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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     .

COMMISSION FILE NUMBER: 333-117362

 

 

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-1150104

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

DOVER CENTRE

117 SEABOARD LANE, BUILDING E

FRANKLIN, TENNESSEE

  37067
(Address of principal executive offices)   (Zip Code)

(615) 844-2747

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ¨    NO  x

(Note: As a voluntary filer not subject to the filing requirements of Sections 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if it were subject to such filing requirements.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of August 14, 2014, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

     3   

Item 1. Financial Statements

     3   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     49   

Item 4. Controls and Procedures

     50   

PART II. OTHER INFORMATION

     50   

Item 1. Legal Proceedings

     50   

Item 1A. Risk Factors

     51   

Item 6. Exhibits

     51   

Signatures

     52   

 

2


Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

     June 30,      September 30,  
     2014      2013  
     (Unaudited)         
ASSETS      

Current assets

     

Cash and cash equivalents

   $ 317,643       $ 438,131   

Accounts receivable, less allowance for doubtful accounts of $232,819 and $255,725 at June 30, 2014 and September 30, 2013, respectively

     336,649         371,006   

Inventories

     58,282         57,781   

Deferred income taxes

     15,491         26,096   

Prepaid expenses and other current assets

     181,224         126,412   

Assets held for sale

     —           119,141   
  

 

 

    

 

 

 

Total current assets

     909,289         1,138,567   

Property and equipment, net

     843,138         833,169   

Goodwill

     815,585         816,410   

Other intangible assets, net

     23,497         25,957   

Other assets, net

     60,445         66,162   
  

 

 

    

 

 

 

Total assets

   $ 2,651,954       $ 2,880,265   
  

 

 

    

 

 

 
LIABILITIES AND EQUITY      

Current liabilities

     

Accounts payable

   $ 119,355       $ 129,542   

Salaries and benefits payable

     53,295         62,884   

Accrued interest payable

     9,682         27,519   

Medical claims payable

     69,108         57,514   

Other accrued expenses and other current liabilities

     61,308         92,553   

Current portion of long-term debt and capital lease obligations

     13,180         13,221   

Advance on divestiture

     —           144,803   

Liabilities held for sale

     —           3,208   
  

 

 

    

 

 

 

Total current liabilities

     325,928         531,244   

Long-term debt and capital lease obligations

     1,843,788         1,852,822   

Deferred income taxes

     114,460         115,592   

Other long-term liabilities

     117,482         123,120   

Non-controlling interests with redemption rights

     108,325         105,464   

Equity

     

Member’s equity

     132,263         142,262   

Non-controlling interests

     9,708         9,761   
  

 

 

    

 

 

 

Total equity

     141,971         152,023   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 2,651,954       $ 2,880,265   
  

 

 

    

 

 

 

See accompanying notes.

 

3


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands)

 

     Quarter Ended     Nine Months Ended  
     June 30,     June 30,  
     2014     2013     2014     2013  

Net revenue

        

Acute care revenue before provision for bad debts

   $ 556,318      $ 555,413      $ 1,692,779      $ 1,636,836   

Less: Provision for bad debts

     (83,437     (96,090     (281,931     (267,014
  

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     472,881        459,323        1,410,848        1,369,822   

Premium revenue

     200,281        139,804        524,995        422,059   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     673,162        599,127        1,935,843        1,791,881   

Costs and expenses

        

Salaries and benefits (includes stock-based compensation of $4,442, $947, $8,796 and $2,946, respectively)

     234,546        219,896        701,983        670,286   

Supplies

     80,411        79,462        243,437        240,724   

Medical claims

     165,943        116,640        436,754        348,556   

Rentals and leases

     18,796        13,992        56,429        40,635   

Other operating expenses

     114,933        106,456        325,012        309,987   

Medicare and Medicaid EHR incentives

     (2,790     (4,827     (10,233     (11,209

Interest expense, net

     32,275        32,771        98,325        99,987   

Depreciation and amortization

     23,276        24,492        71,860        72,606   

Management fees

     1,250        1,250        3,750        3,750   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     668,640        590,132        1,927,317        1,775,322   

Earnings from continuing operations before gain on disposal of assets and income taxes

     4,522        8,995        8,526        16,559   

Gain on disposal of assets, net

     332        481        1,100        649   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     4,854        9,476        9,626        17,208   

Income tax expense

     6,331        3,850        10,198        8,016   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings from continuing operations

     (1,477     5,626        (572     9,192   

Earnings (loss) from discontinued operations, net of income taxes

     (2,847     (531     1,821        849   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (4,324     5,095        1,249        10,041   

Net earnings attributable to non-controlling interests

     (2,453     (1,941     (8,857     (3,189
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (6,777   $ 3,154      $ (7,608   $ 6,852   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Thousands)

 

     Quarter Ended     Nine Months Ended  
     June 30,     June 30,  
     2014     2013     2014     2013  

Net earnings (loss)

   $ (4,324   $ 5,095      $ 1,249      $ 10,041   

Other comprehensive income

        

Change in fair value of highly effective interest rate hedges

     201        1,753        1,179        1,643   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before income taxes

     201        1,753        1,179        1,643   

Change in income tax expense

     (75     (651     (438     (611
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     126        1,102        741        1,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (4,198     6,197        1,990        11,073   

Net earnings attributable to non-controlling interests

     (2,453     (1,941     (8,857     (3,189
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (6,651   $ 4,256      $ (6,867   $ 7,884   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

(In Thousands)

 

     Non-controlling                    
     Interests with           Non-        
     Redemption     Member’s     controlling        
     Rights     Equity     Interests     Total Equity  

Balance at October 1, 2013

   $ 105,464      $ 142,262      $ 9,761      $ 152,023   

Net earnings (loss)

     8,851        (7,608     6        (7,602

Distributions to non-controlling interests

     (13,163     —          (59     (59

Repurchase of non-controlling interests

     (600     —          —          —     

Stock-based compensation

     —          8,796        —          8,796   

Other comprehensive income

     —          741        —          741   

Employee withholdings for taxes related to stock option exercise

     —          (1,838     —          (1,838

Acquisition related adjustments to redemption value of non-controlling interests with redemption rights

     235        —          —          —     

Other

     (2,530     (31     —          (31

Tax benefit from parent company

     —          9        —          9   

Adjustment to redemption value of non-controlling interests with redemption rights

     10,068        (10,068     —          (10,068
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 108,325      $ 132,263      $ 9,708      $ 141,971   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     Nine Months Ended  
     June 30,  
     2014     2013  

Cash flows from operating activities

    

Net earnings

   $ 1,249      $ 10,041   

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     71,860        72,606   

Amortization of loan costs

     5,559        5,760   

Change in physician minimum revenue guarantees

     2,266        2,718   

Amortization of deferred gain on sale-leaseback

     (1,872     —     

Stock-based compensation

     8,796        2,946   

Deferred income taxes

     (1,934     16,338   

Income tax benefit from stock-based compensation

     —          16   

Income tax benefit from parent company

     9        103   

Gain on disposal of assets, net

     (1,100     (649

Earnings from discontinued operations, net

     (1,821     (849

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

    

Accounts receivable, net

     (4,544     (22,880

Inventories, prepaid expenses and other current assets

     (41,570     (21,628

Accounts payable, other accrued expenses and other accrued liabilities

     (18,011     (55,578

Income taxes and other transaction costs payable related to sale-leaseback of real estate

     (22,270     —     
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities — continuing operations

     (3,383     8,944   

Net cash provided by (used in) operating activities — discontinued operations

     (7,161     3,967   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (10,544     12,911   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of property and equipment

     (81,402     (79,369

Cash received (paid) for acquisitions, net

     (1,038     3,584   

Proceeds from sale of assets

     1,510        83   

Change in other assets, net

     (173     (2,467

Other, net

     (3,025     —     
  

 

 

   

 

 

 

Net cash used in investing activities — continuing operations

     (84,128     (78,169

Net cash provided by (used in) investing activities — discontinued operations

     28        (4,318
  

 

 

   

 

 

 

Net cash used in investing activities

     (84,100     (82,487
  

 

 

   

 

 

 

Cash flows from financing activities

    

Payment of debt and capital lease obligations

     (10,184     (101,765

Proceeds from revolving credit facilities

     —          147,000   

Debt financing costs incurred

     —          (1,024

Distributions to non-controlling interests

     (13,222     (5,504

Cash received for the sale of non-controlling interests

     —          849   

Cash paid for the repurchase of non-controlling interests

     (600     (1,018

Other

     (1,838     12   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (25,844     38,550   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (120,488     (31,026

Cash and cash equivalents at beginning of period

     438,131        48,882   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 317,643      $ 17,856   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 111,176      $ 111,687   
  

 

 

   

 

 

 

Cash paid for income taxes, net

   $ 39,030      $ 2,122   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements as of and for the quarters and nine months ended June 30, 2014 and 2013, reflect the financial position, results of operations and cash flows of IASIS Healthcare LLC (“IASIS” or the “Company”). The Company’s sole member and parent company is IASIS Healthcare Corporation (“Holdings” or “IAS”).

IASIS owns and operates acute care hospitals primarily located in high-growth urban and suburban markets. At June 30, 2014, the Company owned or leased 16 acute care hospital facilities and one behavioral health hospital, with a total of 3,778 licensed beds, several outpatient service facilities and more than 137 physician clinics. The Company operates in various regions, including:

 

    Salt Lake City, Utah;

 

    Phoenix, Arizona;

 

    five cities in Texas, including Houston and San Antonio;

 

    West Monroe, Louisiana; and

 

    Las Vegas, Nevada.

The Company also owns and operates Health Choice Arizona, Inc. and related entities (“Health Choice” or the “Plan”) that constitute a provider-owned, managed care organization and insurer that delivers healthcare services to over 266,000 members through multiple health plans, integrated delivery systems and managed care solutions. The Plan is headquartered in Phoenix, Arizona.

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet of the Company at September 30, 2013, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 20, 2013.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year or any other future periods.

Principles of Consolidation

The unaudited condensed consolidated financial statements include all subsidiaries and entities under common control of the Company. Control is generally defined by the Company as ownership of a majority of the voting interest of an entity. In addition, control is demonstrated in most instances when the Company is the sole general partner in a limited partnership. Significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on the Company’s total assets or total liabilities and equity.

 

8


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

General and Administrative

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company include the IASIS corporate office costs, which were $18.3 million and $9.7 million for the quarters ended June 30, 2014 and 2013, respectively, and $51.0 million and $29.5 million for the nine months ended June 30, 2014 and 2013, respectively.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents balance primarily with high credit quality financial institutions. The Company manages its credit exposure by placing its investments in U.S. Treasury securities or other high quality securities, and by periodically evaluating the relative credit standing of the financial institution.

As discussed in Note 3, cash generated from certain asset dispositions may be subject to prepayment requirements under our senior credit agreement and indenture.

