LIFEPOINT HOSPITALS, INC. - FORM 10-K
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-51251
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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20-1538254
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(State or Other Jurisdiction
of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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103 Powell Court,
Suite 200
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37027
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Brentwood, Tennessee
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(Zip Code)
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(Address Of Principal Executive
Offices)
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(615) 372-8500
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, par value
$.01 per share
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NASDAQ Global Select Market
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Preferred Stock Purchase Rights
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NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the
Act: NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer
o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the shares of registrants
Common Stock held by non-affiliates as of June 30, 2006,
was approximately $1.3 billion.
As of January 31, 2007, the number of outstanding shares of
the registrants Common Stock was 57,365,822.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for our 2007 annual
meeting of stockholders are incorporated by reference into
Part III of this report.
PART I
Overview
of Our Company
LifePoint Hospitals, Inc. is a holding company that is one of
the largest owners and operators of general acute care hospitals
in non-urban communities in the United States. Its subsidiaries
own or lease their respective facilities and other assets.
Unless the context otherwise indicates, references in this
report to LifePoint, the Company,
we, our or us are references
to LifePoint Hospitals, Inc.,
and/or its
wholly-owned and majority-owned subsidiaries. Any reference
herein to our hospitals, facilities or employees refers to the
hospitals, facilities or employees of subsidiaries of LifePoint
Hospitals, Inc.
At December 31, 2006, we operated 52 hospitals, including
one hospital that was sold effective January 1, 2007, and
one hospital that is held for sale. In all but five of the
communities in which our hospitals are located, we are the only
provider of acute care hospital services. Our hospitals are
geographically diversified across 19 states: Alabama,
Arizona, California, Colorado, Florida, Indiana, Kansas,
Kentucky, Louisiana, Mississippi, Nevada, New Mexico, South
Carolina, Tennessee, Texas, Utah, Virginia, West Virginia and
Wyoming. We generated $2,439.7 million,
$1,841.5 million and $982.8 million in revenues from
continuing operations during 2006, 2005 and 2004, respectively.
We were formed as a division of HCA Inc. (HCA) in
November 1997 to operate general acute care hospitals in
non-urban communities. We became an independent, publicly traded
company on May 11, 1999 when HCA distributed all
outstanding shares of our common stock to its stockholders. As
part of this transaction, we entered into agreements with HCA to
define our ongoing relationships following the distribution and
to allocate tax, employee benefits and other liabilities and
obligations arising from periods prior to May 11, 1999.
On April 15, 2005, we completed a business combination with
Province Healthcare Company. Province was a public company that,
as of April 15, 2005, operated 21 general acute care
hospitals in non-urban communities in the United States. As a
result of the Province business combination, we acquired all of
the outstanding capital stock of each of Province and Historic
LifePoint. We issued 15.0 million shares of our common
stock, assumed $511.6 million of Provinces
outstanding debt and paid $586.3 million in cash to the
stockholders of Province. In addition, each share of common
stock of Historic LifePoint was automatically converted into a
share of our common stock (Company Common Stock) on
a
one-for-one
basis.
As a result of the Province business combination, we became the
successor issuer to Historic LifePoint under the Securities
Exchange Act of 1934, and succeeded to Historic LifePoints
reporting obligations. Also, shares of Historic LifePoint common
stock ceased to be traded on the Nasdaq National Market.
However, immediately upon the closing of the Province business
combination, shares of Company Common Stock began trading on the
Nasdaq National Market, and currently trade on the NASDAQ Global
Select Market, under the ticker symbol LPNT. We
believe that the Province business combination has provided and
will continue to provide efficiencies and enhance our ability to
compete effectively. As a result of the Province business
combination, we are more geographically and financially
diversified in our asset base. In addition, we have greater
resources and we believe that we have increased opportunities
for growth and margin expansion. The results of operations of
Province are included in our results of operations beginning
April 16, 2005.
Availability
of Information
Our website is www.lifepointhospitals.com. We make
available free of charge on this website under Investor
Information SEC Filings our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished as soon as
reasonably practicable after we electronically file such
materials with, or furnish them to, the Securities and Exchange
Commission.
1
Operating
Philosophy
Since inception, our sole mission has been to acquire, develop
and operate strong community-based hospitals in non-urban
markets. As a result, we adhere to an operating philosophy that
is focused on the unique patient and provider needs and
opportunities in these communities. Our philosophy includes a
commitment to:
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increasing the scope and improving the quality of available
healthcare services;
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providing physicians a positive environment in which to practice
medicine, with access to necessary equipment, office space and
resources needed to operate their practices;
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providing an outstanding work environment for employees;
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recognizing and expanding each hospitals role as a
community asset; and
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continuing to improve each hospitals financial performance.
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The
Non-Urban Healthcare Market
We believe that non-urban communities present opportunities for
us because of the following factors:
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Less Competition than Urban Markets. Because
non-urban communities have smaller populations, they generally
have fewer hospitals and other healthcare service providers.
Because non-urban hospitals are generally the sole providers of
inpatient services in their markets, there is limited
competition. However, we are experiencing an increase in
competition from other specialized care providers, including
outpatient surgery, oncology, physical therapy and diagnostic
centers, as well as competing services rendered in physician
offices.
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Community Focus. We believe that the local
hospital generally is viewed as an integral part of the
community. In addition, we believe that non-urban communities
can have a higher level of patient and physician loyalty that
fosters cooperative relationships among the local hospitals,
physicians, employees, patients and local government authorities.
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Acquisition Opportunities. Currently,
not-for-profit
and governmental entities own most non-urban hospitals. These
entities often have limited access to the capital needed to keep
pace with advances in medical technology. In addition, these
entities sometimes lack the resources to leverage their
professional staff in the manner necessary to control hospital
expenses, recruit and retain physicians, expand healthcare
services and comply with increasingly complex reimbursement and
managed care requirements. As a result, patients may migrate, be
referred by local physicians, or be encouraged by managed care
plans to travel to hospitals in larger, urban markets. We
believe that, as a result of these pressures, many
not-for-profit
and governmental owners of non-urban hospitals who wish to
maximize the value of their community assets and preserve the
local availability of quality healthcare services are interested
in selling or leasing these hospitals to a company like ours,
that is committed to the local delivery of healthcare and that
has greater access to capital and management resources. Of the
51 hospitals that we currently operate, 25 were acquired from
either
not-for-profit
or governmental entities.
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Business
Strategy
We manage our hospitals in accordance with our operating
philosophy and have developed the following strategies as part
of our philosophy, tailored for each of our existing markets and
for new markets:
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Expand Breadth of Services and Attract Community
Patients. We strive to increase revenues by
broadening the scope and improving the quality of healthcare
services available at our facilities and by recruiting
physicians with a broader range of specialties. We believe that
our expansion of available treatments, our emphasis on quality
and our community focus will encourage residents in the
non-urban communities we serve to seek care locally at our
facilities rather than at facilities outside the area. To
broaden our services, we have entered into joint ventures in a
few of our communities. In addition, we have undertaken projects
in a majority of our hospitals that are targeted at expanding
specialty services.
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2
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Capital expenditures related to these projects were as follows
for the years presented (dollars in millions):
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Expansion or Renovation Projects*
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2002
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2003
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2004
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2005
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2006
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Operating room expansions
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$
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10.4
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$
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8.7
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$
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0.8
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$
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0.6
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$
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19.6
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New/replacement hospitals
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29.2
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28.2
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MRI additions
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8.5
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4.9
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3.1
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4.1
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5.5
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Medical office building additions
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4.8
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6.3
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4.1
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12.1
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10.9
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Patient room additions
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1.5
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7.2
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9.3
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15.6
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0.6
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CT scanner additions
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0.7
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2.1
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5.4
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6.4
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Emergency room expansions
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0.5
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3.8
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7.6
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10.3
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21.7
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Rehabilitation additions
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2.8
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1.8
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2.3
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Cardiac catheterization lab
additions
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3.1
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2.0
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0.4
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Miscellaneous expansions
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5.7
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8.8
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22.1
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23.0
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13.2
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$
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38.0
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$
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43.5
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$
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51.4
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$
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100.3
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$
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106.5
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This table reflects approved expansion projects and is updated
as incremental costs are incurred on projects previously
approved. |
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Strengthen Physician Recruiting and
Retention. We believe that recruiting physicians
who are interested in practicing in local communities is
important to increasing the quality of healthcare and the
breadth of available services at our facilities. Our physician
recruitment program is currently focused on recruiting
additional specialty care physicians and primary care
physicians. Our local management teams are focused on working
more collaboratively with individual physicians and physician
practices. We believe that expansion of the range of available
treatments at our hospitals should also assist in physician
recruiting and retention, and contribute to the sense that our
hospitals are community assets.
