UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 333-117362
IASIS HEALTHCARE LLC
(Exact name of registrant as specified in its charter)
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DELAWARE
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20-1150104 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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DOVER CENTRE |
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117 SEABOARD LANE, BUILDING E |
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FRANKLIN, TENNESSEE
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37067 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (615) 844-2747
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. YES þ NO o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large Accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES o NO þ
As
of December 21, 2010, 100% of the registrants common interests outstanding (all of which
are privately owned and are not traded on any public market) were owned by IASIS Healthcare
Corporation, its sole member.
IASIS HEALTHCARE LLC
PART I
Item 1. Business.
Company Overview
We are a leading owner and operator of medium-sized acute care hospitals in high-growth urban
and suburban markets. We operate our hospitals with a strong community focus by offering and
developing healthcare services targeted to the needs of the markets we serve, promoting strong
relationships with physicians and working with local managed care plans. As of September 30, 2010,
we owned or leased 15 acute care hospital facilities and one behavioral health hospital facility
with a total of 3,185 licensed beds. We operate in the following regions:
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Tampa-St. Petersburg, Florida; |
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three cities in Texas, including San Antonio; |
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West Monroe, Louisiana; |
Effective October 1, 2010, through a cash-for-stock acquisition of Brim Holdings, Inc.
(Brim), we added two acute care hospital facilities with 385 licensed beds to our business: one,
a 370 bed acute care hospital facility in Texarkana, Texas, and the other a 15 bed critical access
acute care hospital facility in Woodland Park, Colorado.
Our general, acute care hospital facilities offer a variety of medical and surgical services
commonly available in hospitals, including emergency services, general surgery, internal medicine,
cardiology, obstetrics, orthopedics, psychiatry and physical rehabilitation. In addition, our
facilities provide outpatient and ancillary services including outpatient surgery, physical
therapy, radiation therapy, diagnostic imaging and respiratory therapy.
We also own and operate Health Choice Arizona, Inc. (Health Choice or the Plan), a
Medicaid and Medicare managed health plan in Phoenix that served over 198,000 members as of
September 30, 2010.
For the year ended September 30, 2010, we generated net revenue of $2.5 billion, of which
68.6% was derived from our acute care segment.
Our principal executive offices are located at Dover Centre, 117 Seaboard Lane, Building E,
Franklin, Tennessee 37067 and our telephone number at that address is (615) 844-2747. Our Internet
website address is www.iasishealthcare.com. Information contained on our website is not part of
this annual report on Form 10-K.
In this report, unless we indicate otherwise or the context requires, we, us, our or
our company refers to IASIS Healthcare LLC (IASIS) and its consolidated subsidiaries. Our
parent company, IASIS Healthcare Corporation (IAS), is our sole member.
1
Industry Overview
Growth of Healthcare Spending
According to the Centers for Medicare & Medicaid Services (CMS), U.S. healthcare
expenditures were $2.3 trillion in 2008. CMS projects that total U.S. healthcare expenditures are
expected to grow by 4.2% in 2011 and by an average of 6.3% annually
from 2009 to 2019. As a result
of this growth, total U.S. healthcare expenditures are
estimated to be $4.6 trillion, or 19.6% of the total U.S. gross domestic product by 2019. The
hospital services sector represents the single largest category of healthcare spending at $718.4
billion, or 30% of total healthcare spending in 2008. CMS expects continued increases in hospital
services based on the aging of the U.S. population, advances in medical procedures, expansion of
health coverage, increasing consumer demand for expanded medical services and increased prevalence
of chronic conditions such as diabetes, heart disease and obesity. As a result, CMS projects the
hospital services category to grow at an annual rate of at least 6.0% through 2018, and to continue
as the largest category of healthcare spending.
According to the U.S Census Bureau, the U.S. population includes 40.2 million Americans aged
65 or older, which represents 13.0% of the total population. By the year 2030, the number of
Americans aged 65 or older is expected to increase to
71.5 million, or 19.7% of the total
population. Additionally, as a result of the increasing life expectancy of Americans, the number
of people aged 85 years and older is also expected to increase
by 57% by the year 2030.
Changes in the Delivery of Healthcare Services
We believe the U.S. healthcare system and the demand for healthcare services are evolving in
ways that favor large-scale, comprehensive and integrated service networks. Specifically, we
believe there are a number of initiatives that will continue to gain importance in the foreseeable
future, including: introduction of value-based payment methodologies tied to performance, quality
and coordination of care, implementation of integrated electronic health records (EHR) and
information, and an increasing ability for patients and consumers to make choices about all aspects
of healthcare. Due in large part to our investment in information technology and physician
alignment strategies, we believe our company is well positioned to respond to these emerging trends
and has the resources, expertise and flexibility necessary to adapt in a timely manner to the
changing healthcare regulatory and reimbursement environment.
The Impact of Health Reform
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 previously
uninsured individuals and reduced government healthcare spending. In addition, as enacted, the new law reforms
certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments
to performance and quality, places restrictions on physician owned hospitals, and contains
provisions intended to strengthen fraud and abuse enforcement. Because of the many variables
involved, including the laws complexity, lack of implementing regulations or interpretive
guidance, gradual and potentially delayed implementation, pending court challenges and possible amendment, the impact of the
Health Reform Law, including how individuals and businesses will respond to the choices afforded
them under the new law, is not yet fully known.
Business Strategy
Our objective is to provide high-quality, cost-effective healthcare services to the
communities we serve, while enhancing long-term growth and profitably that allows for the creation
of value and opportunities for reinvestment. In order to achieve these objectives, we are focusing
on the following elements, which we consider to be the key components of our business strategy:
Focus on Operational Excellence. We believe that a continuous focus on operational excellence
sets the standard for managing all aspects of our business, including growth, quality and operating
results. Our management team, which has extensive multi-facility operating experience, continually
emphasizes the importance of operational excellence. We believe that in order to successfully
achieve operational excellence we must focus on the following:
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growing our presence in our existing markets; |
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providing high-quality services to the communities we serve; |
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achieving operational efficiencies and effective cost management in all aspects of
patient care delivery; |
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improving all aspects of the revenue cycle, including our processes for patient
registration, such as patient qualification for financial assistance and point-of-service
collections, billing, collections, and managed care contract compliance; and |
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effectively deploying capital resources in a disciplined manner, including initiatives
related to business development, growth, quality of care, information technology and plant
maintenance. |
Provide High-Quality Services. The keys to providing high-quality services, which include
patient safety, patient satisfaction and clinical quality, are at the center of success for our
facilities. We strive each day to provide high-quality services at all of our facilities, as we
believe the achievement of high-quality care results in the long-term growth of revenue and
profitability. Our strategy for focusing on improving quality of care includes enhancing the
patient care experience by:
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attracting and retaining high-quality healthcare professionals; |
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monitoring and tracking clinical performance and patient safety for numerous purposes,
including the establishment of best practices; |
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utilizing our advanced clinical information system, which provides more timely key
clinical care data, to enable our hospitals to enhance patient safety, reduce medical
errors through bar coding, increase staff time available for direct patient care and
continue to achieve high quality patient care outcomes; |
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utilizing our hospital medical management quality program to drive improvements in core management and allocation of
resources, as well as quality and safety of care; and
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dedicating well-trained corporate and hospital resources to the improvement of patient
care. |
Recruit and Employ Physicians to Meet Community Needs in Our Markets. We believe that a
critical element to providing high quality healthcare to the communities we serve is a
comprehensive physician alignment strategy, which includes the continued investment in the
employment, recruitment and retention of high-quality healthcare professionals. We believe the
objective of attracting and retaining quality physicians is best accomplished by:
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expanding the reach of our outpatient and other specialty services; |
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equipping our hospitals with technologically advanced equipment; |
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enhancing physician convenience and access, including the development of medical office
space on or near our hospital campuses; |
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enabling physicians to remotely access clinical data through our advanced information
systems, facilitating more convenient and timely patient care; and |
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sponsoring training programs to educate physicians on advanced medical procedures. |
Pursue a Comprehensive Development Strategy. We will continue to assess opportunities to
expand our regional and national presence. We believe the many factors currently affecting the
healthcare industry will result in increased consolidation and business development opportunities
across the industry, which we intend to actively pursue. We believe the successful pursuit of a
comprehensive development strategy, including both the expansion of our national presence through
the acquisition of hospitals in existing and new markets and a continued focus to capitalize on the
opportunities in the communities we serve, will result in overall growth of our revenue and
profitability. We believe that our existing markets will continue to benefit from strategic
investments that expand the scope and reach of services provided through a variety of healthcare
delivery access points. Our disciplined approach to enhancing our competitive position within our
existing markets includes the development and expansion of profitable product lines, and the
acquisition of new hospitals and other healthcare service providers, including outpatient and
ancillary service centers.
3
Focus on Managed Care Relationships. We are focused on maintaining market-based relationships,
as we believe that the broad geographic coverage of our hospitals in certain of the regions in
which we operate, the
expansion of our physician networks and our commitment to providing high-quality services
increases our attractiveness to managed care plans in those areas. We believe these factors
provide a platform that allows for negotiating reasonable terms with managed care plans, entering
into contracts with additional managed care plans and aligning reimbursement with acuity of
services.
Implement Operational Initiatives in Response to Healthcare Reform. In March 2010, President
Obama signed the Health Reform Law into law. We believe that our consistent focus on quality and
patient satisfaction programs, coupled with the significant investments we have made in information
systems, positions us to respond promptly and effectively to the changes resulting from the Health
Reform Law, as well as any additional reform initiatives at both the federal and state levels.
Although we expect our business strategy to increase our patient volumes and reimbursement and
allow us to control costs, certain risk factors could offset those increases to our net revenue and
profitability. Please see Item 1A., Risk Factors beginning on page 34 for a discussion of risk
factors affecting our business.
4
Our Markets
The following includes a discussion of the acute care operations in each of our markets as of
September 30, 2010.
Salt Lake City, Utah
We operate four acute care hospital facilities with a total of 705 licensed beds in the Salt
Lake City area, which has consistently been a very competitive environment. We believe that our
hospitals in this market benefit from attractive strategic locations, participate in a more
favorable reimbursement environment and possess significant opportunity to capture additional
market share. For the year ended September 30, 2010, we generated 26.8% of our total acute care
revenue in this market.
Our strategy to capitalize on these elements focuses on providing high-quality patient care, a
disciplined deployment of capital and the expansion of our footprint by developing a more extensive
network of services, including outpatient services and the implementation of a comprehensive
physician employment strategy. In response to this strategy, we have completed various capital projects at
our facilities in this market over the past five years, including patient
tower expansion projects at Jordan Valley Medical Center and Davis Hospital and Medical Center, as
well as emergency room and intensive care unit expansions at Salt Lake Regional Medical Center.
These projects have provided increased bed capacity, as well as additional capacity for womens and
neonatal services, inpatient and outpatient surgery, including cardiac catheterization services,
intensive care, emergency rooms, pediatric services, inpatient psychiatric and various diagnostic
services, along with upgraded imaging technology.
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Phoenix, Arizona
We operate three acute care hospital facilities and one behavioral health hospital facility
with a total of 621 licensed beds in the Phoenix area, which has historically experienced high
population growth. We have made strategic investments in this market, which have focused on
capturing market share through expansion of various service lines, as well as capacity. For the
year ended September 30, 2010, exclusive of Health Choice, we generated 20.8% of our total acute
care revenue in this market.
Since its opening in July 2007, Mountain Vista Medical Center (Mountain Vista) has already
become a state-of-the-art market leader. With the expanded capacity provided by Mountain Vista, as
well as our continued focus on profitable product lines in our other facilities, such as outpatient
imaging, psychiatric and orthopedic services, we believe we can continue to achieve growth in this
market.
We have also implemented a physician employment strategy in our Arizona market. Our strategy
focuses on enhancing our physician specialty and emergency room coverage and is allowing our
hospitals to more effectively meet the needs of the communities we serve.
Texas
As of September 30, 2010, we operated three acute care hospital facilities with a total of 773
licensed beds in San Antonio, Odessa, and Port Arthur, Texas. We believe our facilities in Texas
benefit from the lack of a single dominant competitor in their service areas. For the year ended
September 30, 2010, we generated 26.8% of our total acute care revenue in this market.
On October 1, 2010, through the acquisition of Brim, we acquired Wadley Regional Medical
Center (Wadley), a 370 licensed bed acute care hospital facility located in Texarkana, Texas,
that serves a surrounding population of approximately 275,000, with one primary competitor.
Additionally, Wadley benefits from existing market share opportunities and a strategic partnership
with physician investors. Wadleys services include a full range of medical and surgical
specialties such as internal medicine, family practice, cardiology, cardiovascular surgery,
urology, neurology, pulmonology, orthopedics, gastroenterology, radiology and womens services. The
facility is fully equipped with a 24-bed trauma-ready emergency department, eight general operating
rooms, two open-heart operating rooms, two cardiac catheterization labs, a gastro-intestinal lab
and a 23-bed outpatient surgery pavilion.
6
Our strategic focus in our Texas market is centered on providing high-quality patient care,
developing a more extensive network of primary care physicians, including expansion of our
physician employment strategy, extending the reach of our outpatient business, including both
surgical and imaging services, and continuing to expand profitable product lines within our higher
acuity service lines, including neurosurgery, cardiology and cardio-thoracic services, neonatology
and other surgical services. In recent years, we have completed various growth capital projects in
our Texas market that we believe provide the basis for future success in this market.
Tampa-St. Petersburg, Florida
We operate three acute care hospital facilities with a total of 688 licensed beds in the
Tampa-St. Petersburg area. As a result of a large Medicare population, high managed care
penetration and state restrictions regarding the expansion of operations, the operating environment
in Florida can be more challenging than other markets in which we operate. Certain material capital
projects, including the addition of new beds or services, require regulatory approval under
Floridas certificate of need program, which restricts our ability to expand operations in this
market. Despite these limitations, we believe we can maintain our competitive position in the
Tampa-St. Petersburg market through maintaining and improving quality of services and continuing
our focus on profitable product lines, such as orthopedic, psychiatric, bariatric, outpatient
imaging and non-invasive radiosurgery services. For the year ended September 30, 2010, we
generated 12.1% of our total acute care revenue in this market.
West Monroe, Louisiana
We operate Glenwood Regional Medical Center (Glenwood) with a total of 223 licensed beds, in
West Monroe, Louisiana, which we believe benefits from a strong market position, opportunities for
strategic growth of profitable product lines and a lower than average rate of self-pay utilization.
For the year ended September 30, 2010, we generated 7.6% of our total acute care revenue in this
market.
Our strategic focus for growth in the market is exemplified in our capital spending during the
first four years of our ownership, which has included renovations, expansion and
other various capital projects at Glenwood, with an emphasis on expanding the hospitals
cardiovascular program, expanding and renovating operating rooms, and purchasing new diagnostic
imaging, automated laboratory systems and other equipment. In addition to our capital projects, as
part of our effort to more effectively serve the community in which Glenwood operates, we have
improved the facilitys hospitalist program, expanded emergency room coverage and re-opened the
inpatient psychiatric program.
Glenwood also owns a majority ownership interest in Ouachita
Community Hospital (Ouachita), a ten-bed surgical hospital located in West Monroe, Louisiana. We believe this strategic
acquisition has provided additional surgical capacity and allowed us to expand our market presence.
In connection with these strategic initiatives and capital investments, we believe our focus
on providing high-quality patient care, and our efforts to expand the reach of our physician
network in this market, will result in capturing additional market share.
7
Our Properties
As of October 1, 2010, which includes the acquisition of Brim, we operate 17 acute care
hospital facilities and one behavioral health hospital facility. We own 15 and lease three of our
hospital facilities. Eight of our acute care hospitals have third-party investors. The following
table contains information concerning our hospitals.
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Licensed |
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Hospitals |
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Beds |
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Utah |
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Davis Hospital & Medical Center (1) |
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Layton |
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225 |
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Jordan Valley Medical Center (2) |
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West Jordan |
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183 |
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Pioneer Valley Hospital (3) |
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West Valley City |
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139 |
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Salt Lake Regional Medical Center (4) |
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Salt Lake City |
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158 |
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Arizona |
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Mountain Vista Medical Center (5) |
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Mesa |
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178 |
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St. Lukes Medical Center (6) |
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Phoenix |
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232 |
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St. Lukes Behavioral Health Hospital |
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Phoenix |
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124 |
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Tempe St. Lukes Hospital (7) |
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Tempe |
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87 |
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Texas |
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Odessa Regional Medical Center (8) |
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Odessa |
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222 |
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Southwest General Hospital (9) |
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San Antonio |
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327 |
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The Medical Center of Southeast Texas (10) |
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Port Arthur |
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224 |
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Wadley Regional Medical Center (11) |
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Texarkana |
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370 |
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Florida |
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Memorial Hospital of Tampa |
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Tampa |
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180 |
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Palms of Pasadena Hospital |
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St. Petersburg |
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307 |
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Town & Country Hospital |
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Tampa |
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201 |
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Louisiana |
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Glenwood Regional Medical Center (12) |
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West Monroe |
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223 |
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Colorado |
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Pikes Peak Regional Hospital (13) |
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Woodland Park |
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15 |
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Nevada |
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North Vista Hospital |
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Las Vegas |
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175 |
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Total |
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3,570 |
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(1) |
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Owned by a limited partnership in which we own a 96.2% interest. |
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(2) |
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On July 1, 2007, Jordan Valley Medical Center acquired Pioneer Valley Hospital, a
wholly-owned subsidiary of IASIS. The combined entity is owned by a limited partnership in
which we own a 95.6% interest. |
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(3) |
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A separate campus of Jordan Valley Medical Center, which is leased under an agreement that
expires on January 31, 2019. We have options to extend the term of the lease through January
31, 2039. |
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(4) |
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Owned by a limited partnership in which we own a 98.1% interest. |
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(5) |
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Owned by a limited partnership in which we own a 90.8% interest. |
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(6) |
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On September 28, 2007, St. Lukes Medical Center acquired Tempe St. Lukes Hospital, a
wholly-owned subsidiary of IASIS. |
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A separate campus of St. Lukes Medical Center. |
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(8) |
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Owned by a limited partnership in which we own an 88.4% interest. |
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(9) |
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Owned by a limited partnership in which we own a 93.9% interest. |
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(10) |
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Owned by a limited partnership in which we own an 88.0% interest. |
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(11) |
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Wadley is leased under an agreement that contains unlimited
successive renewal options, at our discretion. The operations are owned by a limited
liability company in which we own a 72.7% interest. |
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(12) |
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Includes Ouachita, a surgical hospital with 10 licensed beds. |
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(13) |
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Pikes Peak Regional Hospital is leased under an agreement that expires on September 11, 2017,
and is subject to three five year renewal periods at our option. |
We also operate and lease medical office buildings in conjunction with our hospitals. These
office buildings are occupied primarily by physicians who practice at our hospitals.
8
Hospital Operations
At each hospital we operate, we have implemented policies and procedures to improve the
hospitals operating and financial performance. A hospitals local management team is generally
comprised of a chief executive officer, chief financial officer and chief nursing officer. Local
management teams, in consultation with our corporate staff, develop annual operating plans setting
forth quality and patient satisfaction goals, revenue growth and operating profit strategies. These
strategies can include the expansion of services offered by the hospital, market development to
improve community access to care, the recruitment and employment of physicians in each community,
plans to enhance quality of care and improvements in operating efficiencies to reduce costs. We
believe that the competence, skills and experience of the management team at each hospital is
critical to the hospitals success because of its role in executing the hospitals operating plan.
Our performance-based compensation program for each local management team is based upon the
achievement of qualitative and quantitative goals set forth in the annual operating plan. Our
hospital management teams are advised by boards of trustees that include members of hospital
medical staffs, as well as community leaders. Each board of trustees establishes policies
concerning medical, professional and ethical practices, monitors such practices and is responsible
for ensuring that these practices conform to established standards.
Factors that affect demand for our services include:
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local economic conditions; |
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the geographic location of our hospital facilities and their convenience for patients
and physicians; |
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our participation in managed care programs; |
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utilization management practices of managed care plans; |
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consolidation of managed care payors; |
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strategic investment and improvements in healthcare access points; |
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capital investment at our facilities; |
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the quality of our medical staff; |
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competition from other healthcare providers; |
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the size of and growth in local population; and |
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improved treatment protocols as a result of advances in medical technology and
pharmacology. |
We believe that the ability of our hospitals to meet the healthcare needs of their communities
is determined by the:
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level of physician support; |
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availability of nurses and other healthcare professionals; |
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quality, skills and compassion of our employees; |
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breadth of our services; |
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physical capacity and level of technological advancement at our facilities; and |
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emphasis on quality of care. |
We continually evaluate our services with the intention of improving quality of care,
expanding our profitable lines of business and improving our business mix. We use our advanced
information systems to perform detailed clinical process reviews, product line margin analyses and
monitor the profitability of the services provided at our facilities. We employ these analyses to
capitalize on price and volume trends through the expansion and improvement of certain services. We
use our information systems to monitor patient care and other quality of care assessment activities
on a continuing basis.
Competition
Our facilities and related businesses operate in competitive environments. A number of factors
affect our competitive position, including:
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the local economies in which we operate; |
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decline in tourism in our service areas; |
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our managed care contracting relationships; |
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the number, availability, quality and specialties of physicians, nurses and other
healthcare professionals; |
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the scope, breadth and quality of services; |
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the reputation of our facilities and physicians; |
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growth in hospital capacity and healthcare access points in the markets we serve; |
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the physical condition of our facilities and medical equipment; |
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the location of our facilities and availability of physician office space; |
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certificate of need restrictions, where applicable; |
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the availability of parking or proximity to public transportation; |
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accumulation, access and interpretation of publicly reported quality indicators; |
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growth in outpatient service providers; |
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charges for services; and |
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the geographic coverage of our hospitals in the regions in which we operate. |
We currently face competition from established, not-for-profit healthcare companies,
investor-owned hospital companies, large tertiary care centers, specialty hospitals and outpatient
service providers, such as surgery centers and imaging centers. In addition, some of our hospitals
operate in regions with vertically integrated healthcare providers that include both payors and
healthcare providers, which could affect our ability to obtain managed care contracts. We continue
to encounter increased competition from specialty hospitals, outpatient service providers,
not-for-profit healthcare companies and companies, like ours, that consolidate hospitals and
healthcare companies in specific geographic markets. Continued consolidation in the healthcare
industry will be a leading contributing factor to increased competition in markets in which we
already have a presence and in markets we may enter in the future.
Another factor in the competitive position of a hospital is the ability of its management to
obtain contracts with purchasers of group healthcare services. The importance of obtaining managed
care contracts continues as private and government payors and others turn to managed care
organizations to help control rising healthcare costs. Most of our markets have experienced
significant managed care penetration, along with consolidation of major managed care plans. The
revenue and operating results of our hospitals are significantly affected by our hospitals ability
to negotiate reasonable contracts with managed care plans. Health maintenance organizations and
preferred provider organizations use managed care contracts to encourage patients to use certain
hospitals in exchange for discounts from the hospitals established charges. Traditional health
insurers also contain costs through similar contracts with hospitals.
An additional competitive factor is whether a hospital is part of a local hospital network, as
well as the scope and quality of services offered by the network compared to competing networks. A
hospital that is part of a network offering a broad range of services in a wide geographic area is
more likely to obtain more favorable managed care contracts. On an
ongoing basis, we evaluate changing circumstances in each geographic area in which we operate. We
may position ourselves to compete in these managed care markets by forming our own, or joining with
others to form, local hospital networks.
As we continue to focus on our physician employment strategy, we face significant competition
for skilled physicians in certain of our markets, as more providers are adopting a physician
staffing model approach, coupled with a general shortage of physicians across most specialties,
especially primary care. This increased competition has resulted in efforts by managed care
organizations to align with certain provider networks in the markets in which we operate. While we
anticipate that our physician employment strategy will help us compete more effectively in our
markets, we are unable to provide any assurance regarding the success of our strategy.
Health Choice
Health Choice is a prepaid Medicaid and Medicare managed health plan in the Phoenix, Arizona
area. Premium revenue is generated through capitated contracts whereby the Plan provides healthcare
services in exchange for fixed periodic payments from the Arizona Health Care Cost Containment
System (AHCCCS) and CMS. Most premium revenue at Health Choice is derived through its contract
with AHCCCS to provide specified health services to qualified Medicaid enrollees through contracted
providers. AHCCCS is the state agency that administers Arizonas Medicaid program. The contract
requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in
exchange for fixed monthly premiums, based upon negotiated per capita member rates, and
supplemental payments from AHCCCS. Capitation payments received by Health Choice are recognized as
revenue in the month that members are entitled to healthcare services.
In connection with our contract effective October 1, 2008, AHCCCS implemented a risk-based or
severity-adjusted payment methodology for all health plans. Capitation rates for each health plan
and geographic service area are adjusted annually based on the severity of treatment episodes
experienced by each plans membership compared to the average over a specified 12 month period.
Adjustments are calculated using diagnosis codes and procedural information from medical and
pharmacy claims data, in addition to member demographic information. Capitation rates are risk
adjusted prospectively before the start of each contract year, and are not adjusted retroactively.
The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs
that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in
excess of stated levels of up to $35,000 per claim, depending on the eligibility classification of
the member. Qualified costs must be incurred during the contract year and are the lesser of the
amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the
contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract,
including estimates of such costs at the end of each accounting period.
Health Choices current contract with AHCCCS, which was effective October 1, 2008, provides
for a three-year term, with AHCCCS having the option to renew for two additional one-year periods.
The contract, which continued our state-wide presence, covers Medicaid members in the following
Arizona counties: Apache, Coconino, Maricopa, Mohave, Navajo, Pima, Yuma, La Paz and Santa Cruz.
9
Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription
Drug (MAPD) Special Needs Plan (SNP). This contract allows Health Choice to offer Medicare and
Part D drug benefit coverage to new and existing dual-eligible members (i.e. those that are
eligible for Medicare and Medicaid). The contract with CMS includes successive one-year renewal
options at the discretion of CMS. CMS has notified Health Choice that it is exercising its option
to extend the contract through December 31, 2011. Under current law, CMS authority to designate
SNPs has been extended through December 31, 2013. Additionally, SNPs are required to meet
additional CMS requirements, including requirements relating to model of care, cost-sharing,
disclosure of information, and reporting of quality measures.
Health Choice is subject to state and federal laws and regulations, and CMS and AHCCCS have
the right to audit Health Choice to determine the plans compliance with such standards. Health
Choice is required to file periodic reports with CMS and AHCCCS and to meet certain financial
viability standards. Health Choice also must provide its enrollees with certain mandated benefits
and must meet certain quality assurance and improvement requirements. Health Choice must also
comply with the electronic transactions regulations and privacy and security standards of the Health Insurance Portability and Accountability Act of 1996
(HIPAA).
The federal anti-kickback statute has been interpreted to prohibit the payment, solicitation,
offering or receipt of any form of remuneration in return for the referral of federal healthcare
program patients or any item or service that is reimbursed, in whole or in part, by any federal
healthcare program. Similar anti-kickback statutes have been adopted in Arizona, which apply
regardless of the source of reimbursement. The U.S. Department of Health and Human Services (the
Department) has adopted safe harbor regulations specifying the following relationships and
activities that are deemed not to violate the federal anti-kickback statute that specifically
relate to managed care:
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|
|
waivers by health maintenance organizations of Medicare and Medicaid beneficiaries
obligation to pay cost-sharing amounts or to provide other incentives in order to attract
Medicare and Medicaid enrollees; |
|
|
|
certain discounts offered to prepaid health plans by contracting providers; |
|
|
|
certain price reductions offered to eligible managed care organizations; and |
|
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certain price reductions offered by contractors with substantial financial risk to
managed care organizations. |
We believe that the incentives offered by Health Choice to its Medicaid and Medicare enrollees
and the discounts it receives from contracting healthcare providers satisfy the requirements of the
safe harbor regulations. However, failure to satisfy each criterion of the applicable safe harbor
does not mean that the arrangement constitutes a violation of the law; rather the safe harbor
regulations provide that the arrangement must be analyzed on the basis of its specific facts and
circumstances. We believe that Health Choices arrangements comply in all material respects with
the federal anti-kickback statute and similar Arizona statutes.
Sources of Acute Care Revenue
Acute care revenue is comprised of net patient revenue and other revenue. A large percentage
of our hospitals net patient revenue consists of fixed payment, discounted sources, including
Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services
are often fixed regardless of the cost incurred or the level of services provided. Similarly, various managed care companies with which we contract reimburse providers on a
fixed payment basis regardless of the costs incurred or the level of services provided. Net patient
revenue is reported net of discounts and contractual adjustments. Contractual adjustments
principally result from differences between the hospitals established charges and payment rates
under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual
adjustments result from our uninsured discount and charity care programs. Other revenue includes
medical office building rental income and other miscellaneous revenue.
We receive payment for patient services primarily from:
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the federal government, primarily under the Medicare program; |
10
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|
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state Medicaid programs, including managed Medicaid plans; |
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managed care payors, including health maintenance organizations, preferred provider
organizations and managed Medicare plans; and |
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individual patients and private insurers. |
The following table presents the approximate percentages of our hospitals net patient revenue
from these sources:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
Payor Source |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Medicare |
|
|
23.4 |
% |
|
|
22.7 |
% |
|
|
23.4 |
% |
Managed Medicare |
|
|
8.5 |
|
|
|
8.0 |
|
|
|
7.7 |
|
Medicaid |
|
|
6.6 |
|
|
|
6.5 |
|
|
|
5.4 |
|
Managed Medicaid |
|
|
9.1 |
|
|
|
8.7 |
|
|
|
8.4 |
|
Managed care |
|
|
40.2 |
|
|
|
43.0 |
|
|
|
46.0 |
|
Self-pay |
|
|
12.2 |
|
|
|
11.1 |
|
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
Total(1) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the years ended September 30, 2010, 2009 and 2008, net patient revenue comprised 68.6%,
70.4% and 73.8%, respectively, of our consolidated net revenue. |
Medicare is a federal program that provides hospital and medical insurance benefits to persons
age 65 and over, some disabled persons and persons with Lou Gehrigs Disease and end-stage renal
disease. All of our hospitals are certified as providers of Medicare services. Under the Medicare
program, acute care hospitals receive reimbursement under a prospective payment system for
inpatient and outpatient hospital services. Currently, certain types of facilities are exempt or
partially exempt from the prospective payment system methodology, including childrens
hospitals,
cancer hospitals and critical access hospitals. Hospitals and units exempt from the prospective payment system are reimbursed
on a reasonable cost-based system, subject to cost limits.
Our hospitals offer discounts from established charges to managed care plans if they are large
group purchasers of healthcare services. Additionally, we offer discounts to all uninsured patients
receiving healthcare services who do not qualify for assistance under state Medicaid, other federal
or state assistance plans or charity care. These discount programs generally limit our ability to
increase net patient revenue in response to increasing costs. Patients generally are not
responsible for any difference between established hospital charges and amounts reimbursed for such
services under Medicare, Medicaid, health maintenance organizations, preferred provider
organizations or private insurance plans. Patients generally are responsible for services not
covered by these plans, along with exclusions, deductibles or co-insurance features of their
coverage. Collecting amounts due from patients is more difficult than collecting from governmental
programs, managed care plans or private insurers. Increases in the population of uninsured
individuals, changes in the states indigent and Medicaid eligibility requirements, continued
efforts by employers to pass more out-of-pocket healthcare costs to employees in the form of
increased co-payments and deductibles, and the effects of the recent economic downturn have
resulted in increased levels of uncompensated care.
Medicare
Inpatient Acute Care
Under the inpatient prospective payment system, a hospital receives a fixed payment based on
the patients assigned Medicare severity diagnosis-related group (MS-DRG). In federal fiscal year
2009, CMS completed a two-year transition to full implementation of MS-DRGs to replace the
previously used Medicare diagnosis related groups in an effort to better recognize severity of
illness in Medicare payment rates. The MS-DRG system classifies categories of illnesses according to
the estimated intensity of hospital resources necessary to furnish care for each principal
diagnosis. The MS-DRG rates for acute care hospitals are based upon a statistically normal
distribution of severity. The MS-DRG payments do not consider a specific hospitals actual costs
but are adjusted for geographic area wage differentials. Inpatient capital costs for acute care
hospitals are reimbursed on a prospective system based on diagnosis related group weights
multiplied by geographically adjusted federal weights. When treatments for
patients fall well outside the normal distribution, providers may receive additional payments
known as outlier payments. For federal fiscal year 2011, CMS has established an outlier threshold
of $23,075.
11
The MS-DRG rates are adjusted each federal fiscal year and have been affected by federal
legislation. The index used to adjust the MS-DRG rates, known as the market basket index, gives
consideration to the inflation experienced by hospitals and entities outside of the healthcare
industry in purchasing goods and services. In past years, the percentage increases to the MS-DRG
rates have been lower than the percentage increases in the costs of goods and services purchased by
hospitals. For federal fiscal year 2010, CMS updated the MS-DRG rates by the full market basket of
2.1%. However, the Health Reform Law reduced the market basket by 0.25% for discharges occurring on
or after April 1, 2010. The Health Reform Law also requires an additional 0.25% reduction to the
market basket for federal fiscal year 2011. For federal fiscal year 2011, CMS issued a final rule
updating the MS-DRG rates by a market basket of 2.35%, representing the full market basket of 2.6%
reduced by 0.25% as required by the Health Reform Law.
The Health Reform Law provides for additional reductions to the inpatient
prospective payment system market basket update, as well as other payment adjustments, in future years
as discussed below in the section entitled Government Regulation and Other FactorsHealthcare
Reform.
In federal fiscal years 2008 and 2009, CMS reduced payments to hospitals through a
documentation and coding adjustment intended to account for coding and classification changes under
the new MS-DRG system that were unrelated to changes in patient case mix. In addition, Congress
gave CMS the ability to determine retrospectively whether the documentation and coding adjustment
levels for federal fiscal years 2008 and 2009 were adequate to account for changes in payments not
related to changes in patient case mix. CMS did not impose an adjustment for federal fiscal year
2010, but announced its intent to impose reductions to payments in federal fiscal years 2011 and
2012 because of what CMS has determined to be an inadequate adjustment in federal fiscal year 2008.
For federal fiscal year 2011, CMS issued a final rule implementing a documentation and coding
adjustment of negative 2.9%. When combined with the market basket increase of 2.35% for federal
fiscal year 2011, this documentation and coding adjustment will result in a net decrease of 0.55%
to MS-DRG rates for federal fiscal year 2011. CMS noted that this documentation and coding
reduction is only half of the full recoupment of 5.8% needed to offset its estimations of excess
payments in 2008 and 2009 and that CMS intends to implement the remaining negative 2.9% in federal
fiscal year 2012. In addition, CMS acknowledges that a prospective 3.9% reduction in rates is
required to offset changes in documentation and coding as a result of the MS-DRG system. CMS has
decided not to implement this prospective reduction in federal fiscal year 2011, but has stated
that it will be required in the future.
Quality of care provided is becoming an increasingly important factor in Medicare
reimbursement. The Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (the Medicare Modernization Act) provides for diagnosis related group rate increases
at the full market basket if the facility submits data for certain patient care indicators to the
Secretary of the Department. Initially, CMS required the reporting of ten quality
measures. As required by the Deficit Reduction Act of 2005 (DEFRA), CMS has expanded, through a
series of rulemakings, the number of patient care indicators that hospitals must report. Currently,
CMS requires hospitals to report 46 quality measures in order to qualify for the full market basket
update to the inpatient prospective payment system in fiscal year 2011. For federal fiscal year
2011, CMS will require hospitals to report 55 quality measures to receive the full market basket
update in federal fiscal year 2012. Those hospitals not submitting the required data will receive
an increase in payment equal to the market basket minus two percentage points. We currently have
the ability to monitor our compliance with the quality indicators and intend to submit the quality
data required to receive the full market basket pricing update when appropriate.
For discharges occurring on or after October 1, 2008, Medicare no longer pays hospitals
additional amounts for the treatment of certain preventable adverse events, also known as
hospital-acquired conditions (HACs), unless the condition was present at admission. Currently,
there are ten categories of conditions on the list of HACs. DEFRA provides that CMS may revise the
list of conditions from time to time. On January 15, 2009, CMS announced three National Coverage
Determinations (NCDs) that prohibit Medicare reimbursement for erroneous surgical procedures
performed on an inpatient or outpatient basis. These three erroneous surgical procedures are in
addition to the HACs designated by regulation. The Health Reform Law contains additional measures to further tie
Medicare payments to performance and quality as discussed below in the section entitled Government Regulation
and Other FactorsHealthcare Reform.
Outpatient
CMS reimburses hospital outpatient services and certain Medicare Part B services furnished to
hospital inpatients who have no Part A coverage on a prospective payment system basis. CMS uses fee
schedules to pay for
physical, occupational and speech therapies, durable medical equipment, clinical diagnostic
laboratory services and nonimplantable orthotics and prosthetics.
12
All services paid under the prospective payment system for hospital outpatient services are
classified into groups called ambulatory payment classifications or APCs. Services in each APC
are similar clinically and in terms of the resources they require. A payment rate is established
for each APC. CMS increased the conversion factor by approximately 2.1% for calendar year 2010.
However, the Health Reform Law reduced the market basket by 0.25% in 2010 and provides for an
additional 0.25% reduction in 2011. For calendar year 2011, CMS has issued a final rule updating
the market basket by 2.35%, representing the full market basket of 2.6% reduced by 0.25% as
required by the Health Reform Law.
The Health Reform Law provides for additional reductions to the outpatient prospective payment
system market basket update, as well as other payment adjustments, in future years as discussed below
in the section entitled Government Regulation and Other FactorsHealthcare Reform.
Hospitals must submit quality data regarding eleven measures relating to outpatient care in
order to receive the full market basket increase under the outpatient prospective payment system in
calendar year 2010 and calendar year 2011. CMS has issued a final rule that requires hospitals to
report 15 total measures in 2011 to receive the full market basket increase for payment in calendar
year 2012. Hospitals that fail to submit such data will receive the market basket update minus two
percentage points for the outpatient prospective payment system.
Rehabilitation
Inpatient rehabilitation hospitals and designated units are reimbursed under a prospective
payment system. Under this prospective payment system, patients are classified into case mix groups
based upon impairment, age, co-morbidities and functional capability. Inpatient rehabilitation
facilities are paid a predetermined amount per discharge that reflects the patients case mix group
and is adjusted for area wage levels, low-income patients, rural areas and high-cost outliers. For
fiscal year 2010, CMS issued a final rule setting the market basket increase factor at 2.5%.
However, the Health Reform Law provides for annual decreases to the market basket, including a
0.25% reduction for discharges occurring on or after April 1, 2010 and an additional 0.25%
reduction in 2011. For federal fiscal year 2011, CMS has issued a notice updating the market
basket by 2.25%, representing the full market basket of 2.5% reduced by 0.25% as required by the
Health Reform Law.
The Health Reform Law provides for additional reductions to the inpatient rehabilitation facility
prospective payment system market basket update, as well as other payment adjustments, in future
years as discussed below in the section entitled Government Regulation and Other
FactorsHealthcare Reform.
In 2004, CMS issued a final rule modifying the criteria for classification as an
inpatient rehabilitation facility as a result of data indicating that most facilities do not meet
the existing criteria. Under the previous requirements, in order for a facility to be considered an
inpatient rehabilitation facility, at least 75% of the facilitys inpatient population during the
most recent 12-month cost reporting period must have required intensive rehabilitation services for
one or more of ten specified conditions. A subsequent rule expanded the list of specified
conditions to 13, and subsequent legislation and regulations temporarily reduced the percentage of
the patient population who must have one of the specified conditions. For cost reporting periods
beginning on or after July 1, 2007, CMS required 65% of the patient population to have one of the
specified conditions. Currently, the percentage is set by statute at 60% of the patient population.
Effective January 1, 2010, inpatient rehabilitation facilities must meet additional coverage
criteria, including patient selection and care requirements relating to pre-admission screenings,
post-admission evaluations, ongoing coordination of care and involvement of rehabilitation
physicians. As of September 30, 2010, we operated nine inpatient rehabilitation units within our
hospitals.
Psychiatric
Inpatient psychiatric facilities are paid based on a prospective payment system. Under this
prospective payment system, inpatient psychiatric facilities receive a federal per diem base rate
that is based on the sum of the average routine operating, ancillary and capital costs for each
patient day of psychiatric care in an inpatient psychiatric facility, adjusted for budget
neutrality. This federal per diem base rate is further adjusted to reflect certain patient and
facility characteristics, including patient age, certain diagnostic related groups, facility wage
index adjustment, and facility rural location. The payment rates are adjusted annually on a July 1
update cycle. Inpatient psychiatric facilities receive additional outlier payments for cases in
which estimated costs for the case exceed an adjusted threshold amount plus the total adjusted
payment amount for the stay. CMS updated payments for rate year 2010 by 2.1%. However, the Health
Reform Law provides for annual decreases to the market basket, including a 0.25% reduction for
discharges occurring on or after April 1, 2010 and an additional 0.25% reduction in 2011. For rate
year 2011, CMS has issued a notice updating the market basket by 2.15%, representing the full
market basket of
2.4% reduced by 0.25% as required by the Health Reform Law.
The Health Reform Law provides for additional reductions to the inpatient psychiatric facility
prospective payment system market basket update, as well as other payment adjustments, in future
years as discussed below in the section entitled Government Regulation and Other
FactorsHealthcare Reform.
As of September 30, 2010, we
operated one behavioral health hospital facility and six specially designated psychiatric units
that are subject to these rules.
13
Physician Services Reimbursement
Physician services are reimbursed under the physician fee schedule (PFS) system, under which
CMS has assigned a national relative value unit (RVU) to most medical procedures and services
that reflects the various resources required by a physician to provide the services relative to all
other services. Each RVU is calculated based on a combination of work required in terms of time
and intensity of effort for the service, practice expense (overhead) attributable to the service
and malpractice insurance expense attributable to the service. These three elements are each
modified by a geographic adjustment factor to account for local practice costs then aggregated.
The aggregated amount is multiplied by a conversion factor that accounts for inflation and targeted
growth in Medicare expenditures (as calculated by the sustainable growth rate (SGR)) to arrive at
the payment amount for each service. While RVUs for various services may change in a given year,
any alterations are required by statute to be virtually budget neutral, such that total payments
made under the PFS may not differ by more than $20 million from what payments would have been if
adjustments were not made.
The PFS rates are adjusted each year, and reductions in both current and future payments are
anticipated. The SGR formula, mandated by statute, is intended to control growth in aggregate
Medicare expenditures for physicians services. For calendar year 2011, CMS has issued a final
rule applying the SGR in a manner that would result in an aggregate reduction of 24.9% to all
physician payments under the PFS. Since 2003, Congress has passed multiple legislative
acts delaying application of the SGR to the PFS, including postponing
the cut from December 1, 2010
until January 1, 2012, but we cannot predict whether Congress will intervene to prevent
this reduction to payments in the future.
Ambulatory Surgery Centers
CMS reimburses ambulatory surgical centers (ASC) using a predetermined fee schedule.
Reimbursements for ASC overhead costs are limited to no more than the overhead costs paid to
hospital outpatient departments under the Medicare hospital outpatient prospective payment system.
Effective January 1, 2008, CMS issued final regulations that change payment for procedures
performed in an ASC. Under this rule, ASC payment groups increased from nine clinically disparate
payment groups to over 200 APCs used under the outpatient prospective payment system for these
surgical services. In addition, CMS significantly expanded the types of procedures that may be
performed in ASCs. More Medicare procedures that are now performed in hospitals, such as ours, may
be moved to ASCs, potentially reducing surgical volume in our hospitals.
Recovery Audit Contractors
The Medicare Modernization Act established the Recovery Audit Contractor (RAC) three-year demonstration
program. Under this program, CMS contracted with third-parties to conduct post-payment reviews on a
contingency fee basis to detect and correct improper payments in the Medicare program. The Tax
Relief and Health Care Act of 2006 made the RAC program permanent and mandated its nationwide
expansion by 2010. CMS has awarded contracts to four RACs that have implemented the permanent RAC
program on a nationwide basis.
Managed Medicare
Managed Medicare plans represent arrangements where CMS contracts with private companies to
provide members with Medicare Part A, Part B and Part D benefits. Managed Medicare plans can be
structured as health maintenance organizations, preferred provider organizations, or private
fee-for-service plans. The Medicare program allows beneficiaries to choose enrollment in certain
managed Medicare plans. Legislative changes in 2003 increased reimbursement to managed Medicare
plans and limited, to some extent, the financial risk to the companies offering the plans.
Following these changes, the number of beneficiaries choosing to receive their Medicare benefits
through such plans has increased.
However, the Health Reform Law provides for reductions to managed Medicare plan payments beginning
in 2010 that will result in managed Medicare per capita premium payments becoming equal, on
average, to traditional Medicare payments. The Health Reform Law also expands the RAC program to
include managed Medicare by December 31, 2010.
14
Medicaid
Medicaid programs are jointly funded by federal and state governments and are administered by
states under an approved plan that provides hospital and other healthcare benefits to qualifying
individuals who are unable to afford care. All of our hospitals are certified as providers of
Medicaid services. State Medicaid programs may use a prospective payment system, cost-based payment
system or other payment methodology for hospital services. However, Medicaid reimbursement is often
less than a hospitals cost of services. In addition, 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 certain HACs.
The federal government and many states from time to time consider altering the level of
Medicaid funding or expanding Medicaid benefits in a manner that could adversely affect future
levels of Medicaid reimbursement received by our hospitals. DEFRA, signed into law on February 8,
2006, included Medicaid cuts of approximately $4.8 billion over five years. CMS has published a
number of proposed and final regulations that, if implemented, would result in significant
additional reductions in Medicaid funding. These regulations have been subject to Congressional
moratoria, rescinded, invalidated by court order or otherwise delayed. However, CMS could pursue
implementation of these regulations or other regulatory measures that would further reduce Medicaid
funding in the future.
Additionally, the states in which we operate have experienced budget constraints as a result
of increased costs and lower than expected tax collections. Many state have experienced or
projected shortfalls in their budgets, and economic conditions may increase these budget
pressures. Health and human services programs, including Medicaid and similar programs, represent a
significant portion of state budgets. The states in which we operate have responded to these budget
concerns by decreasing funding for healthcare programs or making structural changes that have
resulted or may result in a reduction to Medicaid hospital revenues. Additional Medicaid spending
cuts or other program changes may be implemented in the future in the states in which we operate.
However, effective March 23, 2010, the Health Reform Law generally requires states at least to
maintain Medicaid eligibility standards established prior to the enactment of the law until January
1, 2014 for adults and until October 1, 2019 for children. The Health Reform Law also requires
states to significantly expand their Medicaid program coverage by 2014.
The American Recovery and Reinvestment Act of 2009 (ARRA), allocated approximately $87.0
billion to temporarily increase the share of program costs paid by the federal government to fund
each states Medicaid program. Although initially scheduled to expire at the end of 2010, Congress
has allocated additional funds to extend this increased federal funding to states through June
2011. These funds provide a benefit to state Medicaid programs by helping to avoid more extensive
program and reimbursement cuts, but this increased federal funding is not permanent, and state
legislatures are anticipating that the expiration of the increased federal funding could result in
significant reductions to states Medicaid programs.
Through DEFRA, Congress has expanded the federal governments involvement in fighting fraud,
waste and abuse in the Medicaid program by creating the Medicaid Integrity Program. Among other
things, this legislation requires CMS to employ private contractors, referred to as Medicaid
Integrity Contractors (MICs), to perform reviews and post-payment audits of Medicaid claims and
identify overpayments. MICs are assigned to five geographic jurisdictions and have commenced audits
of Medicaid providers in several states in each jurisdiction. The Health Reform Law increases
federal funding for the MIC program for federal fiscal year 2011 and later years. In addition to
MICs, several other contractors and state Medicaid agencies have increased their review activities.
The Health Reform Law also expands the RAC programs scope to include Medicaid claims by requiring
all states to establish programs to contract with RACs by December 31, 2010.
Private
Supplemental Medicaid Reimbursement Programs
Certain of our acute care hospitals receive supplemental Medicaid reimbursement, including
reimbursement from programs for participating private hospitals that enter into indigent care
affiliation agreements with public hospitals or county governments in the state of Texas. Under the
CMS approved programs, affiliated hospitals, including our Texas hospitals, have expanded the
community healthcare safety net by providing indigent healthcare services. Participation in
indigent care affiliation agreements by our Texas hospitals has resulted in an increase in acute
care revenue by virtue of the hospitals entitlement to supplemental Medicaid inpatient
reimbursement. It is
unclear whether our revenues from these programs will be adversely affected as the provisions
of the Health Reform Law are implemented.
15
Managed Medicaid
Managed Medicaid programs represent arrangements in which states contract with one or more
entities for patient enrollment, care management and claims adjudication. The states usually do not
give up program responsibilities for financing, eligibility criteria and core benefit plan design.
We generally contract directly with one of the designated entities, usually a managed care
organization. The provisions of these programs are state-specific.
As state governments seek to control the cost of their Medicaid programs, enrollment in
managed Medicaid plans, including states in which we operate, has increased in recent years. For
example, Florida legislation has established a goal of statewide implementation of Medicaid managed
care programs by 2011. Legislative efforts to meet this goal failed in the 2010 legislative session
but are anticipated to be pursued again in the 2011 legislative session. Furthermore, Florida
could lose $300.0 million of federal funding for hospital charity care if this goal is not met.
Louisiana has requested a section 1115 Medicaid waiver from the federal government that, if
approved, would result in an expansion of Medicaid managed care plans. The Texas legislature and
the Texas Health and Human Services Commission have recommended expanding Medicaid managed care
enrollment for certain Medicaid beneficiaries. However, fiscal budgetary issues resulting from
general economic conditions in the states in which we operate may require reductions in premium
payments to these plans.
Disproportionate Share Hospital Payments
In addition to making payments for services provided directly to beneficiaries, Medicare makes
additional payments to hospitals that treat a disproportionately large number of low-income
patients (Medicaid and Medicare patients eligible to receive Supplemental Security Income).
Disproportionate share hospital (DSH) payments are determined annually based on certain
statistical information required by the Department and are calculated as a percentage addition to
MS-DRG payments. The primary method used by a hospital to qualify for Medicare DSH payments is a
complex statutory formula that results in a DSH percentage that is applied to payments on MS-DRGs.
Hospitals that provide care to a disproportionately high number of low-income patients may
also receive Medicaid DSH payments. The federal government distributes federal Medicaid DSH funds
to each state based on a statutory formula. The states then distribute the DSH funding among
qualifying hospitals. States have broad discretion to define which hospitals qualify for Medicaid
DSH payments and the amount of such payments.
Annual Cost Reports
All hospitals participating in the Medicare and Medicaid programs, whether paid on a
reasonable cost basis or under a prospective payment system, are required to meet specific
financial reporting requirements. Federal regulations require submission of annual cost reports
identifying medical costs and expenses associated with the services provided by each hospital to
Medicare beneficiaries and Medicaid recipients. These annual cost reports are subject to routine
audits, which may result in adjustments to the amounts ultimately determined to be due to us under
these reimbursement programs. The audit process may take several years to reach the final
determination of allowable amounts under the programs. Providers also have the right of appeal, and
it is common to contest issues raised in audits of prior years reports.
Cost reports filed by our facilities generally remain open for three years after the notice of
program reimbursement date. If any of our facilities are found to have been in violation of federal
or state laws relating to preparing and filing of Medicare or Medicaid cost reports, whether prior
to or after our ownership of these facilities, we and our facilities could be subject to
substantial monetary fines, civil and criminal penalties and exclusion from participation in the
Medicare and Medicaid programs. If an allegation is lodged against one of our facilities for a
violation occurring during the time period before we owned the facility, we may have
indemnification rights against the former owner of the facility for any damages we may incur based
on negotiated indemnification and hold harmless provisions in the transaction documents. However,
we offer no assurances that any such matter would be covered by indemnification, or if covered,
that such indemnification would be adequate to cover any potential
losses, fines and penalties. Additionally, we offer no assurances that the former owner would
have the financial ability to satisfy indemnification claims.
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Managed Care
Managed care payors, including health maintenance organizations and preferred provider
organizations, are organizations that provide insurance coverage and a network of healthcare
providers to members for a fixed monthly premium. To control costs, these organizations typically
contract with hospitals and other providers for discounted prices, review medical services to
ensure that no unnecessary services are provided, and market providers within their networks to
patients. A significant percentage of our overall payor mix is commercial managed care. We
generally receive lower payments from commercial managed care payors than from traditional
commercial/indemnity insurers for similar services.
Commercial Insurance
Our hospitals provide services to a decreasing number of individuals covered by traditional
private healthcare insurance. Private insurance carriers make direct payments to hospitals or, in
some cases, reimburse their policy holders, based upon negotiated discounts from the particular
hospitals established charges and the particular coverage provided in the insurance policy.
Commercial insurers are continuing efforts to limit the payments for hospital services by
adopting discounted payment mechanisms, including prospective payment or diagnosis related
group-based payment systems, for more inpatient and outpatient services. In addition, commercial
insurers increasingly are implementing quality requirements and refusing to pay for serious adverse
events, similar to Medicare. To the extent that these efforts are successful, hospitals may receive
reduced levels of reimbursement.
Charity Care
In the ordinary course of business, we provide care without charge to patients who are
financially unable to pay for the healthcare services they receive. Because we do not pursue
collection of amounts determined to qualify as charity care, they are not reported in net revenue.
We currently record revenue deductions for patient accounts that meet our guidelines for charity
care. We provide charity care to patients with income levels below 200% of the federal poverty
level (FPL). Additionally, at all of our hospitals, a sliding scale of reduced rates is offered
to all uninsured patients, who are not covered through federal, state or private insurance, with
incomes between 200% and 400% of the FPL.
Government Regulation and Other Factors
A framework of extremely complex federal and state laws, rules and regulations governs the
healthcare industry and, for many provisions, there is little history of regulatory or judicial
interpretation upon which to rely.
Healthcare Reform
The
Health Reform Law, as enacted, 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.
Although some federal district courts have upheld the constitutionality of the Health Reform Law,
on December 13, 2010, a Virginia federal district court held the requirement that individuals
maintain health insurance or pay a penalty to be unconstitutional, while leaving the remainder of
the Health Reform Law intact. These lawsuits are subject to appeal.
Expanded Coverage
Based
on estimates of the Congressional Budget Office (CBO) and CMS, by 2019, the Health
Reform Law, as enacted, will expand coverage to 32 to 34 million additional individuals (resulting in coverage
of an estimated 94% of the legal U.S. population). This increased coverage will occur through a
combination of public program expansion and private sector health insurance and other reforms.
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Medicaid Expansion. The primary public program coverage expansion will occur through
changes in Medicaid, and to a lesser extent, expansion of the Childrens Health Insurance Program
(CHIP). The most significant changes will expand the categories of individuals eligible for
Medicaid coverage and permit individuals with relatively higher incomes to qualify. The federal
government reimburses the majority of a states Medicaid expenses, and it conditions its payment on
the state meeting certain requirements. The federal government currently requires that states
provide coverage for only limited categories of low-income adults under 65 years old (e.g., women
who are pregnant, and the blind or disabled). In addition, the income level required for
individuals and families to qualify for Medicaid varies widely from state to state.
The Health Reform Law materially changes the requirements for Medicaid eligibility. Commencing
January 1, 2014, all state Medicaid programs are required to provide, and the federal government
will subsidize, Medicaid coverage to virtually all adults under 65 years old with incomes at or
under 133% of the FPL. This expansion will create a minimum Medicaid eligibility threshold that is
uniform across states. Further, the Health Reform Law also requires states to apply a 5% income
disregard to the Medicaid eligibility standard, so that Medicaid eligibility will effectively be
extended to those with incomes up to 138% of the FPL. These new eligibility requirements will
expand Medicaid and CHIP coverage by an estimated 16 to 18 million people nationwide. A
disproportionately large percentage of the new Medicaid coverage is likely to be in states that
currently have relatively low income eligibility requirements.
As Medicaid is a joint federal and state program, the federal government provides states with
matching funds in a defined percentage, known as the federal medical assistance percentage
(FMAP). Beginning in 2014, states will receive an enhanced FMAP for the individuals enrolled in
Medicaid pursuant to the Health Reform Law. The FMAP percentage is as follows: 100% for calendar
years 2014 through 2016; 95% for 2017; 94% in 2018; 93% in 2019; and 90% in 2020 and thereafter.
The Health Reform Law also provides that the federal government will subsidize states that
create non-Medicaid plans for residents whose incomes are greater than 133% of the FPL but do not
exceed 200% of the FPL. Approved state plans will be eligible to receive federal funding. The
amount of that funding per individual will be equal to 95% of subsidies that would have been
provided for that individual had he or she enrolled in a health plan offered through one of the
Exchanges, as discussed below.
Historically, states often have attempted to reduce Medicaid spending by limiting benefits and
tightening Medicaid eligibility requirements. 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.
States with budget deficits may, however, seek exemptions from this requirement, but only to
address eligibility standards that apply to adults making more than 133% of the FPL.
Private Sector Expansion. The expansion of health coverage through the private sector
as a result of the Health Reform Law, as enacted, will occur through new requirements on health insurers,
employers and individuals. Commencing January 1, 2014, health insurance companies will be
prohibited from imposing annual coverage limits, dropping coverage, excluding persons based upon
pre-existing conditions or denying coverage for any individual who is willing to pay the premiums
for such coverage. Effective January 1, 2011, each health plan must keep its annual non-medical
costs lower than 15% of premium revenue for the group market and lower than 20% in the small group
and individual markets or rebate its enrollees the amount spent in excess of the percentage. In
addition, effective September 23, 2010, health insurers are not permitted to deny coverage to
children based upon a pre-existing condition and must allow dependent care coverage for children up
to 26 years old.