Stock-Based Compensation

Although IASIS has no stock option plan or outstanding stock options, the Company, through its parent, IAS, grants stock options for a fixed number of common shares to employees. The Company accounts for this stock-based incentive plan under the measurement and recognition provisions of Financial Accounting Standards Board (“FASB”) authoritative guidance regarding share-based payments (“Share-Based Payments Guidance”). Accordingly, the Company applies the fair value recognition provisions requiring all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on the estimated grant date fair value of each stock-based award. In accordance with the provisions of the Share-Based Payments Guidance, the Company uses the Black-Scholes-Merton model in determining the fair value of its share-based payments. The fair value of compensation costs for time-vested options will generally be amortized on a straight-line basis over the requisite service periods of the awards, generally equal to the awards’ vesting periods, while the fair value of compensation costs for options with market-based conditions are recognized on a graded schedule generally over the awards’ vesting periods.

On October 18, 2013, IAS distributed $115.0 million in a cash dividend to its common stockholders. In connection with this shareholder distribution, the board of directors of IAS authorized management to modify the exercise price of all outstanding stock options to provide protection against the dilutive impact of the common stock dividend on the outstanding options’ intrinsic value. On January 23, 2014, the Company reduced the exercise price for each grant by $7.86 per option. Accordingly, as a result of the modification, an additional $2.8 million of stock-based compensation was recognized in the second quarter of fiscal 2014.

During the quarter ended June 30, 2014, the Company completed certain equity transactions that included the following: (1) the issuance to certain employees of 756,000 options to purchase the common stock of IAS; (2) the exercise by option holders of 1,149,663 options with near-term expiration dates to purchase the common stock of IAS on cashless net settlement basis; (3) the issuance to employees of 992,000 restricted stock units (“RSUs”) that vest at the end of a three year service period; and (4) the exchange of 802,272 out-of-the-money options to purchase the common stock of IAS for RSUs on a 5-for-1 basis that vest at the end of a three year service period. In connection with these equity compensation instruments, the Company recognized $3.7 million of stock-based compensation during the quarter ended June 30, 2014.

Fair Value of Financial Instruments

The Company applies the provisions of FASB authoritative guidance regarding fair value measurements, which provides a single definition of fair value, establishes a framework for measuring fair value, and expands disclosures concerning fair value measurements. The Company applies these provisions to the valuation and disclosure of certain financial instruments. This authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices in active markets that can be accessed at the measurement date; (ii) Level 2, which is defined as inputs other than quoted prices in active markets that are observable, either directly or indirectly; and (iii) Level 3, which is defined as unobservable inputs resulting from the existence of little or no market data, therefore potentially requiring an entity to develop its own assumptions.

Cash and cash equivalents, accounts receivable, inventories, prepaid and other current assets, accounts payable, salaries payable, accrued interest, medical claims payable, and other accrued expenses and other current liabilities are reflected in

 

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Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

the accompanying unaudited condensed consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s capital leases and other long-term financing obligations also approximate carrying value as they bear interest at current market rates. The estimated fair values of the Company’s 8.375% senior notes due 2019 (the “Senior Notes”) and senior secured term loan facility were based upon quoted market prices at that date and are categorized as Level 2 within the fair value hierarchy.

The carrying values and fair values of the senior secured term loan facility and the Senior Notes as of June 30, 2014 and September 30, 2013 were as follows (in thousands):

 

     Carrying Amount      Fair Value  
     June 30,
2014
     September 30,
2013
     June 30,
2014
     September 30,
2013
 

Senior secured term loan facility

   $ 989,150       $ 996,154       $ 996,301       $ 1,003,258   

Senior Notes

     846,287         845,711         907,375         882,938   

The Company determines the fair value of its interest rate hedges in a manner consistent with that used by market participants in pricing hedging instruments, which includes using a discounted cash flow analysis based upon the terms of the agreements, the impact of the forward LIBOR curve and an evaluation of credit risk. Given the use of observable market assumptions and the consideration of credit risk, the Company has categorized the valuation of its interest rate hedges as Level 2.

Discontinued Operations

Effective October 1, 2013, the Company completed the sale of its Florida operations which primarily included three hospitals in the Tampa-St. Petersburg area and all related physician operations. Accordingly, the operating results and cash flows of the Florida operations are reported as discontinued operations for all periods presented. The aggregate proceeds from the sale were $144.8 million, which resulted in a gain on the sale of assets totaling $22.2 million in the nine months ended June 30, 2014. This gain is included in discontinued operations in the accompanying unaudited condensed consolidated statement of operations.

The following table provides the components of discontinued operations related to the Company’s Florida operations (in thousands):

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2014     2013     2014     2013  

Net revenue before provision for bad debts

   $ (1,325   $ 61,434      $ (7,604   $ 183,087   

Earnings (loss) before income taxes

     (4,711     (1,494     3,046        516   

Recent Accounting Pronouncements

Newly Adopted

In February 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 is required to be applied prospectively and is effective for fiscal years beginning after December 15, 2012, and interim periods within those years. The Company has adopted this authoritative guidance effective October 1, 2013. At June 30, 2014, the Company’s only component of accumulated other comprehensive loss relates to unrecognized changes in fair value of interest rate swaps. No reclassifications out of accumulated other comprehensive loss into net earnings (loss) were made during the quarter and nine months ended June 30, 2014, as the Company determined that these cash flow hedges were highly effective.

In July 2011, the FASB issued ASU No. 2011-06, “Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers”. Effective January 1, 2014, the Company adopted this new authoritative guidance relating to the recognition and income statement reporting of the mandated health insurer fee (“HIF”) to be paid to the federal government by health insurers, as part of Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or collectively, Health Reform Law, which is imposed for calendar years beginning after December 31, 2013. The HIF is based on a company’s share of the industry’s net premiums written during the preceding calendar year, and is payable on September 30 of each year.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The Company estimates Health Choice’s portion of the HIF for the 2014 calendar year to be approximately $7.9 million. The final calculation and payment of the HIF will occur in the Company’s fiscal fourth quarter of 2014. The HIF is non-deductible for federal income tax purposes. ASU 2011-06 addresses how the HIF should be recognized and classified in the financial statements of health insurers. In accordance with ASU 2011-06, the Company recorded the estimated liability for the HIF in full with a corresponding deferred asset that is being amortized to expense on a straight-line basis. The Company’s estimated liability for the HIF is recorded within other accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheet. The corresponding deferred asset is recorded within prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet. During the quarter and nine months ended June 30, 2014, the Company recognized $4.0 million in other operating expenses related to amortization of the HIF, with a remaining deferred cost asset balance of $3.9 million. No such amounts were recorded at September 30, 2013 as the qualifying insurance coverage was not provided until January 1, 2014. Because Health Choice primarily serves individuals in government-sponsored programs, Health Choice must secure additional reimbursement from state partners for this added cost. The Company recognizes HIF revenue when there is a contractual commitment from the state to reimburse Health Choice for the full economic impact of the health insurer fee. This HIF revenue is recognized ratably throughout the year.

Recently Issued

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Among other provisions and in addition to expanded disclosures, ASU 2014-08 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, ASU 2014-08 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale. The disclosure of this information is required for all of the same periods that are presented in the entity’s results of operations for the period. The provisions of ASU 2014-08 are effective prospectively for all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. In addition, ASU 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU 2014-09 will become effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the effect of the new revenue recognition guidance.

2. ACUTE CARE REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Acute Care Revenue

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Additionally, the Company offers discounts through its uninsured discount program to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans, or charity care.

Acute care revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. The Company also records a provision for bad debts related to uninsured accounts to reflect its self-pay

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

accounts receivable at the estimated amounts expected to be collected. The sources of the Company’s hospital net patient revenue by payor before the provision for bad debts are summarized as follows:

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2014     2013     2014     2013  

Medicare

     20.3     20.5     20.6     21.3

Managed Medicare

     10.1     9.8     10.1     10.0

Medicaid and managed Medicaid

     13.4     12.0     12.7     12.2

Managed care and other

     40.9     38.4     39.5     37.9

Self-pay

     15.3     19.3     17.1     18.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance For Doubtful Accounts

The provision for bad debts and the associated allowance for doubtful accounts relate primarily to amounts due directly from patients. The Company’s estimation of its allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors accounts receivable balances and the effectiveness of reserve policies on at least a quarterly and reviews various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following:

 

    Historical write-off and collection experience using a hindsight or look-back approach;

 

    Revenue and volume trends by payor, particularly the self-pay components;

 

    Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

 

    Cash collections as a percentage of net patient revenue less bad debts;

 

    Trending of days revenue in accounts receivable; and

 

    Various allowance coverage statistics.

The Company performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of the process for estimating the allowance for doubtful accounts. The Company does not pursue collection of amounts related to patients who qualify for charity care under the Company’s guidelines. Charity care accounts are deducted from gross revenue and do not affect the provision for bad debts.

At June 30, 2014 and September 30, 2013, the Company’s net self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $287.2 million and $336.2 million, respectively. At June 30, 2014 and September 30, 2013, the Company’s allowance for doubtful accounts was $232.8 million and $255.7 million, respectively.

3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consist of the following (in thousands):

 

     June 30,
2014
     September 30,
2013
 

Senior secured term loan facility

   $ 989,150       $ 996,154   

Senior Notes

     846,287         845,711   

Capital leases and other obligations

     21,531         24,178   
  

 

 

    

 

 

 
     1,856,968         1,866,043   

Less current maturities

     13,180         13,221   
  

 

 

    

 

 

 
   $ 1,843,788       $ 1,852,822   
  

 

 

    

 

 

 

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

As of June 30, 2014, the senior secured term loan facility balance reflects an original issue discount (“OID”) of $2.8 million, which is net of accumulated amortization of $2.3 million. The Senior Notes balance reflects an OID of $3.7 million, which is net of accumulated amortization of $2.4 million.

As of June 30, 2014 and September 30, 2013, capital leases and other obligations includes a financing obligation totaling $10.5 million and $11.1 million, respectively, resulting from the Company’s sale-leaseback transactions which closed on September 26, 2013.

$1.325 Billion Senior Secured Credit Facilities

The Company is party to a senior credit agreement, which was amended on February 20, 2013 (the “Repricing Amendment”) as part of a repricing that lowered the interest rate, (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility with a seven-year maturity and (2) a $300.0 million senior secured revolving credit facility with a five-year maturity, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date of the Repricing Amendment, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require installment payments.

Borrowings under the senior secured term loan facility (giving effect to the Repricing Amendment) bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at the Company’s option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain subsidiaries of the Company (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the Credit Facility Guarantors, (2) mortgage liens on all of the Company’s material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires the Company to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow. The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

8.375% Senior Notes due 2019

The Company, together with its wholly owned subsidiary IASIS Capital Corporation (“IASIS Capital”) (together, the “Issuers”), have issued $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The Company may redeem the Senior Notes, in whole or in part, at any time on or after May 15, 2014, at a price equal to 106.281% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date. Each subsequent year the redemption price declines 2.093% until 2017 and thereafter, at which point the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

The Indenture contains covenants that limit the Company’s (and its restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase the Company’s capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to the Company and its restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of the Company’s assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If the Company experiences certain kinds of changes of control, it must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, the Company will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

4. INTEREST RATE SWAPS

In August 2011, the Company executed forward starting interest rate swaps with Citibank N.A. and Barclays Bank PLC, as counterparties, with notional amounts totaling $350.0 million, each agreement effective March 28, 2013 and expiring between September 30, 2014 and September 30, 2016. Under these agreements, the Company is required to make quarterly fixed rate payments at annual rates ranging from 1.6% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to the Company based on the three-month LIBOR rate, each subject to a floor of 1.25%. The Company completed an assessment of these cash flow hedges during the quarters and nine months ended June 30, 2014 and 2013, and determined that these hedges were highly effective. Accordingly, no gain or loss related to these hedges has been reflected in the accompanying unaudited condensed consolidated statements of operations, and the change in fair value has been included in accumulated other comprehensive loss as a component of member’s equity.

