condition, results of operations or prospects, and our
business reputation could suffer significantly.
Federal law permits the Department of Health and Human Services
Office of Inspector General (OIG) to impose civil
monetary penalties, assessments and to exclude from
participation in federal healthcare programs, individuals and
entities who have submitted false, fraudulent or improper claims
for payment. Improper claims include those submitted by
individuals or entities who have been excluded from
participation, or an order to prescribe a medical or other item
or service during a period a person was excluded from
participation, where the person knows or should know that the
claim would be made to a federal healthcare program. These
penalties may also be imposed on providers or entities who
employ or enter into contracts with excluded individuals to
provide services to beneficiaries of federal healthcare
programs. Furthermore, if services are provided by an excluded
individual or entity, the penalties may apply even if the
payment is made directly to a non-excluded entity. Employers of
or entities that contract with excluded individuals or entities
for the provision of services may be liable for up to $10,000
for each item or service furnished by the excluded individual or
entity, an assessment of up to three times the amount claimed
and program exclusions. In order for the penalties to apply, the
employer or contractor must have known or should have known that
the person or entity was excluded from participation. On
October 12, 2009, we voluntarily reported to OIG that two
past employees of Vanguard Health Systems, Inc. had been
excluded from participation in Medicare at certain times during
their employment.
Illinois and Massachusetts require governmental determinations
of need (Certificates of Need) prior to the purchase
of major medical equipment or the construction, expansion,
closure, sale or change of control of healthcare facilities. We
believe our facilities have obtained appropriate certificates
wherever applicable. However, if a determination were made that
we were in material violation of such laws, our operations and
financial results could be materially adversely affected. The
governmental determinations, embodied in Certificates of Need,
can also affect our facilities ability to add bed capacity
or important services. We cannot predict whether we will be able
to obtain required Certificates of Need in the future. A failure
to obtain any required Certificates of Need may impair our
ability to operate the affected facility profitably.
The laws, rules and regulations described above are complex and
subject to interpretation. If we are in violation of any of
these laws, rules or regulations, or if further changes in the
regulatory framework occur, our results of operations could be
significantly harmed.
Some
of our hospitals may be required to submit to CMS information on
their relationships with physicians and this submission could
subject such hospitals and us to liability.
CMS announced in 2007 that it intended to collect information on
ownership, investment and compensation arrangements with
physicians from 500 (pre-selected) hospitals by requiring these
hospitals to
12
submit to CMS Disclosure of Financial Relationship Reports
(DFRR) from each selected hospital. CMS also
indicated that at least 10 of our hospitals would be among these
500 hospitals required to submit a DFRR because these 10
hospitals did not respond to CMS voluntary survey
instrument on this topic purportedly submitted to these
hospitals via email by CMS in 2006. CMS intended to use this
data to determine whether these hospitals were in compliance
with the Stark Law and implementing regulations during the
reporting period, and CMS has indicated it may share this
information with other government agencies and with
congressional committees. Many of these agencies have not
previously analyzed this information and have the authority to
bring enforcement actions against the hospitals. However, in
July 2008 CMS announced that, based on its further review and
expected further public comments on this matter, CMS may decide
in the future to decrease (but not increase) the number of
hospitals to which it will send the DFRR below the 500 hospitals
originally designated. Moreover, in June 2010 CMS announced
that it had determined that mandating hospitals to complete the
DFRR may duplicate some of the reporting obligations related to
physician ownership or investment in hospitals set forth in the
Health Reform Law, and, as a result, it had decided to delay
implementation of the DFRR and instead focus on implementation
of these new reporting provisions as to physician-owned
hospitals only. CMS also explained in this June 2010
announcement that it remained interested in analyzing
physicians compensation relationships with hospitals, and
that after it collected and examined information related to
ownership and investment interests of physicians in hospitals
pursuant to the reporting obligations in the Health Reform Law,
it would determine if it was necessary to capture information
related to compensation arrangements from non-physician owned
hospitals as well pursuant to reimplementation of its DFRR
initiative. We have no physician ownership in our hospitals, so
our hospitals will not be subject to these new physician
ownership and investment reporting obligations under the Health
Reform Law.
Once a hospital receives this request for a DFRR, the hospital
will have 60 days to compile a significant amount of
information relating to its financial relationships with
physicians. The hospital may be subject to civil monetary
penalties of up to $10,000 per day if it is unable to assemble
and report this information within the required timeframe or if
CMS or any other government agency determines that the
submission is inaccurate or incomplete. The hospital may be the
subject of investigations or enforcement actions if a government
agency determines that any of the information indicates a
potential violation of law.
Depending on the final format of the DFRR, responding hospitals
may be subject to substantial penalties as a result of
enforcement actions brought by government agencies and
whistleblowers acting pursuant to the False Claims Act and
similar state laws, based on such allegations like failure to
respond within required deadlines, that the response is
inaccurate or contains incomplete information or that the
response indicates a potential violation of the Stark Law or
other requirements.
Any governmental investigation or enforcement action which
results from the DFRR process could materially adversely affect
our results of operations.
Providers
in the healthcare industry have been the subject of federal and
state investigations, whistleblower lawsuits and class action
litigation, and we may become subject to investigations,
whistleblower lawsuits or class action litigation in the
future.
Both federal and state government agencies have heightened and
coordinated civil and criminal enforcement efforts as part of
numerous ongoing investigations of hospital companies, as well
as their executives and managers. These investigations relate to
a wide variety of topics, including:
| cost reporting and billing practices; | |
| laboratory and home healthcare services; | |
| physician ownership of, and joint ventures with, hospitals; | |
| physician recruitment activities; and | |
| other financial arrangements with referral sources. |
13
The Health Reform Law includes additional federal funding of
$350 million over the next 10 years to fight health
care fraud, waste and abuse, including $95 million for
federal fiscal year 2011, $55 million in federal fiscal
year 2012 and additional increased funding through 2016.
In addition, the federal False Claims Act permits private
parties to bring qui tam, or whistleblower, lawsuits
against companies. Whistleblower provisions allow private
individuals to bring actions on behalf of the government
alleging that the defendant has defrauded the federal
government. Because qui tam lawsuits are filed under
seal, we could be named in one or more such lawsuits of which we
are not aware. Defendants determined to be liable under the
False Claims Act may be required to pay three times the actual
damages sustained by the government, plus mandatory civil
penalties of between $5,500 and $11,000 for each separate false
claim. Typically, each fraudulent bill submitted by a provider
is considered a separate false claim, and thus the penalties
under the False Claims Act may be substantial. Liability arises
when an entity knowingly submits a false claim for reimbursement
to the federal government. The Fraud Enforcement and Recovery
Act, which became law on May 20, 2009, changes the scienter
requirements for liability under the False Claims Act. An entity
may now violate the False Claims Act if it knowingly and
improperly avoids or decreases an obligation to pay money
to the United States. This includes obligations based on an
established duty . . . arising from . . . the retention of
any overpayment. Thus, if a provider is aware that it has
retained an overpayment that it has an obligation to refund,
this may form the basis of a False Claims Act violation even if
the provider did not know the claim was false when
it was submitted. The Health Reform Law expressly requires
health care providers and others to report and return
overpayments. The term overpayment is defined as any funds
that a person receives or retains under title XVIII or XIX
to which the person, after applicable reconciliation, is not
entitled under such title. The Health Reform Law also
defines the period of time in which an overpayment must be
reported and returned to the government. The Health Reform Law
provides that [a]n overpayment must be reported and
returned within 60 days after the date on which
the overpayment was identified, or the date any
corresponding cost report is due, whichever is later. The
provision explicitly states that if the overpayment is retained
beyond the
60-day
period, it becomes an obligation sufficient for
reverse false claim liability under the False Claims Act, and is
therefore subject to treble damages and penalties if there is a
knowing and improper failure to return the
overpayment. In some cases, courts have held that violations of
the Stark Law and Anti-Kickback Statute can properly form the
basis of a False Claims Act case, finding that in cases where
providers allegedly violated other statutes and have submitted
claims to a governmental payer during the time period they
allegedly violated these other statutes, the providers thereby
submitted false claims under the False Claims Act. Some states
have adopted similar whistleblower and false claims provisions.
The Health Reform Law now explicitly links violations of the
Anti-Kickback Statute to the False Claims Act.
The Health Reform Law changes the intent requirement for health
care fraud under 18 U.S.C. § 1347, such that
a person need not have actual knowledge or specific intent
to commit a violation. In addition, the Health Reform Law
significantly changes the False Claims Act by removing the
jurisdictional bar for allegations based on publicly disclosed
information and by loosening the requirements for a qui tam
relator to qualify as an original source. These
changes will effectively increase False Claims Act exposure by
enabling a greater number of whistleblowers to bring a claim.
As required by statute, CMS is in the process of implementing
the Recovery Audit Contractor (RAC) program on a
nationwide basis. Under the program, CMS contracts with RACs to
conduct post-payment reviews to detect and correct improper
payments in the
fee-for-service
Medicare program. The Health Reform Law expands the RAC
programs scope to include managed Medicare plans and to
include Medicaid claims by requiring all states to enter into
contracts with RACs by December 31, 2010. In addition, CMS
employs Medicaid Integrity Contractors (MICs) to
perform post-payment audits of Medicaid claims and identify
overpayments. Throughout 2010, MIC audits will continue to
expand. The Health Reform Law increases federal funding for the
MIC program for federal fiscal year 2011 and later years. In
addition to RACs and MICs, several other contractors, including
the state Medicaid agencies, have increased their review
activities.