Larger employers will be subject to new requirements and incentives to provide health
insurance benefits to their full-time employees. Effective January 1, 2014, employers with 50 or
more employees that do not offer health insurance will be held subject to a penalty if an employee
obtains coverage through an Exchange, if the coverage is subsidized by the government. The employer
penalties will range from $2,000 to $3,000 per employee, subject to certain thresholds and
conditions.
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As enacted, the Health Reform Law uses various means to induce individuals who do not have health
insurance to obtain coverage. By January 1, 2014, individuals will be required to maintain health
insurance for a minimum defined set of benefits or pay a tax penalty. The penalty in most cases is
$95 in 2014, $325 in 2015, $695 in 2016, and indexed to a cost of living adjustment in subsequent
years. The Internal Revenue Service (IRS), in consultation with the Department, is responsible for enforcing the tax penalty, although the
Health Reform Law limits the availability of certain IRS enforcement mechanisms. In addition, for
individuals and families below 400% of the FPL, the cost of obtaining health insurance will be
subsidized by the federal government. Those with lower incomes will be eligible to receive greater
subsidies. It is anticipated that those at the lowest income levels will have the majority of their
premiums subsidized by the federal government, in some cases in excess of 95% of the premium
amount.
To facilitate the purchase of health insurance by individuals and small employers, each state
must establish an Exchange by January 1, 2014. Based on CBO and CMS estimates, between 29 and 31
million individuals will obtain their health insurance coverage through an Exchange by 2019. Of
that amount, an estimated 16 million will be individuals who were previously uninsured, and 13 to
15 million will be individuals who switched from their prior insurance coverage to a plan obtained
through the Exchange. The Health Reform Law requires that the Exchanges be designed to make the
process of evaluating, comparing and acquiring coverage simple for consumers. For example, each
states Exchange must maintain an internet website through which consumers may access health plan
ratings that are assigned by the state based on quality and price, view governmental health program
eligibility requirements and calculate the actual cost of health coverage. Health insurers
participating in the Exchange must offer a set of minimum benefits to be defined by the Department
and may offer more benefits. Health insurers must offer at least two, and up to five, levels of
plans that vary by the percentage of medical expenses that must be paid by the enrollee. These
levels are referred to as platinum, gold, silver, bronze and catastrophic plans, with gold and
silver being the two mandatory levels of plans. Each level of plan must require the enrollee to
share the following percentages of medical expenses up to the deductible/co-payment limit:
platinum, 10%; gold, 20%; silver, 30%; bronze, 40%; and catastrophic, 100%. Health insurers may
establish varying deductible/co-payment levels, up to the statutory maximum (estimated to be
between $6,000 and $7,000 for an individual). The health insurers must cover 100% of the amount of
medical expenses in excess of the deductible/co-payment limit. For example, an individual making
100% to 200% of the FPL will have co-payments and deductibles reduced to about one-third of the
amount payable by those with the same plan with incomes at or above 400% of the FPL.
Public Program Spending
The Health Reform Law provides for Medicare, Medicaid and other federal healthcare program
spending reductions between 2010 and 2019. The CBO estimates that these will include $156 billion
in Medicare fee-for-service market basket and productivity reimbursement reductions for all
providers, the majority of which will come from hospitals; CMS sets this estimate at $233 billion.
The CBO estimates also include an additional $36 billion in reductions of Medicare and Medicaid DSH
funding ($22 billion for Medicare and $14 billion for Medicaid). CMS estimates include an
additional $64 billion in reductions of Medicare and Medicaid DSH funding, with $50 billion of the
reductions coming from Medicare.
Payments for Hospitals and ASCs
Inpatient Market Basket and Productivity Adjustment. Under the Medicare program,
hospitals receive reimbursement under a prospective payment system for general, acute care hospital
inpatient services. CMS establishes fixed prospective payment system payment amounts per inpatient
discharge based on the patients assigned MS-DRG. These MS-DRG rates are updated each federal
fiscal year, which begins October 1, using the market basket, which takes into account inflation
experienced by hospitals and other entities outside the healthcare industry in purchasing goods and
services.
The Health Reform Law provides for three types of annual reductions in the market basket. The
first is a general reduction of a specified percentage each federal fiscal year starting in 2010
and extending through 2019. These reductions are as follows: federal fiscal year 2010, 0.25% for
discharges occurring on or after April 1, 2010; 2011, 0.25%;
2012, 0.1%; 2013, 0.1%; 2014, 0.3%; 2015, 0.2%; 2016, 0.2%; 2017,
0.75%; 2018, 0.75%; and 2019, 0.75%.
19
The second type of reduction to the market basket is a productivity adjustment that will be
implemented by the Department beginning in federal fiscal year 2012. The amount of that reduction
will be the projected nationwide productivity gains over the preceding 10 years. To determine the
projection, the Department will use the Bureau of Labor Statistics (BLS) 10-year moving average
of changes in specified economy-wide productivity (the BLS data is typically a few years old). The
Health Reform Law does not contain guidelines for the Department to use in projecting the
productivity figure. Based upon the latest available data, federal fiscal year 2012 market basket
reductions resulting from this productivity adjustment are likely to range from 1% to 1.4%.
CMS estimates that the combined market basket and productivity adjustments will reduce Medicare
payments under the inpatient prospective payment system by $112.6 billion from 2010 to 2019.
The third type of reduction is in connection with the value-based purchasing program discussed
in more detail below. Beginning in federal fiscal year 2013, CMS will reduce the inpatient
prospective payment system payment amount for all discharges by the following: 1% for 2013; 1.25%
for 2014; 1.5% for 2015; 1.75% for 2016; and 2% for 2017 and subsequent years. For each federal
fiscal year, the total amount collected from these reductions will be pooled and used to fund
payments to hospitals that satisfy certain quality metrics. While some or all of these reductions
may be recovered if a hospital satisfies these quality metrics, the recovery amounts may be
delayed.
If the aggregate of the three market basket reductions described above is more than the annual
market basket adjustments made to account for inflation, there will be a reduction in the MS-DRG
rates paid to hospitals. For example, if market basket increases to account for inflation would
result in a 2% market basket update and the aggregate Health Reform Law market basket adjustments
would result in a 3% reduction, then the rates paid to a hospital for inpatient services would be
1% less than rates paid for the same services in the prior year.
Quality-Based Payment Adjustments and Reductions for Inpatient Services. The Health
Reform Law establishes or expands three provisions to promote value-based purchasing and to link
payments to quality and efficiency. First, in federal fiscal year 2013, the Department is directed
to implement a value-based purchasing program for inpatient hospital services. This program will
reward hospitals that meet certain quality performance standards established by the Department. The
Health Reform Law provides the Department considerable discretion over the value-based purchasing
program. For example, the Department will have the authority to determine the quality performance
measures, the standards hospitals must achieve in order to meet the quality performance measures,
and the methodology for calculating payments to hospitals that meet the required quality threshold.
The Department will also determine how much money each hospital will receive from the pool of
dollars created by the reductions related to the value-based purchasing program as described above.
Because the Health Reform Law provides that the pool will be fully distributed, hospitals that meet
or exceed the quality performance standards set by the Department will receive greater
reimbursement under the value-based purchasing program than they would have otherwise. On the other
hand, hospitals that do not achieve the necessary quality performance will receive reduced Medicare
inpatient hospital payments.
Second, beginning in federal fiscal year 2013, inpatient payments will be reduced if a
hospital experiences excessive readmissions within a 30-day period of discharge for heart attack,
heart failure, pneumonia or other conditions designated by the Department. Hospitals with what the
Department defines as excessive readmissions for these conditions will receive reduced payments
for all inpatient discharges, not just discharges relating to the conditions subject to the
excessive readmission standard. Each hospitals performance will be publicly reported by the
Department. The Department has the discretion to determine what excessive readmissions means, the
amount of the payment reduction and other terms and conditions of this program.
Third, reimbursement will be reduced based on a facilitys HAC rates. A HAC is a condition
that is acquired by a patient while admitted as an inpatient in a hospital, such as a surgical site
infection. Beginning in federal fiscal year 2015, hospitals that rank in the highest 25% nationally
of HACs for all hospitals in the previous year will receive a 1% reduction in their total Medicare
payments. In addition, effective July 1, 2011, the Health Reform Law prohibits the use of federal
funds under the Medicaid program to reimburse providers for medical services provided to treat
HACs.
Outpatient Market Basket and Productivity Adjustment. Hospital outpatient services paid under
the prospective payment system are classified into APCs. The APC payment rates are updated each
calendar year based on the market basket. The first two market basket changes outlined above the
general reduction and the productivity adjustment apply to outpatient services as well as
inpatient services, although these are applied on a calendar year
basis. The percentage changes specified in the Health Reform Law summarized above as the
general reduction for inpatients e.g., 0.2% in 2015 are the same for outpatients.
CMS estimates that the combined market basket and productivity adjustments will reduce Medicare
payments under the outpatient prospective payment system by $26.3 billion from 2010 to 2019.
Inpatient
Rehabilitation Hospitals and Units. The first two market basket changes outlined
above for inpatient servicesthe general reduction and the productivity adjustmentalso apply to
inpatient rehabilitation services. The percentage changes specified in the Health Reform Law
summarized above as the general reduction for inpatientse.g., 0.2% in 2015are the same for
rehabilitation inpatients. CMS estimates that the combined market basket and productivity
adjustments will reduce Medicare payments under the inpatient rehabilitation facilities prospective
payment system by $5.7 billion from 2010 to 2019. Further, beginning in
federal fiscal year 2014, inpatient rehabilitation facilities will be required to report quality
measures to the Department or will receive a two percentage point reduction to the market basket
update.
Inpatient
Psychiatric Facilities. The first two market basket changes outlined above for
inpatient servicesthe general reduction and the productivity adjustmentalso apply to inpatient
psychiatric services. The percentage changes specified in the Health Reform Law summarized above
as the general reduction for inpatientse.g., 0.2% in 2015are the same for psychiatric
inpatients, although these are applied on a rate year basis. CMS estimates that the combined
market basket and productivity adjustments will reduce Medicare payments under the inpatient
psychiatric facilities prospective payment system by $4.3 billion from 2010 to 2019.
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Medicare and Medicaid Disproportionate Share Hospital Payments. The Medicare DSH
program provides for additional payments to hospitals that treat a disproportionate share of
low-income patients. Under the Health Reform Law, beginning in federal fiscal year 2014, Medicare
DSH payments will be reduced to 25% of the amount they otherwise would have been absent the new
law. The remaining 75% of the amount that would otherwise be paid under Medicare DSH will be
effectively pooled, and this pool will be reduced further each year by a formula that reflects
reductions in the national level of uninsured who are under 65 years of age. In other words, the
greater the level of coverage for the uninsured nationally, the more the Medicare DSH payment pool
will be reduced. Each hospital will then be paid, out of the reduced DSH payment pool, an amount
allocated based upon its level of uncompensated care.
It is difficult to predict the full impact of the Medicare DSH
reductions. The CBO estimates that the Health Reform Law will result in $22 billion in reductions to Medicare DSH
payments between 2010 and 2019, but CMS estimates reimbursement reductions totaling $50 billion during that same time period.
The Health Reform Law does not mandate what data source the
Department must use to determine the reduction, if any, in the uninsured population nationally. In
addition, the Health Reform Law does not contain a definition of uncompensated care. As a result,
it is unclear how a hospitals share of the Medicare DSH payment pool will be calculated. CMS could
use the definition of uncompensated care used in connection with hospital cost reports.
However, in July 2009, CMS proposed material revisions to the definition of uncompensated
care used for cost report purposes. Those revisions would exclude certain significant costs that
had historically been covered, such as unreimbursed costs of Medicaid services. CMS has not issued
a final rule, and the Health Reform Law does not require the Department to use this definition,
even if finalized, for DSH purposes. How CMS ultimately defines uncompensated care for purposes
of these DSH funding provisions could have a material effect on a hospitals Medicare DSH
reimbursements.
In addition to Medicare DSH funding, hospitals that provide care to a disproportionately high
number of low-income patients may receive Medicaid DSH payments. The federal government distributes
federal Medicaid DSH funds to each state based on a statutory formula. The states then distribute
the DSH funding among qualifying hospitals. Although federal Medicaid law defines some level of
hospitals that must receive Medicaid DSH funding, states have broad discretion to define additional
hospitals that also may qualify for Medicaid DSH payments and the amount of such payments. The
Health Reform Law will reduce funding for the Medicaid DSH hospital program in federal fiscal years
2014 through 2020 by the following amounts: 2014, $500 million;
2015, $600 million; 2016, $600
million; 2017, $1.8 billion; 2018, $5 billion; 2019,
$5.6 billion; and 2020, $4 billion. How
such cuts are allocated among the states, and how the states allocate these cuts among providers,
have yet to be determined.
Accountable Care Organizations. The Health Reform Law requires the Department to
establish a Medicare Shared Savings Program that promotes accountability and coordination of care
through the creation of Accountable Care Organizations (ACOs). Beginning no later than January 1,
2012, the program will allow providers (including hospitals), physicians and other designated
professionals and suppliers to form ACOs and voluntarily work together to invest in infrastructure
and redesign delivery processes to achieve high quality and efficient delivery of services. The
program is intended to produce savings as a result of improved quality and operational efficiency.
ACOs that achieve quality performance standards established by the Department will be eligible to
share in a portion of the amounts saved by the Medicare program. The Department has significant
discretion to determine key elements of the program, including what steps providers must take to be
considered an ACO, how to decide if Medicare program savings have occurred and what portion of such
savings will be paid to ACOs. In addition, the Department will determine to what degree hospitals,
physicians and other eligible participants will be able to form and operate an ACO without
violating certain existing laws, including the federal Civil Monetary Penalty Law, the anti-kickback
statute and the Stark Law. However, the Health Reform Law does not authorize the Department to
waive other laws that may impact the ability of hospitals and other eligible participants to
participate in ACOs, such as antitrust laws.
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Bundled Payment Pilot Programs. The Health Reform Law requires the Department to
establish a five-year, voluntary national bundled payment pilot program for Medicare services
beginning no later than January 1, 2013. Under the program, providers would agree to receive one
payment for services provided to Medicare patients for certain medical conditions or episodes of
care. The Department will have the discretion to determine how the
program will function. For example, the Department will determine what medical conditions will
be included in the program and the amount of the payment for each condition. In addition, the
Health Reform Law provides for a five-year bundled payment pilot program for Medicaid services to
begin January 1, 2012. The Department will select up to eight states to participate based on the
potential to lower costs under the Medicaid program while improving care. State programs may target
particular categories of beneficiaries, selected diagnoses or geographic regions of the state. The
selected state programs will provide one payment for both hospital and physician services provided
to Medicaid patients for certain episodes of inpatient care. For both pilot programs, the
Department will determine the relationship between the programs and restrictions in certain
existing laws, including the federal Civil Monetary Penalty Law, the anti-kickback statute, the Stark Law
and the HIPAA privacy, security and transaction standard requirements. However, the Health Reform
Law does not authorize the Department to waive other laws that may impact the ability of hospitals
and other eligible participants to participate in the pilot programs, such as antitrust laws.
Ambulatory Surgery Centers. The Health Reform Law reduces reimbursement for
ASCs through a productivity adjustment to the market basket similar to the productivity adjustment
for inpatient and outpatient hospital services, beginning in federal fiscal year 2011.
Medicare Managed Care (Medicare Advantage or MA). Under the MA program, the federal
government contracts with private health plans to provide inpatient and outpatient benefits to
beneficiaries who enroll in such plans. Nationally, approximately 24% of Medicare beneficiaries
have elected to enroll in MA plans. Effective in 2014, the Health Reform Law requires MA plans to
keep annual administrative costs lower than 15% of annual premium revenue. The Health Reform Law
reduces, over a three year period, premium payments to the MA Plans such that CMS managed care per
capita premium payments are, on average, equal to traditional Medicare. As a result of these
changes, the CBO and CMS, respectively, estimate that payments to MA plans will be reduced by $138 to $145 billion between 2010 and 2019. These
reductions to MA plan premium payments may cause some plans to raise premiums or limit benefits,
which in turn might cause some Medicare beneficiaries to terminate their MA coverage and enroll in
traditional Medicare.
Physician-owned Hospitals.
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 effectively
prevents the formation of physician-owned hospitals after December 31, 2010. While the new law
grandfathers existing physician-owned hospitals, including our facilities that have physician ownership, it does not allow these hospitals to increase the
percentage of physician ownership and significantly restricts their ability to expand services.
Program Integrity and Fraud and Abuse
The Health Reform Law makes several significant changes to healthcare fraud and abuse laws,
provides additional enforcement tools to the government, increases cooperation between agencies by
establishing mechanisms for the sharing of information and enhances criminal and administrative
penalties for non-compliance. For example, the Health Reform Law: (1) provides $350 million in
increased federal funding over the next 10 years to fight healthcare fraud, waste and abuse; (2)
expands the scope of the RAC program to include MA plans and Medicaid; (3) authorizes the
Department, in consultation with the Office of Inspector General (OIG), to suspend Medicare and Medicaid payments to a provider
of services or a supplier pending an investigation of a credible allegation of fraud; (4)
provides Medicare contractors with additional flexibility to conduct random prepayment reviews; and
(5) tightens up the requirements for returning overpayments made by governmental health programs
and expands the federal False Claims Act liability to include failure to report and return an overpayment
within 60 days of identifying the overpayment or by the date a corresponding cost report is due,
whichever is later.
Impact of Health Reform Law on Our Company
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.
Further, the Health Reform Law provides for a value-based
purchasing program, the establishment of ACOs and bundled payment pilot programs, which will
create possible sources of additional revenue.
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However,
it is difficult to predict the potential amount of additional revenue resulting from
these elements of the Health Reform Law, because of uncertainty surrounding a number of material
factors, including the following:
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how many previously uninsured individuals will obtain coverage as a
result of the Health Reform Law (while the CBO estimates 32 million,
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); |
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what percentage of the newly insured patients will be covered under
the Medicaid program and what percentage will be covered by private
health insurers; |
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the extent to which states will enroll new Medicaid participants in managed care programs; |
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the pace at which insurance coverage expands, including the pace of different types of
coverage expansion; |
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the change, if any, in the volume of inpatient and outpatient hospital
services that are sought by and provided to previously uninsured
individuals; |
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the rate paid to hospitals by private payors for newly covered
individuals, including those covered through the newly created
Exchanges and those who might be covered under the Medicaid program
under contracts with the state; |
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the rate paid by state governments under the Medicaid program for newly covered individuals; |
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how the value-based purchasing and other quality programs will be implemented; |
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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; |
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the extent to which 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 put
pressure on the profitability 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 |
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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 court challenges and efforts to repeal
or amend the new law. |
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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. Reductions in Medicare and
Medicaid spending may significantly impact our business and could offset any positive effects of
the Health Reform Law. It is difficult to predict the amount of
potential revenue reductions resulting from reduced Medicare
and Medicaid spending because of uncertainty regarding a number of material factors, including the
following:
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the amount of overall revenues we will generate from Medicare and
Medicaid business when the reductions are implemented; |
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whether reductions required by the Health Reform Law will be changed
by statute prior to becoming effective; |
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the size of the Health Reform Laws annual productivity adjustment to the market basket beginning
in 2012 payment years; |
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the amount of the Medicare DSH reductions that will be made, commencing in federal fiscal year 2014; |
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the allocation to our hospitals of the Medicaid DSH reductions, commencing in federal fiscal year 2014; |
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what the losses in revenues will be, if any, from the Health Reform Laws quality initiatives; |
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how successful ACOs will be at coordinating care and reducing costs; |
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the scope and nature of potential changes to Medicare reimbursement
methods, such as an emphasis on bundling payments or coordination of
care programs; |
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whether our revenues from private supplemental Medicaid reimbursement programs
will be adversely affected, because there may be fewer indigent,
non-Medicaid patients for whom we provide services pursuant to these
programs; and |
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reductions to Medicare payments CMS may impose for excessive readmissions. |
Because of the many variables involved, we are unable to predict the net effect of the
expected increases in insured individuals using our facilities, the reductions in Medicare
spending, including Medicare and Medicaid DSH funding, and numerous other provisions in the Health
Reform Law that may affect our business.
Further, it is unclear how federal lawsuits challenging the constitutionality of the Health Reform
Law will be resolved or what the impact will be of any resulting changes to the law. For example,
should the requirement that individuals maintain health insurance ultimately be deemed
unconstitutional but the prohibition on health insurers excluding coverage due to pre-existing
conditions be maintained, significant disruption to the health insurance industry could result,
which could impact our revenues and operations.
Licensure, Certification and Accreditation
Healthcare facility construction and operation is subject to federal, state and local
regulations relating to the adequacy of medical care, equipment, personnel, operating policies and
procedures, fire prevention, rate-setting and compliance with building codes and environmental
protection laws. Our facilities also are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary for licensing and
accreditation. We believe that all of our operating healthcare facilities are properly licensed
under appropriate state healthcare laws, but we cannot assure you that government agencies or other
entities enforcing licensure requirements would find our facilities in compliance with such
requirements.
All of our operating hospitals are certified under the Medicare program and are accredited by
either The Joint Commission or Det Norske Veritas (DNV), the effect of which is to permit the
facilities to participate in the Medicare and Medicaid programs. If any facility loses its
accreditation by either The Joint Commission or DNV, as applicable, the facility would be subject
to state surveys, potentially be subject to increased scrutiny by CMS and likely lose payment from
non-government payors. We intend to conduct our operations in compliance with current applicable
federal, state, local and independent review body regulations and standards, but we cannot assure
you that government agencies or other entities enforcing such requirements would find our
facilities in compliance with such requirements. Licensure, certification, or accreditation
requirements also may require notification or approval in the event of certain transfers or changes
in ownership or organization. Requirements for licensure, certification and accreditation are
subject to change and, in order to remain qualified, we may need to make changes in our facilities,
equipment, personnel and services.
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Utilization Review
Federal law contains numerous provisions designed to ensure that services rendered by
hospitals to Medicare and Medicaid patients meet professionally recognized standards and are
medically necessary and that claims for reimbursement are properly filed. These provisions include
a requirement that a sampling of admissions of Medicare and Medicaid patients be reviewed by
quality improvement organizations that analyze the appropriateness of Medicare and Medicaid patient
admissions and discharges, quality of care provided, validity of diagnosis related group
classifications and appropriateness of cases of extraordinary length of stay or cost. Quality
improvement organizations may deny payment for services provided, assess fines and recommend to the
Department that a provider not in substantial compliance with the standards of the quality
improvement organization be excluded from participation in the Medicare program. Most
non-governmental managed care organizations also require utilization review.
Federal and State Fraud and Abuse Provisions
Participation in any federal healthcare program, like Medicare, is regulated heavily by
statute and regulation. If a hospital provider fails to substantially comply with the numerous
conditions of participation in the Medicare or Medicaid program or performs specific prohibited
acts, the hospitals participation in the Medicare and Medicaid programs may be terminated or civil
or criminal penalties may be imposed upon it under provisions of the Social Security Act and other
statutes.
Among these statutes is a section of the Social Security Act known as the federal
anti-kickback statute. This law prohibits providers and others from soliciting, receiving, offering
or paying, directly or indirectly, any remuneration with the intent of generating referrals or
orders for services or items covered by a federal healthcare program. Courts have interpreted this
law 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. The Health
Reform Law further provides that knowledge of the law or intent to violate the law is not required
to establish a violation of the anti-kickback statute.
The
OIG has published final safe harbor regulations that outline categories of activities that are deemed
protected from prosecution under the anti-kickback statute. Currently there are safe harbors for
various activities, including the following: investment interests, space rental, equipment rental,
practitioner recruitment, personal services and management contracts, sale of practice, referral
services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary
coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance
subsidies, investments in group practices, ambulatory surgery centers, and referral agreements for
specialty services.
The fact that conduct or a business arrangement does not fall within a safe harbor does not
automatically render the conduct or business arrangement illegal under the anti-kickback statute.
The conduct or business arrangement, however, does risk increased scrutiny by government
enforcement authorities. We may be less willing than some of our competitors to take actions or
enter into business arrangements that do not clearly satisfy the safe harbors. As a result, this
unwillingness may put us at a competitive disadvantage.
The OIG, among other regulatory agencies, is responsible for identifying and eliminating
fraud, abuse and waste. The OIG carries out this mission through a nationwide program of audits,
investigations and inspections. In order to provide guidance to healthcare providers, the OIG has
from time to time issued fraud alerts that, although they do not have the force of law, identify
features of a transaction that may indicate that the transaction could violate the anti-kickback
statute or other federal healthcare laws. The OIG has identified several incentive arrangements as
potential violations, including:
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payment of any incentive by the hospital when a physician refers a patient to the
hospital; |
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use of free or significantly discounted office space or equipment for physicians in
facilities usually located close to the hospital; |
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provision of free or significantly discounted billing, nursing, or other staff
services; |
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free training for a physicians office staff, including management and laboratory
techniques; |
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guarantees that provide that, if the physicians income fails to reach a predetermined
level, the hospital will pay any portion of the remainder; |
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low-interest or interest-free loans, or loans that may be forgiven if a physician
refers patients to the hospital; |
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payment of the costs of a physicians travel and expenses for conferences or a
physicians continuing education courses; |
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coverage on the hospitals group health insurance plans at an inappropriately low cost
to the physician; |
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rental of space in physician offices, at other than fair market value terms, by persons
or entities to which physicians refer; |
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payment for services that require few, if any, substantive duties by the physician, or
payment for services in excess of the fair market value of the services rendered; or |
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gainsharing, the practice of giving physicians a share of any reduction in a
hospitals costs for patient care attributable in part to the physicians efforts. |
In addition to issuing fraud alerts, the OIG from time to time issues compliance program
guidance for certain types of healthcare providers. In January 2005, the OIG issued supplemental
compliance program guidance for hospitals. In the supplemental compliance guidance, the OIG
identifies areas of potential risk of liability under federal fraud and abuse statutes and
regulations. These areas of risk include compensation arrangements with physicians, recruitment
arrangements with physicians and joint venture relationships with physicians. The OIG recommends
structuring arrangements to fit squarely within a safe harbor.
We have a variety of financial relationships with physicians who refer patients to our
hospitals. As of October 1, 2010, physicians own interests in eight of our full service acute
care hospitals. We also have other joint venture relationships with physicians and contracts with
physicians providing for a variety of financial arrangements, including employment contracts,
leases and professional service agreements. We provide financial incentives to recruit physicians
to relocate to communities served by our hospitals, including minimum cash collections guarantees
and forgiveness of repayment obligations. Although we have established policies and procedures to
ensure that our arrangements with physicians comply with current law and available interpretations,
we cannot assure you that regulatory authorities that enforce these laws will not determine that
some of these arrangements violate the anti-kickback statute or other applicable laws. Violation of
the anti-kickback statute is a felony, and such a determination could subject us to liabilities
under the Social Security Act, including criminal penalties of imprisonment or fines, civil
penalties up to $50,000, damages up to three times the total amount of the improper payment to the
referral source and exclusion from participation in Medicare, Medicaid or other federal healthcare
programs, any of which could have a material adverse effect on our business, financial condition or
results of operations.
The Social Security Act also imposes criminal and civil penalties for submitting false claims
to Medicare and Medicaid. False claims include, but are not limited to, billing for services not
rendered, misrepresenting actual services rendered in order to obtain higher reimbursement and cost
report fraud. Like the anti-kickback statute, these provisions are very broad. Further, the Social
Security Act contains civil penalties for conduct including improper coding and billing for
unnecessary goods and services. Pursuant to the Health Reform Law, civil penalties may be imposed
for the failure to report and return an overpayment within 60 days of identifying the overpayment
or by the date a corresponding cost report is due, whichever is later. To avoid liability,
providers must, among other things, carefully and accurately code claims for reimbursement, as well
as accurately prepare cost reports.
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Some of these provisions, including the federal Civil Monetary Penalty Law, require a lower
burden of proof than other fraud and abuse laws, including the federal anti-kickback statute. Civil
monetary penalties that may be imposed under the federal Civil Monetary Penalty Law range from
$10,000 to $50,000 per act, and in some cases
may result in penalties of up to three times the remuneration offered, paid, solicited or
received. In addition, a violator may be subject to exclusion from federal and state healthcare
programs. Federal and state governments increasingly use the federal Civil Monetary Penalty Law,
especially where they believe they cannot meet the higher burden of proof requirements under the
federal anti-kickback statute.
HIPAA broadened the scope
of the fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses
that apply to all health benefit programs. This act also created new enforcement mechanisms to
combat fraud and abuse, including the Medicare Integrity Program and an incentive program under
which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse
that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement
officials now have the ability to exclude from Medicare and Medicaid any investors, officers and
managing employees associated with business entities that have committed healthcare fraud.
Additionally, this act establishes a violation for the payment of inducements to Medicare or
Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from
a particular provider or practitioner.
The Social Security Act also includes a provision commonly known as the Stark Law. This law
prohibits physicians from referring Medicare and Medicaid patients to entities with which they or
any of their immediate family members have a financial relationship for the provision of certain
designated health services that are reimbursable by Medicare or Medicaid, including inpatient and
outpatient hospital services. The law also prohibits the entity from billing the Medicare program
for any items or services that stem from a prohibited referral. Sanctions for violating the Stark
Law include civil monetary penalties up to $15,000 per item or service improperly billed and
exclusion from the federal healthcare programs. There are a number of exceptions to the
self-referral prohibition, including an exception for a physicians ownership interest in an entire
hospital, although the Health Reform Law significantly restricts this exception. There are also
exceptions for many of the customary financial arrangements between physicians and providers,
including employment contracts, leases, professional services agreements, non-cash gifts having a
value less than $355 (effective for calendar year 2010) and recruitment agreements. Unlike safe
harbors under the anti-kickback statute, with which compliance is voluntary, an arrangement must
comply with every requirement of the appropriate Stark Law exception or the arrangement is in
violation of the Stark Law. Further, intent does not have to be proven to establish a violation of
the Stark Law.
Through a series of rulemakings, CMS has issued final regulations implementing the Stark Law.
Additional changes to these regulations, which became effective October 1, 2009, further restrict
the types of arrangements that hospitals and physicians may enter, including restrictions on
certain leases, percentage compensation arrangements, and agreements under which a hospital
purchases services under arrangements. While these regulations help clarify the requirements of the
exceptions to the Stark Law, it is unclear how the government will interpret many of these
exceptions for enforcement purposes. CMS has indicated that it is considering additional changes to
the Stark Law regulations. We cannot assure you that the arrangements entered into by us and our
hospitals will be found to be in compliance with the Stark Law, as it ultimately may be implemented
or interpreted.
Historically the Stark Law has contained an exception, commonly referred to as the whole
hospital exception, allowing physicians to own an interest in an entire hospital, as opposed to an
interest in a hospital department. However, the Health Reform Law significantly narrows the Stark
Laws whole hospital exception. Specifically, the whole hospital exception will be available only
to hospitals that have physician ownership in place as of March 23, 2010 and a Medicare provider
agreement effective as of December 31, 2010. Thus, the Health Reform Law effectively prevents the
formation of new physician-owned hospitals. On November 2, 2010, CMS issued a final rule
implementing certain provisions of the amended whole hospital exception. While the amended whole
hospital exception grandfathers certain existing physician-owned hospitals, including ours, it
generally prohibits a grandfathered hospital from increasing its aggregate percentage of physician
ownership beyond the aggregate level that was in place as of March 23, 2010. Further, subject to
limited exceptions, a grandfathered physician-owned hospital may not increase its aggregate number of
operating rooms, procedure rooms, and beds for which it is licensed beyond the number as of March
23, 2010.
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The whole hospital exception, as amended, also contains additional disclosure requirements.
For example, a grandfathered physician-owned hospital is required to submit an annual report to the
Department listing each investor in the hospital, including all physician owners. In addition,
grandfathered physician-owned hospitals must have procedures in place that require each referring
physician owner to disclose to patients, with enough notice for
the patient to make a meaningful decision regarding receipt of care, the physicians ownership
interest and, if applicable, any ownership interest held by the treating physician. A
grandfathered physician-owned hospital also must disclose on its web site and in any public
advertising the fact that it has physician ownership. The Health Reform Law requires grandfathered
physician-owned hospitals to comply with these new requirements by September 23, 2011 and requires
the Department to audit hospitals compliance beginning no later than May 1, 2012.
In addition to the restrictions and disclosure requirements applicable to physician-owned
hospitals set forth in the Health Reform Law, CMS regulations require physician-owned hospitals and
their physician owners to disclose certain ownership information to patients. Physician-owned
hospitals that receive referrals from physician owners must disclose in writing to patients that
such hospitals are owned by physicians and that patients may receive a list of the hospitals
physician investors upon request. Additionally, a physician-owned hospital must require all
physician owners who are members of the hospitals medical staff to agree, as a condition of
continued medical staff membership or admitting privileges, to disclose in writing to all patients
whom they refer to the hospital their (or an immediate family members) ownership interest in the
hospital. A hospital is considered to be physician-owned if any physician, or an immediate family
member of a physician, holds debt, stock or other types of investment in the hospital or in any
owner of the hospital, excluding physician ownership through publicly traded securities that meet
certain conditions. If a hospital fails to comply with these regulations, the hospital could lose
its Medicare provider agreement and be unable to participate in Medicare.
Sanctions for violating the Stark Law include denial of payment, civil monetary penalties of
up to $15,000 per claim submitted and exclusion from the federal healthcare programs. The statute
also provides for a penalty of up to $100,000 for a scheme intended to circumvent the Stark Law
prohibitions.
Evolving interpretations of current, or the adoption of new, federal or state laws or
regulations could affect many of the arrangements entered into by each of our hospitals. In
addition, law enforcement authorities, including the OIG, the courts and Congress are increasing
scrutiny of arrangements between healthcare providers and potential referral sources to ensure that
the arrangements are not designed as a mechanism to improperly pay for patient referrals and or
other business. Investigators also have demonstrated a willingness to look behind the formalities
of a business transaction to determine the underlying purpose of payments between healthcare
providers and potential referral sources.
Many of the states in which we operate also have adopted laws that prohibit payments to
physicians in exchange for referrals similar to the federal anti-kickback statute or that otherwise
prohibit fraud and abuse activities. Many states also have passed self-referral legislation similar
to the Stark Law, prohibiting the referral of patients to entities with which the physician has a
financial relationship. Often these state laws are broad in scope and may apply regardless of the
source of payment for care. These statutes typically provide criminal and civil penalties, as well
as loss of licensure. Little precedent exists for the interpretation or enforcement of these state
laws.
Our operations could be adversely affected by the failure of our arrangements to comply with
the anti-kickback statute, the Stark Law, billing laws and regulations, current state laws or other
legislation or regulations in these areas adopted in the future. We are unable to predict whether
other legislation or regulations at the federal or state level in any of these areas will be
adopted, what form such legislation or regulations may take or how they may affect our operations.
We are continuing to enter into new financial arrangements with physicians and other providers in a
manner structured to comply in all material respects with these laws. We cannot assure you,
however, that governmental officials responsible for enforcing these laws or whistleblowers will
not assert that we are in violation of them or that such statutes or regulations ultimately will be
interpreted by the courts in a manner consistent with our interpretation.
The Federal False Claims Act and Similar State Laws
Another trend affecting the healthcare industry today is the increased use of the federal
False Claims Act (FCA) and, in particular, actions being brought by individuals on the
governments behalf under the FCAs qui tam or whistleblower provisions. Whistleblower provisions
allow private individuals to bring actions on behalf of the government alleging that the defendant
has defrauded the federal government. If the government intervenes in the action and prevails, the
party filing the initial complaint may share in any settlement or judgment. If the government does
not intervene in the action, the whistleblower plaintiff may pursue the action independently and
may receive a larger share of any settlement or judgment. When a private party brings a qui
tam action under the FCA, the defendant generally will not be made aware of the lawsuit until the
government commences its own investigation or makes a determination whether it will intervene.
Further, every entity that receives at least $5.0 million annually in Medicaid payments must have
written policies for all employees, contractors or agents, providing detailed information about
false claims, false statements and whistleblower protections under certain federal laws, including
the FCA, and similar state laws.
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When a defendant is determined by a court of law to be liable under the FCA, the defendant
must pay three times the actual damages sustained by the government, plus mandatory civil penalties
of between $5,500 to $11,000 for each separate false claim. Settlements entered into prior to
litigation usually involve a less severe calculation of damages. There are many potential bases for
liability under the FCA. Liability often arises when an entity knowingly submits a false claim for
reimbursement to the federal government. The FCA broadly defines the term knowingly. Although
simple negligence will not give rise to liability under the FCA, submitting a claim with reckless
disregard to its truth or falsity can constitute knowingly submitting a false claim and result in
liability. In some cases, whistleblowers, the federal government and courts have taken the position
that providers who allegedly have violated other statutes, such as the anti-kickback statute or the
Stark Law, have thereby submitted false claims under the FCA. The Health Reform Law clarifies this
issue with respect to the anti-kickback statute by providing that submission of a claim for an item
or service generated in violation of the anti-kickback statute constitutes a false or fraudulent
claim under the FCA. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA
by, among other things, creating liability for knowingly and improperly avoiding repayment of an
overpayment received from the government and broadening protections for whistleblowers. Under the
Health Reform Law, the FCA is implicated by the knowing failure to report and return an overpayment
within 60 days of identifying the overpayment or by the date a corresponding cost report is due,
whichever is later. Further, the FCA will cover payments involving federal funds in connection
with the new health insurance exchanges to be created pursuant to the Health Reform Law.
A number of states, including states in which we operate, have adopted their own false claims
provisions as well as their own whistleblower provisions whereby a private party may file a civil
lawsuit in state court. DEFRA creates an incentive for states to enact false claims laws that are
comparable to the FCA. From time to time, companies in the healthcare industry, including ours, may
be subject to actions under the FCA or similar state laws.
Corporate Practice of Medicine/Fee Splitting
Certain of the states in which we operate have laws that prohibit unlicensed persons or business
entities, including corporations, from employing physicians or laws that prohibit certain direct or
indirect payments or fee-splitting arrangements between physicians and unlicensed persons or
business entities. Possible sanctions for violations of these restrictions include loss of a
physicians license, civil and criminal penalties and rescission of business arrangements that may
violate these restrictions. These statutes vary from state to state, are often vague and seldom
have been interpreted by the courts or regulatory agencies. Although we exercise care to structure
our arrangements with healthcare providers to comply with relevant state laws, we cannot assure you
that governmental officials responsible for enforcing these laws will not assert that we, or
transactions in which we are involved, are in violation of such laws, or that such laws ultimately
will be interpreted by the courts in a manner consistent with our interpretations.
HIPAA Administrative Simplification and Privacy and Security Requirements
HIPAA requires the use of uniform electronic data transmission standards for healthcare claims
and payment transactions submitted or received electronically. These provisions are intended to
encourage electronic commerce in the healthcare industry. The Department has established electronic
data transmission standards that all healthcare providers must use when submitting or receiving
certain healthcare transactions electronically. In addition, HIPAA requires that each provider use
a National Provider Identifier. In January 2009, CMS published a final rule making changes to the
formats used for certain electronic transactions and requiring the use of updated standard code
sets for certain diagnoses and procedures known as ICD-10 code sets. Although use of the ICD-10
code sets is not mandatory until October 1, 2013, we will be modifying our payment systems and
processes to prepare for their implementation. Use of the ICD-10 code sets will require significant
changes; however, we believe that the cost of compliance with these regulations has not had and is
not expected to have a material adverse effect on our business,
financial position or results of operations. The Health Reform law requires the Department to
adopt standards for additional electronic transactions and to establish operating rules to promote
uniformity in the implementation of each standardized electronic transaction.
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As required by HIPAA, the Department has issued privacy and security regulations that
extensively regulate the use and disclosure of individually identifiable health-related information
and require healthcare providers to implement administrative, physical and technical practices to
protect the security of individually identifiable health information that is electronically
maintained or transmitted. ARRA broadens the scope of the HIPAA privacy and security regulations.
In addition, ARRA extends the application of certain provisions of the security and privacy
regulations to business associates (entities that handle identifiable health-related information on
behalf of covered entities) and subjects business associates to civil and criminal penalties for
violation of the regulations. On July 14, 2010, the Department issued a proposed rule that would
implement these ARRA provisions. If finalized, these changes would likely require amendments to
existing agreements with business associates and would subject business associates and their
subcontractors to direct liability under the HIPAA privacy and security regulations. We have
developed and utilize a HIPAA compliance plan as part of our effort to comply with HIPAA privacy
and security requirements. The privacy regulations and security regulations have and will continue
to impose significant costs on our facilities in order to comply with these standards.
As required by ARRA, the Department published an interim final rule on August 24, 2009, that
requires covered entities to report breaches of unsecured protected health information to affected
individuals without unreasonable delay, but not to exceed 60 days of discovery of the breach by the
covered entity or its agents. Notification must also be made to the Department and, in certain
situations involving large breaches, to the media. Various state laws and regulations may also
require us to notify affected individuals in the event of a data breach involving individually
identifiable information.
Violations of the HIPAA privacy and security regulations may result in civil and criminal
penalties, and ARRA has strengthened the enforcement provisions of HIPAA, which may result in
increased enforcement activity. Under ARRA, the Department is required to conduct periodic
compliance audits of covered entities and their business associates. ARRA broadens the
applicability of the criminal penalty provisions to employees of covered entities and requires the
Department to impose penalties for violations resulting from willful neglect. ARRA significantly
increases the amount of the civil penalties, with penalties of up to $50,000 per violation for a
maximum civil penalty of $1,500,000 in a calendar year for violations of the same requirement.
Further, ARRA authorizes state attorneys general to bring civil actions seeking either injunction
or damages in response to violations of HIPAA privacy and security regulations that threaten the
privacy of state residents. Our facilities also are subject to any federal or state privacy-related
laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary and
could impose additional penalties.
There are numerous other laws and legislative and regulatory initiatives at the federal and
state levels addressing privacy and security concerns. For example, in October 2007, the Federal
Trade Commission issued a final rule requiring financial institutions and creditors, which
arguably included
hospitals and other healthcare providers, to implement written identity theft prevention
programs to detect, prevent, and mitigate identity theft in connection with certain accounts. The
enforcement date for this rule has been postponed until December 31, 2010. In addition, Congress
recently has passed legislation that would restrict the definition of a creditor and may exempt
many hospitals from complying with the rule.
The Emergency Medical Treatment and Active Labor Act
The Federal Emergency Medical Treatment and Active Labor Act (EMTALA) was adopted by
Congress in response to reports of a widespread hospital emergency room practice of patient
dumping. At the time of the enactment, patient dumping was considered to have occurred when a
hospital capable of providing the needed care sent a patient to another facility or simply turned
the patient away based on such patients inability to pay for his or her care. The law imposes
requirements upon physicians, hospitals and other facilities that provide emergency medical
services. Such requirements pertain to what care must be provided to anyone who comes to such
facilities seeking care before they may be transferred to another facility or otherwise denied
care. The government broadly interprets the law to cover situations in which patients do not
actually present to a hospitals emergency department, but
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present to a hospital-based clinic that
treats emergency medical conditions on an urgent basis or are
transported in a hospital-owned ambulance, subject to certain exceptions. At least one court has
interpreted the law also to apply to a hospital that has been notified of a patients pending
arrival in a non-hospital owned ambulance. Sanctions for violations of this statute include
termination of a hospitals Medicare provider agreement, exclusion of a physician from
participation in Medicare and Medicaid programs and civil money penalties. In addition, the law
creates private civil remedies that enable an individual who suffers personal harm as a direct
result of a violation of the law, and a medical facility that suffers a financial loss as a direct
result of another participating hospitals violation of the law, to sue the offending hospital for
damages and equitable relief. We can give no assurance that governmental officials responsible for
enforcing the law, individuals or other medical facilities will not assert from time to time that
our facilities are in violation of this statute.
Conversion Legislation
Many states have enacted or are considering enacting laws affecting the conversion or sale of
not-for-profit hospitals. These laws generally include provisions relating to attorney general
approval, advance notification and community involvement. In addition, attorneys general in states
without specific conversion legislation may exercise authority over these transactions based upon
existing law. In many states, there has been an increased interest in the oversight of
not-for-profit conversions. The adoption of conversion legislation and the increased review of
not-for-profit hospital conversions may increase the cost and difficulty or prevent the completion
of transactions with or acquisitions of not-for-profit organizations in various states.
Healthcare Industry Investigations
Significant media and public attention has focused in recent years on the hospital industry.
Recently, increased attention has been paid by government investigators as well as private parties
pursuing civil lawsuits to the amounts charged by hospitals to uninsured and indigent patients and
the related collection practices of hospitals. Other current areas of interest include hospitals
with high Medicare outlier payments and recruitment arrangements with physicians. Further, there
are numerous ongoing federal and state investigations regarding multiple issues that have targeted
hospital companies as well as their executives and managers. We have substantial Medicare, Medicaid
and other governmental billings, which could result in heightened scrutiny of our operations. We
continue to monitor these and all other aspects of our business and have developed a compliance
program to assist us in gaining comfort that our business practices are consistent with both legal
principles and current industry standards. However, because the law in this area is complex and
constantly evolving, we cannot assure you that government investigations will not result in
interpretations that are inconsistent with industry practices, including ours. In public statements
surrounding current investigations, governmental authorities have taken positions on a number of
issues, including some for which little official interpretation previously has been available, that
appear to be inconsistent with practices that have been common within the industry and that
previously have not been challenged in this manner. In some instances, government investigations
that have in the past been conducted under the civil provisions of federal law may now be conducted
as criminal investigations. Additionally, the federal government has indicated that it plans to
expand its use of civil monetary penalties and Medicare program exclusions to focus on those in the
healthcare industry who accept kickbacks or present false claims, in addition to the federal
governments continuing efforts to focus on the companies that offer or pay kickbacks. Failure to
comply with applicable laws and regulations could subject us to significant regulatory action,
including fines, penalties and exclusion from the Medicare and Medicaid programs.
Many current healthcare investigations are national initiatives in which federal agencies
target an entire segment of the healthcare industry. One example is the federal governments
initiative regarding hospital providers improper requests for separate payments for services
rendered to a patient on an outpatient basis within three days prior to the patients admission to
the hospital, where reimbursement for such services is included as part of the reimbursement for
services furnished during an inpatient stay. In particular, the government has targeted all
hospital providers to ensure conformity with this reimbursement rule. Further, the federal
government continues to investigate Medicare overpayments to prospective payment hospitals that
incorrectly report transfers of patients to other prospective payment system hospitals as
discharges. We are aware that prior to our acquisition of them, several of our hospitals were
contacted in relation to certain government investigations that were targeted at an entire segment
of the healthcare industry. Although we take the position that, under the terms of the acquisition
agreements, the prior owners of these hospitals retained any liability resulting from these
government investigations, we cannot assure you
that the prior owners resolution of these matters or failure to resolve these matters, in the
event that any resolution was deemed necessary, will not have a material adverse effect on our
operations.
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The Health Reform Law allocates $350.0 million of additional federal funding over the next 10
years to fight healthcare fraud, waste and abuse, including $95.0 million for federal fiscal year
2011, $55.0 million for federal fiscal year 2012 and additional increased funding through 2016. In
addition, government agencies and their agents, including Medicare Administrative Contractors, may
conduct audits of our healthcare operations. Private payors may conduct similar audits, and we
also perform internal audits and monitoring.
Certificates of Need
In some states, the construction of new facilities, acquisition of existing facilities or
addition of new beds or services may be subject to review by state regulatory agencies under a
certificate of need program. Florida and Nevada are the only states in which we currently operate
that require approval of acute care hospitals under a certificate of need program. These laws
generally require appropriate state agency determination of public need and approval prior to the
addition of beds or services or other capital expenditures. Failure to obtain necessary state
approval can result in the inability to expand facilities, add services and complete an acquisition
or change ownership. Further, violation may result in the imposition of civil sanctions or the
revocation of a facilitys license.
Environmental Matters
We are subject to various federal, state and local environmental laws and regulations,
including those relating to the protection of human health and the environment. The principal
environmental requirements applicable to our operations relate to:
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the proper handling and disposal of medical waste, hazardous waste and low-level
radioactive medical waste; |
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the proper use, storage and handling of mercury and other hazardous materials; |
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underground and above-ground storage tanks; |
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management of hydraulic fluid or oil associated with elevators, chiller units or other
equipment; |
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management of asbestos-containing materials or lead-based paint present or likely to be
present at some locations; and |
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air emission permits and standards for boilers or other equipment. |
We do not expect our obligations under these or other applicable environmental laws and
requirements to have a material effect on us. In the course of our operations, we may also identify
other circumstances at our facilities, such as water intrusion or the presence of mold or fungus,
which warrant action, and we can and do incur additional costs to address those circumstances.
Under various environmental laws, we may also be required to clean up or contribute to the cost of
cleaning up substances that have been released to the environment either at properties owned or
operated by us or our predecessors or at properties to which substances from our operations were
sent for off-site treatment or disposal. These remediation obligations may be imposed without
regard to fault, and liability for environmental remediation can be substantial. While we cannot
predict whether or to what extent we might be held responsible for such cleanup costs in the
future, at present we have not identified any significant cleanup costs or liabilities that are
expected to have a material effect on us.
Professional and General Liability Insurance
As is typical in the healthcare industry, we are subject to claims and legal actions by
patients in the ordinary course of business. To cover these claims, we maintain professional
malpractice liability insurance and general liability insurance in amounts that we believe to be
sufficient for our operations, including our employed physicians, although some claims may exceed
the scope of the coverage in effect. We also maintain umbrella coverage. Losses up to our
self-insured retentions and any losses incurred in excess of amounts maintained under such
insurance will be funded from working capital.
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For
fiscal 2011, our self-insured retention for professional and general
liability coverage remains unchanged at $5.0 million per claim, with an excess aggregate limit of
$55.0 million, and maximum coverage under our insurance
policies of $75.0 million. Our self-insurance reserves for
estimated claims incurred but not yet reported is based upon estimates determined by third-party
actuaries. Funding for the self-insured retention of such claims is derived from operating cash
flows. We cannot assure you that this insurance will continue to be available at reasonable prices
that will allow us to maintain adequate levels of coverage. We also cannot assure you that our cash
flow will be adequate to provide for professional and general liability claims in the future.
Our Information Systems
We use a common information systems platform across all of our hospitals. We use McKessons
clinical, patient accounting, laboratory, radiology and decision support software and Lawsons
financial application and enterprise resource planning software. We use other vendors for
specialized information systems needs for our decision support, emergency and radiology
departments.
Our information systems are essential to the following areas of our business operations, among
others:
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patient accounting, including billing and collection of net revenue; |
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financial, accounting, reporting and payroll; |
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laboratory, radiology and pharmacy systems; |
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materials and asset management; |
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negotiating, pricing and administering our managed care contracts; and |
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monitoring of quality of care and collecting data on quality measures necessary for
full Medicare payment updates. |
Utilizing a common information systems platform across all our hospitals allows us to:
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enhance patient safety, automate medication administration and increase staff time
available for direct patient care; |
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optimize staffing levels according to patient volumes, acuity and seasonal needs at
each facility; |
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perform product line analyses; |
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continue to meet or exceed quality of care indicators on a current basis; |
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effectively monitor registration, billing, collections, managed care contract
compliance and all other aspects of our revenue cycle; |
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control supply costs by complying with our group purchasing organization contract; and |
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effectively monitor financial results. |
The cost of maintaining our information systems has increased significantly in recent years.
Information systems maintenance expense increased $1.0 million to $9.0 million for the fiscal year
ended September 30, 2010, as compared to the prior year. We expect the trend of increased
maintenance costs in this area to continue in the future.
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ARRA included approximately $26.0 billion in funding for various healthcare information
technology (IT) initiatives, including incentives for
hospitals and physicians to implement EHR - compatible systems.
Implementation of these IT initiatives has been divided into three stages, with stage 1 requiring satisfaction in the 2012 year. Stage 1 requires providers and physicians to meet meaningful use standards which include electronically capturing health information in structured format,
tracking key clinical conditions for coordination of care purposes, implementing clinical decision support tools to facilitate disease and medication management, using EHRs to engage patients and families, and reporting clinical quality measures and public health information.
We have currently spent a total of $16.6 million towards meeting the meaningful use standards.
Though additional investments in hardware and software will be required,
we believe our historical capital investments in advanced clinicals and other information systems,
as well as quality of care programs, provides a solid platform to build upon for timely compliance
with the healthcare IT requirements of ARRA.
Employees and Medical Staff
As of September 30, 2010, we had 12,041 employees, including 3,431 part-time employees. We
consider our employee relations to be good. We recruit and retain nurses and medical support
personnel by creating a desirable, professional work environment, providing competitive wages,
benefits and long-term incentives, and providing career development and other training programs. In
order to supplement our current employee base, we have expanded our relationship with local
colleges and universities, including our sponsorship of nursing scholarship programs, in our
markets.
Our hospitals are staffed by licensed physicians who have been admitted to the medical staff
of our individual hospitals. Any licensed physician may apply to be admitted to the medical staff
of any of our hospitals, but admission to the staff must be approved by each hospitals medical
staff and the appropriate governing board of the hospital in accordance with established
credentialing criteria. In an effort to meet community needs in certain markets in which we
operate, we have implemented a strategy of employing physicians, with an emphasis on those
practicing within certain specialties. While we believe this strategy is consistent with industry
trends, we cannot be assured of the long-term success of such a strategy, which includes related
integration of physician practice management.
Compliance Program
Our compliance program is designed to ensure that we maintain high standards of conduct in the
operation of our business and implement policies and procedures so that employees act in compliance
with all applicable laws, regulations and company policies. The organizational structure of our
compliance program includes a compliance committee of our board of directors, a corporate
management compliance committee and local management compliance committees at each of our
hospitals. These committees have the oversight responsibility for the effective development and
implementation of our program. Our Vice President of Ethics and Business Practices, who reports
directly to our Chief Executive Officer and to the compliance committee of our board
of directors, serves as Chief Compliance Officer and is charged with direct responsibility for the
development and implementation of our compliance program. Other features of our compliance program
include the designation of a Regional Compliance Officer for each of our hospitals, periodic ethics
and compliance training and effectiveness reviews, the development and implementation of policies
and procedures, including a mechanism for employees to report, without fear of retaliation, any
suspected legal or ethical violations.
Item 1A. Risk Factors.
Risks Related to Our Business
If We Are Unable To Retain And Negotiate Reasonable Contracts With Managed Care Plans, Our Net
Revenue May Be Reduced.
Our ability to obtain reasonable contracts with health maintenance organizations, preferred
provider organizations and other managed care plans significantly affects the revenue and operating
results of our hospitals. Revenue derived from health maintenance organizations, preferred provider
organizations and other managed care plans accounted for 40.2%, 43.0% and 46.0% of our hospitals
net patient revenue for the years ended September 30, 2010, 2009 and 2008, respectively. Our
hospitals have over 300 managed care contracts with no one commercial payor representing more than
10.0% of our net patient revenue. In most cases, we negotiate our managed care contracts annually
as they come up for renewal at various times during the year. Further, many of these contracts are
terminable by either party on relatively short notice. Our future success will depend, in part, on
our ability to retain and renew our
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managed care contracts and enter into new managed care
contracts on terms favorable to us. Other healthcare providers, including some with integrated health systems, provider networks,
greater geographic coverage or a wider range of services, may impact our ability to enter into
managed care contracts or negotiate increases in our reimbursement and other favorable terms and
conditions. For example, some of our competitors may negotiate exclusivity provisions with managed
care plans or otherwise restrict the ability of managed care companies to contract with us. In one
region in which we operate, the largest healthcare provider organization controls one of the
largest payor organizations and operates it primarily as a closed network. The patients enrolled in
this integrated health system are largely unavailable to us. In addition, consolidation among
managed care companies may reduce our ability to negotiate favorable contracts with such
payors. It is not clear what impact, if any, the increased obligations on managed care
and other payors imposed by the Health Reform Law will have on our ability to negotiate
reimbursement increases. If we are unable to retain and negotiate favorable contracts with managed
care plans or experience reductions in payment increases or amounts received from nongovernmental
payors, our revenues may be reduced.
We Are Unable to Predict The Impact Of The Health Reform Law, Which Represents Significant
Change To The Healthcare Industry.
The
Health Reform Law represents significant change across the healthcare
industry. As enacted, the Health Reform Law will decrease the number of uninsured individuals by expanding coverage to
additional individuals through a combination of public program expansion and private sector health
insurance reforms. The Health Reform Law expands eligibility under existing Medicaid programs and
subsidizes states that create non-Medicaid plans for certain residents that do not qualify for
Medicaid. Further, the Health Reform Law requires states to establish health insurance exchanges
to facilitate the purchase of health insurance by individuals and small businesses. It also
imposes financial penalties on individuals who fail to carry insurance coverage and certain
employers that do not provide health insurance coverage. However, a federal district court recently ruled
that the requirement for individuals to carry health insurance is unconstitutional.
This ruling is subject to appeal. The Health Reform Law also establishes a
number of health insurance market reforms, including a ban on lifetime limits and pre-existing
condition exclusions, new benefit mandates, and increased dependent coverage. Although the
expansion of health insurance coverage should increase revenues from providing care to certain
previously uninsured individuals, many of these provisions of the Health Reform Law will not become
effective until 2014 or later.
The Health Reform Law could adversely affect our business and results of operations due to
provisions of the Health Reform Law that are intended to reduce Medicare and Medicaid healthcare
costs. Among other things, the Health Reform Law will reduce market basket updates, reduce
Medicare and Medicaid DSH funding, and expand efforts to tie payments to quality and integration.
Any decrease in payment rates or an increase in rates that is below our increase in costs may
adversely affect our results of operations. The Health Reform Law also provides additional
resources to combat fraud, waste, and abuse, including expansion of the RAC program, which may
result in increased costs for us to appeal or refund any alleged overpayments.
The Health Reform Law contains additional 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 any
HACs. Further, effective in federal fiscal year 2013, hospitals with excessive readmissions for
conditions designated by the Department will receive reduced payments for all inpatient discharges,
not just discharges relating to the conditions subject to the excessive readmission standard.
