Attached files
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8-K - FORM 8-K - HCA Healthcare, Inc. | g27505e8vk.htm |
EX-99.1 - EX-99.1 - HCA Healthcare, Inc. | g27505exv99w1.htm |
EX-99.3 - EX-99.3 - HCA Healthcare, Inc. | g27505exv99w3.htm |
EX-23.1 - EX-23.1 - HCA Healthcare, Inc. | g27505exv23w1.htm |
EX-99.4 - EX-99.4 - HCA Healthcare, Inc. | g27505exv99w4.htm |
EXHIBIT 99.2
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AND RESULTS OF OPERATIONS
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The selected financial data and the accompanying consolidated
financial statements present certain information with respect to
the financial position, results of operations and cash flows of
HCA Holdings, Inc. which should be read in conjunction with the
following discussion and analysis. The terms HCA,
Company, we, our, or
us, as used herein, refer HCA Inc. and our
affiliates prior to the Corporate Reorganization and to HCA
Holdings, Inc. and our affiliates after the Corporate
Reorganization unless otherwise stated or indicated by context.
The term affiliates means direct and indirect
subsidiaries of HCA Holdings, Inc. and partnerships and joint
ventures in which such subsidiaries are partners.
Forward-Looking
Statements
This annual report on
Form 10-K
includes certain disclosures which contain forward-looking
statements. Forward-looking statements include all
statements that do not relate solely to historical or current
facts, and can be identified by the use of words like
may, believe, will,
expect, project, estimate,
anticipate, plan, initiative
or continue. These forward-looking statements are
based on our current plans and expectations and are subject to a
number of known and unknown uncertainties and risks, many of
which are beyond our control, which could significantly affect
current plans and expectations and our future financial position
and results of operations. These factors include, but are not
limited to, (1) the ability to recognize the benefits of
the Recapitalization, (2) the impact of our substantial
indebtedness incurred to finance the Recapitalization and
distributions to stockholders and the ability to refinance such
indebtedness on acceptable terms, (3) the effects related
to the enactment of the Health Reform Law, the possible
enactment of additional federal or state health care reforms and
possible changes to the Health Reform Law and other federal,
state or local laws or regulations affecting the health care
industry, (4) increases in the amount and risk of
collectibility of uninsured accounts and deductibles and
copayment amounts for insured accounts, (5) the ability to
achieve operating and financial targets, and attain expected
levels of patient volumes and control the costs of providing
services, (6) possible changes in the Medicare, Medicaid
and other state programs, including Medicaid supplemental
payments pursuant to upper payment limit (UPL)
programs, that may impact reimbursements to health care
providers and insurers, (7) the highly competitive nature
of the health care business, (8) changes in revenue mix,
including potential declines in the population covered under
managed care agreements and the ability to enter into and renew
managed care provider agreements on acceptable terms,
(9) the efforts of insurers, health care providers and
others to contain health care costs, (10) the outcome of
our continuing efforts to monitor, maintain and comply with
appropriate laws, regulations, policies and procedures,
(11) increases in wages and the ability to attract and
retain qualified management and personnel, including affiliated
physicians, nurses and medical and technical support personnel,
(12) the availability and terms of capital to fund the
expansion of our business and improvements to our existing
facilities, (13) changes in accounting practices,
(14) changes in general economic conditions nationally and
regionally in our markets, (15) future divestitures which
may result in charges and possible impairments of long-lived
assets, (16) changes in business strategy or development
plans, (17) delays in receiving payments for services
provided, (18) the outcome of pending and any future tax
audits, appeals and litigation associated with our tax
positions, (19) potential adverse impact of known and
unknown government investigations, litigation and other claims
that may be made against us, and (20) other risk factors
described in this annual report on
Form 10-K.
As a consequence, current plans, anticipated actions and future
financial position and results of operations may differ from
those expressed in any forward-looking statements made by or on
behalf of HCA. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information
presented in this report.
2010
Operations Summary
Net income attributable to HCA Holdings, Inc. totaled
$1.207 billion for 2010, compared to $1.054 billion
for 2009. The 2010 results include net gains on sales of
facilities of $4 million and impairments of long-lived
assets of
1
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
2010
Operations Summary (Continued)
$123 million. The 2009 results include net losses on sales
of facilities of $15 million and impairments of long-lived
assets of $43 million.
Revenues increased to $30.683 billion for 2010 from
$30.052 billion for 2009. Revenues increased 2.1% on both a
consolidated basis and on a same facility basis for 2010,
compared to 2009. The consolidated revenues increase can be
attributed to the combined impact of a 0.9% increase in revenue
per equivalent admission and a 1.2% increase in equivalent
admissions. The same facility revenues increase resulted from a
0.6% increase in same facility revenue per equivalent admission
and a 1.4% increase in same facility equivalent admissions.
During 2010, consolidated admissions declined 0.1% and same
facility admissions increased 0.1%, compared to 2009. Inpatient
surgical volumes declined 1.5% on a consolidated basis and
declined 1.4% on a same facility basis during 2010, compared to
2009. Outpatient surgical volumes declined 1.4% on a
consolidated basis and declined 1.2% on a same facility basis
during 2010, compared to 2009. Emergency room visits increased
2.0% on a consolidated basis and increased 2.1% on a same
facility basis during 2010, compared to 2009.
For 2010, the provision for doubtful accounts declined
$628 million, to 8.6% of revenues from 10.9% of revenues
for 2009. The combined self-pay revenue deductions for charity
care and uninsured discounts increased $1.892 billion for
2010, compared to 2009. The sum of the provision for doubtful
accounts, uninsured discounts and charity care, as a percentage
of the sum of net revenues, uninsured discounts and charity
care, was 25.6% for 2010, compared to 23.8% for 2009. Same
facility uninsured admissions increased 5.4% and same facility
uninsured emergency room visits increased 1.2% for 2010,
compared to 2009.
Interest expense totaled $2.097 billion for 2010, compared
to $1.987 billion for 2009. The $110 million increase
in interest expense for 2010 was due primarily to an increase in
the average effective interest rate.
Cash flows from operating activities increased
$338 million, from $2.747 billion for 2009 to
$3.085 billion for 2010. The increase related primarily to
the net impact of improvements from a $198 million increase
in net income and a $547 million reduction in income tax
payments, offsetting a $384 million net decline from
changes in working capital items and the provision for doubtful
accounts.
Business
Strategy
We are committed to providing the communities we serve with high
quality, cost-effective health care while growing our business,
increasing our profitability and creating long-term value for
our stockholders. To achieve these objectives, we align our
efforts around the following growth agenda:
Grow Our Presence in Existing Markets. We
believe we are well positioned in a number of large and growing
markets that will allow us the opportunity to generate
long-term, attractive growth through the expansion of our
presence in these markets. We plan to continue recruiting and
strategically collaborating with the physician community and
adding attractive service lines such as cardiology, emergency
services, oncology and womens services. Additional
components of our growth strategy include expanding our
footprint through developing various outpatient access points,
including surgery centers, rural outreach, freestanding
emergency departments and walk-in clinics. Since our
Recapitalization, we have invested significant capital into
these markets and expect to continue to see the benefit of this
investment.
Achieve Industry-Leading Performance in Clinical and
Satisfaction Measures. Achieving high levels of
patient safety, patient satisfaction and clinical quality are
central goals of our business model. To achieve these goals, we
have implemented a number of initiatives including infection
reduction initiatives, hospitalist programs, advanced health
information technology and evidence-based medicine programs. We
routinely analyze operational practices from our best-performing
hospitals to identify ways to implement organization-wide
performance
2
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Business
Strategy (Continued)
improvements and reduce clinical variation. We believe these
initiatives will continue to improve patient care, help us
achieve cost efficiencies, grow our revenues and favorably
position us in an environment where our constituents are
increasingly focused on quality, efficacy and efficiency.
Recruit and Employ Physicians to Meet Need for High Quality
Health Services. We depend on the quality and
dedication of the health care providers and other team members
who serve at our facilities. We believe a critical component of
our growth strategy is our ability to successfully recruit and
strategically collaborate with physicians and other
professionals to provide high quality care. We attract and
retain physicians by providing high quality, convenient
facilities with advanced technology, by expanding our specialty
services and by building our outpatient operations. We believe
our continued investment in the employment, recruitment and
retention of physicians will improve the quality of care at our
facilities.
Continue to Leverage Our Scale and Market Positions to
Enhance Profitability. We believe there is
significant opportunity to continue to grow the profitability of
our company by fully leveraging the scale and scope of our
franchise. We are currently pursuing next generation performance
improvement initiatives such as contracting for services on a
multistate basis and expanding our support infrastructure for
additional clinical and support functions, such as physician
credentialing, medical transcription and electronic medical
recordkeeping. We believe our centrally managed business
processes and ability to leverage cost-saving practices across
our extensive network will enable us to continue to manage costs
effectively. We are in the process of creating a subsidiary that
will leverage key components of our support infrastructure,
including revenue cycle management, healthcare group purchasing,
supply chain management and staffing functions, by offering
these services to other hospital companies.
Selectively Pursue a Disciplined Development
Strategy. We continue to believe there are
significant growth opportunities in our markets. We will
continue to provide financial and operational resources to
successfully execute on our in-market opportunities. To
complement our in-market growth agenda, we intend to focus on
selectively developing and acquiring new hospitals, outpatient
facilities and other health care service providers. We believe
the challenges faced by the hospital industry may spur
consolidation and we believe our size, scale, national presence
and access to capital will position us well to participate in
any such consolidation. We have a strong record of successfully
acquiring and integrating hospitals and entering into joint
ventures and intend to continue leveraging this experience.