The Office of the Inspector General of the U.S. Department
of Health and Human Services and the U.S. Department of
Justice have, from time to time, established national
enforcement initiatives that focus on specific billing practices
or other suspected areas of abuse. Initiatives include a focus
on hospital billing for outpatient charges associated with
inpatient services, as well as hospital laboratory, home health
and durable medical equipment billing practices. As a result of
these initiatives, some of our activities could become the
14
subject of governmental investigations or inquiries. For
example, we have significant Medicare and Medicaid billings, we
provide some durable medical equipment and home healthcare
services, and we have joint venture arrangements involving
physician investors. We also have a variety of other financial
arrangements with physicians and other potential referral
sources including recruitment arrangements and leases. In
addition, our executives and managers, many of whom have worked
at other healthcare companies that are or may become the subject
of federal and state investigations and private litigation,
could be included in governmental investigations or named as
defendants in private litigation. We are aware that several of
our hospitals or their related healthcare operations were and
may still be under investigation in connection with activities
conducted prior to our acquisition of them. Under the terms of
our various acquisition agreements, the prior owners of our
hospitals are responsible for any liabilities arising from
pre-closing violations. The prior owners resolution of
these matters or failure to resolve these matters, in the event
that any resolution was deemed necessary, may have a material
adverse effect on our business, financial condition or results
of operations. Any investigations of us, our executives,
managers, facilities or operations could result in significant
liabilities or penalties to us, as well as adverse publicity.
We maintain a voluntary compliance program to address health
regulatory and other compliance requirements. This program
includes initial and periodic ethics and compliance training, a
toll-free hotline for employees to report, without fear of
retaliation, any suspected legal or ethical violations, annual
fraud and abuse audits to look at our financial
relationships with physicians and other referral sources and
annual coding audits to make sure our hospitals bill
the proper service codes in respect of obtaining payment from
the Medicare and Medicaid programs.
As an element of our corporate compliance program and our
internal compliance audits, from time to time we make voluntary
disclosures and repayments to the Medicare and Medicaid programs
and/or to
the federal
and/or state
regulators for these programs in the ordinary course of
business. At the current time, we know of no active
investigations by any of these programs or regulators in respect
of our disclosures or repayments. All of these voluntary actions
on our part could lead to an investigation by the regulators to
determine whether any of our facilities have violated the Stark
Law, the Anti-Kickback Statute, the False Claims Act or similar
state law. Either an investigation or initiation of
administrative or judicial actions could result in a public
announcement of possible violations of the Stark Law, the
Anti-Kickback Statute or the False Claims Act or similar state
law. Such determination or announcements could have a material
adverse effect on our business, financial condition, results of
operations or prospects, and our business reputation could
suffer significantly.
Additionally, several hospital companies have in recent years
been named defendants in class action litigation alleging, among
other things, that their charge structures are fraudulent and,
under state law, unfair or deceptive practices, insofar as those
hospitals charge insurers lower rates than those charged to
uninsured patients. We cannot assure you that we will not be
named as a defendant in litigation of this type. Furthermore,
the outcome of these suits may affect the industry standard for
charity care policies and any response we take may have a
material adverse effect on our financial results.
On June 20, 2006, a federal antitrust class action suit was
filed in San Antonio, Texas against our Baptist Health
System subsidiary in San Antonio, Texas and two other large
hospital systems in San Antonio. In the complaint,
plaintiffs allege that the three hospital system defendants
conspired with each other and with other unidentified
San Antonio area hospitals to depress the compensation
levels of registered nurses employed at the conspiring hospitals
within the San Antonio area by engaging in certain
activities that violated the federal antitrust laws. The
complaint alleges two separate claims. The first count asserts
that the defendant hospitals violated Section 1 of the
federal Sherman Act, which prohibits agreements that
unreasonably restrain competition, by conspiring to depress
nurses compensation. The second count alleges that the
defendant hospital systems also violated Section 1 of the
Sherman Act by participating in wage, salary and benefits
surveys for the purpose, and having the effect, of depressing
registered nurses compensation or limiting competition for
nurses based on their compensation. The class on whose behalf
the plaintiffs filed the complaint is alleged to comprise all
registered nurses employed by the defendant hospitals since
June 20, 2002. The suit seeks unspecified damages, trebling
of this damage amount pursuant to federal law, interest, costs
and attorneys fees. From 2006 through April 2008 we and the
plaintiffs worked on producing documents to each other relating
to, and supplying legal briefs to the court in respect of, the
issue of whether the court will certify a class in this suit. In
April 2008 the case was stayed by the judge pending his ruling
on plaintiffs motion for class certification. We believe
that the allegations contained within this putative class action
suit are without merit, and we have vigorously worked to defeat class
certification. If a class is certified, we will continue to
defend vigorously against the litigation.
On the same date in 2006 that this suit was filed against us in
federal district court in San Antonio, the same attorneys
filed three other substantially similar putative class action
lawsuits in federal district courts in Chicago, Illinois,
Albany, New York and Memphis, Tennessee against some of the
hospitals in those cities (none of such hospitals being owned by
us). The attorneys representing the plaintiffs in all four of
these cases said in June 2006 that they may file similar
complaints in other jurisdictions and in December 2006 they
brought a substantially similar class action lawsuit against
eight hospitals or hospital systems in the Detroit, Michigan metropolitan area, one
of which systems is DMC.
Since representatives of the Service Employees International
Union joined plaintiffs attorneys in announcing the filing
of all four complaints on June 20, 2006, and as has been
reported in the media, we believe that SEIUs involvement
in these actions appears to be part of a corporate campaign to
attempt to organize nurses in these cities, including
San Antonio. The nurses in our hospitals in
San Antonio are currently not members of any union. Of the
four other similar cases filed in 2006, only the Chicago case
has been concluded, following the courts denial of
plaintiffs motion to certify a class. In the suit in Detroit, the plaintiffs have filed a motion for class certification and DMC
has filed a motion for summary judgment and both motions are currently pending before
the trial judge. The other two
suits have progressed at somewhat different paces and remain
pending. To date, in all five suits, the plaintiffs have yet to persuade any court to
certify a class of registered nurses as alleged in their
complaints.
If the plaintiffs (1) are successful in obtaining class
certification and (2) are able to prove substantial damages
which are then trebled under Section 1 of the Sherman Act,
such a result could materially affect our business, financial
condition or results of operations. However, in the opinion of
management, the ultimate resolution of this matter is not
expected to have a material adverse effect on our financial
position or results of operations.
Competition
from other hospitals or healthcare providers may reduce our
patient volumes and profitability.
The healthcare business is highly competitive and competition
among hospitals and other healthcare providers for patients has
intensified in recent years. Generally, other hospitals in the
local communities served by most of our hospitals provide
services similar to those offered by our hospitals. In addition,
CMS publicizes on its Medicare website performance data related
to quality measures and data on patient satisfaction surveys
hospitals
15
submit in connection with their Medicare reimbursement. Federal
law provides for the future expansion of the number of quality
measures that must be reported. Additional quality measures and
future trends toward clinical transparency may have an
unanticipated impact on our competitive position and patient
volumes. Further, the Health Reform Law requires all hospitals
to annually establish, update and make public a list of the
hospitals standard charges for items and services. If any
of our hospitals achieve poor results (or results that are lower
than our competitors) on these quality measures or on patient
satisfaction surveys or if our standard charges are higher than
our competitors, our patient volumes could decline.
In addition, we believe the number of freestanding specialty
hospitals and surgery and diagnostic centers in the geographic
areas in which we operate has increased significantly in recent
years. As a result, most of our hospitals operate in an
increasingly competitive environment. Some of the hospitals that
compete with our hospitals are owned by governmental agencies or
not-for-profit
corporations supported by endowments and charitable
contributions and can finance capital expenditures and
operations on a tax-exempt basis. Increasingly, we are facing
competition from physician-owned specialty hospitals and
freestanding surgery centers that compete for market share in
high margin services and for quality physicians and personnel.
If ambulatory surgery centers are better able to compete in this
environment than our hospitals, our hospitals may experience a
decline in patient volume, and we may experience a decrease in
margin, even if those patients use our ambulatory surgery
centers. Further, if our competitors are better able to attract
patients, recruit physicians, expand services or obtain
favorable managed care contracts at their facilities than our
hospitals and ambulatory surgery centers, we may experience an
overall decline in patient volume.
Our Phoenix Health Plan unit (PHP) also faces
competition within the Arizona markets that it serves. As in the
case of our hospitals, some of our health plan competitors in
these markets are owned by governmental agencies or
not-for-profit
corporations that have greater financial resources than we do.
The revenues we derive from PHP could significantly decrease if
new plans operating in the Arizona Health Care Cost Containment
System (AHCCCS), which is Arizonas state
Medicaid program, enter these markets or other existing AHCCCS
plans increase their number of enrollees. Moreover, a failure to
attract future enrollees may negatively impact our ability to
maintain our profitability in these markets.
We may
be subject to liabilities from claims brought against our
facilities.
We operate in a highly regulated and litigious industry. As a
result, various lawsuits, claims and legal and regulatory
proceedings have been instituted or asserted against us,
including those outside of the ordinary course of business such
as class actions and those in the ordinary course of business
such as malpractice lawsuits. Some of these actions may involve
large claims as well as significant defense costs.
We maintain professional and general liability insurance with
unrelated commercial insurance carriers to provide for losses in
excess of our self-insured retention (directly, or indirectly,
through an insurance subsidiary) of $10.0 million. As a
result, a few successful claims against us that are within our
self-insured retention amounts could have an adverse effect on
our results of operations, cash flows, financial condition or
liquidity. In addition, one or more claims could exceed the
scope of the third-party coverage in effect or the coverage of
particular claims or damages could be denied.