 

     Total Notional
Amounts
 

Effective Dates

   (in thousands)  

Effective from March 28, 2013 to September 30, 2014

   $ 50,000   

Effective from March 28, 2013 to September 30, 2015

     100,000   

Effective from March 28, 2013 to September 30, 2016

     200,000   

The fair value of the Company’s interest rate hedges at June 30, 2014 and September 30, 2013, reflect liability balances of $4.7 million and $5.9 million, respectively, and are included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. The fair value of the Company’s interest rate hedges reflects a liability because the effect of the forward LIBOR curve on future interest payments results in less interest due to the Company under the variable rate component included in the interest rate hedging agreements, as compared to the amount due the Company’s counterparties under the fixed interest rate component.

5. GOODWILL

The following table presents the changes in the carrying amount of goodwill (in thousands):

 

     Acute
Care
    Health
Choice
     Total  

Balance at September 30, 2013

   $ 810,653      $ 5,757       $ 816,410   

Adjustments related to acquisitions

     (825     —          (825
  

 

 

   

 

 

    

 

 

 

Balance at June 30, 2014

   $ 809,828      $ 5,757       $ 815,585   
  

 

 

   

 

 

    

 

 

 

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

6. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss, net of income taxes, are as follows (in thousands):

 

     June 30,
2014
    September 30,
2013
 

Fair value of interest rate hedges

   $ (4,739   $ (5,918

Income tax benefit

     1,851       2,289   
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (2,888   $ (3,629
  

 

 

   

 

 

 

7. INCOME TAXES

For the quarter ended June 30, 2014, the Company recorded income tax expense of $6.3 million, for an effective tax rate of 130.4%, compared to an income tax expense of $3.9 million, for an effective tax rate of 40.6% in the prior year quarter. For the nine months ended June 30, 2014, the Company recorded income tax expense of $10.2 million, for an effective tax rate of 105.9%, compared to income tax expense of $8.0 million, for an effective tax rate of 46.6% in the prior year period. The increase in the effective tax rate was primarily due to an increase in certain nondeductible expenses including: (1) nondeductible compensation, including stock-based compensation; (2) a $1.1 million expense related to an excess of cumulative compensation deductions over the realized tax benefit upon the exercise of employee stock options; and (3) the HIF imposed by the Health Reform Law beginning in 2014, which is treated as a nondeductible excise tax.

8. COMMITMENTS AND CONTINGENCIES

Net Revenue

The calculation of appropriate payments from the Medicare and Medicaid programs, as well as terms governing agreements with other third-party payors, is complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.

Professional, General and Workers’ Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including but not limited to claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains professional and general liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At June 30, 2014 and September 30, 2013, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $67.3 million and $68.2 million, respectively.

The Company is subject to claims and legal actions in the ordinary course of business relative to workers’ compensation matters. To cover these types of claims, the Company maintains workers’ compensation insurance coverage with a self-insured retention. The Company accrues the costs of workers’ compensation claims based upon estimates derived from its claims experience.

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides managed healthcare services in exchange for fixed periodic and supplemental payments from the Arizona Health Care Cost Containment System (“AHCCCS”), the state of Utah’s Medicaid agency and the Centers for Medicare and Medicaid Services (“CMS”). These services are provided regardless of the actual costs incurred to provide these services. The Company receives reinsurance and other supplemental payments to cover certain costs of healthcare services that exceed certain thresholds. The Company believes that current capitated payments received, together with reinsurance and other supplemental payments, are sufficient to pay for the services Health Choice is obligated to deliver. As of June 30, 2014, the Company has provided a performance guaranty in the form of a letter of credit totaling $44.9 million for the benefit of AHCCCS to support Health Choice’s obligations under its contract to provide and pay for the healthcare services. The amount of the performance guaranty is generally based, in part, upon the membership in the Plan and the related capitation revenue paid to Health Choice.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Acquisitions

The Company has acquired and in the future may choose to acquire businesses with prior operating histories. Such businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures designed to conform business practices to its policies following the completion of any acquisition, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Other

In November 2010, the U.S. Department of Justice (“DOJ”) sent a letter to the Company requesting a 12-month tolling agreement in connection with an investigation into Medicare claims submitted by the Company’s hospitals in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) during the period 2003 to the present. At that time, neither the precise number of procedures, number of claims, nor the hospitals involved were identified by the DOJ. The Company understands that the government is conducting a national initiative with respect to ICD procedures involving a number of healthcare providers and is seeking information in order to determine if ICD implantation procedures were performed in accordance with Medicare coverage requirements. On January 11, 2011, the Company entered into the tolling agreement with the DOJ and, subsequently, the DOJ has provided the Company with a list of 194 procedures involving ICDs at 14 hospitals which are the subject of further medical necessity review by the DOJ. The Company is cooperating fully with the government and, to date, the DOJ has not asserted any claim against its hospitals. Applying the resolution model proposed by the DOJ, the Company believes that at least 131 of these procedure claims were properly documented for medical necessity and billed appropriately. The Company’s outside counsel has submitted to the DOJ summary justifications and supporting evidence relating to the medical claims at six of the Company’s hospitals. The Company continues to provide support for the remaining 63 of these cases that could have some likelihood of enforcement by the DOJ. If the Company is unable to place these claims in a non-enforcement or lesser enforcement category, the government may require repayment, which could impose a multiplier. Given the case-specific nature of the claims and the DOJ’s discretion to compromise claims, the Company is unable at this time to estimate any potential repayment obligation related to this matter. The tolling agreement between the Company and the government, as recently extended, is currently set to expire December 31, 2014.

On September 25, 2013, the Company voluntarily self-disclosed for resolution through the Self-Referral Disclosure Protocol established by CMS non-compliance by ten of its affiliated hospitals with a certain element of an exception of the Stark Law. Provisions of the Affordable Care Act that became effective on September 23, 2011 require, as an element of the Stark Law’s “whole-hospital” exception, that hospitals having physician ownership disclose such ownership on their public websites and in public advertising. The self-disclosure states that, on August 12, 2013, the Company discovered that the ten Company-affiliated hospitals partially owned by physicians did not consistently make such disclosures. The self-disclosure also states that, on August 13, 2013, the hospitals added the disclosures to those public websites that did not previously have them and began to include the disclosures in new public advertising. The self-disclosure explains that, as a result of the absence of the website and advertising disclosures, the referrals of direct and indirect physician owners (and physicians who are immediate family members of direct and indirect owners) to the physician-owned hospitals of Medicare beneficiaries did not consistently qualify for the Stark Law’s “whole-hospital” exception from September 23, 2011 through August 13, 2013. On October 21, 2013, the Company submitted a supplement to its self-disclosure, reporting Medicare payments to these hospitals for services resulting from referrals affected by the non-compliance and the hospitals’ profit distributions to physicians (and known immediate family members of physicians) with respect to their ownership interests in the hospitals during the same period. The Company has been in communication with CMS about resolving this matter but, at present, CMS has made no commitments, as a general matter or in this case, regarding the timing or substance of resolution of self-disclosed Stark Law noncompliance through the voluntary CMS Self-Referral Disclosure Protocol. As a result, the Company expresses no opinion as to its outcome other than to state that it could take up to one year or longer to resolve and, at this time, any repayment obligation or other penalties to be determined by CMS is unknown and not currently estimable.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9. SEGMENT INFORMATION

The Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):

 

     For the Quarter Ended June 30, 2014  
     Acute Care     Health Choice      Eliminations     Consolidated  

Acute care revenue before provision for bad debts

   $ 556,318      $ —         $ —        $ 556,318   

Less: Provision for bad debts

     (83,437     —           —          (83,437
  

 

 

   

 

 

    

 

 

   

 

 

 

Acute care revenue

     472,881        —           —          472,881   

Premium revenue

     —          200,281         —          200,281   

Revenue between segments

     3,262        —           (3,262     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net revenue

     476,143        200,281         (3,262     673,162   

Salaries and benefits (excludes stock-based compensation)

     221,175        8,929         —          230,104   

Supplies

     80,341        70         —          80,411   

Medical claims

     —          169,205         (3,262     165,943   

Rentals and leases

     18,348        448         —          18,796   

Other operating expenses (excludes expenses related to stock-based compensation)

     101,706        13,059         —          114,765   

Medicare and Medicaid EHR incentives

     (2,790     —           —          (2,790
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA(1)

     57,363        8,570         —          65,933   

Interest expense, net

     32,275        —           —          32,275   

Depreciation and amortization

     22,244        1,032         —          23,276   

Stock-based compensation and related expenses

     4,610        —           —          4,610   

Management fees

     1,250        —           —          1,250   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (3,016     7,538         —          4,522   

Gain on disposal of assets, net

     332        —           —          332   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

   $ (2,684   $ 7,538       $ —        $ 4,854   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

     For the Quarter Ended June 30, 2013  
     Acute Care     Health Choice      Eliminations     Consolidated  

Acute care revenue before provision for bad debts

   $ 555,413      $ —         $ —        $ 555,413   

Less: Provision for bad debts

     (96,090     —           —          (96,090
  

 

 

   

 

 

    

 

 

   

 

 

 

Acute care revenue

     459,323        —           —          459,323   

Premium revenue

     —          139,804         —          139,804   

Revenue between segments

     1,940        —           (1,940     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net revenue

     461,263        139,804         (1,940     599,127   

Salaries and benefits (excludes stock-based compensation)

     212,859        6,090         —          218,949   

Supplies

     79,422        40         —          79,462   

Medical claims

     —          118,580         (1,940     116,640   

Rentals and leases

     13,597        395         —          13,992   

Other operating expenses

     100,463        5,993         —          106,456   

Medicare and Medicaid EHR incentives

     (4,827     —           —          (4,827
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA(1)

     59,749        8,706         —          68,455   

Interest expense, net

     32,771        —           —          32,771   

Depreciation and amortization

     23,463        1,029         —          24,492   

Stock-based compensation

     947        —           —          947   

Management fees

     1,250        —           —          1,250   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings from continuing operations before gain on disposal of assets and income taxes

     1,318        7,677         —          8,995   

Gain on disposal of assets, net

     481        —           —          481   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings from continuing operations before income taxes

   $ 1,799      $ 7,677       $ —        $ 9,476   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

     For the Nine Months Ended June 30, 2014  
     Acute Care     Health Choice      Eliminations     Consolidated  