Critical
Accounting Policies and Estimates
The preparation of our consolidated financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities and the reported amounts of
revenues and expenses. Our estimates are based on historical
experience and various other assumptions we believe are
reasonable under the circumstances. We evaluate our estimates on
an ongoing basis and make changes to the estimates and related
disclosures as experience develops or new information becomes
known. Actual results may differ from these estimates.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements.
Revenues
Revenues are recorded during the period the health care services
are provided, based upon the estimated amounts due from payers.
Estimates of contractual allowances under managed care health
plans are based upon the payment terms specified in the related
contractual agreements. Laws and regulations governing the
Medicare and Medicaid programs are complex and subject to
interpretation. The estimated reimbursement amounts are made on
a payer-specific basis and are recorded based on the best
information available regarding managements
3
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical
Accounting Policies and Estimates (Continued)
Revenues
(Continued)
interpretation of the applicable laws, regulations and contract
terms. 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 resulting from contract renegotiations and renewals. We
have invested significant resources to refine and improve our
computerized billing systems and the information system data
used to make contractual allowance estimates. We have developed
standardized calculation processes and related training programs
to improve the utility of our patient accounting systems.
The Emergency Medical Treatment and Active Labor Act
(EMTALA) requires any hospital participating in the
Medicare program to conduct an appropriate medical screening
examination of every person who presents to the hospitals
emergency room for treatment and, if the individual is suffering
from an emergency medical condition, to either stabilize the
condition or make an appropriate transfer of the individual to a
facility able to handle the condition. The obligation to screen
and stabilize emergency medical conditions exists regardless of
an individuals ability to pay for treatment. Federal and
state laws and regulations, including but not limited to EMTALA,
require, and our commitment to providing quality patient care
encourages, the provision of services to patients who are
financially unable to pay for the health care services they
receive. The Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act of
2010 (collectively, the Health Reform Law), requires
health plans to reimburse hospitals for emergency services
provided to enrollees without prior authorization and without
regard to whether a participating provider contract is in place.
Further, as enacted, the Health Reform Law contains provisions
that seek to decrease the number of uninsured individuals,
including requirements or incentives, which do not become
effective until 2014, for individuals to obtain, and large
employers to provide, insurance coverage. These mandates may
reduce the financial impact of screening for and stabilizing
emergency medical conditions. However, many factors are unknown
regarding the impact of the Health Reform Law, including the
outcome of court challenges to the constitutionality of the law
and Congressional efforts to amend or repeal the law, how many
previously uninsured individuals will obtain coverage as a
result of the law or the change, if any, in the volume of
inpatient and outpatient hospital services that are sought by
and provided to previously uninsured individuals and the payer
mix.
We do not pursue collection of amounts related to patients who
meet our guidelines to qualify as charity care; therefore, they
are not reported in revenues. Patients treated at our hospitals
for nonelective care, who have income at or below 200% of the
federal poverty level, are eligible for charity care. The
federal poverty level is established by the federal government
and is based on income and family size. We provide discounts
from our gross charges to uninsured patients who do not qualify
for Medicaid or charity care. These discounts are similar to
those provided to many local managed care plans. After the
discounts are applied, we are still unable to collect a
significant portion of uninsured patients accounts, and we
record significant provisions for doubtful accounts (based upon
our historical collection experience) related to uninsured
patients in the period the services are provided.
Due to the complexities involved in the classification and
documentation of health care services authorized and provided,
the estimation of revenues earned and the related reimbursement
are often subject to interpretations that could result in
payments that are different from our estimates. Adjustments to
estimated Medicare and Medicaid reimbursement amounts and
disproportionate-share funds, which resulted in net increases to
revenues, related primarily to cost reports filed during the
respective year were $52 million, $40 million and
$32 million in 2010, 2009 and 2008, respectively. The
adjustments to estimated reimbursement amounts, which resulted
in net increases to revenues, related primarily to cost reports
filed during previous years were $50 million,
$60 million and $35 million in 2010, 2009 and 2008,
respectively. We expect adjustments during the next
12 months related to Medicare and Medicaid cost report
filings and settlements and disproportionate-share funds will
result in increases to revenues within generally similar ranges.
4
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical
Accounting Policies and Estimates (Continued)
Provision
for Doubtful Accounts and the Allowance for Doubtful
Accounts
The collection of outstanding receivables from Medicare, managed
care payers, other third-party payers and patients is our
primary source of cash and is critical to our operating
performance. The primary collection risks relate to uninsured
patient accounts, including patient accounts for which the
primary insurance carrier has paid the amounts covered by the
applicable agreement, but patient responsibility amounts
(deductibles and copayments) remain outstanding. The provision
for doubtful accounts and the allowance for doubtful accounts
relate primarily to amounts due directly from patients. An
estimated allowance for doubtful accounts is recorded for all
uninsured accounts, regardless of the aging of those accounts.
Accounts are written off when all reasonable internal and
external collection efforts have been performed. Our collection
policies include a review of all accounts against certain
standard collection criteria, upon completion of our internal
collection efforts. Accounts determined to possess positive
collectibility attributes are forwarded to a secondary external
collection agency and the other accounts are written off. The
accounts that are not collected by the secondary external
collection agency are written off when they are returned to us
by the collection agency (usually within 12 months).
Writeoffs are based upon specific identification and the
writeoff process requires a writeoff adjustment entry to the
patient accounting system. We do not pursue collection of
amounts related to patients that meet our guidelines to qualify
as charity care.
The amount of the provision for doubtful accounts is based upon
managements assessment of historical writeoffs and
expected net collections, business and economic conditions,
trends in federal, state, and private employer health care
coverage and other collection indicators. Management relies on
the results of detailed reviews of historical writeoffs and
recoveries at facilities that represent a majority of our
revenues and accounts receivable (the hindsight
analysis) as a primary source of information in estimating
the collectibility of our accounts receivable. We perform the
hindsight analysis quarterly, utilizing rolling twelve-months
accounts receivable collection and writeoff data. We believe our
quarterly updates to the estimated allowance for doubtful
accounts at each of our hospital facilities provide reasonable
valuations of our accounts receivable. These routine, quarterly
changes in estimates have not resulted in material adjustments
to our allowance for doubtful accounts, provision for doubtful
accounts or
period-to-period
comparisons of our results of operations. At December 31,
2010 and 2009, the allowance for doubtful accounts represented
approximately 93% and 94%, respectively, of the
$4.249 billion and $5.176 billion, respectively,
patient due accounts receivable balance. The patient due
accounts receivable balance represents the estimated uninsured
portion of our accounts receivable. The estimated uninsured
portion of Medicaid pending and uninsured discount pending
accounts is included in our patient due accounts receivable
balance.
The revenue deductions related to uninsured accounts (charity
care and uninsured discounts) generally have the inverse effect
on the provision for doubtful accounts. To quantify the total
impact of and trends related to uninsured accounts, we believe
it is beneficial to view these revenue deductions and provision
for doubtful accounts in combination, rather than each
separately. A summary of these amounts for the years ended
December 31, follows (dollars in millions):
2010 | 2009 | 2008 | ||||||||||
Provision for doubtful accounts
|
$ | 2,648 | $ | 3,276 | $ | 3,409 | ||||||
Uninsured discounts
|
4,641 | 2,935 | 1,853 | |||||||||
Charity care
|
2,337 | 2,151 | 1,747 | |||||||||
Totals
|
$ | 9,626 | $ | 8,362 | $ | 7,009 | ||||||
The provision for doubtful accounts, as a percentage of
revenues, declined from 12.0% for 2008 to 10.9% for 2009 and
declined to 8.6% for 2010. Our decision to increase uninsured
discounts during the second half of 2009 has directly
contributed to the decline in the provision for doubtful
accounts. However, the sum of the provision for
5
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical
Accounting Policies and Estimates (Continued)
Provision
for Doubtful Accounts and the Allowance for Doubtful Accounts
(Continued)
doubtful accounts, uninsured discounts and charity care, as a
percentage of the sum of net revenues, uninsured discounts and
charity care increased from 21.9% for 2008 to 23.8% for 2009 and
to 25.6% for 2010.
Days revenues in accounts receivable were 46 days,
45 days and 49 days at December 31, 2010, 2009
and 2008, respectively. Management expects a continuation of the
challenges related to the collection of the patient due
accounts. Adverse changes in the percentage of our patients
having adequate health care coverage, general economic
conditions, patient accounting service center operations, payer
mix, or trends in federal, state, and private employer health
care coverage could affect the collection of accounts
receivable, cash flows and results of operations.
The approximate breakdown of accounts receivable by payer
classification as of December 31, 2010 and 2009 is set
forth in the following table:
% of Accounts Receivable | ||||||||||||
Under 91 Days | 91180 Days | Over 180 Days | ||||||||||
Accounts receivable aging at December 31, 2010:
|
||||||||||||
Medicare and Medicaid
|
14 | % | 1 | % | 1 | % | ||||||
Managed care and other insurers
|
21 | 4 | 4 | |||||||||
Uninsured
|
17 | 8 | 30 | |||||||||
Total
|
52 | % | 13 | % | 35 | % | ||||||
Accounts receivable aging at December 31, 2009:
|
||||||||||||
Medicare and Medicaid
|
12 | % | 1 | % | 1 | % | ||||||
Managed care and other insurers
|
18 | 4 | 4 | |||||||||
Uninsured
|
13 | 8 | 39 | |||||||||
Total
|
43 | % | 13 | % | 44 | % | ||||||
Our decisions, to increase uninsured discounts and to reduce the
length of time accounts are left with our secondary collection
agency, have contributed to improvements in our accounts
receivable aging trends, particularly for our uninsured accounts
receivable.