Beginning in federal fiscal year 2015, hospitals that fall into the highest 25% of national
risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their
total Medicare payments. The Health Reform Law also requires the Department to implement a
value-based purchasing system for hospitals that will provide incentive payments to hospitals that
meet or exceed certain quality performance standards and that will be funded through decreases in
the inpatient prospective payment system market basket updates to all hospitals beginning in
federal fiscal year 2013.
As
enacted, the Health Reform Law will change how healthcare services are covered, delivered, and
reimbursed. Because of the many variables involved, we are unable to predict the net effect on our
operations of the expected increases in insured individuals using our facilities, the reductions in
government healthcare spending, and numerous other provisions in the Health Reform Law that may
affect us. Furthermore, we are unable to predict how providers, payors, and other market
participants will respond to the various reform provisions, many of which will not be implemented
for several years. There may be legislative efforts to delay
implementation of, repeal or amend the Health Reform Law. In addition, implementation of these provisions
could be delayed or even blocked due to court challenges. It is unclear how federal lawsuits challenging
the constitutionality of the Health Reform Law will be resolved or what the impact will be of any
resulting changes to the law. For example, should the requirement that individuals maintain health insurance
ultimately be deemed unconstitutional but the prohibition on health insurers excluding coverage due to
pre-existing conditions be maintained, significant disruption to the health insurance industry could result,
which could impact our revenues and operations.
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Changes In Governmental Healthcare Programs May Reduce Our Revenues.
Governmental healthcare programs, principally Medicare and Medicaid, including managed
Medicare and managed Medicaid, accounted for 47.6%, 45.9% and 44.9% of our hospitals net patient
revenue for the years ended September 30, 2010, 2009 and 2008, respectively. However, in recent
years legislative and regulatory changes have limited, and in some cases reduced, the levels of
payments that our hospitals receive for various services under the Medicare, Medicaid and other
federal healthcare programs. For example, CMS has completed its transition to the MS-DRG system,
which represents a refinement to the pre-existing diagnosis-related group system. Future changes
to the MS-DRG system could impact the margins we receive for certain services. Further, the Health
Reform Law provides for material reductions in the growth of Medicare program spending, including
reductions in Medicare market basket updates and Medicare DSH funding. Medicare payments in
federal fiscal year 2011 for inpatient hospital services are expected to be slightly lower than
payments for the same services in federal fiscal year 2010 because of reductions resulting from the
Health Reform Law and the MS-DRG implementation.
In some cases, commercial third-party payors and other payors, such as some state Medicaid
programs, rely on all or portions of the Medicare MS-DRG system to determine payment rates, and
therefore, adjustments that negatively impact Medicare payments may also negatively impact payments
from Medicaid programs or commercial third-party payors and other payors.
In addition, from time to time, state legislatures consider measures to reform healthcare
programs and coverage within their respective states. Because of economic conditions and other
factors, a number of states are experiencing budget problems and have adopted or are considering
legislation designed to reduce their Medicaid expenditures, including enrolling Medicaid recipients
in managed care programs and imposing additional taxes on hospitals to help finance or expand
states Medicaid systems. The states in which we operate have decreased funding for healthcare
programs or made other structural changes resulting in a reduction in Medicaid hospital rates in
recent years. 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. The Health Reform Law provides for significant expansion of
the Medicaid program, but these changes are not required until 2014.
We believe that hospital operating margins across the country, including ours, have been and
may continue to be under pressure because of limited pricing flexibility and growth in operating
expenses in excess of the increase in payments under the Medicare and other governmental
programs. Current or future healthcare reform efforts, additional changes in laws or regulations
regarding government health programs, or other changes in the administration of government health
programs could have a material, adverse effect on our financial position and results of operations.
Our Hospitals Face Competition For Patients From Other Hospitals And Healthcare Providers That
Could Impact Patient Volume.
In general, the hospital industry is highly competitive. Our hospitals face competition for
patients from other hospitals in our markets, large vertically integrated providers, large tertiary
care centers and outpatient service providers that provide similar services to those provided by
our hospitals. All of our facilities are located in geographic areas in which at least one other
hospital provides services comparable to those offered by our hospitals. Some of the hospitals that
compete with ours are owned by governmental agencies or not-for-profit corporations supported by
endowments and charitable contributions and can finance capital expenditures and operations on a
tax-exempt basis. In addition, the number of freestanding specialty hospitals, outpatient surgery
centers and outpatient diagnostic centers has increased significantly in the areas in which we
operate. Some of our competitors also have greater geographic coverage, offer a wider range of
services or invest more capital or other resources than we do. If our competitors are able to
achieve greater geographic coverage, improve access and convenience to physicians and
patients, recruit physicians to provide competing services at their facilities, expand or
improve their services or obtain more favorable managed care contracts, we may experience a decline
in patient volume.
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CMS publicizes performance data relating to quality measures that hospitals submit in
connection with their Medicare reimbursement. Further, the Health Reform Law requires all hospitals
annually to establish, update and make public a list of their standard charges for items and
services. If any of our hospitals should achieve poor results (or results that are lower than our
competitors) on these quality criteria, or if our standard charges are higher than those published
by our competitors, our patient volumes could decline. In the future, other trends toward clinical
transparency and value-based purchasing of healthcare services may have an adverse impact on our
competitive position and patient volume.
If We Continue To Experience A Shift in Payor Mix From Commercial And Managed Care Payors To
Medicaid and Managed Medicaid, Our Revenue and Results Of Operations Could Be
Adversely Affected.
We have experienced a shift in our patient volumes and revenue from commercial and managed
care payors to Medicaid and managed Medicaid. This has resulted in margin pressures from
expending the same amount of resources for patient care, but for less reimbursement. This shift is
reflective of continued high unemployment and the resulting increases in states Medicaid
rolls. The decline in managed care volume and revenue is not only indicative of the depressed
labor market, but also utilization behavior of the insured population resulting from higher
deductible and co-insurance plans from employers which, in turn, has resulted in delays or deferral
of elective and non-emergent procedures. Given the high rate of unemployment and its impact on the
economy, particularly in the markets we serve, we expect the increase in our Medicaid and managed
Medicaid payor mixes to continue until the U.S. economy experiences an economic recovery that
includes job growth and declining unemployment.
If We Experience Further Growth In Volume And Revenue Related To Uncompensated Care, Our
Financial Condition Or Results Of Operations Could Be Adversely Affected.
Like others in the hospital industry, we have experienced increased levels of uncompensated
care, including charity care and our provision for bad debts. Our provision for bad debts and
charity care as a percentage of acute care revenue has increased in recent years due to a growth in
self-pay volume and revenue resulting in large part from an increase in the number of uninsured
patients, along with an increase in the amount of co-payments and deductibles passed on by
employers to employees. In addition, as a result of the recent economic downturn and high levels
of unemployment, we believe that our hospitals may continue to experience growth in bad debts and
charity care. While the Health Reform Law seeks to decrease over time the number of uninsured
individuals through expanding Medicaid and incentivizing employers to offer, and requiring
individuals to carry, health insurance or be subject to penalties, these provisions, as enacted, generally will
not become effective until January 1, 2014. 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 and potentially delayed implementation,
pending court challenges and possible amendment, as well as our
inability to foresee how individuals and businesses will respond to the choices afforded them under
the law. We may continue to provide charity care to those who choose not to comply with the
insurance requirements and undocumented aliens who are not permitted to enroll in a health
insurance exchange or government healthcare programs. Further, a
federal district court recently ruled that the requirement for individuals to carry health
insurance is unconstitutional. The ruling is subject to appeal. 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 further growth in self-pay volume and revenue, our results
of operations could be adversely affected. Further, our ability to improve collections from
self-pay patients may be limited by regulatory and investigatory initiatives, including private
lawsuits directed at hospital charges and collection practices for uninsured and underinsured
patients.
If We Are Unable To Attract And Retain Quality Medical Staffs, Our Financial Condition Or
Results Of Operations Could Be Adversely Affected.
The success of our hospitals depends on the following factors, among others:
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the number and quality of the physicians on the medical staffs of our hospitals; |
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the admitting practices of those physicians; and |
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our maintenance of good relations with those physicians. |
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Our efforts to attract and retain physicians are affected by our managed care contracting
relationships, national shortages in some specialties, such as anesthesiology and radiology, the
adequacy of our support personnel, the condition of our facilities and medical equipment, the
availability of suitable medical office space and federal and state laws and regulations
prohibiting financial relationships that may have the effect of inducing patient referrals.
In an effort to meet community needs in certain markets in
which we operate, we have
implemented a strategy to employ physicians, which has created an
expansion of our employed physician base. The execution of a physician
employment strategy includes increased salary costs, potential malpractice insurance coverage
costs, risks of unsuccessful physician integration and difficulties associated with physician
practice management. While we believe this strategy is consistent with industry trends, we cannot
be assured of the long-term success of such a strategy.
Our Hospitals Face Competition For Staffing, Which May Increase Our Labor Costs And Reduce
Profitability.
We compete with other healthcare providers in recruiting and retaining qualified management
and staff personnel responsible for the day-to-day operations of each of our hospitals, including
nurses and other non-physician healthcare professionals. In the past, the limited supply of nurses
and other medical support personnel presented a significant operating issue. In part, due to the
current economic downturn, we have seen an improvement in the availability of nursing personnel
and other skilled labor. If such a shortage were to occur again, it may require us to enhance wages
and benefits to recruit and retain nurses and other medical support personnel and contract with
more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and
unskilled employees in each of the markets in which we operate. Because a significant percentage of
our revenue consists of fixed, prospective payments, our ability to pass along increased labor
costs to third-party payors is constrained. Our failure to recruit and retain qualified management,
nurses and other medical support personnel, or to control our labor costs could have a material
adverse effect on our financial condition or results of operations.
If We Fail To Continually Enhance Our Hospitals With The Most Recent Technological Advances In
Diagnostic And Surgical Equipment, Our Ability To Maintain And Expand Our Markets May Be Adversely
Affected.
Technological
advances with respect to computed axial tomography (CT), magnetic resonance
imaging (MRI) and positron emission tomography
(PET) equipment, as well as other equipment used in
our facilities, are continually evolving. In an effort to compete with other healthcare providers,
we must constantly be evaluating our equipment needs and upgrading equipment as a result of
technological improvements. Such equipment costs typically range from $1.0 million to $3.0 million,
exclusive of construction or build-out costs. If we fail to remain current with the technological
advancements of the medical community, our volumes and revenue may be negatively impacted.
If We Fail To Comply With Extensive Laws And Government Regulations, We Could Suffer
Penalties, Be Required To Alter Arrangements With Investors In Our Hospitals Or Be Required To Make
Significant Changes To Our Operations.
The healthcare industry, including our company, is required to comply with extensive and
complex laws and regulations at the federal, state and local government levels relating to, among
other things:
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billing and coding for services and proper handling of overpayments; |
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relationships with physicians and other referral sources; |
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adequacy of medical care; |
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quality of medical equipment and services; |
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qualifications of medical and support personnel; |
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confidentiality, maintenance, data breach, identity theft and security issues
associated with individually identifiable information and medical records; |
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the screening, stabilization and transfer of patients who have emergency medical
conditions; |
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licensure and certification; |
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hospital rate or budget review; |
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preparing and filing of cost reports; |
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activities regarding competitors; |
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operating policies and procedures; |
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addition of facilities and services; |
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provider-based reimbursement, including complying with requirements allowing multiple
locations of a hospital to be billed under the hospitals Medicare provider number; and |
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disclosures to patients, including disclosure of any physician ownership in a hospital. |
Because many of these laws and regulations are relatively new, we do not always have the
benefit of significant regulatory or judicial interpretation of these laws and regulations. For
that reason and because these laws and regulations are so complex, hospital companies face a risk
of inadvertent violations. In the future, different interpretations or enforcement of these laws
and regulations could subject our current or past practices to allegations of impropriety or
illegality or could require us to make changes in our facilities, equipment, personnel, services,
capital expenditure programs and operating expenses.
If we fail to comply with applicable laws and regulations, we could be subjected to
liabilities, including:
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civil penalties, including the loss of our licenses to operate one or more of our
facilities; and |
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exclusion of one or more of our facilities from participation in the Medicare, Medicaid
and other federal and state healthcare programs. |
The Health Reform Law Imposes Significant New Restrictions On Hospitals That Have Physician
Owners, Including Our Hospitals That Have Physician Owners.
Some of our hospitals have physician ownership pursuant to an exception to the Stark Law known
as the whole hospital exception. However, the Health Reform Law significantly narrows the Stark
Laws whole hospital exception to apply only to hospitals that have physician ownership in place as
of March 23, 2010 and a Medicare provider agreement effective as of December 31, 2010. On November
2, 2010, CMS issued a final rule implementing certain provisions of the amended whole hospital
exception. While the amended whole hospital exception grandfathers certain existing
physician-owned hospitals, including ours, it generally prohibits a grandfathered hospital from
increasing its percentage of physician ownership beyond the aggregate level that was in
place as of March 23, 2010. Further, subject to limited exceptions, a grandfathered
physician-owned hospital may not increase its aggregate number of operating rooms, procedure rooms, and beds
for which it is licensed beyond the number as of March 23, 2010.
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The whole hospital exception, as amended, also contains additional disclosure requirements.
For example, a grandfathered physician-owned hospital is required to submit an annual report to the
Department listing each investor in the hospital, including all physician owners. In addition,
grandfathered physician-owned hospitals must
have procedures in place that require each referring physician owner to disclose to patients,
with enough notice for the patient to make a meaningful decision regarding receipt of care, the
physicians ownership interest and, if applicable, any ownership interest held by the treating
physician. A grandfathered physician-owned hospital also must disclose on its web site and in any
public advertising the fact that it has physician ownership. The Health Reform Law requires
grandfathered physician-owned hospitals to comply with these new requirements by September 23, 2011
and requires the Department to audit hospitals compliance beginning no later than May 1, 2012.
In light of the recently enacted restrictions on the whole hospital exception and limited
interpretive guidance, it may be difficult for us to determine how the exception will apply to
specific situations that may arise with our hospitals. If any of our hospitals fail to comply with
the amended whole hospital exception, those hospitals could be found to be in violation of the
Stark Law, and we could incur significant financial or other penalties.
Providers In The Healthcare Industry Have Been The Subject Of Federal And State
Investigations, And We May Become Subject To Additional Investigations In The Future That Could
Result In Significant Liabilities Or Penalties To Us.
Both federal and state government agencies have increased their focus on and coordination of
civil and criminal enforcement efforts in the healthcare area. As a result, there are numerous
ongoing investigations of hospital companies, as well as their executives and managers. The OIG and
the Department of Justice have, from time to time, established national enforcement initiatives
that focus on specific billing practices or other suspected areas of abuse. Further, under the FCA,
private parties have the right to bring qui tam whistleblower lawsuits against companies that
submit false claims for payments to, or improperly retain overpayments from, the government. Some
states have adopted similar state whistleblower and false claims provisions.
Federal and state investigations relate to a wide variety of routine healthcare operations
including:
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cost reporting and billing practices; |
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financial arrangements with referral sources; |
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physician recruitment activities; |
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physician joint ventures; and |
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hospital charges and collection practices for self-pay patients. |
We engage in many of these and other activities which could be the subject of governmental
investigations or inquiries from time to time. For example, we have significant Medicare and
Medicaid billings, we have numerous financial arrangements with physicians who are referral sources
to our hospitals and we have eight hospitals as of October 1, 2010 that have physician
investors. In addition, our executives and managers, many of whom have worked at other healthcare
companies that are or may become the subject of federal and state investigations and private
litigation, may be included in governmental investigations or named as defendants in private
litigation. Any additional investigations of us, our executives or our managers could result in
significant liabilities or penalties to us, as well as adverse publicity.
In addition, governmental agencies and their agents, such as the Medicare Administrative
Contractors, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid
programs, conduct audits of our healthcare operations. Private payors may conduct similar audits,
and we also perform internal audits and monitoring. Depending on the nature of the conduct found in
such audits and whether the underlying conduct could be considered systemic, the resolution of
these audits could have a material, adverse effect on our financial position, results of operations
and liquidity.
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CMS is in the process of implementing a nationwide RAC program as required by the Tax Relief
and Health Care Act of 2006. Under the RAC program, CMS engages private contractors to conduct
post-payment reviews to detect and correct improper payments in the Medicare program, and the
contractors receive a contingency fee based on the amount of corrected, improper payments. The
Health Reform Law expands the RAC programs scope to include other Medicare programs, including
managed Medicare, by December 31, 2010.
In addition, through DEFRA, Congress has expanded the federal governments involvement in
fighting fraud, waste and abuse in the Medicaid program by creating the Medicaid Integrity Program.
Under this program, CMS engages private contractors, referred to as MICs, to perform post-payment
audits of Medicaid claims and identify overpayments. In addition, the Health Reform Law expands the
RAC programs scope to include Medicaid claims by requiring all states to establish programs to
contract with RACs by December 31, 2010. In addition to MICs and RACs, several other contractors
and state Medicaid agencies have increased their review activities.
Any such audit or investigation could have a material adverse effect on the results of our
operations.
We May Incur Material Fees, Costs And Expenses In Connection With An Appeal Of The Court Order
Dismissing With Prejudice the Qui Tam Action And Investigation of IAS.
On March 31, 2008, the United States District Court for the District of Arizona (the District
Court) dismissed with prejudice the qui tam complaint against IAS, our parent company. The qui tam
action sought monetary damages and civil penalties under the FCA and included allegations that
certain business practices related to physician relationships and the medical necessity of certain
procedures resulted in the submission of claims for reimbursement in violation of the FCA. The
case dates back to March 2005 and became the subject of a subpoena by the OIG in September 2005. In August 2007, the case was unsealed and the U.S. Department
of Justice declined to intervene. The District Court dismissed the case from the bench at the
conclusion of oral arguments on IAS motion to dismiss. On April 21, 2008, the District Court
issued a written order dismissing the case with prejudice and entering formal judgment for IAS and
denying as moot IAS motions related to the relators misappropriation of information subject to a
claim of attorney-client privilege by IAS. Both parties appealed. On August 12, 2010, United
States Court of Appeals for the Ninth Circuit reversed the District Courts dismissal of the qui
tam complaint and the District Courts denial of IAS motions concerning relators misappropriation
of documents and ordered that the qui tam relator be allowed leave to file a Third Amended
Complaint and for the District Court to consider IAS motions concerning relators misappropriation
of documents. The District Court ordered the qui tam relator to file his Third Amended Complaint
by November 22, 2010, and set a schedule for the filing of motions related to the relators
misappropriation of documents. On October 20, 2010, the qui tam relator filed a motion to transfer
this action to the United States District Court for the Eastern District of Texas. That motion
remains pending. On November 22, 2010, the relator filed his Third Amended Complaint. IAS
anticipates filing a motion to dismiss the Third Amended Complaint and motions concerning the
relators misappropriation of documents. If the qui tam action was to be resolved in a manner
unfavorable to us, it could have a material adverse effect on our business, financial condition and
results of operations, including exclusion from the Medicare and Medicaid programs. In addition,
we may incur material fees, costs and expenses in connection with defending the qui tam action.
Compliance With Section 404 Of The Sarbanes-Oxley Act May Negatively Impact Our Results Of
Operations And Failure To Comply May Subject The Company To Regulatory Scrutiny And A Loss Of
Investors Confidence In Our Internal Control Over Financial Reporting.
We are required to perform an annual evaluation of our internal control over financial
reporting and file managements attestation with our annual report to comply with Section 404 of
the Sarbanes-Oxley Act of 2002.
Compliance with all requirements and interpretive guidance associated with Section 404 of the
Sarbanes-Oxley Act of 2002, and any changes in our internal control over financial reporting in
response to our internal evaluations, may be expensive and time-consuming and may negatively impact
our results of operations. In addition, we cannot assure you that we will be able to meet the
annual required deadlines for compliance with Section 404. Any failure on our part to meet the
required compliance deadlines may subject us to regulatory scrutiny and a loss of public confidence
in our internal control over financial reporting.
41
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 net revenue; |
|
|
|
financial, accounting, reporting and payroll; |
|
|
|
laboratory, radiology and pharmacy systems; |
|
|
|
materials and asset management; |
|
|
|
negotiating, pricing and administering managed care contracts; and |
|
|
|
monitoring quality of care and collecting data on quality measures necessary for full
Medicare payment updates. |
If we are unable to use these systems effectively, we may experience delays in collection of
net revenue and may not be able to properly manage our operations or oversee the compliance with
laws or regulations.
If We Fail to Effectively and Timely Implement Electronic Health Record Systems, Our
Operations Could Be Adversely Affected.
If we fail to effectively and timely implement EHR systems, our operations could be adversely
affected. As required by ARRA, the Department is in the process of developing and implementing an
incentive payment program for eligible hospitals and healthcare professionals that adopt and
meaningfully use certified 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.
Regional Economic Downturns Or Other Material Changes In The Economic Condition Could Cause
Our Overall Business Results To Suffer.
The
U.S. economy is experiencing the effects of a severe economic downturn. Depressed
consumer spending and high unemployment rates continue to pressure many industries. During economic
downturns, governmental entities often experience budgetary constraints as a result of increased
costs and lower than expected tax collections. These budgetary constraints have resulted in
decreased spending for health and human service programs, including Medicare, Medicaid and similar
programs, which represent significant payor sources for our hospitals. Many states, including
states in which we operate, have decreased funding for state healthcare programs or made other
structural changes resulting in a reduction in Medicaid spending. Additional Medicaid spending cuts
may be implemented in the future in the states in which we operate. Other risks we face from
general economic weakness include patient decisions to postpone or cancel elective and non-emergent
healthcare procedures, increases in the uninsured population and further difficulties in our
collection of patient co-payment and deductible receivables.
42
Of
our 15 acute care hospital facilities at September 30, 2010, four are located in Salt
Lake City, three are located in Phoenix, three are located in Tampa-St. Petersburg, three are
located in the state of Texas, one is located in Las Vegas and one is located in West Monroe,
Louisiana. In addition, our health plan, Health Choice, and our behavioral health hospital facility
are located in Phoenix. For the year ended September 30, 2010, our net revenue was generated as
follows:
|
|
|
|
|
Health Choice |
|
|
31.4 |
% |
Salt Lake City, Utah |
|
|
18.4 |
% |
Phoenix, Arizona (excluding Health Choice) |
|
|
14.3 |
% |
Three cities in Texas, including San Antonio |
|
|
18.4 |
% |
Tampa-St. Petersburg, Florida |
|
|
8.3 |
% |
Other |
|
|
9.2 |
% |
Any material change in the current demographic, economic, competitive or regulatory conditions
in any of these regions could adversely affect our overall business results because of the
significance of our operations in each of these regions to our overall operating performance.
Moreover, our business is not as diversified as some competing multi-facility healthcare companies
and, therefore, is subject to greater market risks.
We May Be Subject To Liabilities Because Of Claims Brought Against Our Facilities.
Plaintiffs frequently bring actions against hospitals and other healthcare providers, alleging
malpractice, product liability or other legal theories. Many of these actions involve large claims
and significant defense costs. For example, certain other hospital companies have been subject to
class-action claims in connection with their billing practices relating to uninsured patients.
We maintain professional malpractice liability insurance and general liability insurance in
amounts we believe are sufficient to cover claims arising out of the operations of our facilities.
Some of the claims could exceed the scope of the coverage in effect or coverage of particular
claims or damages could be denied.
The volatility of professional liability insurance and, in some cases, the lack of
availability of such insurance coverage, for physicians with privileges at our hospitals increases
our risk of vicarious liability in cases where both our hospital and the uninsured or underinsured
physician are named as co-defendants. As a result, we are subject to greater self-insured risk and
may be required to fund claims out of our operating cash flow to a greater extent than during 2010.
We cannot assure you that we will be able to continue to obtain insurance coverage in the future or
that such insurance coverage, if it is available, will be available on acceptable terms.
Our
fiscal 2011 self-insured retention for professional and general
liability coverage remains unchanged at $5.0
million per claim, with an excess aggregate limit of
$55.0 million, and maximum coverage under our
insurance policies of $75.0 million.
If Health Choices Contract With AHCCCS Was Discontinued, Our Net Revenue And Profitability
Would Be Adversely Affected.
Effective October 1, 2008, Health Choice began its current contract with AHCCCS, which
provides for a three-year term, with AHCCCS having the option to renew for two additional one-year
periods. The contract is terminable without cause on 90 days written notice or for cause upon
written notice if we fail to comply with any term or condition of the contract or fail to take
corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can
terminate our contract in the event of the unavailability of state or federal funding. If our
contract with AHCCCS is terminated, our financial condition, cash flows and results of operations
would be adversely affected.
43
If We Are Unable To Control Healthcare Costs At Health Choice, Our Profitability May Be
Adversely Affected.
Health Choice derives its premium revenue through a contract with AHCCCS, which is the state
agency that administers Arizonas Medicaid program, and a contract with CMS for the MAPD SNP. For
the years ended September 30, 2010, 2009 and 2008, we derived 29.4%, 27.8% and 24.2%, respectively,
of our consolidated net revenue from our contract with AHCCCS. AHCCCS and CMS set the capitated
rates we receive at Health Choice which, in turn, subcontracts with physicians, hospitals and other
healthcare providers to provide services to its enrollees. If we fail to effectively manage
healthcare costs, these costs may exceed the payments we receive. Historically, our medical claims
expense as a percentage of premium revenue has fluctuated. Our medical loss ratio for the years
ended September 30, 2010, 2009 and 2008, was 87.2%, 86.1% and 85.2%, respectively. Relatively small
changes in these medical loss ratios can create significant changes in the profitability of Health
Choice. Many factors can cause actual healthcare costs to exceed the capitated rates set by AHCCCS
and CMS, including:
|
|
|
our ability to contract with cost-effective healthcare providers; |
|
|
|
the increased cost of individual healthcare services; |
|
|
|
the type and number of individual healthcare services delivered; and |
|
|
|
the occurrence of catastrophes, epidemics or other unforeseen occurrences. |
Although we have been able to manage medical claims expense through a variety of initiatives,
we may not be able to continue to effectively manage medical claims expense in the future.
Additionally, any future growth in members increases the risk associated with effectively managing
health claims expense. If our medical claims expense increases, our financial condition or results
of operations may be adversely affected.
If AHCCCS Significantly Alters The Payment Structure Of Its Contracts Or The Amount Of
Premiums Paid To Us, Our Net Revenue And Profitability May Be Adversely Affected.
In
response to state budgetary issues in Arizona, AHCCCS has taken steps to
control its costs, including cuts in capitation premiums and the
implementation of a risk-based or
severity-adjusted payment methodology for all health plans. Capitation rates for each health plan
and geographic service area are adjusted annually based on the severity of treatment episodes
experienced by each plans membership compared to the average over a specified 12 month period.
Adjustments are calculated using diagnosis codes and procedural information from medical and
pharmacy claims data, in addition to member demographic information. Capitation rates are risk
adjusted prospectively before the start of each contract year, and are not adjusted retroactively.
If AHCCCS continues to reduce capitation premium rates or makes further alterations to
the payment structure of its contracts, our results of operations and
cash flows may be adversely affected.
Significant Competition From Other Healthcare Companies And State Efforts To Regulate The Sale
Of Not-For-Profit Hospitals May Affect Our Ability To Acquire Hospitals.
One element of our business strategy is to expand through selective acquisitions of hospitals
in our existing markets and in new growing markets. We compete for acquisitions with other
healthcare companies, some of which have greater competitive advantages or financial resources than
us. Therefore, we may not be able to acquire hospitals on terms favorable to us or at all.
Additionally, many states, including some where we have hospitals and others where we may in the
future acquire hospitals, have adopted legislation regarding the sale or other disposition of
hospitals operated by not-for-profit entities. In other states that do not have specific
legislation, the attorneys general have demonstrated an interest in these transactions under their
general obligations to protect charitable assets from waste. These legislative and administrative
efforts focus primarily on the appropriate valuation of the assets divested and the use of the
proceeds of the sale by the not-for-profit seller. These review and approval processes can add time
to the closing of an acquisition of a not-for-profit hospital and future actions on the state level
could seriously delay or even prevent our ability to acquire not-for-profit hospitals in the
future.
Difficulties With The Integration Of Acquisitions May Disrupt Our Ongoing Operations.
The process of integrating acquired hospitals may require a disproportionate amount of
managements time and attention, potentially distracting management from its other day-to-day
responsibilities. In addition, poor integration of acquired facilities could cause interruptions to
our business activities, including those of the acquired facilities. As a result, we may not
realize all or any of the anticipated benefits of an acquisition and we may incur significant costs
related to the acquisitions or integration of these facilities. In addition, we may acquire
hospitals that have unknown or contingent liabilities, including liabilities for failure to comply
with healthcare laws and regulations. Although we seek indemnification from prospective sellers
covering these matters, we may nevertheless have material liabilities for past activities of
acquired hospitals.
44
We Are Dependent On Key Personnel And The Loss Of One Or More Of Our Senior Management Team Or
Local Management Personnel Could Have A Material Adverse Effect On Our Business.
Our business strongly depends upon the services and management experience of our senior
management team. We depend on the ability of our senior management team and key employees to manage
growth successfully and on our ability to attract and retain skilled employees. If any of our
executive officers resign or otherwise are unable to serve, our management expertise and ability to
deliver healthcare services efficiently and to effectively execute our business strategy could be
diminished. If we fail to attract and retain managers at our hospitals and related facilities, our
operations could be adversely effected. Moreover, we do not maintain key man life insurance
policies on any of our officers.
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. 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. 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.
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 maintain insurance coverage
for third-party liability related to the storage tanks located at our facilities in the amount $2.0
million per claim and $25.0 million in the aggregate.
If The Fair Value Of Our Reporting Units Declines, A Material Non-Cash Charge To Earnings From
Impairment Of Our Goodwill May Result.
At
September 30, 2010, we had $718.2 million of goodwill
recorded in our consolidated financial statements.
We expect 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. If the carrying value of our goodwill is impaired, we
may incur a material non-cash charge to earnings.
As a result of our annual impairment test during the year ended September 30, 2009, we
recorded a $64.6 million non-cash charge to pre-tax earnings related to the impairment of goodwill
in our Florida market. This impairment was due, in part, to limitations on our ability to expand in
our Florida market as a result of CON restrictions, as well as with high Medicare utilization and
expanded managed care penetration. In addition, we had experienced changes in market conditions and
the business mix in our Florida market, which negatively impacted operating results, producing
trends that may not be temporary in nature. As a result, we wrote off all goodwill associated with
our Florida market.
Risks Related to Our Capital Structure
Servicing Our Indebtedness Requires A Significant Amount of Cash. Our Ability To Generate
Sufficient Cash Depends On Numerous Factors Beyond Our Control, And We May Be Unable To Generate
Sufficient Cash Flow To Service Our Debt Obligations, Including Making Payments On Our 8
3/4% Notes And Term Loans.
We
have outstanding $475.0 million in aggregate principal amount of 8 3/4%
senior subordinated notes due 2014, that have been registered under the Securities Act of 1933, as
amended, (the 8 3/4% notes). We have also entered into our senior secured
credit facilities, which includes amounts outstanding under our senior
secured term loan and our senior secured delayed draw term loan of
$423.6 million and $146.7 million, respectively, both maturing on March 15, 2014. We cannot assure you that
our business will generate sufficient cash flow from operations or that future borrowing will be
available to us under our senior secured credit facilities in an amount sufficient to enable us to
pay the principal, if any, and interest on our
indebtedness, including the 8 3/4% notes and term loans, or to fund our
other liquidity needs. Our ability to fund these payments is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are beyond our control. We
may need to refinance all or a portion of our indebtedness, including the 8
3/4% notes and term loans, on or before maturity. We cannot assure you that
we will be able to refinance any of our indebtedness, on commercially reasonable terms or at all.
In addition, the terms of existing or future debt agreements, including the amended and restated
credit agreement governing the senior secured credit facilities and the indenture governing the 8
3/4% notes, may restrict us from affecting any of these alternatives.
45
The senior secured credit facilities also include a senior secured revolving credit facility
of $225.0 million, with a $100.0 million sub-limit for letters of credit that matures on April 27,
2013. Our ability to borrow funds under our revolving credit facility is subject to the financial
viability of the participating financial institutions. On February 9, 2010, Barclays Capital
assumed a $20.0 million position in our senior secured revolving credit facility, which represents
8.9% of the total capacity. This position was previously held by Lehman Brothers,
which we had identified as a defaulting lender. At completion of this assumption, we had access to
100% of our total revolver capacity. If any of our creditors were to suffer financial difficulties,
or if the credit markets were to deteriorate as they did towards the end of calendar 2008, our
ability to access available funds under our revolving credit facility could be limited.
During
the next twelve months, along with interest on our senior secured
credit facilities, we
are required to repay $5.9 million in principal under our senior
secured credit facilities and $41.6
million in interest under the 8 3/4% notes. If we cannot make scheduled payments on our debt, we will
be in default and, as a result:
|
|
|
our debt holders could declare all outstanding principal and interest to be due and
payable; |
|
|
|
our secured debt lenders could terminate their commitments and commence foreclosure
proceedings against our assets; and |
|
|
|
we could be forced into bankruptcy or liquidation. |
Our Substantial Level Of Indebtedness Could Adversely Affect Our Financial Condition And
Prevent Us From Fulfilling Our Obligations Under The 8 3/4% Notes And Senior
Secured Credit Facilities.
We
have a significant amount of indebtedness at September 30, 2010,
including $475.0 million of
outstanding 8 3/4% notes and $576.6 million of other indebtedness (of which
$570.3 million consisted of borrowings under our senior secured credit facilities and $6.3 million
consisted of capital lease obligations and other debt). All of our other indebtedness ranks senior
to the 8 3/4% notes. In addition, subject to restrictions in the indenture
governing the 8 3/4% notes and the amended and restated credit agreement
governing the senior secured credit facilities, we may incur additional indebtedness.
Our substantial indebtedness could have important consequences to our financial condition and
results of operations, including the following:
|
|
|
it may be more difficult for us to satisfy our obligations, including debt service
requirements under our outstanding debt; |
|
|
|
our ability to obtain additional financing for working capital, acquisitions, capital
expenditures, debt service requirements, or other general corporate purposes may be
impaired; |
|
|
|
we must use a substantial portion of our cash flow to pay principal and interest on our
8 3/4% notes, senior secured credit facilities, and other
indebtedness which will reduce the funds available to us for other purposes; |
|
|
|
we are more vulnerable to economic downturns and adverse industry conditions; |
|
|
|
our ability to capitalize on business opportunities and to react to competitive
pressures as compared to our competitors may be compromised due to our high level of
indebtedness; and |
|
|
|
our ability to borrow additional funds or to refinance indebtedness may be limited. |
46
Our senior secured credit facilities are rated by Moodys and Standard & Poors. If these
ratings were ever downgraded, our access to and cost of future capital could be adversely affected.
In addition, our ability to borrow additional funds may be reduced and the risks related to our
substantial indebtedness would intensify.
An Increase In Interest Rates Would Increase The Cost Of Servicing Our Debt And Could Reduce
Our Profitability.
Borrowings under our senior secured credit facilities bear interest at variable rates. As of
September 30, 2010, we had outstanding variable rate debt of $570.3 million. We have managed our
market exposure to changes in interest rates by converting $425.0 million of this variable rate
debt to fixed rate debt through the use of interest rate swap agreements, effectively leaving
$145.3 million in debt subject to variable rates. As a result, an increase in interest rates,
whether because of an increase in market interest rates or an increase in our own cost of
borrowing, would increase the cost of servicing our debt and could materially reduce our
profitability. For more discussion on the effect of changes in interest rates, see Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
We Are Controlled By Our Principal Equity Sponsors.
We are controlled by our principal equity sponsors who have the ability to control our
financial-related policies and decisions. For example, our principal equity sponsors could cause us
to enter into transactions that, in their judgment, could enhance their equity investment, even
though such transactions might reduce our cash flows or capital reserves. So long as our principal
equity sponsors continue to own a significant amount of our equity interests, they will continue to
be able to strongly influence and effectively control the decisions related to our company.
Additionally, our principal equity sponsors may from time to time acquire and hold interests in
businesses that compete directly or indirectly with us and, therefore, have interests that may
conflict with the interests of our company.
Item 2. Properties.
Information with respect to our hospitals and other healthcare related properties can be found
in Item 1 of this report under the caption, BusinessOur Properties.
Additionally, our principal executive offices in Franklin, Tennessee are located in
approximately 58,000 square feet of office space. Our office space is leased pursuant to two
contracts which both expire on December 31, 2010. We have
entered into a new contract to lease approximately 42,000 square
feet of office space at the same location, effective
January 1, 2011, which expires on December 31, 2020. Our principal executive offices, hospitals and
other facilities are suitable for their respective uses and generally are adequate for our present
needs.
47
Item 3. Legal Proceedings.
On March 31, 2008, the District Court dismissed with prejudice the qui tam complaint against
IAS, our parent company. The qui tam action sought monetary damages and civil penalties under the
FCA and included allegations that certain business practices related to physician relationships and
the medical necessity of certain procedures resulted in the submission of claims for reimbursement
in violation of the FCA. The case dates back to March 2005 and became the subject of a subpoena by
the OIG in September 2005. In August 2007, the case was unsealed and the U.S. Department of
Justice declined to intervene. The District Court dismissed the case from the bench at the
conclusion of oral arguments on IAS motion to dismiss. On April 21, 2008, the District Court
issued a written order dismissing the case with prejudice and entering formal judgment for IAS and
denying as moot IAS motions related to the relators misappropriation of information subject to a
claim of attorney-client privilege by IAS. Both parties appealed. On August 12, 2010, United
States Court of Appeals for the Ninth Circuit reversed the District Courts dismissal of the qui
tam complaint and the District Courts denial of IAS motions concerning relators misappropriation
of documents and ordered that the qui tam relator be allowed leave to file a Third Amended
Complaint and for the District Court to consider IAS motions concerning relators misappropriation
of documents.
The District Court ordered the qui tam relator to file his Third Amended Complaint by November
22, 2010, and set a schedule for the filing of motions related to the relators misappropriation of
documents. On October 20, 2010, the qui tam relator filed a motion to transfer this action to the
United States District Court for the Eastern District of Texas. That motion remains pending. On
November 22, 2010, the relator filed his Third Amended Complaint. IAS anticipates filing a motion
to dismiss the Third Amended Complaint and motions concerning the relators misappropriation of
documents.
Item 4. (Removed and Reserved).
48
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
There is no established public trading market for our common interests. At September 30, 2010,
all of our common interests were owned by IASIS Healthcare Corporation, a Delaware corporation,
referred to as IAS.
See Item 12., Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, included elsewhere in this report for information regarding our equity
compensation plans.
Item 6. Selected Financial Data.
The following table presents selected historical financial data for the fiscal years ended
September 30, 2010, 2009, 2008, 2007 and 2006, and was derived from the audited consolidated
financial statements.
Our audited consolidated financial statements referenced above, together with the related
report of the independent registered public accounting firm, are included elsewhere in this report.
The selected financial information and other data presented below should be read in conjunction
with the information contained in Managements Discussion and Analysis of Financial Condition and
Results of Operations and the consolidated financial statements and the related notes thereto
included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Statement of Operations Data (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
2,521,406 |
|
|
$ |
2,361,972 |
|
|
$ |
2,065,536 |
|
|
$ |
1,766,079 |
|
|
$ |
1,539,577 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits (2) |
|
|
686,303 |
|
|
|
660,921 |
|
|
|
632,109 |
|
|
|
533,792 |
|
|
|
439,349 |
|
Supplies |
|
|
266,545 |
|
|
|
250,573 |
|
|
|
231,259 |
|
|
|
194,915 |
|
|
|
167,616 |
|
Medical claims |
|
|
678,651 |
|
|
|
592,760 |
|
|
|
452,055 |
|
|
|
376,505 |
|
|
|
347,217 |
|
Other operating expenses |
|
|
363,916 |
|
|
|
325,735 |
|
|
|
283,123 |
|
|
|
266,263 |
|
|
|
223,946 |
|
Provision for bad debts |
|
|
197,680 |
|
|
|
192,563 |
|
|
|
161,936 |
|
|
|
136,233 |
|
|
|
134,614 |
|
Rentals and leases |
|
|
39,955 |
|
|
|
39,127 |
|
|
|
36,633 |
|
|
|
31,546 |
|
|
|
30,277 |
|
Interest expense, net |
|
|
66,810 |
|
|
|
67,890 |
|
|
|
75,665 |
|
|
|
71,206 |
|
|
|
67,124 |
|
Depreciation and amortization |
|
|
96,106 |
|
|
|
97,462 |
|
|
|
96,741 |
|
|
|
75,388 |
|
|
|
69,137 |
|
Management fees |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
4,746 |
|
|
|
4,189 |
|
Impairment of goodwill (3) |
|
|
|
|
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related property damage (4) |
|
|
|
|
|
|
938 |
|
|
|
3,589 |
|
|
|
|
|
|
|
|
|
Business interruption insurance
recoveries (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,443 |
) |
|
|
(8,974 |
) |
Loss on extinguishment of debt (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
2,400,966 |
|
|
|
2,297,608 |
|
|
|
1,978,110 |
|
|
|
1,693,380 |
|
|
|
1,474,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before gain (loss) on disposal of
assets and income taxes |
|
|
120,440 |
|
|
|
64,364 |
|
|
|
87,426 |
|
|
|
72,699 |
|
|
|
65,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of assets, net |
|
|
108 |
|
|
|
1,465 |
|
|
|
(75 |
) |
|
|
(1,359 |
) |
|
|
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
|
120,548 |
|
|
|
65,829 |
|
|
|
87,351 |
|
|
|
71,340 |
|
|
|
65,995 |
|
Income tax expense |
|
|
44,715 |
|
|
|
27,576 |
|
|
|
35,325 |
|
|
|
25,909 |
|
|
|
22,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
75,833 |
|
|
|
38,253 |
|
|
|
52,026 |
|
|
|
45,431 |
|
|
|
43,480 |
|
Earnings (loss) from discontinued
operations, net of income taxes |
|
|
(1,087 |
) |
|
|
(176 |
) |
|
|
(11,275 |
) |
|
|
669 |
|
|
|
(385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
74,746 |
|
|
|
38,077 |
|
|
|
40,751 |
|
|
|
46,100 |
|
|
|
43,095 |
|
Net earnings attributable to
non-controlling interests |
|
|
(8,279 |
) |
|
|
(9,987 |
) |
|
|
(4,437 |
) |
|
|
(4,496 |
) |
|
|
(3,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to IASIS
Healthcare LLC |
|
$ |
66,467 |
|
|
$ |
28,090 |
|
|
$ |
36,314 |
|
|
$ |
41,604 |
|
|
$ |
39,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
144,511 |
|
|
$ |
206,528 |
|
|
$ |
80,738 |
|
|
$ |
|
|
|
$ |
95,415 |
|
Total assets |
|
$ |
2,353,194 |
|
|
$ |
2,357,204 |
|
|
$ |
2,308,147 |
|
|
$ |
2,186,422 |
|
|
$ |
1,967,835 |
|
Long-term debt and capital lease
obligations (including current
portion) |
|
$ |
1,051,578 |
|
|
$ |
1,059,837 |
|
|
$ |
1,114,622 |
|
|
$ |
1,031,657 |
|
|
$ |
896,945 |
|
Members equity |
|
$ |
702,135 |
|
|
$ |
750,932 |
|
|
$ |
714,507 |
|
|
$ |
674,732 |
|
|
$ |
639,714 |
|
49
|
|
|
(1) |
|
The results of Glenwood and Alliance are included from January 31, 2007 and May 31, 2007,
respectively, their dates of acquisition. Excludes Mesa General Hospital and Biltmore Surgery
Center, where operations were discontinued effective May 31, 2008 and April 30, 2008,
respectively. |
|
(2) |
|
Results for the year ended September 30, 2010, include $2.0 million in stock compensation
expense related to the repurchase of certain equity by our parent company. |
|
(3) |
|
Results for the year ended September 30, 2009, include a $64.6 million non-cash charge ($43.2
million after taxes) related to the impairment of goodwill in our Florida market. |
|
(4) |
|
Results for the years ended September 30, 2009 and 2008, include an adverse financial impact
totaling $938,000 and $3.6 million, respectively, before income taxes related to property
damage sustained at The Medical Center of Southeast Texas, as a result of Hurricane Ike. |
|
(5) |
|
Results for the years ended September 30, 2007 and 2006, include $3.4 million and $9.0
million, respectively, of business interruption insurance recoveries received in connection
with the temporary closure and disruption of operations at The Medical Center of Southeast
Texas, as a result of Hurricane Rita. Cumulative business interruption insurance recoveries of
$12.4 million received through fiscal 2007 includes the impact of related insurance
deductibles of $4.6 million. |
|
(6) |
|
Results for the year ended September 30, 2007, include a $6.2 million loss on extinguishment
of debt related to the refinancing of our senior secured credit facilities. |
Selected Operating Data
The following table sets forth certain unaudited operating data for each of the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Acute Care (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Number of acute care hospital facilities
at end of period (2) |
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
Licensed beds at end of period |
|
|
3,185 |
|
|
|
3,162 |
|
|
|
3,027 |
|
Average length of stay (days) (3) |
|
|
4.8 |
|
|
|
4.7 |
|
|
|
4.7 |
|
Occupancy rates (average beds in service) |
|
|
46.6 |
% |
|
|
46.5 |
% |
|
|
48.9 |
% |
Admissions (4) |
|
|
101,798 |
|
|
|
101,083 |
|
|
|
101,302 |
|
Adjusted admissions (5) |
|
|
170,812 |
|
|
|
169,721 |
|
|
|
165,819 |
|
Patient days (6) |
|
|
489,274 |
|
|
|
473,601 |
|
|
|
471,853 |
|
Adjusted patient days (5) |
|
|
790,958 |
|
|
|
762,234 |
|
|
|
741,466 |
|
Net patient revenue per adjusted admission |
|
$ |
10,066 |
|
|
$ |
9,703 |
|
|
$ |
9,101 |
|
Outpatient revenue as a % of gross patient revenue |
|
|
39.6 |
% |
|
|
39.0 |
% |
|
|
36.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Choice: |
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid covered lives |
|
|
194,095 |
|
|
|
187,104 |
|
|
|
142,193 |
|
Dual-eligible lives (7) |
|
|
4,298 |
|
|
|
3,659 |
|
|
|
3,300 |
|
Medical loss ratio (8) |
|
|
87.2 |
% |
|
|
86.1 |
% |
|
|
85.2 |
% |
|
|
|
(1) |
|
Excludes Mesa General Hospital and Biltmore Surgery Center, where operations were
discontinued effective May 31, 2008 and April 30, 2008, respectively. |
|
(2) |
|
Excludes St. Lukes Behavioral Hospital. |
|
(3) |
|
Represents the average number of days that a patient stayed in our hospitals. |
|
(4) |
|
Represents the total number of patients admitted to our hospitals for stays in excess of 23
hours. Management and investors use this number as a general measure of inpatient volume. |
|
(5) |
|
Adjusted admissions and adjusted patient days are general measures of combined inpatient and
outpatient volume. We compute adjusted admissions/patient days by multiplying
admissions/patient days by gross patient revenue and then dividing that number by gross
inpatient revenue. |
|
(6) |
|
Represents the number of days our beds were occupied by inpatients over the period. |
|
(7) |
|
Represents members eligible for Medicare and Medicaid benefits under Health Choices contract
with CMS to provide coverage as a MAPD SNP. |
|
(8) |
|
Represents medical claims expense as a percentage of premium revenue, including claims paid
to our hospitals. |
50
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion and analysis of financial condition and results of operations should
be read in conjunction with our audited consolidated financial statements, the notes to our audited
consolidated financial statements, and the other financial information appearing elsewhere in this
report. We intend for this discussion to provide you with information that will assist you in
understanding our financial statements, the changes in certain key items in those financial
statements from year to year, and the primary factors that accounted for those changes. It includes
the following sections:
|
|
|
Forward Looking Statements; |
|
|
|
|
Executive Overview; |
|
|
|
|
Critical Accounting Policies and Estimates; |
|
|
|
|
Results of Operations Summary; |
|
|
|
|
Liquidity and Capital Resources; and |
|
|
|
|
Recent Accounting Pronouncements. |
Data for the fiscal years ended September 30, 2010, 2009 and 2008, has been derived from our
audited consolidated financial statements. References herein to we, us, our and our company
are to IASIS Healthcare LLC and its subsidiaries, unless indicated otherwise.
FORWARD LOOKING STATEMENTS
Some of the statements we make in this annual report on Form 10-K are forward-looking within
the meaning of the federal securities laws, which are intended to be covered by the safe harbors
created thereby. Those forward-looking statements include all statements that are not historical
statements of fact and those regarding our intent, belief or expectations including, but not
limited to, the discussions of our operating and growth strategy (including possible acquisitions
and dispositions), financing needs, projections of revenue, income or loss, capital expenditures
and future operations. Forward-looking statements involve known and unknown risks and uncertainties
that may cause actual results in future periods to differ materially from those anticipated in the
forward-looking statements.
Those risks and uncertainties include, among others, the risks and uncertainties discussed
under Item 1A, Risk Factors in this Annual Report on Form 10-K. Although we believe that the
assumptions underlying the forward-looking statements contained in this report are reasonable, any
of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included in this report, you
should not regard the inclusion of such information as a representation by us or any other person
that our objectives and plans will be achieved. We undertake no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated events.
51
EXECUTIVE OVERVIEW
We are a leading owner and operator of medium-sized acute care hospitals in high-growth urban
and suburban markets. We operate our hospitals with a strong community focus by offering and
developing healthcare services targeted to the needs of the markets we serve, promoting strong
relationships with physicians and working with local managed care plans. At September 30, 2010, we
owned or leased 15 acute care hospital facilities and one behavioral health hospital facility, with
a total of 3,185 licensed beds, located in six regions:
|
|
|
Salt Lake City, Utah; |
|
|
|
|
Phoenix, Arizona; |
|
|
|
|
Tampa-St. Petersburg, Florida; |
|
|
|
|
three cities in Texas, including San Antonio; |
|
|
|
|
Las Vegas, Nevada; and |
|
|
|
|
West Monroe, Louisiana. |
We also own and operate Health Choice, a Medicaid and Medicare managed health plan in Phoenix.
Acquisition
Effective October 1, 2010, we purchased Brim in a cash-for-stock transaction valued at $95.0
million, subject to changes in working capital. The acquisition of Brim included the operations of
Wadley Regional Medical Center, a 370 licensed bed acute care hospital facility located in
Texarkana, Texas and Pikes Peak Regional Hospital, a 15 licensed bed critical access acute care
hospital facility, in Woodland Park, Colorado.
Revenue and Volume Trends
Net revenue is comprised of acute care and premium revenue. Net revenue for the year ended
September 30, 2010, increased 6.8% to $2.5 billion, compared to $2.4 billion in the prior year.
Acute care revenue contributed $66.9 million to the increase in total net revenue for the year
ended September 30, 2010, while premium revenue contributed $92.6 million.
Acute Care Revenue
Our acute care revenue was $1.7 billion for the year ended September 30, 2010, reflecting an
increase of 4.0%, compared to the prior year. Admissions and adjusted admissions increased 0.7% and
0.6%, respectively, for the year ended September 30, 2010, compared to the prior year. Our volume
growth has been negatively impacted, in part, by an overall decline in obstetric related services,
resulting from the impact of the current economic environment, and the closures of our neonatal
intensive care unit on October 1, 2009, and our obstetrics service line on January 1, 2010, both at
our North Las Vegas hospital. Excluding these service line closures, admissions and adjusted
admissions increased 2.0% and 1.8%, respectively, for the year ended September 30, 2010, compared
to the prior year. These volume improvements have been driven primarily by growth in general
medicine and psychiatric services.
While we have experienced growth in our inpatient service lines, we believe that outpatient
volumes continue to be negatively impacted, in part, by the effect of the economic climate in our
markets, including the impact of high unemployment and patient decisions to defer or cancel
elective procedures, general primary care and other non-emergent healthcare procedures until their
conditions become more acute. The deferral of non-emergent procedures has also been facilitated by
an increase in the number of high deductible employer sponsored health plans, which ultimately
shift more of the medical cost responsibility onto the patient. As a result, these factors have
contributed to declines in both emergency room visits and outpatient surgeries.
We believe our volumes and revenue over the long-term will continue to grow as a result of our
business strategies, including the strategic deployment of capital, the expansion of our physician
base and outpatient service lines and the general aging of the population.
52
The following table provides the sources of our gross patient revenue by payor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Medicare |
|
|
31.0 |
% |
|
|
31.1 |
% |
|
|
31.9 |
% |
Managed Medicare |
|
|
12.3 |
|
|
|
11.5 |
|
|
|
10.9 |
|
Medicaid |
|
|
8.5 |
|
|
|
8.4 |
|
|
|
7.2 |
|
Managed Medicaid |
|
|
12.5 |
|
|
|
11.2 |
|
|
|
10.6 |
|
Managed care |
|
|
30.7 |
|
|
|
32.8 |
|
|
|
34.7 |
|
Self-pay |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Consistent with industry trends, we are currently experiencing a shift in our patient volumes
and revenue from commercial and managed care payors to Medicaid and managed Medicaid. Given the
high rate of unemployment and its impact on the economy, particularly in the markets we serve, we
expect the elevated levels in our Medicaid and managed Medicaid payor mixes to continue until the
U.S. economy experiences an economic recovery that includes job growth and declining unemployment.
Additionally, the decline in outpatient related volumes, the majority of which are typically
comprised of commercial and managed care patients, has contributed to the decline in our managed
care revenue mix.
Net patient revenue per adjusted admission increased 3.8% for the year ended September 30,
2010, compared to the prior year. Our net patient revenue per adjusted admission has benefitted, in
part, from an overall decline in obstetric related services, which was particularly impacted by the
service line closures at our North Las Vegas hospital, continued increases in managed
care rates, growth in physician practice revenue as we continue to invest in our physician
employment strategy and additional supplemental Medicaid reimbursement associated with our Texas
market. Revenue recognized under the Texas private supplemental Medicaid reimbursement programs for
the year ended September 30, 2010, was $83.1 million, compared to $57.2 million in the prior year.
While our net patient revenue per adjusted admission continues to increase, the impact of high
unemployment and other industry pressures, including but not limited to the shift in our payor mix
from commercial and managed care payors to more Medicaid and managed Medicaid, both of which
typically result in lower reimbursement on a per adjusted admission basis, have contributed to
moderating rates of pricing growth. Additionally, the impact of state budgetary issues on Medicaid
funding, which has resulted in rate freezes and, in some cases, rate cuts to providers, has caused
a decline in pricing related to Medicaid and managed Medicaid volumes, which is compounded by the
impact of increasing Medicaid utilization. As states continue working through their budgetary
issues, any additional cuts to Medicaid funding would negatively impact our future pricing and
earnings.
We offer discounts to all uninsured patients receiving healthcare services who do not qualify
for assistance under state Medicaid, other federal or state assistance plans, or charity care. We
provided uninsured discounts totaling $71.6 million, $69.7 million and $57.9 million for the years
ended September 30, 2010, 2009 and 2008, respectively.
Premium Revenue
Premium revenue generated under the AHCCCS and CMS contracts with Health Choice represented
31.4%, 29.6% and 26.2% of our consolidated net revenue for the years ended September 30, 2010, 2009
and 2008, respectively.
As a result of our current contract and increasing enrollment in the state program, which is
attributable to a rising indigent population associated with the current economic downturn, Health
Choices enrollment through its AHCCCS contract at September 30, 2010, exceeded 194,000 members,
compared to over 187,000 members in the prior year. While we anticipate our membership
may continue to increase in the near term, we cannot guarantee the continued growth of our membership.
The Health Reform Law reduces, over a three year period, premium payments to managed Medicare
plans such that CMS managed care per capita premium payments are, on average, equal to traditional
Medicare. The Health Reform Law implements fee adjustments based on service benchmarks and quality
ratings. The CBO estimated that, as a result of these changes, payments to plans will be reduced
by $138.0 billion between 2010 and 2019, while CMS estimated the reduction to be $145.0 billion.
53
Premiums received from AHCCCS and CMS to provide services to our members, which have been
declining on a per member per month basis, will be further affected by the significant budgetary
concerns that continue to face the state of Arizona. As Arizona continues working to eliminate its
budget deficit, its recently enacted budget for fiscal year 2011 includes additional reimbursement
cuts, including elimination of Medicaid coverage for some services and a cut of up to 5% for all
Medicaid providers beginning in April 2011. In an effort to relieve some of the budget pressures,
on May 18, 2010, voters passed a sales tax referendum that would temporarily raise money at the
state level to help fund these budgetary shortfalls. The state legislature may have to consider
additional cuts to Medicaid funding beyond the initial 5% that is planned for fiscal 2011, as a
result of the impact of the Health Reform Law and the uncertainty surrounding the impact of the
extension of the FMAP, which was originally implemented in 2009 by ARRA. Depending upon member mix,
we generally believe Health Choice could continue to experience a decline in rates received on a
per member per month basis, which may negatively impact our premium revenue over the near-term.
Significant Industry Trends
The following paragraphs discuss recent trends that we believe are significant factors in our
current and/or future operating results and cash flows. Certain of these trends apply to the entire
acute care hospital industry while others may apply to us more specifically. These trends could be
short-term in nature or could require long-term attention and resources. While these trends may
involve certain factors that are outside of our control, the extent to which these trends affect
our hospitals and our ability to manage the impact of these trends play vital roles in our current
and future success. In many cases, we are unable to predict what impact, if any, these trends will
have on us.