Additionally, we experienced unfavorable claims development
results recently, which are reflected in our professional and
general liability costs. The relatively high cost of
professional liability insurance and, in some cases, the lack of
availability of such insurance coverage, for physicians with
privileges at our hospitals increases our risk of vicarious
liability in cases where both our hospital and the uninsured or
underinsured physician are named as co-defendants. As a result,
we are subject to greater self-insured risk and may be required
to fund claims out of our operating cash flows to a greater
extent than during fiscal year 2009. We cannot assure you that
we will be able to continue to obtain insurance coverage in the
future or that such insurance coverage, if it is available, will
be available on acceptable terms.
While we cannot predict the likelihood of future claims or
inquiries, we expect that new matters may be initiated against
us from time to time. Moreover, the results of current claims,
lawsuits and investigations cannot be predicted, and it is
possible that the ultimate resolution of these matters,
individually or in the
16
aggregate, may have a material adverse effect on our business
(both in the near and long term), financial position, results of
operations or cash flows.
Our
hospitals face a growth in uncompensated care as the result of
the inability of uninsured patients to pay for healthcare
services and difficulties in collecting patient portions of
insured accounts.
Like others in the hospital industry, we have experienced an
increase in uncompensated care. Our combined provision for
doubtful accounts, uninsured discounts and charity care
deductions as a percentage of patient service revenues (prior to
these adjustments) was 12.0% during both fiscal 2008 and 2009.
This ratio increased to 15.7% for the nine months ended
March 31, 2010. Approximately 350 basis points of this
increase related to the uninsured discount and Medicaid pending
policy changes implemented in our Illinois hospitals effective
April 1, 2009 and in our Phoenix and San Antonio
hospitals effective July 1, 2009. Our self-pay discharges
as a percentage of total discharges have fluctuated only
slightly between 3.3% and 3.7% during the past three fiscal
years and during the nine months ended March 31, 2010 (as
adjusted for our Medicaid pending policy changes in Illinois on
April 1, 2009 and in Phoenix and San Antonio on
July 1, 2009). Our hospitals remain at risk for increases
in uncompensated care as a result of price increases, the
continuing trend of increases in coinsurance and deductible
portions of managed care accounts and increases in uninsured
patients as a result of potential state Medicaid funding cuts or
general economic weakness. Although we continue to seek ways of
improving point of service collection efforts and implementing
appropriate payment plans with our patients, if we continue to
experience growth in self-pay revenues prior to the Health
Reform Law being fully implemented, our results of operations
could be materially adversely affected. Further, our ability to
improve collections for self-pay patients may be limited by
regulatory and investigatory initiatives, including private
lawsuits directed at hospital charges and collection practices
for uninsured and underinsured patients.
The Health Reform Law seeks to decrease over time the number of
uninsured individuals. Among other things, the Health Reform Law
will, effective January 1, 2014, expand Medicaid and
incentivize employers to offer, and require individuals to
carry, health insurance or be subject to penalties. However, it
is difficult to predict the full impact of the Health Reform Law
due to the laws complexity, lack of implementing
regulations or interpretive guidance, gradual implementation and
possible amendment, as well as our inability to foresee how
individuals and businesses will respond to the choices afforded
them by the law. In addition, even after implementation of the
Health Reform Law, we may continue to experience bad debts and
have to provide uninsured discounts and charity care for
undocumented aliens who are not permitted to enroll in a health
insurance exchange or government healthcare programs.
Our
performance depends on our ability to recruit and retain quality
physicians.
Physicians generally direct the majority of hospital admissions.
Thus, the success of our hospitals depends in part on the
following factors:
| the number and quality of the physicians on the medical staffs of our hospitals; | |
| the admitting practices of those physicians; and | |
| the maintenance of good relations with those physicians. |
Most physicians at our hospitals also have admitting privileges
at other hospitals. Our efforts to attract and retain physicians
are affected by our managed care contracting relationships,
national shortages in some specialties, such as anesthesiology
and radiology, the adequacy of our support personnel, the
condition of our facilities and medical equipment, the
availability of suitable medical office space and federal and
state laws and regulations prohibiting financial relationships
that may have the effect of inducing patient referrals. If
facilities are not staffed with adequate support personnel or
technologically advanced equipment that meets the needs of
patients, physicians may be discouraged from referring patients
to our facilities, which could adversely affect our
profitability.
In an effort to meet community needs in the markets in which we
operate, we have implemented a strategy to employ physicians
both in primary care and in certain specialties. As of
March 31, 2010, we employed more than 300 practicing
physicians, excluding residents. The deployment of a physician
employment strategy includes increased salary and benefits
costs, physician integration risks and difficulties
17
associated with physician practice management. While we believe
this strategy is consistent with industry trends, we cannot be
assured of the long-term success of such a strategy. In
addition, if we raise wages in response to our competitors
wage increases and are unable to pass such increases on to our
clients, our margins could decline, which could adversely affect
our business, financial condition and results of operations.
We may
be unable to achieve our acquisition and growth strategies and
we may have difficulty acquiring
not-for-profit
hospitals due to regulatory scrutiny.
An important element of our business strategy is expansion by
acquiring hospitals in our existing and in new urban and
suburban markets and by entering into partnerships or
affiliations with other healthcare service providers. The
competition to acquire hospitals is significant, including
competition from healthcare companies with greater financial
resources than ours. We have not acquired a hospital since
December 2004 and may never acquire another hospital, which
would seriously impact our ability to grow our business.
Even if we are able to acquire more hospitals, such acquisitions
may be on less than favorable terms. We may have difficulty
obtaining financing, if necessary, for such acquisitions on
satisfactory terms. We sometimes agree not to sell an acquired
hospital for some period of time (currently no longer than
10 years) after purchasing it
and/or grant
the seller a right of first refusal to purchase the hospital if
we agree to sell it to a third party. In addition, we may not be
able to effectively integrate any acquired facilities with our
operations. Even if we continue to acquire additional facilities
and/or enter
into partnerships or affiliations with other healthcare service
providers, federal and state regulatory agencies may constrain
our ability to grow.
Additionally, many states, including some where we have
hospitals and others where we may in the future attempt to
acquire hospitals, have adopted legislation regarding the sale
or other disposition of hospitals operated by
not-for-profit
entities. In other states that do not have specific legislation,
the attorneys general have demonstrated an interest in these
transactions under their general obligations to protect
charitable assets from waste. These legislative and
administrative efforts focus primarily on the appropriate
valuation of the assets divested and the use of the sale
proceeds by the
not-for-profit
seller. These review and approval processes can add time to the
consummation of an acquisition of a
not-for-profit
hospital, and future actions on the state level could seriously
delay or even prevent future acquisitions of
not-for-profit
hospitals. Furthermore, as a condition to approving an
acquisition, the attorney general of the state in which the
hospital is located may require us to maintain specific
services, such as emergency departments, or to continue to
provide specific levels of charity care, which may affect our
decision to acquire or the terms upon which we acquire one of
these hospitals.
The
consummation of the acquisition of DMC is subject to a number of
closing conditions that could prevent us from consummating the
transaction in accordance with our current expectations, if at
all.
Our acquisition of DMC is subject to a number of closing
conditions, including the approval of the Michigan Attorney
General. Among other matters being reviewed, the Michigan
Attorney General has announced that his office will attempt to
determine whether DMC will receive from the Vanguard acquisition
companies fair value for all assets proposed to be sold by DMC.
In this regard in June 2010 the Michigan Attorney General
announced that it had hired two financial consulting firms
(AlixPartners and Focus Management Group) to assist his office
in its review and that such firms are to report their findings
to the Attorney General by August 15, 2010, with the
Attorney General also announcing that his office currently
intends to issue a decision on the DMC transaction by
September 15, 2010. The Michigan Attorney General has also
informed DMC that his office intends to schedule a public
hearing on the DMC transaction on July 17, 2010 during
which his office will entertain questions about the proposed
transaction from the public.
If the approval from the Michigan Attorney General is not
received or any other condition to closing is not satisfied by
November 1, 2010, each of the Vanguard acquisition
companies and DMC has the right to terminate the Purchase
Agreement, as long as such failure to consummate was not caused
by a breach by the terminating party of the Purchase Agreement.
The Vanguard acquisition companies currently expect to
consummate the DMC transaction on or before November 1,
2010. However, we cannot assure you that the Vanguard
acquisition companies will consummate the DMC acquisition on
this timetable, if at all. Completion of the acquisition of DMC
is not a condition of the consummation of this offering.
18
We may
not be able to successfully integrate our acquisition of DMC or
realize the potential benefits of the acquisition, which could
cause our business to suffer.
We may not be able to combine successfully the operations of DMC
with our operations and, even if such integration is
accomplished, we may never realize the potential benefits of the
acquisition. The integration of DMC with our operations requires
significant attention from management and may impose substantial
demands on our operations or other projects. The integration of
DMC also involves a significant capital commitment, and the
return that we achieve on any capital invested may be less than
the return that we would achieve on our other projects or
investments. Any of these factors could cause delays or
increased costs of combining the companies, which could
adversely affect our operations, financial results and liquidity.
Future
acquisitions or joint ventures may use significant resources,
may be unsuccessful and could expose us to unforeseen
liabilities.