Professional
Liability Claims
We, along with virtually all health care providers, operate in
an environment with professional liability risks. Our facilities
are insured by our wholly-owned insurance subsidiary for losses
up to $50 million per occurrence, subject to a
$5 million per occurrence self-insured retention. We
purchase excess insurance on a claims-made basis for losses in
excess of $50 million per occurrence. Our professional
liability reserves, net of receivables under reinsurance
contracts, do not include amounts for any estimated losses
covered by our excess insurance coverage. Provisions for losses
related to professional liability risks were $222 million,
$211 million and $175 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Reserves for professional liability risks represent the
estimated ultimate cost of all reported and unreported losses
incurred through the respective consolidated balance sheet
dates. The estimated ultimate cost includes estimates of direct
expenses and fees paid to outside counsel and experts, but does
not include the general overhead costs of our insurance
subsidiary or corporate office. Individual case reserves are
established based upon the particular circumstances of each
reported claim and represent our estimates of the future costs
that will be paid on
6
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical
Accounting Policies and Estimates (Continued)
Professional
Liability Claims (Continued)
reported claims. Case reserves are reduced as claim payments are
made and are adjusted upward or downward as our estimates
regarding the amounts of future losses are revised. Once the
case reserves for known claims are determined, information is
stratified by loss layers and retentions, accident years,
reported years, and geographic location of our hospitals.
Several actuarial methods are employed to utilize this data to
produce estimates of ultimate losses and reserves for incurred
but not reported claims, including: paid and incurred
extrapolation methods utilizing paid and incurred loss
development to estimate ultimate losses; frequency and severity
methods utilizing paid and incurred claims development to
estimate ultimate average frequency (number of claims) and
ultimate average severity (cost per claim); and
Bornhuetter-Ferguson methods which add expected development to
actual paid or incurred experience to estimate ultimate losses.
These methods use our company-specific historical claims data
and other information. Company-specific claim reporting and
settlement data collected over an approximate
20-year
period is used in our reserve estimation process. This
company-specific data includes information regarding our
business, including historical paid losses and loss adjustment
expenses, historical and current case loss reserves, actual and
projected hospital statistical data, professional liability
retentions for each policy year, geographic information and
other data.
Reserves and provisions for professional liability risks are
based upon actuarially determined estimates. The estimated
reserve ranges, net of amounts receivable under reinsurance
contracts, were $1.067 billion to $1.276 billion at
December 31, 2010 and $1.024 billion to
$1.270 billion at December 31, 2009. Our estimated
reserves for professional liability claims may change
significantly if future claims differ from expected trends. We
perform sensitivity analyses which model the volatility of key
actuarial assumptions and monitor our reserves for adequacy
relative to all our assumptions in the aggregate. Based on our
analysis, we believe the estimated professional liability
reserve ranges represent the reasonably likely outcomes for
ultimate losses. We consider the number and severity of claims
to be the most significant assumptions in estimating reserves
for professional liabilities. A 2% change in the expected
frequency trend could be reasonably likely and would increase
the reserve estimate by $16 million or reduce the reserve
estimate by $15 million. A 2% change in the expected claim
severity trend could be reasonably likely and would increase the
reserve estimate by $71 million or reduce the reserve
estimate by $65 million. We believe adequate reserves have
been recorded for our professional liability claims; however,
due to the complexity of the claims, the extended period of time
to settle the claims and the wide range of potential outcomes,
our ultimate liability for professional liability claims could
change by more than the estimated sensitivity amounts and could
change materially from our current estimates.
The reserves for professional liability risks cover
approximately 2,700 and 2,600 individual claims at
December 31, 2010 and 2009, respectively, and estimates for
unreported potential claims. The time period required to resolve
these claims can vary depending upon the jurisdiction and
whether the claim is settled or litigated. The average time
period between the occurrence and payment of final settlement
for our professional liability claims is approximately five
years, although the facts and circumstances of each individual
claim can result in an
occurrence-to-settlement
timeframe that varies from this average. The estimation of the
timing of payments beyond a year can vary significantly.
Reserves for professional liability risks were
$1.262 billion and $1.322 billion at December 31,
2010 and 2009, respectively. The current portion of these
reserves, $268 million and $265 million at
December 31, 2010 and 2009, respectively, is included in
other accrued expenses. Obligations covered by
reinsurance contracts are included in the reserves for
professional liability risks, as the insurance subsidiary
remains liable to the extent reinsurers do not meet their
obligations. Reserves for professional liability risks (net of
$14 million and $53 million receivable under
reinsurance contracts at December 31, 2010 and 2009,
respectively) were $1.248 billion and $1.269 billion
at December 31, 2010 and 2009, respectively. The estimated
total net reserves for professional liability risks at
7
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical
Accounting Policies and Estimates (Continued)
Professional
Liability Claims (Continued)
December 31, 2010 and 2009 are comprised of
$758 million and $680 million, respectively, of case
reserves for known claims and $490 million and
$589 million, respectively, of reserves for incurred but
not reported claims.
Changes in our professional liability reserves, net of
reinsurance recoverable, for the years ended December 31,
are summarized in the following table (dollars in millions):
2010 | 2009 | 2008 | ||||||||||
Net reserves for professional liability claims, January 1
|
$ | 1,269 | $ | 1,330 | $ | 1,469 | ||||||
Provision for current year claims
|
272 | 258 | 239 | |||||||||
Favorable development related to prior years claims
|
(50 | ) | (47 | ) | (64 | ) | ||||||
Total provision
|
222 | 211 | 175 | |||||||||
Payments for current year claims
|
7 | 4 | 7 | |||||||||
Payments for prior years claims
|
236 | 268 | 307 | |||||||||
Total claim payments
|
243 | 272 | 314 | |||||||||
Net reserves for professional liability claims, December 31
|
$ | 1,248 | $ | 1,269 | $ | 1,330 | ||||||
The favorable development related to prior years claims
resulted from declining claim frequency and moderating claim
severity trends. We believe these favorable trends are primarily
attributable to tort reforms enacted in key states, particularly
Texas, and our risk management and patient safety initiatives,
particularly in the area of obstetrics.
Income
Taxes
We calculate our provision for income taxes using the asset and
liability method, under which deferred tax assets and
liabilities are recognized by identifying the temporary
differences that arise from the recognition of items in
different periods for tax and accounting purposes. Deferred tax
assets generally represent the tax effects of amounts expensed
in our income statement for which tax deductions will be claimed
in future periods.
Although we believe we have properly reported taxable income and
paid taxes in accordance with applicable laws, federal, state or
international taxing authorities may challenge our tax positions
upon audit. Significant judgment is required in determining and
assessing the impact of uncertain tax positions. We report a
liability for unrecognized tax benefits from uncertain tax
positions taken or expected to be taken in our income tax
return. During each reporting period, we assess the facts and
circumstances related to uncertain tax positions. If the
realization of unrecognized tax benefits is deemed probable
based upon new facts and circumstances, the estimated liability
and the provision for income taxes are reduced in the current
period. Final audit results may vary from our estimates.
Results
of Operations
Revenue/Volume
Trends
Our revenues depend upon inpatient occupancy levels, the
ancillary services and therapy programs ordered by physicians
and provided to patients, the volume of outpatient procedures
and the charge and negotiated payment rates for such services.
Gross charges typically do not reflect what our facilities are
actually paid. Our facilities have entered into agreements with
third-party payers, including government programs and managed
care health plans, under which the facilities are paid based
upon the cost of providing services, predetermined rates per
diagnosis,
8
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Revenue/Volume
Trends (Continued)
fixed per diem rates or discounts from gross charges. We do not
pursue collection of amounts related to patients who meet our
guidelines to qualify for charity care; therefore, they are not
reported in revenues. We provide discounts to uninsured patients
who do not qualify for Medicaid or charity care that are similar
to the discounts provided to many local managed care plans.
Revenues increased 2.1% to $30.683 billion for 2010 from
$30.052 billion for 2009 and increased 5.9% for 2009 from
$28.374 billion for 2008. The increase in revenues in 2010
can be primarily attributed to the combined impact of a 0.9%
increase in revenue per equivalent admission and a 1.2% increase
in equivalent admissions compared to the prior year. The
increase in revenues in 2009 can be primarily attributed to the
combined impact of a 2.6% increase in revenue per equivalent
admission and a 3.2% increase in equivalent admissions compared
to 2008. The decline in the rate of revenue growth from 5.9% for
2009 compared to 2008 to 2.1% for 2010 compared to 2009 is
primarily due to a decline in the rate of volume growth
(equivalent admission growth declined from 3.2% for 2009
compared to 2008 to 1.2% for 2010 compared to 2009) and a
decline in uninsured revenues (uninsured revenues were
$1.732 billion, $2.350 billion and $2.695 billion
for the years ended December 31, 2010, 2009 and 2008,
respectively) resulting from our increased uninsured discounts
(uninsured discounts were $4.641 billion,
$2.935 billion and $1.853 billion for the years ended
December 31, 2010, 2009 and 2008, respectively).
Consolidated admissions declined 0.1% in 2010 compared to 2009
and increased 1.0% in 2009 compared to 2008. Consolidated
inpatient surgeries declined 1.5% and consolidated outpatient
surgeries declined 1.4% during 2010 compared to 2009.
Consolidated inpatient surgeries increased 0.3% and consolidated
outpatient surgeries declined 0.4% during 2009 compared to 2008.
Consolidated emergency room visits increased 2.0% during 2010
compared to 2009 and increased 6.6% during 2009 compared to 2008.
Same facility revenues increased 2.1% for the year ended
December 31, 2010 compared to the year ended
December 31, 2009 and increased 6.1% for the year ended
December 31, 2009 compared to the year ended
December 31, 2008. The 2.1% increase for 2010 can be
primarily attributed to the combined impact of a 0.6% increase
in same facility revenue per equivalent admission and a 1.4%
increase in same facility equivalent admissions. The 6.1%
increase for 2009 can be primarily attributed to the combined
impact of a 2.6% increase in same facility revenue per
equivalent admission and a 3.4% increase in same facility
equivalent admissions.