Payor Mix Shift
Like others in the hospital industry, we have experienced a shift in our patient volumes and
revenue from commercial and managed care payors to Medicaid and managed Medicaid. This has resulted
in margin pressures created from expending the same amount of resources to provide patient care,
but for less reimbursement. This shift is reflective of continued high unemployment and the resulting
increases in states Medicaid rolls. The decline in managed care volume and revenue mix is not
only indicative of the depressed labor market, but also utilization behavior of the insured
population resulting from higher deductible and co-insurance plans implemented by employers, which,
in turn, has resulted in delays or the deferral of elective and non-emergent procedures. Given the
high rate of unemployment and its impact on the economy, particularly in the markets we serve, we
expect the elevated levels in our Medicaid and managed Medicaid payor mixes to continue until the
U.S. economy experiences an economic recovery that includes job growth and declining unemployment.
Value-Based Reimbursement
There is a trend in the healthcare industry towards value-based purchasing of healthcare
services. These value-based purchasing programs include both public reporting and financial
incentives tied to the quality and efficiency of care provided by facilities. The Health Reform Law
recently enacted by Congress expands the use of value-based purchasing initiatives in federal
healthcare programs. We expect programs of this type to become more common in the healthcare
industry.
Medicare requires providers to report certain quality measures in order to receive full
reimbursement increases that previously were awarded automatically. CMS has expanded, through a
series of rulemakings, the number of patient care indicators that hospitals must report. CMS
currently requires hospitals to report 46 quality measures in order to qualify for the full market
basket update to the inpatient prospective payment system for fiscal year 2011 and will require
hospitals to report 55 quality measures to qualify for the full market basket update for fiscal
year 2012. CMS will require hospitals to report 57 quality measures in fiscal year 2011 to receive
the full market basket update for fiscal year 2013. CMS also requires hospitals to submit quality
data regarding eleven measures relating to outpatient care in order to receive the full market
basket increase under the outpatient prospective payment system in calendar year 2011. In order to
receive the full market basket update for calendar year 2012, CMS has proposed increasing the
number of outpatient quality measures that must be reported to 17. We anticipate that CMS will
continue to expand the number of inpatient and outpatient quality measures. We have invested
significant capital and resources in the implementation of our advanced clinical system that
assists us in monitoring and reporting these quality measures. CMS makes the data submitted by
hospitals, including our hospitals, public on its website.
54
Medicare no longer pays hospitals additional amounts for the treatment of certain preventable
adverse events, also known as HACs, unless the condition was present at admission. Currently, there
are ten categories of conditions on the list of HACs. On January 15, 2009, CMS announced three
NCDs that prohibit Medicare reimbursement for erroneous surgical
procedures performed on an inpatient or outpatient basis. These three erroneous surgical procedures
are in addition to the HACs designated by CMS by regulation. DEFRA provides that CMS may revise the list of HACs from time to time. 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 HACs. Further, effective federal fiscal year 2013,
hospitals with excessive readmissions for certain conditions designated by the Department will
receive reduced payments for all inpatient discharges, not just discharges relating to the
conditions subject to the excessive readmission standard. Beginning in federal fiscal year 2015,
hospitals that fall into the highest 25% of national risk-adjusted HAC rates for all hospitals in
the previous year will receive a 1% reduction in their total Medicare payments.
The Health Reform Law also requires the Department to implement a value-based purchasing
program for inpatient hospital services. Beginning in federal fiscal year 2013, the Department 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 the Department.
The Department will determine the amount received by each hospital that meets or exceeds the
quality performance standards from the pool of dollars created by these payment reductions.
Many large commercial payors currently require providers to report quality data. Several
commercial payors have announced that they will stop reimbursing hospitals for certain preventable
adverse events. A number of state hospital associations have also announced policies addressing the
waiver of patient bills for care related to a serious adverse event. In addition, managed care
organizations may begin programs that condition payment on performance against specified measures.
The quality measurement criteria used by commercial payors may be similar to or even more stringent
than Medicare requirements.
We expect these trends towards value-based purchasing of healthcare services by Medicare and
other payors to continue. Because of these trends, if we are unable to demonstrate quality of care
in our facilities, our operating results could be significantly impacted in the future.
Physician Alignment and Integration
In an effort to meet community needs and address coverage issues, we continue to recruit and
employ physicians with primary emphasis on family practice and internal medicine, general surgery,
hospitalists, obstetrics and gynecology, cardiology, neurology and orthopedics. Our ability to
attract and retain skilled physicians to our hospitals is critical to our success and is affected
by the quality of care at our hospitals. This is one reason we have taken significant steps in
implementing our expanded quality of care initiatives. We believe intense efforts focusing on
quality of care will enhance our ability to recruit and retain the skilled physicians necessary to
make our hospitals successful.
We experience certain risks associated with the integration of medical staffs at our
hospitals. As we continue to focus on our physician employment strategy, we face significant
competition for skilled physicians in certain of our markets as more hospital providers adopt a
physician staffing model approach, coupled with a general shortage of physicians across most
specialties. This increased competition has resulted in efforts by managed care organizations to
align with certain provider networks in the markets in which we operate. For the year ended
September 30, 2010, as we continue to
execute our physician employment strategy, we have experienced a 35% increase in our employed
physician base. While we expect
that employing physicians should provide relief on cost pressures associated with on-call coverage
and other professional fees, we anticipate incurring additional labor and other start-up
related costs as we continue the integration of employed physicians.
55
We also face risk from competition for outpatient business. We expect to mitigate this risk
through continued focus on our physician employment strategy, our commitment to capital investment
in our hospitals, including updated technology and equipment, and our commitment to our quality of
care initiatives that some competitors, including individual physicians or physician groups, may
not be equipped to implement.
Uncompensated Care
Like others in the hospital industry, we continue to experience high levels of uncompensated
care, including charity care and bad debts. These elevated levels are driven by the number of
uninsured patients seeking care at our hospitals, increasing healthcare costs and other factors
beyond our control, such as increases in the amount of co-payments and deductibles as employers
continue to pass more of these costs on to their employees. In addition, as a result of high
unemployment and its impact on the economy, we believe that our hospitals may continue to
experience high levels of or possibly growth in bad debts and charity care. During the year ended
September 30, 2010, our uncompensated care as a percentage of acute care revenue was 13.2%,
compared to 13.5% in the prior year.
We continue to monitor our self-pay admissions on a daily basis and continue to focus on the
efficiency of our emergency rooms, point-of-service cash collections, Medicaid eligibility
automation and process-flow improvements. While the volume of patients registered as uninsured
remains high, we continue to be successful in qualifying many of these uninsured patients for
Medicaid or other third-party coverage, which has helped to alleviate some of the pressure created
from the growth in our uncompensated care.
Our level of uncompensated care continues to be affected by the volume of under-insured
patients or patient balances after insurance. At September 30, 2010, self-pay balances after
insurance were $35.9 million, compared to $37.3 million at September 30, 2009.
We anticipate that if we experience further growth in uninsured volume and revenue over the
near-term, along with continued increases in co-payments and deductibles for insured patients, our
uncompensated care will increase and our results of operations could be adversely affected.
The percentages of insured and uninsured hospital receivables (prior to allowances for
contractual adjustments and doubtful accounts) are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Insured receivables |
|
|
61.8 |
% |
|
|
62.0 |
% |
Uninsured receivables |
|
|
38.2 |
% |
|
|
38.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The percentages in the table above are calculated using hospital receivable balances. Uninsured
and insured receivables are net of discounts and contractual adjustments recorded at the time of
billing. Included in insured receivables are accounts that are pending approval from Medicaid.
These receivables were 3.0% and 3.2% of hospital receivables at September 30, 2010 and 2009,
respectively.
The percentages of hospital receivables in summarized aging categories are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
0 to 90 days |
|
|
71.9 |
% |
|
|
69.4 |
% |
91 to 180 days |
|
|
17.8 |
% |
|
|
18.1 |
% |
Over 180 days |
|
|
10.3 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
56
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. In preparing our financial statements, we make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
We have determined an accounting estimate to be critical if: (1) the accounting estimate
requires us to make assumptions about matters that were highly uncertain at the time the accounting
estimate was made and (2) changes in the estimate would have a material impact on our financial
condition or results of operations. There are other items within our financial statements that
require estimation but are not deemed critical as defined herein. Changes in estimates used in
these and other items could have a material impact on our financial statements.
Allowance for Doubtful Accounts. Our ability to collect outstanding receivables from
third-party payors and patients is critical to our operating performance and cash flows. The
primary collection risk lies with uninsured patient accounts or patient accounts for which primary
insurance has paid but a patient portion remains outstanding. The provision for bad debts and the
allowance for doubtful accounts relate primarily to amounts due directly from patients. Our
estimation of the allowance for doubtful accounts is based primarily upon the type and age of the
patient accounts receivable and the effectiveness of our collection efforts. Our policy is to
reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts
related to co-payments and deductibles, as these charges are recorded. We monitor our accounts
receivable balances and the effectiveness of our reserve policies on a monthly basis and review
various analytics to support the basis for our estimates. These efforts primarily consist of
reviewing the following:
|
|
|
Historical write-off and collection experience using a hindsight or look-back approach; |
|
|
|
|
Revenue and volume trends by payor, particularly the self-pay components; |
|
|
|
|
Changes in the aging and payor mix of accounts receivable, including increased focus on
accounts due from the uninsured and accounts that represent co-payments and deductibles due
from patients; |
|
|
|
|
Cash collections as a percentage of net patient revenue less bad debt expense; |
|
|
|
|
Trending of days revenue in accounts receivable; and |
|
|
|
|
Various allowance coverage statistics. |
We
regularly perform hindsight procedures to evaluate historical
write-off and collection experience throughout the year to assist in
determining the reasonableness of our process for estimating the
allowance for doubtful accounts.
We do not pursue collection of amounts related to patients who qualify for charity care under
our guidelines. Charity care accounts are deducted from gross revenue and do not affect the
provision for bad debts.
At September 30, 2010, our self-pay receivables, including amounts due from uninsured patients
and co-payment and deductible amounts due from insured patients, were $160.7 million and our
allowance for doubtful accounts was $125.4 million. Excluding third-party settlement balances, days
revenue in accounts receivable were 43 days at September 30, 2010, compared to 49 days at September
30, 2009. For the year ended September 30, 2010, the provision for bad debts was 11.4% of acute
care revenue, compared to 11.5% in the prior year. Significant changes in payor mix or business
office operations could have a significant impact on the provision for bad debts, as well as our
results of operations and cash flows.
Allowance for Contractual Discounts and Settlement Estimates. We derive a significant portion
of our net patient revenue from Medicare, Medicaid and managed care payors that receive discounts
from our standard charges. For the years ended September 30, 2010, 2009 and 2008, Medicare,
Medicaid and managed care revenue together accounted for 87.8%, 88.9% and 90.9%, respectively, of
our hospitals net patient revenue.
We estimate contractual discounts and allowances based upon payment terms outlined in our
managed care contracts, by federal and state regulations for the Medicare and various Medicaid
programs, and in accordance with terms of our uninsured discount program. Contractual discounts for
most of our patient revenue are determined by an automated process that establishes the discount on
a patient-by-patient basis. The payment terms or fee schedules for most payors have been entered
into our patient accounting systems. Automated (system-generated) contractual discounts are
recorded, at the time a patient account is billed, based upon the system-loaded payment terms. In
certain instances for payors that are not significant or who have not entered into a contract with
us, we make manual estimates in determining contractual allowances based upon historical collection
rates. At the end of each month, we estimate contractual allowances for all unbilled accounts based
on payor-specific six-month average contractual discount rates.
57
For governmental payors such as Medicare and Medicaid, we determine contractual discounts or
allowances based upon the programs reimbursement (payment) methodology (i.e. either prospectively
determined or retrospectively determined based on costs as defined by the government payor). These
contractual discounts are determined by an automated process in a manner similar to the process
used for managed care revenue. Under prospective payment programs, we record contractual discounts
based upon predetermined reimbursement rates. For retrospective cost-based revenues, which are less
prevalent, we estimate contractual allowances based upon historical and current factors which are
adjusted as necessary in future periods, when final settlements of filed cost reports are received.
Net adjustments to estimated third-party payor settlements, also known as prior year contractuals,
resulted in an increase in acute care revenue of $5.2 million, $3.2 million and $1.0 million for
the years ended September 30, 2010, 2009 and 2008, respectively.
Management continually reviews the contractual estimation process to consider and incorporate
updates to laws and regulations and the frequent changes in managed care contractual terms that
result from contract renegotiations and renewals. All contractual adjustments, regardless of type
of payor or method of calculation, are reviewed and compared to actual payment experience on an
individual patient account basis. Discrepancies between expected and actual payments are reviewed,
and as necessary, appropriate corrections to the patient accounts are made to reflect actual
payments received. If a discrepancy exists between the payment terms loaded into the contract
management system and the actual discount based on payments received, the system is updated
accordingly to ensure appropriate discounting of future charges.
Additionally, we rely on other analytical tools to ensure our contractual discounts are
reasonably estimated. These include, but are not limited to, monitoring of collection experience by
payor, reviewing total patient collections as a percentage of net patient revenue (adjusted for the
provision for bad debts) on a trailing twelve-month basis, gross to net patient revenue
comparisons, contractual allowance metrics, etc. As well, patient accounts are continually reviewed
to ensure all patient accounts reflect either system-generated discounts or estimated contractual
allowances, as necessary.
Medicare and Medicaid regulations and various managed care contracts are often complex and may
include multiple reimbursement mechanisms for different types of services provided in our
healthcare facilities, requiring complex calculations and assumptions which are subject to
interpretation. Additionally, the services authorized and provided and resulting reimbursement are
often subject to interpretation. These interpretations sometimes result in payments that differ
from our estimates. Additionally, updates to regulations and contract renegotiations occur
frequently, necessitating continual review and assessment of the estimation process by management.
We have made significant investments in our patient accounting information systems, human resources
and internal controls, which we believe greatly reduces the likelihood of a significant variance
occurring between the recorded and estimated contractual discounts. Given that most of our
contractual discounts are pre-defined or contractually based, and as a result of continual internal
monitoring processes and our use of analytical tools, we believe the aggregate differences between
amounts recorded for initial contractual discounts and final contractual discounts resulting from
payments received are not significant. Finally, we believe that having a wide variety and large
number of managed care contracts that are subject to review and administration on a
hospital-by-hospital basis minimizes the impact on the Companys net revenue of any imprecision in
recorded contractual discounts caused by the system-load of payment terms of a particular payor. We
believe that our systems and processes, as well as other items discussed, provide reasonable
assurance that any change in estimate related to contractual discounts is immaterial to our
financial position, results of operations and cash flows.
Insurance Reserves. Given the nature of our operating environment, we may become subject to
medical malpractice or workers compensation claims or lawsuits. We maintain third-party insurance
coverage for individual malpractice and workers compensation claims to mitigate a portion of this
risk. In addition, we maintain excess coverage limiting our exposure to an aggregate annual amount
for claims. We estimate our reserve for self-insured professional and general liability and workers
compensation risks using historical claims data, demographic factors, severity factors, current
incident logs and other actuarial analysis. At September 30, 2010 and 2009, our professional and
general liability accrual for asserted and unasserted claims was $41.6 million and $41.7 million,
respectively. For the year ended September 30, 2010, our total premiums and self-insured retention
cost for professional and general liability insurance was $23.4 million, compared with $25.5
million in the prior year.
58
The estimated accrual for medical malpractice and workers compensation claims could be
significantly affected should current and future occurrences differ from historical claims trends.
The estimation process is also complicated by the complexity and changing nature of tort reform in
the states in which we operate. While we monitor current claims closely and consider outcomes when
estimating our insurance accruals, the complexity of the claims and wide range of potential
outcomes often hampers timely adjustments to the assumptions used in the estimates.
Valuations from our independent actuary for professional and general liability losses resulted
in a change in related estimates for prior years which decreased professional and general liability
expense by the following amounts (in millions):
|
|
|
|
|
Year ended September 30, 2010 |
|
$ |
(2.6 |
) |
Year ended September 30, 2009 |
|
$ |
(1.2 |
) |
Year ended September 30, 2008 |
|
$ |
(6.8 |
) |
Our estimate of the reserve for professional and general liability claims is based upon
actuarial calculations that are completed semi-annually. The changes in estimates noted above were
recognized in the periods in which the independent actuarial calculations were received. The key
assumptions underlying the development of our estimate (loss development, trends and increased
limits factors) have not changed materially, as they are largely based upon professional liability
insurance industry data published by the Insurance Services Office (ISO), a leading provider of
data, underwriting, risk management and legal/regulatory services. The reductions in professional
and general liability expense related to changes in prior year estimates reflected above for the
years ended September 30, 2010, 2009 and 2008, are the result of better than expected claims
experience as compared to the industry benchmarks for loss development included in the original
actuarial estimate.
Sensitivity in the estimate of our professional and general liability claims reserve is
reflected in various actuarial confidence levels. We utilize a statistical confidence level of 50%
in developing our best estimate of the reserve for professional and general liability claims.
Higher statistical confidence levels, while not representative of our best estimate, provide a
range of reasonably likely outcomes upon resolution of the related claims. The following table
outlines our reported reserve amounts compared to reserve levels established at the higher
statistical confidence levels.
|
|
|
|
|
As reported at September 30, 2010 |
|
$ |
41.6 |
|
75% Confidence Level |
|
$ |
48.2 |
|
90% Confidence Level |
|
$ |
60.1 |
|
Valuations from our independent actuary for workers compensation losses resulted in a change
in related estimates for prior years which increased (decreased) workers compensation expense by
the following amounts (in millions):
|
|
|
|
|
Year ended September 30, 2010 |
|
$ |
1.1 |
|
Year ended September 30, 2009 |
|
$ |
(0.5 |
) |
Year ended September 30, 2008 |
|
$ |
0.8 |
|
Medical Claims Payable. Medical claims expense, including claims paid to our hospitals, was
$690.5 million, $602.1 million and $461.6 million, or 87.2%, 86.1% and 85.2% of premium revenue,
for the years ended September 30, 2010, 2009 and 2008, respectively. For the years ended September
30, 2010, 2009 and 2008, $11.8 million, $9.3 million and $9.6 million, respectively, of health plan
payments made to hospitals and other healthcare entities owned by us for services provided to our
enrollees were eliminated in consolidation.
59
The following table shows the components of the change in medical claims payable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Medical claims payable as of October 1 |
|
$ |
113,519 |
|
|
$ |
97,343 |
|
Medical claims expense incurred during the year: |
|
|
|
|
|
|
|
|
Related to current year |
|
|
697,052 |
|
|
|
620,153 |
|
Related to prior years |
|
|
(6,596 |
) |
|
|
(18,077 |
) |
|
|
|
|
|
|
|
Total expenses |
|
|
690,456 |
|
|
|
602,076 |
|
|
|
|
|
|
|
|
Medical claims payments during the year: |
|
|
|
|
|
|
|
|
Related to current year |
|
|
(587,292 |
) |
|
|
(508,299 |
) |
Related to prior years |
|
|
(105,310 |
) |
|
|
(77,601 |
) |
|
|
|
|
|
|
|
Total payments |
|
|
(692,602 |
) |
|
|
(585,900 |
) |
|
|
|
|
|
|
|
Medical claims payable as of September 30 |
|
$ |
111,373 |
|
|
$ |
113,519 |
|
|
|
|
|
|
|
|
As reflected in the table above, medical claims expense for the year ended September 30, 2010,
includes a $6.6 million reduction of medical costs related to prior years resulting from favorable
development in the Medicaid and Medicare product lines of $6.4 million and $209,000, respectively.
The favorable development is attributable to lower than anticipated
medical costs. Medical claims
expense for the year ended September 30, 2009, includes an $18.1 million reduction of medical costs
related to prior years resulting from favorable development in the Medicaid and Medicare product
lines of $15.5 million and $2.6 million, respectively. The favorable development is attributable to
lower than anticipated medical costs and is offset, in part, by $10.8 million in reductions in
premium revenue associated with settlements of various prior year program receivables.
We estimate our medical claims payable using historical claims experience (including severity
and payment lag time) and other actuarial analysis including number of enrollees, age of enrollees
and certain enrollee health indicators to predict the cost of healthcare services provided to
enrollees during any given period. While management believes that its estimation methodology
effectively captures trends in medical claims costs, actual payments could differ significantly
from our estimates given changes in healthcare costs or adverse experience. For example, our
medical claims payable is primarily composed of estimates related to the most recent three months
and periods prior to the most recent three months. The claims trend factor, which is developed
through a comprehensive analysis of claims incurred in prior months, is the most significant
component used in developing the claims liability estimates for the most recent three months. The
completion factor is an actuarial estimate, based upon historical experience, of the percentage of
incurred claims during a given period that have been adjudicated as of the date of estimation. The
completion factor is the most significant component used in developing the claims liability
estimates for the periods prior to the most recent three months. The following table illustrates
the sensitivity of our medical claims payable at September 30, 2010, and the estimated potential
impact on our results of operations, to changes in these factors that management believes are
reasonably likely based upon our historical experience and currently available information (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims Trend Factor |
|
|
Completion Factor |
|
|
|
|
|
Increase (Decrease) in |
|
|
|
|
|
|
Increase (Decrease) in |
|
Increase (Decrease) in |
|
|
Medical Claims |
|
|
Increase (Decrease) in |
|
|
Medical Claims |
|
Factor |
|
|
Payable |
|
|
Factor |
|
|
Payable |
|
|
(3.0 |
)% |
|
$ |
(4,363 |
) |
|
|
1.0 |
% |
|
$ |
(5,042 |
) |
|
(2.0 |
) |
|
|
(2,908 |
) |
|
|
0.5 |
|
|
|
(2,524 |
) |
|
(1.0 |
) |
|
|
(1,454 |
) |
|
|
(0.5 |
) |
|
|
2,592 |
|
|
1.0 |
|
|
|
1,454 |
|
|
|
(1.0 |
) |
|
|
5,190 |
|
Goodwill and Other Intangibles. The accounting policies and estimates related to goodwill and
other intangibles are considered critical because of the significant impact that impairment could
have on our operating results. We record all assets and liabilities acquired in purchase
acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair
value as required by Financial Accounting Standards Board (FASB) authoritative guidance regarding
business combinations. Goodwill, which was $718.2 million at September 30, 2010, is not amortized
but is subject to tests for impairment annually or more often if events or circumstances indicate
it may be impaired. The initial recording of goodwill and other intangibles requires subjective
judgments concerning estimates of the fair value of the acquired assets. An impairment loss is
recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. We did
not record an impairment loss during the year ended September 30, 2010. During the year ended
September 30, 2009, we recorded a $64.6 million non-cash charge ($43.2 million after tax) related
to the impairment of goodwill in our Florida market. Other identifiable intangible assets, net of
accumulated amortization, were $27.0 million at September 30, 2010, compared to $30.0 million in
the prior year. These are amortized over their estimated useful lives and are evaluated for
impairment if events and circumstances indicate a possible impairment. Such evaluation of other
intangible assets is based on undiscounted cash flow projections. Estimated cash flows may extend
far into the future and, by their nature, are difficult to determine over an extended timeframe.
Factors that may significantly affect the estimates include, among others, competitive forces,
customer behaviors and attrition, changes in revenue growth trends, cost structures and technology,
and changes in discount rates and specific industry or market sector conditions. Other key
judgments in accounting for intangibles include useful life and classification between goodwill and
indefinite-lived intangibles or other intangibles which require amortization. See Goodwill and
Other Intangible Assets in the Notes to Consolidated Financial Statements for additional
information regarding intangible assets. To assist in assessing the impact of a goodwill or
intangible asset impairment charge at September 30, 2010, we have $745.2 million of goodwill and
intangible assets. The impact of a 5% impairment charge would result in a reduction in pre-tax
income of $37.3 million.
60
Income Taxes. We estimate and record a valuation allowance to reduce
deferred tax assets to the amount we believe is more likely than not
to be realized in future periods based on all relevant information.
We believe that future income as well as the reversal of deferred tax
liabilities will enable us to realize the deferred tax assets we have
recorded, net of the valuation allowance we have established.
Certain tax matters require interpretations of tax law
that may be subject to future challenge and may not be upheld under tax audit. Significant judgment is required in determining and
assessing the impact of such tax-related contingencies. Effective October 1, 2007, we adopted the provisions of FASB authoritative guidance regarding
accounting for uncertainty in income taxes, which prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of all tax positions
accounted for in accordance with provisions of FASB authoritative guidance regarding accounting for
income taxes. In addition, the provisions related to accounting for uncertainty in income taxes
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. We applied these provisions to all tax positions upon initial
adoption of this guidance. Only tax positions that meet the more-likely-than-not recognition
threshold at the effective date, October 1, 2007, have been recognized in connection with these
provisions.
The provisions regarding accounting for uncertainty in income taxes permits interest and
penalties on underpayments of income taxes to be classified as interest expense, income tax
expense, or another appropriate expense classification based on the accounting election of the
company. Our policy is to classify interest and penalties as a component of income tax expense.
The estimates, judgments and assumptions used by us under Allowance for Doubtful Accounts,
Allowance for Contractual Discounts and Settlement Estimates, Insurance Reserves, Medical
Claims Payable, Goodwill and Other Intangibles and Income Taxes are, we believe, reasonable,
but involve inherent uncertainties as described above, which may or may not be controllable by
management. As a result, the accounting for such items could result in different amounts if
management used different assumptions or if different conditions occur in future periods.
61
RESULTS OF OPERATIONS SUMMARY
Consolidated
The following table sets forth, for the periods indicated, results of consolidated operations
expressed in dollar terms and as a percentage of net revenue. Such information has been derived
from our audited consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
($ in thousands) |
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
1,729,344 |
|
|
|
68.6 |
% |
|
$ |
1,662,469 |
|
|
|
70.4 |
% |
|
$ |
1,523,790 |
|
|
|
73.8 |
% |
Premium revenue |
|
|
792,062 |
|
|
|
31.4 |
% |
|
|
699,503 |
|
|
|
29.6 |
% |
|
|
541,746 |
|
|
|
26.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
2,521,406 |
|
|
|
100.0 |
% |
|
|
2,361,972 |
|
|
|
100.0 |
% |
|
|
2,065,536 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
686,303 |
|
|
|
27.2 |
% |
|
|
660,921 |
|
|
|
28.0 |
% |
|
|
632,109 |
|
|
|
30.6 |
% |
Supplies |
|
|
266,545 |
|
|
|
10.6 |
% |
|
|
250,573 |
|
|
|
10.6 |
% |
|
|
231,259 |
|
|
|
11.2 |
% |
Medical claims |
|
|
678,651 |
|
|
|
26.9 |
% |
|
|
592,760 |
|
|
|
25.1 |
% |
|
|
452,055 |
|
|
|
21.9 |
% |
Other operating expenses |
|
|
363,916 |
|
|
|
14.4 |
% |
|
|
325,735 |
|
|
|
13.8 |
% |
|
|
283,123 |
|
|
|
13.7 |
% |
Provision for bad debts |
|
|
197,680 |
|
|
|
7.9 |
% |
|
|
192,563 |
|
|
|
8.2 |
% |
|
|
161,936 |
|
|
|
7.8 |
% |
Rentals and leases |
|
|
39,955 |
|
|
|
1.6 |
% |
|
|
39,127 |
|
|
|
1.7 |
% |
|
|
36,633 |
|
|
|
1.8 |
% |
Interest expense, net |
|
|
66,810 |
|
|
|
2.6 |
% |
|
|
67,890 |
|
|
|
2.9 |
% |
|
|
75,665 |
|
|
|
3.7 |
% |
Depreciation and
amortization |
|
|
96,106 |
|
|
|
3.8 |
% |
|
|
97,462 |
|
|
|
4.1 |
% |
|
|
96,741 |
|
|
|
4.7 |
% |
Management fees |
|
|
5,000 |
|
|
|
0.2 |
% |
|
|
5,000 |
|
|
|
0.2 |
% |
|
|
5,000 |
|
|
|
0.2 |
% |
Impairment of goodwill |
|
|
|
|
|
|
|
|
|
|
64,639 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
Hurricane-related
property damage |
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
0.0 |
% |
|
|
3,589 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and
expenses |
|
|
2,400,966 |
|
|
|
95.2 |
% |
|
|
2,297,608 |
|
|
|
97.3 |
% |
|
|
1,978,110 |
|
|
|
95.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before gain
(loss) on disposal of
assets and income taxes |
|
|
120,440 |
|
|
|
4.8 |
% |
|
|
64,364 |
|
|
|
2.7 |
% |
|
|
87,426 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal
of assets, net |
|
|
108 |
|
|
|
0.0 |
% |
|
|
1,465 |
|
|
|
0.1 |
% |
|
|
(75 |
) |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before income
taxes |
|
|
120,548 |
|
|
|
4.8 |
% |
|
|
65,829 |
|
|
|
2.8 |
% |
|
|
87,351 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
44,715 |
|
|
|
1.8 |
% |
|
|
27,576 |
|
|
|
1.2 |
% |
|
|
35,325 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from
continuing operations |
|
|
75,833 |
|
|
|
3.0 |
% |
|
|
38,253 |
|
|
|
1.6 |
% |
|
|
52,026 |
|
|
|
2.5 |
% |
Loss from discontinued
operations, net of income
taxes |
|
|
(1,087 |
) |
|
|
(0.1 |
)% |
|
|
(176 |
) |
|
|
(0.0 |
)% |
|
|
(11,275 |
) |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
74,746 |
|
|
|
2.9 |
% |
|
|
38,077 |
|
|
|
1.6 |
% |
|
|
40,751 |
|
|
|
2.0 |
% |
Net earnings attributable
to non-controlling
interests |
|
|
(8,279 |
) |
|
|
(0.3 |
)% |
|
|
(9,987 |
) |
|
|
(0.4 |
)% |
|
|
(4,437 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable
to IASIS Healthcare LLC |
|
$ |
66,467 |
|
|
|
2.6 |
% |
|
$ |
28,090 |
|
|
|
1.2 |
% |
|
$ |
36,314 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
Acute Care
The following table sets forth, for the periods indicated, results of our acute care
operations expressed in dollar terms and as a percentage of acute care revenue. Such information
has been derived from our audited consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
($ in thousands) |
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
1,729,344 |
|
|
|
99.3 |
% |
|
$ |
1,662,469 |
|
|
|
99.4 |
% |
|
$ |
1,523,790 |
|
|
|
99.4 |
% |
Revenue between segments |
|
|
11,805 |
|
|
|
0.7 |
% |
|
|
9,316 |
|
|
|
0.6 |
% |
|
|
9,594 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acute care revenue (1) |
|
|
1,741,149 |
|
|
|
100.0 |
% |
|
|
1,671,785 |
|
|
|
100.0 |
% |
|
|
1,533,384 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
667,154 |
|
|
|
38.3 |
% |
|
|
641,893 |
|
|
|
38.4 |
% |
|
|
614,442 |
|
|
|
40.1 |
% |
Supplies |
|
|
266,347 |
|
|
|
15.3 |
% |
|
|
250,310 |
|
|
|
15.0 |
% |
|
|
231,001 |
|
|
|
15.1 |
% |
Other operating expenses |
|
|
339,304 |
|
|
|
19.5 |
% |
|
|
302,804 |
|
|
|
18.1 |
% |
|
|
264,814 |
|
|
|
17.3 |
% |
Provision for bad debts |
|
|
197,680 |
|
|
|
11.4 |
% |
|
|
192,563 |
|
|
|
11.5 |
% |
|
|
161,936 |
|
|
|
10.6 |
% |
Rentals and leases |
|
|
38,409 |
|
|
|
2.2 |
% |
|
|
37,563 |
|
|
|
2.2 |
% |
|
|
35,466 |
|
|
|
2.3 |
% |
Interest expense, net |
|
|
66,810 |
|
|
|
3.8 |
% |
|
|
67,890 |
|
|
|
4.1 |
% |
|
|
75,665 |
|
|
|
4.9 |
% |
Depreciation and amortization |
|
|
92,544 |
|
|
|
5.3 |
% |
|
|
94,014 |
|
|
|
5.6 |
% |
|
|
93,003 |
|
|
|
6.0 |
% |
Management fees |
|
|
5,000 |
|
|
|
0.3 |
% |
|
|
5,000 |
|
|
|
0.3 |
% |
|
|
5,000 |
|
|
|
0.3 |
% |
Impairment of goodwill |
|
|
|
|
|
|
|
|
|
|
64,639 |
|
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
Hurricane-related property damage |
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
0.1 |
% |
|
|
3,589 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,673,248 |
|
|
|
96.1 |
% |
|
|
1,657,614 |
|
|
|
99.2 |
% |
|
|
1,484,916 |
|
|
|
96.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before gain (loss)
on disposal of assets and
income taxes |
|
|
67,901 |
|
|
|
3.9 |
% |
|
|
14,171 |
|
|
|
0.8 |
% |
|
|
48,468 |
|
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of
assets, net |
|
|
108 |
|
|
|
0.0 |
% |
|
|
1,616 |
|
|
|
0.1 |
% |
|
|
(75 |
) |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before income taxes |
|
$ |
68,009 |
|
|
|
3.9 |
% |
|
$ |
15,787 |
|
|
|
0.9 |
% |
|
$ |
48,393 |
|
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Revenue between segments is eliminated in our consolidated results. |
Years Ended September 30, 2010 and 2009
Acute care revenue Acute care revenue from our hospital operations for the year
ended September 30, 2010, was $1.7 billion, an increase of $69.4 million, or 4.1%, compared to $1.7
billion in the prior year. The increase in acute care revenue is comprised of an increase in
adjusted admissions of 0.6% and an increase in net patient revenue per adjusted admission of 3.8%.
Salaries and benefits Salaries and benefits expense from our hospital operations for
the year ended September 30, 2010, was $667.2 million, or 38.3% of acute care revenue, compared to
$641.9 million, or 38.4% of acute care revenue in the prior year.
Supplies Supplies expense from our hospital operations for the year ended September
30, 2010, was $266.3 million, or 15.3% of acute care revenue, compared to $250.3 million, or 15.0%
of acute care revenue, in the prior year. The increase in supplies as a percentage of acute care
revenue is primarily the result of a shift in the mix of our surgical volume to cases with more costly
implant utilization, such as certain cardiology and orthopedic procedures.
Other operating expenses Other operating expenses from our hospital operations for
the year ended September 30, 2010, were $339.3 million, or 19.5% of acute care revenue, compared to
$302.8 million, or 18.1% of acute care revenue in the prior year. Included in the current year were
increased professional fees associated with our participation in the indigent care affiliation
agreements in our Texas market. Excluding the impact of these indigent care affiliation agreements,
other operating expenses as a percentage of acute care revenue were 16.7% for the year ended
September 30, 2010, compared to 16.1% in the prior year. The remaining increase in other operating
expenses as a percentage of acute care revenue in the current year
period is impacted by a 0.3%
increase in non-income related taxes, and a 0.4% increase in purchased services related to information
technology costs and collection agency fees.
63
Provision for bad debts Provision for bad debts from our hospital operations for the
year ended September 30, 2010, was $197.7 million, or 11.4% of acute care revenue, compared to
$192.6 million, or 11.5% of acute care revenue in the prior year.
Earnings
from continuing operations before income taxes Earnings from continuing
operations before income taxes increased $52.2 million to $68.0 million for the year ended
September 30, 2010, compared to $15.8 million in the prior year. Earnings from continuing
operations before income taxes for the year ended September 30, 2009, included the impact of a
$64.6 million non-cash charge related to the impairment of goodwill in our Florida market.
Years Ended September 30, 2009 and 2008
Acute care revenue Acute care revenue from our hospital operations for the year
ended September 30, 2009, was $1.7 billion, an increase of $138.4 million, or 9.0%, compared to
$1.5 billion in the prior year. Approximately 2.1% of this increase is attributable to the increase
in revenue associated with the supplemental Medicaid reimbursement programs in our Texas market.
The remaining increase in acute care revenue of 6.9% is comprised of an increase in adjusted
admissions of 2.4% and an increase in net patient revenue per adjusted admission of 4.4%, excluding
the impact of supplemental Medicaid reimbursement.
Salaries and benefits Salaries and benefits expense from our hospital operations for
the year ended September 30, 2009, was $641.9 million, or 38.4% of acute care revenue, compared to
$614.4 million, or 40.1% of acute care revenue in the prior year. The decline in salaries and
benefits expense as a percentage of acute care revenue is attributable to a reduction in employee
medical and pharmacy claims experience, primarily resulting from changes in our employee health
plan design. Additionally, our nursing contract labor as a percentage of acute care revenue
declined to 0.8% for the year ended September 30, 2009, compared to 1.2% in the prior year.
Other operating expenses Other operating expenses from our hospital operations for
the year ended September 30, 2009, were $302.8 million, or 18.1% of acute care revenue, compared to
$264.8 million, or 17.3% of acute care revenue in the prior year. The increase in other operating
expenses as a percentage of acute care revenue was the result of additional professional fees
incurred at our Texas hospitals to provide indigent care services during the current year, compared
to the prior year.
Provision for bad debts Provision for bad debts from our hospital operations for the
year ended September 30, 2009, was $192.6 million, or 11.5% of acute care revenue, compared to
$161.9 million, or 10.6% of acute care revenue in the prior year. We believe, as a result of the
prolonged economic recession and rising unemployment, we continue to experience an increase in
self-pay volume and revenue, as well as increases in the amount of co-payments and deductibles
passed on by employers to employees. For the year ended September 30, 2009, our self-pay admissions
as a percentage of total admissions were 6.0%, compared to 5.2% in the prior year. These trends
continue to be the main driver behind the increase in our provision for bad debts.
Interest expense, net Interest expense, net of interest income, for the year ended
September 30, 2009, was $67.9 million, compared to $75.7 million in the prior year. This decrease
of $7.8 million was primarily due to the impact of lower LIBOR interest rates in the current year,
compared to the prior year. The weighted average interest rate of outstanding borrowings under our
senior secured credit facilities was 3.6% for the year ended September 30, 2009, compared to 5.6%
in the prior year.
Impairment of goodwill Impairment of goodwill for the year ended September 30, 2009,
includes a $64.6 million non-cash charge related to our Florida market. We have experienced other
than temporary changes in market conditions and the business mix of our Florida operations, which
have negatively impacted operating results in this market. Accordingly, we have written off the
goodwill associated with our Florida market.
Earnings from continuing operations before income taxes Earnings from continuing
operations before income taxes decreased $32.6 million to $15.8 million for the year ended
September 30, 2009, compared to $48.4 million in the prior year. Earnings from continuing
operations before income taxes for the year ended September 30, 2009, included the impact of a
$64.6 million non-cash charge related to the impairment of goodwill in our Florida market.
64
Health Choice
The following table sets forth, for the periods indicated, results of our Health Choice
operations expressed in dollar terms and as a percentage of premium revenue. Such information has
been derived from our audited consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
($ in thousands) |
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
Premium revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue |
|
$ |
792,062 |
|
|
|
100.0 |
% |
|
$ |
699,503 |
|
|
|
100.0 |
% |
|
$ |
541,746 |
|
|
|
100.0 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
19,149 |
|
|
|
2.4 |
% |
|
|
19,028 |
|
|
|
2.7 |
% |
|
|
17,667 |
|
|
|
3.3 |
% |
Supplies |
|
|
198 |
|
|
|
0.0 |
% |
|
|
263 |
|
|
|
0.0 |
% |
|
|
258 |
|
|
|
0.0 |
% |
Medical claims (1) |
|
|
690,456 |
|
|
|
87.2 |
% |
|
|
602,076 |
|
|
|
86.1 |
% |
|
|
461,649 |
|
|
|
85.2 |
% |
Other operating expenses |
|
|
24,612 |
|
|
|
3.1 |
% |
|
|
22,931 |
|
|
|
3.3 |
% |
|
|
18,309 |
|
|
|
3.4 |
% |
Rentals and leases |
|
|
1,546 |
|
|
|
0.2 |
% |
|
|
1,564 |
|
|
|
0.2 |
% |
|
|
1,167 |
|
|
|
0.2 |
% |
Depreciation and amortization |
|
|
3,562 |
|
|
|
0.5 |
% |
|
|
3,448 |
|
|
|
0.5 |
% |
|
|
3,738 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
739,523 |
|
|
|
93.4 |
% |
|
|
649,310 |
|
|
|
92.8 |
% |
|
|
502,788 |
|
|
|
92.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before loss on
disposal of assets |
|
|
52,539 |
|
|
|
6.6 |
% |
|
|
50,193 |
|
|
|
7.2 |
% |
|
|
38,958 |
|
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets, net |
|
|
|
|
|
|
|
|
|
|
(151 |
) |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
52,539 |
|
|
|
6.6 |
% |
|
$ |
50,042 |
|
|
|
7.2 |
% |
|
$ |
38,958 |
|
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Medical claims paid to our hospitals of $11.8 million, $9.3 million and $9.6 million for the
years ended September 30, 2010, 2009 and 2008, respectively, are eliminated in our
consolidated results. |
Years Ended September 30, 2010 and 2009
Premium revenue Premium revenue from Health Choice was $792.1 million for the year
ended September 30, 2010, an increase of $92.6 million or
13.2%, compared to $699.5 million in the
prior year. The growth in premium revenue was due to a 14.4% increase in Medicaid member months
resulting from increased enrollment in the state program, primarily attributable to the impact of
high unemployment, partially offset by a 1.9% decline in Medicaid premium revenue on a per member
per month basis.
Medical claims Prior to eliminations, medical claims expense was $690.5 million for
the year ended September 30, 2010, compared to $602.1 million in the prior year. Medical claims
expense represents the amounts paid by Health Choice for healthcare services provided to its
members. Medical claims expense as a percentage of premium revenue was 87.2% for the year ended
September 30, 2010, compared to 86.1% in the prior year. The increase in our medical claims expense
as a percentage of premium revenue is primarily the result of an overall increase in medical costs
on a per member per month basis, compared to the prior year, coupled with a 1.6% decline in overall
premium revenue on a per member per month basis.
Years Ended September 30, 2009 and 2008
Premium revenue Premium revenue from Health Choice was $699.5 million for the year
ended September 30, 2009, an increase of $157.8 million or 29.1%, compared to $541.7 million in the
prior year. The growth in premium revenue was attributable to a 31.6% increase in Medicaid
enrollees, resulting from Health Choices new contract with AHCCCS and increased enrollment in the
state program. In addition, Health Choice has implemented successful outreach efforts, especially
in its new counties, which have helped to increase the number of covered lives.
Medical claims Prior to eliminations, medical claims expense was $602.1 million for
the year ended September 30, 2009, compared to $461.6 million in the prior year. Medical claims
expense represents the amounts paid by Health Choice for healthcare services provided to its
members. Medical claims expense as a percentage of premium revenue was 86.1% for the year ended
September 30, 2009, compared to 85.2% in the prior year. The increase in medical claims expense as
a percentage of premium revenue is the result of AHCCCS implementation of a new risk based payment
methodology, which has negatively affected premium revenue on a per member per month basis in the
current year.
65
Income Taxes
The following discussion sets forth, for the periods indicated, the impact of income taxes on
our consolidated results. Such information has been derived from our audited consolidated
statements of operations.
Years Ended September 30, 2010 and 2009
Income tax expense We recorded a provision for income taxes from continuing
operations of $44.7 million, resulting in an effective tax rate of 37.1% for the year ended
September 30, 2010, compared to $27.6 million, for an effective tax rate of 41.9% in the prior
year. Our effective tax rate for the year ended September 30, 2009, was impacted by a non-deductible component of the
$64.6 million non-cash charge related to the impairment of goodwill in our Florida market.
Years Ended September 30, 2009 and 2008
Income tax expense We recorded a provision for income taxes from continuing
operations of $27.6 million, resulting in an effective tax rate of 41.9% for the year ended
September 30, 2009, compared to $35.3 million, for an effective tax rate of 40.4% in the prior
year. The increase in our effective tax rate is the result of the impact of a non-deductible
component of the $64.6 million non-cash charge related to the impairment of goodwill in our Florida
market.
Summary of Operations by Quarter
The following table presents unaudited quarterly operating results for the years ended
September 30, 2010 and 2009. We believe that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in conjunction with the
consolidated financial statements. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
Sept. 30, |
|
|
June 30, |
|
|
March 31, |
|
|
Dec. 31, |
|
|
|
2010(1) |
|
|
2010 |
|
|
2010(2) |
|
|
2009 |
|
|
|
(in thousands) |
|
Net revenue |
|
$ |
629,939 |
|
|
$ |
637,988 |
|
|
$ |
624,522 |
|
|
$ |
628,957 |
|
Earnings from continuing operations before income taxes |
|
|
20,800 |
|
|
|
34,410 |
|
|
|
35,410 |
|
|
|
29,928 |
|
Net earnings from continuing operations |
|
|
12,629 |
|
|
|
21,727 |
|
|
|
22,140 |
|
|
|
19,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
Sept. 30, |
|
|
June 30, |
|
|
March 31, |
|
|
Dec. 31, |
|
|
|
2009(3) |
|
|
2009 |
|
|
2009(4) |
|
|
2008 |
|
|
|
(in thousands) |
|
Net revenue |
|
$ |
620,056 |
|
|
$ |
601,618 |
|
|
$ |
578,674 |
|
|
$ |
561,624 |
|
Earnings (loss) from continuing operations
before income taxes |
|
|
(38,699 |
) |
|
|
36,943 |
|
|
|
44,816 |
|
|
|
22,769 |
|
Net earnings (loss) from continuing operations |
|
|
(27,300 |
) |
|
|
23,228 |
|
|
|
28,367 |
|
|
|
13,958 |
|
|
|
|
(1) |
|
Results for the quarter ended September 30, 2010, include a $1.7 million property tax
assessment related to prior periods, and a $723,000 reduction and a $273,000 increase in prior
year estimates for professional and general liability losses and workers compensation claims,
respectively, as a result of our semi-annual actuarial studies. |
|
(2) |
|
Results for the quarter ended March 31, 2010, include $2.0 million of stock compensation
expense related to the repurchase of certain equity by our parent company, and a $1.9 million
reduction and an $801,000 increase in prior year estimates for professional and general
liability losses and workers compensation claims, respectively, as a result of our
semi-annual actuarial studies. |
|
(3) |
|
Results for the quarter ended September 30, 2009, include a $64.6 million non-cash charge
($43.2 million after taxes) related to the impairment of goodwill in our Florida market, and a
$2.0 million and a $326,000 increase in prior year estimates for professional and general
liability losses and workers compensation claims, respectively, as a result of our
semi-annual actuarial studies. |
|
(4) |
|
Results for the quarter ended March 31, 2009, include a $3.2 million and an $852,000
reduction in prior year estimates for professional and general liability losses and workers
compensation claims, respectively, as a result of our semi-annual actuarial studies. Results
for the quarter ended March 31, 2009, also include $938,000 in costs associated with property
damage sustained at The Medical Center of Southeast Texas, as a result of Hurricane Ike. |
66
LIQUIDITY AND CAPITAL RESOURCES
Overview of Cash Flow Activities for the Years Ended September 30, 2010 and 2009
For the years ended September 30, 2010 and 2009, our cash flows are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities |
|
$ |
257,239 |
|
|
$ |
271,971 |
|
Cash flows from investing activities |
|
|
(176,473 |
) |
|
|
(82,576 |
) |
Cash flows from financing activities |
|
|
(142,783 |
) |
|
|
(63,605 |
) |
Operating Activities
Operating cash flows decreased $14.7 million
for the year ended
September 30, 2010, compared to the prior year, primarily as a result
of an increase in cash taxes.
At September 30, 2010, we had $134.5 million in net working capital, compared to $264.5
million at September 30, 2009. Net accounts receivable decreased $21.0 million to $209.2 million at
September 30, 2010, from $230.2 million at September 30, 2009. Our days revenue in accounts
receivable at September 30, 2010, were 43, compared to 49 at September 30, 2009.
Investing Activities
Capital expenditures for the year ended September 30, 2010, were $81.3 million, compared to
$87.7 million in the prior year. Included in the year ended September 30, 2009, was $25.8 million related to the
construction of our two patient tower projects in our Utah market, which were completed during
fiscal 2009.
Investing activities during the year ended September 30, 2010, include $97.9 million in
funding for the acquisition of Brim.
Financing Activities
During the year ended September 30, 2010, we distributed $125.0 million, net of a $1.8 million
income tax benefit, to IAS, our parent company, to fund the
repurchase of certain shares of its outstanding preferred stock and cancel certain vested rollover
options to purchase its common stock. The holder of the IAS preferred stock is represented by an
investor group led by TPG, JLL Partners and Trimaran Fund Management. The repurchase of preferred
stock, which included accrued and outstanding dividends, and the cancellation of rollover options
were funded by our excess cash on hand. The cancellation of the rollover options, which were
associated with our 2004 recapitalization, resulted in the recognition of $2.0 million in stock
compensation expense during the year ended September 30, 2010.
During the year ended September 30, 2010, pursuant to the terms of our senior secured credit
facilities, we made net payments totaling $5.9 million, compared to net payments of $53.7 million,
including $47.8 million used to pay the outstanding balance of our revolving credit facility, in
the prior year. Additionally, we made payments totaling $2.5 million on capital leases and other
debt obligations during the year ended September 30, 2010, compared to $1.8 million in the prior
year.
67
Capital Resources
As of September 30, 2010, we had two separate debt arrangements:
|
|
|
$854.0 million in senior secured credit facilities; and |
|
|
|
|
$475.0 million in 8 3/4% senior subordinated notes due 2014. |
$854.0 Million Senior Secured Credit Facilities
The $854.0 million senior secured credit facilities include: (i) a senior secured term loan of
$439.0 million; (ii) a senior secured delayed draw term loan of $150.0 million; (iii) a senior
secured revolving credit facility of $225.0 million, with a $100.0 million sub-limit for letters of
credit; and (iv) a senior secured synthetic letter of credit facility of $40.0 million. All
facilities mature on March 15, 2014, except for the revolving credit facility, which matures on
April 27, 2013. The term loans bear interest at an annual rate of LIBOR plus 2.00% or, at our
option, the administrative agents base rate plus 1.00%. The revolving loans bear interest at an
annual rate of LIBOR plus an applicable margin ranging from 1.25% to 1.75% or, at our option, the
administrative agents base rate plus an applicable margin ranging from 0.25% to 0.75%, such rate
in each case depending on our senior secured leverage ratio. A commitment fee ranging from 0.375%
to 0.50% per annum is charged on the undrawn portion of the senior secured revolving credit
facility and is payable in arrears.
Principal under the senior secured term loan is due in 24 consecutive equal quarterly
installments in an aggregate annual amount equal to 1.0% of the original principal amount ($439.0
million) during the first six years thereof, with the balance payable in four equal installments in
year seven. Principal under the senior secured delayed draw term loan is due in equal quarterly
installments in an aggregate annual amount equal to 1.0% of the original principal amount ($150.0
million) until March 31, 2013, with the balance payable in four equal installments during the final
year of the loan. Unless terminated earlier, the senior secured revolving credit facility has a
single maturity of six years. The senior secured credit facilities are also subject to mandatory
prepayment under specific circumstances, including a portion of excess cash flow, a portion of the
net proceeds from an initial public offering, asset sales, debt issuances and specified casualty
events, each subject to various exceptions.
The senior secured credit facilities are (i) secured by a first mortgage and lien on our real
property and related personal and intellectual property and pledges of equity interests in the
entities that own such properties and (ii) guaranteed by certain of our subsidiaries.
In addition, the senior secured credit facilities contain certain covenants which, among other
things, limit the incurrence of additional indebtedness, investments, dividends, transactions with
affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other
matters customarily restricted in such agreements. The senior secured credit facilities agreement
contains a customary restricted payments covenant, which, among others restrictions, limits the
amount of dividends or other cash payments to IAS. As of September 30, 2010, we have $192.0 million
available to expend free of any such restrictions pursuant to the restricted payment basket
provisions set forth in this covenant.
At September 30, 2010, amounts outstanding under our senior secured credit facilities
consisted of a $423.6 million term loan and a $146.7 million delayed draw term loan. In addition,
we had $39.9 million and $41.4 million in letters of credit outstanding under the synthetic letter
of credit facility and the revolving credit facility, respectively. The weighted average interest
rate of outstanding borrowings under the senior secured credit facilities was 3.4% for the year
ended September 30, 2010.
$475.0 Million 8 3/4% Senior Subordinated Notes Due 2014
We and our wholly-owned subsidiary, IASIS Capital Corporation, a holding company with no
assets or operations, as issuers, have outstanding $475.0 million aggregate principal amount of 8
3/4% notes. Our 8 3/4% notes are general unsecured
senior subordinated obligations of the issuers, are subordinated in right of payment to their
existing and future senior debt, are pari passu in right of payment with any of their future senior
subordinated debt and are senior in right of payment to any of their future subordinated debt. Our
existing domestic subsidiaries, other than certain non-guarantor subsidiaries, which include Health
Choice and our non-wholly owned subsidiaries, are guarantors of our 8 3/4%
notes. Our 8 3/4% notes are effectively subordinated to all of the issuers
and the guarantors secured debt to the extent of the value of the assets securing the debt and are
structurally subordinated to all liabilities and commitments (including trade payables and capital
lease obligations) of our subsidiaries that are not guarantors of our 8 3/4%
notes. Our 8 3/4% notes require semi-annual interest payments in June and
December. The indenture related to the 8 3/4% notes contains a customary
restricted payments covenant, which, among others restrictions, limits the amount of dividends or
other cash payments to IAS, including payments to fund the interest on the Holdings Senior
Paid-in-Kind (PIK) Loans, which becomes cash pay in June 2012. As of September 30, 2010, we have
$105.0 million available to expend free of any such restrictions pursuant to the restricted payment
basket provisions set forth in this covenant.
68
Holdings Senior PIK Loans
IAS has outstanding Holdings Senior PIK Loans, which mature June 15, 2014. Proceeds were used
to repurchase certain preferred equity from the stockholders of IAS. The Holdings Senior PIK Loans
bear interest at an annual rate equal to LIBOR plus 5.25%. The Holdings Senior PIK Loans rank
behind our existing debt and will convert to cash-pay in June 2012, at which time all accrued
interest becomes payable. At September 30, 2010, the outstanding balance of the Holdings Senior PIK
Loans was $389.8 million, which includes $89.8 million of interest that has accrued to the
principal of these loans since the date of issuance, and is recorded in the financial statements of
IAS. The credit agreement related to the Holdings Senior PIK Loans includes a restricted payment
covenant, which, among other restrictions, limits the amount of dividends that can be paid to the
stockholders of IAS. As of September 30, 2010, we have $43.0 million available to expend free of
any such restrictions pursuant to the restricted payment basket provisions set forth in this
covenant.
Other
We are a party to interest rate swap agreements with Citibank, N.A. (Citibank) and Wachovia
Bank, N.A. (Wachovia), as counterparties, with notional amounts totaling $425.0 million, in an
effort to manage exposure to floating interest rate risk on a portion of our variable rate debt.
The arrangements with each counterparty include two interest rate swap agreements, one with a
notional amount of $112.5 million maturing on February 28, 2011, and one with a notional amount of
$100.0 million maturing on February 29, 2012. Under these agreements, we are required to make
monthly interest payments to our counterparties at fixed annual interest rates ranging from 1.5% to
2.0%, depending upon the agreement. Our counterparties are obligated to make monthly interest
payments to us based upon the one-month LIBOR rate in effect over the term of each agreement.
As of September 30, 2010, we provided a performance guaranty in the form of letters of credit
totaling $48.3 million for the benefit of AHCCCS to support our obligations under the Health Choice
contract to provide and pay for healthcare services. The amount of the performance guaranty is
based in part upon the membership in the plan and the related capitation revenue paid to us.
Capital Expenditures
We plan to finance our proposed capital expenditures with cash generated from operations,
borrowings under our senior secured credit facilities and other capital sources that may become
available. We expect our capital expenditures for fiscal 2011 to be $120.0 million to $130.0
million, including the following significant expenditures:
|
|
|
$50.0 million to $55.0 million for growth and new business projects; |
|
|
|
|
$40.0 million to $45.0 million in replacement or maintenance related projects at our
hospitals; |
|
|
|
|
$12.0 million related to
our newly acquired facilities; and |
|
|
|
|
$18.0 million in hardware and software costs related to information systems
projects, including healthcare IT stimulus initiatives. |
Liquidity
We rely on cash generated from our internal operations as our primary source of liquidity, as
well as available credit facilities, project and bank financings and the issuance of long-term
debt. From time to time, we have also utilized operating lease transactions that are sometimes
referred to as off-balance sheet arrangements. We expect that our future funding for working
capital needs, capital expenditures, long-term debt repayments and other financing activities will
continue to be provided from some or all of these sources. Each of our existing and projected
sources of cash is impacted by operational and financial risks that influence the overall amount of
cash generated and the capital available to us. For example, cash generated by our business
operations may be impacted by, among other things, economic downturns, weather-related catastrophes
and adverse industry conditions. Our future liquidity will be impacted by our ability to access
capital markets, which may be restricted due to our credit ratings, general market conditions, and
by existing or future debt agreements. For a further discussion of risks that can impact our
liquidity, see Item 1A., Risk Factors, beginning on page 34.
69
Including our senior secured credit facilities at September 30, 2010, we had available
liquidity as follows (in millions):
|
|
|
|
|
Available cash and cash equivalents |
|
$ |
144.5 |
|
Available capacity under our senior secured revolving credit facility |
|
|
183.6 |
|
|
|
|
|
Net available liquidity at September 30, 2010 |
|
$ |
328.1 |
|
|
|
|
|
Net available liquidity assumes 100% participation from all lenders currently participating in
our senior secured revolving credit facility. On February 9, 2010, Barclays Capital assumed a $20.0
million position in our senior secured revolving credit facility, which represents
8.9% of the total capacity. This position was previously held by Lehman Brothers, which we had
identified as a defaulting lender. At completion of this assumption, we had access to 100% of our
total revolver capacity. In addition to our available liquidity, we expect to generate significant
operating cash flow in fiscal 2011. We will also utilize proceeds from our financing activities as
needed.