Acute care revenue before provision for bad debts

   $ 1,692,779      $ —         $ —        $ 1,692,779   

Less: Provision for bad debts

     (281,931     —           —          (281,931
  

 

 

   

 

 

    

 

 

   

 

 

 

Acute care revenue

     1,410,848        —           —          1,410,848   

Premium revenue

     —          524,995         —          524,995   

Revenue between segments

     8,539        —           (8,539     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net revenue

     1,419,387        524,995         (8,539     1,935,843   

Salaries and benefits (excludes stock-based compensation)

     669,527        23,660         —          693,187   

Supplies

     243,264        173         —          243,437   

Medical claims

     —          445,293         (8,539     436,754   

Rentals and leases

     55,264        1,165         —          56,429   

Other operating expenses (excludes expenses related to stock-based compensation

     296,401        28,443         —          324,844   

Medicare and Medicaid EHR incentives

     (10,233     —           —          (10,233
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA(1)

     165,164        26,261         —          191,425   

Interest expense, net

     98,325        —           —          98,325   

Depreciation and amortization

     68,723        3,137         —          71,860   

Stock-based compensation and related expenses

     8,964        —           —          8,964   

Management fees

     3,750        —           —          3,750   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (14,598     23,124         —          8,526   

Gain on disposal of assets, net

     1,100        —           —          1,100   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

   $ (13,498   $ 23,124       $ —        $ 9,626   
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment assets

   $ 2,303,767      $ 348,187         $ 2,651,954   
  

 

 

   

 

 

      

 

 

 

Capital expenditures

   $ 80,276      $ 1,126         $ 81,402   
  

 

 

   

 

 

      

 

 

 

Goodwill

   $ 809,828      $ 5,757         $ 815,585   
  

 

 

   

 

 

      

 

 

 

 

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Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

     For the Nine Months Ended June 30, 2013  
     Acute Care     Health Choice      Eliminations     Consolidated  

Acute care revenue before provision for bad debts

   $ 1,636,836      $ —         $ —        $ 1,636,836   

Less: Provision for bad debts

     (267,014     —           —          (267,014
  

 

 

   

 

 

    

 

 

   

 

 

 

Acute care revenue

     1,369,822        —           —          1,369,822   

Premium revenue

     —          422,059         —          422,059   

Revenue between segments

     5,334        —           (5,334     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net revenue

     1,375,156        422,059         (5,334     1,791,881   

Salaries and benefits (excludes stock-based compensation)

     649,720        17,620         —          667,340   

Supplies

     240,582        142         —          240,724   

Medical claims

     —          353,890         (5,334     348,556   

Rentals and leases

     39,443        1,192         —          40,635   

Other operating expenses

     292,488        17,499         —          309,987   

Medicare and Medicaid EHR incentives

     (11,209     —           —          (11,209
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA(1)

     164,132        31,716         —          195,848   

Interest expense, net

     99,987        —           —          99,987   

Depreciation and amortization

     69,510        3,096         —          72,606   

Stock-based compensation

     2,946        —           —          2,946   

Management fees

     3,750        —           —          3,750   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (12,061     28,620         —          16,559   

Gain on disposal of assets, net

     649        —           —          649   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

   $ (11,412   $ 28,620       $ —        $ 17,208   
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment assets

   $ 2,387,601      $ 319,505         $ 2,707,106   
  

 

 

   

 

 

      

 

 

 

Capital expenditures

   $ 78,830      $ 539         $ 79,369   
  

 

 

   

 

 

      

 

 

 

Goodwill

   $ 810,969      $ 5,757         $ 816,726   
  

 

 

   

 

 

      

 

 

 

 

(1) Adjusted EBITDA represents net earnings from continuing operations before interest expense, income tax expense, depreciation and amortization, stock-based compensation and related expenses, gain on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to TPG, the Company’s majority financial sponsor, and certain other members of IASIS Investment LLC, majority shareholder of IAS. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate hospital performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the unaudited condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Company’s Senior Secured Credit Facilities and may not be comparable to similarly titled measures of other companies.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

10. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes described in Note 3 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing domestic subsidiaries, other than non-guarantor subsidiaries, which include Health Choice and the Company’s non-wholly owned subsidiaries. The guarantees are subject to customary release provisions set forth in the Indenture for the Senior Notes.

Summarized unaudited condensed consolidating balance sheets at June 30, 2014 and September 30, 2013, unaudited condensed consolidating statements of operations for the quarters and nine months ended June 30, 2014 and 2013, unaudited condensed consolidating statements of comprehensive income (loss) for the quarters and nine months ended June 30, 2014 and 2013, and unaudited condensed consolidating statements of cash flows for the nine months ended June 30, 2014 and 2013, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below.

 

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Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet (unaudited)

June 30, 2014

(in thousands)

 

            Subsidiary     Subsidiary            Condensed  
     Parent Issuer      Guarantors     Non-Guarantors      Eliminations     Consolidated  
Assets             

Current assets

            

Cash and cash equivalents

   $ —         $ 304,805      $ 12,838       $ —        $ 317,643   

Accounts receivable, net

     —           88,725        247,924         —          336,649   

Inventories

     —           16,157        42,125         —          58,282   

Deferred income taxes

     15,491         —          —           —          15,491   

Prepaid expenses and other current assets

     —           31,423        149,801         —          181,224   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     15,491         441,110        452,688         —          909,289   

Property and equipment, net

     —           253,936        589,202         —          843,138   

Intercompany

     —           (109,718     109,718         —          —     

Net investment in and advances to subsidiaries

     2,051,151         —          —           (2,051,151     —     

Goodwill

     7,407         63,094        745,084         —          815,585   

Other intangible assets, net

     —           7,747        15,750         —          23,497   

Other assets, net

     22,853         26,813        10,779         —          60,445   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,096,902       $ 682,982      $ 1,923,221       $ (2,051,151   $ 2,651,954   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and Equity

            

Current liabilities

            

Accounts payable

   $ —         $ 39,927      $ 79,428       $ —        $ 119,355   

Salaries and benefits payable

     —           24,810        28,485         —          53,295   

Accrued interest payable

     9,682         (3,220     3,220         —          9,682   

Medical claims payable

     —           —          69,108         —          69,108   

Other accrued expenses and other current liabilities

     —           37,835        23,473         —          61,308   

Current portion of long-term debt and capital lease obligations

     10,071         3,109        23,605         (23,605     13,180   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     19,753         102,461        227,319         (23,605     325,928   

Long-term debt and capital lease obligations

     1,825,687         18,101        528,684         (528,684     1,843,788   

Deferred income taxes

     114,460         —          —           —          114,460   

Other long-term liabilities

     4,739         112,150        593         —          117,482   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,964,639         232,712        756,596         (552,289     2,401,658   

Non-controlling interests with redemption rights

     —           108,325        —           —          108,325   

Equity

            

Member’s equity

     132,263         332,237        1,166,625         (1,498,862     132,263   

Non-controlling interests

     —           9,708        —           —          9,708   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

     132,263         341,945        1,166,625         (1,498,862     141,971   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,096,902       $ 682,982      $ 1,923,221       $ (2,051,151   $ 2,651,954   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet (unaudited)

September 30, 2013

(in thousands)

 

            Subsidiary     Subsidiary            Condensed  
     Parent Issuer      Guarantors     Non-Guarantors      Eliminations     Consolidated  
Assets             

Current assets

            

Cash and cash equivalents

   $ —         $ 430,047      $ 8,084       $ —        $ 438,131   

Accounts receivable, net

     —           124,700        246,306         —          371,006   

Inventories

     —           16,015        41,766         —          57,781   

Deferred income taxes

     26,096         —          —           —          26,096   

Prepaid expenses and other current assets

     —           26,187        100,225         —          126,412   

Assets held for sale

     —           119,141        —           —          119,141   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     26,096         716,090        396,381         —          1,138,567   

Property and equipment, net

     —           234,910        598,259         —          833,169   

Intercompany

     —           (218,630     218,630         —          —     

Net investment in and advances to subsidiaries

     2,072,847         —          —           (2,072,847     —     

Goodwill

     7,407         65,246        743,757         —          816,410   

Other intangible assets, net

     —           7,957        18,000         —          25,957   

Other assets, net

     27,287         24,895        13,980         —          66,162   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,133,637       $ 830,468      $ 1,989,007       $ (2,072,847   $ 2,880,265   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and Equity

            

Current liabilities

            

Accounts payable

   $ —         $ 52,257      $ 77,285       $ —        $ 129,542   

Salaries and benefits payable

     —           28,686        34,198         —          62,884   

Accrued interest payable

     27,519         (3,229     3,229         —          27,519   

Medical claims payable

     —           —          57,514         —          57,514   

Other accrued expenses and other current liabilities

     —           75,900        16,653         —          92,553   

Current portion of long-term debt and capital lease obligations

     10,071         3,150        23,641         (23,641     13,221   

Advance on divestiture

     —           144,803        —           —          144,803   

Liabilities held for sale

     —           3,208        —           —          3,208   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     37,590         304,775        212,520         (23,641     531,244   

Long-term debt and capital lease obligations

     1,832,275         20,547        549,200         (549,200     1,852,822   

Deferred income taxes

     115,592         —          —           —          115,592   

Other long-term liabilities

     5,918         116,601        601         —          123,120   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,991,375         441,923        762,321         (572,841     2,622,778   

Non-controlling interests with redemption rights

     —           105,464        —           —          105,464   

Equity

            

Member’s equity

     142,262         273,320        1,226,686         (1,500,006     142,262   

Non-controlling interests

     —           9,761        —           —          9,761   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

     142,262         283,081        1,226,686         (1,500,006     152,023   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,133,637       $ 830,468      $ 1,989,007       $ (2,072,847   $ 2,880,265   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations (unaudited)

For the Quarter Ended June 30, 2014

(in thousands)

 

           Subsidiary     Subsidiary           Condensed  
     Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Net revenue

          

Acute care revenue before provision for bad debts

   $ —        $ 152,054      $ 407,526      $ (3,262   $ 556,318   

Less: Provision for bad debts

     —          (19,600     (63,837     —          (83,437
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     —          132,454        343,689        (3,262     472,881   

Premium revenue

     —          —          200,281        —          200,281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          132,454        543,970        (3,262     673,162   

Costs and expenses

          

Salaries and benefits

     4,442        88,511        141,593        —          234,546   

Supplies

     —          23,023        57,388        —          80,411   

Medical claims

     —          —          169,205        (3,262     165,943   

Rentals and leases

     —          6,612        12,184        —          18,796   

Other operating expenses

     —          25,604        89,329        —          114,933   

Medicare and Medicaid EHR incentives

     —          (791     (1,999     —          (2,790

Interest expense, net

     32,275        —          12,232        (12,232     32,275   

Depreciation and amortization

     —          8,660        14,616        —          23,276   

Management fees

     1,250        (8,498     8,498        —          1,250   

Equity in earnings of affiliates

     (23,413     —          —          23,413        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     14,554        143,121        503,046        7,919        668,640   

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (14,554     (10,667     40,924        (11,181     4,522   

Gain on disposal of assets, net

     —          332        —          —          332   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (14,554     (10,335     40,924        (11,181     4,854   