Same facility admissions increased 0.1% in 2010 compared to 2009
and increased 1.2% in 2009 compared to 2008. Same facility
inpatient surgeries declined 1.4% and same facility outpatient
surgeries declined 1.2% during 2010 compared to 2009. Same
facility inpatient surgeries increased 0.5% and same facility
outpatient surgeries declined 0.1% during 2009 compared to 2008.
Same facility emergency room visits increased 2.1% during 2010
compared to 2009 and increased 7.0% during 2009 compared to 2008.
Same facility uninsured emergency room visits increased 1.2% and
same facility uninsured admissions increased 5.4% during 2010
compared to 2009. Same facility uninsured emergency room visits
increased 6.5% and same facility uninsured admissions increased
4.7% during 2009 compared to 2008.
9
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Revenue/Volume
Trends (Continued)
The approximate percentages of our admissions related to
Medicare, managed Medicare, Medicaid, managed Medicaid, managed
care and other insurers and the uninsured for the years ended
December 31, 2010, 2009 and 2008 are set forth below.
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Medicare
|
34 | % | 34 | % | 35 | % | ||||||
Managed Medicare
|
10 | 10 | 9 | |||||||||
Medicaid
|
9 | 9 | 8 | |||||||||
Managed Medicaid
|
8 | 7 | 7 | |||||||||
Managed care and other insurers
|
32 | 34 | 35 | |||||||||
Uninsured
|
7 | 6 | 6 | |||||||||
100 | % | 100 | % | 100 | % | |||||||
The approximate percentages of our inpatient revenues related to
Medicare, managed Medicare, Medicaid, managed Medicaid, managed
care plans and other insurers and the uninsured for the years
ended December 31, 2010, 2009 and 2008 are set forth below.
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Medicare
|
31 | % | 31 | % | 31 | % | ||||||
Managed Medicare
|
9 | 8 | 8 | |||||||||
Medicaid
|
9 | 8 | 7 | |||||||||
Managed Medicaid
|
4 | 4 | 4 | |||||||||
Managed care and other insurers
|
44 | 44 | 44 | |||||||||
Uninsured(a)
|
3 | 5 | 6 | |||||||||
100 | % | 100 | % | 100 | % | |||||||
(a) | Increases in discounts to uninsured revenues have resulted in declines in the percentage of our inpatient revenues related to the uninsured, as the percentage of uninsured admissions compared to total admissions has increased slightly. |
At December 31, 2010, we owned and operated 38 hospitals
and 32 surgery centers in the state of Florida. Our Florida
facilities revenues totaled $7.490 billion,
$7.343 billion and $7.009 billion for the years ended
December 31, 2010, 2009 and 2008, respectively. At
December 31, 2010, we owned and operated 36 hospitals and
23 surgery centers in the state of Texas. Our Texas
facilities revenues totaled $8.352 billion,
$8.042 billion and $7.351 billion for the years ended
December 31, 2010, 2009 and 2008, respectively. During
2010, 2009 and 2008, 57%, 57% and 55% of our admissions and 52%,
51% and 51%, respectively, of our revenues were generated by our
Florida and Texas facilities. Uninsured admissions in Florida
and Texas represented 63%, 64% and 63% of our uninsured
admissions during 2010, 2009 and 2008, respectively.
We receive a significant portion of our revenues from government
health programs, principally Medicare and Medicaid, which are
highly regulated and subject to frequent and substantial
changes. We have increased the indigent care services we provide
in several communities in the state of Texas, in affiliation
with other hospitals. The state of Texas has been involved in
the effort to increase the indigent care provided by private
hospitals. As a result of this additional indigent care provided
by private hospitals, public hospital districts or counties in
Texas
10
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Revenue/Volume
Trends (Continued)
have available funds that were previously devoted to indigent
care. The public hospital districts or counties are under no
contractual or legal obligation to provide such indigent care.
The public hospital districts or counties have elected to
transfer some portion of these available funds to the
states Medicaid program. Such action is at the sole
discretion of the public hospital districts or counties. It is
anticipated that these contributions to the state will be
matched with federal Medicaid funds. The state then may make
supplemental payments to hospitals in the state for Medicaid
services rendered. Hospitals receiving Medicaid supplemental
payments may include those that are providing additional
indigent care services. Such payments must be within the federal
UPL established by federal regulation. Our Texas Medicaid
revenues included $657 million, $474 million and
$262 million during 2010, 2009 and 2008, respectively, of
Medicaid supplemental payments pursuant to UPL programs.
The American Recovery and Reinvestment Act of 2009 provides for
Medicare and Medicaid incentive payments beginning in 2011 for
eligible hospitals and professionals that adopt and meaningfully
use certified electronic health record (EHR)
technology. We estimate a majority of our eligible hospitals
will attest to adopting, implementing, upgrading or
demonstrating meaningful use of certified EHR technology during
the fourth quarter of 2011, and we will not recognize any
revenues related to the Medicare or Medicaid incentive payments
until we are able to complete these attestations. We currently
estimate that, during 2011 (primarily during our fourth
quarter), the amount of Medicare or Medicaid incentive payments
realizable (and revenues recognized) will be in the range of
$275 million to $325 million. Actual incentive
payments could vary from these estimates due to certain factors
such as availability of federal funding for both Medicare and
Medicaid incentive payments, timing of the approval of state
Medicaid incentive payment plans by CMS and our ability to
implement and demonstrate meaningful use of certified EHR
technology. We have incurred and will continue to incur both
capital costs and operating expenses in order to implement our
certified EHR technology and meet meaningful use requirements.
These expenses are ongoing and are projected to continue over
all stages of implementation of meaningful use. The timing of
recognizing the expenses will not correlate with the receipt of
the incentive payments and the recognition of revenues. We
estimate that operating expenses to implement our certified EHR
technology and meet meaningful use will be in the range of
$125 million to $150 million for 2011. Actual
operating expenses could vary from these estimates. There can be
no assurance that we will be able to demonstrate meaningful use
of certified EHR technology, and the failure to do so could have
a material, adverse effect on our results of operations.
11
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Operating
Results Summary
The following are comparative summaries of operating results for
the years ended December 31, 2010, 2009 and 2008 (dollars
in millions):
2010 | 2009 | 2008 | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Revenues
|
$ | 30,683 | 100.0 | $ | 30,052 | 100.0 | $ | 28,374 | 100.0 | |||||||||||||||
Salaries and benefits
|
12,484 | 40.7 | 11,958 | 39.8 | 11,440 | 40.3 | ||||||||||||||||||
Supplies
|
4,961 | 16.2 | 4,868 | 16.2 | 4,620 | 16.3 | ||||||||||||||||||
Other operating expenses
|
5,004 | 16.3 | 4,724 | 15.7 | 4,554 | 16.1 | ||||||||||||||||||
Provision for doubtful accounts
|
2,648 | 8.6 | 3,276 | 10.9 | 3,409 | 12.0 | ||||||||||||||||||
Equity in earnings of affiliates
|
(282 | ) | (0.9 | ) | (246 | ) | (0.8 | ) | (223 | ) | (0.8 | ) | ||||||||||||
Depreciation and amortization
|
1,421 | 4.6 | 1,425 | 4.8 | 1,416 | 5.0 | ||||||||||||||||||
Interest expense
|
2,097 | 6.8 | 1,987 | 6.6 | 2,021 | 7.1 | ||||||||||||||||||
Losses (gains) on sales of facilities
|
(4 | ) | | 15 | | (97 | ) | (0.3 | ) | |||||||||||||||
Impairments of long-lived assets
|
123 | 0.4 | 43 | 0.1 | 64 | 0.2 | ||||||||||||||||||
28,452 | 92.7 | 28,050 | 93.3 | 27,204 | 95.9 | |||||||||||||||||||
Income before income taxes
|
2,231 | 7.3 | 2,002 | 6.7 | 1,170 | 4.1 | ||||||||||||||||||
Provision for income taxes
|
658 | 2.2 | 627 | 2.1 | 268 | 0.9 | ||||||||||||||||||
Net income
|
1,573 | 5.1 | 1,375 | 4.6 | 902 | 3.2 | ||||||||||||||||||
Net income attributable to noncontrolling interests
|
366 | 1.2 | 321 | 1.1 | 229 | 0.8 | ||||||||||||||||||
Net income attributable to HCA Holdings, Inc.
|
$ | 1,207 | 3.9 | $ | 1,054 | 3.5 | $ | 673 | 2.4 | |||||||||||||||
% changes from prior year:
|
||||||||||||||||||||||||
Revenues
|
2.1 | % | 5.9 | % | 5.6 | % | ||||||||||||||||||
Income before income taxes
|
11.5 | 71.1 | (16.3 | ) | ||||||||||||||||||||
Net income attributable to HCA Holdings, Inc.