As part of our growth strategy, we may pursue acquisitions or
joint ventures of hospitals or other related healthcare
facilities and services. These acquisitions or joint ventures
may involve significant cash expenditures, debt incurrence,
additional operating losses and expenses that could have a
material adverse effect on our financial condition and results
of operations. Acquisitions or joint ventures involve numerous
risks, including:
| difficulty and expense of integrating acquired personnel into our business; | |
| diversion of managements time from existing operations; | |
| potential loss of key employees or customers of acquired companies; and | |
| assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations. |
We cannot assure you that we will succeed in obtaining financing
for acquisitions or joint ventures at a reasonable cost, or that
such financing will not contain restrictive covenants that limit
our operating flexibility. We also may be unable to operate
acquired hospitals profitably or succeed in achieving
improvements in their financial performance.
The
cost of our malpractice insurance and the malpractice insurance
of physicians who practice at our facilities remains volatile.
Successful malpractice or tort claims asserted against us, our
physicians or our employees could materially adversely affect
our financial condition and profitability.
Physicians, hospitals and other healthcare providers are subject
to legal actions alleging malpractice, product liability or
related legal theories. Many of these actions involve large
monetary claims and significant defense costs. Hospitals and
physicians have typically maintained a special type of insurance
(commonly called malpractice or professional liability
insurance) to protect against the costs of these types of legal
actions. We created a captive insurance subsidiary on
June 1, 2002, to assume a substantial portion of the
professional and general liability risks of our facilities. For
claims incurred during the period June 1, 2002 to
May 31, 2006 and those subsequent to June 30, 2009, we
maintained all of our professional and general liability
insurance through this captive insurance subsidiary in respect
of losses up to $10.0 million per occurrence. For claims
incurred from June 1, 2006 to June 30, 2009, we
self-insured the first $9.0 million per occurrence, and our
captive subsidiary insured the next $1.0 million per
occurrence. We have also purchased an umbrella excess policy for
professional and general liability insurance for the period
July 1, 2009 to June 30, 2010 with unrelated
commercial carriers. This policy covers losses in excess of
$10.0 million per occurrence up to $75.0 million, but
is limited to total annual payments of $65.0 million in the
aggregate. While our premium prices have declined during the
past few years, the total cost of professional and general
liability insurance remains sensitive to the volume and severity
of cases reported. There is no guarantee that excess insurance
coverage will continue to be available in the future at a cost
allowing us to maintain adequate levels of such insurance.
Moreover, due to the increased retention limits insured by us
and our captive subsidiary, if actual payments of claims
materially exceed our projected estimates of malpractice claims,
our financial condition could be materially adversely affected.
Physicians professional liability insurance costs in
certain markets have dramatically increased to the point where
some physicians are either choosing to retire early or leave
those markets. If physician professional liability insurance
costs continue to escalate in markets in which we operate, some
physicians
19
may choose not to practice at our facilities, which could reduce
our patient volumes and revenues. Our hospitals may also incur a
greater percentage of the amounts paid to claimants if
physicians are unable to obtain adequate malpractice coverage
since we are often sued in the same malpractice suits brought
against physicians on our medical staffs who are not employed by
us.
We expect to continue to employ additional physicians in the
near future. A significant increase in employed physicians could
significantly increase our professional and general liability
risks and related costs in future periods since for employed
physicians there is no insurance coverage from unaffiliated
insurance companies.
Our
facilities are concentrated in a small number of regions. If any
one of the regions in which we operate experiences a regulatory
change, economic downturn or other material change, our overall
business results may suffer.
Among our operations as of March 31, 2010, five hospitals
and various related healthcare businesses were located in
San Antonio, Texas; five hospitals and related healthcare
businesses were located in metropolitan Phoenix, Arizona; two
hospitals and related healthcare businesses were located in
metropolitan Chicago, Illinois; and three hospitals and related
healthcare businesses were located in Massachusetts.
For the year ended June 30, 2009 and the nine months ended
March 31, 2010, our total revenues were generated as
follows:
Year Ended |
Nine Months Ended |
|||||||
June 30, |
March 31, |
|||||||
2009 | 2010 | |||||||
San Antonio
|
29.6 | % | 26.2 | % | ||||
Phoenix Health Plan and Abrazo Advantage Health Plan
|
19.3 | 23.1 | ||||||
Massachusetts
|
18.3 | 18.3 | ||||||
Metropolitan Phoenix, excluding Phoenix Health Plan and Abrazo
Advantage Health Plan
|
17.9 | 18.1 | ||||||
Metropolitan Chicago(1)
|
14.6 | 14.1 | ||||||
Other
|
0.3 | 0.2 | ||||||
100.0 | % | 100.0 | % | |||||
(1) | Includes MacNeal Health Providers. |
Any material change in the current demographic, economic,
competitive or regulatory conditions in any of these regions
could adversely affect our overall business results because of
the significance of our operations in each of these regions to
our overall operating performance. Moreover, due to the
concentration of our revenues in only four regions, our business
is less diversified and, accordingly, is subject to greater
regional risk than that of some of our larger competitors.
If we
are unable to control our healthcare costs at Phoenix Health
Plan and Abrazo Advantage Health Plan, if the health plans
should lose their governmental contracts or if budgetary cuts
reduce the scope of Medicaid or dual-eligibility coverage, our
profitability may be adversely affected.
For the year ended June 30, 2009 and the nine months ended
March 31, 2010, PHP generated approximately 18.1% and 22.0%
of our total revenues, respectively. PHP derives substantially
all of its revenues through a contract with AHCCCS. AHCCCS pays
capitated rates to PHP, and PHP subcontracts with physicians,
hospitals and other healthcare providers to provide services to
its enrollees. If we fail to effectively manage our healthcare
costs, these costs may exceed the payments we receive. Many
factors can cause actual healthcare costs to exceed the
capitated rates paid by AHCCCS, including:
| our ability to contract with cost-effective healthcare providers; | |
| the increased cost of individual healthcare services; |
20
| the type and number of individual healthcare services delivered; and | |
| the occurrence of catastrophes, epidemics or other unforeseen occurrences. |
Our current contract with AHCCCS began October 1, 2008 and
expires September 30, 2011. This contract is terminable
without cause on 90 days written notice from AHCCCS
or for cause upon written notice from AHCCCS if we fail to
comply with any term or condition of the contract or fail to
take corrective action as required to comply with the terms of
the contract. AHCCCS may also terminate the contract with PHP in
the event of unavailability of state or federal funding. If our
AHCCCS contract is terminated, our profitability would be
adversely affected by the loss of these revenues and cash flows.
Also, should the scope of the Medicaid program be reduced as a
result of state budgetary cuts or other political factors, our
results of operations could be adversely affected.
For the year ended June 30, 2009 and the nine months ended
March 31, 2010, AAHP generated 1.2% and 1.1% of our total
revenues, respectively. AAHP began providing healthcare coverage
to Medicare and Medicaid dual-eligible enrollees on
January 1, 2006. Most of AAHPs members were formerly
enrolled in PHP. AAHPs contract with CMS went into effect
on January 1, 2006, for a term of one year, with a
provision for successive one year renewals, and has currently
been renewed through December 31, 2010. If we fail to
effectively manage AAHPs healthcare costs, these costs may
exceed the payments we receive.
We are
dependent on our senior management team and local management
personnel, and the loss of the services of one or more of our
senior management team or key local management personnel could
have a material adverse effect on our business.
The success of our business is largely dependent upon the
services and management experience of our senior management
team, which includes Charles N. Martin, Jr., our Chairman
and Chief Executive Officer; Kent H. Wallace, our President and
Chief Operating Officer; Keith B. Pitts, our Vice Chairman,
Phillip W. Roe, our Executive Vice President, Chief Financial
Officer and Treasurer; and Joseph D. Moore, Executive Vice
President. In addition, we depend on our ability to attract and
retain local managers at our hospitals and related facilities,
on the ability of our senior officers and key employees to
manage growth successfully and on our ability to attract and
retain skilled employees. We do not maintain key man life
insurance policies on any of our officers. If we were to lose
any of our senior management team or members of our local
management teams, or if we are unable to attract other necessary
personnel in the future, it could have a material adverse effect
on our business, financial condition and results of operations.
If we were to lose the services of one or more members of our
senior management team or a significant portion of our hospital
management staff at one or more of our hospitals, we would
likely experience a significant disruption in our operations and
failure of the affected hospitals to adhere to their respective
business plans.
Controls
designed to reduce inpatient services may reduce our
revenues.
Controls imposed by Medicare and commercial third-party payers
designed to reduce admissions and lengths of stay, commonly
referred to as utilization review, have affected and
are expected to continue to affect our facilities. Utilization
review entails the review of the admission and course of
treatment of a patient by managed care plans. Inpatient
utilization, average lengths of stay and occupancy rates
continue to be negatively affected by payer-required
preadmission authorization and utilization review and by payer
pressures to maximize outpatient and alternative healthcare
delivery services for less acutely ill patients. Efforts to
impose more stringent cost controls are expected to continue.
For example, the Health Reform Law potentially expands the use
of prepayment review by Medicare contractors by eliminating
statutory restrictions on their use. Although we are unable to
predict the effect these changes will have on our operations,
significant limits on the scope of services reimbursed and on
reimbursement rates and fees could have a material, adverse
effect on our business, financial position and results of
operations.
The
industry trend towards value-based purchasing may negatively
impact our revenues.