Based upon our current level of operations and anticipated growth, we believe we have
sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over
the next three years. In evaluating the sufficiency of our liquidity for both the short-term and
long-term, we considered the expected cash flow to be generated by our operations, cash on hand and
the available borrowings under our senior secured credit facilities compared to our anticipated
cash requirements for debt service, working capital, capital expenditures and the payment of taxes,
as well as funding requirements for long-term liabilities.
As a result of this evaluation, we believe that we will have sufficient liquidity for the next
three years to fund the cash required for the payment of taxes and the capital expenditures
required to maintain our facilities during this period of time. We are unable at this time to
extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you,
however, that our operating performance will generate sufficient cash flow from operations or that
future borrowings will be available under our senior secured credit facilities, or otherwise, to
enable us to grow our business, service our indebtedness, including the senior secured credit
facilities and the 8 3/4% notes, or make anticipated capital
expenditures. For more information, see Item 1A., Risk Factors, beginning on page 34.
One element of our business strategy is to selectively pursue acquisitions and strategic
alliances in existing and new markets. Any acquisitions or strategic alliances may result in the
incurrence of, or assumption by us, of additional indebtedness. We continually assess our capital
needs and may seek additional financing, including debt or equity as considered necessary to fund
capital expenditures and potential acquisitions or for other corporate purposes. Our future
operating performance, ability to service or refinance our 8 3/4% notes and
ability to service and extend or refinance the senior secured credit facilities will be subject to
future economic conditions and to financial, business and other factors, many of which are beyond
our control. For more information, see Item 1A., Risk Factors, beginning on page 34.
70
We do not have any relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities, established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit
risk that could arise if we had engaged in such relationships.
Tabular Disclosure of Contractual Obligations
The following table reflects a summary of obligations and commitments outstanding including
both the principal and interest portions of long-term debt and capital lease obligations at
September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
Total |
|
|
|
(in millions) |
|
Contractual Cash Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, with interest (1) |
|
$ |
67.8 |
|
|
$ |
408.5 |
|
|
$ |
787.7 |
|
|
$ |
|
|
|
$ |
1,264.0 |
|
Capital lease obligations, with interest |
|
|
0.9 |
|
|
|
1.2 |
|
|
|
1.1 |
|
|
|
4.7 |
|
|
|
7.9 |
|
Medical claims |
|
|
111.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111.4 |
|
Operating leases |
|
|
28.5 |
|
|
|
50.0 |
|
|
|
38.5 |
|
|
|
57.4 |
|
|
|
174.4 |
|
Estimated self-insurance liabilities |
|
|
7.7 |
|
|
|
15.9 |
|
|
|
21.4 |
|
|
|
|
|
|
|
45.0 |
|
Purchase obligations |
|
|
30.8 |
|
|
|
17.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
48.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
247.1 |
|
|
$ |
492.7 |
|
|
$ |
848.9 |
|
|
$ |
62.1 |
|
|
$ |
1,650.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
Total |
|
|
|
(in millions) |
|
Other Commitments (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees of surety bonds |
|
$ |
12.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12.1 |
|
Letters of credit |
|
|
|
|
|
|
39.9 |
|
|
|
41.4 |
|
|
|
|
|
|
|
81.3 |
|
Other commitments |
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
16.9 |
|
|
|
39.9 |
|
|
|
41.4 |
|
|
|
|
|
|
|
98.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations and commitments |
|
$ |
264.0 |
|
|
$ |
532.6 |
|
|
$ |
890.3 |
|
|
$ |
62.1 |
|
|
$ |
1,749.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We used 3.4%, the weighted average interest rate incurred on our senior secured credit
facilities in fiscal 2010, which accrues actual interest at a variable rate. Actual interest
will vary based on changes in interest rates. Included in the weighted average interest rate
is the effect of our interest rate swap arrangements, which effectively converts $425.0
million of variable rate debt to fixed rate debt. |
|
(2) |
|
Excludes $11.7 million of unrecognized tax benefits and related interest that could result in
a cash settlement, of which $9.2 million relates to timing differences between book and
taxable income that may be offset by a reduction of cash tax obligations in future periods. We
have not included these amounts in the above table as we cannot reliably estimate the amount
and timing of payments related to these liabilities. |
Seasonality
The patient volumes and net revenue at our healthcare operations are subject to seasonal
variations and generally are greater during the quarter ended March 31 than other quarters. These
seasonal variations are caused by a number of factors, including seasonal cycles of illness,
climate and weather conditions in our markets, vacation patterns of both patients and physicians
and other factors relating to the timing of elective procedures.
RECENT ACCOUNTING PRONOUNCEMENTS
We have adopted the FASB authoritative guidance regarding business combinations, which
applies prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. This
guidance establishes principles and requirements for recognition and measurement of items acquired
during a business combination, as well as certain disclosure requirements in the financial
statements. The adoption of these provisions did not impact our results of operations or financial
position; however, it is anticipated to have a material effect on our accounting for future
acquisitions.
71
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to market risk from exposure to changes in interest rates based on our
financing, investing, and cash management activities. The following components of our senior
secured credit facilities bear interest at variable rates at specified margins above either the
agent banks alternate base rate or the LIBOR rate: (i) a $439.0 million, seven-year term loan;
(ii) a $150.0 million senior secured delayed draw term loan; and (iii) a $225.0 million, six-year
senior secured revolving credit facility. As of September 30, 2010, we had outstanding variable
rate debt of $570.3 million. We have managed our market exposure to changes in interest rates by
converting $425.0 million of this variable rate debt to fixed rate debt through the use of interest
rate swap agreements. Our interest rate swaps provide for $425.0 million of fixed rate debt under
our senior secured credit facilities through February 28, 2011 and $200.0 million from March 1,
2011 through February 29, 2012, at rates ranging from 1.5% to 2.0% depending upon the terms of the
specific agreement.
Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds
borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in
interest rates on our remaining variable rate debt or our consolidated financial position, results
of operations or cash flows would not be material. Holding other variables constant, including
levels of indebtedness and interest rate swaps, a 0.125% increase in interest rates would have an
estimated impact on pre-tax earnings and cash flows for the next twelve month period of $713,000.
Our interest rate swap agreements expose us to credit risk in the event of non-performance by
our counterparties, Citibank and Wachovia. However, we do not anticipate non-performance by
Citibank or Wachovia.
We have $475.0 million in senior subordinated notes due December 15, 2014, with interest
payable semi-annually at the rate of 8 3/4% per annum. At September 30, 2010,
the fair market value of the outstanding 8 3/4% notes was $485.7 million,
based upon quoted market prices as of that date.
We currently believe we have adequate liquidity to fund operations during the near term
through the generation of operating cash flows, cash on hand and access to our revolving credit
facility. Our ability to borrow funds under our revolving credit facility is subject to the
financial viability of the participating financial institutions. While we do not anticipate any of
our current lenders defaulting on their obligations, we are unable to provide assurance that any
particular lender will not default at a future date.
72
Item 8. Financial Statements and Supplementary Data.
IASIS Healthcare LLC
Index to Consolidated Financial Statements
73
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
IASIS Healthcare Corporation, sole member of IASIS Healthcare LLC
We have audited the accompanying consolidated balance sheets of IASIS Healthcare LLC as of
September 30, 2010 and 2009, and the related consolidated statements of operations, equity and cash
flows for each of the three years in the period ended September 30, 2010. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of IASIS Healthcare LLC at September 30, 2010 and
2009, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended September 30, 2010, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company changed its accounting
and disclosure for noncontrolling interests with the adoption of the guidance originally issued in
FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (codified in
FASB ASC Topic 810, Consolidation) effective October 1, 2009.
/s/ Ernst & Young LLP
Nashville, Tennessee
December 21, 2010
74
IASIS HEALTHCARE LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
144,511 |
|
|
$ |
206,528 |
|
Accounts receivable, less allowance for doubtful accounts of
$125,406 and $126,132 at September 30, 2010 and 2009,
respectively |
|
|
209,173 |
|
|
|
230,198 |
|
Inventories |
|
|
53,842 |
|
|
|
50,492 |
|
Deferred income taxes |
|
|
15,881 |
|
|
|
39,038 |
|
Prepaid expenses and other current assets |
|
|
65,340 |
|
|
|
49,453 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
488,747 |
|
|
|
575,709 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
985,291 |
|
|
|
997,353 |
|
Goodwill |
|
|
718,243 |
|
|
|
717,920 |
|
Other intangible assets, net |
|
|
27,000 |
|
|
|
30,000 |
|
Deposit for acquisition |
|
|
97,891 |
|
|
|
|
|
Other assets, net |
|
|
36,022 |
|
|
|
36,222 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,353,194 |
|
|
$ |
2,357,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
78,931 |
|
|
$ |
68,552 |
|
Salaries and benefits payable |
|
|
38,110 |
|
|
|
42,548 |
|
Accrued interest payable |
|
|
12,536 |
|
|
|
12,511 |
|
Medical claims payable |
|
|
111,373 |
|
|
|
113,519 |
|
Other accrued expenses and other current liabilities |
|
|
106,614 |
|
|
|
65,701 |
|
Current portion of long-term debt and capital lease obligations |
|
|
6,691 |
|
|
|
8,366 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
354,255 |
|
|
|
311,197 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
1,044,887 |
|
|
|
1,051,471 |
|
Deferred income taxes |
|
|
109,272 |
|
|
|
106,425 |
|
Other long-term liabilities |
|
|
60,162 |
|
|
|
54,222 |
|
|
|
|
|
|
|
|
|
|
Non-controlling interests with redemption rights |
|
|
72,112 |
|
|
|
72,527 |
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Members equity |
|
|
702,135 |
|
|
|
750,932 |
|
Non-controlling interests |
|
|
10,371 |
|
|
|
10,430 |
|
|
|
|
|
|
|
|
Total equity |
|
|
712,506 |
|
|
|
761,362 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
2,353,194 |
|
|
$ |
2,357,204 |
|
|
|
|
|
|
|
|
See accompanying notes.
75
IASIS HEALTHCARE LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
1,729,344 |
|
|
$ |
1,662,469 |
|
|
$ |
1,523,790 |
|
Premium revenue |
|
|
792,062 |
|
|
|
699,503 |
|
|
|
541,746 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
2,521,406 |
|
|
|
2,361,972 |
|
|
|
2,065,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
686,303 |
|
|
|
660,921 |
|
|
|
632,109 |
|
Supplies |
|
|
266,545 |
|
|
|
250,573 |
|
|
|
231,259 |
|
Medical claims |
|
|
678,651 |
|
|
|
592,760 |
|
|
|
452,055 |
|
Other operating expenses |
|
|
363,916 |
|
|
|
325,735 |
|
|
|
283,123 |
|
Provision for bad debts |
|
|
197,680 |
|
|
|
192,563 |
|
|
|
161,936 |
|
Rentals and leases |
|
|
39,955 |
|
|
|
39,127 |
|
|
|
36,633 |
|
Interest expense, net |
|
|
66,810 |
|
|
|
67,890 |
|
|
|
75,665 |
|
Depreciation and amortization |
|
|
96,106 |
|
|
|
97,462 |
|
|
|
96,741 |
|
Management fees |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
5,000 |
|
Impairment of goodwill |
|
|
|
|
|
|
64,639 |
|
|
|
|
|
Hurricane-related property damage |
|
|
|
|
|
|
938 |
|
|
|
3,589 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
2,400,966 |
|
|
|
2,297,608 |
|
|
|
1,978,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before gain (loss)
on disposal of assets and income taxes |
|
|
120,440 |
|
|
|
64,364 |
|
|
|
87,426 |
|
Gain (loss) on disposal of assets, net |
|
|
108 |
|
|
|
1,465 |
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
120,548 |
|
|
|
65,829 |
|
|
|
87,351 |
|
Income tax expense |
|
|
44,715 |
|
|
|
27,576 |
|
|
|
35,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
75,833 |
|
|
|
38,253 |
|
|
|
52,026 |
|
Loss from discontinued operations, net of income taxes |
|
|
(1,087 |
) |
|
|
(176 |
) |
|
|
(11,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
74,746 |
|
|
|
38,077 |
|
|
|
40,751 |
|
Net earnings attributable to non-controlling interests |
|
|
(8,279 |
) |
|
|
(9,987 |
) |
|
|
(4,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to IASIS Healthcare LLC |
|
$ |
66,467 |
|
|
$ |
28,090 |
|
|
$ |
36,314 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
76
IASIS HEALTHCARE LLC
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests with |
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Redemption |
|
|
Members |
|
|
controlling |
|
|
|
|
|
|
Rights |
|
|
Equity |
|
|
Interests |
|
|
Total Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 (as previously
reported) |
|
$ |
|
|
|
$ |
691,514 |
|
|
$ |
|
|
|
$ |
691,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to non-controlling interests
from adoption of FASB authoritative
guidance |
|
|
44,134 |
|
|
|
(16,782 |
) |
|
|
8,604 |
|
|
|
(8,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 (as adjusted) |
|
|
44,134 |
|
|
|
674,732 |
|
|
|
8,604 |
|
|
|
683,336 |
|
Net earnings |
|
|
4,285 |
|
|
|
36,314 |
|
|
|
152 |
|
|
|
36,466 |
|
Distributions to non-controlling interests |
|
|
(5,313 |
) |
|
|
|
|
|
|
(172 |
) |
|
|
(172 |
) |
Proceeds from the sale of non-controlling
interests |
|
|
15,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of non-controlling intersts |
|
|
(802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests in acquisition of Ouachita |
|
|
|
|
|
|
|
|
|
|
1,897 |
|
|
|
1,897 |
|
Tax effect of adoption of FASB income tax
guidance |
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
(59 |
) |
Adjustment to redemption value of
non-controlling interests with redemption
rights |
|
|
(3,520 |
) |
|
|
3,520 |
|
|
|
|
|
|
|
3,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
|
54,656 |
|
|
|
714,507 |
|
|
|
10,481 |
|
|
|
724,988 |
|
Net earnings |
|
|
9,769 |
|
|
|
28,090 |
|
|
|
218 |
|
|
|
28,308 |
|
Distributions to non-controlling interests |
|
|
(6,481 |
) |
|
|
|
|
|
|
(269 |
) |
|
|
(269 |
) |
Repurchases of non-controlling interests |
|
|
(1,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of non-controlling interests
to note payable |
|
|
(691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation |
|
|
|
|
|
|
561 |
|
|
|
|
|
|
|
561 |
|
Other comprehensive loss |
|
|
|
|
|
|
(2,926 |
) |
|
|
|
|
|
|
(2,926 |
) |
Income tax benefit resulting from
exercise of employee stock options |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Contribution from parent company related
to tax benefit from Holdings Senior PIK
Loans interest |
|
|
|
|
|
|
27,344 |
|
|
|
|
|
|
|
27,344 |
|
Adjustment to redemption value of
non-controlling interests with redemption
rights |
|
|
16,653 |
|
|
|
(16,653 |
) |
|
|
|
|
|
|
(16,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
|
72,527 |
|
|
|
750,932 |
|
|
|
10,430 |
|
|
|
761,362 |
|
Net earnings |
|
|
8,144 |
|
|
|
66,467 |
|
|
|
135 |
|
|
|
66,602 |
|
Distributions to non-controlling interests |
|
|
(8,790 |
) |
|
|
|
|
|
|
(194 |
) |
|
|
(194 |
) |
Repurchases of non-controlling interests |
|
|
(459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation |
|
|
|
|
|
|
2,487 |
|
|
|
|
|
|
|
2,487 |
|
Other comprehensive loss |
|
|
|
|
|
|
(653 |
) |
|
|
|
|
|
|
(653 |
) |
Distribution to parent company in
connection with the repurchase of equity,
net |
|
|
|
|
|
|
(124,962 |
) |
|
|
|
|
|
|
(124,962 |
) |
Contribution from parent company related
to tax benefit from Holdings Senior PIK
Loans interest |
|
|
|
|
|
|
8,554 |
|
|
|
|
|
|
|
8,554 |
|
Adjustment
to redemption value of non-controlling interests with redemption rights |
|
|
690 |
|
|
|
(690 |
) |
|
|
|
|
|
|
(690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
72,112 |
|
|
$ |
702,135 |
|
|
$ |
10,371 |
|
|
$ |
712,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
77
IASIS HEALTHCARE LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
74,746 |
|
|
$ |
38,077 |
|
|
$ |
40,751 |
|
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
96,106 |
|
|
|
97,462 |
|
|
|
96,741 |
|
Amortization of loan costs |
|
|
3,163 |
|
|
|
3,029 |
|
|
|
2,913 |
|
Stock compensation costs |
|
|
2,487 |
|
|
|
561 |
|
|
|
|
|
Deferred income taxes |
|
|
30,473 |
|
|
|
(5,572 |
) |
|
|
19,368 |
|
Income tax benefit from stock compensation |
|
|
(1,770 |
) |
|
|
|
|
|
|
|
|
Income tax benefit from parent company interest |
|
|
8,554 |
|
|
|
27,344 |
|
|
|
|
|
Loss (gain) on disposal of assets, net |
|
|
(108 |
) |
|
|
(1,465 |
) |
|
|
75 |
|
Loss from discontinued operations |
|
|
1,087 |
|
|
|
176 |
|
|
|
11,275 |
|
Impairment of goodwill |
|
|
|
|
|
|
64,639 |
|
|
|
|
|
Hurricane-related property damage |
|
|
|
|
|
|
938 |
|
|
|
3,589 |
|
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
21,279 |
|
|
|
(7,302 |
) |
|
|
17,131 |
|
Inventories, prepaid expenses and other current assets |
|
|
(19,227 |
) |
|
|
6,728 |
|
|
|
(21,361 |
) |
Accounts payable, other accrued expenses and other
accrued liabilities |
|
|
41,957 |
|
|
|
45,884 |
|
|
|
(29,419 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities continuing operations |
|
|
258,747 |
|
|
|
270,499 |
|
|
|
141,063 |
|
Net cash provided by (used in) operating activities
discontinued operations |
|
|
(1,508 |
) |
|
|
1,472 |
|
|
|
2,313 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
257,239 |
|
|
|
271,971 |
|
|
|
143,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(81,268 |
) |
|
|
(87,720 |
) |
|
|
(137,415 |
) |
Cash paid for acquisitions |
|
|
(98,305 |
) |
|
|
(1,941 |
) |
|
|
(16,821 |
) |
Proceeds from sale of assets |
|
|
57 |
|
|
|
5,252 |
|
|
|
360 |
|
Change in other assets |
|
|
3,043 |
|
|
|
1,823 |
|
|
|
4,613 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing operations |
|
|
(176,473 |
) |
|
|
(82,586 |
) |
|
|
(149,263 |
) |
Net cash provided by (used in) investing activities
discontinued operations |
|
|
|
|
|
|
10 |
|
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(176,473 |
) |
|
|
(82,576 |
) |
|
|
(150,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations |
|
|
(8,378 |
) |
|
|
(55,476 |
) |
|
|
(306,611 |
) |
Proceeds from debt borrowings |
|
|
|
|
|
|
|
|
|
|
384,978 |
|
Distribution to parent company in connection with the repurchase
of equity, net |
|
|
(124,962 |
) |
|
|
|
|
|
|
|
|
Distributions to non-controlling interests |
|
|
(8,984 |
) |
|
|
(6,750 |
) |
|
|
(5,485 |
) |
Proceeds received from sale (costs paid for repurchase) of
non-controlling interests, net |
|
|
(459 |
) |
|
|
(1,379 |
) |
|
|
15,070 |
|
Other |
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities continuing
operations |
|
|
(142,783 |
) |
|
|
(63,605 |
) |
|
|
88,144 |
|
Net cash used in financing activities discontinued operations |
|
|
|
|
|
|
|
|
|
|
(502 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(142,783 |
) |
|
|
(63,605 |
) |
|
|
87,642 |
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(62,017 |
) |
|
|
125,790 |
|
|
|
80,738 |
|
Cash and cash equivalents at beginning of period |
|
|
206,528 |
|
|
|
80,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
144,511 |
|
|
$ |
206,528 |
|
|
$ |
80,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
63,762 |
|
|
$ |
66,136 |
|
|
$ |
83,126 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for income taxes, net |
|
$ |
13,528 |
|
|
$ |
4,104 |
|
|
$ |
(925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations resulting from acquisitions |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,849 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
78
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
IASIS Healthcare LLC (IASIS or the Company) owns and operates medium-sized acute care
hospitals in high-growth urban and suburban markets. At September 30, 2010, the Company owned or
leased 15 acute care hospital facilities and one behavioral health hospital facility, with a total
of 3,185 licensed beds, located in six regions:
|
|
|
Tampa-St. Petersburg, Florida; |
|
|
|
three cities in Texas, including San Antonio; |
|
|
|
West Monroe, Louisiana. |
The Company also owns and operates Health Choice Arizona, Inc. (Health Choice or the
Plan), a Medicaid and Medicare managed health plan in Phoenix.
Principles of Consolidation
The consolidated financial statements include all subsidiaries and entities under common
control of the Company. Control is generally defined by the Company as ownership of a majority of
the voting interest of an entity. In addition, control is demonstrated in instances when the
Company is the sole general partner in a limited partnership. Significant intercompany transactions
have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) requires management to make estimates and assumptions that affect
the amounts reported in the accompanying audited consolidated financial statements and notes.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
These reclassifications have no impact on the Companys total assets or total liabilities and
equity.
General and Administrative
The majority of the Companys expenses are cost of revenue items. Costs that could be
classified as general and administrative by the Company would include the IASIS corporate office
costs, which were $39.2 million, $45.6 million and $50.5 million, for the years ended September 30,
2010, 2009 and 2008, respectively.
Subsequent Events Consideration
The Company has evaluated its financial statements and disclosures for the impact of
subsequent events up to the date of filing its annual report on Form 10-K with the Securities and
Exchange Commission.
79
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SIGNIFICANT ACCOUNTING POLICIES
Net Revenue
Acute Care Revenue
The Companys healthcare facilities have entered into agreements with third-party payors,
including government programs and managed care health plans, under which the facilities are paid
based upon established charges, the cost of providing services, predetermined rates per diagnosis,
fixed per diem rates or discounts from established charges. Additionally, the Company offers
discounts through its uninsured discount program to all uninsured patients receiving healthcare
services who do not qualify for assistance under state Medicaid, other federal or state assistance
plans, or charity care.
Net patient revenue is reported at the estimated net realizable amounts from third-party
payors and others for services rendered, including estimated retroactive adjustments under
reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and are adjusted, if necessary, in
future periods when final settlements are determined. Net adjustments to estimated third-party
payor settlements (prior year contractuals) resulted in an increase in net revenue of $5.2
million, $3.2 million and $1.0 million for the years ended September 30, 2010, 2009 and 2008,
respectively.
In the ordinary course of business, the Company provides care without charge to patients who
are financially unable to pay for the healthcare services they receive. Because the Company does
not pursue collection of amounts determined to qualify as charity care, they are not reported in
net revenue. The Company currently records revenue deductions for patient accounts that meet its
guidelines for charity care. The Company provides charity care to patients with income levels below
200% of the federal poverty level (FPL). Additionally, at all of the Companys hospitals, a
sliding scale of reduced rates is offered to uninsured patients, who are not covered through
federal, state or private insurance, with incomes between 200% and 400% of the FPL. Charity care
deductions based on gross charges for the years ended September 30, 2010, 2009 and 2008 were $37.9
million, $38.6 million and $37.7 million, respectively.
Premium Revenue
Health Choice is a prepaid Medicaid and Medicare managed health plan that derives most of its
revenue through a contract with the Arizona Health Care Cost Containment System (AHCCCS) to
provide specified health services to qualified Medicaid enrollees through contracted providers.
AHCCCS is the state agency that administers Arizonas Medicaid program. The contract requires the
Plan to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed
monthly premiums, based upon negotiated per capita member rates, and supplemental payments from
AHCCCS. Capitation payments received by Health Choice are recognized as revenue in the month that
members are entitled to healthcare services.
The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs
that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in
excess of stated levels of up to $35,000 per claim, depending on the eligibility classification of
the member. Qualified costs must be incurred during the contract year and are the lesser of the
amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the
contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract,
including estimates of such costs at the end of each accounting period.
Effective October 1, 2008, Health Choice began its current contract with AHCCCS, which
provides for a three-year term, with AHCCCS having the option to renew for two additional one-year
periods. The contract is terminable without cause on 90 days written notice or for cause upon
written notice if the Company fails to comply with any term or condition of the contract or fails
to take corrective action as required to comply with the terms of the contract. Additionally,
AHCCCS can terminate the contract in the event of the unavailability of state or federal funding.
80
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Health Choice also provides coverage as a Medicare Advantage Prescription Drug (MAPD)
Special Needs Plan (SNP) provider pursuant to its contract with the Centers for Medicare and
Medicaid Services (CMS). The
SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and
existing dual-eligible members, or those that are eligible for Medicare and Medicaid. The contract
with CMS includes successive one-year renewal options at the discretion of CMS and is terminable
without cause on 90 days written notice or for cause upon written notice if the Company fails to
comply with any term or condition of the contract or fails to take corrective action as required to
comply with the terms of the contract. Health Choice has received notification that CMS is
exercising its option to extend its contract through December 31, 2011.
The Plan subcontracts with hospitals, physicians and other medical providers within Arizona
and surrounding states to provide services to its Medicaid enrollees in Apache, Coconino, Maricopa,
Mohave, Navajo, Pima, Yuma, LaPaz and Santa Cruz counties, and to its Medicare enrollees in
Maricopa, Pima, Pinal, Coconino, Apache and Navajo counties. These services are provided regardless
of the actual costs incurred to provide these services.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or
less to be cash equivalents. The Company maintains its cash and cash equivalents balances primarily
with high credit quality financial institutions. The Company manages its credit exposure by placing
its investments in United States Treasury securities or other high quality securities, and by
periodically evaluating the relative credit standing of the financial institution.
Accounts Receivable
The Company receives payments for services rendered from federal and state agencies (under the
Medicare, Medicaid and TRICARE programs), managed care health plans, including Medicare and
Medicaid managed health plans, commercial insurance companies, employers and patients. During the
years ended September 30, 2010, 2009 and 2008, 47.6%, 45.9% and 44.9%, respectively, of the
Companys net patient revenue related to patients participating in the Medicare and Medicaid
programs, including Medicare and Medicaid managed health plans. The Company recognizes that revenue
and receivables from government agencies are significant to its operations, but does not believe
that there is significant credit risks associated with these government agencies. The Company
believes that concentration of credit risk from other payors is limited due to the number of
patients and payors.
Net Medicare settlement receivables estimated at September 30, 2010 and 2009, totaled $1.3
million and $6.3 million, respectively, are included in accounts receivable in the accompanying
consolidated balance sheets.
Allowance for Doubtful Accounts
The Companys estimation of the allowance for doubtful accounts is based primarily upon the
type and age of the patient accounts receivable and the effectiveness of the Companys collection
efforts. The Companys policy is to reserve a portion of all self-pay receivables, including
amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges
are recorded. On a monthly basis, the Company reviews its accounts receivable balances, the
effectiveness of the Companys reserve policies and various analytics to support the basis for its
estimates. These efforts primarily consist of reviewing the following:
|
|
|
Historical write-off and collection experience using a hindsight or look-back
approach; |
|
|
|
Revenue and volume trends by payor, particularly the self-pay components; |
|
|
|
Changes in the aging and payor mix of accounts receivable, including increased
focus on accounts due from the uninsured and accounts that represent co-payments and
deductibles due from patients; |
|
|
|
Cash collections as a percentage of net patient revenue less bad debt expense; |
|
|
|
Trending of days revenue in accounts receivable; and |
|
|
|
Various allowance coverage statistics. |
The
Company regularly performs hindsight procedures to evaluate
historical write-off and collection experience throughout the year to
assist in determing the reasonableness of its process for estimating
the allowance for doubtful accounts.
81
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inventories
Inventories, principally medical supplies, implants and pharmaceuticals, are stated at the
lower of average cost or market.
Long-lived Assets
The primary components of the Companys long-lived assets are discussed below. When events,
circumstances or operating results indicate that the carrying values of certain long-lived assets
and related identifiable intangible assets (excluding goodwill) that are expected to be held and
used might be impaired under the provisions of Financial Accounting Standards Board (FASB)
authoritative guidance regarding accounting for the impairment or disposal of long-lived assets,
the Company considers the recoverability of assets to be held and used by comparing the carrying
amount of the assets to the undiscounted value of future net cash flows expected to be generated by
the assets. If assets are identified as impaired, the impairment is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets as determined by independent
appraisals or estimates of discounted future cash flows. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs are charged to
expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized.
Buildings and improvements are depreciated over estimated useful lives ranging generally from 14 to
40 years. Estimated useful lives of equipment vary generally from 3 to 25 years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the terms of the respective
leases or their estimated useful lives. Depreciation expense, including amortization of assets
capitalized under capital leases, is computed using the straight-line method and was $93.1 million,
$94.5 million and $93.7 million for the years ended September 30, 2010, 2009 and 2008,
respectively. In connection with certain construction projects, the Company capitalized interest
totaling $1.2 million and $1.4 million for the years ended September 30, 2009 and 2008,
respectively. No amounts were capitalized in the year ended September 30, 2010.
Goodwill and Other Intangible Assets
See Note 10 for the values of goodwill and other intangible assets assigned to each business
segment. Intangible assets are evaluated for impairment if events and circumstances indicate a
possible impairment.
Goodwill is not amortized but is subject to annual tests for impairment or more often if
events or circumstances indicate it may be impaired. An impairment loss is recorded to the extent
that the carrying amount of goodwill exceeds its implied fair value. The Company completed its
annual impairment test of goodwill during fiscal 2010, noting no impairment. During fiscal 2009,
the Companys testing of goodwill indicated impairment of goodwill associated with its Florida
market. See Note 10 for more details.
Other Assets
Other assets consist primarily of costs associated with the issuance of debt, which are
amortized over the life of the related debt. Amortization of deferred financing costs is included
in interest expense and totaled $3.2 million, $3.0 million and $2.9 million for the years ended
September 30, 2010, 2009 and 2008, respectively. Deferred financing costs, net of accumulated
amortization, totaled $12.0 million and $15.2 million at September 30, 2010 and 2009, respectively.
82
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Insurance Reserves
The Company estimates its reserve for self-insured professional and general liability and
workers compensation risks using historical claims data, demographic factors, severity factors,
current incident logs and other actuarial analysis.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with
FASB authoritative guidance regarding accounting for income taxes and its related uncertainty. This
approach requires the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the tax bases of assets
and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply when the temporary differences are expected to reverse. The Company assesses the
likelihood that deferred tax assets will be recovered from future taxable income to determine
whether a valuation allowance should be established.
Non-controlling Interests in Consolidated Entities
Effective October 1, 2009, the Company adopted the provisions of FASB authoritative guidance
regarding non-controlling interests in consolidated financial statements. The guidance requires the
Company to clearly identify and present ownership interests in subsidiaries held by parties other
than the Company in the consolidated financial statements within the equity section. It also
requires the amounts of consolidated net earnings attributable to the Company and to the
non-controlling interests to be clearly identified and presented on the face of the consolidated
statements of operations.
The Company consolidates seven subsidiaries with non-controlling interests that include
third-party partners that own limited partnership units with certain redemption features. The
redeemable limited partnership units require the Company to buy back the units upon the occurrence
of certain events at the fair value of the units. In addition, the limited partnership agreements
for all of the limited partnerships provide the limited partners with put rights which allow the
units to be sold back to the Company, subject to certain limitations, at the fair value of the
units. According to the limited partnership agreements, the fair value of the units is generally
calculated as the product of the most current audited fiscal periods EBITDA (earnings before
interest, taxes, depreciation, amortization and management fees) and a fixed multiple, less any
long-term debt of the entity. The majority of these put rights require an initial holding period of
six years after purchase, at which point the holder of the redeemable limited partnership units may
put back to the Company 20% of such holders units. Each succeeding year, the number of vested
redeemable units will increase by 20% until the end of the tenth year after the initial investment,
at which point 100% of the units may be put back to the Company. Under no circumstances shall the
Company be required to repurchase more than 25% of the total vested redeemable limited partnership
units in any fiscal year. The equity attributable to these interests has been classified as
non-controlling interests with redemption rights in the accompanying consolidated balance sheets.
Medical Claims Payable
Monthly capitation payments made by Health Choice to physicians and other healthcare providers
are expensed in the month services are contracted to be performed. Claims expense for non-capitated
arrangements is accrued as services are rendered by hospitals, physicians and other healthcare
providers during the year.
Medical claims payable related to Health Choice includes claims received but not paid and an
estimate of claims incurred but not reported. Incurred but not reported claims are estimated using
a combination of historical claims experience (including severity and payment lag time) and other
actuarial analysis, including number of enrollees, age of enrollees and certain enrollee health
indicators, to predict the cost of healthcare services provided to enrollees during any given
period. While management believes that its estimation methodology effectively captures trends in
medical claims costs, actual payments could differ significantly from estimates given changes in
the healthcare cost structure or adverse experience.
83
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table shows the components of the change in medical claims payable (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Medical claims payable as of October 1 |
|
$ |
113,519 |
|
|
$ |
97,343 |
|
Medical claims expense incurred during the year: |
|
|
|
|
|
|
|
|
Related to current year |
|
|
697,052 |
|
|
|
620,153 |
|
Related to prior years |
|
|
(6,596 |
) |
|
|
(18,077 |
) |
|
|
|
|
|
|
|
Total expenses |
|
|
690,456 |
|
|
|
602,076 |
|
|
|
|
|
|
|
|
Medical claims payments during the year: |
|
|
|
|
|
|
|
|
Related to current year |
|
|
(587,292 |
) |
|
|
(508,299 |
) |
Related to prior years |
|
|
(105,310 |
) |
|
|
(77,601 |
) |
|
|
|
|
|
|
|
Total payments |
|
|
(692,602 |
) |
|
|
(585,900 |
) |
|
|
|
|
|
|
|
Medical claims payable as of September 30 |
|
$ |
111,373 |
|
|
$ |
113,519 |
|
|
|
|
|
|
|
|
As reflected in the table above, medical claims expense for the year ended September 30, 2010,
includes a $6.6 million reduction of medical costs related to prior years resulting from favorable
development in the Medicaid and Medicare product lines of $6.4 million and $209,000, respectively.
The favorable development is attributable to lower than anticipated medical costs. Medical claims
expense for the year ended September 30, 2009, includes an $18.1 million reduction of medical costs
related to prior years resulting from favorable development in the Medicaid and Medicare product
lines of $15.5 million and $2.6 million, respectively. The favorable development is attributable to
lower than anticipated medical costs and is offset, in part, by $10.8 million in reductions in
premium revenue associated with settlements of various prior year
program receivables. Additional adjustments to prior year estimates
may be necessary in future periods as more information becomes
available.
Health Choice has experienced an increase in the number of lives served by the plan.
Enrollment in Health Choice at September 30, 2010 and 2009, was 198,393 and 190,763, respectively.
Stock Based Compensation
Although IASIS has no stock option plan or outstanding stock options, the Company, through its
parent, IASIS Healthcare Corporation (IAS), grants stock options for a fixed number of common
shares to employees. The Company accounts for this stock-based incentive plan under the measurement
and recognition provisions of FASB authoritative guidance regarding share-based payments
(Share-Based Payments Guidance). Accordingly, the Company has not recognized any compensation
expense for the stock options granted prior to October 1, 2006, as the exercise price of the
options equaled, or was greater than, the market value of the underlying stock on the date of
grant.
For stock options granted on or after October 1, 2006, the Company applies the fair value
recognition provisions of the Share-Based Payments Guidance, requiring all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement
based on their fair values. In accordance with the provisions of the Share-Based Payments Guidance,
the Company uses the Black-Scholes-Merton model in determining the fair value of its share-based
payments. The fair value of compensation costs will be amortized on a straight-line basis over the
requisite service periods of the awards, generally equal to the awards vesting periods.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are
reflected in the accompanying consolidated financial statements at amounts that approximate fair
value because of the short-term nature of these instruments. The fair value of the Companys
capital lease obligations also approximate carrying value as they bear interest at current market
rates. The estimated fair values of the Companys 8 3/4% senior subordinated
notes due 2014 (the 8 3/4% notes) and senior secured credit facilities were
$485.7 million and $570.3 million, respectively, at September 30, 2010, based upon quoted market
prices at that date.
84
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Management Services Agreement
The Company is party to a management services agreement with affiliates of TPG, JLL Partners
and Trimaran
Fund Management. The management services agreement provides that in exchange for consulting
and management advisory services that will be provided to the Company by the investors, the Company
will pay an aggregate monitoring fee of 0.25% of budgeted net revenue up to a maximum of $5.0
million per fiscal year to these parties (or certain of their respective affiliates) and reimburse
them for their reasonable disbursements and out-of-pocket expenses. This monitoring fee is divided
among the parties in proportion to their relative ownership percentages in IASIS Investment LLC,
parent company and majority stockholder of IAS. The monitoring fee will be subordinated to the
senior subordinated notes in the event of a bankruptcy of the Company. The management services
agreement does not have a stated term. Pursuant to the provisions of the management services
agreement, the Company has agreed to indemnify the investors (or certain of their respective
affiliates) in certain situations arising from or relating to the agreement, the investors
investment in the securities of IAS or any related transactions or the operations of the investors,
except for losses that arise on account of the investors negligence or willful misconduct. For
each of the three years ended September 30, 2010, 2009 and 2008, the Company paid $5.0 million in
monitoring fees under the management services agreement.
Recently Issued Accounting Pronouncements
The Company has adopted the new FASB authoritative guidance regarding business combinations,
which applies prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2008. This
new guidance establishes principles and requirements for recognition and measurement of items
acquired during a business combination, as well as certain disclosure requirements in the financial
statements. The adoption of these provisions did not impact the Companys results of operations or
financial position; however, it is anticipated to have a material effect on the Companys
accounting for future acquisitions.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Senior secured credit facilities |
|
$ |
570,260 |
|
|
$ |
576,150 |
|
Senior subordinated notes |
|
|
475,000 |
|
|
|
475,000 |
|
Capital leases and other obligations |
|
|
6,318 |
|
|
|
8,687 |
|
|
|
|
|
|
|
|
|
|
|
1,051,578 |
|
|
|
1,059,837 |
|
Less current maturities |
|
|
6,691 |
|
|
|
8,366 |
|
|
|
|
|
|
|
|
|
|
$ |
1,044,887 |
|
|
$ |
1,051,471 |
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
The $854.0 million senior secured credit facilities include: (i) a senior secured term loan of
$439.0 million; (ii) a senior secured delayed draw term loan of $150.0 million; (iii) a senior
secured revolving credit facility of $225.0 million, which includes a $100.0 million sub-limit for
letters of credit; and (iv) a senior secured synthetic letter of credit facility of $40.0 million.
All facilities mature on March 15, 2014, except for the revolving credit facility, which matures on
April 27, 2013. The term loans bear interest at an annual rate of LIBOR plus 2.00% or, at the
Companys option, the administrative agents base rate plus 1.00%. The revolving loans bear
interest at an annual rate of LIBOR plus an applicable margin ranging from 1.25% to 1.75% or, at
the Companys option, the administrative agents base rate plus an applicable margin ranging from
0.25% to 0.75%, such rate in each case depending on the Companys senior secured leverage ratio. A
commitment fee ranging from 0.375% to 0.5% per annum is charged on the undrawn portion of the
senior secured revolving credit facility and is payable in arrears.
Principal under the senior secured term loan is due in 24 consecutive equal quarterly
installments in an aggregate annual amount equal to 1.0% of the original principal amount ($439.0
million) during the first six years thereof, with the balance payable in four equal installments in
year seven. Principal under the senior secured delayed draw term loan is due in equal quarterly
installments in an aggregate annual amount equal to 1.0% of the original principal amount ($150.0
million) until March 31, 2013, with the balance payable in four equal installments during the final
year of the loan. Unless terminated earlier, the senior secured revolving credit facility has a
single maturity of six years. The senior secured credit facilities are also subject to mandatory
prepayment under specific circumstances,
including a portion of excess cash flow, a portion of the net proceeds from an initial public
offering, asset sales, debt issuances and specified casualty events, each subject to various
exceptions.
85
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The senior secured credit facilities are (i) secured by a first mortgage and lien on the real
property and related personal and intellectual property of the Company and pledges of equity
interests in the entities that own such properties and (ii) guaranteed by certain of the Companys
subsidiaries.
In addition, the senior secured credit facilities contain certain covenants which, among other
things, limit the incurrence of additional indebtedness, investments, dividends, transactions with
affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other
matters customarily restricted in such agreements.
At September 30, 2010, amounts outstanding under the Companys senior secured credit
facilities consisted of a $423.6 million term loan and a $146.7 million delayed draw term loan. In
addition, the Company had $39.9 million and $41.4 million in letters of credit outstanding under
the synthetic letter of credit facility and the revolving credit facility, respectively. The
weighted average interest rate of outstanding borrowings under the senior secured credit facilities
was 3.4% and 3.6% for the years ended September 30, 2010 and 2009, respectively.
8 3/4% Senior Subordinated Notes
The Company, together with its wholly-owned subsidiary, IASIS Capital Corporation, a holding
company with no assets or operations, as issuers, have outstanding $475.0 million aggregate
principal amount of 8 3/4% notes. The 8 3/4% notes are
general unsecured senior subordinated obligations and are subordinated in right of payment to all
existing and future senior debt of the Company. The Companys existing domestic subsidiaries, other
than certain non-guarantor subsidiaries, which include Health Choice and the Companys non-wholly
owned subsidiaries, are guarantors of the 8 3/4% notes. The 8
3/4% notes are effectively subordinated to all of the issuers and the
guarantors secured debt to the extent of the value of the assets securing the debt and are
structurally subordinated to all liabilities and commitments (including trade payables and capital
lease obligations) of the Companys subsidiaries that are not guarantors of the 8
3/4% notes.
Holdings Senior Paid-in-Kind Loans
IAS has outstanding unsecured Senior Paid-in-Kind (PIK) Loans, which were used to repurchase certain
preferred equity from its stockholders in fiscal 2007. The Senior PIK Loans mature June 15, 2014,
and bear interest at an annual rate equal to LIBOR plus 5.25%. At September 30, 2010, the
outstanding balance of the Senior PIK Loans was $389.8 million, which includes $89.8 million of
interest that has accrued to the principal of these loans since the date of issuance, and is
recorded in the financial statements of IAS. In June 2012, the Senior PIK Loans, which rank behind
the Companys existing debt, will convert to cash-pay, at which time all accrued interest becomes
payable. In the event the Senior PIK Loans are not refinanced before
their maturity, it is anticipated that principle and interest will be funded by the cash flows of the Company.
4. INTEREST RATE SWAPS
Effective March 2, 2009, the Company executed interest rate swap transactions with Citibank,
N.A. and Wachovia Bank, N.A., as counterparties, with notional amounts totaling $425.0 million. The
arrangements with each counterparty include two interest rate swap agreements, one with a notional
amount of $112.5 million maturing on February 28, 2011 and one with a notional amount of $100.0
million maturing on February 29, 2012. The Company entered into these interest rate swap
arrangements to mitigate the floating interest rate risk on a portion of its outstanding variable
rate debt. Under these agreements, the Company is required to make monthly fixed rate payments to
the counterparties, as calculated on the applicable notional amounts, at annual fixed rates, which
range from 1.5% to 2.0% depending upon the agreement. The counterparties are obligated to make
monthly floating rate payments to the Company based on the one-month LIBOR rate for the same
referenced notional amount.
|
|
|
|
|
|
|
Total Notional |
|
Date Range |
|
Amounts |
|
|
|
(in thousands) |
|
Expiring on February 28, 2011 |
|
$ |
225,000 |
|
Expiring on February 29, 2012 |
|
$ |
200,000 |
|
86
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company accounts for its interest rate swaps in accordance with the provisions of FASB
authoritative guidance regarding accounting for derivative instruments and hedging activities,
which also includes enhanced disclosure requirements. In accordance with these provisions, the
Company has designated its interest rate swaps as cash flow hedge instruments. The Company assesses
the effectiveness of these cash flow hedges on a quarterly basis, with any ineffectiveness being
measured using the hypothetical derivative method. The Company completed an assessment of its cash
flow hedge instruments during the years ended September 30, 2010 and 2009, and determined its
hedging instruments to be highly effective in all periods. Accordingly, no gain or loss resulting
from hedging ineffectiveness is reflected in the Companys accompanying consolidated statements of
operations.
The Company applies the provisions of FASB authoritative guidance regarding fair value
measurements, which provides a single definition of fair value, establishes a framework for
measuring fair value, and expands disclosures concerning fair value measurements. The Company
applies these provisions to the valuation and disclosure of its interest rate swaps. This
authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices
in active markets that can be accessed at the measurement date; (ii) Level 2, which is defined as
inputs other than quoted prices in active markets that are observable, either directly or
indirectly; and (iii) Level 3, which is defined as unobservable inputs resulting from the existence
of little or no market data, therefore potentially requiring an entity to develop its own
assumptions.
The Company determines the fair value of its interest rate swaps in a manner consistent with
that used by market participants in pricing hedging instruments, which includes using a discounted
cash flow analysis based upon the terms of the agreements, the impact of the one-month forward
LIBOR curve and an evaluation of credit risk. Given the use of observable market assumptions and
the consideration of credit risk, the Company has categorized the valuation of its interest rate
swaps as Level 2.
The fair value of the Companys interest rate swaps at September 30, 2010 and 2009, reflect
liability balances of $5.7 million and $4.7 million, respectively, and are included in other
long-term liabilities in the accompanying consolidated balance sheets. The fair value of the
Companys interest rate swaps reflects a liability because the effect of the forward LIBOR curve on
future interest payments results in less interest due to the Company under the variable rate
component included in the interest rate swap agreements, as compared to the amount due the
Companys counterparties under the fixed interest rate component. Any change in the fair value of
the Companys interest rate swaps, net of income taxes, is included in other comprehensive loss as
a component of members equity in the accompanying consolidated balance sheets.
87
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. COMPREHENSIVE INCOME
Comprehensive income consists of two components: net earnings and other comprehensive income.
Other comprehensive income refers to revenues, expenses, gains and losses that under the FASB
authoritative guidance related to accounting for comprehensive income are recorded as elements of
equity, but are excluded from net earnings. The following table presents the components of
comprehensive income, net of income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
74,746 |
|
|
$ |
38,077 |
|
Change in fair value of interest rate swaps |
|
|
(1,045 |
) |
|
|
(4,660 |
) |
Change in income tax benefit |
|
|
392 |
|
|
|
1,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
74,093 |
|
|
$ |
35,151 |
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive loss, net of income taxes, are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Fair value of interest rate swaps |
|
$ |
(5,707 |
) |
|
$ |
(4,662 |
) |
Income tax benefit |
|
|
2,128 |
|
|
|
1,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(3,579 |
) |
|
$ |
(2,926 |
) |
|
|
|
|
|
|
|
6. DISTRIBUTION TO PARENT
During the year ended September 30, 2010, the Company distributed $125.0 million, net of a
$1.8 million income tax benefit, to IAS to fund the repurchase of certain shares of its outstanding
preferred stock and cancel certain vested rollover options to purchase its common stock. The holder
of the IAS preferred stock is represented by an investor group led by TPG, JLL Partners and
Trimaran Fund Management. The repurchase of preferred stock, which included accrued and outstanding
dividends, and the cancellation of rollover options were funded by the Companys excess cash on
hand.
7. ACQUISITIONS
Effective October 1, 2010, the Company purchased Brim Holdings, Inc. (Brim) in a
cash-for-stock transaction valued at $95.0 million, subject to changes in net working capital.
Brim operates Wadley Regional Medical Center, a 370 licensed bed acute care hospital facility
located in Texarkana, Texas, and Pikes Peak Regional Hospital, a 15 licensed bed critical access
acute care hospital facility, in Woodland Park, Colorado. In connection with the Companys
agreement to purchase Brim, the Company made an agent fund deposit of $97.9 million, which is
included in long-term assets in the accompanying consolidated balance sheet as of September 30,
2010.
Effective February 1, 2008, IASIS Glenwood Regional Medical Center, LP, a wholly-owned
subsidiary of the Company, purchased a majority ownership interest in Ouachita Community Hospital,
a ten-bed surgical hospital located in West Monroe, Louisiana. The purchase price for the majority
ownership interest included $16.8 million in cash.
88
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. DISCONTINUED OPERATIONS
The
Companys lease agreements to operate Mesa General Hospital
(Mesa General), located in
Mesa, Arizona, and Biltmore Surgery Center (Biltmore), located in Phoenix, Arizona, expired by
their terms on July 31, 2008 and September 30, 2008, respectively. The Company discontinued
services at Mesa General on May 31, 2008,
and Biltmore on April 30, 2008. The operating results of Mesa General and Biltmore are
classified in the Companys accompanying consolidated financial statements as discontinued
operations. The following table sets forth the components of discontinued operations (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
Year ended |
|
|
Year ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
77 |
|
|
$ |
974 |
|
|
$ |
49,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,814 |
|
|
|
1,256 |
|
|
|
64,648 |
|
Loss on disposal of assets |
|
|
|
|
|
|
|
|
|
|
3,928 |
|
Income tax benefit |
|
|
(650 |
) |
|
|
(106 |
) |
|
|
(7,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes |
|
$ |
(1,087 |
) |
|
$ |
(176 |
) |
|
$ |
(11,275 |
) |
|
|
|
|
|
|
|
|
|
|
The Company allocated to discontinued operations interest expense of $2.5 million for the year
ended September 30, 2008. The allocation of interest expense to discontinued operations was based
on the ratio of disposed net assets of Mesa General and Biltmore to the sum of total net assets of
the Company plus the Companys total outstanding debt.
Income taxes allocated to the discontinued operations resulted in related effective tax rates
of 37.4%, 37.6% and 39.4% for the years ended September 30, 2010, 2009 and 2008, respectively.
89
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
102,969 |
|
|
$ |
102,499 |
|
Buildings and improvements |
|
|
811,569 |
|
|
|
792,467 |
|
Equipment |
|
|
556,353 |
|
|
|
500,450 |
|
|
|
|
|
|
|
|
|
|
|
1,470,891 |
|
|
|
1,395,416 |
|
Less accumulated depreciation and amortization |
|
|
(501,952 |
) |
|
|
(414,572 |
) |
|
|
|
|
|
|
|
|
|
|
968,939 |
|
|
|
980,844 |
|
Construction-in-progress |
|
|
16,352 |
|
|
|
16,509 |
|
|
|
|
|
|
|
|
|
|
$ |
985,291 |
|
|
$ |
997,353 |
|
|
|
|
|
|
|
|
Included in property and equipment are assets acquired under capital
leases of $4.7 million and $4.6
million, net of accumulated amortization of $2.6 million and $3.4 million, at September 30, 2010
and 2009, respectively.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute |
|
|
Health |
|
|
|
|
|
|
Care |
|
|
Choice |
|
|
Total |
|
Balance at September 30, 2008 |
|
$ |
774,842 |
|
|
$ |
5,757 |
|
|
$ |
780,599 |
|
Impairment of Florida market goodwill |
|
|
(64,639 |
) |
|
|
|
|
|
|
(64,639 |
) |
Other acquisitions |
|
|
1,960 |
|
|
|
|
|
|
|
1,960 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
|
712,163 |
|
|
|
5,757 |
|
|
|
717,920 |
|
Other acquisitions |
|
|
323 |
|
|
|
|
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
712,486 |
|
|
$ |
5,757 |
|
|
$ |
718,243 |
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2010, as a result of the Companys annual impairment testing,
the Company has determined all remaining goodwill and long-lived assets to be recoverable. For the
year ended September 30, 2009, as a result of the Companys annual impairment testing, the Company
recorded a $64.6 million non-cash charge ($43.2 million after tax) for the impairment of goodwill
related to its Florida market.
Other intangible assets consist solely of Health Choices contract with AHCCCS, which is
amortized over a period of 15 years, the contracts estimated useful life, including assumed
renewal periods. The gross intangible value originally assigned to the contract was $45.0 million.
The Company expects amortization expense for this intangible asset to be $3.0 million per year
over the estimated life of the contract. Amortization of this intangible asset is included in
depreciation and amortization expense in the accompanying consolidated statement of operations and
totaled $3.0 million for each of the years ended September 30, 2010, 2009 and 2008. Net other
intangible assets included in the accompanying consolidated balance sheets at September 30, 2010
and 2009, totaled $27.0 million and $30.0 million, respectively.
90
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. MEMBERS EQUITY
Common Interests of IASIS
As of September 30, 2010, all of the common interests of IASIS were owned by IAS, its sole
member.
12. STOCK OPTIONS
Management Rollover Options
In 2004, an investor group led by TPG acquired IAS, the parent company of IASIS. Prior to the
acquisition, IAS maintained the IASIS 2000 Stock Option Plan. In connection with the acquisition,
certain holders of 299,900 of in-the-money common stock options elected to rollover and convert
such options into fully vested options to purchase an aggregate 3,263 shares of preferred stock, with an
exercise price of $437.48 per share, and an aggregate 163,150 shares of common stock, with an
exercise price of $8.75 per share. All of the other outstanding options under
the IASIS 2000 Stock Option Plan were cancelled upon consummation of the acquisition and the plan
was terminated.
In connection with the issuance of the Senior PIK Loans in fiscal 2007, the preferred rollover
options were cancelled in exchange for a cash payment equal to the excess of the accreted value of
the preferred stock over the exercise price of $437.48 per share.
During the year ended September 30, 2010, the Company paid $4.9 million, net of a $1.8 million
income tax benefit, to cancel the 163,150 vested rollover options to purchase its common stock. The
cancellation of the rollover options resulted in the Company recognizing $2.0 million in stock
compensation expense during the year ended September 30, 2010.
2004 Stock Option Plan
The IAS 2004 Stock Option Plan (the 2004 Stock Option Plan) was established to promote the
Companys interests by providing additional incentives to its key employees, directors, service
providers and consultants. The options granted under the plan represent the right to purchase IAS
common stock upon exercise. Each option shall be identified as either an incentive stock option or
a non-qualified stock option. The plan was adopted by the board of directors and majority
stockholder of IAS in June 2004. The maximum number of shares of IAS common stock that may be
issued pursuant to options granted under the 2004 Stock Option Plan is 2,625,975. The options
become exercisable over a period not to exceed five years after the date of grant, subject to
earlier vesting provisions as provided for in the 2004 Stock Option Plan. All options granted under
the 2004 Stock Option Plan expire no later than 10 years from the respective dates of grant. At
September 30, 2010, there were 939,646 options available for grant.
91
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Information regarding the Companys stock option activity is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Stock Option Plan |
|
|
Rollover Options |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Option Price |
|
|
Exercise |
|
|
|
|
|
|
Option Price |
|
|
Exercise |
|
|
|
Options |
|
|
Per Share |
|
|
Price |
|
|
Options |
|
|
Per Share |
|
|
Price |
|
Options outstanding at
September 30, 2007 |
|
|
1,491,125 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
22.09 |
|
|
|
163,150 |
|
|
$ |
8.75 |
|
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,080 |
|
|
$ |
34.75 |
|
|
$ |
34.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(9,600 |
) |
|
$ |
20.00 |
|
|
$ |
20.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(80,720 |
) |
|
$ |
20.00-$35.68 |
|
|
$ |
26.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
September 30, 2008 |
|
|
1,401,885 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
21.82 |
|
|
|
163,150 |
|
|
$ |
8.75 |
|
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
477,700 |
|
|
$ |
34.75 |
|
|
$ |
34.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(119,410 |
) |
|
$ |
20.00-$35.68 |
|
|
$ |
31.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
September 30, 2009 |
|
|
1,760,175 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
24.70 |
|
|
|
163,150 |
|
|
$ |
8.75 |
|
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
45,000 |
|
|
$ |
34.75-$45.66 |
|
|
$ |
43.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(118,846 |
) |
|
$ |
20.00-$35.68 |
|
|
$ |
33.38 |
|
|
|
(163,150 |
) |
|
|
8.75 |
|
|
|
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
September 30, 2010 |
|
|
1,686,329 |
|
|
$ |
20.00-$45.66 |
|
|
$ |
24.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
September 30, 2010 |
|
|
1,374,620 |
|
|
$ |
20.00-$35.68 |
|
|
$ |
21.98 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information regarding assumptions used in the fair value
measurement for options granted on or after October 1, 2006.
|
|
|
|
|
|
|
Options Granted |
|
|
|
On or After |
|
|
|
October 1, 2006 |
|
Risk-free interest |
|
|
3.1 |
% |
Dividend yield |
|
|
0.0 |
% |
Volatility |
|
|
35.0 |
% |
Expected option life |
|
|
7.3 years |
|
For options granted on or after October 1, 2006, the Company used the Black-Scholes-Merton
valuation model in determining the fair value measurement. Volatility for such options was
estimated based on the historical stock price information of certain peer group companies for a
period of time equal to the expected option life period.