|
14.5 | 56.7 | (23.0 | ) | ||||||||||||||||||||
Admissions(a)
|
(0.1 | ) | 1.0 | (0.7 | ) | |||||||||||||||||||
Equivalent admissions(b)
|
1.2 | 3.2 | 0.5 | |||||||||||||||||||||
Revenue per equivalent admission
|
0.9 | 2.6 | 5.2 | |||||||||||||||||||||
Same facility % changes from prior year(c):
|
||||||||||||||||||||||||
Revenues
|
2.1 | 6.1 | 7.0 | |||||||||||||||||||||
Admissions(a)
|
0.1 | 1.2 | 0.9 | |||||||||||||||||||||
Equivalent admissions(b)
|
1.4 | 3.4 | 1.9 | |||||||||||||||||||||
Revenue per equivalent admission
|
0.6 | 2.6 | 5.1 |
(a) | Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume. | |
(b) | Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation equates outpatient revenue to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume. | |
(c) | Same facility information excludes the operations of hospitals and their related facilities that were either acquired, divested or removed from service during the current and prior year. |
12
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Operating
Results Summary (Continued)
Supplemental
Non-GAAP Disclosures
Operating Measures on a Cash Revenues Basis
(Dollars in millions)
Operating Measures on a Cash Revenues Basis
(Dollars in millions)
The results of operations presented on a cash revenues basis for
the years ended December 31, 2010, 2009 and 2008 (dollars
in millions):
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Non- |
Non- |
Non- |
||||||||||||||||||||||||||||||||||
GAAP % |
GAAP % |
GAAP % |
GAAP % |
GAAP % |
GAAP % |
|||||||||||||||||||||||||||||||
of Cash |
of |
of Cash |
of |
of Cash |
of |
|||||||||||||||||||||||||||||||
Revenues |
Revenues |
Revenues |
Revenues |
Revenues |
Revenues |
|||||||||||||||||||||||||||||||
|
Amount | Ratios(b) | Ratios(b) | Amount | Ratios(b) | Ratios(b) | Amount | Ratios(b) | Ratios(b) | |||||||||||||||||||||||||||
Revenues
|
$ | 30,683 | 100.0 | % | $ | 30,052 | 100.0 | % | $ | 28,374 | 100.0 | % | ||||||||||||||||||||||||
Provision for doubtful accounts
|
2,648 | 3,276 | 3,409 | |||||||||||||||||||||||||||||||||
Cash revenues(a)
|
28,035 | 100.0 | % | 26,776 | 100.0 | % | 24,965 | 100.0 | % | |||||||||||||||||||||||||||
Salaries and benefits
|
12,484 | 44.5 | 40.7 | 11,958 | 44.7 | 39.8 | 11,440 | 45.8 | 40.3 | |||||||||||||||||||||||||||
Supplies
|
4,961 | 17.7 | 16.2 | 4,868 | 18.2 | 16.2 | 4,620 | 18.5 | 16.3 | |||||||||||||||||||||||||||
Other operating expenses
|
5,004 | 17.9 | 16.3 | 4,724 | 17.6 | 15.7 | 4,554 | 18.3 | 16.1 | |||||||||||||||||||||||||||
% changes from prior year:
|
||||||||||||||||||||||||||||||||||||
Revenues
|
2.1 | % | 5.9 | % | 5.6 | % | ||||||||||||||||||||||||||||||
Cash revenues
|
4.7 | 7.2 | 5.2 | |||||||||||||||||||||||||||||||||
Revenue per equivalent admission
|
0.9 | 2.6 | 5.2 | |||||||||||||||||||||||||||||||||
Cash revenue per equivalent admission
|
3.5 | 3.9 | 4.7 |
(a) | Cash revenues is defined as reported revenues less the provision for doubtful accounts. We use cash revenues as an analytical indicator for purposes of assessing the effect of uninsured patient volumes, adjusted for the effect of both the revenue deductions related to uninsured accounts (charity care and uninsured discounts) and the provision for doubtful accounts (which relates primarily to uninsured accounts), on our revenues and certain operating expenses, as a percentage of cash revenues. Variations in the revenue deductions related to uninsured accounts generally have the inverse effect on the provision for doubtful accounts. During 2010, uninsured discounts increased $1.706 billion and the provision for doubtful accounts declined $628 million, compared to 2009. During 2009, uninsured discounts increased $1.082 billion and the provision for doubtful accounts declined $133 million, compared to 2008. Cash revenues is commonly used as an analytical indicator within the health care industry. Cash revenues should not be considered as a measure of financial performance under generally accepted accounting principles. Because cash revenues is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, cash revenues, as presented, may not be comparable to other similarly titled measures of other health care companies. | |
(b) | Salaries and benefits, supplies and other operating expenses, as a percentage of cash revenues (a non-GAAP financial measure), present the impact on these ratios due to the adjustment of deducting the provision for doubtful accounts from reported revenues and results in these ratios being non-GAAP financial measures. We believe these non-GAAP financial measures are useful to investors to provide disclosures of our results of operations on the same basis as that used by management. Management uses this information to compare certain operating expense categories as a percentage of cash revenues. Management finds this information useful to evaluate certain expense category trends without the influence of whether adjustments related to revenues for uninsured accounts are recorded as revenue adjustments (charity care and uninsured discounts) or operating expenses (provision for doubtful accounts), and thus the expense category trends are generally analyzed as a percentage of cash revenues. These non-GAAP financial measures should not be considered alternatives to GAAP financial measures. We believe this supplemental information provides management and the users of our financial statements with useful information for period-to-period comparisons. Investors are encouraged to use GAAP measures when evaluating our overall financial performance. |
13
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Years
Ended December 31, 2010 and 2009
Net income attributable to HCA Holdings, Inc. totaled
$1.207 billion for the year ended December 31, 2010
compared to $1.054 billion for the year ended
December 31, 2009. Financial results for 2010 include net
gains on sales of facilities of $4 million and asset
impairment charges of $123 million. Financial results for
2009 include net losses on sales of facilities of
$15 million and asset impairment charges of
$43 million.
Revenues increased 2.1% to $30.683 billion for 2010 from
$30.052 billion for 2009. The increase in revenues was due
primarily to the combined impact of a 0.9% increase in revenue
per equivalent admission and a 1.2% increase in equivalent
admissions compared to 2009. Same facility revenues increased
2.1% due primarily to the combined impact of a 0.6% increase in
same facility revenue per equivalent admission and a 1.4%
increase in same facility equivalent admissions compared to
2009. Cash revenues (reported revenues less the provision for
doubtful accounts) increased 4.7% for 2010, compared to 2009.
During 2010, consolidated admissions declined 0.1% and same
facility admissions increased 0.1% for 2010, compared to 2009.
Consolidated inpatient surgical volumes declined 1.5%, and same
facility inpatient surgeries declined 1.4% during 2010 compared
to 2009. Consolidated outpatient surgical volumes declined 1.4%,
and same facility outpatient surgeries declined 1.2% during 2010
compared to 2009. Emergency room visits increased 2.0% on a
consolidated basis and increased 2.1% on a same facility basis
during 2010 compared to 2009.
Salaries and benefits, as a percentage of revenues, were 40.7%
in 2010 and 39.8% in 2009. Salaries and benefits, as a
percentage of cash revenues, were 44.5% in 2010 and 44.7% in
2009. Salaries and benefits per equivalent admission increased
3.2% in 2010 compared to 2009. Same facility labor rate
increases averaged 2.7% for 2010 compared to 2009.
Supplies, as a percentage of revenues, were 16.2% in both 2010
and 2009. Supplies, as a percentage of cash revenues, were 17.7%
in 2010 and 18.2% in 2009. Supply costs per equivalent admission
increased 0.7% in 2010 compared to 2009. Supply costs per
equivalent admission increased 2.4% for medical devices, 0.8%
for blood products, and 2.9% for general medical and surgical
items, and declined 0.7% for pharmacy supplies in 2010 compared
to 2009.
Other operating expenses, as a percentage of revenues, increased
to 16.3% in 2010 from 15.7% in 2009. Other operating expenses,
as a percentage of cash revenues, increased to 17.9% in 2010
from 17.6% in 2009. Other operating expenses are primarily
comprised of contract services, professional fees, repairs and
maintenance, rents and leases, utilities, insurance (including
professional liability insurance) and nonincome taxes. The major
component of the increase in other operating expenses, as a
percentage of revenues, was related to indigent care costs in
certain Texas markets which increased to $354 million for
2010 from $248 million for 2009. Provisions for losses
related to professional liability risks were $222 million
and $211 million for 2010 and 2009, respectively.
Provision for doubtful accounts declined $628 million, from
$3.276 billion in 2009 to $2.648 billion in 2010, and
as a percentage of revenues, declined to 8.6% for 2010 from
10.9% in 2009. The provision for doubtful accounts and the
allowance for doubtful accounts relate primarily to uninsured
amounts due directly from patients. The decline in the provision
for doubtful accounts can be attributed to the
$1.892 billion increase in the combined self-pay revenue
deductions for charity care and uninsured discounts during 2010,
compared to 2009. The sum of the provision for doubtful
accounts, uninsured discounts and charity care, as a percentage
of the sum of net revenues, uninsured discounts and charity
care, was 25.6% for 2010, compared to 23.8% for 2009. At
December 31, 2010, our allowance for doubtful accounts
represented approximately 93% of the $4.249 billion total
patient due accounts receivable balance, including accounts, net
of estimated contractual discounts, related to patients for
which eligibility for Medicaid coverage or uninsured discounts
was being evaluated.
14
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Years
Ended December 31, 2010 and 2009 (Continued)
Equity in earnings of affiliates increased from
$246 million for 2009 to $282 million for 2010. Equity
in earnings of affiliates relates primarily to our Denver,
Colorado market joint venture.
Depreciation and amortization declined, as a percentage of
revenues, to 4.6% in 2010 from 4.8% in 2009. Depreciation
expense was $1.416 billion for 2010 and $1.419 billion
for 2009.
Interest expense increased to $2.097 billion for 2010 from
$1.987 billion for 2009. The increase in interest expense
was due primarily to an increase in the average effective
interest rate. Our average debt balance was $26.751 billion
for 2010 compared to $26.267 billion for 2009. The average
interest rate for our long-term debt increased from 7.6% for
2009 to 7.8% for 2010.
Net gains on sales of facilities were $4 million for 2010
and were related to sales of real estate and other health care
entity investments. Net losses on sales of facilities were
$15 million for 2009 and included $8 million of net
losses on the sales of three hospital facilities and
$7 million of net losses on sales of real estate and other
health care entity investments.