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Improve Expense Management. We seek to control
costs by, among other things, attempting to improve employee
productivity, controlling supply expenses through the use of a
group purchasing organization, controlling professional and
general liability insurance expenses through the utilization of
risk management and quality care programs, and reducing
uncollectible revenues. We have implemented cost control
initiatives that include efforts to adjust staffing levels
according to patient volumes, modify supply purchases according
to usage patterns and provide support to hospital staff in more
efficient billing and collection processes. We believe that as
our company continues to grow, we should benefit from our
ability to spread certain overhead fixed costs over a larger
base of operations.
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Retain and Develop Stable Management and Clinical
Staff. We seek to retain and develop the
executive teams at our hospitals, to enhance medical staff
relations, and maintain continuity of relationships within the
community, and develop our existing clinical staff. We focus our
recruitment of managers on those who wish to live and work in
the communities in which our hospitals are located. Our hospital
executives are participants in our stock incentive plans.
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Improve Managed Care Revenues. We continue to
strive to improve our revenues from managed care plans by
negotiating facility-specific contracts with these payors on
terms appropriate for non-urban markets.
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Acquire Other Hospitals and Healthcare Service
Providers. We continue to pursue a selective
acquisition strategy and seek to identify and acquire hospitals
in non-urban markets that are the sole or a significant market
provider of healthcare services in the community. We may also
pursue the acquisition of other healthcare service providers,
such as ambulatory surgery centers and diagnostic imaging
centers, in our existing markets. By implementing our operating
strategies at acquired facilities, we believe that we may
attract many of the patients in these markets that historically
have sought care elsewhere. From time to time, we may evaluate
our facilities and sell assets that we believe, for various
reasons, may no longer fit within our long-term strategy.
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3
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Align Interests with Our Communities. We
believe that our strategic goals align our interests with those
of the local communities served by our hospitals. We believe
that the following qualities enable us to compete successfully
for acquisitions:
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our commitment to maintaining the local availability of quality
healthcare services;
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our practice of providing market-specific, broader-based
healthcare;
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our focus on physician relationships, recruiting and retention;
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our managements operating experience;
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our access to capital markets; and
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our ability to provide the necessary equipment and other
resources for physicians.
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Develop New Hospitals and Replace Existing
Hospitals. We continue to focus on improving the
operations at our hospitals as well as seeking additional
opportunities. Consistent with our operating strategies, we
continually evaluate the communities we serve and our existing
facilities to determine where replacement facilities would be
beneficial.
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Acquisitions
Since our inception in 1999, we have acquired the following
hospitals (dollars in millions):
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Acquired
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Acquisition
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Purchase
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Licensed
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Hospital Name
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Date
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Location
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Price(a)
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Beds
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Clinch Valley Medical Center
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July 1, 2006
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Richland, VA
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$
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239.0
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(b)
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200
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Raleigh General Hospital
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July 1, 2006
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Beckley, WV
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N/A
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(b)
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369
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St. Josephs Hospital(c)
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July 1, 2006
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Parkersburg, WV
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N/A
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(b)
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325
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Saint Francis Hospital(d)
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July 1, 2006
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Charleston, WV
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N/A
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(b)
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155
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Danville Regional Medical Center(e)
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July 1, 2005
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Danville, VA
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210.0
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350
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Wythe County Community Hospital(e)
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June 1, 2005
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Wytheville, VA
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43.3
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104
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Province business combination:
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1,797.6
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2,529
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Ashland Regional Medical
Center(e),(f)
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April 15, 2005
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Ashland, PA
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N/A
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123
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Bolivar Medical Center(e)
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April 15, 2005
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Cleveland, MS
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N/A
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165
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Coastal Carolina Medical Center
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April 15, 2005
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Hardeeville, SC
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N/A
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41
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Colorado Plains Medical Center(e)
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April 15, 2005
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Fort Morgan, CO
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N/A
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50
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Colorado River Medical Center(e)
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April 15, 2005
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Needles, CA
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N/A
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49
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Doctors Hospital of Opelousas
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April 15, 2005
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Opelousas, LA
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N/A
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171
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Ennis Regional Medical Center(e)
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April 15, 2005
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Ennis, TX
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N/A
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45
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Eunice Community Medical Center(e)
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April 15, 2005
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Eunice, LA
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N/A
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72
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Havasu Regional Medical Center(e)
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April 15, 2005
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Lake Havasu City, AZ
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N/A
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138
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Los Alamos Medical Center(e)
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April 15, 2005
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Los Alamos, NM
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N/A
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47
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Medical Center of Southern
Indiana(e),(f)
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April 15, 2005
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Charlestown, IN
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N/A
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96
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Memorial Hospital of Martinsville
and Henry County(e)
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April 15, 2005
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Martinsville, VA
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N/A
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237
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Memorial Medical Center of Las
Cruces(e)
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April 15, 2005
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Las Cruces, NM
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N/A
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286
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Minden Medical Center
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April 15, 2005
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Minden, LA
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N/A
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159
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Northeastern Nevada Regional
Hospital(e)
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April 15, 2005
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Elko, NV
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N/A
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75
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Palestine Regional Medical Center(e)
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April 15, 2005
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Palestine, TX
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N/A
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249
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Palo Verde Hospital(e),(g)
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April 15, 2005
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Blythe, CA
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N/A
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51
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Parkview Regional Hospital(e)
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April 15, 2005
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Mexia, TX
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N/A
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59
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Starke Memorial Hospital(e)
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April 15, 2005
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Knox, IN
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N/A
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53
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Teche Regional Medical Center(e)
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April 15, 2005
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Morgan City, LA
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N/A
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149
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4
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Acquired
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Acquisition
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Purchase
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Licensed
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Hospital Name
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Date
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Location
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Price(a)
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Beds
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Vaughan Regional Medical Center(e)
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April 15, 2005
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Selma, AL
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N/A
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214
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River Parishes Hospital
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July 1, 2004
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LaPlace, LA
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24.0
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106
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Spring View Hospital(e)
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October 1, 2003
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Lebanon, KY
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16.1
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113
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Logan Regional Medical
Center(e) and Guyan Valley Hospital(e),(h)
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December 1, 2002
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Logan, WV
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87.5
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151
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Lakeland Community
Hospital(e) and Northwest Medical Center(e)
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December 1, 2002
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Haleyville, AL
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22.1
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170
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Russellville Hospital(e)
|
|
October 3, 2002
|
|
Russellville, AL and Winfield, AL
|
|
|
19.8
|
|
|
|
100
|
|
Ville Platte Medical Center(e)
|
|
December 1, 2001
|
|
Ville Platte, LA
|
|
|
11.1
|
|
|
|
116
|
|
Athens Regional Medical Center
|
|
October 1, 2001
|
|
Athens, TN
|
|
|
17.0
|
|
|
|
118
|
|
Bluegrass Community Hospital(e),(i)
|
|
January 2, 2001
|
|
Versailles, KY
|
|
|
3.2
|
|
|
|
25
|
|
Lander Valley Medical Center
|
|
July 1, 2000
|
|
Lander, WY
|
|
|
29.8
|
|
|
|
102
|
|
Putnam Community Medical Center
|
|
June 16, 2000
|
|
Palatka, FL
|
|
|
43.5
|
|
|
|
141
|
|
|
|
|
(a) |
|
Excluding working capital, except for the Province business
combination. |
|
(b) |
|
We acquired four hospitals from HCA under the same purchase
agreement. |
|
(c) |
|
Held-for-sale
hospital. |
|
(d) |
|
Divested on January 1, 2007. |
|
(e) |
|
Immediately prior to the acquisition of this hospital by
Province or us, it was owned by a
not-for-profit
or governmental entity. |
|
(f) |
|
Divested on May 1, 2006. |
|
(g) |
|
Divested on January 1, 2006. |
|
(h) |
|
We voluntarily closed and ceased the operations of Guyan Valley
Hospital as an eight-bed critical access hospital effective
December 29, 2006. |
|
(i) |
|
Initially an operating lease; we exercised our option to
purchase Bluegrass Community Hospital for $3.2 million in
January 2005. |
Dispositions
Since our inception in 1999, we have disposed of the following
hospitals (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition
|
|
|
|
Sale
|
|
|
Licensed
|
|
Hospital Name
|
|
Date
|
|
Location
|
|
Price
|
|
|
Beds
|
|
|
Saint Francis Hospital
|
|
January 1, 2007
|
|
Charleston, WV
|
|
$
|
37.5
|
|
|
|
155
|
|
Ashland Regional Medical Center
|
|
May 1, 2006
|
|
Ashland, PA
|
|
|
4.1
|
|
|
|
123
|
|
Medical Center of Southern Indiana
|
|
May 1, 2006
|
|
Charleston, IN
|
|
|
4.6
|
|
|
|
96
|
|
Smith County Memorial Hospital
|
|
March 31, 2006
|
|
Carthage, TN
|
|
|
20.0
|
|
|
|
63
|
|
Palo Verde Hospital
|
|
January 1, 2006
|
|
Blythe, CA
|
|
|
1.0
|
|
|
|
51
|
|
Bartow Memorial Hospital
|
|
March 31, 2005
|
|
Bartow, FL
|
|
|
33.0
|
|
|
|
56
|
|
Springhill Medical Center
|
|
November 17, 2000
|
|
Springhill, LA
|
|
|
5.7
|
|
|
|
63
|
|
Barrow Medical Center
|
|
September 1, 2000
|
|
Barrow, GA
|
|
|
2.2
|
|
|
|
56
|
|
Riverview Medical Center
|
|
August 1, 2000
|
|
Gonzales, LA
|
|
|
20.7
|
|
|
|
104
|
|
Halstead Hospital
|
|
April 1, 2000
|
|
Halstead, KS
|
|
|
|
|
|
|
177
|
|
Trinity Hospital
|
|
February 1, 2000
|
|
Erin, TN
|
|
|
2.4
|
|
|
|
40
|
|
In addition to the above dispositions, St. Josephs
Hospital is held for sale. We have entered into a definitive
agreement to sell this hospital, which we currently expect to
occur during mid-2007.