Income tax expense

     6,331        —          —          —          6,331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (20,885     (10,335     40,924        (11,181     (1,477

Earnings (loss) from discontinued operations, net of income taxes

     1,876        (4,723     —          —          (2,847
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (19,009     (15,058     40,924        (11,181     (4,324

Net earnings attributable to non-controlling interests

     —          (2,453     —          —          (2,453
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (19,009   $ (17,511   $ 40,924      $ (11,181   $ (6,777
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations (unaudited)

For the Quarter Ended June 30, 2013

(in thousands)

 

           Subsidiary     Subsidiary           Condensed  
     Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Net revenue

          

Acute care revenue before provision for bad debts

   $ —        $ 165,618      $ 391,735      $ (1,940   $ 555,413   

Less: Provision for bad debts

     —          (33,440     (62,650     —          (96,090
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     —          132,178        329,085        (1,940     459,323   

Premium revenue

     —          —          139,804        —          139,804   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          132,178        468,889        (1,940     599,127   

Costs and expenses

          

Salaries and benefits

     947        80,889        138,060        —          219,896   

Supplies

     —          23,624        55,838        —          79,462   

Medical claims

     —          —          118,580        (1,940     116,640   

Rentals and leases

     —          5,083        8,909        —          13,992   

Other operating expenses

     —          28,031        78,425        —          106,456   

Medicare and Medicaid EHR incentives

     —          (973     (3,854     —          (4,827

Interest expense, net

     32,771        —          14,702        (14,702     32,771   

Depreciation and amortization

     —          8,452        16,040        —          24,492   

Management fees

     1,250        (8,245     8,245        —          1,250   

Equity in earnings of affiliates

     (24,927     —          —          24,927        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     10,041        136,861        434,945        8,285        590,132   

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (10,041     (4,683     33,944        (10,225     8,995   

Gain on disposal of assets, net

     —          415        66        —          481   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (10,041     (4,268     34,010        (10,225     9,476   

Income tax expense

     2,179        —          1,671        —          3,850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (12,220     (4,268     32,339        (10,225     5,626   

Earnings (loss) from discontinued operations, net of income taxes

     672        (1,203     —          —          (531
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (11,548     (5,471     32,339        (10,225     5,095   

Net earnings attributable to non-controlling interests

     —          (1,941     —          —          (1,941
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (11,548   $ (7,412   $ 32,339      $ (10,225   $ 3,154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations (unaudited)

For the Nine Months Ended June 30, 2014

(in thousands)

 

           Subsidiary     Subsidiary           Condensed  
     Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Net revenue

          

Acute care revenue before provision for bad debts

   $ —        $ 462,240      $ 1,239,078      $ (8,539   $ 1,692,779   

Less: Provision for bad debts

     —          (72,125     (209,806     —          (281,931
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     —          390,115        1,029,272        (8,539     1,410,848   

Premium revenue

     —          —          524,995        —          524,995   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          390,115        1,554,267        (8,539     1,935,843   

Costs and expenses

          

Salaries and benefits

     8,796        269,568        423,619        —          701,983   

Supplies

     —          70,510        172,927        —          243,437   

Medical claims

     —          —          445,293        (8,539     436,754   

Rentals and leases

     —          19,794        36,635        —          56,429   

Other operating expenses

     —          72,965        252,047        —          325,012   

Medicare and Medicaid EHR incentives

     —          (3,769     (6,464     —          (10,233

Interest expense, net

     98,325        —          36,816        (36,816     98,325   

Depreciation and amortization

     —          28,876        42,984        —          71,860   

Management fees

     3,750        (25,727     25,727        —          3,750   

Equity in earnings of affiliates

     (77,791     —          —          77,791        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     33,080        432,217        1,429,584        32,436        1,927,317   

Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes

     (33,080     (42,102     124,683        (40,975     8,526   

Gain (loss) on disposal of assets, net

     —          1,312        (212     —          1,100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (33,080     (40,790     124,471        (40,975     9,626   

Income tax expense

     10,198        —          —          —          10,198   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (43,278     (40,790     124,471        (40,975     (572

Earnings (loss) from discontinued operations, net of income taxes

     (1,146     2,967        —          —          1,821   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (44,424     (37,823     124,471        (40,975     1,249   

Net earnings attributable to non-controlling interests

     —          (8,857     —          —          (8,857
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (44,424   $ (46,680   $ 124,471      $ (40,975   $ (7,608
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations (unaudited)

For the Nine Months Ended June 30, 2013

(in thousands)

 

           Subsidiary     Subsidiary           Condensed  
     Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Net revenue

          

Acute care revenue before provision for bad debts

   $ —        $ 479,303      $ 1,162,867      $ (5,334   $ 1,636,836   

Less: Provision for bad debts

     —          (89,398     (177,616     —          (267,014
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     —          389,905        985,251        (5,334     1,369,822   

Premium revenue

     —          —          422,059        —          422,059   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          389,905        1,407,310        (5,334     1,791,881   

Costs and expenses

          

Salaries and benefits

     2,946        244,352        422,988        —          670,286   

Supplies

     —          70,284        170,440        —          240,724   

Medical claims

     —          —          353,890        (5,334     348,556   

Rentals and leases

     —          14,646        25,989        —          40,635   

Other operating expenses

     —          71,881        238,106        —          309,987   

Medicare and Medicaid EHR incentives

     —          (5,505     (5,704     —          (11,209

Interest expense, net

     99,987        —          47,057        (47,057     99,987   

Depreciation and amortization

     —          25,230        47,376        —          72,606   

Management fees

     3,750        (24,494     24,494        —          3,750   

Equity in earnings of affiliates

     (73,311     —          —          73,311        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     33,372        396,394        1,324,636        20,920        1,775,322   

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (33,372     (6,489     82,674        (26,254     16,559   

Gain on disposal of assets, net

     —          570        79        —          649   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (33,372     (5,919     82,753        (26,254     17,208   

Income tax expense

     6,345        —          1,671        —          8,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (39,717     (5,919     81,082        (26,254     9,192   

Earnings (loss) from discontinued operations, net of income taxes

     (488     1,338        (1     —          849   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (40,205     (4,581     81,081        (26,254     10,041   

Net earnings attributable to non-controlling interests

     —          (3,189     —          —          (3,189
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (40,205   $ (7,770   $ 81,081      $ (26,254   $ 6,852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended June 30, 2014 (unaudited)

(In thousands)

 

           Subsidiary     Subsidiary            Condensed  
     Parent Issuer     Guarantors     Non-Guarantors      Eliminations     Consolidated  

Net earnings (loss)

   $ (19,009   $ (15,058   $ 40,924       $ (11,181   $ (4,324

Other comprehensive income

           

Change in fair value of highly effective interest rate hedges

     201        —          —           —          201   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income before income taxes

     201        —          —           —          201   

Change in income tax expense

     (75     —          —           —          (75
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     126        —          —           —          126   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

     (18,883     (15,058     40,924         (11,181     (4,198

Net earnings attributable to non-controlling interests

     —          (2,453     —           —          (2,453
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (18,883   $ (17,511   $ 40,924       $ (11,181   $ (6,651
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

28


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended June 30, 2013 (unaudited)

(In thousands)

 

           Subsidiary     Subsidiary            Condensed  
     Parent Issuer     Guarantors     Non-Guarantors      Eliminations     Consolidated  

Net earnings (loss)

   $ (11,548   $ (5,471   $ 32,339       $ (10,225   $ 5,095   

Other comprehensive income

           

Change in fair value of highly effective interest rate hedges

     1,753        —          —           —          1,753   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income before income taxes

     1,753        —          —           —          1,753   

Change in income tax expense

     (651     —          —           —          (651
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     1,102        —          —           —          1,102   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

     (10,446     (5,471     32,339         (10,225     6,197   

Net earnings attributable to non-controlling interests

     —          (1,941     —           —          (1,941
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (10,446   $ (7,412   $ 32,339       $ (10,225   $ 4,256   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

29


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Nine Months Ended June 30, 2014 (unaudited)

(In thousands)

 

           Subsidiary     Subsidiary            Condensed  
     Parent Issuer     Guarantors     Non-Guarantors      Eliminations     Consolidated  

Net earnings (loss)

   $ (44,424   $ (37,823   $ 124,471       $ (40,975   $ 1,249   

Other comprehensive income

           

Change in fair value of highly effective interest rate hedges

     1,179        —          —           —          1,179   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income before income taxes

     1,179        —          —           —          1,179   

Change in income tax expense

     (438     —          —           —          (438
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     741        —          —           —          741   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

     (43,683     (37,823     124,471         (40,975     1,990   

Net earnings attributable to non-controlling interests

     —          (8,857     —           —          (8,857
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (43,683   $ (46,680   $ 124,471       $ (40,975   $ (6,867
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

30


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Nine Months Ended June 30, 2013 (unaudited)

(In thousands)

 

           Subsidiary     Subsidiary            Condensed  
     Parent Issuer     Guarantors     Non-Guarantors      Eliminations     Consolidated  

Net earnings (loss)

   $ (40,205   $ (4,581   $ 81,081       $ (26,254   $ 10,041   

Other comprehensive income

           

Change in fair value of highly effective interest rate hedges

     1,643        —          —           —          1,643   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income before income taxes

     1,643        —          —           —          1,643   

Change in income tax expense

     (611     —          —           —          (611
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     1,032        —          —           —          1,032   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

     (39,173     (4,581     81,081         (26,254     11,073   

Net earnings attributable to non-controlling interests

     —          (3,189     —           —          (3,189
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (39,173   $ (7,770   $ 81,081       $ (26,254   $ 7,884   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

31


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended June 30, 2014 (unaudited)

(In thousands)

 

           Subsidiary     Subsidiary           Condensed  
     Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Cash flows from operating activities

          

Net earnings (loss)

   $ (44,424   $ (37,823   $ 124,471      $ (40,975   $ 1,249   

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —          28,876        42,984        —          71,860   

Amortization of loan costs

     5,559        —          —          —          5,559   

Change in physician minimum revenue guarantees

     —          222        2,044        —          2,266   

Amortization of deferred gain on sale-leaseback

     (1,872     —          —          —          (1,872

Stock-based compensation

     8,796        —          —          —          8,796   

Deferred income taxes

     (1,934     —          —          —          (1,934

Income tax benefit from parent company

     9        —          —          —          9   

Loss (gain) on disposal of assets, net

     —          (1,312     212        —          (1,100

Loss (earnings) from discontinued operations, net

     1,146        (2,967     —          —          (1,821

Equity in earnings of affiliates

     (77,791     —          —          77,791        —     

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

          

Accounts receivable, net

     —          (3,476     (1,068     —          (4,544

Inventories, prepaid expenses and other current assets

     —          (6,672     (34,898     —          (41,570

Accounts payable, other accrued expenses and other accrued liabilities

     (19,016     8,308        (7,303     —          (18,011

Income taxes and other transaction costs payable related to sale-leaseback of real estate

     (18,901     (1,048     (2,321     —          (22,270
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities — continuing operations