Impairments of long-lived assets were $123 million for 2010
and included $74 million related to two hospital facilities
and $49 million related to other health care entity
investments, which includes $35 million for the writeoff of
capitalized engineering and design costs related to certain
building safety requirements (California earthquake standards)
that have been revised. Impairments of long-lived assets were
$43 million for 2009 and included $19 million related
to goodwill and $24 million related to property and
equipment.
The effective tax rate was 35.3% and 37.3% for 2010 and 2009,
respectively. The effective tax rate computations exclude net
income attributable to noncontrolling interests as it relates to
consolidated partnerships. Our provisions for income taxes for
2010 and 2009 were reduced by $44 million and
$12 million, respectively, related to reductions in
interest expense related to taxing authority examinations.
Excluding the effect of these adjustments, the effective tax
rate for 2010 and 2009 would have been 37.6% and 38.0%,
respectively.
Net income attributable to noncontrolling interests increased
from $321 million for 2009 to $366 million for 2010.
The increase in net income attributable to noncontrolling
interests related primarily to growth in operating results of
hospital joint ventures in two Texas markets.
Years
Ended December 31, 2009 and 2008
Net income attributable to HCA Holdings, Inc. totaled
$1.054 billion for the year ended December 31, 2009
compared to $673 million for the year ended
December 31, 2008. Financial results for 2009 include
losses on sales of facilities of $15 million and asset
impairment charges of $43 million. Financial results for
2008 include gains on sales of facilities of $97 million
and asset impairment charges of $64 million.
Revenues increased 5.9% to $30.052 billion for 2009 from
$28.374 billion for 2008. The increase in revenues was due
primarily to the combined impact of a 2.6% increase in revenue
per equivalent admission and a 3.2% increase in equivalent
admissions compared to 2008. Same facility revenues increased
6.1% due primarily to the combined impact of a 2.6% increase in
same facility revenue per equivalent admission and a 3.4%
increase in same facility equivalent admissions compared to
2008. Cash revenues (reported revenues less the provision for
doubtful accounts) increased 7.2% for 2009, compared to 2008.
During 2009, consolidated admissions increased 1.0% and same
facility admissions increased 1.2% for 2009, compared to 2008.
Consolidated inpatient surgical volumes increased 0.3%, and same
facility inpatient surgeries increased 0.5% during 2009 compared
to 2008. Consolidated outpatient surgical volumes declined 0.4%,
and same
15
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Years
Ended December 31, 2009 and 2008 (Continued)
facility outpatient surgeries declined 0.1% during 2009 compared
to 2008. Emergency department visits increased 6.6% on a
consolidated basis and increased 7.0% on a same facility basis
during 2009 compared to 2008.
Salaries and benefits, as a percentage of revenues, were 39.8%
in 2009 and 40.3% in 2008. Salaries and benefits, as a
percentage of cash revenues, were 44.7% in 2009 and 45.8% in
2008. Salaries and benefits per equivalent admission increased
1.3% in 2009 compared to 2008. Same facility labor rate
increases averaged 3.7% for 2009 compared to 2008.
Supplies, as a percentage of revenues, were 16.2% in 2009 and
16.3% in 2008. Supplies, as a percentage of cash revenues, were
18.2% in 2009 and 18.5% in 2008. Supply costs per equivalent
admission increased 2.1% in 2009 compared to 2008. Same facility
supply costs increased 5.9% for medical devices, 4.0% for
pharmacy supplies, 7.1% for blood products and 7.0% for general
medical and surgical items in 2009 compared to 2008.
Other operating expenses, as a percentage of revenues, declined
to 15.7% in 2009 from 16.1% in 2008. Other operating expenses,
as a percentage of cash revenues, declined to 17.6% in 2009 from
18.3% in 2008. Other operating expenses are primarily comprised
of contract services, professional fees, repairs and
maintenance, rents and leases, utilities, insurance (including
professional liability insurance) and nonincome taxes. The
overall decline in other operating expenses, as a percentage of
revenues, is comprised of relatively small reductions in several
areas, including utilities, employee recruitment and travel and
entertainment. Other operating expenses include
$248 million and $144 million of indigent care costs
in certain Texas markets during 2009 and 2008, respectively.
Provisions for losses related to professional liability risks
were $211 million and $175 million for 2009 and 2008,
respectively.
Provision for doubtful accounts declined $133 million, from
$3.409 billion in 2008 to $3.276 billion in 2009, and
as a percentage of revenues, declined to 10.9% for 2009 from
12.0% in 2008. The provision for doubtful accounts and the
allowance for doubtful accounts relate primarily to uninsured
amounts due directly from patients. The decline in the provision
for doubtful accounts can be attributed to the
$1.486 billion increase in the combined self-pay revenue
deductions for charity care and uninsured discounts during 2009,
compared to 2008. The sum of the provision for doubtful
accounts, uninsured discounts and charity care, as a percentage
of the sum of net revenues, uninsured discounts and charity
care, was 23.8% for 2009, compared to 21.9% for 2008. At
December 31, 2009, our allowance for doubtful accounts
represented approximately 94% of the $5.176 billion total
patient due accounts receivable balance, including accounts, net
of estimated contractual discounts, related to patients for
which eligibility for Medicaid coverage or uninsured discounts
was being evaluated.
Equity in earnings of affiliates increased from
$223 million for 2008 to $246 million for 2009. Equity
in earnings of affiliates relates primarily to our Denver,
Colorado market joint venture.
Depreciation and amortization decreased, as a percentage of
revenues, to 4.8% in 2009 from 5.0% in 2008. Depreciation
expense was $1.419 billion for 2009 and $1.412 billion
for 2008.
Interest expense declined to $1.987 billion for 2009 from
$2.021 billion for 2008. The decline in interest expense
was due to reductions in the average debt balance. Our average
debt balance was $26.267 billion for 2009 compared to
$27.211 billion for 2008. The average interest rate for our
long-term debt increased from 7.4% for 2008 to 7.6% for 2009.
Net losses on sales of facilities were $15 million for 2009
and included $8 million of net losses on the sales of three
hospital facilities and $7 million of net losses on sales
of real estate and other health care entity investments. Gains
on sales of facilities were $97 million for 2008 and
included $81 million of gains on the sales of two hospital
facilities and $16 million of net gains on sales of real
estate and other health care entity investments.
16
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results
of Operations (Continued)
Years
Ended December 31, 2009 and 2008 (Continued)
Impairments of long-lived assets were $43 million for 2009
and included $19 million related to goodwill and
$24 million related to property and equipment. Impairments
of long-lived assets were $64 million for 2008 and included
$48 million related to goodwill and $16 million
related to property and equipment.
The effective tax rate was 37.3% and 28.5% for 2009 and 2008,
respectively. The effective tax rate computations exclude net
income attributable to noncontrolling interests as it relates to
consolidated partnerships. Primarily as a result of reaching a
settlement with the IRS Appeals Division and the revision of the
amount of a proposed IRS adjustment related to prior taxable
periods, we reduced our provision for income taxes by
$69 million in 2008. Excluding the effect of these
adjustments, the effective tax rate for 2008 would have been
35.8%.
Net income attributable to noncontrolling interests increased
from $229 million for 2008 to $321 million for 2009.
The increase in net income attributable to noncontrolling
interests related primarily to growth in operating results of
hospital joint ventures in two Texas markets.
Liquidity
and Capital Resources
Our primary cash requirements are paying our operating expenses,
servicing our debt, capital expenditures on our existing
properties, acquisitions of hospitals and other health care
entities, distributions to stockholders and distributions to
noncontrolling interests. Our primary cash sources are cash
flows from operating activities, issuances of debt and equity
securities and dispositions of hospitals and other health care
entities.
Cash provided by operating activities totaled
$3.085 billion in 2010 compared to $2.747 billion in
2009 and $1.990 billion in 2008. Working capital totaled
$2.650 billion at December 31, 2010 and
$2.264 billion at December 31, 2009. The
$338 million increase in cash provided by operating
activities for 2010, compared to 2009, was primarily comprised
of the net impact of the $198 million increase in net
income, a $547 million improvement from lower income tax
payments and a $384 million decline from changes in
operating assets and liabilities and the provision for doubtful
accounts. The $757 million increase in cash provided by
operating activities for 2009, compared to 2008, related
primarily to the $473 million increase in net income and
$143 million improvement from changes in operating assets
and liabilities and the provision for doubtful accounts. Cash
payments for interest and income taxes declined
$387 million for 2010 compared to 2009 and increased
$203 million for 2009 compared to 2008.
Cash used in investing activities was $1.039 billion,
$1.035 billion and $1.467 billion in 2010, 2009 and
2008, respectively. Excluding acquisitions, capital expenditures
were $1.325 billion in 2010, $1.317 billion in 2009
and $1.600 billion in 2008. We expended $233 million,
$61 million and $85 million for acquisitions of
hospitals and health care entities during 2010, 2009 and 2008,
respectively. Expenditures for acquisitions in 2010 included two
hospital facilities, and in 2009 and 2008 were generally
comprised of outpatient and ancillary services entities. Planned
capital expenditures are expected to approximate
$1.6 billion in 2011. At December 31, 2010, there were
projects under construction which had an estimated additional
cost to complete and equip over the next five years of
$1.7 billion. We expect to finance capital expenditures
with internally generated and borrowed funds.
During 2010, we received cash proceeds of $37 million from
sales of other health care entities and real estate investments.
We also received net cash proceeds of $472 million related
to net changes in our investments. During 2009, we received cash
proceeds of $41 million from dispositions of three
hospitals and sales of other health care entities and real
estate investments. We also received net cash proceeds of
$303 million related to net changes in our investments.
During 2008, we received cash proceeds of $143 million from
dispositions of two hospitals and $50 million from sales of
other health care entities and real estate investments.