5
Operations
Our hospitals typically provide the range of medical and
surgical services commonly available in hospitals in non-urban
markets. These services generally include general surgery,
internal medicine, obstetrics, psychiatric care, emergency room
care, radiology, oncology, diagnostic care, coronary care,
rehabilitation services, pediatric services, and, in some of our
hospitals, specialized services such as open-heart surgery,
skilled nursing and neuro-surgery. In many markets, we also
provide outpatient services such as
one-day
surgery, laboratory, x-ray, respiratory therapy, imaging, sports
medicine and lithotripsy.
Each of our hospitals has a local board of trustees that
includes members of the hospitals medical staff as well as
community leaders. The board establishes policies concerning
medical, professional and ethical practices, monitors these
practices, and is responsible for reviewing these practices in
order to determine that they conform to established standards.
We maintain quality assurance programs to support and monitor
quality of care standards and to meet accreditation and
regulatory requirements. We also monitor patient care
evaluations and other quality of care assessment activities on a
regular basis.
Like most hospitals located in non-urban markets, our hospitals
do not engage in extensive medical research and medical
education programs. However, two of our hospitals have an
affiliation with medical schools, including the clinical
rotation of medical students, and one of our hospitals owns and
operates a school of health professions with a nursing program
and a radiologic technology program.
In addition to providing access to capital resources, we make
available a variety of management services to our hospitals.
These services include, among other things:
|
|
|
|
|
accounting, financial, tax and reimbursement management;
|
|
|
|
clinical management and consulting;
|
|
|
|
construction oversight and management;
|
|
|
|
corporate ethics and compliance;
|
|
|
|
education and training;
|
|
|
|
employee benefits;
|
|
|
|
HIPAA compliance;
|
|
|
|
human resources management;
|
|
|
|
information and clinical systems;
|
|
|
|
internal auditing and consulting;
|
|
|
|
legal management;
|
|
|
|
managed care contracting;
|
|
|
|
materials management;
|
|
|
|
physician recruiting;
|
|
|
|
physician services management;
|
|
|
|
quality resource management;
|
|
|
|
risk management; and
|
|
|
|
revenue and cash cycle management.
|
We participate along with other healthcare companies in a group
purchasing organization, HealthTrust Purchasing Group, which
makes certain national supply and equipment contracts available
to our facilities. We own approximately a 4.6% equity interest
in this group purchasing organization at December 31, 2006.
6
Seasonality
We typically experience higher patient volumes and revenues in
the first and fourth quarters of each year. We generally
experience these seasonal volume and revenue peaks because more
people become ill during the winter months, resulting in an
increased number of patients that we treat during those months.
Properties
The following table presents certain information with respect to
our hospitals as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition/
|
|
|
|
|
Licensed Beds
|
|
|
Opening/
|
|
Operational
|
Hospital Name
|
|
Acute
|
|
|
Psychiatric
|
|
|
Rehabilitation
|
|
|
SNF(a)
|
|
|
Total
|
|
|
Swing(b)
|
|
|
Lease Date
|
|
Status
|
|
Alabama
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andalusia Regional Hospital
|
|
|
88
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
100
|
|
|
|
10
|
|
|
May 11, 1999
|
|
Own
|
Lakeland Community Hospital(c)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
10
|
|
|
December 1, 2002
|
|
Own
|
Northwest Medical Center
|
|
|
61
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
December 1, 2002
|
|
Own
|
Russellville Hospital
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
10
|
|
|
October 3, 2002
|
|
Own
|
Vaughan Regional Medical
Center(d),(e)
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
Arizona
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Havasu Regional Medical
Center(c),(d)
|
|
|
119
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
Valley View Medical Center
|
|
|
50
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
November 8, 2005
|
|
Own
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado River Medical Center(d),(f)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
April 15, 2005
|
|
Lease
|
Colorado
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado Plains Medical
Center(c),(d),(g)
|
|
|
40
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
April 15, 2005
|
|
Lease
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Putnam Community Medical Center(e)
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
141
|
|
|
|
|
|
|
June 16, 2000
|
|
Own
|
Indiana
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starke Memorial Hospital(d)
|
|
|
45
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
53
|
|
|
|
6
|
|
|
April 15, 2005
|
|
Lease
|
Kansas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Plains Medical Complex(c)
|
|
|
74
|
|
|
|
|
|
|
|
16
|
|
|
|
9
|
|
|
|
99
|
|
|
|
|
|
|
May 11, 1999
|
|
Own
|
Kentucky
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bluegrass Community Hospital(f)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
15
|
|
|
January 2, 2001
|
|
Own
|
Bourbon Community Hospital
|
|
|
33
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
10
|
|
|
May 11, 1999
|
|
Own
|
Georgetown Community Hospital
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
10
|
|
|
May 11, 1999
|
|
Own
|
Jackson Purchase Medical Center(e)
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
10
|
|
|
May 11, 1999
|
|
Own
|
Lake Cumberland Regional
Hospital(c),(e)
|
|
|
186
|
|
|
|
34
|
|
|
|
27
|
|
|
|
12
|
|
|
|
259
|
|
|
|
|
|
|
May 11, 1999
|
|
Own
|
Logan Memorial Hospital
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
10
|
|
|
May 11, 1999
|
|
Own
|
Meadowview Regional Medical Center
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
10
|
|
|
May 11, 1999
|
|
Own
|
Spring View Hospital
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
6
|
|
|
October 1, 2003
|
|
Own
|
Louisiana
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acadian Medical Center(d),(g)
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
Doctors Hospital of
Opelousas(d),(g)
|
|
|
117
|
|
|
|
32
|
|
|
|
22
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
Minden Medical Center(d),(e)
|
|
|
127
|
|
|
|
20
|
|
|
|
12
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
River Parishes Hospital
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
July 1, 2004
|
|
Own
|
Teche Regional Medical Center(c),(d)
|
|
|
140
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
April 15, 2005
|
|
Lease
|
Ville Platte Medical Center(g),(h)
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
December 1, 2001
|
|
Own
|
Mississippi
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bolivar Medical Center(c),(d)
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
165
|
|
|
|
|
|
|
April 15, 2005
|
|
Lease
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition/
|
|
|
|
|
Licensed Beds
|
|
|
Opening/
|
|
Operational
|
Hospital Name
|
|
Acute
|
|
|
Psychiatric
|
|
|
Rehabilitation
|
|
|
SNF(a)
|
|
|
Total
|
|
|
Swing(b)
|
|
|
Lease Date
|
|
Status
|
|
Nevada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeastern Nevada Regional
Hospital(c),(d)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
New Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Alamos Medical Center(c),(d)
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
6
|
|
|
April 15, 2005
|
|
Own
|
Memorial Medical Center of Las
Cruces(d)
|
|
|
274
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
286
|
|
|
|
|
|
|
April 15, 2005
|
|
Lease
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coastal Carolina Medical Center(d)
|
|
|
31
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
Tennessee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Athens Regional Medical Center
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
10
|
|
|
October 1, 2001
|
|
Own
|
Crockett Hospital(h)
|
|
|
97
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
May 11, 1999
|
|
Own
|
Emerald-Hodgson Hospital
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
41
|
|
|
|
|
|
|
May 11, 1999
|
|
Own
|
Hillside Hospital(h)
|
|
|
81
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
5
|
|
|
May 11, 1999
|
|
Own
|
Livingston Regional Hospital(h)
|
|
|
100
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
114
|
|
|
|
14
|
|
|
May 11, 1999
|
|
Own
|
Southern Tennessee Medical Center
|
|
|
107
|
|
|
|
12
|
|
|
|
12
|
|
|
|
26
|
|
|
|
157
|
|
|
|
|
|
|
May 11, 1999
|
|
Own
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ennis Regional Medical Center(d)
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
April 15, 2005
|
|
Lease
|
Palestine Regional Medical
Center(c),(d),(e),(g)
|
|
|
100
|
|
|
|
28
|
|
|
|
49
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
Parkview Regional