There is a trend in the healthcare industry towards value-based
purchasing of healthcare services. These value-based purchasing
programs include both public reporting of quality data and
preventable adverse
21
events tied to the quality and efficiency of care provided by
facilities. Governmental programs including Medicare and
Medicaid currently require hospitals to report certain quality
data to receive full reimbursement updates. In addition,
Medicare does not reimburse for care related to certain
preventable adverse events (also called never
events). Many large commercial payers currently require
hospitals to report quality data, and several commercial payers
do not reimburse hospitals for certain preventable adverse
events.
The Health Reform Law contains a number of provisions intended
to promote value-based purchasing. Effective July 1, 2011,
the Health Reform Law will prohibit the use of federal funds
under the Medicaid program to reimburse providers for medical
assistance provided to treat hospital acquired conditions
(HACs). Beginning in federal fiscal year 2015,
hospitals that fall into the top 25% of national risk-adjusted
HAC rates for all hospitals in the previous year will receive a
1% reduction in their total Medicare payments. Hospitals with
excessive readmissions for conditions designated by the
Department of Health and Human Services (HHS) will
receive reduced payments for all inpatient discharges, not just
discharges relating to the conditions subject to the excessive
readmission standard.
The Health Reform Law also requires HHS to implement a
value-based purchasing program for inpatient hospital services.
Beginning in federal fiscal year 2013, HHS will reduce inpatient
hospital payments for all discharges by a percentage specified
by statute ranging from 1% to 2% and pool the total amount
collected from these reductions to fund payments to reward
hospitals that meet or exceed certain quality performance
standards established by HHS. HHS will determine the amount each
hospital that meets or exceeds the quality performance standards
will receive from the pool of dollars created by these payment
reductions.
We expect value-based purchasing programs, including programs
that condition reimbursement on patient outcome measures, to
become more common and to involve a higher percentage of
reimbursement amounts. We are unable at this time to predict how
this trend will affect our results of operations, but it could
negatively impact our revenues.
Our
facilities are subject to extensive federal and state laws and
regulations relating to the privacy of individually identifiable
information.
The Health Insurance Portability and Accountability Act of 1996
required the U.S. Department of Health and Human Services
to adopt standards to protect the privacy and security of
individually identifiable health-related information. The
department released final regulations containing privacy
standards in December 2000 and published revisions to the final
regulations in August 2002. The Health Information Technology
for Economic and Clinical Health Act (HITECH
Act) one part of the American Recovery and
Reinvestment Act of 2009 (ARRA)
broadened the scope of the HIPAA privacy and security
regulations. On August 24, 2009, HHS issued an Interim
Final Rule addressing security breach notification requirements
and, on October 30, 2009, issued an Interim Final Rule
implementing amendments to the enforcement regulations under
HIPAA. The privacy regulations extensively regulate the use and
disclosure of individually identifiable health-related
information. The regulations also provide patients with
significant rights related to understanding and controlling how
their health information is used or disclosed. The security
regulations require healthcare providers to implement
administrative, physical and technical practices to protect the
security of individually identifiable health information that is
maintained or transmitted electronically.
Violations of the Health Insurance Portability and
Accountability Act of 1996 could result in civil or criminal
penalties. An investigation or initiation of civil or criminal
actions could have a material adverse effect on our business,
financial condition, results of operations or prospects and our
business reputation could suffer significantly. In addition,
there are numerous federal and state laws and regulations
addressing patient and consumer privacy concerns, including
unauthorized access or theft of personal information. State
statutes and regulations vary from state to state and could
impose additional penalties. We have developed a comprehensive
set of policies and procedures in our efforts to comply with the
Health Insurance Portability and Accountability Act of 1996 and
other privacy laws. Our compliance officers are responsible for
implementing and monitoring compliance with our privacy and
security policies and procedures at our facilities. We believe
that the cost of our compliance with the Health Insurance
Portability and Accountability
22
Act of 1996 and other federal and state privacy laws will not
have a material adverse effect on our business, financial
condition, results of operations or cash flows.
As a
result of increased post-payment reviews of claims we submit to
Medicare for our services, we may incur additional costs and may
be required to repay amounts already paid to us.
We are subject to regular post-payment inquiries, investigations
and audits of the claims we submit to Medicare for payment for
our services. These post-payment reviews are increasing as a
result of new government cost-containment initiatives, including
enhanced medical necessity reviews for Medicare patients
admitted to long-term care hospitals, and audits of Medicare
claims under the Recovery Audit Contractor program
(RAC). The RAC program began as a demonstration
project in 2005 in three states (New York, California and
Florida) and was expanded into the three additional states of
Arizona, Massachusetts and South Carolina in July 2007. The
program was made permanent by the Tax Relief and Health Care Act
of 2006 enacted in December 2006. CMS ended the demonstration
project in March 2008 and commenced the permanent RAC program in
all states beginning in 2009 with plans to have RACs in full
operation in all 50 states by 2010.
RACs utilize a post-payment targeted review process employing
data analysis techniques in order to identify those Medicare
claims most likely to contain overpayments, such as incorrectly
coded services, incorrect payment amounts, non-covered services
and duplicate payments. The RAC review is either
automated, for which a decision can be made without
reviewing a medical record, or complex, for which
the RAC must contact the provider in order to procure and review
the medical record to make a decision about the payment. CMS has
given RACs the authority to look back at claims up to three
years old, provided that the claim was paid on or after
October 1, 2007. Claims identified as overpayments will be
subject to the Medicare appeals process.
These additional post-payment reviews may require us to incur
additional costs to respond to requests for records and to
pursue the reversal of payment denials, and ultimately may
require us to refund amounts paid to us by Medicare that are
determined to have been overpaid.
If we
fail to continually enhance our hospitals with the most recent
technological advances in diagnostic and surgical equipment, our
ability to maintain and expand our markets will be adversely
affected.
Technological advances with respect to computed axial tomography
(CT), magnetic resonance imaging (MRI) and positron emission
tomography (PET) equipment, as well as other equipment used in
our facilities, are continually evolving. In an effort to
compete with other healthcare providers, we must constantly
evaluate our equipment needs and upgrade equipment as a result
of technological improvements. Such equipment costs typically
range from $1.0 million to $3.0 million, exclusive of
construction or build-out costs. If we fail to remain current
with the technological advancements of the medical community,
our volumes and revenue may be negatively impacted.
Our
hospitals face competition for staffing especially as a result
of the national shortage of nurses and the increased imposition
on us of nurse-staffing ratios, which has in the past and may in
the future increase our labor costs and materially reduce our
profitability.
We compete with other healthcare providers in recruiting and
retaining qualified management and staff personnel responsible
for the
day-to-day
operations of each of our hospitals, including most
significantly nurses and other non-physician healthcare
professionals. In the healthcare industry generally, including
in our markets, the national shortage of nurses and other
medical support personnel has become a significant operating
issue. This shortage has caused us in the past and may require
us in the future to increase wages and benefits to recruit and
retain nurses and other medical support personnel or to hire
more expensive temporary personnel. We have voluntarily raised
on several occasions in the past, and expect to raise in the
future, wages for our nurses and other medical support personnel.
In addition, union-mandated or state-mandated nurse-staffing
ratios significantly affect not only labor costs, but may also
cause us to limit patient admissions with a corresponding
adverse effect on revenues if we are unable to hire the
appropriate number of nurses to meet the required ratios. While
we do not currently
23
operate in any states with mandated nurse-staffing ratios, the
states in which we operate could adopt mandatory nurse-staffing
ratios at any time. In those instances where our nurses are
unionized, it is our experience that new union contracts often
impose significant new additional staffing ratios by contract on
our hospitals. This was the case with the increased staffing
ratios imposed on us in our union contract with our nurses at
Saint Vincent Hospital in Worcester, Massachusetts negotiated in
2007.
The U.S. Congress is currently considering a bill called
the Employee Free Choice Act of 2009 (EFCA), which
organized labor, a major supporter of the Obama administration,
has called its number one legislative objective. EFCA would
amend the National Labor Relations Act to establish a procedure
whereby the National Labor Relations Board (NLRB)
would certify a union as the bargaining representative of
employees, without a NLRB-supervised secret ballot election, if
a majority of unit employees signs valid union authorization
cards (the card-check provision). Additionally,
under EFCA, parties that are unable to reach a first contract
within 90 days of collective bargaining could refer the
dispute to mediation by the Federal Mediation and Conciliation
Service (the Service). If the Service is unable to
bring the parties to agreement within 30 days, the dispute
then would be referred to binding arbitration. Also, the bill
would provide for increased penalties for labor law violations
by employers. In July 2009, due to intense opposition from the
business community, alternative draft legislation became public,
dropping the card-check provision, but putting in its place new
provisions making it easier for employees to organize including
provisions to require shorter unionization campaigns, faster
elections and limitations on employer-sponsored
anti-unionization meetings, which employees are required to
attend. This legislation, if passed, would make it easier for
our nurses or other groups of hospital employees to unionize,
which could materially increase our labor costs.
If our labor costs continue to increase, we may not be able to
raise our payer reimbursement levels to offset these increased
costs, including the significantly increased costs that we will
incur for wage increases and nurse-staffing ratios under our new
union contract with our nurses at Saint Vincent Hospital.
Because substantially all of our net patient revenues consist of
payments based on fixed or negotiated rates, our ability to pass
along increased labor costs is materially constrained. Our
failure to recruit and retain qualified management, nurses and
other medical support personnel, or to control our labor costs,
could have a material adverse effect on our profitability.
Compliance
with Section 404 of the Sarbanes-Oxley Act may negatively
impact our results of operations and failure to comply may
subject us to regulatory scrutiny and a loss of investors
confidence in our internal control over financial
reporting.
Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404) requires us to perform an
evaluation of our internal control over financial reporting and
file managements attestation with our annual report.
Section 404 also requires our independent auditors to opine
on our internal control over financial reporting beginning with
our fiscal year ending June 30, 2010. We have evaluated,
tested and implemented internal controls over financial
reporting to enable management to report on such internal
controls under Section 404. However, we cannot assure you
that the conclusions we will reach in our June 30, 2010
management report will be the same as those reached by our
independent auditors in their report. Failure on our part to
comply with Section 404 may subject us to regulatory
scrutiny and a loss of public confidence in the reliability of
our financial statements. In addition, we may be required to
incur costs in improving our internal control over financial
reporting and hiring additional personnel. Any such actions
could negatively affect our results of operations.
A
failure of our information systems would adversely affect our
ability to properly manage our operations.
We rely on our advanced information systems and our ability to
successfully use these systems in our operations. These systems
are essential to the following areas of our business operations,
among others:
| patient accounting, including billing and collection of patient service revenues; | |
| financial, accounting, reporting and payroll; | |
| coding and compliance; | |
| laboratory, radiology and pharmacy systems; |
24
| remote physician access to patient data; | |
| negotiating, pricing and administering managed care contracts; and | |
| monitoring quality of care. |
If we are unable to use these systems effectively, we may
experience delays in collection of patient service revenues and
may not be able to properly manage our operations or oversee
compliance with laws or regulations.
If we
fail to effectively and timely implement electronic health
record systems, our operations could be adversely
affected.
As required by the American Recovery and Reinvestment Act of
2009, HHS is in the process of developing and implementing an
incentive payment program for eligible hospitals and health care
professionals that adopt and meaningfully use certified
electronic health record (EHR) technology. If our
hospitals and employed professionals are unable to meet the
requirements for participation in the incentive payment program,
we will not be eligible to receive incentive payments that could
offset some of the costs of implementing EHR systems. Further,
beginning in 2015, eligible hospitals and professionals that
fail to demonstrate meaningful use of certified EHR technology
will be subject to reduced payments from Medicare. Failure to
implement EHR systems effectively and in a timely manner could
have a material, adverse effect on our financial position and
results of operations.
Difficulties
with current construction projects or new construction projects
such as additional hospitals or major expansion projects may
involve significant capital expenditures that could have an
adverse impact on our liquidity.
During the quarter ended March 31, 2010, we entered into a
contract to construct a replacement facility for one of our San
Antonio hospitals, and we may decide to construct an additional
hospital or hospitals in the future or construct additional
major expansion projects to existing hospitals in order to
achieve our growth objectives. Our ability to complete
construction of new hospitals or new expansion projects on
budget and on schedule would depend on a number of factors,
including, but not limited to:
| our ability to control construction costs; | |
| the failure of general contractors or subcontractors to perform under their contracts; | |
| adverse weather conditions; | |
| shortages of labor or materials; | |
| our ability to obtain necessary licensing and other required governmental authorizations; and | |
| other unforeseen problems and delays. |
As a result of these and other factors, we cannot assure you
that we will not experience increased construction costs on our
construction projects or that we will be able to construct our
current or any future construction projects as originally
planned. In addition, our current and any future major
construction projects would involve a significant commitment of
capital with no revenues associated with the projects during
construction, which also could have a future adverse impact on
our liquidity.
If the
costs for construction materials and labor continue to rise,
such increased costs could have an adverse impact on the return
on investment relating to our expansion projects.
The cost of construction materials and labor has significantly
increased over the past years as a result of global and domestic
events. We have experienced significant increases in the cost of
steel due to the demand in China for such materials and an
increase in the cost of lumber due to multiple factors.
Increases in oil and gas prices have increased costs for
oil-based products and for transporting materials to job sites.
As we continue to invest in modern technologies, emergency rooms
and operating room expansions, we expend large
25
sums of cash generated from operating activities. We evaluate
the financial viability of such projects based on whether the
projected cash flow return on investment exceeds our cost of
capital. Such returns may not be achieved if the cost of
construction continues to rise significantly or anticipated
volumes do not materialize.
State
efforts to regulate the construction or expansion of hospitals
could impair our ability to operate and expand our
operations.
Some states require healthcare providers to obtain prior
approval, known as certificates of need, for:
| the purchase, construction or expansion of healthcare facilities; | |
| capital expenditures exceeding a prescribed amount; or | |
| changes in services or bed capacity. |
In giving approval, these states consider the need for
additional or expanded healthcare facilities or services.
Illinois and Massachusetts are the only states in which we
currently own hospitals that have
certificate-of-need
laws. The failure to obtain any required certificate of need
could impair our ability to operate or expand operations in
these states.
If the
fair value of our reporting units declines, a material non-cash
charge to earnings from impairment of our goodwill could
result.
Blackstone acquired our predecessor company during fiscal 2005.
We recorded a significant portion of the purchase price as
goodwill. At March 31, 2010, we had approximately
$649.1 million of goodwill recorded on our financial
statements. There is no guarantee that we will be able to
recover the carrying value of this goodwill through our future
cash flows. On an ongoing basis, we evaluate, based on the fair
value of our reporting units, whether the carrying value of our
goodwill is impaired. During fiscal 2007, we recorded a
$123.8 million ($110.5 million, net of tax benefit)
impairment charge to goodwill to reduce the carrying values of
our Illinois hospitals to their fair values. Our two Illinois
hospitals have experienced deteriorating economic factors that
have negatively impacted their results of operations and cash
flows. While various initiatives mitigated the impact of these
economic factors in previous quarters, the operating results of
the Illinois hospitals have not improved to the level
anticipated. After having the opportunity to evaluate the
operating results of the Illinois hospitals for the first six
months of fiscal year 2010 and to reassess the market trends and
economic factors, we concluded that it was unlikely that
previously projected cash flows for these hospitals would be
achieved. We performed an interim goodwill impairment test
during the quarter ended December 31, 2009 and, based upon
revised projected cash flows, market participant data and
appraisal information, we determined that the $43.1 million
remaining goodwill related to this reporting unit was impaired.
We recorded the $43.1 million ($31.8 million, net of taxes)
non-cash impairment loss in our condensed consolidated statement
of operations for the quarter ended December 31, 2009.
Our
hospitals are subject to potential responsibilities and costs
under environmental laws that could lead to material
expenditures or liability.
We are subject to various federal, state and local environmental
laws and regulations, including those relating to the protection
of human health and the environment. We could incur substantial
costs to maintain compliance with these laws and regulations. To
our knowledge, we have not been and are not currently the
subject of any investigations relating to noncompliance with
environmental laws and regulations. We could become the subject
of future investigations, which could lead to fines or criminal
penalties if we are found to be in violation of these laws and
regulations. The principal environmental requirements and
concerns applicable to our operations relate to proper
management of regulated materials, hazardous waste and medical
waste, above-ground and underground storage tanks, operation of
boilers, chillers and other equipment, and management of
building conditions, such as the presence of mold, lead-based
paint or asbestos. Our hospitals engage independent contractors
for the transportation, handling and disposal of hazardous
waste, and we require that our hospitals be named as additional
insureds on the liability insurance policies maintained by these
contractors.
We also may be subject to requirements related to the
remediation of substances that have been released into the
environment at properties owned or operated by us or our
predecessors or at properties where substances were sent for
off-site treatment or disposal. These remediation requirements
may be imposed without regard to fault, and liability for
environmental remediation can be substantial.
26
Capitalization
The following table sets forth our cash and cash equivalents and
capitalization as of March 31, 2010 on an (i) actual
basis and (ii) as adjusted basis to give effect to the
consummation of this offering and the Acquisition.
As of March 31, |
||||||||
2010 | ||||||||
Actual | As Adjusted | |||||||
(Dollars in millions) | ||||||||
Cash and cash equivalents
|
$ | 210.3 | $ | 63.9 | ||||
VHS Holdco II Debt:
|
||||||||
2010 Credit Facilities:
|
||||||||
Revolving Credit Facility
|
$ | | $ | | ||||
Term Loan Credit Facility
|
815.0 | 815.0 | ||||||
Senior notes(1)
|
936.6 | 1,161.6 | ||||||
Other(2)
|
| 17.1 | ||||||
Total VHS Holdco II debt
|
1,751.6 | 1,993.7 | ||||||
Total equity
|
250.7 | 246.7 | ||||||
Total capitalization
|
$ | 2,002.3 | $ | 2,240.4 | ||||
(1) | Does not reflect any original issue discount for the new notes offered hereby. | |
(2) | Reflects DMC debt to be assumed in connection with the Acquisition, substantially all of which is capital leases. |
27
Unaudited
Pro Forma Condensed Combined Financial Information
The following unaudited pro forma condensed combined financial
information with respect to Vanguard is based upon the
historical consolidated financial statements of Vanguard. The
unaudited pro forma condensed combined financials include the
following:
| The unaudited pro forma condensed combined balance sheet as of March 31, 2010, which assumes this offering was completed and the probable acquisition of DMC occurred on March 31, 2010. | |
| The unaudited pro forma condensed combined statement of operations for the year ended June 30, 2009 and for the nine months ended March 31, 2010, which assumes this offering was completed and the probable acquisition of DMC occurred on July 1, 2008. |
Our fiscal year ends on June 30 of each year. DMCs fiscal
year ends on December 31. The unaudited pro forma condensed
combined balance sheet combines our unaudited condensed
consolidated balance sheet as of March 31, 2010 with the
unaudited condensed consolidated balance sheet of DMC as of
March 31, 2010. The unaudited pro forma condensed combined
statement of operations for the year ended June 30, 2009
combines our audited consolidated statement of operations for
the fiscal year ended June 30, 2009 with DMCs
unaudited condensed consolidated statement of operations for the
twelve months ended June 30, 2009 (which was derived from
DMCs audited consolidated statement of operations for the
year ended December 31, 2008 less DMCs unaudited
consolidated statement of operations for the six months ended
December 31, 2008 plus DMCs unaudited consolidated
statement of operations for the six months ended June 30,
2009). The unaudited pro forma condensed combined statement of
operations for the nine months ended March 31, 2010
combines our unaudited condensed consolidated statement of
operations for the nine months ended March 31, 2010 with
DMCs unaudited consolidated statement of operations for
the nine months ended March 31, 2010 (which was derived
from DMCs audited consolidated statement of operations for
the year ended December 31, 2009 less DMCs unaudited
consolidated statement of operations for the six months ended
June 30, 2009 plus DMCs unaudited consolidated
statement of operations for the three months ended
March 31, 2010).