     (148,428     (15,892     124,121        36,816        (3,383

Net cash used in operating activities —discontinued operations

     —          (7,161     —          —          (7,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (148,428     (23,053     124,121        36,816        (10,544
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

          

Purchases of property and equipment

     —          (49,600     (31,802     —          (81,402

Cash paid for acquisitions, net

     —          (1,038     —          —          (1,038

Proceeds from sale of assets

     —          1,497        13        —          1,510   

Change in other assets, net

     —          (3,707     3,534        —          (173

Other, net

     —          (2,724     (301     —          (3,025
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities — continuing operations

     —          (55,572     (28,556     —          (84,128

Net cash provided by investing activities — discontinued operations

     —          28        —          —          28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (55,544     (28,556     —          (84,100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

          

Payment of debt and capital lease obligations

     (8,010     (100     (2,074     —          (10,184

Distributions to non-controlling interests

     —          (13,222     —          —          (13,222

Cash paid for the repurchase of non-controlling interests

     —          (600     —          —          (600

Other

     —          (1,838     —          —          (1,838

Change in intercompany balances with affiliates, net

     156,438        (30,885     (88,737     (36,816     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     148,428        (46,645     (90,811     (36,816     (25,844
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     —          (125,242     4,754        —          (120,488

Cash and cash equivalents at beginning of period

     —          430,047        8,084        —          438,131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 304,805      $ 12,838      $ —        $ 317,643   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended June 30, 2013 (unaudited)

(In thousands)

 

           Subsidiary     Subsidiary           Condensed  
     Parent Issuer     Guarantors     Non-Guarantors     Eliminations     Consolidated  

Cash flows from operating activities

          

Net earnings (loss)

   $ (40,205   $ (4,581   $ 81,081      $ (26,254   $ 10,041   

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —          25,230        47,376        —          72,606   

Amortization of loan costs

     5,760        —          —          —          5,760   

Change in physician minimum revenue guarantee

     —          221        2,497        —          2,718   

Stock-based compensation

     2,946        —          —          —          2,946   

Deferred income taxes

     16,338        —          —          —          16,338   

Income tax benefit from stock-based compensation

     16        —          —          —          16   

Income tax benefit from parent company

     103        —          —          —          103   

Loss on disposal of assets, net

     —          (570     (79     —          (649

Loss (earnings) from discontinued operations, net

     488        (1,338     1        —          (849

Equity in earnings of affiliates

     (73,311     —          —          73,311        —     

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

          

Accounts receivable, net

     —          9,557        (32,437     —          (22,880

Inventories, prepaid expenses and other current assets

     —          (20,254     (1,374     —          (21,628

Accounts payable, other accrued expenses and other accrued liabilities

     (19,621     (13,375     (22,582     —          (55,578
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities — continuing operations

     (107,486     (5,110     74,483        47,057        8,944   

Net cash provided by operating activities —discontinued operations

     —          3,967        —          —          3,967   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (107,486     (1,143     74,483        47,057        12,911   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

          

Purchases of property and equipment

     —          (41,596     (37,773     —          (79,369

Cash received (paid) for acquisitions, net

     —          (849     4,433        —          3,584   

Proceeds from sale of assets

     —          6        77        —          83   

Change in other assets, net

     —          3,287        (5,754     —          (2,467
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities — continuing operations

     —          (39,152     (39,017     —          (78,169

Net cash used in investing activities — discontinued operations

     —          (4,318     —          —          (4,318
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (43,470     (39,017     —          (82,487
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

          

Payment of debt and capital lease obligations

     (94,598     (4,689     (2,478     —          (101,765

Proceeds from revolving credit facilities

     147,000        —          —          —          147,000   

Debt financing costs incurred

     (1,024     —          —          —          (1,024

Distributions to non-controlling interests

     —          (5,504     —          —          (5,504

Cash received for the sale of non-controlling interests

     —          849        —          —          849   

Cash paid for the repurchase of non-controlling interest

     —          (1,018     —          —          (1,018

Other

     —          1,065        (1,053     —          12   

Change in intercompany balances with affiliates, net

     56,108        27,457        (36,508     (47,057     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     107,486        18,160        (40,039     (47,057     38,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     —          (26,453     (4,573     —          (31,026

Cash and cash equivalents at beginning of period

     —          39,219        9,663        —          48,882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 12,766      $ 5,090      $ —        $ 17,856   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this report. Data for the quarters and nine months ended June 30, 2014 and 2013, have been derived from our unaudited condensed consolidated financial statements. References herein to “we,” “our” and “us” are to IASIS Healthcare LLC and its subsidiaries. References herein to “IAS” are to IASIS Healthcare Corporation, our parent company.

FORWARD LOOKING STATEMENTS

Some of the statements we make in this report are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Those risks and uncertainties include, among others, changes in governmental healthcare programs that could reduce our revenues, including the impact of sequestration; the uncertain impact of federal health reform; the possibility of Health Choice Arizona, Inc.’s (“Health Choice” or the “Plan”), contract with the Arizona Health Care Cost Containment System (“AHCCCS”) being discontinued and changes in the payment structure under that contract, as well as an inability to control costs at Health Choice; shifts in payor mix from commercial and managed care payors to Medicaid and managed Medicaid; our ability to retain and negotiate reasonable contracts with managed care plans; a growth in the level of uncompensated care at our hospitals; our ability to recruit and retain quality physicians and medical professionals; competition from other hospitals and healthcare providers impacting our patient volume; our failure to continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment; the federal health reform law’s significant restrictions on hospitals that have physician owners; a failure of our information systems that would adversely affect our ability to properly manage our operations; failure to effectively and timely implement electronic health record systems; claims brought against our facilities for malpractice, product liability and other legal grounds; difficulties with the integration of acquisitions that may disrupt our ongoing operations; our dependence on key management personnel; potential responsibilities and costs under environmental laws; the possibility of a decline in the fair value of our reporting units that could result in a material non-cash charge to earnings; the risks and uncertainties related to our ability to generate sufficient cash to service our existing indebtedness; our substantial level of indebtedness; the possibility of an increase in interest rates, which would increase the cost of servicing our debt; and the risks associated with us being owned by equity sponsors who have the ability to control our financial decisions. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties, among others discussed in this report, are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the Securities and Exchange Commission (the “SEC”).

Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

EXECUTIVE OVERVIEW

We are a leading provider of high quality, affordable healthcare services primarily in high-growth urban and suburban markets. As of June 30, 2014, we owned or leased 16 acute care hospital facilities and one behavioral health hospital, with a total of 3,778 licensed beds, several outpatient service facilities, and more than 137 physician clinics. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. We operate in various regions, including:

 

    Salt Lake City, Utah;

 

    Phoenix, Arizona;

 

    five cities in Texas, including Houston and San Antonio;

 

    West Monroe, Louisiana; and

 

    Las Vegas, Nevada.

We also own and operate Health Choice, a provider-owned, managed care organization and insurer that delivers healthcare services to over 266,000 members through multiple health plans, integrated delivery systems and managed care solutions. The Plan is headquartered in Phoenix, Arizona.

 

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In May 2014, Health Choice entered into an agreement with Humana Medical Plan, Inc. (“Humana”), under which Health Choice will provide administrative and managed care services to approximately 80,000 Humana managed Medicaid plan members in the state of Florida. During the quarter and nine months ended June 30, 2014, we incurred $2.0 million and $3.0 million, respectively, in startup related costs associated with Health Choice’s new third-party administration and management services organization business.

Significant Industry Trends

The following sections discuss recent trends that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and health plan operations and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.

The Impact of Health Reform

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”) expands coverage of previously uninsured individuals, largely through expansion of Medicaid coverage and establishment of insurance exchanges (“Exchanges”) where individuals may purchase coverage. The Health Reform Law also contains an “individual mandate” that imposes financial penalties on individuals who fail to carry health insurance and employers that do not provide health insurance. In addition, the Health Reform Law reforms certain aspects of health insurance, reduces government reimbursement rates, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, places restrictions on physician-owned hospitals and contains provisions intended to strengthen fraud and abuse enforcement.

As of April 15, 2014, the federal government has released information indicating that approximately 8.5 million individuals have enrolled in healthcare coverage through the Exchanges. Of those enrolled, the federal government states that approximately 80% of those have paid the related premiums, and 83% have selected plans including financial assistance. While the most significant provisions of the Health Reform Law that result in reducing the number of uninsured individuals generally became effective January 1, 2014, the employer mandate, which requires companies with 50 or more employees to provide health insurance or pay fines, as well as insurer reporting requirements, has been delayed until January 1, 2015. For employers with 50 to 99 employees, this requirement has been further delayed until January 1, 2016. Additionally, a number of state governors and legislatures, including Texas and Louisiana, have chosen not to participate in the expanded Medicaid program at this time; however, these states could choose to implement the expansion at a later date. While some states have currently chosen not to participate, other states such as Arizona and Nevada have expanded their Medicaid programs.

Because of the many variables involved, including the law’s complexity, the lack of implementing regulations or interpretive guidance for all of its provisions, gradual and partially delayed implementation, court challenges, possible reductions in funding by the U.S. Congress (“Congress”) and future reductions in Medicare and Medicaid reimbursement, the impact of the Health Reform Law, including how individuals and businesses will respond to the new choices and obligations under the law, is not yet fully known. We believe, however, that trends toward pay-for-performance reimbursement models focused on quality and cost control, which are encouraged by the Health Reform Law, are taking hold among private health insurers and will continue to do so.

One notable provision of the Health Reform Law is an annual health insurer fee (“HIF”) that applies to most health plans, including commercial health plans and Medicaid managed care plans like Health Choice. While characterized as a “fee” in the text of the Health Reform Law, the intent of Congress was to impose a broad based health insurance industry excise tax, with the understanding that the tax could be passed on to consumers, most likely through higher commercial insurance premiums. However, because Medicaid is a government-funded program, Medicaid health plans have no alternative but to look to their respective state partners for payment to offset the impact of this tax. We continue to work with our state partners to obtain reimbursement for the economic impact of this fee, and currently anticipate to be reimbursed in full. Currently, we project that our HIF payable by September 30, 2014 will be approximately $7.9 million.

Two Midnight Rule

In the Medicare program’s hospital inpatient prospective payment system (“IPPS”) final rule for federal fiscal year 2014, the Centers for Medicare and Medicaid Services (“CMS”) issued the “two midnight rule,” which revised its longstanding guidance to hospitals and physicians relating to when hospital inpatient admissions are deemed to be reasonable and necessary for payment under Medicare Part A. Under the two midnight rule, in addition to services that are designated as inpatient-only, surgical procedures, diagnostic tests and other treatments are generally appropriate for inpatient hospital admission and payment under Medicare Part A when the physician (i) expects the beneficiary to require a stay that crosses at least two midnights and (ii) admits the beneficiary to the hospital based upon that expectation. Conversely, hospital stays in which the physician expects the beneficiary to require care that spans less than two midnights are generally inappropriate for payment under Medicare Part A, and should be treated and billed as outpatient services under Part B.