Hospital(c),(d),(g)
|
|
|
49
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
April 15, 2005
|
|
Lease
|
Utah
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ashley Valley Medical Center(c)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
39
|
|
|
May 11, 1999
|
|
Own
|
Castleview Hospital(c)
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
12
|
|
|
May 11, 1999
|
|
Own
|
Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinch Valley Medical Center
|
|
|
176
|
|
|
|
|
|
|
|
10
|
|
|
|
14
|
|
|
|
200
|
|
|
|
|
|
|
July 1, 2006
|
|
Own
|
Danville Regional Medical Center
|
|
|
245
|
|
|
|
35
|
|
|
|
10
|
|
|
|
60
|
|
|
|
350
|
|
|
|
|
|
|
July 1, 2005
|
|
Own
|
Memorial Hospital of Martinsville
and Henry County(d)
|
|
|
208
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
April 15, 2005
|
|
Own
|
Wythe County Community Hospital(c)
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
100
|
|
|
|
9
|
|
|
June 1, 2005
|
|
Lease
|
West Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logan Regional Medical Center(c),(g)
|
|
|
124
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
132
|
|
|
|
|
|
|
December 1, 2002
|
|
Own
|
Raleigh General Hospital
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
July 1, 2006
|
|
Own
|
Saint Francis Hospital(i),(j)
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
155
|
|
|
|
|
|
|
July 1, 2006
|
|
Own
|
St. Josephs Hospital(i)
|
|
|
268
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
July 1, 2006
|
|
Own
|
Wyoming
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lander Valley Medical Center(c),(g)
|
|
|
66
|
|
|
|
15
|
|
|
|
8
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
July 1, 2000
|
|
Own
|
Riverton Memorial Hospital(c),(g)
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
May 11, 1999
|
|
Own
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,404
|
|
|
|
315
|
|
|
|
277
|
|
|
|
181
|
|
|
|
6,177
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Skilled nursing facility licensed beds. |
|
(b) |
|
The federal swing-bed program allows certain rural hospitals to
provide a mix of acute and skilled nursing care without
obtaining a change in their licenses. Reported swing-beds are
included in the amount of acute licensed beds. |
|
(c) |
|
Designated by Medicare as a sole community hospital. |
|
(d) |
|
Hospital acquired as a result of the Province business
combination. |
|
(e) |
|
Designated by Medicare as a rural referral center. |
|
(f) |
|
Designated by Medicare as a critical-access hospital
(CAH). |
|
(g) |
|
Hospital is certified by the State and Medicare to use swing
beds. However, the State licensure does not assign a specific
number of swing beds to a hospital. |
8
|
|
|
(h) |
|
Designated by Medicare as a Medicare dependent hospital. |
|
(i) |
|
Held-for-sale
hospital. |
|
(j) |
|
Divested on January 1, 2007. |
We operate medical office buildings in conjunction with many of
our hospitals. We own the majority of these medical office
buildings. These office buildings are primarily occupied by
physicians who practice at our hospitals. Our corporate
headquarters are located in approximately 92,000 square
feet of leased space in Brentwood, Tennessee. Our corporate
headquarters, hospitals and other facilities are suitable for
their respective uses and are generally adequate for our present
needs.
The following are brief narratives of each of our hospitals as
of February 1, 2007, listed alphabetically by the state
where they are located, describing their location relative to
the nearest urban area, their nearest competitors and any
associated significant leases.
Alabama
Andalusia Regional Hospital is located in Andalusia,
which is approximately 94 miles south of Montgomery. Its
nearest competitors are Mizell Memorial Hospital, a 99-bed
facility located approximately 17 miles away in Opp, and
Florala Memorial Hospital, a 23-bed facility located
approximately 27 miles away in Florala. Additionally, there
are two competing diagnostic imaging centers located in the
community.
Lakeland Community Hospital is located in Haleyville,
which is approximately 78 miles northwest of Birmingham.
Lakeland Community Hospital is located approximately
25 miles away from our own Russellville Hospital and
approximately 36 miles away from our own Northwest Medical
Center. Its nearest competitors are Marion Regional Medical
Center, a 57-bed facility located approximately 24 miles
away in Hamilton, and Walker Baptist Medical Center, a 267-bed
facility located approximately 42 miles away in Jasper.
Northwest Medical Center is located in Winfield, which is
approximately 72 miles northwest of Birmingham. Northwest
Medical Center is located approximately 48 miles away from
our own Russellville Hospital and approximately 36 miles
away from our own Lakeland Community Hospital. Its nearest
competitors are Fayette Medical Center, a 61-bed facility
located approximately 17 miles away in Fayette, and Marion
Regional Medical Center, a 57-bed facility located approximately
19 miles away in Hamilton.
Russellville Hospital is located in Russellville, which
is approximately 100 miles northwest of Birmingham.
Russellville Hospital is located approximately 25 miles
away from our own Lakeland Community Hospital and approximately
48 miles away from our own Northwest Medical Center. Its
nearest competitors are Shoals Hospital, a 128-bed facility
located approximately 23 miles away in Muscle Shoals, and
Helen Keller Hospital, a 152-bed facility located approximately
20 miles away in Sheffield.
Vaughan Regional Medical Center is located in Selma,
which is approximately 50 miles west of Montgomery and
90 miles south of Birmingham. Its nearest competitors are
Prattville Baptist Hospital, a
47-bed
facility located approximately 40 miles away in Prattville,
and J. Paul Jones Hospital, a 32-bed facility located
approximately 43 miles away in Camden. Vaughn Regional
Medical Center is owned by a limited liability company in which
a subsidiary of ours owns a 99% Class A membership interest
and a non-affiliated entity owns a 1% Class B membership
interest. Additionally, there is one competing diagnostic
imaging center and one competing outpatient therapy center
located in the community.
Arizona
Havasu Regional Medical Center is located in Lake Havasu
City, which is approximately 150 miles south of Las Vegas,
Nevada. It is located approximately 42 miles southeast of
our own Colorado River Medical Center and approximately
57 miles south of our own Valley View Medical Center. Its
nearest competitors are La Paz Regional Hospital, a 39-bed
facility located approximately 40 miles away in Parker, and
Kingman Regional Medical Center, a 153-bed facility located
approximately 62 miles away in Kingman. Additionally, there
are two competing diagnostic imaging centers located in the
community.
9
Effective September 1, 2006, we formed a joint venture with
certain physicians in the Lake Havasu City area. We contributed
cash and substantially all of the assets used in the operations
of Havasu Regional Medical Center, excluding real estate and
home health assets, and the physicians contributed substantially
all the assets of Havasu Surgery Center, an outpatient surgical
center. We retain an approximately 96% equity interest in the
joint venture.
Valley View Medical Center is located in Ft. Mohave,
which is approximately 108 miles south of Las Vegas,
Nevada. Valley View is located approximately 12 miles north
of our own Colorado River Medical Center and approximately
57 miles north of our own Havasu Regional Medical Center.
Its nearest competitors are Western Arizona Regional Medical
Center, a 123-bed facility located approximately nine miles away
in Bullhead City, and Kingman Regional Medical Center, a 153-bed
facility located approximately 46 miles away in Kingman.
California
Colorado River Medical Center is located in Needles,
which is approximately 112 miles south of Las Vegas,
Nevada. It is located approximately 14 miles south of our
own Valley View Medical Center and approximately 42 miles
northwest of our own Havasu Regional Medical Center. Its nearest
competitor is Western Arizona Regional Medical Center, a 123-bed
facility located approximately 24 miles away in Bullhead
City, Arizona. The lease for Colorado River Medical Center
expires in July 2012 and is subject to three five-year renewal
terms. We have a right of first refusal to purchase Colorado
River Medical Center. This lease is accounted for as a capital
lease.
Colorado
Colorado Plains Medical Center is located in
Fort Morgan, which is approximately 85 miles northeast
of Denver. Its nearest competitors are East Morgan County
Hospital, a 15-bed critical access facility located
approximately 8 miles away in Brush, Sterling Regional
Medical Center, a 36-bed facility located approximately
45 miles away in Sterling, and Northern Colorado Medical
Center, a 326-bed facility located 50 miles away in
Greeley. The lease for Colorado Plains Medical Center expires in
March 2035 and is subject to two five-year renewal terms. We
have a right of first refusal to purchase Colorado Plains
Medical Center. This lease is accounted for as a prepaid capital
lease.