13. INCOME TAXES
Income tax expense on earnings from continuing operations consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
11,439 |
|
|
$ |
28,220 |
|
|
$ |
12,631 |
|
State |
|
|
2,803 |
|
|
|
4,933 |
|
|
|
3,326 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
26,750 |
|
|
|
(5,092 |
) |
|
|
15,522 |
|
State |
|
|
3,723 |
|
|
|
(485 |
) |
|
|
3,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44,715 |
|
|
$ |
27,576 |
|
|
$ |
35,325 |
|
|
|
|
|
|
|
|
|
|
|
92
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of the federal statutory rate to the effective income tax rate applied to
earnings from continuing operations before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Federal statutory rate |
|
$ |
35.0 |
% |
|
$ |
35.0 |
% |
|
$ |
35.0 |
% |
State income taxes, net of federal income tax benefit |
|
|
3.5 |
|
|
|
4.4 |
|
|
|
5.3 |
|
Non-deductible goodwill impairment charges |
|
|
|
|
|
|
3.8 |
|
|
|
|
|
Other non-deductible expenses |
|
|
0.2 |
|
|
|
0.8 |
|
|
|
0.5 |
|
Income attributable to non-controlling interests |
|
|
(2.4 |
) |
|
|
(5.3 |
) |
|
|
(1.8 |
) |
Change in valuation allowance charged to federal
income tax expense |
|
|
0.4 |
|
|
|
2.4 |
|
|
|
1.1 |
|
Other items, net |
|
|
0.4 |
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
37.1 |
% |
|
$ |
41.9 |
% |
|
$ |
40.4 |
% |
|
|
|
|
|
|
|
|
|
|
93
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the items comprising deferred tax assets and liabilities is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
Depreciation and fixed asset basis differences |
|
$ |
|
|
|
$ |
76,706 |
|
|
$ |
|
|
|
$ |
77,743 |
|
Amortization and intangible asset basis differences |
|
|
|
|
|
|
66,092 |
|
|
|
|
|
|
|
55,721 |
|
Allowance for doubtful accounts |
|
|
8,424 |
|
|
|
|
|
|
|
30,769 |
|
|
|
|
|
Professional liability |
|
|
15,350 |
|
|
|
|
|
|
|
15,561 |
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
18,617 |
|
|
|
|
|
|
|
14,625 |
|
|
|
|
|
Deductible carryforwards and credits |
|
|
10,221 |
|
|
|
|
|
|
|
9,861 |
|
|
|
|
|
Other, net |
|
|
6,325 |
|
|
|
|
|
|
|
3,841 |
|
|
|
|
|
Valuation allowance |
|
|
(9,530 |
) |
|
|
|
|
|
|
(8,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49,407 |
|
|
$ |
142,798 |
|
|
$ |
66,077 |
|
|
$ |
133,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets of $15.9 million and $39.0 million and net non-current
deferred tax liabilities of $109.3 million and $106.4 million are included in the accompanying
consolidated balance sheets at September 30, 2010 and 2009, respectively. The Company had a net
income tax receivable of $6.6 million included in other current assets at September 30, 2010, and a
net income tax payable of $3.4 million included in other current liabilities at September 30, 2009.
The Company and some of its subsidiaries are included in IAS consolidated filing group for
U.S. federal income tax purposes, as well as in certain state and local income tax returns that
include IAS. With respect to tax returns for any taxable period in which the Company or any of its
subsidiaries are included in a tax return filing with IAS, the amount of taxes to be paid by the
Company is determined, subject to some adjustments, as if it and its subsidiaries filed their own
tax returns excluding IAS. Members equity in the accompanying consolidated balance sheets as of
September 30, 2010 and 2009, include $35.9 million and $27.3 million, respectively, in capital
contributions representing cumulative tax benefits generated by IAS and utilized by the Company in
the combined tax return filings, for which IAS did not require cash settlement from the Company.
The Company maintains a valuation allowance for deferred tax assets it believes may not be
utilized. The valuation allowance increased by $900,000 and $2.9 million during the years ended
September 30, 2010 and 2009, respectively. The increases in the valuation allowance for both years
relate to the generation of net operating loss carryforwards by certain subsidiaries excluded from
the IAS consolidated federal income tax return, as well as state net operating loss carryforwards
that may not ultimately be utilized.
As of September 30, 2010, federal net operating loss carryforwards were available to offset
$12.1 million of future taxable income generated by subsidiaries of the Company that are excluded
from the IAS consolidated return. A valuation allowance has been established against $10.3 million
of these carryforwards, which expire between 2026 and 2030. State net operating losses in the
amount of $149.8 million were also available, but largely offset by a valuation allowance. The
state net operating loss carryforwards expire between 2018 and 2030.
The Company adopted the provisions of FASB authoritative guidance regarding accounting for
uncertainty in income taxes, on October 1, 2007. As a result, the Company recorded a liability for unrecognized
tax benefits of $8.1 million, and reduced deferred tax assets
for federal and state net operating losses generated by uncertain
tax deductions by $9.9 million as of October 1, 2007.
94
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The liability for unrecognized tax benefits included in the accompanying consolidated balance
sheets was $11.7 million, including accrued interest of $319,000 at September 30, 2010, and $7.8
million, including accrued interest of $122,000 at September 30, 2009. An additional $6.2 million
and $5.9 million of unrecognized tax benefits are reflected as a reduction to deferred tax assets
for state net operating losses generated by uncertain tax deductions as of September 30, 2010 and
2009, respectively. Of the total unrecognized tax benefits at September 30, 2010, $2.3 million (net
of the tax benefit on state taxes and interest) represents the amount of unrecognized tax and
interest that, if recognized, would favorably impact the Companys effective income tax rate. The
remainder of the unrecognized tax positions consist of items for which the uncertainty relates only
to the timing of the deductibility, and state net operating loss carryforwards for which ultimate
recognition would result in the creation of an offsetting valuation allowance due to the
unlikelihood of future taxable income in that state.
A summary of activity of the Companys total amounts of unrecognized tax benefits is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Unrecognized tax benefits at October 1 |
|
$ |
13,638 |
|
|
$ |
15,550 |
|
|
|
17,942 |
|
Additions resulting from tax positions taken in a prior period |
|
|
|
|
|
|
14 |
|
|
|
937 |
|
Reductions resulting from tax positions taken in a prior period |
|
|
(1,700 |
) |
|
|
(3,171 |
) |
|
|
(6,258 |
) |
Additions resulting from tax positions taken in the current period |
|
|
5,596 |
|
|
|
1,965 |
|
|
|
2,929 |
|
Reductions resulting from lapse of statute of limitations |
|
|
|
|
|
|
(720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at September 30 |
|
$ |
17,534 |
|
|
$ |
13,638 |
|
|
$ |
15,550 |
|
|
|
|
|
|
|
|
|
|
|
The
Companys policy is to classify interest and penalties as a
component of income tax expense. Interest expense totaling $129,000
and $146,000 (net of related tax benefits) is included in income tax expense for the years ended September 30, 2010 and 2008, respectively. Income tax expense for the year ended September 30, 2009, has been reduced by $122,000 due to a decrease in accrued interest payable in connection with uncertain tax positions (net of related tax benefits).
The Companys tax years 2007 and beyond remain open to examination by U.S. federal and state
taxing authorities. It is reasonably possible that unrecognized tax benefits could significantly
increase or decrease within the next twelve months. However, the Company is currently unable to
estimate the range of any possible change.
14. COMMITMENTS AND CONTINGENCIES
Net Revenue
The calculation of appropriate payments from the Medicare and Medicaid programs, including
supplemental Medicaid reimbursement, as well as terms governing agreements with other third-party
payors are complex and subject to interpretation. Final determination of amounts earned under the
Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered
because of audits by the programs, rights of appeal and the application of numerous technical
provisions. In the opinion of management, adequate provision has been made for adjustments that may
result from such routine audits and appeals.
Professional, General and Workers Compensation Liability Risks
The Company is subject to claims and legal actions in the ordinary course of business,
including claims relating to patient treatment and personal injuries. To cover these types of
claims, the Company maintains professional and general liability insurance in excess of
self-insured retentions through a commercial insurance carrier in amounts that the Company believes
to be sufficient for its operations, although, potentially, some claims may exceed the scope of
coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not
be covered by insurance. The Company is currently not a party to any such proceedings that, in the
Companys opinion, would have a material adverse effect on the Companys business, financial
condition or results of operations. The Company expenses an estimate of the costs it expects to
incur under the self-insured retention exposure for professional and general liability claims using
historical claims data, demographic factors, severity factors, current incident logs and other
actuarial analysis. At September 30, 2010 and 2009, the Companys professional and general
liability accrual for asserted and unasserted claims totaled $41.6 million and $41.7 million,
respectively. The semi-annual valuations from the Companys independent actuary for professional
and general liability losses resulted in a change related to estimates for prior years which
decreased professional and general liability expense by $2.6 million, $1.2 million and $6.8 million
during the years ended September 30, 2010, 2009 and 2008, respectively.
95
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company is subject to claims and legal actions in the ordinary course of business relative
to workers compensation. To cover these types of claims, the Company maintains workers
compensation insurance coverage with a self-insured retention. The Company accrues costs of
workers compensation claims based upon estimates derived from its claims experience. The
semi-annual valuations from the Companys independent actuary for workers compensation losses
resulted in a change related to estimates for prior years which increased workers compensation
expense by $1.1 million during the year ended September 30, 2010, decreased workers compensation
expense by $526,000, during the year ended September 30, 2009, and increased workers compensation
expense by $759,000 during the year ended September 30, 2008.
Health Choice
Health Choice has entered into capitated contracts whereby the Plan provides healthcare
services in exchange for fixed periodic and supplemental payments from the AHCCCS and CMS. These
services are provided regardless of the actual costs incurred to provide these services. The
Company receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of
healthcare services that exceed certain thresholds. The Company believes the capitated payments,
together with reinsurance and other supplemental payments are sufficient to pay for the services
Health Choice is obligated to deliver. As of September 30, 2010, the Company has provided a
performance guaranty in the form of letters of credit totaling $48.3 million for the benefit of
AHCCCS to support its obligations under the Health Choice contract to provide and pay for the
healthcare services. The amount of the performance guaranty is generally based in part upon the
membership in the Plan and the related capitation revenue paid to Health Choice.
Acquisitions
The Company has acquired and in the future may choose to acquire businesses with prior
operating histories. Such businesses may have unknown or contingent liabilities, including
liabilities for failure to comply with healthcare laws and regulations, such as billing and
reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures
designed to conform business practices to its policies following the completion of any acquisition,
there can be no assurance that the Company will not become liable for previous activities of prior
owners that may later be asserted to be improper by private plaintiffs or government agencies.
Although the Company generally seeks to obtain indemnification from prospective sellers covering
such matters, there can be no assurance that any such matter will be covered by indemnification, or
if covered, that such indemnification will be adequate to cover potential losses and fines.
Other
On March 31, 2008, the United States District Court for the District of Arizona (the District
Court) dismissed with prejudice the qui tam complaint against IAS. The qui tam action sought
monetary damages and civil penalties under the federal False Claims Act (FCA) and included
allegations that certain business practices related to physician relationships and the medical
necessity of certain procedures resulted in the submission of claims for reimbursement in violation
of the FCA. The case dates back to March 2005 and became the subject of a subpoena by the Office
of Inspector General (OIG) in September 2005. In August 2007, the case was unsealed and the U.S.
Department of Justice declined to intervene. The District Court dismissed the case from the bench
at the conclusion of oral arguments on IAS motion to dismiss. On April 21, 2008, the District
Court issued a written order dismissing the case with prejudice and entering formal judgment for
IAS and denying as moot IAS motions related to the relators misappropriation of information
subject to a claim of attorney-client privilege by IAS. Both parties appealed. On August 12,
2010, United States Court of Appeals for the Ninth Circuit reversed the District Courts dismissal
of the qui tam complaint and the District Courts denial of IAS motions concerning relators
misappropriation of documents and ordered that the qui tam relator be allowed leave to file a Third
Amended Complaint and for the District Court to consider IAS motions concerning relators
misappropriation of documents. The District Court ordered the qui tam relator to file his Third
Amended Complaint by November 22, 2010, and set a schedule for the filing of motions related to the
relators misappropriation of documents. On October 20, 2010, the qui tam relator filed a motion
to transfer this action to the United States District Court for the Eastern District of Texas.
That motion remains pending. On November 22, 2010, the relator filed his Third Amended Complaint.
IAS anticipates filing a motion to dismiss the Third Amended Complaint and motions concerning the
relators misappropriation of documents. If the qui tam action was to be resolved in a manner
unfavorable to us, it could have a material adverse effect on our business, financial condition and
results of operations, including exclusion
from the Medicare and Medicaid programs. In addition, we may incur material fees, costs and
expenses in connection with defending the qui tam action.
96
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. LEASES
The Company leases various buildings, office space and equipment under capital and operating
lease agreements. These leases expire at various times and have various renewal options.
The Company is a party to an amended facility lease with a 15 year term that expires in
January 31, 2019, and includes options to extend the term of the lease through January 31, 2039.
The annual cost under this agreement is $6.4 million, payable in monthly installments. Future
minimum lease payments at September 30, 2010, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
Leases |
|
|
Leases |
|
2011 |
|
$ |
933 |
|
|
$ |
28,525 |
|
2012 |
|
|
652 |
|
|
|
25,766 |
|
2013 |
|
|
562 |
|
|
|
24,254 |
|
2014 |
|
|
562 |
|
|
|
20,769 |
|
2015 |
|
|
562 |
|
|
|
17,713 |
|
Thereafter |
|
|
4,679 |
|
|
|
57,380 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
7,950 |
|
|
$ |
174,407 |
|
|
|
|
|
|
|
|
|
Amount representing interest (at rates ranging from 4.4% to 11.0%) |
|
|
3,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Present
value of net minimum lease payments (including $649 classified as current) |
|
$ |
4,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate future minimum rentals to be received under noncancellable subleases as of September
30, 2010, were $6.8 million.
16. RETIREMENT PLANS
Substantially all employees who are employed by the Company or its subsidiaries, upon
qualification, are eligible to participate in a defined contribution 401(k) plan (the Retirement
Plan). Employees who elect to participate generally make contributions from 1% to 20% of their
eligible compensation, and the Company matches, at its discretion, such contributions up to a
maximum percentage. Generally, employees immediately vest 100% in their own contributions and vest
in the employer portion of contributions over a period not to exceed five years. Company
contributions to the Retirement Plan were $6.7 million, $5.7 million and $5.0 million for the years
ended September 30, 2010, 2009 and 2008, respectively.
97
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. SEGMENT AND GEOGRAPHIC INFORMATION
The Companys acute care hospitals and related healthcare businesses are similar in their
activities and the economic environments in which they operate (i.e., urban and suburban markets).
Accordingly, the Companys reportable operating segments consist of (1) acute care hospitals and
related healthcare businesses, collectively, and (2) Health Choice. The following is a financial
summary by business segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2010 |
|
|
|
Acute Care |
|
|
Health Choice |
|
|
Eliminations |
|
|
Consolidated |
|
Acute care revenue |
|
$ |
1,729,344 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,729,344 |
|
Premium revenue |
|
|
|
|
|
|
792,062 |
|
|
|
|
|
|
|
792,062 |
|
Revenue between segments |
|
|
11,805 |
|
|
|
|
|
|
|
(11,805 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,741,149 |
|
|
|
792,062 |
|
|
|
(11,805 |
) |
|
|
2,521,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits (excludes
stock compensation) |
|
|
664,667 |
|
|
|
19,149 |
|
|
|
|
|
|
|
683,816 |
|
Supplies |
|
|
266,347 |
|
|
|
198 |
|
|
|
|
|
|
|
266,545 |
|
Medical claims |
|
|
|
|
|
|
690,456 |
|
|
|
(11,805 |
) |
|
|
678,651 |
|
Other operating expenses |
|
|
339,304 |
|
|
|
24,612 |
|
|
|
|
|
|
|
363,916 |
|
Provision for bad debts |
|
|
197,680 |
|
|
|
|
|
|
|
|
|
|
|
197,680 |
|
Rentals and leases |
|
|
38,409 |
|
|
|
1,546 |
|
|
|
|
|
|
|
39,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1) |
|
|
234,742 |
|
|
|
56,101 |
|
|
|
|
|
|
|
290,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
66,810 |
|
|
|
|
|
|
|
|
|
|
|
66,810 |
|
Depreciation and amortization |
|
|
92,544 |
|
|
|
3,562 |
|
|
|
|
|
|
|
96,106 |
|
Stock compensation |
|
|
2,487 |
|
|
|
|
|
|
|
|
|
|
|
2,487 |
|
Management fees |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before gain on
disposal of assets and income
taxes |
|
|
67,901 |
|
|
|
52,539 |
|
|
|
|
|
|
|
120,440 |
|
Gain on disposal of assets, net |
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before income
taxes |
|
$ |
68,009 |
|
|
$ |
52,539 |
|
|
$ |
|
|
|
$ |
120,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
2,032,246 |
|
|
$ |
320,948 |
|
|
|
|
|
|
$ |
2,353,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
80,966 |
|
|
$ |
302 |
|
|
|
|
|
|
$ |
81,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
712,486 |
|
|
$ |
5,757 |
|
|
|
|
|
|
$ |
718,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2009 |
|
|
|
Acute Care |
|
|
Health Choice |
|
|
Eliminations |
|
|
Consolidated |
|
Acute care revenue |
|
$ |
1,662,469 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,662,469 |
|
Premium revenue |
|
|
|
|
|
|
699,503 |
|
|
|
|
|
|
|
699,503 |
|
Revenue between segments |
|
|
9,316 |
|
|
|
|
|
|
|
(9,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,671,785 |
|
|
|
699,503 |
|
|
|
(9,316 |
) |
|
|
2,361,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits (excludes stock compensation) |
|
|
641,332 |
|
|
|
19,028 |
|
|
|
|
|
|
|
660,360 |
|
Supplies |
|
|
250,310 |
|
|
|
263 |
|
|
|
|
|
|
|
250,573 |
|
Medical claims |
|
|
|
|
|
|
602,076 |
|
|
|
(9,316 |
) |
|
|
592,760 |
|
Other operating expenses |
|
|
302,804 |
|
|
|
22,931 |
|
|
|
|
|
|
|
325,735 |
|
Provision for bad debts |
|
|
192,563 |
|
|
|
|
|
|
|
|
|
|
|
192,563 |
|
Rentals and leases |
|
|
37,563 |
|
|
|
1,564 |
|
|
|
|
|
|
|
39,127 |
|
Hurricane-related property damage |
|
|
938 |
|
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1) |
|
|
246,275 |
|
|
|
53,641 |
|
|
|
|
|
|
|
299,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
67,890 |
|
|
|
|
|
|
|
|
|
|
|
67,890 |
|
Depreciation and amortization |
|
|
94,014 |
|
|
|
3,448 |
|
|
|
|
|
|
|
97,462 |
|
Stock compensation |
|
|
561 |
|
|
|
|
|
|
|
|
|
|
|
561 |
|
Impairment of goodwill |
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
64,639 |
|
Management fees |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before gain (loss) on
disposal of assets and income taxes |
|
|
14,171 |
|
|
|
50,193 |
|
|
|
|
|
|
|
64,364 |
|
Gain (loss) on disposal of assets, net |
|
|
1,616 |
|
|
|
(151 |
) |
|
|
|
|
|
|
1,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
$ |
15,787 |
|
|
$ |
50,042 |
|
|
$ |
|
|
|
$ |
65,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
2,109,422 |
|
|
$ |
247,782 |
|
|
|
|
|
|
$ |
2,357,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
86,875 |
|
|
$ |
845 |
|
|
|
|
|
|
$ |
87,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
712,163 |
|
|
$ |
5,757 |
|
|
|
|
|
|
$ |
717,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2008 |
|
|
|
Acute Care |
|
|
Health Choice |
|
|
Eliminations |
|
|
Consolidated |
|
Acute care revenue |
|
$ |
1,523,790 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,523,790 |
|
Premium revenue |
|
|
|
|
|
|
541,746 |
|
|
|
|
|
|
|
541,746 |
|
Revenue between segments |
|
|
9,594 |
|
|
|
|
|
|
|
(9,594 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
1,533,384 |
|
|
|
541,746 |
|
|
|
(9,594 |
) |
|
|
2,065,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
614,442 |
|
|
|
17,667 |
|
|
|
|
|
|
|
632,109 |
|
Supplies |
|
|
231,001 |
|
|
|
258 |
|
|
|
|
|
|
|
231,259 |
|
Medical claims |
|
|
|
|
|
|
461,649 |
|
|
|
(9,594 |
) |
|
|
452,055 |
|
Other operating expenses |
|
|
264,814 |
|
|
|
18,309 |
|
|
|
|
|
|
|
283,123 |
|
Provision for bad debts |
|
|
161,936 |
|
|
|
|
|
|
|
|
|
|
|
161,936 |
|
Rentals and leases |
|
|
35,466 |
|
|
|
1,167 |
|
|
|
|
|
|
|
36,633 |
|
Hurricane-related property damage |
|
|
3,589 |
|
|
|
|
|
|
|
|
|
|
|
3,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1) |
|
|
222,136 |
|
|
|
42,696 |
|
|
|
|
|
|
|
264,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
75,665 |
|
|
|
|
|
|
|
|
|
|
|
75,665 |
|
Depreciation and amortization |
|
|
93,003 |
|
|
|
3,738 |
|
|
|
|
|
|
|
96,741 |
|
Management fees |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before loss on
disposal of assets and income taxes |
|
|
48,468 |
|
|
|
38,958 |
|
|
|
|
|
|
|
87,426 |
|
Loss on disposal of assets, net |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
$ |
48,393 |
|
|
$ |
38,958 |
|
|
$ |
|
|
|
$ |
87,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
2,123,069 |
|
|
$ |
185,078 |
|
|
|
|
|
|
$ |
2,308,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
136,425 |
|
|
$ |
990 |
|
|
|
|
|
|
$ |
137,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
774,842 |
|
|
$ |
5,757 |
|
|
|
|
|
|
$ |
780,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted EBITDA represents net earnings from continuing operations before interest
expense, income tax expense, depreciation and amortization, stock compensation, impairment of
goodwill, gain (loss) on disposal of assets and management fees. Management fees represent
monitoring and advisory fees paid to TPG, the Companys majority financial sponsor, and
certain other members of IASIS Investment LLC. Management routinely calculates and
communicates adjusted EBITDA and believes that it is useful to investors because it is
commonly used as an analytical indicator within the healthcare industry to evaluate hospital
performance, allocate resources and measure leverage capacity and debt service ability. In
addition, the Company uses adjusted EBITDA as a measure of performance for its business
segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as
a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are
significant components in understanding and assessing financial performance. Adjusted EBITDA
should not be considered in isolation or as an alternative to net earnings, cash flows
generated by operating, investing, or financing activities or other financial statement data
presented in the consolidated financial statements as an indicator of financial performance or
liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Companys
senior secured credit facilities and may not be comparable to similarly titled measures of
other companies. |
18. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Employee health insurance payable |
|
$ |
8,265 |
|
|
$ |
9,183 |
|
Accrued property taxes |
|
|
11,645 |
|
|
|
10,496 |
|
Health Choice program settlements payable |
|
|
56,487 |
|
|
|
13,720 |
|
Other |
|
|
30,217 |
|
|
|
32,302 |
|
|
|
|
|
|
|
|
|
|
$ |
106,614 |
|
|
$ |
65,701 |
|
|
|
|
|
|
|
|
100
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the Companys allowance for doubtful accounts is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written Off, |
|
|
|
|
|
|
Beginning |
|
|
Provision for |
|
|
|
|
|
|
Net of |
|
|
Ending |
|
|
|
Balance |
|
|
Bad Debts |
|
|
Other (1) |
|
|
Recoveries |
|
|
Balance |
|
Year Ended September
30, 2008 |
|
$ |
97,829 |
|
|
|
161,936 |
|
|
|
6,782 |
|
|
|
(158,092 |
) |
|
$ |
108,455 |
|
Year Ended September
30, 2009 |
|
$ |
108,455 |
|
|
|
192,563 |
|
|
|
641 |
|
|
|
(175,527 |
) |
|
$ |
126,132 |
|
Year Ended September
30, 2010 |
|
$ |
126,132 |
|
|
|
197,680 |
|
|
|
|
|
|
|
(198,406 |
) |
|
$ |
125,406 |
|
|
|
|
(1) |
|
Represents provision for bad debts recorded at facilities which are now included in
discontinued operations. |
The provision for bad debts increased $30.6 million during the year ended September 30, 2009,
primarily as a result of increases in self-pay volume and revenue.
20. IMPACT OF HURRICANE ACTIVITY
The Medical Center of Southeast Texas, the Companys hospital located in Port Arthur, Texas,
was damaged during Hurricane Ike in September 2008. The hospital sustained roof and water intrusion
damage. The majority of services at the hospital became operational during October of 2008. The
Companys results from operations include hurricane-related property damage of $938,000 and $3.6
million for the years ended September 30, 2009 and 2008, respectively.
21. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The 8 3/4% notes described in Note 3 are fully
and unconditionally
guaranteed on a joint and several basis by all of the Companys existing domestic subsidiaries,
other than non-guarantor subsidiaries which include Health Choice and the Companys non-wholly
owned subsidiaries.
Effective February 1, 2008, Salt Lake Regional Medical Center, LP (Salt Lake) sold limited
partner units representing, in the aggregate, a 2.2% ownership interest in Salt Lake. As a result,
the Companys ownership interest in Salt Lake was reduced to 97.8%. Salt Lake is included in the
condensed consolidating financial statements as a subsidiary non-guarantor.
Summarized condensed consolidating balance sheets at September 30, 2010 and 2009, condensed
consolidating statements of operations and cash flows for the years ended September 30, 2010, 2009
and 2008, for the Company, segregating the parent company issuer, the subsidiary guarantors, the
subsidiary non-guarantors and eliminations, are found below. Prior year amounts have been
reclassified to conform to the current year presentation.
101
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
IASIS Healthcare LLC
Condensed Consolidating Balance Sheet
September 30, 2010
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
143,599 |
|
|
$ |
912 |
|
|
$ |
|
|
|
$ |
144,511 |
|
Accounts receivable, net |
|
|
|
|
|
|
81,649 |
|
|
|
127,524 |
|
|
|
|
|
|
|
209,173 |
|
Inventories |
|
|
|
|
|
|
22,793 |
|
|
|
31,049 |
|
|
|
|
|
|
|
53,842 |
|
Deferred income taxes |
|
|
15,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,881 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
23,577 |
|
|
|
41,763 |
|
|
|
|
|
|
|
65,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
15,881 |
|
|
|
271,618 |
|
|
|
201,248 |
|
|
|
|
|
|
|
488,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
351,265 |
|
|
|
634,026 |
|
|
|
|
|
|
|
985,291 |
|
Intercompany |
|
|
|
|
|
|
(297,257 |
) |
|
|
297,257 |
|
|
|
|
|
|
|
|
|
Net investment in and advances to subsidiaries |
|
|
1,823,973 |
|
|
|
|
|
|
|
|
|
|
|
(1,823,973 |
) |
|
|
|
|
Goodwill |
|
|
17,331 |
|
|
|
65,504 |
|
|
|
635,408 |
|
|
|
|
|
|
|
718,243 |
|
Other intangible assets, net |
|
|
|
|
|
|
|
|
|
|
27,000 |
|
|
|
|
|
|
|
27,000 |
|
Deposit for acquisition |
|
|
|
|
|
|
97,891 |
|
|
|
|
|
|
|
|
|
|
|
97,891 |
|
Other assets, net |
|
|
12,018 |
|
|
|
17,967 |
|
|
|
6,037 |
|
|
|
|
|
|
|
36,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,869,203 |
|
|
$ |
506,988 |
|
|
$ |
1,800,976 |
|
|
$ |
(1,823,973 |
) |
|
$ |
2,353,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
32,400 |
|
|
$ |
46,531 |
|
|
$ |
|
|
|
$ |
78,931 |
|
Salaries and benefits payable |
|
|
|
|
|
|
19,916 |
|
|
|
18,194 |
|
|
|
|
|
|
|
38,110 |
|
Accrued interest payable |
|
|
12,536 |
|
|
|
(3,237 |
) |
|
|
3,237 |
|
|
|
|
|
|
|
12,536 |
|
Medical claims payable |
|
|
|
|
|
|
|
|
|
|
111,373 |
|
|
|
|
|
|
|
111,373 |
|
Other accrued expenses and other current liabilities |
|
|
|
|
|
|
32,326 |
|
|
|
74,288 |
|
|
|
|
|
|
|
106,614 |
|
Current portion of long-term debt and capital lease obligations |
|
|
5,890 |
|
|
|
801 |
|
|
|
20,570 |
|
|
|
(20,570 |
) |
|
|
6,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
18,426 |
|
|
|
82,206 |
|
|
|
274,193 |
|
|
|
(20,570 |
) |
|
|
354,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
1,039,370 |
|
|
|
5,517 |
|
|
|
547,170 |
|
|
|
(547,170 |
) |
|
|
1,044,887 |
|
Deferred income taxes |
|
|
109,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,272 |
|
Other long-term liabilities |
|
|
|
|
|
|
59,527 |
|
|
|
635 |
|
|
|
|
|
|
|
60,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,167,068 |
|
|
|
147,250 |
|
|
|
821,998 |
|
|
|
(567,740 |
) |
|
|
1,568,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests with redemption rights |
|
|
|
|
|
|
72,112 |
|
|
|
|
|
|
|
|
|
|
|
72,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
702,135 |
|
|
|
277,255 |
|
|
|
978,978 |
|
|
|
(1,256,233 |
) |
|
|
702,135 |
|
Non-controlling interests |
|
|
|
|
|
|
10,371 |
|
|
|
|
|
|
|
|
|
|
|
10,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
702,135 |
|
|
|
287,626 |
|
|
|
978,978 |
|
|
|
(1,256,233 |
) |
|
|
712,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
1,869,203 |
|
|
$ |
506,988 |
|
|
$ |
1,800,976 |
|
|
$ |
(1,823,973 |
) |
|
$ |
2,353,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
IASIS Healthcare LLC
Condensed Consolidating Balance Sheet
September 30, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
$ |
|
|
|
$ |
206,331 |
|
|
$ |
197 |
|
|
$ |
|
|
|
$ |
206,528 |
|
Accounts receivable, net |
|
|
|
|
|
|
90,883 |
|
|
|
139,315 |
|
|
|
|
|
|
|
230,198 |
|
Inventories |
|
|
|
|
|
|
22,405 |
|
|
|
28,087 |
|
|
|
|
|
|
|
50,492 |
|
Deferred income taxes |
|
|
39,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,038 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
15,521 |
|
|
|
33,932 |
|
|
|
|
|
|
|
49,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
39,038 |
|
|
|
335,140 |
|
|
|
201,531 |
|
|
|
|
|
|
|
575,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net |
|
|
|
|
|
|
347,657 |
|
|
|
649,696 |
|
|
|
|
|
|
|
997,353 |
|
Intercompany |
|
|
|
|
|
|
(243,956 |
) |
|
|
243,956 |
|
|
|
|
|
|
|
|
|
Net investment in and advances to subsidiaries |
|
|
1,851,008 |
|
|
|
|
|
|
|
|
|
|
|
(1,851,008 |
) |
|
|
|
|
Goodwill |
|
|
17,331 |
|
|
|
67,445 |
|
|
|
633,144 |
|
|
|
|
|
|
|
717,920 |
|
Other intangible assets, net |
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
30,000 |
|
Other assets, net |
|
|
15,182 |
|
|
|
16,780 |
|
|
|
4,260 |
|
|
|
|
|
|
|
36,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,922,559 |
|
|
$ |
523,066 |
|
|
$ |
1,762,587 |
|
|
$ |
(1,851,008 |
) |
|
$ |
2,357,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
25,269 |
|
|
$ |
43,283 |
|
|
$ |
|
|
|
$ |
68,552 |
|
Salaries and benefits payable |
|
|
|
|
|
|
25,008 |
|
|
|
17,540 |
|
|
|
|
|
|
|
42,548 |
|
Accrued interest payable |
|
|
12,511 |
|
|
|
(3,239 |
) |
|
|
3,239 |
|
|
|
|
|
|
|
12,511 |
|
Medical claims payable |
|
|
|
|
|
|
|
|
|
|
113,519 |
|
|
|
|
|
|
|
113,519 |
|
Other accrued expenses and other current
liabilities |
|
|
|
|
|
|
39,559 |
|
|
|
26,142 |
|
|
|
|
|
|
|
65,701 |
|
Current portion of long-term debt and
capital lease obligations |
|
|
7,431 |
|
|
|
935 |
|
|
|
20,614 |
|
|
|
(20,614 |
) |
|
|
8,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities |
|
|
19,942 |
|
|
|
87,532 |
|
|
|
224,337 |
|
|
|
(20,614 |
) |
|
|
311,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
1,045,260 |
|
|
|
6,211 |
|
|
|
566,980 |
|
|
|
(566,980 |
) |
|
|
1,051,471 |
|
Deferred income taxes |
|
|
106,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,425 |
|
Other long-term liabilities |
|
|
|
|
|
|
53,577 |
|
|
|
645 |
|
|
|
|
|
|
|
54,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,171,627 |
|
|
|
147,320 |
|
|
|
791,962 |
|
|
|
(587,594 |
) |
|
|
1,523,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests with redemption rights |
|
|
|
|
|
|
72,527 |
|
|
|
|
|
|
|
|
|
|
|
72,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
750,932 |
|
|
|
292,789 |
|
|
|
970,625 |
|
|
|
(1,263,414 |
) |
|
|
750,932 |
|
Non-controlling interests |
|
|
|
|
|
|
10,430 |
|
|
|
|
|
|
|
|
|
|
|
10,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
750,932 |
|
|
|
303,219 |
|
|
|
970,625 |
|
|
|
(1,263,414 |
) |
|
|
761,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity |
|
$ |
1,922,559 |
|
|
$ |
523,066 |
|
|
$ |
1,762,587 |
|
|
$ |
(1,851,008 |
) |
|
$ |
2,357,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2010 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
|
|
|
$ |
685,244 |
|
|
$ |
1,055,905 |
|
|
$ |
(11,805 |
) |
|
$ |
1,729,344 |
|
Premium revenue |
|
|
|
|
|
|
|
|
|
|
792,062 |
|
|
|
|
|
|
|
792,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
685,244 |
|
|
|
1,847,967 |
|
|
|
(11,805 |
) |
|
|
2,521,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
|
|
|
|
351,792 |
|
|
|
334,511 |
|
|
|
|
|
|
|
686,303 |
|
Supplies |
|
|
|
|
|
|
111,777 |
|
|
|
154,768 |
|
|
|
|
|
|
|
266,545 |
|
Medical claims |
|
|
|
|
|
|
|
|
|
|
690,456 |
|
|
|
(11,805 |
) |
|
|
678,651 |
|
Other operating expenses |
|
|
|
|
|
|
121,522 |
|
|
|
242,394 |
|
|
|
|
|
|
|
363,916 |
|
Provision for bad debts |
|
|
|
|
|
|
90,564 |
|
|
|
107,116 |
|
|
|
|
|
|
|
197,680 |
|
Rentals and leases |
|
|
|
|
|
|
16,736 |
|
|
|
23,219 |
|
|
|
|
|
|
|
39,955 |
|
Interest expense, net |
|
|
66,810 |
|
|
|
|
|
|
|
41,270 |
|
|
|
(41,270 |
) |
|
|
66,810 |
|
Depreciation and amortization |
|
|
|
|
|
|
40,762 |
|
|
|
55,344 |
|
|
|
|
|
|
|
96,106 |
|
Management fees |
|
|
5,000 |
|
|
|
(22,831 |
) |
|
|
22,831 |
|
|
|
|
|
|
|
5,000 |
|
Equity in earnings of affiliates |
|
|
(139,647 |
) |
|
|
|
|
|
|
|
|
|
|
139,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
(67,837 |
) |
|
|
710,322 |
|
|
|
1,671,909 |
|
|
|
86,572 |
|
|
|
2,400,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before gain (loss)
on disposal of assets and income taxes |
|
|
67,837 |
|
|
|
(25,078 |
) |
|
|
176,058 |
|
|
|
(98,377 |
) |
|
|
120,440 |
|
Gain (loss) on disposal of assets, net |
|
|
|
|
|
|
273 |
|
|
|
(165 |
) |
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes |
|
|
67,837 |
|
|
|
(24,805 |
) |
|
|
175,893 |
|
|
|
(98,377 |
) |
|
|
120,548 |
|
Income tax expense |
|
|
43,290 |
|
|
|
|
|
|
|
1,425 |
|
|
|
|
|
|
|
44,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
|
24,547 |
|
|
|
(24,805 |
) |
|
|
174,468 |
|
|
|
(98,377 |
) |
|
|
75,833 |
|
Earnings (loss) from discontinued operations, net of income
taxes |
|
|
650 |
|
|
|
(1,731 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(1,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
25,197 |
|
|
|
(26,536 |
) |
|
|
174,462 |
|
|
|
(98,377 |
) |
|
|
74,746 |
|
Net earnings attributable to non-controlling interests |
|
|
|
|
|
|
(8,279 |
) |
|
|
|
|
|
|
|
|
|
|
(8,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to IASIS Healthcare LLC |
|
$ |
25,197 |
|
|
$ |
(34,815 |
) |
|
$ |
174,462 |
|
|
$ |
(98,377 |
) |
|
$ |
66,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2009 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
|
|
|
$ |
656,913 |
|
|
$ |
1,014,872 |
|
|
$ |
(9,316 |
) |
|
$ |
1,662,469 |
|
Premium revenue |
|
|
|
|
|
|
|
|
|
|
699,503 |
|
|
|
|
|
|
|
699,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
656,913 |
|
|
|
1,714,375 |
|
|
|
(9,316 |
) |
|
|
2,361,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
|
|
|
|
336,687 |
|
|
|
324,234 |
|
|
|
|
|
|
|
660,921 |
|
Supplies |
|
|
|
|
|
|
103,587 |
|
|
|
146,986 |
|
|
|
|
|
|
|
250,573 |
|
Medical claims |
|
|
|
|
|
|
|
|
|
|
602,076 |
|
|
|
(9,316 |
) |
|
|
592,760 |
|
Other operating expenses |
|
|
|
|
|
|
121,597 |
|
|
|
204,138 |
|
|
|
|
|
|
|
325,735 |
|
Provision for bad debts |
|
|
|
|
|
|
94,662 |
|
|
|
97,901 |
|
|
|
|
|
|
|
192,563 |
|
Rentals and leases |
|
|
|
|
|
|
16,138 |
|
|
|
22,989 |
|
|
|
|
|
|
|
39,127 |
|
Interest expense, net |
|
|
67,890 |
|
|
|
|
|
|
|
43,063 |
|
|
|
(43,063 |
) |
|
|
67,890 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,492 |
|
|
|
54,970 |
|
|
|
|
|
|
|
97,462 |
|
Management fees |
|
|
5,000 |
|
|
|
(21,862 |
) |
|
|
21,862 |
|
|
|
|
|
|
|
5,000 |
|
Impairment of goodwill |
|
|
|
|
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
64,639 |
|
Hurricane-related property damage |
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
|
|
|
|
938 |
|
Equity in earnings of affiliates |
|
|
(84,640 |
) |
|
|
|
|
|
|
|
|
|
|
84,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
(11,750 |
) |
|
|
757,940 |
|
|
|
1,519,157 |
|
|
|
32,261 |
|
|
|
2,297,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before gain (loss)
on disposal of assets and income taxes |
|
|
11,750 |
|
|
|
(101,027 |
) |
|
|
195,218 |
|
|
|
(41,577 |
) |
|
|
64,364 |
|
Gain (loss) on disposal of assets, net |
|
|
|
|
|
|
1,598 |
|
|
|
(133 |
) |
|
|
|
|
|
|
1,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes |
|
|
11,750 |
|
|
|
(99,429 |
) |
|
|
195,085 |
|
|
|
(41,577 |
) |
|
|
65,829 |
|
Income tax expense |
|
|
26,829 |
|
|
|
|
|
|
|
747 |
|
|
|
|
|
|
|
27,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
|
(15,079 |
) |
|
|
(99,429 |
) |
|
|
194,338 |
|
|
|
(41,577 |
) |
|
|
38,253 |
|
Earnings (loss) from discontinued operations, net of income
taxes |
|
|
106 |
|
|
|
(310 |
) |
|
|
28 |
|
|
|
|
|
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
(14,973 |
) |
|
|
(99,739 |
) |
|
|
194,366 |
|
|
|
(41,577 |
) |
|
|
38,077 |
|
Net earnings attributable to non-controlling interests |
|
|
|
|
|
|
(9,987 |
) |
|
|
|
|
|
|
|
|
|
|
(9,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to IASIS Healthcare LLC |
|
$ |
(14,973 |
) |
|
$ |
(109,726 |
) |
|
$ |
194,366 |
|
|
$ |
(41,577 |
) |
|
$ |
28,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2008 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care revenue |
|
$ |
|
|
|
$ |
637,773 |
|
|
$ |
895,611 |
|
|
$ |
(9,594 |
) |
|
$ |
1,523,790 |
|
Premium revenue |
|
|
|
|
|
|
|
|
|
|
541,746 |
|
|
|
|
|
|
|
541,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
|
|
|
|
637,773 |
|
|
|
1,437,357 |
|
|
|
(9,594 |
) |
|
|
2,065,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
|
|
|
|
319,243 |
|
|
|
312,866 |
|
|
|
|
|
|
|
632,109 |
|
Supplies |
|
|
|
|
|
|
104,698 |
|
|
|
126,561 |
|
|
|
|
|
|
|
231,259 |
|
Medical claims |
|
|
|
|
|
|
|
|
|
|
461,649 |
|
|
|
(9,594 |
) |
|
|
452,055 |
|
Other operating expenses |
|
|
|
|
|
|
111,781 |
|
|
|
171,342 |
|
|
|
|
|
|
|
283,123 |
|
Provision for bad debts |
|
|
|
|
|
|
80,139 |
|
|
|
81,797 |
|
|
|
|
|
|
|
161,936 |
|
Rentals and leases |
|
|
|
|
|
|
14,891 |
|
|
|
21,742 |
|
|
|
|
|
|
|
36,633 |
|
Interest expense, net |
|
|
75,665 |
|
|
|
|
|
|
|
54,716 |
|
|
|
(54,716 |
) |
|
|
75,665 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,721 |
|
|
|
54,020 |
|
|
|
|
|
|
|
96,741 |
|
Management fees |
|
|
5,000 |
|
|
|
(19,337 |
) |
|
|
19,337 |
|
|
|
|
|
|
|
5,000 |
|
Hurricane-related property damage |
|
|
|
|
|
|
|
|
|
|
3,589 |
|
|
|
|
|
|
|
3,589 |
|
Equity in earnings of affiliates |
|
|
(91,476 |
) |
|
|
|
|
|
|
|
|
|
|
91,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
(10,811 |
) |
|
|
654,136 |
|
|
|
1,307,619 |
|
|
|
27,166 |
|
|
|
1,978,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before gain (loss)
on disposal of assets and income taxes |
|
|
10,811 |
|
|
|
(16,363 |
) |
|
|
129,738 |
|
|
|
(36,760 |
) |
|
|
87,426 |
|
Gain (loss) on disposal of assets, net |
|
|
|
|
|
|
(81 |
) |
|
|
6 |
|
|
|
|
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes |
|
|
10,811 |
|
|
|
(16,444 |
) |
|
|
129,744 |
|
|
|
(36,760 |
) |
|
|
87,351 |
|
Income tax expense |
|
|
34,996 |
|
|
|
|
|
|
|
329 |
|
|
|
|
|
|
|
35,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing
operations |
|
|
(24,185 |
) |
|
|
(16,444 |
) |
|
|
129,415 |
|
|
|
(36,760 |
) |
|
|
52,026 |
|
Earnings (loss) from discontinued operations, net of income
taxes |
|
|
5,783 |
|
|
|
(12,257 |
) |
|
|
(4,801 |
) |
|
|
|
|
|
|
(11,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
(18,402 |
) |
|
|
(28,701 |
) |
|
|
124,614 |
|
|
|
(36,760 |
) |
|
|
40,751 |
|
Net earnings attributable to non-controlling interests |
|
|
|
|
|
|
(4,437 |
) |
|
|
|
|
|
|
|
|
|
|
(4,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to IASIS Healthcare LLC |
|
$ |
(18,402 |
) |
|
$ |
(33,138 |
) |
|
$ |
124,614 |
|
|
$ |
(36,760 |
) |
|
$ |
36,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2010 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
25,197 |
|
|
$ |
(26,536 |
) |
|
$ |
174,462 |
|
|
$ |
(98,377 |
) |
|
$ |
74,746 |
|
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
40,762 |
|
|
|
55,344 |
|
|
|
|
|
|
|
96,106 |
|
Amortization of loan costs |
|
|
3,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,163 |
|
Stock compensation costs |
|
|
2,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,487 |
|
Deferred income taxes |
|
|
30,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,473 |
|
Income tax benefit from stock compensation |
|
|
(1,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,770 |
) |
Income tax benefit from parent company interest |
|
|
8,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,554 |
|
Loss (gain) on disposal of assets |
|
|
|
|
|
|
(273 |
) |
|
|
165 |
|
|
|
|
|
|
|
(108 |
) |
Loss (earnings) from discontinued operations |
|
|
(650 |
) |
|
|
1,731 |
|
|
|
6 |
|
|
|
|
|
|
|
1,087 |
|
Equity in earnings of affiliates |
|
|
(139,647 |
) |
|
|
|
|
|
|
|
|
|
|
139,647 |
|
|
|
|
|
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
9,488 |
|
|
|
11,791 |
|
|
|
|
|
|
|
21,279 |
|
Inventories, prepaid expenses and other current assets |
|
|
|
|
|
|
(8,423 |
) |
|
|
(10,804 |
) |
|
|
|
|
|
|
(19,227 |
) |
Accounts payable, other accrued expenses and other
accrued liabilities |
|
|
1,795 |
|
|
|
11,108 |
|
|
|
29,054 |
|
|
|
|
|
|
|
41,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
continuing operations |
|
|
(70,398 |
) |
|
|
27,857 |
|
|
|
260,018 |
|
|
|
41,270 |
|
|
|
258,747 |
|
Net cash used in operating activities discontinued
operations |
|
|
(216 |
) |
|
|
(1,292 |
) |
|
|
|
|
|
|
|
|
|
|
(1,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(70,614 |
) |
|
|
26,565 |
|
|
|
260,018 |
|
|
|
41,270 |
|
|
|
257,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
(44,246 |
) |
|
|
(37,022 |
) |
|
|
|
|
|
|
(81,268 |
) |
Cash paid for acquisitions |
|
|
|
|
|
|
(97,891 |
) |
|
|
(414 |
) |
|
|
|
|
|
|
(98,305 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
20 |
|
|
|
37 |
|
|
|
|
|
|
|
57 |
|
Change in other assets |
|
|
|
|
|
|
4,247 |
|
|
|
(1,204 |
) |
|
|
|
|
|
|
3,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(137,870 |
) |
|
|
(38,603 |
) |
|
|
|
|
|
|
(176,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations |
|
|
(7,521 |
) |
|
|
(43 |
) |
|
|
(814 |
) |
|
|
|
|
|
|
(8,378 |
) |
Distribution to parent company in connection with the
repurchase of equity, net |
|
|
(124,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124,962 |
) |
Distributions to non-controlling interests |
|
|
|
|
|
|
(194 |
) |
|
|
(8,790 |
) |
|
|
|
|
|
|
(8,984 |
) |
Costs paid for repurchase of non-controlling interests |
|
|
|
|
|
|
(459 |
) |
|
|
|
|
|
|
|
|
|
|
(459 |
) |
Change in intercompany balances with affiliates, net |
|
|
49,269 |
|
|
|
49,269 |
|
|
|
(211,096 |
) |
|
|
(41,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
70,614 |
|
|
|
48,573 |
|
|
|
(220,700 |
) |
|
|
(41,270 |
) |
|
|
(142,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
|
|
|
|
(62,732 |
) |
|
|
715 |
|
|
|
|
|
|
|
(62,017 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
206,331 |
|
|
|
197 |
|
|
|
|
|
|
|
206,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
143,599 |
|
|
$ |
912 |
|
|
$ |
|
|
|
$ |
144,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2009 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(14,973 |
) |
|
$ |
(99,739 |
) |
|
$ |
194,366 |
|
|
$ |
(41,577 |
) |
|
$ |
38,077 |
|
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (earnings) from discontinued operations |
|
|
(106 |
) |
|
|
310 |
|
|
|
(28 |
) |
|
|
|
|
|
|
176 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,492 |
|
|
|
54,970 |
|
|
|
|
|
|
|
97,462 |
|
Amortization of loan costs |
|
|
3,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,029 |
|
Income tax benefit from parent company interest |
|
|
27,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,344 |
|
Deferred income taxes |
|
|
(5,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,572 |
) |
Loss (gain) on disposal of assets |
|
|
|
|
|
|
(1,598 |
) |
|
|
133 |
|
|
|
|
|
|
|
(1,465 |
) |
Impairment of goodwill |
|
|
|
|
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
64,639 |
|
Hurricane-related property damage |
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
|
|
|
|
938 |
|
Stock compensation costs |
|
|
561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561 |
|
Equity in earnings of affiliates |
|
|
(84,640 |
) |
|
|
|
|
|
|
|
|
|
|
84,640 |
|
|
|
|
|
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
9,319 |
|
|
|
(16,621 |
) |
|
|
|
|
|
|
(7,302 |
) |
Inventories, prepaid expenses and other current assets |
|
|
|
|
|
|
1,179 |
|
|
|
5,549 |
|
|
|
|
|
|
|
6,728 |
|
Accounts payable, other accrued expenses and other
accrued liabilities |
|
|
51 |
|
|
|
30,220 |
|
|
|
15,613 |
|
|
|
|
|
|
|
45,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
continuing operations |
|
|
(74,306 |
) |
|
|
46,822 |
|
|
|
254,920 |
|
|
|
43,063 |
|
|
|
270,499 |
|
Net cash provided by (used in) operating activities
discontinued operations |
|
|
(106 |
) |
|
|
1,739 |
|
|
|
(161 |
) |
|
|
|
|
|
|
1,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(74,412 |
) |
|
|
48,561 |
|
|
|
254,759 |
|
|
|
43,063 |
|
|
|
271,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
(24,965 |
) |
|
|
(62,755 |
) |
|
|
|
|
|
|
(87,720 |
) |
Cash paid for acquisitions |
|
|
|
|
|
|
(1,941 |
) |
|
|
|
|
|
|
|
|
|
|
(1,941 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
3,018 |
|
|
|
2,234 |
|
|
|
|
|
|
|
5,252 |
|
Change in other assets |
|
|
|
|
|
|
(654 |
) |
|
|
2,477 |
|
|
|
|
|
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing
operations |
|
|
|
|
|
|
(24,542 |
) |
|
|
(58,044 |
) |
|
|
|
|
|
|
(82,586 |
) |
Net cash provided by investing activities
discontinued operations |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(24,532 |
) |
|
|
(58,044 |
) |
|
|
|
|
|
|
(82,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations |
|
|
(55,015 |
) |
|
|
|
|
|
|
(461 |
) |
|
|
|
|
|
|
(55,476 |
) |
Distributions to non-controlling interests |
|
|
|
|
|
|
(269 |
) |
|
|
(6,481 |
) |
|
|
|
|
|
|
(6,750 |
) |
Costs paid for repurchase of non-controlling interests |
|
|
|
|
|
|
(1,379 |
) |
|
|
|
|
|
|
|
|
|
|
(1,379 |
) |
Change in intercompany balances with affiliates, net |
|
|
129,427 |
|
|
|
103,614 |
|
|
|
(189,978 |
) |
|
|
(43,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
74,412 |
|
|
|
101,966 |
|
|
|
(196,920 |
) |
|
|
(43,063 |
) |
|
|
(63,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
|
|
|
|
125,995 |
|
|
|
(205 |
) |
|
|
|
|
|
|
125,790 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
80,336 |
|
|
|
402 |
|
|
|
|
|
|
|
80,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
206,331 |
|
|
$ |
197 |
|
|
$ |
|
|
|
$ |
206,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2008 |
|
|
|
|
|
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
Condensed |
|
|
|
Parent Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(18,402 |
) |
|
$ |
(28,701 |
) |
|
$ |
124,614 |
|
|
$ |
(36,760 |
) |
|
$ |
40,751 |
|
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (earnings) from discontinued
operations |
|
|
(5,783 |
) |
|
|
12,257 |
|
|
|
4,801 |
|
|
|
|
|
|
|
11,275 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,721 |
|
|
|
54,020 |
|
|
|
|
|
|
|
96,741 |
|
Amortization of loan costs |
|
|
2,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,913 |
|
Deferred income taxes |
|
|
19,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,368 |
|
Loss (gain) on disposal of assets |
|
|
|
|
|
|
81 |
|
|
|
(6 |
) |
|
|
|
|
|
|
75 |
|
Hurricane-related property damage |
|
|
|
|
|
|
|
|
|
|
3,589 |
|
|
|
|
|
|
|
3,589 |
|
Equity in earnings of affiliates |
|
|
(91,476 |
) |
|
|
|
|
|
|
|
|
|
|
91,476 |
|
|
|
|
|
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
23,114 |
|
|
|
(5,983 |
) |
|
|
|
|
|
|
17,131 |
|
Inventories, prepaid expenses and other current assets |
|
|
|
|
|
|
2,328 |
|
|
|
(23,689 |
) |
|
|
|
|
|
|
(21,361 |
) |
Accounts payable, other accrued expenses and other accrued
liabilities |
|
|
(10,947 |
) |
|
|
(13,040 |
) |
|
|
(5,432 |
) |
|
|
|
|
|
|
(29,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
continuing operations |
|
|
(104,327 |
) |
|
|
38,760 |
|
|
|
151,914 |
|
|
|
54,716 |
|
|
|
141,063 |
|
Net cash provided by (used in) operating activities
discontinued operations |
|
|
5,783 |
|
|
|
(884 |
) |
|
|
(2,586 |
) |
|
|
|
|
|
|
2,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(98,544 |
) |
|
|
37,876 |
|
|
|
149,328 |
|
|
|
54,716 |
|
|
|
143,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
(45,109 |
) |
|
|
(92,306 |
) |
|
|
|
|
|
|
(137,415 |
) |
Cash paid for acquisitions |
|
|
|
|
|
|
(16,799 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
(16,821 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
94 |
|
|
|
266 |
|
|
|
|
|
|
|
360 |
|
Change in other assets |
|
|
|
|
|
|
5,226 |
|
|
|
(613 |
) |
|
|
|
|
|
|
4,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing operations |
|
|
|
|
|
|
(56,588 |
) |
|
|
(92,675 |
) |
|
|
|
|
|
|
(149,263 |
) |
Net cash provided by (used in) investing activities
discontinued operations |
|
|
|
|
|
|
(1,040 |
) |
|
|
23 |
|
|
|
|
|
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(57,628 |
) |
|
|
(92,652 |
) |
|
|
|
|
|
|
(150,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations |
|
|
(303,190 |
) |
|
|
(849 |
) |
|
|
(2,572 |
) |
|
|
|
|
|
|
(306,611 |
) |
Proceeds from debt borrowings |
|
|
384,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384,978 |
|
Distributions to non-controlling interests |
|
|
|
|
|
|
(172 |
) |
|
|
(5,313 |
) |
|
|
|
|
|
|
(5,485 |
) |
Proceeds received from sale of non-controlling interests, net |
|
|
|
|
|
|
15,070 |
|
|
|
|
|
|
|
|
|
|
|
15,070 |
|
Other |
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192 |
|
Change in intercompany balances with affiliates, net |
|
|
16,564 |
|
|
|
90,593 |
|
|
|
(52,441 |
) |
|
|
(54,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
continuing operations |
|
|
98,544 |
|
|
|
104,642 |
|
|
|
(60,326 |
) |
|
|
(54,716 |
) |
|
|
88,144 |
|
Net cash used in financing activities
discontinued operations |
|
|
|
|
|
|
(502 |
) |
|
|
|
|
|
|
|
|
|
|
(502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
98,544 |
|
|
|
104,140 |
|
|
|
(60,326 |
) |
|
|
(54,716 |
) |
|
|
87,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
|
|
|
|
84,388 |
|
|
|
(3,650 |
) |
|
|
|
|
|
|
80,738 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
(4,052 |
) |
|
|
4,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
80,336 |
|
|
$ |
402 |
|
|
$ |
|
|
|
$ |
80,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluations of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended, as of September 30, 2010. Based on this
evaluation, the principal executive officer and principal accounting officer concluded that our
disclosure controls and procedures are effective in timely alerting them to material information
required to be included in our periodic reports.
Report of Management on Internal Control over Financial Reporting
The management of IASIS is responsible for the preparation, integrity and fair presentation of
the consolidated financial statements appearing in our periodic filings with the SEC. The
consolidated financial statements were prepared in conformity with U.S. generally accepted
accounting principles and, accordingly, include certain amounts based on our best judgments and
estimates.
Management is also responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Rules 13a-15(f) under the Securities and Exchange
Act of 1934. Internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of our financial reporting in accordance with U.S. generally accepted
accounting principles. Our internal control over financial reporting includes a program of internal
audits and appropriate reviews by management, written policies and guidelines, careful selection
and training of qualified personnel including a dedicated compliance department and a written Code
of Business Conduct and Ethics adopted by our board of directors, applicable to all of our
directors, officers and employees.
Internal control over financial reporting includes maintaining records that in reasonable
detail accurately and fairly reflect our transactions; providing reasonable assurance that
transactions are recorded as necessary for preparation of our financial statements; providing
reasonable assurance that receipts and expenditures of company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized acquisition, use or
disposition of company assets that could have a material effect on our financial statements would
be prevented or detected in a timely manner. Because of its inherent limitations, including the
possibility of human error and the circumvention or overriding of control procedures, internal
control over financial reporting is not intended to provide absolute assurance that a misstatement
of our financial statements would be prevented or detected. Therefore, even those internal controls
determined to be effective can only provide reasonable assurance with respect to financial
statement preparation and presentation.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that our internal control over financial reporting was effective as of
September 30, 2010.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting because that requirement under
Section 404 of the Sarbanes-Oxley Act of 2002 was permanently removed for non-accelerated filers
pursuant to the provisions of Section 989G(a) set forth in the Dodd-Frank Wall
Street Reform and Consumer Protection Act enacted into federal law in July 2010.
Changes in Internal Control Over Financial Reporting
During the fourth fiscal quarter of the period covered by this report, there has been no
change in our internal control over financial reporting that has materially affected or is
reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information.
None.