The unaudited pro forma condensed combined financial information
is presented for informational purposes only, is based on
certain assumptions that we believe are reasonable and is not
intended to represent our financial condition or results of
operations had this offering or the Acquisition occurred on the
dates noted above or to project the results for any future date
or period. In the opinion of management, all adjustments have
been made that are necessary to present fairly the unaudited pro
forma condensed combined financial information.
We intend to use the net cash proceeds from this offering to
fund a portion of the Acquisition purchase price and to use
$146.4 million of cash on hand to fund the remainder of the
Acquisition purchase price and pay Acquisition-related expenses.
The final purchase price for the Acquisition depends upon the
actual amount of debt assumed and the final amounts of assets
acquired and liabilities assumed. To the extent that additional
funds are needed to fund the DMC consideration, the additional
funds will be provided by borrowings under the New Revolving
Credit Facility.
The unaudited pro forma condensed combined financial information
includes adjustments, which are based upon preliminary
estimates, to reflect the allocation of the purchase price to
the fair values of acquired assets and assumed liabilities of
DMC. The final purchase price allocation will be based upon the
fair values of actual net tangible and intangible assets
acquired and liabilities assumed. The preliminary purchase price
allocation for DMC is subject to revision as more detailed
analysis is completed and additional information related to the
fair value of DMCs assets and liabilities becomes
available. Any change in the fair value of the net assets of DMC
will change the amount of the purchase price allocable to
goodwill. Additionally, changes in DMCs working capital,
including the results of operations from March 31, 2010,
through the date the proposed transaction is completed, will
change the amount of goodwill recorded. Due to these varying
assumptions, final purchase accounting adjustments may differ
materially from the pro forma adjustments presented herein.
28
The unaudited pro forma condensed combined financial information
does not include the potential acquisition of
Resurrections Westlake Hospital, its West Suburban Medical
Center and the outpatient facilities and other assets related to
each hospital, based on the status of the acquisition.
29
Unaudited
Pro Forma Condensed Combined Balance Sheet
As of March 31, 2010
As of March 31, 2010
Pro Forma |
Pro Forma |
|||||||||||||||||||||||
Actual |
Probable DMC |
Acquisition |
Transaction |
Pro Forma |
||||||||||||||||||||
Vanguard | Acquisition | Adjustments | Adjustments | Vanguard | ||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Current assets:
|
||||||||||||||||||||||||
Cash and cash equivalents
|
$ | 210.3 | $ | 60.1 | $ | (424.4 | ) | (a) | $ | 217.9 | (i) | $ | 63.9 | |||||||||||
Restricted cash
|
2.0 | | | | 2.0 | |||||||||||||||||||
Accounts receivable, net of allowance for doubtful accounts
|
294.8 | 152.6 | | | 447.4 | |||||||||||||||||||
Prepaid expenses and other current assets
|
105.6 | 127.1 | (7.1 | ) | (b) | |||||||||||||||||||
(25.8 | ) | (j) | ||||||||||||||||||||||
(8.3 | ) | (f) | | 191.5 | ||||||||||||||||||||
Deferred income taxes
|
18.3 | | | | 18.3 | |||||||||||||||||||
Total current assets
|
631.0 | 339.8 | (465.6 | ) | 217.9 | 723.1 | ||||||||||||||||||
Property, plant and equipment, net
|
1,173.4 | 436.8 | 80.0 | (c) | | 1,690.2 | ||||||||||||||||||
Goodwill
|
649.1 | 0.1 | (0.1 | ) | (d) | | ||||||||||||||||||
118.6 | (e) | 767.7 | ||||||||||||||||||||||
Intangible assets
|
68.9 | | | 7.1 | (i) | 76.0 | ||||||||||||||||||
Other assets
|
105.3 | 486.1 | (266.8 | ) | (f) | | ||||||||||||||||||
(8.7 | ) | (d) | ||||||||||||||||||||||
3.8 | (a) | 319.7 | ||||||||||||||||||||||
Total assets
|
$ | 2,627.7 | $ | 1,262.8 | $ | (538.8 | ) | $ | 225.0 | $ | 3,576.7 | |||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||
Current liabilities:
|
||||||||||||||||||||||||
Accounts payable and accrued expenses
|
$ | 516.2 | $ | 324.9 | $ | (3.8 | ) | (g) | $ | | $ | 811.5 | ||||||||||||
(25.8 | ) | (j) | ||||||||||||||||||||||
Current maturities of debt and notes payable
|
8.2 | 42.0 | (34.6 | ) | (g) | | 15.6 | |||||||||||||||||
Total current liabilities
|
524.4 | 366.9 | (64.2 | ) | | 827.1 | ||||||||||||||||||
Other liabilities
|
109.2 | 433.1 | (17.5 | ) | (b) | | 524.8 | |||||||||||||||||
Long-term debt
|
1,743.4 | 487.8 | (478.1 | ) | (g) | 225.0 | (i) | 1,978.1 | ||||||||||||||||
Equity:
|
||||||||||||||||||||||||
Common stock
|
| | | | | |||||||||||||||||||
Additional paid-in capital
|
354.2 | | | | 354.2 | |||||||||||||||||||
Accumulated other comprehensive loss
|
(2.5 | ) | | | | (2.5 | ) | |||||||||||||||||
Net assets
|
| (25.0 | ) | 25.0 | (h) | | | |||||||||||||||||
Retained deficit
|
(108.7 | ) | | (4.0 | ) | (a) | | (112.7 | ) | |||||||||||||||
Total equity attributable to parent
|
243.0 | (25.0 | ) | 21.0 | | 239.0 | ||||||||||||||||||
Non-controlling interests
|
7.7 | | | | 7.7 | |||||||||||||||||||
Total equity
|
250.7 | (25.0 | ) | 21.0 | | 246.7 | ||||||||||||||||||
Total liabilities and equity
|
$ | 2,627.7 | $ | 1,262.8 | $ | (538.8 | ) | $ | 225.0 | $ | 3,576.7 | |||||||||||||
See notes to unaudited pro forma condensed combined balance
sheet.
30
Notes to
Unaudited Pro Forma Condensed Combined Balance Sheet
(a) | To reflect the estimated purchase price paid for the DMC acquisition of $416.6 million plus $4.0 million of direct acquisition costs paid (reflected as an adjustment to retained deficit) plus a $3.8 million reclassification of cash to other assets. |
(b) | To eliminate $7.1 million of DMC Medicare program settlement receivables and $17.5 million of DMC Medicare program settlement liabilities not acquired by Vanguard. |
(c) | To reflect Vanguards $80.0 million estimated increase to the net book value of DMCs property, plant and equipment to adjust to fair value as of the acquisition date. Vanguards estimate assumes increases in the net book value of each classification of property, plant and equipment except for construction in progress in amounts ranging from 15% to 25%. These increases are estimates only and are subject to post-acquisition adjustment upon Vanguards receipt of appraisal information. |
(d) | To eliminate DMCs existing $0.1 million goodwill balance and $8.7 million of certain other capitalized costs related to the existing debt expected to be repaid upon acquisition. |
(e) | To reflect Vanguards estimate of unallocated purchase price related to the DMC acquisition, calculated as follows (in millions): |
Total purchase price paid | $ | 416.6 | ||||||
Cash acquired | 56.3 | |||||||
Other current assets acquired | 238.5 | |||||||
Property, plant and equipment acquired | 516.8 | |||||||
Other assets acquired | 214.4 | |||||||
Accounts payable and accrued expenses assumed | (295.3 | ) | ||||||
Debt assumed (not repaid) | (17.1 | ) | ||||||
Other liabilities assumed | (415.6 | ) | ||||||
Net assets acquired | $ | 298.0 | ||||||
Estimated goodwill | $ | 118.6 | ||||||
Vanguard expects to complete the actual purchase price
allocation within one year of the acquisition date during which
time the unallocated purchase price would be allocated to
acquired assets, assumed liabilities, intangible assets or
goodwill.
The estimated purchase price allocation above does not include
(i) $850.0 million of capital commitments that
Vanguard will be required to make over the five years
subsequent to the closing of the DMC acquisition
($500.0 million of which relates to specified capital
projects and $350.0 million of which relates to routine
maintenance capital); and (ii) the Vanguard stock warrants
issued at closing to collateralize the $500.0 million
specified capital commitment.