Florida
Putnam Community Medical Center is located in Palatka,
which is approximately 45 miles southeast of Gainesville
and 60 miles south of Jacksonville. Its nearest competitors
are Flagler Hospital, a 271-bed facility located approximately
26 miles away in St. Augustine, and Orange Park Medical
Center, a 196-bed facility located approximately 42 miles
away in Orange Park. Additionally, there is one competing
diagnostic imaging center and one competing cardiac
catheterization lab located in the community.
Indiana
Starke Memorial Hospital is located in Knox, which is
approximately 53 miles southwest of South Bend. Its primary
competitors are La Porte Regional Health System, a 227-bed
facility located approximately 25 miles away in
La Porte, and Porter Memorial Hospital, a 276-bed facility
located approximately 32 miles away in Valparaiso. The
lease for Starke Memorial Hospital expires in September 2016 and
is subject to two ten-year renewal terms at our option. We have
a right of first refusal to purchase Starke Memorial Hospital.
This lease is accounted for as a prepaid capital lease.
Kansas
Western Plains Medical Complex is located in Dodge City,
which is approximately 155 miles west of Wichita. Its
nearest competitors are Minneola District Hospital, a 15-bed
facility located approximately 24 miles away in Minneola,
and St. Catherine Hospital, a 132-bed facility located
approximately 53 miles
10
away in Garden City. Additionally, there are two competing
diagnostic imaging centers and one competing surgery center
located in the community.
Kentucky
Bluegrass Community Hospital is located in Versailles,
which is approximately 13 miles west of Lexington.
Bluegrass Community Hospital is located approximately
18 miles from our own Georgetown Community Hospital and
approximately 32 miles from our own Bourbon Community
Hospital. Its nearest competitors are five hospitals that are
all located approximately 13 to 20 miles away in Lexington.
Bourbon Community Hospital is located in Paris, which is
approximately 20 miles northeast of Lexington. Bourbon
Community Hospital is 20 miles from our own Georgetown
Community Hospital and 32 miles from our own Bluegrass
Community Hospital. Its nearest competitors are five hospitals
that are all located approximately 20 to 25 miles away in
Lexington.
Georgetown Community Hospital is located in Georgetown,
which is approximately 11 miles northwest of Lexington.
Georgetown Community Hospital is 20 miles from our own
Bourbon Community Hospital and 18 miles from our own
Bluegrass Community Hospital. Its nearest competitors are five
hospitals that are all located approximately 11 to 15 miles
away in Lexington.
Jackson Purchase Medical Center is located in Mayfield,
which is approximately 150 miles northwest of Nashville,
Tennessee. Jackson Purchase Medical Centers nearest
competitors are Lourdes Hospital, a 252-bed facility, and
Western Baptist Hospital, a 252-bed facility, both of which are
located approximately 20 miles away in Paducah, and
Murray-Calloway County Hospital, a 140-bed facility located
approximately 28 miles away in Murray.
Lake Cumberland Regional Hospital is located in Somerset,
which is approximately 75 miles south of Lexington. Its
nearest competitors are Wayne County Hospital, a 25-bed facility
located approximately 27 miles away in Monticello, Russell
County Hospital, a 25-bed critical access facility located
approximately 20 miles away in Russell Springs.
Additionally, there are two competing diagnostic imaging centers
and one competing surgery center located in the community.
Logan Memorial Hospital is located in Russellville, which
is approximately 53 miles north of Nashville, Tennessee.
Its nearest competitors are Greenview Regional Hospital, a
211-bed facility, and The Medical Center at Bowling Green, a
506-bed facility, both of which are located approximately
30 miles away in Bowling Green.
Meadowview Regional Medical Center is located in
Maysville, which is approximately 56 miles southeast of
Cincinnati, Ohio and approximately 60 miles northeast of
Lexington. Its nearest competitors include Fleming County
Hospital, a 43-bed facility located approximately 18 miles
away in Flemingsburg, Brown County General Hospital, a
53-bed facility located approximately 25 miles away in
Georgetown, Ohio and Adams County Hospital, a 25-bed critical
access facility located approximately 20 miles away in West
Union, Ohio. Additionally, there is one competing diagnostic
imaging center with a cardiac catheterization lab located in the
community.
Spring View Hospital is located in Lebanon, which is
approximately 65 miles southwest of Lexington. Its two
nearest competitors are Taylor County Hospital, a 90-bed
facility located approximately 25 miles away in
Campbellsville, and Flaget Memorial Hospital, a 52-bed facility
located approximately 35 miles away in Bardstown.
Louisiana
Acadian Medical Center is located in Eunice, which is
approximately 44 miles northwest of Lafayette. Acadian
Medical Center is located approximately 25 miles from our
own Doctors Hospital of Opelousas and approximately
18 miles from our own Ville Platte Medical Center. Its
nearest competitors are Savoy Medical Center, a 198-bed facility
located approximately 12 miles north in Mamou, and
Opelousas General Hospital, a 180-bed facility located
approximately 25 miles away in Opelousas. We completed the
construction of this
11
52-bed
replacement hospital in the first quarter of 2006, which
replaced Eunice Community Medical Center. Acadian Medical Center
is on property we lease from the St. Landry Hospital Service
District.
Doctors Hospital of Opelousas is located in
Opelousas, which is approximately 21 miles north of
Lafayette. Doctors Hospital of Opelousas is located
approximately 25 miles from our own Acadian Medical Center
and approximately 23 miles from our own Ville Platte
Medical Center. Its nearest competitors are Opelousas General
Hospital, a 180-bed facility located approximately four miles
away and Our Lady of Lourdes Regional Medical Center, a 266-bed
facility located approximately 21 miles away in Lafayette.
Additionally, there is one competing diagnostic imaging center
and one competing surgery center located in the community.
Minden Medical Center is located in Minden, which is
approximately 30 miles east of Shreveport. Its nearest
competitors are the Willis-Knight Health System, a 755-bed
system of four hospitals, Christus Schumpert Health System, a
761-bed system of three hospitals, and LSU Health Sciences
Center, a 436-bed facility, all of which are located in
Shreveport or Bossier City.
River Parishes Hospital is located in LaPlace, which is
approximately 30 miles west of New Orleans. Its nearest
competitors are St. James Parish Hospital, a 20-bed critical
access facility located approximately 13 miles away in
Lutcher, St. Charles Parish Hospital, a 56-bed facility located
approximately 12 miles away in Luling, Kenner Regional
Medical Center, a 300-bed facility located approximately
19 miles away in Kenner, and East Jefferson General
Hospital, a 437-bed facility located approximately 25 miles
away in Metairie.
Teche Regional Medical Center is located in Morgan City,
which is approximately 76 miles south of Baton Rouge,
70 miles southwest of New Orleans and 65 miles
southeast of Lafayette. Its nearest competitors are Thibodaux
Regional Medical Center, a 149-bed facility located
approximately 30 miles away in Thibodaux, Terrebonne
General Medical Center, a 281-bed facility located approximately
35 miles away in Houma, and Franklin Foundation Hospital, a
25-bed critical access facility located approximately
23 miles away in Franklin. The lease for Teche Regional
Medical Center expires in April 2040. This lease is accounted
for as a prepaid capital lease.
Ville Platte Medical Center is located approximately
75 miles northwest of Baton Rouge. Ville Platte Medical
Center is located approximately 23 miles from our own
Doctors Hospital of Opelousas and approximately
18 miles from our own Acadian Medical Center. Its nearest
competitors are Savoy Medical Center, a 198-bed facility located
approximately 12 miles away in Mamou, and Opelousas General
Hospital, a 180-bed facility located approximately 18 miles
away in Opelousas.
Mississippi
Bolivar Medical Center is located in Cleveland, which is
approximately 112 miles south of Memphis, Tennessee. Its
nearest competitors are North Sunflower Medical Center, a 25-bed
critical access facility located approximately 10 miles
away in Ruleville, Delta Regional Medical Center, a 268-bed
facility located 35 miles away in Greenwood, Northwest
Mississippi Regional Medical Center, a 180-bed facility located
37 miles away in Clarksdale, and Greenwood Leflore
Hospital, a 270-bed facility located approximately 40 miles
away in Greenwood. The lease for Bolivar Medical Center expires
in December 2041. This lease is accounted for as a prepaid
capital lease.
Nevada
Northeastern Nevada Regional Hospital is located in Elko,
which is approximately 233 miles west of Salt Lake
City, Utah, 290 miles northeast of Reno and 420 miles
north of Las Vegas. Its primary competitors are in Salt Lake
City and Reno. Two additional smaller competitors are Humboldt
General, a 52-bed facility located approximately 140 miles
away in Winnemucca, and William Bree Ririe Hospital, a 29-bed
facility located approximately 190 miles away in Ely.
Additionally, there is one competing diagnostic imaging center
and one competing surgery center located in the community.
12
New
Mexico
Los Alamos Medical Center is located in Los Alamos, which
is approximately 96 miles north of Albuquerque and
approximately 35 miles west of Santa Fe. Its nearest
competitors are Espanola Hospital, an 80-bed facility located
approximately 20 miles away in Espanola, and St.