17
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity
and Capital Resources (Continued)
Cash used in financing activities totaled $1.947 billion in
2010, $1.865 billion in 2009 and $451 million in 2008.
During 2010, we paid $4.257 billion in distributions to our
stockholders and received net proceeds of $2.533 billion
from our debt issuance and debt repayment activities. During
2009 and 2008, we used cash proceeds from sales of facilities
and available cash provided by operations to make net debt
repayments of $1.459 billion and $260 million,
respectively. During 2010, we received contributions from
noncontrolling interests of $57 million. During 2010, 2009
and 2008, we made distributions to noncontrolling interests of
$342 million, $330 million and $178 million,
respectively. We paid debt issuance costs of $50 million
and $70 million for 2010 and 2009, respectively. During
2010, we received income tax benefits of $114 million for
certain items (primarily the cash distributions to holders of
our stock options) that were deductible expenses for tax
purposes, but were recognized as adjustments to
stockholders deficit for financial reporting purposes. We
or our affiliates, including affiliates of the Sponsors, may in
the future repurchase portions of our debt securities, subject
to certain limitations, from time to time in either the open
market or through privately negotiated transactions, in
accordance with applicable SEC and other legal requirements. The
timing, prices, and sizes of purchases depend upon prevailing
trading prices, general economic and market conditions, and
other factors, including applicable securities laws. Funds for
the repurchase of debt securities have, and are expected to,
come primarily from cash generated from operations and borrowed
funds.
In addition to cash flows from operations, available sources of
capital include amounts available under our senior secured
credit facilities ($1.314 billion as of December 31,
2010 and $1.523 billion as of January 31,
2011) and anticipated access to public and private debt
markets.
During 2010, our Board of Directors declared three distributions
to our stockholders and holders of stock options. The
distributions totaled $9.43 per share and vested stock option,
or $4.332 billion in the aggregate. The distributions were
funded using funds available under our existing senior secured
credit facilities, proceeds from the November 2010 issuance of
$1.525 billion aggregate principal amount of
73/4% senior
unsecured notes due 2021 and cash on hand.
On May 5, 2010, our Board of Directors granted approval for
the Company to file with the Securities and Exchange Commission
(SEC) a registration statement on
Form S-1
relating to a proposed initial public offering of its common
stock. We filed the
Form S-1
on May 7, 2010. In connection with the Corporate
Reorganization, on December 15, 2010, HCA Holdings,
Inc.s Board of Directors granted approval for the Company
to file with the SEC a registration statement on
Form S-1
relating to a proposed initial public offering of its common
stock. The
Form S-1
was filed on December 22, 2010, with HCA Inc. at the same
time filing a request to withdraw its registration statement on
Form S-1.
We intend to use the anticipated net proceeds to repay certain
of our existing indebtedness, as will be determined prior to our
offering, and for general corporate purposes. Upon completion of
the offering and in connection with our termination of the
management agreement we have with affiliates of the Investors,
we will be required to pay a termination fee based upon the net
present value of our future obligations under the management
agreement.
Investments of our professional liability insurance subsidiary,
to maintain statutory equity and pay claims, totaled
$742 million and $1.316 billion at December 31,
2010 and 2009, respectively. Investments were reduced during
2010 as a result of the insurance subsidiary distributing
$500 million of excess capital to the Company. The
insurance subsidiary maintained net reserves for professional
liability risks of $452 million and $590 million at
December 31, 2010 and 2009, respectively. Our facilities
are insured by our wholly-owned insurance subsidiary for losses
up to $50 million per occurrence; however, since January
2007, this coverage is subject to a $5 million per
occurrence self-insured retention. Net reserves for the
self-insured professional liability risks retained were
$796 million and $679 million at December 31,
2010 and 2009, respectively. Claims payments, net of reinsurance
recoveries, during the next 12 months are expected to
approximate $265 million. We estimate that approximately
18
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity
and Capital Resources (Continued)
$165 million of the expected net claim payments during the
next 12 months will relate to claims subject to the
self-insured retention.
Financing
Activities
Due to the Recapitalization, we are a highly leveraged company
with significant debt service requirements. Our debt totaled
$28.225 billion and $25.670 billion at
December 31, 2010 and 2009, respectively. Our interest
expense was $2.097 billion for 2010 and $1.987 billion
for 2009.
During March 2010, we issued $1.400 billion aggregate
principal amount of
71/4% senior
secured first lien notes due 2020 at a price of 99.095% of their
face value, resulting in $1.387 billion of gross proceeds.
After the payment of related fees and expenses, we used the
proceeds to repay outstanding indebtedness under our senior
secured term loan facilities. During November 2010, we issued
$1.525 billion aggregate principal amount of
73/4% senior
unsecured notes due 2021 at a price of 100% of their face value.
After the payment of related fees and expenses, we used the
proceeds to make a distribution to our stockholders and
optionholders. During February 2009, we issued $310 million
aggregate principal amount of
97/8% senior
secured second lien notes due 2017 at a price of 96.673% of
their face value, resulting in $300 million of gross
proceeds. During April 2009, we issued $1.500 billion
aggregate principal amount of
81/2% senior
secured first lien notes due 2019 at a price of 96.755% of their
face value, resulting in $1.451 billion of gross proceeds.
During August 2009, we issued $1.250 billion aggregate
principal amount of
77/8% senior
secured first lien notes due 2020 at a price of 98.254% of their
face value, resulting in $1.228 billion of gross proceeds.
After the payment of related fees and expenses, we used the
proceeds from these debt issuances to repay outstanding
indebtedness under our senior secured term loan facilities.
Management believes that cash flows from operations, amounts
available under our senior secured credit facilities and our
anticipated access to public and private debt markets will be
sufficient to meet expected liquidity needs during the next
twelve months.
19
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Contractual
Obligations and Off-Balance Sheet Arrangements
As of December 31, 2010, maturities of contractual
obligations and other commercial commitments are presented in
the table below (dollars in millions):
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations(a)
|
Total | Current | 2-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
Long-term debt including interest, excluding the senior secured
credit facilities(b)
|
$ | 29,803 | $ | 1,845 | $ | 4,824 | $ | 5,053 | $ | 18,081 | ||||||||||
Loans outstanding under the senior secured credit facilities,
including interest(b)
|
12,013 | 848 | 7,828 | 1,147 | 2,190 | |||||||||||||||
Operating leases(c)
|
1,876 | 269 | 466 | 293 | 848 | |||||||||||||||
Purchase and other obligations(c)
|
225 | 37 | 44 | 36 | 108 | |||||||||||||||
Total contractual obligations
|
$ | 43,917 | $ | 2,999 | $ | 13,162 | $ | 6,529 | $ | 21,227 | ||||||||||
Other Commercial Commitments Not Recorded on the |
Commitment Expiration by Period | |||||||||||||||||||
Consolidated Balance Sheet
|
Total | Current | 2-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
Surety bonds(d)
|
$ | 59 | $ | 52 | $ | 6 | $ | 1 | $ | | ||||||||||
Letters of credit(e)
|
82 | 9 | 41 | 32 | | |||||||||||||||
Physician commitments(f)
|
33 | 26 | 7 | | | |||||||||||||||
Guarantees(g)
|
2 | | | | 2 | |||||||||||||||
Total commercial commitments
|
$ | 176 | $ | 87 | $ | 54 | $ | 33 | $ | 2 | ||||||||||
(a) | We have not included obligations to pay net estimated professional liability claims ($1.248 billion at December 31, 2010, including net reserves of $452 million relating to the wholly-owned insurance subsidiary) in this table. The estimated professional liability claims, which occurred prior to 2007, are expected to be funded by the designated investment securities that are restricted for this purpose ($742 million at December 31, 2010). We also have not included obligations related to unrecognized tax benefits of $413 million at December 31, 2010, as we cannot reasonably estimate the timing or amounts of cash payments, if any, at this time. | |
(b) | Estimates of interest payments assume that interest rates, borrowing spreads and foreign currency exchange rates at December 31, 2010, remain constant during the period presented. | |
(c) | Amounts relate to future operating lease obligations, purchase obligations and other obligations and are not recorded in our consolidated balance sheet. Amounts also include physician commitments that are recorded in our consolidated balance sheet. | |
(d) | Amounts relate primarily to instances in which we have agreed to indemnify various commercial insurers who have provided surety bonds to cover self-insured workers compensation claims, utility deposits and damages for malpractice cases which were awarded to plaintiffs by the courts. These cases are currently under appeal and the bonds will not be released by the courts until the cases are closed. | |
(e) | Amounts relate primarily to various insurance programs and employee benefit plan obligations for which we have letters of credit outstanding. | |
(f) | In consideration for physicians relocating to the communities in which our hospitals are located and agreeing to engage in private practice for the benefit of the respective communities, we make advances to physicians, normally over a period of one year, to assist in establishing the physicians practices. The actual amount of these commitments to be advanced often depends upon the financial results of the physicians private practices |
20
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Contractual
Obligations and Off-Balance Sheet Arrangements
(Continued)
during the recruitment agreement payment period. The physician commitments reflected were based on our maximum exposure on effective agreements at December 31, 2010. | ||
(g) | We have entered into guarantee agreements related to certain leases. |
Market
Risk
We are exposed to market risk related to changes in market
values of securities. The investments in debt and equity
securities of our wholly-owned insurance subsidiary were
$734 million and $8 million, respectively, at
December 31, 2010. These investments are carried at fair
value, with changes in unrealized gains and losses being
recorded as adjustments to other comprehensive income. At
December 31, 2010, we had a net unrealized gain of
$10 million on the insurance subsidiarys investment
securities.
We are exposed to market risk related to market illiquidity.