(f) | To eliminate $275.1 million of certain board-restricted and donor-restricted assets not acquired by Vanguard or else not utilized as a portion of the DMC purchase price. |
(g) | To eliminate $512.8 million of long-term debt and current maturities of long-term debt plus $3.7 million of accrued interest related to such debt that will be repaid at closing of the DMC acquisition with a portion of the DMC purchase price. |
(h) | To eliminate the net assets of DMC not acquired by Vanguard. |
(i) | To reflect the $225.0 million gross cash proceeds from the new notes being offered hereby and the $4.5 million of bank fees and $2.6 million of other professional fees paid to complete the notes offering (such costs expected to be capitalized as deferred loan costs and amortized over the life of the notes). Does not reflect any original issue discount. |
(j) | To eliminate $25.8 million of current assets and current liabilities related to a portion of a securities lending program that Vanguard will not acquire. |
31
Unaudited
Pro Forma Condensed Combined Statement Of Operations
For The Year Ended June 30, 2009
For The Year Ended June 30, 2009
Pro Forma |
Pro Forma |
|||||||||||||||||||||||
Actual |
Probable DMC |
Acquisition |
Transaction |
Pro Forma |
||||||||||||||||||||
Vanguard | Acquisition | Adjustments | Adjustments | Vanguard | ||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Total revenues:
|
||||||||||||||||||||||||
Patient service revenues
|
$ | 2,521.7 | $ | 1,913.3 | $ | (81.5 | ) | (a) | $ | | $ | 4,353.5 | ||||||||||||
Premium revenues
|
678.0 | | | | 678.0 | |||||||||||||||||||
Other revenues
|
| 108.4 | 5.8 | (g) | | |||||||||||||||||||
9.6 | (h) | 123.8 | ||||||||||||||||||||||
Total revenues
|
3,199.7 | 2,021.7 | (66.1 | ) | | 5,155.3 | ||||||||||||||||||
Costs and expenses:
|
||||||||||||||||||||||||
Salaries and benefits
|
1,240.1 | 842.0 | (5.3 | ) | (i) | | 2,076.8 | |||||||||||||||||
Provision for doubtful accounts
|
210.8 | 260.5 | (81.5 | ) | (a) | | 389.8 | |||||||||||||||||
Other operating expenses
|
1,450.8 | 784.0 | 6.1 | (b) | ||||||||||||||||||||
21.4 | (c) | | 2,262.3 | |||||||||||||||||||||
Depreciation and amortization
|
130.6 | 79.4 | (5.6 | ) | (d) | | 204.4 | |||||||||||||||||
Interest, net
|
111.6 | 33.0 | | (12.7 | ) | (e) | 131.9 | |||||||||||||||||
Pension expense
|
| | 5.3 | (i) | | 5.3 | ||||||||||||||||||
Other expenses
|
8.9 | | | | 8.9 | |||||||||||||||||||
Total costs and expenses
|
3,152.8 | 1,998.9 | (59.6 | ) | (12.7 | ) | 5,079.4 | |||||||||||||||||
Income (loss) from continuing operations before income taxes
|
46.9 | 22.8 | (6.5 | ) | 12.7 | 75.9 | ||||||||||||||||||
Income taxes
|
(16.0 | ) | | (10.7 | ) | (f) | (4.9 | ) | (f) | (31.6 | ) | |||||||||||||
Income (loss) from continuing operations
|
$ | 30.9 | $ | 22.8 | $ | (17.2 | ) | $ | 7.8 | $ | 44.3 | |||||||||||||
See notes to unaudited pro forma condensed combined statements
of operations.
32
Unaudited
Pro Forma Condensed Combined Statement Of Operations
For the Nine Months Ended March 31, 2010
For the Nine Months Ended March 31, 2010
Pro Forma |
Pro Forma |
|||||||||||||||||||
Actual |
Probable DMC |
Acquisition |
Transaction |
Pro Forma |
||||||||||||||||
Vanguard | Acquisition | Adjustments | Adjustments | Vanguard | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Total revenues:
|
||||||||||||||||||||
Patient service revenues
|
$ | 1,900.2 | $ | 1,464.6 | $ | (61.1 | ) (a) | $ | | $ | 3,303.7 | |||||||||
Premium revenues
|
628.0 | | | | 628.0 | |||||||||||||||
Other revenues
|
| 113.1 | (3.0 | ) (g) | | |||||||||||||||
(8.6 | ) (h) | 101.5 | ||||||||||||||||||
Total revenues
|
2,528.2 | 1,577.7 | (72.7 | ) | | 4,033.2 | ||||||||||||||
Costs and expenses:
|
| | ||||||||||||||||||
Salaries and benefits
|
967.6 | 672.2 | (18.8 | ) (i) | | 1,621.0 | ||||||||||||||
Provision for doubtful accounts
|
112.9 | 210.6 | (61.1 | ) (a) | | 262.4 | ||||||||||||||
Other operating expenses
|
1,208.6 | 590.6 | 4.6 | (b) | ||||||||||||||||
16.1 | (c) | | 1,819.9 | |||||||||||||||||
Depreciation and amortization
|
102.9 | 60.9 | (5.5 | ) (d) | | 158.3 | ||||||||||||||
Interest, net
|
84.6 | 23.3 | | (8.1 | ) (e) | 99.8 | ||||||||||||||
Pension expense
|
| | 18.8 | (i) | | 18.8 | ||||||||||||||
Impairment loss
|
43.1 | | | | 43.1 | |||||||||||||||
Debt extinguishment costs
|
73.2 | | | | 73.2 | |||||||||||||||
Other expenses
|
3.5 | | | | 3.5 | |||||||||||||||
Total costs and expenses
|
2,596.4 | 1,557.6 | (45.9 | ) | (8.1 | ) | 4,100.0 | |||||||||||||
Income (loss) from continuing operations
|
||||||||||||||||||||
before income taxes
|
(68.2 | ) | 20.1 | (26.8 | ) | 8.1 | (66.8 | ) | ||||||||||||
Income taxes
|
18.2 | | (0.8 | ) (f) | (3.1 | ) (f) | 14.3 | |||||||||||||
Income (loss) from continuing operations
|
$ | (50.0 | ) | $ | 20.1 | $ | (27.6 | ) | $ | 5.0 | $ | (52.5 | ) | |||||||
See notes to unaudited pro forma condensed combined statements
of operations.
33
Notes to
Unaudited Pro Forma Condensed Combined
Statements
of Operations
(a) | To reclassify estimated DMC charity care services of $81.5 million for the year ended June 30, 2009 and $61.1 million for the nine months ended March 31, 2010 to a revenue deduction instead of additional provision for doubtful accounts to be consistent with Vanguards presentation. |
(b) | To eliminate certain estimated DMC pharmacy supply discounts of $6.1 million for the year ended June 30, 2009 and $4.6 million for the nine months ended March 31, 2010 that will no longer be available to Vanguard as a for profit healthcare provider. |
(c) | To reflect estimated additional sales, unemployment and property taxes of $21.4 million for the year ended June 30, 2009 and $16.1 million for the nine months ended March 31, 2010 that Vanguard will be required to pay as a for profit healthcare provider. These estimated amounts are presented net of the impact of certain tax abatements Vanguard expects to receive as a result of the approval of certain of DMCs hospitals as part of a qualified Renaissance Zone. |
(d) | To eliminate the historical depreciation and amortization of DMC of $79.4 million and $60.9 million for the year ended June 30, 2009 and for the nine months ended March 31, 2010, respectively, and to record Vanguards estimate of post-acquisition DMC depreciation and amortization of $73.8 million and $55.4 million for the year ended June 30, 2009 and the nine months ended March 31, 2010, respectively. The post-acquisition estimates were determined using the acquisition date estimated fair values of property, plant and equipment as discussed in Note (c) to the Notes to Unaudited Pro Forma Condensed Combined Balance Sheet and using estimated remaining useful lives of 20 years for buildings and improvements and four years for equipment. |
(e) | To adjust net interest to reflect the following: |
Nine Months |
||||||||
Year Ended |
Ended |
|||||||
June 30, 2009 | March 31, 2010 | |||||||
Elimination of historical DMC interest expense for debt to be
repaid at transaction closing
|
$ | (31.6 | ) | $ | (22.3 | ) | ||
Interest expense incurred for notes offered hereby
($225.0 million at 8.0%)
|
18.0 | 13.5 | ||||||
Interest expense related to amortization of capitalized debt
issuance costs
|
0.9 | 0.7 | ||||||
Net interest adjustment
|
$ | (12.7 | ) | $ | (8.1 | ) | ||
(f) | To record the provision for income taxes related to the acquired DMC operations including the impact of Acquisition-related pro forma adjustments of $10.7 million and $0.8 million for the year ended June 30, 2009 and the nine months ended March 31, 2010, respectively, and to record the provision for income taxes related to the Transaction pro forma adjustments of $4.9 million and $3.1 million for the year ended June 30, 2009 and the nine months ended March 31, 2010, respectively. |
(g) | To eliminate $5.8 million of realized net losses and $3.0 million of realized net gains from revenues for the year ended June 30, 2009 and the nine months ended March 31, 2010, respectively, related to DMC investments that are not being acquired by Vanguard or otherwise will not be used as part of the Acquisition purchase price. |
(h) | To eliminate $9.6 million of net unrealized losses and $8.6 million of net unrealized gains from revenues for the year ended June 30, 2009 and the nine months ended March 31, 2010, respectively, related to DMC investments that are not being acquired by Vanguard or otherwise will not be used as part of the Acquisition purchase price. |
(i) | To reclassify pension expense of $5.3 million and $18.8 million for the year ended June 30, 2009 and nine months ended March 31, 2010, respectively, from salaries and benefits to a separate non-operating expense item to conform to Vanguard presentation. |
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