Vincents Hospital, a 272-bed facility located
approximately 37 miles away in Santa Fe. Additionally,
there is one competing surgery center located in the community.
Memorial Medical Center of Las Cruces is located in Las
Cruces, which is approximately 43 miles north of
El Paso, Texas. Its nearest competitors are Mountain View
Regional Medical Center, a 168-bed facility located
approximately three miles away and Mimbres Medical Center, a
68-bed facility located approximately 63 miles away in
Deming. The lease for Memorial Medical Center of Las Cruces
expires in May 2044. This lease is accounted for as a prepaid
capital lease. Additionally, there are five competing diagnostic
imaging centers and four competing surgery centers located in
the community.
South
Carolina
Coastal Carolina Medical Center is located in
Hardeeville, which is approximately 19 miles north of
Savannah, Georgia. Its nearest competitors are Candler Hospital,
a 292-bed facility, and Memorial Medical Center, a 488-bed
facility, both of which are located approximately 27 miles
away in Savannah, Georgia, Hilton Head Regional Medical Center,
a 99-bed facility located approximately 27 miles away on
Hilton Head Island, and Beaufort Memorial Hospital, a 197-bed
facility located approximately 31 miles away in Beaufort.
Additionally, there is one competing diagnostic
imaging/surgery/urgent care center located in the community.
Tennessee
Athens Regional Medical Center is located in Athens,
between Knoxville and Chattanooga, both of which are
approximately 50 miles away from Athens. Its nearest
competitors are Sweetwater Hospital, a 59-bed facility located
approximately 15 miles away in Sweetwater, and Woods
Memorial Hospital, a 72-bed facility located approximately
12 miles away in Etowah. Additionally, there is one
competing surgery center located in the community.
Crockett Hospital is located in Lawrenceburg, which is
approximately 83 miles southwest of Nashville. Its nearest
competitor is Maury Regional Hospital, a 255-bed facility
located approximately 33 miles away in Columbia.
Hillside Hospital is located in Pulaski, which is
approximately 77 miles south of Nashville. Its nearest
competitor is Maury Regional Hospital, a 255-bed facility
located approximately 33 miles away in Columbia.
Livingston Regional Hospital is located in Livingston,
which is approximately 100 miles east of Nashville. Its
nearest competitors are Cumberland River Hospital, a 30-bed
facility located approximately 18 miles away in Celina, and
Cookeville Regional Medical Center, a 247-bed facility located
approximately 20 miles away in Cookeville.
Southern Tennessee Medical Center is located in
Winchester, and its satellite facility, Emerald-Hodgson
Hospital, is located in Sewanee. The hospitals, which are
13 miles apart, are approximately 98 miles southeast
of Nashville and approximately 62 miles northwest of
Chattanooga. Their nearest competitors are Harton Regional
Hospital, a 137-bed facility located approximately 18 miles
away in Tullahoma, and Grandview Medical Center, a 70-bed
facility located approximately 41 miles away in Jasper.
Texas
Ennis Regional Medical Center is located in Ennis, which
is approximately 36 miles south of Dallas. Its nearest
competitors are Baylor Medical Center, a 75-bed facility located
approximately 16 miles away in Waxahachie, and Navarro
Regional Hospital, a 162-bed facility located approximately
25 miles away in Corsicana. The lease for Ennis Regional
Medical Center expires in February 2030 and is subject to three
ten-year
renewal terms at our option. The lease is accounted for as a
prepaid capital lease. The City of Ennis
13
has approved the construction of a new facility to replace Ennis
Regional Medical Center at an estimated cost of
$35.0 million. The City of Ennis has agreed to fund
$15.0 million of this cost. We will fund the difference and
the prepaid lease will expire in 40 years. The replacement
facility is scheduled for completion in June 2007.
Palestine Regional Medical Center is located in
Palestine, which is approximately 125 miles southeast of
Dallas and 167 miles north of Houston. Its nearest
competitors are Trinity Mother Frances Hospital, a 305-bed
facility located approximately 56 miles away in Tyler, and
East Texas Medical Center, which includes a
388-bed
facility located approximately 56 miles away in Tyler and a
75-bed facility located approximately 35 miles away in
Crockett.
Parkview Regional Hospital is located in Mexia, which is
approximately 85 miles south of Dallas. Its nearest
competitors are Limestone Medical Center, a 16-bed facility
located approximately 12 miles away in Groesbeck, and
Providence Hospital, a 170-bed facility, and Hillcrest Baptist
Medical Center, a 393-bed facility, both of which are located
approximately 45 miles away in Waco. The lease for Parkview
Regional Hospital expires in January 2011 and is subject to two
five-year renewal terms. We have a right of first refusal to
purchase Parkview Regional Hospital.
Utah
Ashley Valley Medical Center is located in Vernal, which
is approximately 171 miles southeast of Salt Lake
City. Its nearest competitor is Uintah Basin Medical Center, a
42-bed facility located approximately 30 miles away in
Roosevelt.
Castleview Hospital is located in Price, which is
approximately 119 miles southeast of Salt Lake City. Its
nearest competitors are Utah Valley Medical Center, a 409-bed
facility located approximately 77 miles away in Provo, and
Mountain View Hospital, a 118-bed facility located approximately
73 miles away in Payson. Additionally, there is one
competing surgery center located in the community.
Virginia
Clinch Valley Medical Center is located in Richlands,
which is approximately 145 miles west of Roanoke, Virginia
and approximately 145 miles south of Charleston, West
Virginia. Its nearest competitors are Tazewell Community
Hospital, a 56-bed facility located approximately 22 miles
away in Tazewell, Buchanan General Hospital, a 134-bed facility
located approximately 28 miles away in Grundy, and Russell
County Medical Center, a 78-bed facility located approximately
29 miles away in Lebanon. Additionally, there is one
competing diagnostic imaging center located in the community.
Danville Regional Medical Center is located in Danville,
which is approximately 147 miles southwest of Richmond and
approximately 30 miles from our own Memorial Hospital of
Martinsville. Its primary competitors are Halifax Regional
Hospital, a 192-bed facility located approximately 33 miles
away in South Boston, Morehead Memorial Hospital, a 108-bed
facility located approximately 24 miles away in Eden, North
Carolina, Moses Cone Memorial Hospital, a 535-bed facility
located approximately 44 miles away in Greensboro, North
Carolina, Annie Penn Hospital, a 110-bed facility located
approximately 23 miles away in Reidsville, North Carolina,
and Duke University Medical Center, a 989-bed facility located
approximately 60 miles away in Durham, North Carolina.
Additionally, there is one competing surgery center located in
the community.
Memorial Hospital of Martinsville and Henry County is
located in Martinsville, which is approximately 113 miles
northwest of Raleigh, North Carolina and approximately
30 miles from our own Danville Regional Medical Center. Its
nearest competitors are Morehead Memorial Hospital, a 108-bed
facility located approximately 20 miles away in Eden, North
Carolina, Carilion Health System (Roanoke Community Hospital and
Roanoke Memorial Hospital), located approximately 52 miles
away in Roanoke with 765 beds, and Carilion Franklin Memorial
Hospital, a 37-bed facility located 27 miles away in Rocky
Mount. Additionally, there is one competing lab/diagnostic
imaging center located in the community.
14
Wythe County Community Hospital is located in Wytheville,
which is approximately 80 miles southwest of Roanoke,
Virginia and approximately 130 miles south of Charleston,
West Virginia. Its nearest competitors are Smyth County Medical
Center, a 50-bed facility located 25 miles southwest in
Marion, and Pulaski Community Hospital, a 147-bed facility
located approximately 24 miles northeast in Pulaski. The
lease for Wythe County Community Hospital expires in 2035 and is
subject to one
30-year
renewal term. This lease is accounted for as a prepaid capital
lease.
West
Virginia
Logan Regional Medical Center is located in Logan, which
is approximately 56 miles southwest of Charleston. Its
nearest competitors are Boone Memorial Hospital, a 38-bed
critical access facility located approximately 29 miles
away in Madison, and Williamson Memorial Hospital, a 76-bed
facility located approximately 30 miles away in Williamson.
Raleigh General Hospital is located in Beckley, which is
approximately 57 miles southwest of Charleston. Its nearest
competitors are Beckley ARH Hospital, a 173-bed facility located
approximately four miles away, Plateau Medical Center, a 25-bed
facility located approximately 15 miles away in Oak Hill,
and Summers County ARH Hospital, a 25-bed facility located
approximately 27 miles away in Hinton. Additionally, there
is one competing surgery center and two competing diagnostic
imaging centers located in the community.