110
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the name, age and position of the directors and executive
officers of IAS and executive officers of IASIS. See Certain Relationships and Related
Transactions.
|
|
|
|
|
|
|
Name |
|
Age |
|
|
Position |
W. Carl Whitmer
|
|
|
46 |
|
|
Director, Chief Executive Officer and President |
Phillip J. Mazzuca
|
|
|
51 |
|
|
Chief Operating Officer |
John M. Doyle
|
|
|
50 |
|
|
Chief Financial Officer |
Frank A. Coyle
|
|
|
46 |
|
|
Secretary and General Counsel |
James Moake
|
|
|
41 |
|
|
Operations Chief Financial Officer |
Paul Jenson
|
|
|
62 |
|
|
Executive Vice President |
Richard Gonzalez
|
|
|
59 |
|
|
President, Texas and Louisiana Markets |
Matt Tulin
|
|
|
44 |
|
|
Chief Financial Officer, Utah Market |
Bashar Abunaser
|
|
|
42 |
|
|
Corporate Operations Controller and Chief Financial
Officer, Florida, Texas and Louisiana Markets |
Peter Stanos
|
|
|
47 |
|
|
Vice President, Ethics and Business Practices |
Carolyn Rose
|
|
|
61 |
|
|
Chief Executive Officer, Health Choice Arizona, Inc. |
David R. White
|
|
|
63 |
|
|
Chairman of the Board |
Sandra K. McRee
|
|
|
54 |
|
|
Vice Chair of the Board |
Jonathan J. Coslet
|
|
|
46 |
|
|
Director |
David Dupree
|
|
|
57 |
|
|
Director |
Kirk E. Gorman
|
|
|
60 |
|
|
Director |
Greg Kranias
|
|
|
33 |
|
|
Director |
Todd B. Sisitsky
|
|
|
39 |
|
|
Director |
Paul S. Levy
|
|
|
63 |
|
|
Director |
Jeffrey C. Lightcap
|
|
|
51 |
|
|
Director |
Sharad Mansukani
|
|
|
41 |
|
|
Director |
W. Carl
Whitmer become a Director of IAS in April 2010. He has served as President since April 2010 and was appointed Chief Executive
Officer in November 2010. Prior to that time, he served as Chief Financial Officer since November
2001 and Vice President and Treasurer from March 2000 to October 2001. Prior to joining our
company, Mr. Whitmer served various roles including Vice President of Finance and Treasurer and
Chief Financial Officer of PhyCor Inc., where he was employed from July 1994 through February 2000.
Mr. Whitmers responsibilities at PhyCor included acquisitions, capital planning and management,
investor relations, treasury management and external financial reporting. Prior to joining PhyCor
Inc., Mr. Whitmer served as a Senior Manager with the accounting firm of KPMG LLP, where he was
employed from July 1986 to July 1994. Mr. Whitmer also serves on the board of directors, including
the audit committee, of Fenwall, Inc.
Phillip J. Mazzuca was appointed Chief Operating Officer in October 2010. Prior to joining
our company, Mr. Mazzuca served as President and Chief Executive Officer of Brim Holdings, Inc.,
for the past two years. Prior to joining Brim Holdings, Inc.,
Mr. Mazzuca served for three years as
the Executive Vice President and Chief Operating Officer of Charlotte, North Carolina-based MedCath
Corporation, where he oversaw the companys hospital operations. Starting in 1999, he spent six
years at IASIS, rising to Division President for the Texas and Florida markets. In previous years,
he served in operations leadership roles for a number of hospitals and hospital companies,
including Chief Executive Officer of hospitals in several states including Alabama, California,
Illinois and Virginia.
John M. Doyle
has served as Chief Financial Officer since April 2010. Prior to that time, he served as Vice
President and Chief Accounting Officer since July 2006 and Vice President and Treasurer
from April 2006 to July 2006. Prior to joining our company,
Mr. Doyle was a Senior Manager at Ernst & Young
LLP from February 1997 until March 2002 and at KPMG LLP from August 1994 to January 1997, where he
specialized in healthcare audit and business advisory services, including mergers and acquisitions.
In addition, from October 1991 to August 1994, Mr. Doyle was the Chief Financial Officer for two
community hospitals in East Tennessee and North Carolina.
111
Frank A. Coyle
has been Secretary and General Counsel since October 1999.
From August
1998 until October 1999, Mr. Coyle served as Secretary and General Counsel of a company formed by
members of our management that was merged into one of our subsidiaries. Mr. Coyle served from May
1995 to August 1998 as Assistant Vice President Development in Physician Services and in-house
Development Counsel for Columbia/HCA. From May 1990 to May 1995, Mr. Coyle was an attorney with
Baker, Worthington, Crossley, Stansberry & Woolf where his work included mergers, acquisitions,
securities transactions, not-for-profit representation and formation of Tennessee health
maintenance organizations.
James Moake
has served as Operations Chief Financial Officer since February 2005. Prior
to that time, he
has served as a Division Chief Financial Officer since March 2003. From November 2002 to
March 2003, Mr. Moake served as Operations Controller. Prior to joining our company, from
March 2000 to November 2002, he served as the Chief Financial Officer for two regional medical
centers of Province Healthcare Corporation. Mr. Moake served as the Chief Financial Officer of HMA,
Inc.s Community Hospital of Lancaster (PA) from July 1999 to March 2000 and the Assistant Chief
Financial Officer of HMA, Inc.s Biloxi Regional Medical Center (MS) from June 1998 to June 1999.
From December 1994 to May 1998, he served as the Chief Financial Officer of Grant Regional Health
Center, Inc. in Wisconsin.
Paul Jenson has served as the Executive Vice President Western Region since April 1, 2008.
Prior to that time, Mr. Jenson served as President of the Arizona Market from July 1, 2007 and had
also served as the President of the Nevada Market since October 1, 2007. From April 1, 2005 to July
1, 2007, his position was Chief Executive Officer of St. Lukes Medical Center, St. Lukes
Behavioral Health Center and Biltmore Surgery Center in Phoenix,
Arizona. Prior to joining our company, Mr. Jenson worked for HCA Inc. for 14 years with his last position being Chief Executive Officer of
HCA-Brunswick Community Hospital from September 2002 until April 2005. Mr. Jenson has a background
of 40 years of experience in healthcare management in locations throughout the United States.
Richard Gonzalez has
served as President of the Texas and Louisiana markets since December
2008. In addition, he has served as Chief Executive Officer of Southwest General Hospital since
April 2003. Prior to joining our company, Mr. Gonzalez held numerous healthcare leadership positions in
the United States and Mexico since 1975, including, most recently, as Chief Financial Officer of
The Methodist Hospital in Houston, Texas.
Matt Tulin has served as Chief Financial Officer of the Utah market since April 2009. Prior to
that time, Mr. Tulin served as Chief Financial Officer over finance and operations, from 2006 to
2009, for NEA Baptist Memorial Hospital, formally Triad Healthcare then Community Health Systems, a
joint venture syndication healthsystem over two acute care facilities. From 2004 to 2006, Mr. Tulin
served as Chief Financial Officer at two LifePoint Hospitals, Southern Tennessee Medical Center in
Winchester, Tennessee and Emerald Hodgson Hospital in Sewanee, Tennessee.
Bashar Abunaser is serving as the Corporate Operations Controller and the Chief Financial
Officer of the Florida, Texas and Louisiana markets. Prior to that time, Mr. Abunaser served as
Director of Financial Operations at SunLink Health Systems, Inc. from August 2006 to December 2007
and as Chief Financial Officer at two SunLink hospitals, Chestatee Regional Hospital in Dahlonega,
Georgia and Missouri Southern Healthcare in Dexter, Missouri, from September 2003 to August 2006.
Peter Stanos
has served as Vice President, Ethics & Business Practices since April 2003.
Prior to that time, he served as Regional Director Clinical Operations for our Utah market since July
2002. Prior to joining our company, from May 2000 until July 2002, Mr. Stanos was employed by
Province Healthcare Corporation as Chief Quality Officer of Havasu Regional Medical Center and as
Regional Director of Quality and Resource Management. From 1997 until 2000, Mr. Stanos was employed
by HCA and Triad Hospitals, Inc. as an Associate Administrator and Director of Quality and Resource
Management, Materials, Pharmacy and Risk Management. Prior to joining HCA, Mr. Stanos served as
Regional Director of several healthcare companies, as well as an independent healthcare consultant.
Carolyn Rose has served as Chief Executive Officer of Health Choice since 1999. From 1983 to
1999, Ms. Rose held a number of senior management positions in the managed healthcare industry.
Ms. Rose served as Executive Director/CEO for several large indigent practice associations, as well
as serving as a principal and partner in a consulting firm specializing in managed care and
hospital consolidations.
112
David R. White currently serves as Chairman of the Board of Directors of IAS. Mr. White served
as Chief Executive Officer of IAS from December 1, 2000 to October 2010 and President of IAS from
May 2001 through May 2004. Mr. White served as President and Chief Executive Officer of LifeTrust,
an assisted living company, from November 1998 until November 2000. From June 1994 to September
1998, Mr. White served as President of the Atlantic Group at Columbia/HCA, where he was responsible
for 45 hospitals located in nine states. Previously, Mr. White was Executive Vice President and
Chief Operating Officer at Community Health Systems, Inc., a for-profit hospital management company
that operated approximately 20 acute-care hospitals.
Sandra K. McRee was appointed Vice Chair of the Board of Directors of IAS in April 2010.
Prior to that time, she served as Chief Operating Officer of IAS from May 2001 to October 2010 and
President from May 2004 to April 2010. Ms. McRee was a Regional Vice President for Province
Healthcare Corporation from April 1999 until May 2001, where she oversaw the operations of five
facilities in Florida, Louisiana and Mississippi. Ms. McRee also served as Vice President,
Operations of Province Healthcare Corporation from October 1998 through March 1999. From August
1997 through September 1998, she served as a Division President for Columbia/HCA. Ms. McRee also
served as a Group Vice President, Operations for Columbia/HCA from May 1995 through July 1997.
Prior to joining Columbia/HCA, Ms. McRee served as an Assistant Vice President for Community Health
Systems Inc. where she oversaw 36 facilities. Ms. McRee has spent her entire professional career in
the healthcare industry.
Jonathan J. Coslet became a Director of IAS
in June 2004. Mr.
Coslet is a Senior Partner of TPG. Mr. Coslet is also a member of the firms Investment Committee
and Management Committee. Prior to joining TPG in 1993, Mr. Coslet was in the Investment Banking
Department of Donaldson, Lufkin & Jenrette, specializing in leveraged acquisitions and high yield
finance from 1991 to 1993. Mr. Coslet serves on the boards of directors of The Neiman Marcus Group,
Inc., PETCO Animal Supplies, Inc., Biomet, Inc., Quintiles Transnational Corp. and Harrahs
Entertainment.
David Dupree became a director of IAS in April 2007. Mr. Dupree has been Managing Director and
Chief Executive Officer of The Halifax Group since 1999. Prior to co-founding Halifax, Mr. Dupree
was a Managing Director and Partner with The Carlyle Group, where he was primarily responsible for
investments in healthcare and related sectors. Prior to joining The Carlyle Group in 1992, Mr.
Dupree was a Principal in corporate finance with Montgomery Securities. Mr. Dupree also serves as a
Director of Primo Water Corporation, a supplier of bottled water dispensers, and a Director Emeritus of Whole Foods Market, Inc., a natural and organic foods supermarket company
where he served as Director from 1997 until 2008.
113
Kirk E. Gorman was appointed a Director of IAS in August 2004. Mr. Gorman currently serves as
Senior Vice President and Chief Financial Officer of Jefferson Health System, a not-for-profit
health system based in Radnor, Pennsylvania, which he joined in October 2003. Prior to joining
Jefferson Health System, Mr. Gorman served as Senior Vice President and Chief Financial Officer of
Universal Health Services, Inc., a public hospital company based in Pennsylvania, from 1987 to
February 2003. Mr. Gorman also has 13 years of experience in the banking industry and served as
Senior Vice President of Mellon Bank prior to his work in the healthcare industry. Mr. Gorman
serves as a Director of Cardionet Inc., the leading provider of mobile cardiac outpatient
telemetry. Mr. Gorman served as a Director of Care Investment Trust, a real estate investment and
finance company, from 2007 to 2009.
Greg
Kranias became a Director of IAS effective May 25, 2010. Mr. Kranias serves as a
Principal at TPG. Prior to joining TPG in 2005, Mr. Kranias worked at the private
equity firm Forstmann Little & Company. Before joining Forstmann Little & Company in 2001, Mr.
Kranias was an investment banker with Goldman, Sachs & Co. Mr. Kranias is involved with TPGs
investment in Harrahs Entertainment, Inc. He received his M.B.A. from the Stanford Graduate School
of Business and his A.B. from Harvard College, where he graduated Phi Beta Kappa.
Todd
B. Sisitsky became a Director of IAS in June 2004. Mr. Sisitsky
is a Partner of TPG where he leads the firms investment activities in the
healthcare services, pharmaceutical and medical device sectors. In
addition to our company, he played key
roles in connection with TPGs investments in Axcan Pharma, Biomet, Inc., Fenwal Transfusion
Therapies, Surgical Care Affiliates, LLC and IMS Health and serves on the board of directors of
each of these companies. Prior to joining TPG in 2003, Mr. Sisitsky worked at Forstmann Little &
Company and Oak Hill Capital Partners.
Paul S. Levy has been a Director of IAS since October 1999. Mr. Levy is a Senior Managing
Director of JLL Partners, Inc., which he founded in 1988. Mr. Levy serves as a director of several
companies, including Builders FirstSource, Inc., Medical Card
Systems, Inc., Patheon Inc., PGT Inc. and
PharmaNet Development Group, Inc.
Jeffrey C. Lightcap has been a Director of IAS since October 1999. Since October 2006, Mr.
Lightcap has been a Senior Managing Director of HealthCor Group. Prior to joining HealthCor Group,
Mr. Lightcap was a Senior Managing Director at JLL Partners, Inc., which he joined in June 1997. From
February 1993 to May 1997, Mr. Lightcap was a Managing
Director at Merrill Lynch & Co., Inc., where
he was the head of leveraged buyout firm coverage for the mergers and acquisitions group.
Sharad Mansukani became a Director of IAS in April 2005. Dr. Mansukani serves as a senior
advisor of TPG, and serves on the faculty at both the University of Pennsylvania and Temple
University School of Medicine. Dr. Mansukani previously served as a senior advisor to the
Administrator of CMS from 2003 to 2005, and as Senior Vice President and Chief Medical Officer of
Health Partners, a non-profit Medicaid and Medicare health plan owned at the time by
Philadelphia-area hospitals. Dr. Mansukani completed a residency and fellowship in ophthalmology at
the University of Pennsylvania School of Medicine and a fellowship in quality management and
managed care at the Wharton School of Business. Dr. Mansukani
also serves as a Director of
Healthspring, Inc.
Director Qualifications
The certificate of incorporation and by-laws of IAS provide that its board of directors will
consist of not less than three nor more than 15 members, the exact number of which shall be
determined by the board of directors in a resolution. The directors are elected at the annual
meeting of stockholders for one-year terms and until their successors are duly elected and
qualified.
Pursuant to the limited liability company operating agreement of IASIS Investment, JLL is
entitled to nominate two directors to IAS board of directors. TPG is entitled to nominate the
remaining directors. Messrs. Levy and Lightcap serve on IAS board of directors as designees of
JLL. The remaining directors serve as designees of TPG.
When considering whether the directors and nominees have the experience, qualifications,
attributes and skills, taken as a whole, to enable the board of directors to satisfy its oversight
responsibilities effectively in light of the Companys business and structure, the board of
directors focused primarily on the information discussed in each of the directors biographical
information set forth above.
114
Each of the directors possesses high ethical standards, acts with integrity, and exercises
careful, mature judgment. Each is committed to employing their skills and abilities to aid the
long-term interests of the stakeholders of the
Company. In addition, our directors are knowledgeable and experienced in one or more business,
governmental, or civic endeavors, which further qualifies them for service as members of the board
of directors. Alignment with our stockholders is important in building value at the Company over
time.
As a group, the non-management directors possess experience in owning and managing enterprises
like the Company and are familiar with corporate finance, strategic business planning activities
and issues involving stakeholders more generally.
The management directors bring leadership, extensive business, operating, financial, legal and
policy experience, and knowledge of our Company and the Companys industry, to the board of
directors. In addition, the management directors bring their broad strategic vision for our Company
to the board of directors.
Audit Committee Financial Expert
The current members of our audit committee are Messrs. Sisitsky, Lightcap and Gorman. IAS
board of directors has determined that Todd Sisitsky is an audit committee financial expert as
that term is defined in Item 401(h) of Regulation S-K promulgated by the SEC.
Code of Ethics
We have adopted a code of ethics for our principal executive officer, principal financial
officer, principal accounting officer, controller and persons performing similar functions, which
is Exhibit 14 to this annual report on Form 10-K and which also has been posted on our Internet
website at www.iasishealthcare.com. Please note that our Internet website address is provided as an
inactive textual reference only. We will make any legally required disclosures regarding amendments
to, or waivers of, provisions of our code of ethics on our Internet website.
115
Item 11. Executive Compensation.
COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
This section discusses the principles underlying our executive compensation policies and
decisions. It provides qualitative information regarding the manner in which compensation is
earned by our executive officers and places in context the data presented in the tables that
follow. In addition, in this section, we address the compensation paid or awarded during fiscal
2010 to the following executive officers: David R. White, our Chairman and Chief Executive Officer
through October 31, 2010; W. Carl Whitmer, our President and effective November 1, 2010, our Chief
Executive Officer (who also acted as our Chief Financial Officer during part of fiscal 2010), John
M. Doyle, our Chief Financial Officer (who also acted as our Chief Accounting Officer during part
of fiscal 2010; and three other executive officers who were our three other most highly compensated
executive officers in fiscal 2010, as follows: Sandra McRee, our Chief Operating Officer through
October 31, 2010; Frank Coyle, our Secretary and General Counsel, and Carolyn Rose, Chief Executive
Officer of Health Choice. We refer to these six executive officers as our named executive
officers.
During fiscal 2010, as part of a leadership transition at the Company, Mr. White and Ms. McRee
announced their respective retirements, effective after fiscal 2010. Mr. White will continue as
Chairman of the Board of Directors and Ms. McRee will take on the position of Vice Chair of the
Board of Directors. During fiscal 2010, Mr. Whitmer was promoted from Chief Financial Officer to
President and Mr. Doyle was promoted from Chief Accounting Officer to Chief Financial Officer. Mr.
Whitmer also became our Chief Executive Officer effective November 1, 2010.
On June 22, 2004, an investor group led by TPG acquired IAS through a merger. In order to
effect the acquisition, the investor group established IASIS Investment LLC (IASIS Investment),
and a wholly owned subsidiary of IASIS Investment, which merged with and into IAS. In the merger,
IAS issued shares of common and preferred stock to IASIS Investment, which is the sole stockholder
of IAS after giving effect to the merger. Prior to the merger, IAS contributed substantially all of
its assets and liabilities to IASIS in exchange for all of the equity interests in IASIS. As a
result, IAS is a holding company, IASIS is a limited liability company consisting of 100% common
interests owned by IAS and IASs operations are conducted by IASIS and its subsidiaries. We refer
to the merger, the related financing transactions and the applications of the proceeds from the
financing transactions as the Transactions.
As discussed in more detail below, various aspects of named executive officer compensation
were negotiated and determined at the time of the Transactions. In addition, since the equity of
our company is owned entirely by a group of sophisticated investment funds who also control our
board of directors, our compensation structure is largely driven by these investment funds that
rely heavily upon their experience and expertise. Our Compensation Committee (the Committee) is
made up of three individuals, our Chief Executive Officer, two directors of IAS, one of whom serves
as a representative of JLL Partners and one of whom is a partner in the TPG group who represents
our equity investors and chairs the Committee.
The Committees compensation philosophy is to align the interests of the executive officers
with those of the investors while encouraging long-term executive retention. Furthermore, the
Committee believes that our ability to grow and be successful in the long-term is enhanced by a
comprehensive compensation program that includes different types of incentives for attracting,
motivating and retaining executives and rewarding outstanding service, including awards that link
compensation to applicable performance measures. Under the Committees direction and supervision,
we have developed and implemented compensation policies, plans and programs designed to enhance the
quality of healthcare services delivered by our hospitals and increase investor value by closely
aligning the financial interests of our named executive officers with those of our investors.
As discussed in more detail in the following pages, the compensation structure utilizes not
only base salary to compensate our executives competitively, but also heavily relies on annual and
long-term incentive compensation to attract and retain highly qualified executives and motivate
them to perform to the best of their abilities. In years of outstanding achievement, the Committee
believes that our named executive officers should be properly rewarded for their respective
contributions to our success through a combination of incentive-based cash and equity-based
awards.
116
The Executive Compensation Process
The Compensation Committee
The Committee oversees our executive compensation program. The Committees responsibilities
include, but are not limited to, the following:
|
|
|
Reviewing and approving our compensation philosophy; |
|
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|
Determining executive compensation levels; |
|
|
|
Annually reviewing and assessing performance goals and objectives for all
executive officers, with particular emphasis with respect to the Chief Executive
Officer, the Chief Operating Officer and the Chief Financial Officer; and |
|
|
|
Determining short-term and long-term incentive compensation for all executive
officers with particular emphasis with respect to the Chief Executive Officer, the Chief
Operating Officer and the Chief Financial Officer. |
Mr. Coslet, the TPG partner on the Committee, makes all decisions with respect to the
compensation of the Chief Executive Officer. Annually, the non-executive directors of the board of
directors evaluate the performance of the Chief Executive Officer and that evaluation is then
communicated to the Chief Executive Officer by Mr. Coslet. The Chief Executive Officer recommends
to Mr. Coslet compensation decisions for our Chief Operating Officer and our Chief Financial
Officer, respectively. Our Chief Executive Officer and Mr. Coslet discuss these recommendations in
detail before reaching a final decision. With respect to the other named executive officers, our
Chief Executive Officer is generally responsible for conducting reviews and making compensation
decisions.
During our fiscal year ended September 30, 2010, the Committee did not rely on the advice or
reports of any external compensation consultant in making compensation decisions. As TPG has
substantial experience and expertise in executive compensation and in some cases internally employs
compensation experts, the Committee may from time to time rely upon such experience, expertise and
experts.
Our Chief Executive Officer, a member of the board of directors of IAS, is also a member of
the Committee and, as discussed above, plays an important role in many compensation decisions.
Other named executive officers also attend the Committee meetings and participate only as and if
required by the Committee. As discussed above, the Chief Executive Officer does not participate on
behalf of the Committee or the board of directors in decisions regarding his own compensation. Any
discussion by the Committee regarding compensation for the Chief Executive Officer or other named
executive officers is conducted by the Committee in executive session without such persons in
attendance.
Benchmarking Process
The Committees process for determining executive compensation is straightforward and, in
part, involves consideration of the highly competitive market for executives in the healthcare
industry, including review of compensation levels of comparable companies. Management prepares for
the Committee informal schedules that compare our cash compensation to the cash compensation
offered by certain comparable companies in the acute hospital industry that file such information
with the SEC. These comparisons are part of the total mix of information used to annually evaluate
base salary, short-term incentive compensation and total cash compensation. The Committee may also,
from time to time, rely on analysis performed by TPG that compares the compensation of our
executive officers with that of other portfolio companies or private equity backed companies in
general. Since one of the objectives of our compensation program is to consistently reward and
retain top performers, compensation will also vary depending on individual and company performance.
117
Pay for Performance
The Company emphasizes aligning compensation with performance. With respect to our named
executive officers, the primary factor that is utilized in structuring annual compensation,
including payouts under the short-term incentive plan, is Adjusted EBITDA (as such term is defined
in Note 17 to our consolidated financial statements) compared to our company budget for the
previous year. Other factors that may in the Committees discretion be considered in certain years
include:
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Adjusted EBITDA year over year growth; |
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Peer group comparisons including comparisons of net revenue growth, expense
margins and return on capital; |
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Individual, company or division performance including certain core performance
measures; |
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Promotion of an effective, company-wide program that fosters a culture of legal
compliance; and |
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Response to unusual or extreme events. |
Another component of the Companys pay for performance compensation philosophy is the
significant equity holdings of the named executive officers. Certain named executive officers were
granted common stock options at the time of the Transactions and also rolled over equity. As shown
in the compensation tables below, the Company paid approximately $6.1 million to certain named
executive officers during fiscal 2010 to cancel remaining vested rollover options to purchase its
common stock.
Internal Pay Equity
Internal pay equity is not a material factor with respect to the Committees compensation
decisions. The Committee believes that the variation in compensation among the named executive
officers is reasonable in light of each executives experience, contribution and importance to the
Company.
Components of the Executive Compensation Program
Employment Agreements
During the process of completing the Transactions, TPG and the other equity investors entered
into negotiations regarding employment agreements with Mr. White, Mr. Whitmer and Ms. McRee. The
employment agreements that resulted were heavily negotiated and were largely influenced by the
experience and expertise of TPG and the other equity holders as well as the executives previous
performance and familiarity with the business. The resulting employment agreements established the
foundation of the Companys compensation structure with respect to Mr. White, Mr. Whitmer and Ms.
McRee. Mr. Whitmer entered into a new negotiated employment agreement upon his promotion to
President during fiscal 2010. Mr. Doyle entered into a negotiated employment agreement upon his
promotion to Chief Financial Officer during the year. Ms. Rose entered into an agreement for
severance benefits and restrictive convenants upon being hired by IASIS in March 2001. Mr. Coyle
does not have an employment agreement.
Base Salary
Base salary represents the fixed component of our named executive officers compensation and
is intended to compensate the executive for competence in the executive role. The Committee
attempts to maintain base salaries at competitive levels while also reserving a substantial portion
of compensation for the other compensation elements that are directly related to company
performance.
118
The Committee annually reviews and adjusts base salaries of the Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer. The Chief Executive Officer approves all base salary
increases for other named executive officers. Any base salary increase during this annual process
is generally intended to compensate the executive for exceptional performance or contributions,
cost of living increases, changes in responsibility, and changes in the competitive landscape. Base
salaries may also be adjusted at any time during the year if Mr. Coslet, the Committee, or the
Chief Executive Officer, as relevant, finds it necessary or advisable to maintain a competitive
level or to compensate an individual for increased responsibility. Mr. White and Ms. McRee did not
receive a base compensation increase during the year. Effective April 23, 2010, in connection with
their respective promotions, Mr. Whitmer received a base compensation increase from $534,871 to
$650,000 and Mr. Doyle received a base compensation increase from $260,000 to $400,000. Mr. Coyle
and Ms. Rose did not receive a base compensation increase during the year.
Short-Term Incentive Compensation
Our named executive officers have the opportunity to earn cash incentive awards based upon the
level of achievement of financial performance metrics. The range of potential payouts for Mr.
White, Mr. Whitmer, Ms. McRee and Mr. Doyle are set forth in their employment agreements and, as
discussed above, were highly negotiated. Mr. Coyle and Ms. Rose have target and maximum bonus levels that
have been approved by the Chief Executive Officer as representing a competitive level and
significantly aligning the interests of these executive officers with those of the investors.
Before the end of the first quarter of the relevant fiscal year, the Company, with the input
of members of the board of directors and the investors, establishes target levels for Adjusted
EBITDA (as such term is defined in Note 17 to our consolidated financial statements) and other
operating metrics such as revenue growth and free cash flow that are used both for compensation and
budgeting purposes. Our performance during the year versus the Adjusted EBITDA target levels is the
primary factor in calculating the short-term incentive compensation paid to the named executive
officers. The Committee has chosen Adjusted EBITDA as the primary financial metric used to
calculate short term incentive compensation payouts because it believes it provides an effective
measure of our companys financial health and the creation of long-term equity value.
Annual incentive target awards to our named executive officers vary depending on the Companys
performance against the target levels for Adjusted EBITDA and other operating metrics, as follows:
Annual Incentive Target Award Ranges (as a Percentage of Base Salary) for Fiscal 2010
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Threshold |
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Target |
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Maximum |
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David R. White |
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20 |
% |
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100 |
% |
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200 |
% |
W. Carl Whitmer(1) |
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10 |
% |
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75 |
% |
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150 |
% |
Sandra K. McRee |
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10 |
% |
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50 |
% |
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100 |
% |
John M. Doyle(2) |
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10 |
% |
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50 |
% |
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100 |
% |
Frank A. Coyle |
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35 |
% |
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35 |
% |
Carolyn Rose |
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35 |
% |
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75 |
% |
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(1) |
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For the time period prior to his promotion to President on April 23, 2010, Mr.
Whitmers Target award was 50% and his Maximum award was 100%. |
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(2) |
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For the time period prior to his promotion to Chief Financial Officer on April 23,
2010, Mr. Doyles Target award was 35% and his Maximum award was 50%. |
While the primary factor in calculating short-term incentive compensation payouts for Mr.
White, Mr. Whitmer, Ms. McRee and Mr. Doyle is Adjusted EBITDA, Mr. Coslet or the Committee, as
relevant, may consider, in its discretion, other factors in awarding annual incentive compensation
to these individuals, including:
|
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|
Adjusted EBITDA year over year growth; |
119
|
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|
Peer group comparisons including comparisons of net revenue growth, expense
margins and return on capital; |
|
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Individual, company or division performance including certain core performance
measures; |
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Promotion of an effective, company-wide program that fosters a culture of legal
compliance; and |
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Response to unusual or extreme events. |
While the primary factor in calculating short-term incentive compensation payouts for Mr.
Coyle and Ms. Rose is also Adjusted EBITDA and the awards are generally either paid or not paid
based upon meeting the budgeted level, payouts for Mr. White, Mr. Whitmer, Ms. McRee and Mr. Doyle
may consider quality and customer service metrics, cash collections, certain operational and
individual goals, as well as any of the factors listed above, in either adjusting the level of
payout or whether a payout is made.
In fiscal 2010, the Adjusted EBITDA target was the primary factor considered in awarding
payment under the short-term incentive plan to the named executive officers. However, Mr. Coslet
and the Committee, as relevant, also considered individual achievements, our companys free cash
flow financial performance to budget and the companys overall financial performance compared to
peer companies. As a result of the Company not achieving target levels for Adjusted EBITDA and
other factors, Mr. White, Mr. Whitmer, Ms. McRee, Mr. Doyle
or Mr. Coyle were not granted an award,. The Committee granted an award at 75%, the maximum
target level, to Ms. Rose based
on the targets and goals achieved at Health Choice.
Long-Term Incentive Compensation
Our executive officer compensation has a substantial equity component as we believe superior
equity investors returns are achieved through a culture that focuses on long-term performance by
our named executive officers and other key associates. By providing our executives with an equity
stake in the Company, we are better able to align the interests of our named executive officers and
our equity holders. At the time of the Transactions, certain named executive officers each received
common stock options granted under the 2004 Option Plan and rolled over certain equity. As shown
in the compensation tables below, the Company paid approximately $6.1 million to certain named
executive officers during fiscal 2010 to cancel vested rollover options to purchase its common
stock.
IAS also maintains the IAS 2004 Stock Option Plan and from time to time may grant additional
options to the named executive officers pursuant to this plan. In making long-term equity incentive
grants to the named executive officers, certain factors are considered, including but not limited
to, the present ownership levels of the named executive officers and the level of the executives
total compensation package compared to peer companies. It is the responsibility of Mr. Coslet to
recommend grants to the Committee for the Chief Executive Officer, the Chief Executive Officer to
recommend grants to the Committee for the Chief Operating Officer and Chief Financial Officer, and
the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer to recommend
grants to the Committee for any other named executive officers. No grants were made to the named
executive officers in fiscal 2010.
Generally, the exercise price of an option grant is set at the fair market value of a share of
the common stock as of the grant date, as determined by the IAS board of directors in good faith
and, as necessary, supplemented and supported by an independent third party valuation. We have no
formal practices regarding the timing of option grants.
Due to our current equity structure, an optionee is expected at the time of grant to enter
into an agreement that will generally provide that for the 90-day period following the later of (i)
a termination of employment or (ii) six months and one day following the date that shares of common
stock were acquired pursuant to the exercise of the option, we have the right to repurchase each
share then owned by the participant at fair value, as determined in good faith by the IAS board of
directors.
120
Non-qualified Executive Savings Plan
We provide certain of our employees a non-qualified executive savings plan. The plan is a
voluntary, tax-deferred savings vehicle that is available to those employees earning a minimum base
salary ($115,000 in 2010). The executive savings plan was implemented in order to assist in the
recruitment and retention of key executives by providing the ability to defer additional pre-tax
compensation in excess of the limits allowed by the Companys 401(k) plan.
An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) plan in
order to participate in the non-qualified executive savings plan. There are two types of deferrals
available under the plan: excess deferrals and additional deferrals. Excess deferrals are
contributions that are deposited into the non-qualified executive savings plan because either (a)
the participants earnings have exceeded $250,000 and/or (b) the participants deferrals into the
401(k) plan have reached a dollar limit stipulated by the IRS ($16,500 in 2010). Excess deferrals
are automatically deposited into the nonqualified executive savings plan if these limits are
reached. Employed physician excess deferrals are not matched. Executive excess deferrals are
matched at the same rate as contributions to the 401(k) plan. There is a five-year service
requirement for participants to vest in the IASIS excess matching contributions. Currently, none of
the named executive officers participates in the plan.
Additional deferrals are contributions to the non-qualified executive savings plan that are
independent of a participants 401(k) contribution election. These contributions are voluntary and
are capped according to applicable IRS guidelines for such a plan.
The non-qualified executive savings plan offers a range of investment options that act as
benchmark funds. Benchmark funds are defined as the investment fund or funds used to represent
the performance and current deemed balance of a participants non-qualified account, which is
considered a notional deferred compensation account. Contributions become part of our general
assets. Investment options under the non-qualified executive savings plan are the same as those
available under the IASIS 401(k) plan.
Severance and Change in Control Agreements
Messrs. White and Whitmer and Ms. McRee entered into employment agreements in connection with
the Transactions, which agreements provide, among other things, for each executives rights upon a
termination of employment. Mr. Whitmer entered into a new negotiated employment agreement upon his
promotion to President during fiscal 2010. Mr. Doyle entered into a negotiated employment
agreement upon his promotion to Chief Financial Officer during fiscal 2010. Ms. Rose entered into
an agreement for severance benefits and restrictive covenants in March 2001, which provides for her
rights upon a termination of employment. We believe that reasonable and appropriate severance and
change in control benefits are appropriate in order to be competitive in our executive retention
efforts. In agreeing to these benefits, the board of directors recognized that it may be difficult
for such executives to find comparable employment within a short period of time. In addition, the
board of directors recognized that formalized severance and change in control arrangements are
common benefits offered by employers competing for similar senior executive talent. Information
regarding applicable payments under such agreements for the named executive officers is provided
under Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
and Potential Payments Upon Termination or Change in Control.
Perquisites
From time to time we agree to provide certain executives with perquisites. We provide these
perquisites on a limited basis in order to attract key talent and to enhance business efficiency.
We believe these perquisites are in line with market practice. For fiscal 2010, we provided the
named executive officers with the following perquisite:
Group term life insurance premiums. We paid insurance premiums with respect to group term life
insurance for the named executive officers.
121
Impact of Tax and Accounting Rules
The forms of our executive compensation are largely dictated by our capital structure and have
not been designed to achieve any particular accounting treatment. We do take tax considerations
into account, both to avoid tax disadvantages, and obtain tax advantages where reasonably possible
consistent with our compensation goals. Certain tax advantages for our executives benefit us by
reducing the overall compensation we must pay to provide the same after-tax income to our
executives. Thus, our severance pay plans are designed to take account of and avoid parachute
excise taxes under Section 280G of the Internal Revenue Code. Since we currently have no publicly
traded equity interests, we are not currently subject to the $1,000,000 limitation on deductions
for certain executive compensation under Section 162(m) of the Internal Revenue Code, though that
rule will be considered if our equity interests become publicly traded. Incentives paid to
executives under our annual incentive plan are taxable at the time paid to our executives.
Recovery of Certain Awards
We do not have a formal policy for recovery of annual incentives paid on the basis of
financial results which are subsequently restated. Under the Sarbanes-Oxley Act, our Chief
Executive Officer and Chief Financial Officer must forfeit incentive compensation paid on the basis
of previously issued financial statements for which they were responsible and which have to be
restated due to such officers actions. If the situation arises, we would consider our course of
action in light of the particular facts and circumstances, including the culpability of the
individuals involved.
Compensation Committee Conclusion
The Committees philosophy for executive pay for fiscal 2010 was intended to reflect the
unique attributes of our company and each employee individually in the context of our pay
positioning policies, emphasizing an overall analysis of the executives performance for the prior
year, projected role and responsibilities, required impact on execution of our strategy,
vulnerability to recruitment by other companies, external pay practices, total cash compensation
and equity positioning internally, current equity holdings, and other factors the Committee deemed
appropriate. We believe our approach to executive compensation emphasized significant time and
performance-based elements intended to promote long term investor value and strongly aligned the
interests of our executive officers with those of investors.
Compensation Committee Report
The Committee has reviewed and discussed the Compensation Discussion and Analysis with
management. Based upon the review and discussions, the Committee directed that the Compensation
Discussion and Analysis be included in this annual report on Form 10-K.
Compensation Committee:
Jonathan J. Coslet
David R. White
Jeffrey C. Lightcap
122
Summary Compensation Table Fiscal 2010
The following table sets forth, for the fiscal year ended September 30, 2010, the compensation
earned by the Principal Executive Officer and Principal Financial Officer. Both Mr. Whitmer and Mr.
Doyle served as our Principle Financial Officer during fiscal 2010. The table also sets forth the
compensation earned by our other three most highly compensated executive officers during 2010. We
refer to these persons as our named executive officers. For 2010, Salary accounted for
approximately 31.5% of the total compensation of the named executives, Option Awards accounted
for approximately 66.0% of total compensation, and all other compensation accounted for
approximately 2.5% of total compensation. There are no above-market or preferential earnings on
deferred compensation. Consequently, the table does not include earnings on deferred amounts. None
of the named executive officers is eligible for pension benefits as we do not have a defined
benefit program.
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Change in |
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Pension Value |
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and |
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Non-Equity |
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Nonqualified |
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Option |
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Incentive Plan |
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Deferred |
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All Other |
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Name and Principal |
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Salary |
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Bonus |
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Awards |
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Compensation |
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Compensation |
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Compensation |
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Position |
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Year |
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($) |
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($) |
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($)(1) |
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($)(2) |
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Earnings ($) |
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($) |
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Total ($) |
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David R.
White (3)
Chairman of the Board &
Chief Executive Officer |
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2010 |
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808,500 |
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2,466,992 |
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9,628 |
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3,285,120 |
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2009 |
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808,500 |
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16,374 |
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1,617,000 |
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9,628 |
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2,451,502 |
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2008 |
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808,500 |
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9,474 |
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817,974 |
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W. Carl
Whitmer (3)
President |
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2010 |
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585,458 |
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1,438,157 |
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7,945 |
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2,031,560 |
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2009 |
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534,871 |
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6,264 |
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534,871 |
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7,879 |
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1,083,885 |
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2008 |
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521,620 |
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8,638 |
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530,258 |
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Sandra K.
McRee (3)
Chief Operating Officer |
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2010 |
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600,000 |
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1,809,865 |
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7,242 |
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2,417,107 |
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2009 |
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600,000 |
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6,264 |
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600,000 |
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7,242 |
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1,213,506 |
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2008 |
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585,135 |
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8,142 |
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593,277 |
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John M. Doyle
Chief Financial Officer |
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2010 |
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321,515 |
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150,453 |
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9,179 |
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481,147 |
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Frank A. Coyle
Secretary and General Counsel |
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2010 |
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339,570 |
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221,255 |
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7,640 |
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568,465 |
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2009 |
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339,570 |
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5,693 |
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118,850 |
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7,596 |
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471,709 |
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2008 |
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337,097 |
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7,098 |
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344,195 |
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Carolyn Rose
Chief Executive Officer Health Choice |
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2010 |
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245,000 |
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180,000 |
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7,057 |
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432,057 |
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2009 |
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245,000 |
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13,208 |
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158,400 |
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8,498 |
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425,106 |
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2008 |
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240,000 |
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236,250 |
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9,551 |
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485,801 |
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1. |
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For 2010, amount represents the
incremental fair value paid for canceled vested rollover
options to purchase common stock. For 2009, represents the proportionate amount of the total
value of option awards recognized as an expense during fiscal 2009 for financial accounting
purposes under the provision of FASB authoritative guidance regarding accounting for
share-based payments, disregarding for this purpose estimated forfeitures related to
service-based vesting conditions. Compensation expense is equal to the grant date fair value
of the options estimated using the Black-Scholes-Merton model as amortized over the requisite
service periods. See Note 2 to our consolidated financial statements, Significant Accounting
Policies for additional information. |
|
2. |
|
Represents compensation to the named executive officers made pursuant to the Companys
short-term incentive bonus plan. |
|
3. |
|
Mr. White acted as Chief
Executive Officer through October 31, 2010 and currently serves as
Chairman of the Board. Mr. Whitmer currently acts as President and
became Chief Executive Officer effective November 1, 2010. Ms. McRee
acted as Chief Operating Officer through October 31, 2010 and
currently serves as Vice Chair of the Board. |
123
Grants of Plan-Based Awards in Fiscal Year 2010
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Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) |
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|
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Threshold |
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Target |
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Maximum |
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Name of Executive |
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($) |
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|
($) |
|
|
($) |
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David R White |
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161,700 |
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|
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808,500 |
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|
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1,617,000 |
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W. Carl Whitmer |
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58,546 |
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292,729 |
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|
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585,458 |
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Sandra K. McRee |
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60,000 |
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300,000 |
|
|
|
600,000 |
|
John M. Doyle |
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32,152 |
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|
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160,758 |
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|
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321,515 |
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Frank A. Coyle |
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118,850 |
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118,850 |
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Carolyn Rose |
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85,750 |
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183,750 |
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Future Payouts Under Equity Incentive Plan Awards(2) |
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All Other Option |
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Awards: Number of |
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Grant date fair |
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Securities Underlying |
|
|
Exercise or Base Price |
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value of stock and |
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|
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Options |
|
|
of Option Awards |
|
|
option awards |
|
Name of Executive |
|
(#) |
|
|
($/Sh) |
|
|
($) |
|
David R White |
|
|
60,658 |
|
|
|
8.75 |
|
|
|
2,466,992 |
|
Sandra K. McRee |
|
|
44,501 |
|
|
|
8.75 |
|
|
|
1,809,865 |
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W. Carl Whitmer |
|
|
35,361 |
|
|
|
8.75 |
|
|
|
1,438,157 |
|
Frank A. Coyle |
|
|
5,440 |
|
|
|
8.75 |
|
|
|
221,255 |
|
John M. Doyle |
|
|
3,699 |
|
|
|
8.75 |
|
|
|
150,453 |
|
|
|
|
1. |
|
Awards made under the 2010 Short Term Incentive Plan. |
|
2. |
|
Amounts are for cancelled option awards that were paid at $49.42 per share during
fiscal 2010. |
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreements
On May 4, 2004, we entered into employment agreements with Mr. White, Ms. McRee and Mr.
Whitmer that commenced upon the consummation of the Transactions. Mr. White is entitled to receive
an annual target bonus of up to 100% of his base salary and an annual maximum bonus of up to 200%
of his base salary based upon the achievement of certain performance objectives set annually by the
IAS board of directors. Ms. McRee is also are entitled to receive an annual target bonus of up to
50% of her base salary and an annual maximum bonus of up to 100% of her base salary based upon the
achievement of certain performance objectives set annually by the IAS board of directors. The base
salaries of Mr. White, Ms. McRee and Mr. Whitmer have been increased over time from the initial
amounts set forth in such agreements pursuant to the process discussed below.
Effective April 2010, upon his promotion to President, Mr. Whitmer entered into a new negotiated
employment agreement. Under the terms of the employment agreement, Mr. Whitmer was entitled to an
initial base salary of $650,000 per year during the period in which he served as President of the
Company and is entitled to $750,000 per year during the period in which he serves as Chief
Executive Officer of the Company. In addition, Mr. Whitmer was also entitled to receive an annual
cash target bonus of 75% of his base salary and an annual cash maximum bonus of 150% of his base
salary during the period in which he served as the Companys President and is entitled to an annual
cash target bonus of 100% of his base salary and an annual cash maximum bonus of 200% of his base
salary during the period in which he serves as the Companys Chief Executive Officer, in each case
based upon the achievement of certain performance objectives set annually by the IAS board of
directors. In October 2010, pursuant to the employment agreement, Mr. Whitmer was also granted an option
to purchase 88,500 of the total outstanding common stock of IAS at fair market value on the date of
grant, and, upon his promotion to Chief Executive Officer, an option to purchase an additional
88,500 of the total outstanding common stock of IAS at fair market value on the date of grant, in
each case under the terms of the related grant agreement and the IAS 2004
Stock Option Plan.
Also in April 2010, Mr. Doyle entered into a negotiated employment agreement upon his
promotion to Chief Financial Officer. Under the terms of the employment agreement, Mr. Doyle is
entitled to an initial base salary of
$400,000 per year. Mr. Doyle is also entitled to receive an annual cash target bonus of 50% of
his base salary and an annual cash maximum bonus of 100% of his base salary based upon the
achievement of certain performance objectives set annually by the IAS
board of directors. In October 2010, pursuant
to the terms of the employment agreement, Mr. Doyle was also granted an option to purchase 62,000
shares of common stock of the IAS at fair market value on the date of grant and under the terms of
the related grant agreement and the IAS 2004 Stock Option Plan.
124
On March 1, 2001, we entered into an agreement for severance benefits and restrictive
covenants with Ms. Rose. Although Ms. Roses agreement does not provide for an initial base salary,
it does provide for amounts to be paid to her upon certain termination events. Ms. Rose is also
entitled to participate in a short-term compensation program on similar terms to the other
executive officers and as described below.
The 2004 Stock Option Plan
All outstanding options were granted pursuant to the IAS 2004 Stock Option Plan. Generally,
the exercise price of the options will equal the fair market value of a share of the common stock
as of the grant date as determined by the IAS board of directors. Upon a change in control, the
options will become 100% vested if the participants employment is terminated without cause or by
the participant for good reason within the 2-year period immediately following such change in
control. On a termination of a participants employment outside the change in control context,
unvested options automatically expire and vested options expire on the earlier of (i) the
commencement of business on the date the employment is terminated for cause; (ii) 90 days after
the date employment is terminated for any reason other than cause, death or disability; (iii) one
year after the date employment is terminated by reason of death or disability; or (iv) the 10th
anniversary of the grant date for such option.
In connection with the plan, each participant is expected to enter into an agreement that will
generally provide that for the 90-day period following the later of (i) a termination of employment
or (ii) six months and one day following the date that shares of common stock were acquired
pursuant to the exercise of the option, we have the right to repurchase each share then owned by
the participant at fair value, as determined in good faith by the IAS board of directors.
The maximum number of shares of IAS common stock that may be issued pursuant to options
granted under the plan is 2,625,975.
The terms and conditions applicable to options are set forth by the Committee in each
individual option agreement. However, no option granted under this plan may expire later than ten
years from its date of grant. In addition, the Committee may not grant incentive stock options to
any person who is not our employee on the date of the grant, and the exercise price of an incentive
stock option cannot be less than the fair market value of a share of IAS common stock on the date
of its grant. The exercise price of an incentive stock option granted to a stockholder who owns at
the time of the grant shares of IAS common stock with more than 10% of the total combined voting
power of all classes of IAS capital stock cannot be less than 110% of the fair market value of a
share of IAS common stock on the date of the grant and the exercise period shall not exceed five
years from the date of the grant. Furthermore, the aggregate fair market value of the shares of IAS
common stock for which incentive stock options granted under this plan or any other stock option
plan, determined as of the date of grant, that become exercisable for the first time by any person
during any calendar year may not exceed $100,000. Any incentive stock options granted in excess of
this limitation will be treated for all purposes as non-qualified stock options. As of September
30, 2010, we had no incentive stock options outstanding under the 2004 Stock Option Plan.
The IAS board of directors may amend this plan at any time for any reason subject to the
stockholders approval to the extent necessary to meet the requirements of applicable law. However,
no amendment can adversely affect an optionees right under a previously granted option without the
consent of the optionee. Unless terminated earlier by the board of directors, this plan will
terminate by its terms effective June 22, 2014, although previously granted options may be
exercised after plan termination in accordance with the terms of the plan as in effect upon
termination.
125
As of September 30, 2010, options to purchase a total of 1,687,329 shares had been granted and
were outstanding under this plan, of which 1,374,620 were then vested and exercisable.
Outstanding Equity Awards at Fiscal 2010 Year-End
The following table summarizes the outstanding equity awards held by each named executive
officer at September 30, 2010.
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Option Awards |
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Number of |
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Number of |
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Securities |
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Securities |
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Underlying |
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Underlying |
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Unexercised Options |
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Unexercised Options |
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Option |
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(#) |
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(#) |
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Exercise Price |
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Option |
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Name |
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Exercisable |
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Unexercisable |
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($) |
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Expiration Date |
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(a) |
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(b) |
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(c) |
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(d) |
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(e) |
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David R. White |
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292,000 |
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20.00 |
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6/23/14 |
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194,000 |
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20.00 |
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3/22/15 |
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5,000 |
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35.68 |
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4/1/16 |
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2,875 |
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8,625 |
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34.75 |
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10/2/18 |
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Sandra K. McRee |
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116,800 |
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20.00 |
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6/23/14 |
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85,200 |
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20.00 |
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3/22/15 |
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2,600 |
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650 |
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35.68 |
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4/1/16 |
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1,100 |
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4,400 |
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34.75 |
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10/2/18 |
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W. Carl Whitmer |
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116,800 |
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20.00 |
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6/23/14 |
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85,200 |
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20.00 |
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3/22/15 |
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2,600 |
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650 |
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35.68 |
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4/1/16 |
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1,100 |
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4,400 |
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34.75 |
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10/2/18 |
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John M. Doyle |
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18,300 |
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20.00 |
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9/9/14 |
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6,700 |
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20.00 |
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3/22/15 |
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10,400 |
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2,600 |
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35.68 |
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4/1/16 |
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4,800 |
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7,200 |
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34.75 |
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10/2/18 |
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Frank A. Coyle |
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30,000 |
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20.00 |
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9/9/14 |
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30,000 |
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20.00 |
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3/22/15 |
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8,000 |
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2,000 |
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35.68 |
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4/1/16 |
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1,000 |
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4,000 |
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34.75 |
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10/2/18 |
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Carolyn Rose |
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7,000 |
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20.00 |
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9/9/14 |
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1,120 |
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280 |
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35.68 |
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4/1/16 |
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2,320 |
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9,280 |
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34.75 |
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10/2/18 |
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Option Award Vesting Schedule for David R. White
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Grant Date |
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Vesting Schedule |
6/23/2004
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25% vests each year for four years from date of grant |
3/22/2005
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25% vests each year for four years from date of grant |
4/1/2006
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25% vests each year for four years from date of grant |
10/2/2008
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25% vests each year for four years from date of grant |
Option Award Vesting Schedule
Named Executive Officers except David R. White
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Grant Date |
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Vesting Schedule |
6/23/2004
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20% vests each year for five years from date of grant |
9/9/2004
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20% vests each year for five years from date of grant |
3/22/2005
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20% vests each year for five years from date of grant |
4/1/2006
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20% vests each year for five years from date of grant |
10/2/2008
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20% vests each year for five years from date of grant |
Pension Benefits
We maintain a 401(k) plan as previously discussed in the Compensation Discussion and Analysis.
We do not maintain any defined benefit plans.
126
Nonqualified Deferred Compensation for Fiscal 2010
We introduced our non-qualified executive savings plan July 1, 2006. The plan is a voluntary,
tax-deferred savings vehicle that is available to those employees, including physicians, earning a
minimum base salary ($250,000 in 2010). The executive savings plan was implemented in order to
contribute to the recruitment and retention of key executives by providing the ability to defer
additional pre-tax compensation in excess of the limits allowed by our 401(k) plan.
An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) Retirement
Savings Plan in order to participate in the non-qualified executive savings plan. There are two
types of deferrals available under the plan: excess deferrals and additional deferrals. Excess
deferrals are contributions that are deposited into the non-qualified executive savings plan
because either (a) the participants earnings have exceeded $245,000 and/or (b) the participants
deferrals into the 401(k) retirement plan have reached a dollar limit stipulated by the IRS
($16,500 in 2010). Excess deferrals are automatically deposited into the nonqualified executive
savings plan if these limits are reached. Physician excess deferrals are not matched. Executive
excess deferrals are matched at the same rate as contributions to the 401(k) Retirement Savings
Plan. There is a five-year service requirement for participants to vest in the IASIS excess
matching contributions. Currently, none of the named executive officers participates in the
plan.
Additional deferrals are contributions to the non-qualified executive savings plan that are
independent of a participants 401(k) contribution election. These contributions are voluntary and
are capped according to applicable IRS guidelines for such a plan.
The non-qualified executive savings plan offers a range of investment options that act as
benchmark funds. Benchmark funds are defined as the investment fund or funds used to represent
the performance and current deemed balance of a participants non-qualified account, which is
considered a notional deferred compensation account. Contributions become part of our general
assets. Investment options under the non-qualified executive savings plan are the same as those
available under the IASIS 401(k) plan.
Employment Agreements
Messrs. White and Whitmer and Mrs. McRee entered into employment agreements in connection with
the Transactions. Mr. Whitmer entered into a new negotiated employment agreement upon his promotion
to President during the year. Mr. Doyle entered into a negotiated employment agreement upon his
promotion to Chief Financial Officer during the year. Ms. Rose entered into an agreement for
severance benefits and restrictive covenants in March, 2001. Mr. Coyle does not have an employment
agreement. Information regarding these employment agreements is provided under Narrative
Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table and Potential
Payments Upon Termination or Change of Control.
Potential Payments Upon Termination or Change in Control
The Employment Agreements
Messrs. White, Whitmer and Doyle and Ms. McRee have employment agreements in place that
require payment upon certain termination events including, in certain circumstances, a change of
control. Ms. Rose has an agreement for severance benefits and restrictive covenants in place that
require payment upon certain termination events. As previously stated, Mr. Coyle does not have an
employment agreement.
127
Death
The employment agreements provide that the respective estates of Mr. White, Mr. Whitmer, Ms.
McRee and Mr. Doyle will receive the following upon the death of such named executive officer:
(i) all base salary and benefits to be paid or provided to the executive through the date of
death;
(ii) a severance amount equal to the executives base salary at the then-current rate of base
salary with respect to Mr. White, Ms. McRee and Mr. Doyle;
(iii) with respect to Mr. Whitmer, an amount equal to the sum of executives base salary at
the then-current rate of base salary and the annual cash target bonus;
(iv) to the extent applicable, an amount equal to the pro rata bonus;
(v) in the event that the executives spouse or heirs are entitled to receive a payment with
respect to the pro rata bonus, they will also be entitled to an additional severance amount
equal to one hundred percent (100%) of the pro rata bonus with respect to Mr. White and Ms.
McRee;
(vi) the company will also provide the executives eligible dependents continued health and
medical benefits through the date one year after the date of death; the company may satisfy
this obligation by paying such dependents health and medical continuation coverage (COBRA)
premium payments (with the dependents paying the portion of such COBRA payments that the
executive was required to pay with respect to such dependents prior to the date of death)
with respect to Mr. White, Ms. McRee and Mr. Whitmer; and
(vii) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of death but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of death, will immediately vest and become
exercisable while all remaining unvested options will terminate as of the date of death.
Where the executives spouse or heirs are entitled to receive a payment with respect to the
pro rata bonus, all of the vested options must be exercised by the executives spouse or
heirs within two years following the date of death or they will
terminate with respect to Mr. White and Ms. McRee. If the executives
spouse or heirs are not entitled to receive a payment with respect to the pro rata bonus, all
of the vested options must be exercised by the executives spouse or heirs within one year
following the date of death or they will terminate with respect to Mr. White and Ms. McRee.
With respect to Mr. Whitmer and Mr. Doyle, all of the vested options must be exercised within
the earlier of (i) the tenth anniversary of the date the options were granted or (ii) two
years in the case of Mr. Whitmer, and one year, in the case of Mr. Doyle, following the date
of death.
Disability
The employment agreements provide that Mr. White, Mr. Whitmer, Ms. McRee and Mr. Doyle will
receive the following upon the disability of such named executive officer:
(i) all base salary and benefits to be paid or provided to the executive through the date of
disability;
(ii) with respect to Mr. White, Ms. McRee and Mr. Whitmer, a severance amount equal to the
executives base salary at the then-current rate of base salary provided, however, that in
the event the date of termination is the date of delivery of the final required physicians
opinion that the executive will be disabled for 6 consecutive months, the payment with
respect to base salary, together with all base salary paid to the executive following the
first date that the executive was disabled will equal one hundred and fifty percent (150%) of
the executives base salary and; provided, further, that amounts payable to the executive
must be reduced by the proceeds of any short or long-term disability payments to which the
executive may be entitled during such period under policies maintained at the expense of the
Company;
(iii) with respect to Mr. Whitmer, an amount equal to 100% of his annual cash target bonus;
(iv) to the extent applicable, an amount equal to the pro rata bonus; if the executive is
eligible for such a pro rata bonus, the executive is also entitled to an additional severance
amount equal to the pro rata bonus;
128
(v) with respect to Mr. White, Ms. McRee and Mr. Whitmer, the Company will pay for the
executive and his eligible dependents continued health and medical benefits through the date
one year after the date of termination (provided, however, that in the event that the date of
termination is the date of delivery of the
final physicians opinion referred to above, the Company will provide health and medical
benefits through the date that is eighteen (18) months following the first date that
Executive was unable to perform his duties; the Company may satisfy this obligation by paying
COBRA premium payments with respect to the executive and his eligible dependents (with the
executive paying the portion of such COBRA payments that executive was required to pay prior
to the date of termination); and
(vi) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of termination but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of termination, will immediately vest and
become exercisable while all remaining unvested options will terminate as of the date of
termination. Where the executive is entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within two years
following the date of termination or the options will terminate with respect to Mr. White and
Ms. McRee. If the executive is not entitled to receive a payment with respect to the pro rata
bonus, all of the vested options must be exercised by the executive within one year following
the date of termination or the options will terminate with respect to Mr. White and Ms. McRee. With respect to Mr. Whitmer and Mr.