While the IPPS final rule for federal fiscal year 2014 became effective on October 1, 2013, CMS initially indicated that, for a period of 90 days after the effective date of the rule, it would not permit recovery auditors and other Medicare review contractors to review inpatient admissions of one midnight or less that began between October 1, 2013 and December 31, 2013. CMS subsequently extended that delay to inpatient admissions that occur on or prior to September 30, 2014. CMS did, however, instruct Medicare Administrative Contractors (“MACs”) to review, on a pre-payment basis, a small sample (approximately 10 – 25) of inpatient hospital claims relating to admissions that occur between March 31, 2014 and September 30, 2014, and that span less than two midnights after admission in order to determine each hospital’s compliance with the new inpatient admission and medical review criteria. Hospitals can rebill denied inpatient hospital admissions in accordance with the rule.

 

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On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014 (the “PAM Act”) into law. Among other things, the PAM Act extends the delay of the enforcement of the two midnight rule by recovery auditor and other Medicare review contractors through March 31, 2015, and authorizes CMS to continue to allow MACs to review, on a pre-payment basis, a small sample of inpatient hospital claims relating to admissions that span less than two midnights and that occur between March 31, 2014, and March 31, 2015, in order to determine hospital compliance with the new inpatient admission and medical review criteria.

We cannot predict whether Congress or CMS will further delay the review of inpatient admissions of one midnight or less by recovery auditors or other Medicare review contractors, the impact that any such reviews will have on our business and results of operations, or when they are allowed by CMS. In addition, legislation has been introduced in Congress that, among other things, would both generally prohibit Medicare review contractors from denying claims due to the length of a patient’s stay or a determination that services could have been provided in an outpatient setting and require CMS to develop a new payment methodology for services that are provided during short inpatient hospital stays. Federal lawsuits have also been filed challenging the two midnight rule primarily on the grounds that the implementation of the rule itself, and the payment reduction associated with the rule (i.e., 0.2% IPPS payment reduction to hospitals) violate the Administrative Procedure Act. We cannot predict whether legislation will be adopted or, if adopted, the amount of reimbursement that would be paid under any alternative payment methodology that would be developed by CMS. We also cannot predict whether federal court challenges to the two midnight rule will be successful.

Budget Control Act and Sequestration

The Budget Control Act of 2011 (the “BCA”) increased the nation’s borrowing authority and takes steps to reduce federal spending and the deficit. The deficit reduction portion of the BCA imposes caps, which began in federal fiscal year 2012, that reduce discretionary spending by more than $900 billion over ten years. The BCA also requires automatic spending reductions of $1.2 trillion for federal fiscal years 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. The spending reductions have been extended through 2024. These automatic spending reductions are commonly referred to as “sequestration.” The spending reductions are split evenly between defense and non-defense discretionary spending, although certain programs (including Medicaid and Children’s Health Insurance Programs (“CHIP”)), are exempt from these automatic spending reductions, and Medicare expenditures cannot be reduced by more than two percent. Sequestration began on March 1, 2013, with CMS imposing a two percent reduction on Medicare claims beginning April 1, 2013. We are unable to predict what other deficit reduction initiatives may be proposed by the President or Congress or whether the President and the Congress will restructure or suspend sequestration. It is possible that changes in the law to end or restructure sequestration will result in greater spending reductions than currently required by the BCA.

Value-Based Reimbursement

The trend in the healthcare industry continues towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting and financial incentives tied to the quality and efficiency of care provided by facilities. The Health Reform Law expands the use of value-based purchasing initiatives in federal healthcare programs. We expect programs of this type to become more common in the healthcare industry.

In addition, managed care organizations are implementing programs that condition payment on performance against specified measures. The quality measurement criteria used by managed care and commercial payors may be similar to or even more stringent than Medicare requirements.

As we expect these trends towards value-based purchasing of healthcare services by Medicare and other payors to continue, we believe that our position as a high-quality, low cost provider in certain of our markets will prove beneficial as we continue to move towards a quality and value-based reimbursement system. Because of these trends, if we are unable to meet or exceed quality of care standards in our facilities, our operating results could be significantly impacted in the future.

State Medicaid Budgets

Over recent years, the states in which we operate experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. The states in which we operate responded to these budget concerns, by decreasing funding for Medicaid and other healthcare programs or by making structural changes that resulted in a reduction in hospital reimbursement. In addition, many states have received waivers from CMS in order to implement or expand managed Medicaid programs.

 

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Texas

The Texas legislature and the Texas Health and Human Services Commission (“THHSC”) recommended expanding Medicaid managed care enrollment in the state, and in December 2011, CMS approved a five-year Medicaid waiver that: (1) allows Texas to expand its Medicaid managed care program while preserving hospital funding; (2) provides incentive payments for improvements in healthcare delivery; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. Certain of our acute care hospitals currently receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs for the quarter and nine months ended June 30, 2014, was $17.6 million and $53.6 million, respectively, compared to $16.5 million and $45.7 million in the prior year periods. Under the Medicaid waiver, funds are distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities’ care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination will be controlled primarily by government-owned public hospitals that serve the surrounding geographic areas. Complexities of the underlying methodologies in determining the funding for the state’s Medicaid supplemental reimbursement programs, along with a lack of sufficient resources at THHSC to administer the programs, has resulted in a delay in related reimbursements. As of June 30, 2014, we had $73.6 million in receivables due to our Texas hospitals in connection with these supplemental Medicaid reimbursement programs, including amounts due under the Texas Medicaid Disproportionate Share Hospital program (“Texas Medicaid DSH”), compared to receivables of $66.8 million at September 30, 2013. During the quarter ended June 30, 2014, we received cash of $37.0 million from the state of Texas related to the supplemental Medicaid reimbursement programs.

The THHSC has released proposed rules to change the Texas Medicaid DSH methodology for the state’s fiscal year 2014 and 2015. While changes to the Texas Medicaid DSH methodology have been proposed, details regarding its computation for the state’s upcoming fiscal year have not yet been finalized. Because deliberations regarding the Texas Medicaid DSH program are ongoing, we are unable to estimate the financial impact, if any, that proposed program changes may have on our results of operations. Texas has appropriated $160.0 million for fiscal year 2014 and $140.0 million for fiscal year 2015 to stabilize and improve the Texas Medicaid DSH program, including providing rate adjustments to recognize improvements in quality of patient care, the most appropriate use of care, and patient outcomes. These appropriations provide that the funding is contingent on “measurable progress” by THHSC toward a long-term plan. Funds appropriated for in 2015 may not be spent before the plan is finalized. During the quarter and nine months ended June 30, 2014, we recognized $7.5 million and $22.6 million, respectively, in Texas Medicaid DSH revenues, compared to $7.1 million and $21.4 million in the prior year periods.

Arizona

Beginning in July 2011, in an effort to control its budgeted expenditures and balance its budget, the state of Arizona implemented a plan to reduce its eligible Medicaid beneficiaries, particularly childless adults. Following implementation of this plan by the state of Arizona, Health Choice experienced a significant decline through the end of our fiscal year 2013 in its enrollees, premium revenue and earnings.

Effective January 1, 2014, Arizona expanded its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that was previously eliminated. The expansion of the state’s Medicaid program under the Health Reform Law could potentially result in the addition of approximately 370,000 people to its Medicaid rolls. As a result of the Medicaid expansion, enrollment at Health Choice increased 10.4% for the quarter ended June 30, 2014, compared to the prior year quarter. In addition, in connection with the expanded Medicaid coverage, the state implemented a provider assessment effective January 1, 2014, to fund a portion of the expanded eligibility related to the childless adult population. During the quarter and nine months ended June 30, 2014, we incurred $1.3 million and $2.6 million, respectively, in provider tax assessments.

If additional Medicaid program changes are implemented in the future in Arizona or other states in which we operate, our revenue and earnings could be significantly impacted.

Physician Alignment and Clinical Integration

In an effort to meet community needs and address coverage issues, we have made significant investments in order to align with physicians through various recruitment and employment strategies, as well as alternative means of alignment such as our formation of provider networks in certain markets. We believe that physician alignment promotes clinical integration, enhances quality of care and makes us more efficient and competitive in a healthcare environment trending toward value-based purchasing and pay-for-performance.

As we continue to focus on our physician alignment and integration strategies, we face significant competition for skilled physicians in certain of our markets as more hospital providers adopt a physician staffing model approach, coupled with a general

 

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shortage of physicians across most specialties. This increased competition has resulted in efforts by managed care organizations to align with certain provider networks in the markets in which we operate. In response, we have formed our own provider networks in certain markets that include both employed and non-affiliated physicians, providing the infrastructure through which we are able to contract more efficiently with commercial payors, position ourselves for value based reimbursement and promote clinical integration. While we expect that employing physicians provides relief on cost pressures associated with on-call coverage and other professional fees, we anticipate the addition of new employed physicians would result in increased labor and other start-up related costs as we integrated the physicians and their related support staff into our healthcare delivery systems.

We also face risk from competition for outpatient business. We expect to mitigate this risk through continued focus on our physician employment strategy, the development of new access points of care, our commitment to capital investment in our hospitals, including updated technology and equipment, and our commitment to our quality of care initiatives that some competitors, including individual physicians or physician groups, may not be equipped to implement.

Uncompensated Care

While the amount of uncompensated care, including discounts to the uninsured, bad debts and charity care, we deliver to the communities we serve continues to remain high in comparison to historical levels, we have experienced improvement during the quarter and nine months ended June 30, 2014. During the quarter ended June 30, 2014, our uncompensated care as a percentage of acute care revenue was 20.6%, compared to 23.5% in the prior year quarter. During the nine months ended June 30, 2014, our uncompensated care as a percentage of acute care revenue was 22.3%, compared to 23.9% in the prior year period. We believe the improvement in our uncompensated care as a percentage of acute care revenue can be attributed primarily to the impact of Medicaid expansion in the state of Arizona, which has resulted in lower self-pay volume and revenue for the quarter and nine months ended June 30, 2014, compared to the same prior year periods. During the quarter ended June 30, 2014, our self-pay admissions represented 6.0% of our total admissions, compared to 8.0% in the prior year quarter. During the nine months ended June 30, 2014, our self-pay admissions represented 7.0% of our total admissions, compared to 7.9% in the prior year period. The improvement in our uncompensated care as a percentage of acute care revenue has been mitigated somewhat by the higher acuity levels at which self-pay patients are presenting for treatment through our emergency rooms.

Additionally, the declines in our self-pay volume and revenue are being aided by increasing benefits from recent Exchange enrollment, given that certain Exchange enrollees previously were included in the uninsured population. During the quarter ended June 30, 2014, we experienced 305 Exchange related admissions, compared to 103 in the sequential quarter ended March 31, 2014.

We would expect uninsured volumes to continue to decline in the near future as the impact of the Health Reform Law is fully realized. However, if we were to experience growth in uninsured volume and revenue, our uncompensated care may increase and our results of operations could be adversely affected.