Liquidity of the investments in debt and equity securities of
our wholly-owned insurance subsidiary could be impaired by the
inability to access the capital markets. Should the wholly-owned
insurance subsidiary require significant amounts of cash in
excess of normal cash requirements to pay claims and other
expenses on short notice, we may have difficulty selling these
investments in a timely manner or be forced to sell them at a
price less than what we might otherwise have been able to in a
normal market environment. At December 31, 2010, our
wholly-owned insurance subsidiary had invested $250 million
($251 million par value) in tax-exempt student loan auction
rate securities that continue to experience market illiquidity.
It is uncertain if auction-related market liquidity will resume
for these securities. We may be required to recognize
other-than-temporary
impairments on these long-term investments in future periods
should issuers default on interest payments or should the fair
market valuations of the securities deteriorate due to ratings
downgrades or other issue specific factors.
We are also exposed to market risk related to changes in
interest rates, and we periodically enter into interest rate
swap agreements to manage our exposure to these fluctuations.
Our interest rate swap agreements involve the exchange of fixed
and variable rate interest payments between two parties, based
on common notional principal amounts and maturity dates. The
notional amounts of the swap agreements represent balances used
to calculate the exchange of cash flows and are not our assets
or liabilities. Our credit risk related to these agreements is
considered low because the swap agreements are with creditworthy
financial institutions. The interest payments under these
agreements are settled on a net basis. These derivatives have
been recognized in the financial statements at their respective
fair values. Changes in the fair value of these derivatives,
which are designated as cash flow hedges, are included in other
comprehensive income, and changes in the fair value of
derivatives which have not been designated as hedges are
recorded in operations.
With respect to our interest-bearing liabilities, approximately
$3.037 billion of long-term debt at December 31, 2010
was subject to variable rates of interest, while the remaining
balance in long-term debt of $25.188 billion at
December 31, 2010 was subject to fixed rates of interest.
Both the general level of interest rates and, for the senior
secured credit facilities, our leverage affect our variable
interest rates. Our variable debt is comprised primarily of
amounts outstanding under the senior secured credit facilities.
Borrowings under the senior secured credit facilities bear
interest at a rate equal to an applicable margin plus, at our
option, either (a) a base rate determined by reference to
the higher of (1) the federal funds rate plus 0.50% and
(2) the prime rate of Bank of America or (b) a LIBOR
rate for the currency of such borrowing for the relevant
interest period. The applicable margin for borrowings under the
senior secured credit facilities may fluctuate according to a
leverage ratio. The average effective interest rate for our
long-term debt increased from 7.6% for 2009 to 7.8% for 2010.
On March 2, 2009, we amended our $13.550 billion and
1.000 billion senior secured cash flow credit facility,
dated as of November 17, 2006, as amended February 16,
2007 (the cash flow credit facility), to allow for
one or more future issuances of additional secured notes, which
may include notes that are secured on a pari passu basis
or
21
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Market
Risk (Continued)
on a junior basis with the obligations under the cash flow
credit facility, so long as (1) such notes do not require,
subject to certain exceptions, scheduled repayments, payment of
principal or redemption prior to the scheduled term loan B-1
maturity date, (2) the terms of such notes, taken as a
whole, are not more restrictive than those in the cash flow
credit facility and (3) no subsidiary of HCA Inc. that is
not a U.S. guarantor is an obligor of such additional
secured notes, and such notes are not secured by any European
collateral securing the cash flow credit facility. The
U.S. security documents related to the cash flow credit
facility were also amended and restated in connection with the
amendment in order to give effect to the security interests to
be granted to holders of such additional secured notes.
On March 2, 2009, we amended our $2.000 billion senior
secured asset-based revolving credit facility, dated as of
November 17, 2006, as amended and restated as of
June 20, 2007 (the ABL credit facility), to
allow for one or more future issuances of additional secured
notes or loans, which may include notes or loans that are
secured on a pari passu basis or on a junior basis with
the obligations under the cash flow credit facility, so long as
(1) such notes or loans do not require, subject to certain
exceptions, scheduled repayments, payment of principal or
redemption prior to the scheduled term loan B-1 maturity date,
(2) the terms of such notes or loans, as applicable, taken
as a whole, are not more restrictive than those in the cash flow
credit facility and (3) no subsidiary of HCA Inc. that is
not a U.S. guarantor is an obligor of such additional
secured notes. The amendment to the ABL credit facility also
altered the excess facility availability requirement to include
a separate minimum facility availability requirement applicable
to the ABL credit facility and increased the applicable LIBOR
and ABR margins for all borrowings under the ABL credit facility
by 0.25% each.
On June 18, 2009, the cash flow credit facility was amended
to permit the unlimited incurrence of new term loans to
refinance the term loans initially incurred as well as any
previously incurred refinancing term loans and to permit the
establishment of commitments under a replacement cash flow
revolver under the cash flow credit facility to replace all or a
portion of the revolving commitments initially established under
the cash flow credit facility as well as any previously issued
replacement revolvers. On April 6, 2010 the cash flow
credit facility was further amended to (i) extend the
maturity date for $2.0 billion of the tranche B term
loans from November 17, 2013 to March 31, 2017 and
(ii) increase the ABR margin and LIBOR margin with respect
to such extended term loans to 2.25% and 3.25%, respectively.
On November 8, 2010, an amended and restated joinder
agreement was entered into with respect to the cash flow credit
facility to establish a new replacement revolving credit series,
which will mature on November 17, 2015. The replacement
revolving credit commitments will become effective upon the
earlier of (i) our receipt of all or a portion of the
proceeds (including by way of contribution) from an initial
public offering of the common stock of HCA Inc. or its direct or
indirect parent company (the IPO Proceeds Condition)
and (ii) May 17, 2012, subject to the satisfaction of
certain other conditions. If the IPO Proceeds Condition has not
been satisfied, on May 17, 2012 or, if the IPO Proceeds
Condition has been satisfied prior to May 17, 2012, on
November 17, 2012, the applicable ABR and LIBOR margins
with respect to the replacement revolving loans will be
increased from the applicable ABR and LIBOR margins of the
existing revolving loans based upon the achievement of a certain
leverage ratio, which level will decrease from the levels of the
existing revolving loans.
The estimated fair value of our total long-term debt was
$28.738 billion at December 31, 2010. The estimates of
fair value are based upon the quoted market prices for the same
or similar issues of long-term debt with the same maturities.
Based on a hypothetical 1% increase in interest rates, the
potential annualized reduction to future pretax earnings would
be approximately $30 million. To mitigate the impact of
fluctuations in interest rates, we generally target a portion of
our debt portfolio to be maintained at fixed rates.
Our international operations and the European term loan expose
us to market risks associated with foreign currencies. In order
to mitigate the currency exposure related to debt service
obligations through December 31,
22
HCA
HOLDINGS, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Market
Risk (Continued)
2011 under the European term loan, we have entered into cross
currency swap agreements. A cross currency swap is an agreement
between two parties to exchange a stream of principal and
interest payments in one currency for a stream of principal and
interest payments in another currency over a specified period.
Financial
Instruments
Derivative financial instruments are employed to manage risks,
including foreign currency and interest rate exposures, and are
not used for trading or speculative purposes. We recognize
derivative instruments, such as interest rate swap agreements
and foreign exchange contracts, in the consolidated balance
sheets at fair value. Changes in the fair value of derivatives
are recognized periodically either in earnings or in
stockholders equity, as a component of other comprehensive
income, depending on whether the derivative financial instrument
qualifies for hedge accounting, and if so, whether it qualifies
as a fair value hedge or a cash flow hedge. Gains and losses on
derivatives designated as cash flow hedges, to the extent they
are effective, are recorded in other comprehensive income, and
subsequently reclassified to earnings to offset the impact of
the hedged items when they occur. Changes in the fair value of
derivatives not qualifying as hedges, and for any portion of a
hedge that is ineffective, are reported in earnings.
The net interest paid or received on interest rate swaps is
recognized as interest expense. Gains and losses resulting from
the early termination of interest rate swap agreements are
deferred and amortized as adjustments to expense over the
remaining period of the debt originally covered by the
terminated swap.
Effects
of Inflation and Changing Prices
Various federal, state and local laws have been enacted that, in
certain cases, limit our ability to increase prices. Revenues
for general, acute care hospital services rendered to Medicare
patients are established under the federal governments
prospective payment system. Total
fee-for-service
Medicare revenues approximated 23.5% in 2010, 22.8% in 2009 and
23.1% in 2008 of our revenues.
Management believes hospital industry operating margins have
been, and may continue to be, under significant pressure because
of changes in payer mix and growth in operating expenses in
excess of the increase in prospective payments under the
Medicare program. In addition, as a result of increasing
regulatory and competitive pressures, our ability to maintain
operating margins through price increases to non-Medicare
patients is limited.
IRS
Disputes
At December 31, 2010, we were contesting, before the IRS
Appeals Division, certain claimed deficiencies and adjustments
proposed by the IRS Examination Division in connection with its
audit of HCA Inc.s 2005 and 2006 federal income tax
returns. The disputed items include the timing of recognition of
certain patient service revenues, the deductibility of certain
debt retirement costs and our method for calculating the tax
allowance for doubtful accounts. In addition, eight taxable
periods of HCA Inc. and its predecessors ended in 1997 through
2004, for which the primary remaining issue is the computation
of the tax allowance for doubtful accounts, were pending before
the IRS Examination Division as of December 31, 2010. The
IRS Examination Division began an audit of HCA Inc.s 2007,
2008 and 2009 federal income tax returns in December 2010.
Management believes HCA Holdings, Inc., its predecessors and
affiliates properly reported taxable income and paid taxes in
accordance with applicable laws and agreements established with
the IRS and final resolution of these disputes will not have a
material, adverse effect on our results of operations or
financial position. However, if payments due upon final
resolution of these issues exceed our recorded estimates, such
resolutions could have a material, adverse effect on our results
of operations or financial position.
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