Doyle, all of the vested options must be exercised within the earlier of (i) the tenth
anniversary of the date the options were granted or (ii) two years, in the case of Mr.
Whitmer, and one year, in the case of Mr. Doyle, from the date of disability.
The agreement for severance benefits and restrictive covenants for Ms. Rose does not address
this scenario.
Termination by the Company for Cause
Upon termination for cause, the executive will be entitled to receive all base salary and
benefits to be paid or provided to the executive through the date of termination.
By the Company without Cause
The employment agreements provide that Mr. White, Mr. Whitmer, Ms. McRee and Mr. Doyle will
receive the following upon the termination by the Company without cause of such named executive
officer:
(i) all base salary and benefits to be paid or provided to the executive through the date of
termination;
(ii) with respect to Mr. White and Ms. McRee, a severance amount equal to two hundred percent
(200%) of the executives base salary at the then-current rate of base salary;
(iii) with respect to Mr. Whitmer and Mr. Doyle, an amount equal to the sum of (i) two
hundred percent (200%), in the case of Mr. Whitmer, and one hundred fifty percent (150%) in
the case of Mr. Doyle, of the executives base salary at the then-current rate of base salary
and (ii) the annual cash target bonus;
(iv) to the extent applicable, an amount equal to the pro rata bonus,
(v) with respect to Mr. White and Ms. McRee, in the event that the executive is entitled to
receive a payment with respect to the pro rata bonus, an additional severance amount equal to
two hundred percent (200%) of the pro rata bonus;
(vi) a lump sum payment equal to the then present value of all major medical, disability and
life insurance coverage through the date two years (eighteen months with respect to Mr.
Doyle) after the date of termination, provided that under such circumstances the executive
shall make all COBRA premium payments on his own behalf; and
(vii) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of termination but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of termination, will immediately vest and
become exercisable while all remaining unvested options will terminate as of the date of
termination. Where the executive is entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within two years
following the date of termination or the options will terminate with respect to Mr. White
and Ms. McRee. If the executive is not entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within one year
following the date of termination or the options will terminate with respect to Mr. White
and Ms. McRee. With respect to Mr. Whitmer and Mr. Doyle, all of the vested options must be
exercised within the earlier of (i) the tenth anniversary of the date the options were
granted or (ii) two years, in the case of Mr. Whitmer, and one year, in the case of Mr.
Doyle, following the date of termination.
129
The agreement for severance benefits and restrictive covenants for Ms. Rose provides that she
will receive the following upon her termination by the Company without cause:
(i) the monthly base salary at the time of termination for a period of nine consecutive
months;
(ii) an amount equal to all unused sick leave, vacation time and/or paid time off; and
(iii) additional consideration of $2,500 to provide with outplacement assistance.
By the Executive for Good Reason
The employment agreements provide that Mr. White, Mr. Whitmer, Ms. McRee and Mr. Doyle will
receive the following upon the resignation by such executive for good reason:
(i) all base salary and benefits to be paid or provided to the executive through the date of
Termination;
(ii) with respect to Mr. White and Ms. McRee, an amount equal to two hundred percent (200%)
of the executives base salary at the then-current rate of base salary;
(iii) with respect to Mr. Whitmer and Mr. Doyle, an amount equal to the sum of (i) two
hundred percent (200%), in the case of Mr. Whitmer, and one
hundred fifty percent (150%), in
the case of Mr. Doyle, of the executives base salary at the then-current rate of base salary
and (ii) the annual cash target bonus;
(iv) to the extent applicable, an amount equal to the pro rata bonus;
(v) with respect to Mr. White and Ms. McRee in the event that the executive is entitled to
receive a payment with respect to the pro rata bonus, an additional severance amount equal to
two hundred percent (200%) of the pro rata bonus;
(vi) a lump sum payment equal to the then present value of all major medical, disability and
life insurance coverage through the date two years (eighteen months with respect to Mr.
Doyle) after the date of termination, provided that under such circumstances the executive
shall make all COBRA premium payments on his own behalf; and
(vii) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of termination but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of termination, will immediately vest and
become exercisable while all remaining unvested options will terminate as of the date of
termination. Where the executive is entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within two years
following the date of termination or the options will terminate with respect to Mr. White and
Ms. McRee. If the executive is not entitled to receive a payment with respect to the pro rata
bonus, all of the vested options must be exercised by the executive within one year following
the date of termination or the options will terminate with respect to Mr. White and Ms.
McRee. With respect to Mr. Whitmer and Mr. Doyle, all of the vested options must be
exercised within the earlier of (i) the tenth anniversary of the date the options were
granted or (ii) two years, in the case of Mr. Whitmer, and one year, in the case of Mr.
Doyle, following the date of termination.
130
Ms. Roses agreement for severance benefits and restrictive covenants provides that she will
receive the following upon the event of her resignation for good
reason:
(i) the monthly base salary at the time of termination for a period of nine consecutive
months;
(ii) an amount equal to all unused sick leave, vacation time and/or paid time off; and
(iii) additional consideration of $2,500 to provide with outplacement assistance.
By the Executive without Good Reason or the Executives Failure to Extend the Employment Term
Upon termination for good reason, the executive will be entitled to receive all base salary
and benefits to be paid or provided to the executive through the date of termination.
Definition of Good Reason
Each of the following events shall constitute good reason for resignation for purposes of
the employment agreements of Mr. White, Mr. Whitmer, Ms. McRee and Mr. Doyle:
(i) with respect to Mr. White, Ms. McRee and Mr. Whitmer, the one-year anniversary of the
date of any Change of Control (as defined below) unless the acquirer is in the healthcare
facilities business, in which case the one-year anniversary will be reduced to six months
after the date of the Change of Control;
(ii) the removal of the executive from or the failure to elect or re-elect the executive to
his or her respective positions within the company or on the board (other than a removal or
failure to elect Mr. White as Chairman after an initial public offering, and provided that
the appointment of a non-executive chairman following a transaction or a Change of Control
will not constitute grounds for good reason);
(iii) with
respect to Mr. Whitmer and Mr. White only, the removal of or the failure to elect Mr. White to the
board of directors;
(iv) any material reduction in duties of the respective executive or any assignment
materially inconsistent with his or her position;
(v) any breach by the company of the respective employment agreement; and
(vi) with respect to Mr. Whitmer only, any failure to promote Mr. Whitmer to Chief Executive
Officer within 90 days after the retirement of Mr. White.
Each of the following events shall constitute good reason for resignation for Ms. Rose only:
(i) the removal of or failure to re-elect Ms. Rose to the position of Chief Executive Officer
of Health Choice;
(ii) any material reduction by the Company of Ms. Roses duties or responsibilities or the
assignment to Ms. Rose of duties materially inconsistent with such position;
(iii) any material breach by the Company of the agreement for severance benefits and
restrictive covenants; and
(iv) resignation within 12 months after the date of any Change in Control (as defined below).
The Companys Failure to Extend the Employment Term
The employment agreements provide that Mr. White, Mr. Whitmer, Ms. McRee and Mr. Doyle will
receive the following upon the Companys failure to the extend the employment term:
(i) all base salary and benefits to be paid or provided to the executive through the date of
death;
(ii) with respect to Mr. White and Ms. McRee a severance amount equal to the executives base
salary at the then-current rate of base salary;
131
(iii) with respect to Mr. Whitmer and Mr. Doyle, an amount equal to the sum of (i) the
executives base salary at the then-current rate of base salary and (ii) the annual cash
target bonus;
(iv) to the extent applicable, an amount equal to the pro rata bonus;
(v) with
respect to Mr. White and Ms. McRee, in the event that the executive is entitled to
receive a payment with respect to the pro rata bonus, an additional severance amount equal to
one hundred percent (100%) of the pro rata bonus;
(vi) a lump sum payment equal to the then present value of all major medical, disability and
life insurance coverage through the date one year after the date of termination, provided
that under such circumstances the executive shall make all COBRA premium payments on his own
behalf; and
(vii) additionally, all of the executives options to purchase shares of capital stock of IAS
which are unvested as of the date of termination but otherwise scheduled to vest on the first
vesting date scheduled to occur following the date of termination, will immediately vest and
become exercisable while all remaining unvested options will terminate as of the date of
termination. Where the executive is entitled to receive a payment with respect to the pro
rata bonus, all of the vested options must be exercised by the executive within two years
following the date of termination or the options will terminate with respect to Mr. White and
Ms. McRee. If the executive is not entitled to receive a payment with respect to the pro rata
bonus, all of the vested options must be exercised by the executive within one year following
the date of termination or the options will terminate with respect to Mr. White and Ms.
McRee. With respect to Mr. Whitmer and Mr. Doyle, all of the vested options must be
exercised within the earlier of (i) the tenth anniversary of the date the options were
granted and (ii) two years, in the case of Mr. Whitmer, and one year, in the case of Mr.
Doyle, following the date of termination.
Definition of Change of Control
The employment agreements of Mr. White, Mr. Whitmer and Ms. McRee define a change of control
as any transaction where a person or group of persons (other than the present private equity
investors in the Company or their affiliates):
(i) acquire a majority interest in IAS or IASIS Investment LLC, its parent; or
(ii) acquire all or substantially all of the assets of IAS or IASIS Investment LLC, its
parent; or
The initial public offering of IAS shares or any secondary offering of such shares will not
constitute a change of control.
The agreement for severance benefits and restrictive covenants for Ms. Rose defines a change
of control as any transaction where a person or group of persons other than IAS directly or
indirectly acquires beneficially or of record, more than 50% of the outstanding voting securities
of Health Choice or upon a sale of all or substantially all of the assets of Health Choice.
In addition, the employment agreements contain non-competition and non-solicitation provisions
pursuant to which Mr. White, Mr. Whitmer, Ms. McRee and Mr. Doyle will not compete with IAS or its
subsidiaries within 25 miles of the location of any hospital we manage for two years (eighteen
months with respect to Mr. Doyle) following the date of termination of such persons employment.
The agreements provide that during this time such person will not solicit or recruit our business
partners and employees, respectively. Ms. Roses agreement for severance benefits and restrictive
covenants contains non-competition provisions pursuant to which Ms. Rose will not compete with
Health Choice, without prior consent of the Company, for a period of 15 months following a
voluntary termination of Ms. Rose or a termination by the Company for cause.
In certain circumstances following a change of control, IAS has agreed to compensate Mr. White
in the event any payment under his employment agreement is subject to an excise tax under Section
4999 of the Internal Revenue Code.
132
IAS 2004 Stock Option Plan
Vesting Date of Options
Each stock option grant agreement must indicate the date or conditions under which the option
will become exercisable. However, unless otherwise provided in a participants stock option grant
agreement, if within the two-year period following a Change of Control the executives employment
is:
(i) terminated by the company or its Affiliates without cause; or
(ii) terminated by the executive with good reason,
all of the executives options granted hereunder shall immediately become vested and exercisable.
Definition of Change of Control
The IAS 2004 Stock Option Plan defines Change of Control in substantially the same way as the
employment agreements of Messrs. White and Whitmer and Ms. McRee.
Definition of Good Reason
The IAS 2004 Stock Option Plan defines good reason as:
(i) a material reduction in an executives duties and responsibilities other than a change in
such executives duties and responsibilities that results from becoming part of a larger
organization following a Change of Control,
(ii) a decrease in an executives base salary or benefits other than a decrease in benefits
that applies to all employees of the company otherwise eligible to participate in the
affected plan, or
(iii) a relocation of an executives primary work location more than 50 miles from the
executives primary work location, as in effect immediately before a Change of Control,
without written consent.
Definition of Cause
The IAS 2004 Stock Option Plan defines termination with cause as the termination of the
executives employment because of:
(i) dishonesty in the performance of such executives duties;
(ii) the executives willful misconduct in connection with such executives duties or any act
or omission which is materially injurious to the financial condition or business reputation
of the Company or any of its subsidiaries or affiliates;
(iii) a breach by an executive of the participants duty of loyalty to the Company and its
affiliates;
(iv) the executives unauthorized removal from the premises of the Company of any document
(in any medium or form) relating to the company or the customers of the company; or
(v) the commission by the executive of any felony or other serious crime involving moral
turpitude.
133
Summary of Payments Made Upon Termination or a Change of Control
The following tables describe the potential payments and benefits under our compensation and
benefit plans and arrangements to which Messrs. White, Whitmer, Doyle, Ms. McRee and Ms. Rose would
be entitled upon a termination of their employment under their employment agreements. In accordance
with SEC disclosure rules, dollar amounts below assume a termination of employment on September 30,
2010 (the last business day of our last completed fiscal year).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Termination |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
|
|
Without |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
David R. White |
|
Cause ($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Cash severance |
|
|
1,617,000 |
|
|
|
|
|
|
|
|
|
|
|
1,617,000 |
|
|
|
|
|
|
|
808,500 |
|
|
|
1,212,750 |
|
|
|
1,617,000 |
|
Health and welfare continuation |
|
|
27,248 |
|
|
|
|
|
|
|
|
|
|
|
27,248 |
|
|
|
|
|
|
|
27,248 |
|
|
|
27,248 |
|
|
|
27,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,644,248 |
|
|
|
|
|
|
|
|
|
|
|
1,644,248 |
|
|
|
|
|
|
|
835,748 |
|
|
|
1,239,998 |
|
|
|
1,644,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Without |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
Sandra K. McRee |
|
Cause |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
Cash severance |
|
|
1,200,000 |
|
|
|
|
|
|
|
|
|
|
|
1,200,000 |
|
|
|
|
|
|
|
600,000 |
|
|
|
900,000 |
|
|
|
1,200,000 |
|
Health and welfare continuation |
|
|
25,656 |
|
|
|
|
|
|
|
|
|
|
|
25,656 |
|
|
|
|
|
|
|
25,656 |
|
|
|
25,656 |
|
|
|
25,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,225,656 |
|
|
|
|
|
|
|
|
|
|
|
1,225,656 |
|
|
|
|
|
|
|
625,656 |
|
|
|
925,656 |
|
|
|
1,225,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Without |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
W. Carl Whitmer |
|
Cause |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
Cash severance |
|
|
1,170,916 |
|
|
|
|
|
|
|
|
|
|
|
1,170,916 |
|
|
|
|
|
|
|
585,458 |
|
|
|
878,187 |
|
|
|
1,170,916 |
|
Health and welfare continuation |
|
|
37,878 |
|
|
|
|
|
|
|
|
|
|
|
37,878 |
|
|
|
|
|
|
|
37,878 |
|
|
|
37,878 |
|
|
|
37,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,208,794 |
|
|
|
|
|
|
|
|
|
|
|
1,208,794 |
|
|
|
|
|
|
|
623,336 |
|
|
|
916,065 |
|
|
|
1,208,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Without |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
John M. Doyle |
|
Cause |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
Cash severance |
|
|
482,273 |
|
|
|
|
|
|
|
|
|
|
|
482,273 |
|
|
|
|
|
|
|
321,515 |
|
|
|
482,273 |
|
|
|
|
|
Health and welfare continuation |
|
|
37,605 |
|
|
|
|
|
|
|
|
|
|
|
37,605 |
|
|
|
|
|
|
|
37,605 |
|
|
|
37,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
519,878 |
|
|
|
|
|
|
|
|
|
|
|
519,878 |
|
|
|
|
|
|
|
359,120 |
|
|
|
519,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Involuntary |
|
|
|
|
|
|
Resignation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Without |
|
|
Termination |
|
|
|
|
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In |
|
Carolyn Rose |
|
Cause |
|
|
For Cause |
|
|
Resignation |
|
|
Reason |
|
|
Retirement |
|
|
Death |
|
|
Disability |
|
|
Control |
|
Cash severance |
|
|
183,750 |
|
|
|
|
|
|
|
|
|
|
|
183,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,750 |
|
Health and welfare continuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
183,750 |
|
|
|
|
|
|
|
|
|
|
|
183,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
Director Compensation for Fiscal 2010
The following table provides compensation information for the year ended September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Paid in |
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
Awards |
|
|
Option Awards |
|
|
All Other |
|
|
Total |
|
Name |
|
($) |
|
|
($) |
|
|
($) |
|
|
Compensation ($) |
|
|
($) |
|
Jonathan J. Coslet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Dupree |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kirk E. Gorman |
|
|
37,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,500 |
|
Greg Kranias |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd B. Sisitsky |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul S. Levy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey C. Lightcap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sharad Mansukani |
|
|
37,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Options Held |
|
|
Aggregate Stock Awards Held |
|
Name |
|
at Fiscal Year End |
|
|
at Fiscal Year End |
|
Jonathan J. Coslet |
|
|
|
|
|
|
|
|
David Dupree |
|
|
|
|
|
|
|
|
Kirk E. Gorman |
|
|
3,319 |
|
|
|
3,319 |
|
Greg Kranias |
|
|
|
|
|
|
|
|
Todd B. Sisitsky |
|
|
|
|
|
|
|
|
Paul S. Levy |
|
|
|
|
|
|
|
|
Jeffrey C. Lightcap |
|
|
|
|
|
|
|
|
Sharad Mansukani |
|
|
3,082 |
|
|
|
3,082 |
|
On February 14, 2005, pursuant to a Director Compensation and Restricted Share Award
Agreement, IAS granted Kirk Gorman options to purchase 1,175 shares of IASs common stock and
committed to grant Mr. Gorman, on each of the first, second, third and fourth anniversaries of the
grant date, provided that he is still a director, options to purchase a number of shares valued at
$18,750 based on the fair market value of the common stock as determined on each such anniversary.
These grants were made pursuant to the form of stock option grant agreement under the IAS 2004
Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award
Agreement with Mr. Gorman on the grant date. Pursuant to such Director Compensation and Restricted
Share Award Agreement, IAS agreed to pay Mr. Gorman cash compensation of $9,375 for the fiscal
quarter ended December 31, 2004 and annual cash compensation of $37,500 for the remaining term
(five years or until the date on which, for any reason, Mr. Gorman no longer serves as a director
of the company) in equal quarterly installments, in consideration for his services as a member of
IASs board of directors. IAS also granted Mr. Gorman 1,175 shares of restricted common stock on
the grant date and committed to grant Mr. Gorman, on each of the first, second, third and fourth
anniversaries of the grant date, provided that he is still a director, restricted common stock
valued at $18,750 based on the fair market value of the common stock as determined on each such
anniversary.
On April 14, 2005, IAS granted Sharad Mansukani options to purchase 938 shares of IASs common
stock and committed to grant Dr. Mansukani, on each of the first, second, third and fourth
anniversaries of the grant date, provided that he is still a director, options to purchase a number
of shares of common stock valued at $18,750 based on the fair market value of the common stock on
each such anniversary. These grants were made pursuant to the form of stock option grant agreement
under the IAS 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and
Restricted Share Award Agreement with Dr. Mansukani on the grant date. Pursuant to such Director
Compensation and Restricted Share Award Agreement, IAS agreed to pay Dr. Mansukani annual cash
compensation of $37,500 for the term (five years or until the date on which, for any reason, Dr.
Mansukani no longer serves as a director of the Company) of the Director Compensation and
Restricted Share Award Agreement, payable in equal quarterly installments, in consideration for his
services as a member of IASs board of directors. IAS also granted Dr. Mansukani 938 shares of
restricted common stock on the grant date and committed to grant Dr. Mansukani, on each of the
first, second, third and fourth anniversaries of the grant date, provided that he is still a
director, restricted common stock valued at $18,750 based on the fair market value of the common
stock on each such anniversary.
135
Currently, IASs other directors do not receive any compensation for their services. IAS does,
however, reimburse them for travel expenses and other out-of-pocket costs incurred in connection
with attendance at board of directors and committee meetings.
Committee Interlocks and Insider Participation
During fiscal 2010, the Committee was composed of David R. White, Jonathan J. Coslet and
Jeffrey C. Lightcap. Mr. White currently serves as our Chairman and served as our Chief Executive
Officer until November 1, 2010. Officer. Mr. Coslet has never been an officer of IAS. Mr. Lightcap
is currently a Director of IAS.
136
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Equity Compensation Plans
The table below sets forth the following information as of September 30, 2010
with respect to IAS equity compensation plans (including individual compensation arrangements) under which its equity
securities are authorized for issuance, aggregated by (i) all compensation plans previously
approved by IAS security holders and (ii) all compensation plans not previously approved by IAS
security holders:
|
|
|
the number of securities to be issued upon the exercise of outstanding options; |
|
|
|
the weighted-average exercise price of the outstanding options; and |
|
|
|
the number of securities remaining available for future issuance under the plans. |
The IAS 2004 Stock Option Plan has been approved by its stockholders. IAS has not issued any
warrants or other rights to purchase its equity securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Available |
|
|
|
|
|
|
|
|
|
|
|
for Future Issuance |
|
|
|
Number of |
|
|
|
|
|
|
Under Equity |
|
|
|
Securities to be |
|
|
|
|
|
|
Compensation Plans |
|
|
|
Issued Upon |
|
|
Weighted-average |
|
|
(excluding securities |
|
|
|
Exercise of |
|
|
Exercise Price of |
|
|
reflected in the |
|
Plan Category |
|
Outstanding Options |
|
|
Outstanding Options |
|
|
first column) |
|
Equity compensation
plans approved by
security holders (1) |
|
|
1,686,329 |
|
|
$ |
24.58 |
|
|
|
939,646 |
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,686,329 |
|
|
$ |
24.58 |
|
|
|
939,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of 1,686,329 shares of common stock to be issued upon exercise of options issued
under IAS 2004 Stock Option Plan, with exercise prices ranging from $20.00 to $35.68 per
share. Of the 2,625,975 shares of common stock currently authorized for issuance under the
2004 Stock Option Plan, 939,646 shares remain available for future issuance. |
Beneficial Ownership of Common Stock
After giving effect to the Transactions, IASIS is a limited liability company consisting of
100% common interests owned by IAS. IAS outstanding shares consist of one class of common stock
and one class of preferred stock, and 99.9% of the outstanding common stock and 100% of the
outstanding preferred stock is owned by IASIS Investment. The outstanding equity interest of IASIS
Investment is held 74.4% by TPG, 18.8% by JLL and 6.8% by Trimaran.
The
following table presents information as of December 21, 2010, regarding ownership of
shares of IAS common stock and preferred stock by each person known to be a holder of more than 5%
of IAS common stock and preferred stock, the members of the IAS board of directors, each executive
officer named in the summary compensation table and all current directors and executive officers as
a group.
137
When reviewing the following table, you should be aware that the amounts and percentage of
common stock and preferred stock beneficially owned are reported on the basis of regulations of the
SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC,
a person is deemed to be a beneficial owner of a security if that person has or shares voting
power, which includes the power to vote or to direct the voting of such security, or investment
power, which includes the power to dispose of or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities of which that person has a right
to acquire beneficial ownership within 60 days.
Unless otherwise indicated, the address of each person listed below is 117 Seaboard Lane,
Building E, Franklin, Tennessee 37067.
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Percentage of |
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Percentage of |
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Preferred Shares |
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Common Shares |
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Preferred Shares |
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Common Shares |
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Beneficial Owners |
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Beneficially Owned |
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Beneficially Owned (a) |
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Beneficially Owned |
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Beneficially Owned |
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IASIS Investment (b)(c) |
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17,989 |
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14,600,000 |
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100.0 |
% |
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99.9 |
% |
David R. White |
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497,250 |
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* |
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* |
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Sandra K. McRee |
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206,800 |
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* |
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* |
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W. Carl Whitmer |
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206,800 |
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* |
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* |
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John M. Doyle |
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40,200 |
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* |
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* |
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Frank A. Coyle |
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70,000 |
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* |
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* |
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Carolyn Rose |
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12,760 |
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* |
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* |
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Percentage of |
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Percentage of |
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Preferred Shares |
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Common Shares |
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Preferred Shares |
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Common Shares |
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Beneficial Owners |
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Beneficially Owned |
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Beneficially Owned (a) |
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Beneficially Owned |
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Beneficially Owned |
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Jonathan J. Coslet (c) |
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David Dupree |
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Kirk E. Gorman (c) |
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5,562 |
(d) |
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* |
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* |
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Greg Kranias
(c) |
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Todd B. Sisitsky (c) |
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Paul S. Levy (e) |
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3,382 |
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2,744,800 |
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18.8 |
% |
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18.8 |
% |
Jeffrey C. Lightcap |
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Sharad Mansukani (c) |
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5,088 |
(d) |
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* |
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* |
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Current directors and
executive officers as
a group (21 persons) |
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17,989 |
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1,126,815 |
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100.0 |
% |
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100.0 |
% |
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* |
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Less than 1%. |
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(a) |
|
The following shares of common stock subject to options currently exercisable or exercisable
within 60 days of December 21, 2010, include: Mr. White, 497,250; Ms. McRee, 206,800; Mr. Whitmer, 206,800; Mr. Doyle, 140,200; Mr. Coyle, 70,000; Ms. Rose, 12,760;
and all current directors and executive officers as a group (21
persons), 1,126,815. |
|
(b) |
|
The membership interests of IASIS Investment are owned as follows: TPG, 74.4%, JLL, 18.8%,
and Trimaran, 6.8%. TPG Advisors III, Inc. and TPG Advisors IV, Inc. through their ownership
of TPG, which owns a controlling interest in IASIS Investment, may be deemed to beneficially
own all of the shares of preferred stock and common stock owned by IASIS Investment. |
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(c) |
|
David Bonderman and James G. Coulter are directors, executive officers and the sole
shareholders of TPG Advisors III, Inc. and TPG Advisors IV, Inc. TPG Advisors III, Inc. and
TPG Advisors IV, Inc., through their control of investment funds, parallel investment vehicles
and co-investment vehicles that own a controlling interest in IASIS Investment, may be deemed
to beneficially own all of the shares of preferred stock and common stock owned by IASIS
Investment. Messrs. Bonderman and Coulter, by virtue of their positions with TPG Advisors III,
Inc. and TPG Advisors IV, Inc., may be deemed to have investment power and beneficial
ownership with respect to all of the shares of preferred stock and common stock owned by IASIS
Investment. None of Messrs. Coslet, Kranias, Sisitsky or Mansukani has investment power over any of the
shares of preferred stock and common stock owned by IASIS Investment. |
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(d) |
|
Represents shares of restricted stock and options currently or exercisable within 60 days of
December 21, 2010, granted to Messrs. Gorman and Mansukani pursuant to Director Compensation
and Restricted Stock Award Agreements. |
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(e) |
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Mr. Levy is a senior managing director of JLL Partners, Inc. which, through its controlling
interest in JLL, which owns 18.8% of IASIS Investment, may be deemed to beneficially own 18.8%
of the shares of preferred
stock and common stock owned by IASIS Investment. Accordingly, Mr. Levy may be deemed to
beneficially own 18.8% of the shares of preferred stock and common stock owned by IASIS
Investment. |
138
All of the membership interests in IASIS are pledged to our lenders as security for our
obligations under our senior secured credit facilities. In the event of a default under our senior
secured credit facilities, our lenders would have the right to foreclose on such membership
interests, which would result in a change of control of our company.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
IASIS Investment Limited Liability Company Operating Agreement
TPG is party to a limited liability company operating agreement of IASIS Investment LLC with
Trimaran and JLL. TPG, JLL and Trimaran hold approximately 74.4%, 18.8% and 6.8%, respectively, of
the equity interests of IASIS Investment LLC. TPG is the managing member of IASIS Investment LLC.
The board of directors has not made a determination as to whether each director is
independent because all of the members of our board have been appointed by our equity sponsors.
Pursuant to the limited liability company operating agreement of IASIS Investment LLC, JLL is
entitled to nominate two directors to the IAS board of directors. TPG is entitled to nominate the
remaining directors. Messrs. Levy and Lightcap serve on the IAS board of directors as designees of
JLL. The remaining directors serve as designees of TPG. The right of JLL to nominate two directors
is subject to its ownership percentage in IASIS Investment LLC remaining at or above 9.4%. In the
event JLLs ownership percentage in IASIS Investment LLC falls below 9.4%, but is at least 4.7%,
JLL will have the right to nominate one director. If JLLs ownership percentage falls below 4.7%,
it will not have the right to nominate any directors. The agreement also places certain
restrictions on the transfer of membership interests in IASIS Investment LLC. JLL and Trimaran have
the right to participate in certain dispositions by TPG and can be required to participate on the
same terms in any sale by TPG in excess of a specified percentage of its collective interest.
We have no securities listed for trading on a national securities exchange or in an automated
inter-dealer quotation system of a national securities association, which have requirements that a
majority of directors be independent. We do not believe any of our directors would be considered
independent under the New York Stock Exchanges definition of independence.
Investor Rights Agreement
After giving effect to the Transactions, IASIS Investment is the majority stockholder of IAS,
which owns 100% of the common interests of IASIS. IASIS Investment is party to an investor rights
agreement with IAS. Pursuant to this agreement, IASIS Investment can cause IAS to register its
interests in IAS under the Securities Act and to maintain a shelf registration statement effective
with respect to such interests. IASIS Investment is also entitled to participate on a pro rata
basis in any registration of our equity interests under the Securities Act that IAS may undertake.
The agreement also grants IASIS Investment preemptive rights over certain additional issuances of
equity securities by IAS.
Management Services Agreement
Upon the consummation of the Transactions, we entered into a management services agreement
with affiliates of TPG, JLL Partners Inc. and Trimaran Fund Management, L.L.C. The management
services agreement provides that in exchange for consulting and management advisory services that
will be provided to us by the investors, we will pay an aggregate monitoring fee of 0.25% of
budgeted net revenue up to a maximum of $5.0 million per fiscal year to these parties (or certain
of their respective affiliates) and reimburse them for their reasonable disbursements and
out-of-pocket expenses. This monitoring fee will be subordinated to the senior subordinated notes
in the event of a bankruptcy of the company. For each of the years ended September 30, 2010, 2009
and 2008, we paid $5.0 million in monitoring fees under the management services agreement.
Income Tax Allocations
The Company and some of its subsidiaries are included in IAS consolidated filing group for
U.S. federal income tax purposes, as well as in certain state and local income tax returns that
include IAS. With respect to tax returns for any taxable period in which the Company or any of its
subsidiaries are included in a tax return filing with IAS, the amount of taxes to be paid by the
Company is determined, subject to some adjustments, as if it and its subsidiaries filed their own
tax returns excluding IAS.
139
Policy on Transactions with Related Persons
On an annual basis, each director, director nominee and executive officer is required to
complete a Director and Officers Questionnaire that requires disclosure of any transaction in
which the director or executive officer has a direct or indirect material interest and in which the
company participates and the amount involved exceeds $120,000. The board has not adopted a formal
policy for the review, approval or ratification of such transactions. However, pursuant to the
companys corporate code of ethics, executive officers may not participate in, or benefit from, a
related party transaction without the approval of the Companys compliance officer.
During fiscal year 2010, there were no transactions between our company and a related person
requiring disclosure under applicable securities laws.
Item 14. Principal Accountant Fees and Services.
The following table sets forth the aggregate fees for services related to fiscal years 2010
and 2009 provided by Ernst & Young LLP, our principal accountants:
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Fiscal |
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Fiscal |
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2010 |
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2009 |
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Audit Fees (a) |
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$ |
1,002,700 |
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$ |
1,022,500 |
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Audit-Related Fees (b) |
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2,000 |
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17,500 |
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Tax Fees |
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7,300 |
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2,100 |
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All Other Fees (c) |
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(a) |
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Audit Fees represent fees billed for professional services rendered for the audit of our
annual financial statements and review of our quarterly financial statements, and audit
services provided in connection with other statutory or regulatory filings. |
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(b) |
|
Audit-Related Fees represent fees billed for assurance services related to the audit of our
financial statements, as well as certain due diligence projects. |
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(c) |
|
All Other Fees represent fees for services provided to us not otherwise included in the
categories above. |
During fiscal 2010, we reviewed our existing practices regarding the use of our independent
auditors to provide non-audit and consulting services, to ensure compliance with SEC proposals. Our
audit committee pre-approval policy provides that our independent auditors may provide certain
non-audit services which do not impair the auditors independence. In that regard, our audit
committee must pre-approve all audit services provided to our company, as well as all non-audit
services provided by our companys independent auditors. This policy is administered by our senior
corporate financial management, which reports throughout the year to our audit committee. Our audit
committee pre-approved all audit and non-audit services provided by Ernst & Young LLP during fiscal
years 2010 and 2009.
140
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements: See Item 8
2. Financial Statement Schedules: Not Applicable
3. Management Contracts and Compensatory Plans and Arrangements
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Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and David R. White (1) |
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Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and Sandra K. McRee (1) |
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Employment Agreement, dated as of September 30, 2010, by and between IASIS Healthcare Corporation and W. Carl Whitmer (18) |
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Employment Agreement, dated as of September 30, 2010, by and between IASIS Healthcare Corporation and John M. Doyle (18) |
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Employment Agreement, dated as of September 30, 2010, by and between IASIS Healthcare Corporation and Phillip J. Mazzuca (19) |
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First Amendment to Employment Agreement, dated January 31, 2008, by and between IASIS Healthcare Corporation and Sandra K. McRee (11) |
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Agreement for Severance Benefits and Restrictive Covenants, dated as of March 1, 2001, by and between IASIS Management Company and Carolyn Rose (16) |
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Form of Roll-over Option Letter Agreement (1) |
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Amended and Restated IASIS Healthcare Corporation 2004 Stock Option Plan (19) |
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|
Form of Management Stockholders Agreement between IAS and each of David R. White, Sandra K. McRee and W. Carl Whitmer (1) |
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Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1) |
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Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1) |
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Stock Option Agreement, dated October 11, 2010, by and between IASIS Healthcare Corporation and W. Carl Whitmer (19) |
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|
Stock Option Agreement, dated October 11, 2010, by and
between IASIS Healthcare Corporation and John M. Doyle (19) |
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Stock Option Agreement, dated October 11, 2010, by and between IASIS Healthcare Corporation and Phillip J. Mazzuca (19) |
141
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Form of Management Stockholders Agreement for Rollover Options (1) |
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|
IASIS Corporate Incentive Plan (1) |
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IASIS Market Executive Incentive Program (1) |
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|
Director Compensation and Restricted Share Award Agreement, dated as of February 14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (12) |
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|
Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005, between IASIS Healthcare Corporation and Sharad Mansukani (13) |
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IASIS Healthcare Non-Qualified Deferred Compensation Program (4) |
142
(b) Exhibits:
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Exhibit No. |
|
Description |
|
2.1 |
|
|
Agreement and Plan of Merger, dated as of May 4, 2004, by and among IASIS Investment
LLC, Titan Merger Corporation and IASIS Healthcare Corporation (1) |
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2.2 |
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Indemnification Agreement dated as of May 4, 2004, by and among IASIS Investment LLC,
IASIS Healthcare Corporation, and the stockholders and option holders of IASIS
Healthcare Corporation listed on the signature pages thereof (2) |
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3.1 |
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Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State
of the State of Delaware on May 11, 2004 (1) |
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3.2 |
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Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (1) |
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4.1 |
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Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC, IASIS Capital
Corporation, the Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as
Trustee (1) |
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4.2 |
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Form of Notation of Subsidiary Guarantee (1) |
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4.3 |
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Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (1) |
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4.4 |
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Supplemental Indenture, dated as of June 30, 2004, by and between IASIS Finance Texas
Holdings, LLC, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary
Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1) |
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4.5 |
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Supplemental Indenture, effective as of August 1, 2005, by and among Cardiovascular
Specialty Centers of Utah, LP, IASIS Healthcare LLC, IASIS Capital Corporation, the
existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee
(3) |
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4.6 |
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Supplemental Indenture, dated as of July 20, 2006, by and among IASIS Glenwood Regional
Medical Center, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing
Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (4) |
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4.7 |
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Supplemental Indenture, dated as of July 27, 2006, by and among The Heart Center of
Central Phoenix, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing
Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (4) |
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4.8 |
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Supplemental Indenture, dated as of October 1, 2010, by and among Brim Holding Company,
Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee |
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10.1 |
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Lease, dated as of July 29, 1977, by and between Sierra Equities, Inc., as Landlord,
and Mesa General Hospital, Inc., as Tenant (5) |
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10.2 |
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Addendum to Lease entered into by and between Sierra Equities, Inc., as Landlord, and
Mesa General Hospital, Inc., as Tenant (5) |
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10.3 |
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Conforming Amendment to Lease, dated as of June 10, 1991, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (5) |
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10.4 |
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Amendment to Hospital Lease, dated as of October 31, 2000, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, L.P., as Tenant (5) |
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10.5 |
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Amendment to Lease, dated April 30, 2003, by and between Sierra Equities, Inc. and Mesa
General Hospital, L.P. (6) |
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10.6 |
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Letter Agreement effective May 6, 2005, amending Lease by and between Sierra Equities
Inc. and Mesa General Hospital, L.P. (7) |
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10.7 |
|
|
Amended and Restated Pioneer Hospital Lease, dated as of June 28, 2002, by and between
Health Care Property Investors, Inc. and Pioneer Valley Hospital, Inc. (8) |
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10.8 |
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Lease Agreement, dated as of October 6, 2003, between The Dover Centre, LLC and IASIS
Healthcare Corporation (9) |
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10.9 |
|
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Form of Indemnification Agreement (1) |
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10.10 |
|
|
Contract between Arizona Health Care Cost Containment System and Health Choice Arizona
(including Amendment No. 1 thereto), effective as of October 1, 2008 (16) |
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|
10.11 |
|
|
Amendment No. 2 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of January 15, 2009 (17) |
143
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|
|
Exhibit No. |
|
Description |
|
10.12 |
|
|
Amendment No. 3 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of May 1, 2009 (17) |
|
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|
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|
|
10.13 |
|
|
Amendment No. 4 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of August 1, 2009 (17) |
|
|
|
|
|
|
10.14 |
|
|
Amendment No. 5 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of August 1, 2009 (17) |
|
|
|
|
|
|
10.15 |
|
|
Amendment No. 6 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 (17) |
|
|
|
|
|
|
10.16 |
|
|
Amendment No. 7 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 (17) |
|
|
|
|
|
|
10.17 |
|
|
Amendment No. 8 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 (17) |
|
|
|
|
|
|
10.18 |
|
|
Amendment No. 9 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 (17) |
|
|
|
|
|
|
10.19 |
|
|
Amendment No. 10 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2010 |
|
|
|
|
|
|
10.20 |
|
|
Amendment No. 11 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.21 |
|
|
Amendment No. 12 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.22 |
|
|
Information System Agreement, dated February 23, 2000, between McKesson Information
Solutions LLC and IASIS Healthcare Corporation, as amended (1)** |
|
|
|
|
|
|
10.23 |
|
|
Amended and Restated Credit Agreement, dated as of April 27, 2007, by and among IASIS
Healthcare LLC, as Borrower, IASIS Healthcare Corporation, as Holdings, Bank of
America, N.A., as administrative agent, swingline lender revolving L/C issuer and
synthetic L/C issuer and each lender from time to time party thereto (18) |
|
|
|
|
|
|
10.24 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and David R. White (1) |
|
|
|
|
|
|
10.25 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and Sandra K. McRee (1) |
|
|
|
|
|
|
10.26 |
|
|
Employment Agreement, dated as of September 30, 2010, by and between IASIS Healthcare
Corporation and W. Carl Whitmer (18) |
|
|
|
|
|
|
10.27 |
|
|
Employment Agreement, dated September 30, 2010, by and between IASIS Healthcare
Corporation and John M. Doyle (18) |
|
|
|
|
|
|
10.28 |
|
|
Employment Agreement, dated October 11, 2010, by and between IASIS Healthcare
Corporation and Phillip J. Mazzuca (19) |
|
|
|
|
|
|
10.29 |
|
|
First Amendment to Employment Agreement, dated January 31, 2008, by and between IASIS
Healthcare Corporation and Sandra K. McRee (11) |
|
|
|
|
|
|
10.30 |
|
|
Agreement for Severance Benefits and Restrictive Covenants, dated as of March 1, 2001,
by and between IASIS Management Company and Carolyn Rose (16) |
|
|
|
|
|
|
10.31 |
|
|
Form of Roll-over Option Letter Agreement (1) |
|
|
|
|
|
|
10.32 |
|
|
Amended and Restated IASIS Healthcare Corporation 2004 Stock Option Plan (19) |
|
|
|
|
|
|
10.33 |
|
|
Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare
LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital
L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners
Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS
Co-Invest II LLC (1) |
144
|
|
|
|
|
Exhibit No. |
|
Description |
|
10.34 |
|
|
Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment
LLC and IASIS Healthcare Corporation (1) |
|
|
|
|
|
|
10.35 |
|
|
Form of Management Stockholders Agreement between IAS and each of David R. White,
Sandra K. McRee and W. Carl Whitmer (1) |
|
|
|
|
|
|
10.36 |
|
|
Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
|
|
10.37 |
|
|
Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
|
|
10.38 |
|
|
Stock Option Award Agreement, dated October 11, 2010, by and between IASIS Healthcare
Corporation and W. Carl Whitmer (19) |
|
|
|
|
|
|
10.39 |
|
|
Stock Option Award Agreement, dated October 11, 2010, by and between IASIS Healthcare
Corporation and John M. Doyle (19) |
|
|
|
|
|
|
10.40 |
|
|
Stock Option Agreement, dated October 11, 2010, by and between IASIS Healthcare
Corporation and Phillip J. Mazzuca (19) |
|
|
|
|
|
|
10.41 |
|
|
Form of Management Stockholders Agreement for Rollover Options (1) |
|
|
|
|
|
|
10.42 |
|
|
IASIS Corporate Incentive Plan (1) |
|
|
|
|
|
|
10.43 |
|
|
IASIS Market Executive Incentive Program (1) |
|
|
|
|
|
|
10.44 |
|
|
Director Compensation and Restricted Share Award Agreement, dated as of February 14,
2005, between IASIS Healthcare Corporation and Kirk Gorman (12) |
|
|
|
|
|
|
10.45 |
|
|
Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005,
between IASIS Healthcare Corporation and Sharad Mansukani (13) |
|
|
|
|
|
|
10.46 |
|
|
Asset Purchase Agreement, dated July 20, 2006, by and among Glenwood Regional Medical
Center, Glenwood Health Services, Inc., Hospital Service District No. 1 of the Parish
of Ouachita, State of Louisiana, IASIS Glenwood Regional Medical Center, L.P. and IASIS
Healthcare, LLC (14) |
|
|
|
|
|
|
10.47 |
|
|
IASIS Healthcare Non-Qualified Deferred Compensation Program (4) |
|
|
|
|
|
|
10.48 |
|
|
Contribution Agreement, dated as of May 9, 2007, by and among Odessa Regional Hospital,
LP, Alliance Hospital, Ltd. and Sri-Sai Enterprises, Inc. (15) |
|
|
|
|
|
|
10.49 |
|
|
Supplement No. 1, dated as of October 1, 2010, to the Guaranty dated as of April 27,
2007 among IASIS Healthcare Corporation, certain subsidiaries of IASIS Healthcare LLC
from time to time party thereto and Bank of America, N.A., as Administrative Agent |
|
|
|
|
|
|
10.50 |
|
|
Supplement No. 1, dated as of October 1, 2010, to the Amended and Restated Security
Agreement dated as of April 27, 2007 among IASIS Healthcare Corporation, IASIS
Healthcare LLC, certain subsidiaries of IASIS Healthcare LLC from time to time party
thereto and Bank of America, N.A., as Administrative Agent |
|
|
|
|
|
|
14 |
|
|
Code of Ethics (9) |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of IASIS Healthcare Corporation |
|
|
|
|
|
|
31.1 |
|
|
Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
** |
|
Portions of this exhibit have been omitted and filed separately with the Commission
pursuant to a grant of confidential treatment pursuant to Rule 24(b)-2 promulgated under the
Securities Exchange Act of 1934, as amended. |
|
(1) |
|
Incorporated by reference to the Companys Registration Statement on Form S-4 (Registration
No. 333-117362). |
145
|
|
|
(2) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2004. |
|
(3) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2006. |
|
(4) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2006. |
|
(5) |
|
Incorporated by reference to IASIS Healthcare Corporations Annual Report on Form 10-K for
the fiscal year ended September 30, 2000. |
|
(6) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2003. |
|
(7) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 12, 2005. |
|
(8) |
|
Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2002. |
|
(9) |
|
Incorporated by reference to IASIS Healthcare Corporations Annual Report on Form 10-K for
the fiscal year ended September 30, 2003. |
|
(10) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 2, 2007. |
|
(11) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on February 5,
2008. |
|
(12) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on February 18,
2005. |
|
(13) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on April 20, 2005. |
|
(14) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on July 24, 2006. |
|
(15) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on May 10, 2007. |
|
(16) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2008. |
|
(17) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended
September 30, 2009. |
|
(18) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on October 6,
2010. |
|
(19) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on October 15,
2010. |
146
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
IASIS HEALTHCARE LLC
|
|
Date: December 21, 2010 |
By: |
/s/ W. Carl Whitmer
|
|
|
|
W. Carl Whitmer |
|
|
|
Chief Executive Officer and President |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ David R. White
|
|
Chairman of the Board |
|
|
|
|
|
|
December 21, 2010 |
|
|
|
|
|
|
|
Vice Chair of the Board |
|
|
|
|
|
|
|
|
|
|
|
|
/s/ W. Carl Whitmer
W. Carl Whitmer
|
|
Chief Executive Officer and President
and Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
(Principal Executive Officer)
|
|
December 21, 2010 |
|
|
|
|
|
/s/ John M. Doyle
John M. Doyle
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
December 21, 2010 |
|
|
|
|
|
/s/ Jonathan J. Coslet
Jonathan J. Coslet
|
|
Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
|
|
December 21, 2010 |
|
|
|
|
|
/s/ David Dupree
David Dupree
|
|
Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
|
|
December 21, 2010 |
|
|
|
|
|
/s/ Kirk E. Gorman
Kirk E. Gorman
|
|
Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
|
|
December 21, 2010 |
|
|
|
|
|
/s/ Greg Kranias
Greg Kranias
|
|
Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
|
|
December 21, 2010 |
|
|
|
|
|
/s/ Todd B. Sisitsky
Todd B. Sisitsky
|
|
Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
|
|
December 21, 2010 |
|
|
|
|
|
|
|
Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
|
|
|
|
|
|
|
|
|
|
Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
|
|
|
|
|
|
|
|
/s/ Sharad Mansukani
Sharad Mansukani
|
|
Director of IASIS Healthcare Corporation
(sole member of IASIS Healthcare LLC)
|
|
December 21, 2010 |
147
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY
REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material has been sent to security holders.
148
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
2.1 |
|
|
Agreement and Plan of Merger, dated as of May 4, 2004, by and among IASIS Investment
LLC, Titan Merger Corporation and IASIS Healthcare Corporation (1) |
|
|
|
|
|
|
2.2 |
|
|
Indemnification Agreement dated as of May 4, 2004, by and among IASIS Investment LLC,
IASIS Healthcare Corporation, and the stockholders and option holders of IASIS
Healthcare Corporation listed on the signature pages thereof (2) |
|
|
|
|
|
|
3.1 |
|
|
Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State
of the State of Delaware on May 11, 2004 (1) |
|
|
|
|
|
|
3.2 |
|
|
Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (1) |
|
|
|
|
|
|
4.1 |
|
|
Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC, IASIS Capital
Corporation, the Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as
Trustee (1) |
|
|
|
|
|
|
4.2 |
|
|
Form of Notation of Subsidiary Guarantee (1) |
|
|
|
|
|
|
4.3 |
|
|
Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (1) |
|
|
|
|
|
|
4.4 |
|
|
Supplemental Indenture, dated as of June 30, 2004, by and between IASIS Finance Texas
Holdings, LLC, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary
Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1) |
|
|
|
|
|
|
4.5 |
|
|
Supplemental Indenture, effective as of August 1, 2005, by and among Cardiovascular
Specialty Centers of Utah, LP, IASIS Healthcare LLC, IASIS Capital Corporation, the
existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee
(3) |
|
|
|
|
|
|
4.6 |
|
|
Supplemental Indenture, dated as of July 20, 2006, by and among IASIS Glenwood Regional
Medical Center, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing
Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (4) |
|
|
|
|
|
|
4.7 |
|
|
Supplemental Indenture, dated as of July 27, 2006, by and among The Heart Center of
Central Phoenix, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing
Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (4) |
|
|
|
|
|
|
4.8 |
|
|
Supplemental Indenture, dated as of October 1, 2010, by and among Brim Holding Company,
Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee |
|
|
|
|
|
|
10.1 |
|
|
Lease, dated as of July 29, 1977, by and between Sierra Equities, Inc., as Landlord,
and Mesa General Hospital, Inc., as Tenant (5) |
|
|
|
|
|
|
10.2 |
|
|
Addendum to Lease entered into by and between Sierra Equities, Inc., as Landlord, and
Mesa General Hospital, Inc., as Tenant (5) |
|
|
|
|
|
|
10.3 |
|
|
Conforming Amendment to Lease, dated as of June 10, 1991, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (5) |
|
|
|
|
|
|
10.4 |
|
|
Amendment to Hospital Lease, dated as of October 31, 2000, by and between Sierra
Equities, Inc., as Landlord, and Mesa General Hospital, L.P., as Tenant (5) |
|
|
|
|
|
|
10.5 |
|
|
Amendment to Lease, dated April 30, 2003, by and between Sierra Equities, Inc. and Mesa
General Hospital, L.P. (6) |
|
|
|
|
|
|
10.6 |
|
|
Letter Agreement effective May 6, 2005, amending Lease by and between Sierra Equities
Inc. and Mesa General Hospital, L.P. (7) |
|
|
|
|
|
|
10.7 |
|
|
Amended and Restated Pioneer Hospital Lease, dated as of June 28, 2002, by and between
Health Care Property Investors, Inc. and Pioneer Valley Hospital, Inc. (8) |
|
|
|
|
|
|
10.8 |
|
|
Lease Agreement, dated as of October 6, 2003, between The Dover Centre, LLC and IASIS
Healthcare Corporation (9) |
|
|
|
|
|
|
10.9 |
|
|
Form of Indemnification Agreement (1) |
|
|
|
|
|
|
10.10 |
|
|
Contract between Arizona Health Care Cost Containment System and Health Choice Arizona
(including Amendment No. 1 thereto), effective as of October 1, 2008 (16) |
|
|
|
|
|
|
10.11 |
|
|
Amendment No. 2 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of January 15, 2009 (17) |
149
|
|
|
|
|
Exhibit No. |
|
Description |
|
10.12 |
|
|
Amendment No. 3 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of May 1, 2009 (17) |
|
|
|
|
|
|
10.13 |
|
|
Amendment No. 4 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of August 1, 2009 (17) |
|
|
|
|
|
|
10.14 |
|
|
Amendment No. 5 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of August 1, 2009 (17) |
|
|
|
|
|
|
10.15 |
|
|
Amendment No. 6 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 (17) |
|
|
|
|
|
|
10.16 |
|
|
Amendment No. 7 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 (17) |
|
|
|
|
|
|
10.17 |
|
|
Amendment No. 8 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 (17) |
|
|
|
|
|
|
10.18 |
|
|
Amendment No. 9 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 (17) |
|
|
|
|
|
|
10.19 |
|
|
Amendment No. 10 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2010 |
|
|
|
|
|
|
10.20 |
|
|
Amendment No. 11 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.21 |
|
|
Amendment No. 12 to Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona, effective as of October 1, 2009 |
|
|
|
|
|
|
10.22 |
|
|
Information System Agreement, dated February 23, 2000, between McKesson Information
Solutions LLC and IASIS Healthcare Corporation, as amended (1)** |
|
|
|
|
|
|
10.23 |
|
|
Amended and Restated Credit Agreement, dated as of April 27, 2007, by and among IASIS
Healthcare LLC, as Borrower, IASIS Healthcare Corporation, as Holdings, Bank of
America, N.A., as administrative agent, swingline lender revolving L/C issuer and
synthetic L/C issuer and each lender from time to time party thereto (18) |
|
|
|
|
|
|
10.24 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and David R. White (1) |
|
|
|
|
|
|
10.25 |
|
|
Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare
Corporation and Sandra K. McRee (1) |
|
|
|
|
|
|
10.26 |
|
|
Employment Agreement, dated as of September 30, 2010, by and between IASIS Healthcare
Corporation and W. Carl Whitmer (18) |
|
|
|
|
|
|
10.27 |
|
|
Employment Agreement, dated September 30, 2010, by and between IASIS Healthcare
Corporation and John M. Doyle (18) |
|
|
|
|
|
|
10.28 |
|
|
Employment Agreement, dated October 11, 2010, by and between IASIS Healthcare
Corporation and Phillip J. Mazzuca (19) |
|
|
|
|
|
|
10.29 |
|
|
First Amendment to Employment Agreement, dated January 31, 2008, by and between IASIS
Healthcare Corporation and Sandra K. McRee (11) |
|
|
|
|
|
|
10.30 |
|
|
Agreement for Severance Benefits and Restrictive Covenants, dated as of March 1, 2001,
by and between IASIS Management Company and Carolyn Rose (16) |
|
|
|
|
|
|
10.31 |
|
|
Form of Roll-over Option Letter Agreement (1) |
|
|
|
|
|
|
10.32 |
|
|
Amended and Restated IASIS Healthcare Corporation 2004 Stock Option Plan (19) |
|
|
|
|
|
|
10.33 |
|
|
Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare
LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital
L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners
Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS
Co-Invest II LLC (1) |
150
|
|
|
|
|
Exhibit No. |
|
Description |
|
10.34 |
|
|
Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment
LLC and IASIS Healthcare Corporation (1) |
|
|
|
|
|
|
10.35 |
|
|
Form of Management Stockholders Agreement between IAS and each of David R. White,
Sandra K. McRee and W. Carl Whitmer (1) |
|
|
|
|
|
|
10.36 |
|
|
Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
|
|
10.37 |
|
|
Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock
Option Plan (1) |
|
|
|
|
|
|
10.38 |
|
|
Stock Option Award Agreement, dated October 11, 2010, by and between IASIS Healthcare
Corporation and W. Carl Whitmer (19) |
|
|
|
|
|
|
10.39 |
|
|
Stock Option Award Agreement, dated October 11, 2010, by and between IASIS Healthcare
Corporation and John M. Doyle (19) |
|
|
|
|
|
|
10.40 |
|
|
Stock Option Agreement, dated October 11, 2010, by and between IASIS Healthcare
Corporation and Phillip J. Mazzuca (19) |
|
|
|
|
|
|
10.41 |
|
|
Form of Management Stockholders Agreement for Rollover Options (1) |
|
|
|
|
|
|
10.42 |
|
|
IASIS Corporate Incentive Plan (1) |
|
|
|
|
|
|
10.43 |
|
|
IASIS Market Executive Incentive Program (1) |
|
|
|
|
|
|
10.44 |
|
|
Director Compensation and Restricted Share Award Agreement, dated as of February 14,
2005, between IASIS Healthcare Corporation and Kirk Gorman (12) |
|
|
|
|
|
|
10.45 |
|
|
Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005,
between IASIS Healthcare Corporation and Sharad Mansukani (13) |
|
|
|
|
|
|
10.46 |
|
|
Asset Purchase Agreement, dated July 20, 2006, by and among Glenwood Regional Medical
Center, Glenwood Health Services, Inc., Hospital Service District No. 1 of the Parish
of Ouachita, State of Louisiana, IASIS Glenwood Regional Medical Center, L.P. and IASIS
Healthcare, LLC (14) |
|
|
|
|
|
|
10.47 |
|
|
IASIS Healthcare Non-Qualified Deferred Compensation Program (4) |
|
|
|
|
|
|
10.48 |
|
|
Contribution Agreement, dated as of May 9, 2007, by and among Odessa Regional Hospital,
LP, Alliance Hospital, Ltd. and Sri-Sai Enterprises, Inc. (15) |
|
|
|
|
|
|
10.49 |
|
|
Supplement No. 1, dated as of October 1, 2010, to the Guaranty dated as of April 27,
2007 among IASIS Healthcare Corporation, certain subsidiaries of IASIS Healthcare LLC
from time to time party thereto and Bank of America, N.A., as Administrative Agent |
|
|
|
|
|
|
10.50 |
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Supplement No. 1, dated as of October 1, 2010, to the Amended and Restated Security
Agreement dated as of April 27, 2007 among IASIS Healthcare Corporation, IASIS
Healthcare LLC, certain subsidiaries of IASIS Healthcare LLC from time to time party
thereto and Bank of America, N.A., as Administrative Agent |
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14 |
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Code of Ethics (9) |
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21 |
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Subsidiaries of IASIS Healthcare Corporation |
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31.1 |
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Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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** |
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Portions of this exhibit have been omitted and filed separately with the Commission
pursuant to a grant of confidential treatment pursuant to Rule 24(b)-2 promulgated under the
Securities Exchange Act of 1934, as amended. |
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(1) |
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Incorporated by reference to the Companys Registration Statement on Form S-4 (Registration
No. 333-117362). |
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(2) |
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Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2004. |
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(3) |
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Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2006. |
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(4) |
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Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2006. |
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(5) |
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Incorporated by reference to IASIS Healthcare Corporations Annual Report on Form 10-K for
the fiscal year ended September 30, 2000. |
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(6) |
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Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2003. |
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(7) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on May 12, 2005. |
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(8) |
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Incorporated by reference to IASIS Healthcare Corporations Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2002. |
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(9) |
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Incorporated by reference to IASIS Healthcare Corporations Annual Report on Form 10-K for
the fiscal year ended September 30, 2003. |
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(10) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on May 2, 2007. |
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(11) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on February 5,
2008. |
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(12) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on February 18,
2005. |
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(13) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on April 20, 2005. |
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(14) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on July 24, 2006. |
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(15) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on May 10, 2007. |
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(16) |
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Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2008. |
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(17) |
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Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2009. |
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(18) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on October 6, 2010. |
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(19) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on October 15, 2010. |
152