The percentages of our insured and uninsured hospital net receivables are summarized as follows (1):

 

     June 30,
2014
    September 30,
2013
 

Insured receivables

     82.2     81.4

Uninsured receivables

     17.8     18.6
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

The percentages of hospital net receivables in summarized aging categories are as follows (1):

 

     June 30,
2014
    September 30,
2013
 

0 to 90 days

     61.0     61.8

91 to 180 days

     20.3     20.7

Over 180 days

     18.7     17.5
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

(1) Excludes hospital receivables retained related to our discontinued Florida operations.

Adoption of Electronic Health Records (“EHR”)

The American Recovery and Reinvestment Act of 2009 (“ARRA”) included approximately $26.0 billion in funding for various healthcare information technology (“IT”) initiatives, including Medicare and Medicaid incentives for eligible hospitals and professionals to adopt and meaningfully use certified EHR technology (“EHR Incentive Programs”). In addition, eligible providers that fail to demonstrate meaningful use of certified EHR technology will be subject to reduced payments from Medicare, beginning in federal fiscal year 2015 for eligible hospitals and calendar year 2015 for eligible professionals. Implementation of the EHR Incentive

 

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Programs has been divided into three stages with increasing requirements for participation. Stage 1 requires providers to meet meaningful use objectives specified by CMS, which include electronically capturing health information in structured format, tracking key clinical conditions for coordination of care purposes, implementing clinical decision support tools to facilitate disease and medication management, using EHRs to engage patients and families, and reporting clinical quality measures and public health information. Our hospitals, as well as a number of our physician clinics, substantially met the Stage 1 requirements in our fiscal year 2012. Stage 2 introduces several new meaningful use measures, as well as imposes stricter requirements on certain existing Stage 1 measures. Providers must achieve meaningful use under the Stage 1 criteria before advancing to Stage 2 and are required to meet the criteria for the applicable stage based on their first year of attesting to meaningful use. Our hospitals and physician clinics whose first payment year was 2011 and 2012 are required to meet Stage 2 criteria beginning in 2014. Though we expect to continue to incur certain non-productive and other operating costs, as well as additional investments in hardware and software, we believe our historical investments in advanced clinical and other information systems, as well as quality of care programs, provides a solid platform to build upon for timely compliance with the healthcare IT initiatives and requirements of ARRA. During the quarter and nine months ended June 30, 2014, we recognized Medicare and Medicaid EHR incentives totaling $2.8 million and $10.2 million, respectively, compared to $4.8 million and $11.2 million in the prior year periods.

Revenue and Volume Trends

Total net revenue for the quarter ended June 30, 2014, increased 12.4% to $673.2 million, compared to $599.1 million in the prior year quarter. Total net revenue for the nine months ended June 30, 2014, increased 8.4% to $1.94 billion, compared to $1.79 billion in the prior year period. Total net revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium revenue. Acute care revenue contributed $13.5 million to the increase in total net revenue for the quarter ended June 30, 2014, compared to the prior year quarter, while premium revenue at Health Choice contributed $60.5 million for the same period. Acute care revenue contributed $41.0 million to the increase in total net revenue for the nine months ended June 30, 2014, compared to the prior year period, while premium revenue at Health Choice contributed $102.9 million for the same period.

Acute Care Revenue

Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Acute care revenue is reported net of the provision for doubtful accounts. Other revenue includes medical office building rental income and other miscellaneous revenue.

Admissions decreased 3.1% and 3.4% for the quarter and nine months ended June 30, 2014, respectively, compared to the same prior year periods. These decreases are reflective of a decline in Medicare 1-day stays, an industry-wide decline in inpatient utilization, and a continued shift towards outpatient services. In addition, respiratory or flu-related volumes declined for the nine months ended June 30, 2014, as compared to the same prior year periods. Adjusted admissions increased 1.9% and 0.7% for the quarter and nine months ended June 30, 2014, compared to the same prior year periods. For the quarter and nine months ended June 30, 2014, our outpatient volumes were positively impacted by increases in outpatient surgeries of 4.5% and 5.1%, respectively, compared to the same prior year periods. Additionally, emergency room visits for the quarter ended June 30, 2014 increased 3.2% compared to the prior year, while decreasing 0.9% in the nine months ended June 30, 2014, compared to the prior year period.

The following table provides the sources of our hospitals’ gross patient revenue by payor:

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2014     2013     2014     2013  

Medicare

     27.2     29.8     27.8     29.2

Managed Medicare

     14.6     14.9     14.7     14.4

Medicaid and managed Medicaid

     22.3     18.3     21.4     20.2

Managed care and other

     30.5     29.9     30.0     29.2

Self-pay

     5.4     7.1     6.1     7.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table provides the sources of our hospitals’ net patient revenue by payor before the provision for bad debts:

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2014     2013     2014     2013  

Medicare

     20.3     20.5     20.6     21.3

Managed Medicare

     10.1     9.8     10.1     10.0

Medicaid and managed Medicaid

     13.4     12.0     12.7     12.2

Managed care and other

     40.9     38.4     39.5     37.9

Self-pay

     15.3     19.3     17.1     18.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

As noted in the above tables, our gross and net patient revenue by payor is experiencing a shift from self-pay to Medicaid and managed Medicaid and managed care payors. This shift is primarily a result of Arizona’s expansion of its Medicaid program under Health Care Reform, which become effective January 1, 2014, the initial benefit being experienced as Exchange enrollees begin accessing the healthcare system and the early signs of improvement in the underlying economic fundamentals in the markets we serve.

Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 1.3% and 2.5% for the quarter and nine months ended June 30, 2014, compared to the same prior year periods.

See “Item 1 — Business — Sources of Acute Care Revenue” and “Item 1 — Business — Government Regulation and Other Factors” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the SEC on December 20, 2013, for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In those sections, we also discussed the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by CMS that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also addressed in such Annual Report on Form 10-K.

Premium Revenue

Health Choice contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted providers. Most of its premium revenue is derived through a contract with AHCCCS, the state agency that administers Arizona’s Medicaid program. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”). This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

Premium revenue generated by Health Choice represented 29.8% and 27.1% of our consolidated net revenue for the quarter and nine months ended June 30, 2014, respectively, compared to 23.3% and 23.6% in the same prior year periods.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2013.

SELECTED OPERATING DATA

The following table sets forth certain unaudited operating data from continuing operations for each of the periods presented.

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2014     2013     2014     2013  

Acute Care

        

Number of acute care hospital facilities at end of period

     16        16        16        16   

Licensed beds at end of period (1)

     3,778        3,804        3,778        3,804   

Average length of stay (days) (2)

     5.07        5.09        5.15        5.10   

Occupancy rates (average beds in service)

     48.5     49.7     49.6     50.6

Admissions (3)

     26,307        27,155        79,796        82,643   

Adjusted admissions (4)

     49,103        48,175        144,790        143,750   

Patient days (5)

     133,488        138,108        409,923        421,159   

Adjusted patient days (4)

     249,162        245,015        743,804        732,569   

Net patient revenue per adjusted admission (6)

   $ 9,509      $ 9,391      $ 9,611      $ 9,376   

Health Choice

        

Covered lives (7)

     213,032        186,111        213,032        186,111   

Medical loss ratio (8)

     84.5     84.8     84.8     83.8

 

(1) Includes St. Luke’s Behavioral Hospital in Phoenix, Arizona.
(2) Represents the average number of days that a patient stayed in our hospitals.
(3) Represents the total number of patients admitted to our hospitals for stays in excess of 23 hours. Management and investors use this number as a general measure of inpatient volume.
(4) Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions/patient days by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.
(5) Represents the number of days our beds were occupied by inpatients over the period.
(6) Includes the impact of the provision for bad debts as a component of revenue.
(7) Represents total lives enrolled across all health plan product lines. Includes dual-eligible lives, which are members eligible for Medicare and Medicaid benefits, under Health Choice’s contract with CMS to provide coverage as a MAPD SNP totaling 8,006 and 4,310 as of June 30, 2014 and 2013, respectively.
(8) Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

 

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RESULTS OF OPERATIONS SUMMARY

Consolidated

The following table sets forth, for the periods presented, the results of our consolidated operations expressed in dollar terms and as a percentage of net revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

    Quarter Ended     Quarter Ended     Nine Months Ended     Nine Months Ended  
    June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

($ in thousands):

  Amount     Percentage     Amount     Percentage     Amount     Percentage     Amount     Percentage  

Net revenue

               

Acute care revenue before provision for bad debts

  $ 556,318        $ 555,413        $ 1,692,779        $ 1,636,836     

Less: Provision for bad debts

    (83,437       (96,090       (281,931       (267,014  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

    472,881        70.2     459,323        76.7     1,410,848        72.9     1,369,822        76.4

Premium revenue

    200,281        29.8     139,804        23.3     524,995        27.1     422,059        23.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    673,162        100.0     599,127        100.0     1,935,843        100.0     1,791,881        100.0

Costs and expenses

               

Salaries and benefits

    234,546        34.8     219,896        36.7     701,983        36.3     670,286        37.4

Supplies

    80,411        11.9     79,462        13.3     243,437        12.6     240,724        13.4

Medical claims

    165,943        24.7     116,640        19.5     436,754        22.6     348,556        19.5

Rentals and leases

    18,796        2.8     13,992        2.3     56,429        2.9     40,635        2.3

Other operating expenses

    114,933        17.1     106,456        17.8     325,012        16.8     309,987        17.3

Medicare and Medicaid EHR incentives

    (2,790     (0.4 %)      (4,827     (0.8 %)      (10,233     (0.5 %)      (11,209     (0.6 %) 

Interest expense, net

    32,275        4.8     32,771        5.4     98,325        5.2     99,987        5.5

Depreciation and amortization

    23,276        3.4     24,492        4.1     71,860        3.6     72,606        4.1

Management fees

    1,250        0.2     1,250        0.2     3,750        0.2     3,750        0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    668,640        99.3     590,132        98.5     1,927,317        99.6     1,775,322        99.1

Earnings from continuing operations before gain on disposal of assets and income taxes

    4,522        0.7     8,995        1.5     8,526        0.4     16,559        0.9

Gain on disposal of assets, net

    332        0.0     481        0.1     1,100        0.1     649        0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

    4,854        0.7     9,476        1.6     9,626        0.5     17,208        1.0

Income tax expense

    6,331        0.9     3,850        0.7     10,198        0.5     8,016        0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

    (1,477     (0.2 %)      5,626        0.9     (572     (0.0 %)      9,192        0.5

Earnings (loss) from discontinued operations, net of income taxes

    (2,847     (0.4 %)      (531     (0.1 %)      1,821        (0.0 %)      849        0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

    (4,324     (0.6 %)      5,095        0.8     1,249        0.0     10,041        0.6

Net earnings attributable to non-controlling interests

    (2,453     (0.4 %)      (1,941     (0.3 %)      (8,857     (0.5 %)      (3,189     (0.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

  $ (6,777     (1.0 %)    $ 3,154        0.5   $ (7,608     (0.5 %)    $ 6,852        0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Acute Care

The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollar terms and as a percentage of acute care revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

     Quarter Ended     Quarter Ended     Nine Months Ended     Nine Months Ended  
     June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

($ in thousands):

   Amount     Percentage     Amount     Percentage     Amount     Percentage     Amount     Percentage  

Acute care revenue