St. Josephs Hospital is located in Parkersburg,
which is approximately 80 miles north of Charleston and
approximately 110 miles southeast of Columbus, Ohio. Its
nearest competitors are Camden-Clark Memorial Hospital, a
269-bed facility located approximately one mile away, and
Marietta Memorial Hospital, a 168-bed facility located
approximately 14 miles away in Marietta, Ohio.
Additionally, there is one competing diagnostic center and two
freestanding urgent care facilities located in the community. We
have entered into a definitive agreement to sell St.
Josephs Hospital during mid-2007.
Wyoming
Lander Valley Medical Center is located in Lander, which
is approximately 150 miles west of Casper. Lander Valley
Medical Center is located approximately 28 miles away from
our own Riverton Memorial Hospital. Its nearest competitor is
Wyoming Medical Center, a 205-bed facility located in Casper. We
lease the real estate associated with Lander Valley Medical
Center from the City of Lander, Wyoming pursuant to a ground
lease that expires on December 31, 2073.
Riverton Memorial Hospital is located in Riverton, which
is approximately 120 miles west of Casper. Riverton
Memorial Hospital is located approximately 28 miles away
from our own Lander Valley Medical Center. Its nearest
competitor is Wyoming Medical Center, a 205-bed facility located
in Casper. Additionally, there is a competing physical therapy
center located adjacent to the hospital.
15
Demographic
Information
We review demographic information related to each of our
communities to identify opportunities to expand the breadth of
our services. The following table represents certain average
demographic information compared to the U.S. average.
Demographics have an impact on volume trends, particularly as
they relate to changes in the overall population, females aged
from 15 to 44 years old and the 65 and over population.
Each of these categories could increase or decrease our volume
trends and affect our payor classifications. In addition, the
effects of the local economies relating to unemployment rates
and median household incomes impact our uncompensated care and
cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical(a)
|
|
|
Projected(b)
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2011
|
|
|
Average County/Parish Population
|
|
LifePoint Average
|
|
|
51,207
|
|
|
|
51,454
|
|
|
|
53,193
|
|
|
|
56,377
|
|
Total Population Growth
|
|
LifePoint Average
|
|
|
0.9
|
%
|
|
|
0.0
|
%
|
|
|
2.5
|
%
|
|
|
0.6
|
%
|
|
|
U.S. Average
|
|
|
0.5
|
%
|
|
|
1.0
|
%
|
|
|
1.6
|
%
|
|
|
1.3
|
%
|
Females
Ages 15-44
Growth
|
|
LifePoint Average
|
|
|
0.4
|
%
|
|
|
(0.7
|
)%
|
|
|
1.6
|
%
|
|
|
(0.6
|
)%
|
|
|
U.S. Average
|
|
|
0.3
|
%
|
|
|
(0.1
|
)%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
Females
Ages 15-44
as a % of Total Population
|
|
LifePoint Average
|
|
|
19.6
|
%
|
|
|
19.4
|
%
|
|
|
19.2
|
%
|
|
|
18.1
|
%
|
|
|
U.S. Average
|
|
|
21.2
|
%
|
|
|
21.0
|
%
|
|
|
20.8
|
%
|
|
|
19.9
|
%
|
Population Ages 65 + Growth
|
|
LifePoint Average
|
|
|
1.0
|
%
|
|
|
0.4
|
%
|
|
|
2.3
|
%
|
|
|
1.3
|
%
|
|
|
U.S. Average
|
|
|
0.6
|
%
|
|
|
1.5
|
%
|
|
|
1.0
|
%
|
|
|
1.8
|
%
|
Population Ages 65+ as a % of
Total Population
|
|
LifePoint Average
|
|
|
14.8
|
%
|
|
|
14.9
|
%
|
|
|
15.0
|
%
|
|
|
15.6
|
%
|
|
|
U.S. Average
|
|
|
12.5
|
%
|
|
|
12.6
|
%
|
|
|
12.5
|
%
|
|
|
12.8
|
%
|
Median Household Income
|
|
LifePoint Average
|
|
$
|
36,575
|
|
|
$
|
37,587
|
|
|
$
|
38,420
|
|
|
$
|
44,149
|
|
|
|
U.S. Average
|
|
$
|
49,660
|
|
|
$
|
51,261
|
|
|
$
|
53,256
|
|
|
$
|
62,955
|
|
Unemployment Rate(c)
|
|
LifePoint Average
|
|
|
6.2
|
%
|
|
|
5.8
|
%
|
|
|
5.2
|
%
|
|
|
N/A
|
|
|
|
U.S. Average
|
|
|
5.5
|
%
|
|
|
5.1
|
%
|
|
|
4.4
|
%
|
|
|
N/A
|
|
|
|
|
(a) |
|
The 2004, 2005 and 2006 historical rates are annual growth rates. |
|
(b) |
|
The 2011 projected growth rate represents the compounded annual
growth rate from 2006 to 2011. |
|
(c) |
|
The 2006 unemployment rate represents the eleven-month average
as of November 30, 2006. |
Services
and Utilization
We believe that the most important factors relating to the
overall utilization of a hospital are the number, quality,
availability and specialties of physicians providing patient
care within the facility, breadth of services, market position
and reputation of the hospital, level of technology and emphasis
on patient care and convenience for patients and physicians.
Other factors which impact the ability of a non-urban hospital
to competitively meet the healthcare needs of its community
include:
|
|
|
|
|
the size of and growth in local population;
|
|
|
|
local economic conditions;
|
|
|
|
loyalty of the local population to support the local hospital;
|
|
|
|
physician availability, expertise and local reputation;
|
|
|
|
physician utilization trends;
|
|
|
|
the availability of reimbursement programs such as Medicare and
Medicaid;
|
16
|
|
|
|
|
the ability to negotiate contracts with managed care
organizations that are appropriate for non-urban markets;
|
|
|
|
necessary medical equipment to perform clinical
procedures; and
|
|
|
|
improved treatment protocols as a result of advances in medical
technology and pharmacology.
|
Most of our hospitals have experienced growth in outpatient care
services. We believe outpatient services provided at most of our
hospitals have increased for three primary reasons. First, new
physicians tend to provide primarily outpatient care services
until they become established in the community and develop a
patient base. Second, our third-party payors utilize
nationally-accepted guidelines for care and treatment that
generally encourage the utilization of outpatient, rather than
inpatient, services when appropriate, and shortened lengths of
stay for inpatient care. Third, outpatient services continue to
grow because of improvements in technology and clinical
practices.
In response to this increasing demand for outpatient care, we
are continuing to reconfigure some of our hospitals to more
effectively accommodate outpatient services and diagnostics. We
are also restructuring existing surgical capacity and adding
technology in some of our hospitals to permit additional
outpatient volume and a greater variety of outpatient services.
An important component of our continued growth in outpatient
services will include the development of outpatient joint
ventures with physicians in appropriate circumstances.
Sources
of Revenue
Our hospitals receive payment for patient services from the
federal government primarily under the Medicare program, state
governments under their respective Medicaid programs, health
maintenance organizations (HMOs), preferred provider
organizations (PPOs) and other private insurers, as
well as directly from patients. The approximate percentages of
total revenues from continuing operations from these sources
during the years specified below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Medicare
|
|
|
35.2
|
%
|
|
|
35.7
|
%
|
|
|
36.7
|
%
|
|
|
36.5
|
%
|
|
|
34.8
|
%
|
Medicaid
|
|
|
11.5
|
|
|
|
10.8
|
|
|
|
11.1
|
|
|
|
9.3
|
|
|
|
10.0
|
|
HMOs, PPOs and other private
insurers
|
|
|
43.1
|
|
|
|
40.6
|
|
|
|
38.8
|
|
|
|
38.8
|
|
|
|
38.7
|
|
Self-pay
|
|
|
8.2
|
|
|
|
8.7
|
|
|
|
9.4
|
|
|
|
12.3
|
|
|
|
12.7
|
|
Other
|
|
|
2.0
|
|
|
|
4.2
|
|
|
|
4.0
|
|
|
|
3.1
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patients generally are not responsible for any difference
between customary hospital charges and amounts reimbursed for
the services under Medicare, Medicaid, some private insurance
plans, HMOs or PPOs, but are responsible for services not
covered by these plans, exclusions, deductibles or co-insurance
features of their coverage. The amount of exclusions,
deductibles and co-insurance generally has been increasing each
year as employers have been shifting a higher percentage of
healthcare costs to employees. In some states, the Medicaid
program budgets have been either cut or funds diverted to other
programs, which have resulted in limiting the enrollment of
participants. This has resulted in higher bad debt expense at
many of our hospitals during the past few years.
Medicare
Medicare provides hospital and medical insurance benefits to
persons age 65 and over, some disabled persons and persons
with end-stage renal disease. All of our hospitals are currently
certified as providers of Medicare services. Amounts received
under the Medicare program generally are significantly less than
the hospitals customary charges for the services provided.
With the passage of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (MMA), which was
signed into law on December 8, 2003, Congress passed
sweeping changes to the
17
Medicare program. This legislation offers a prescription drug
benefit for Medicare beneficiaries and also provides a number of
benefits to hospitals, particularly rural hospitals. The Deficit
Reduction Act of 2005 (the DRA), which was signed
into law on February 6, 2006, includes measures related to
specialty hospitals, quality reporting and
pay-for-performance,
the inpatient rehabilitation 75% Rule and Medicaid cuts. The
major hospital provisions of MMA and DRA are discussed in the
subsections below.
Inpatient Acute Care Diagnosis Related Group
Payments. Payments from Medicare for inpatient
hospital services are generally made under the prospective
payment system, commonly known as PPS. Under PPS,
our hospitals are paid a prospectively determined amount for
each hospital discharge based on the patients diagnosis.
Specifically, each diagnosis is assigned a diagnosis related
group, commonly known as a DRG. Each DRG is assigned
a payment rate that is prospectively set using national average
resources used per case for treating a patient with a particular
diagnosis. DRG payments do not consider the actual resources
incurred by an individual hospital in providing a particular
inpatient service. This DRG assignment also affects the
prospectively determined capital rate paid with each DRG. DRG
and capital payments are adjusted by a predetermined geographic
adjustment factor assigned to the geographic area in which the
hospital is located.
The following tables list our historical Medicare DRG and
capital payments for the years presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
Medicare
|
|
|
|
DRG
|
|
|
Capital
|
|
|
|
Payments
|
|
|
Payments
|
|
|
2002
|
|
$
|
137.2
|
|
|
$
|
13.1
|
|
2003
|
|
|
177.8
|
|
|
|
16.0
|
|
2004
|
|
|
194.2
|
|
|
|
17.5
|
|
2005
|
|
|
359.5
|
|
|
|
33.3
|
|
2006
|
|
|
458.8
|
|
|
|
41.3
|
|
The DRG rates are adjusted by an update factor each federal
fiscal year (FFY), which begins on October 1.
The index used to adjust the DRG rates, known as the
hospital market basket index, gives consideration to
the inflation experienced by hospitals in purchasing goods and
services. Generally, however, the percentage increases in the
DRG payments have been lower than the projected increase in the
cost of goods and services purchased by hospitals. Historical
and FFY 2007 DRG rate increases are as follows:
|
|
|
|
|
|
|
% Increase
|
|
|
2002
|
|
|
2.75
|
|
2003
|
|
|
2.95
|
|
2004
|
|
|
3.40
|
|
2005
|
|
|
3.30
|
|
2006
|
|
|
3.70
|
|
2007
|
|
|
3.40
|
|
On August 1, 2006, the Centers for Medicare and Medicaid
Services (CMS) issued its FFY 2007 Hospital
Inpatient PPS final rule which implemented several policy
changes in the inpatient PPS, effective with discharges on or
after October 1, 2006. CMS will phase in over three years a
transition to using estimated hospital costs rather than charges
to set payment rates. We estimate that this transition will
positively affect our payments by approximately
$1.3 million during 2007. CMS is adding 20 new groups to
the current DRG system and will conduct an evaluation of
alternative systems for more comprehensive severity adjustment
to DRGs for FFY 2008, which may negatively affect our future DRG
reimbursement.
MMA and DRA provide a full market basket update for hospitals
that submit data on ten quality measures to CMS for FFY 2005 and
FFY 2006. For FFY 2006, the full market basket update was 3.4%.
For FFY 2007, CMS set the full market basket update to 3.4%.
Beginning in FFY 2007, DRA expands quality reporting
requirements to include additional measures and increases the
reduction to the market basket to 2.0% from 0.4% for hospitals
that do not report all the required data or withdraw from the
program. Reductions to a
18
non-participating hospitals rate will apply only to the
fiscal year involved. If the hospital subsequently joins the
program, the prior reduction will not be taken into account in
computing the update for that fiscal year. MMA and DRA restrict
the application of these provisions to hospitals paid under the
Inpatient PPS. The provisions do not apply to hospitals and
hospital units excluded from the Inpatient PPS or to payments
made to hospitals under other systems such as the Outpatient PPS.
MMA also made a permanent 1.6% increase in the base DRG payment
rate for rural hospitals and urban hospitals in smaller
metropolitan areas. In addition, MMA provided for payment relief
to the wage index component of the base DRG rate. Effective
October 1, 2004, MMA lowered the percentage of the DRG
subject to a wage adjustment from 71% to 62% for hospitals in
areas with a wage index below the national average. A majority
of our hospitals have benefited from the MMA provisions
adjusting the DRG payment rates. Several provisions will
continue to affect the FFY 2007 standardized amounts including a
full market basket adjusted rate for hospitals reporting
of quality data as part of the CMS Hospital Quality Initiative
and the reduction of the labor share to 62% for hospitals with a
wage index below the national average. In addition, effective
October 1, 2005, CMS reduced the labor-related share of the
wage index from 71.1% to 69.7% for hospitals in areas with a
wage index greater than the national average. These changes are
reflected in the following tables:
FFY 2007
Standard Rate for Hospitals with a Wage Index Greater than the
National Average
(69.7% Labor Share and 30.3% Nonlabor Share)
|
|
|
|
|
|
|
|
|
|
|
Labor-Related
|
|
|
Nonlabor-Related
|
|
|
Full update (3.4%)
|
|
$
|
3,397.52
|
|
|
$
|
1,476.97
|
|
Reduced update (1.4%)
|
|
$
|
3,331.80
|
|
|
$
|
1,448.40
|
|
FFY 2007
Standard Rate for Hospitals with a Wage Index Less than or Equal
to the National Average
(62.0% Labor Share and 38.0% Percent Nonlabor
Share)
|
|
|
|
|
|
|
|
|
|
|
Labor-Related
|
|
|
Nonlabor-Related
|
|
|
Full update (3.4%)
|
|
$
|
3,022.18
|
|
|
$
|
1,852.31
|
|
Reduced update (1.4%)
|
|
$
|
2,963.73
|
|
|
$
|
1,816.48
|
|
Capital
Standard
Federal Payment Rate
$427.03
Outlier Payments. In addition to DRG and
capital payments, hospitals may qualify for payments for cases
involving extraordinarily high costs when compared to average
cases in the same DRG. To qualify as a cost outlier, a
hospitals cost for the case must exceed the payment rate
for the DRG plus a specified amount called the fixed-loss
threshold. The outlier payment is equal to 80% of the difference
between the hospitals cost for the stay and the threshold
amount. The threshold is adjusted every year based on CMSs
projections of total outlier payments to make outlier
reimbursement equal 5.1% of total payments. We anticipate
outlier payments to decrease slightly in 2007 as a result of an
increase in the outlier threshold from $23,600 to $24,485.
The following table lists our historical Medicare outlier
payments for the years presented (in millions):
|
|
|
|
|
|
|
Medicare
|
|
|
|
Outlier
|
|
|
|
Payments
|
|
|
2002
|
|
$
|
0.7
|
|
2003
|
|
|
0.3
|
|
2004
|
|
|
0.6
|
|
2005
|
|
|
2.5
|
|
2006
|
|
|
3.2
|
|
19
Disproportionate Share Payments. The
Disproportionate Share Hospital (DSH) adjustment
provides additional payments to hospitals that treat a high
percentage of low-income patients. The adjustment is based on
the hospitals DSH patient percentage, which is the sum of
the number of patient days for patients who were entitled to
both Medicare Part A and Supplemental Security Income
benefits, divided by the total number of Medicare Part A
patient days plus the days for patients who were eligible for
Medicaid divided by the total number of hospital inpatient days.
Hospitals whose DSH patient percentage exceeds 15% are eligible
for a DSH payment adjustment.
Effective April 1, 2004, MMA raised the cap on the DSH
payment adjustment percentage from 5.25% to 12.0% for rural and
small urban hospitals and specified that payments to all
hospitals be based on the same conversion factor, regardless of
geographic location. Most of our hospitals have benefited from
these provisions.
The following table lists our historical Medicare DSH payments
for the years presented (in millions):
|
|
|
|
|
|
|
Medicare
|
|
|
|
DSH
|
|
|
|
Payments
|
|
|
2002
|
|
$
|
8.8
|
|
2003
|
|
|
9.8
|
|
2004
|
|
|
20.9
|
|
2005
|
|
|
47.6
|
|
2006
|
|
|
50.3
|
|
Wage Index and Geographic
Reclassification. Under PPS, the prospective
payment rates are adjusted for the area differences in wage
levels by a factor (wage index) reflecting the
relative wage level in the geographic area compared to the
national average wage level. Effective October 1, 2004 for
inpatient PPS and January 1, 2005 for outpatient PPS, CMS
implemented a number of changes to the wage index calculation.
These changes include adopting new standards for defining labor
market geographic areas based on standards for defining
Core-Based Statistical Areas issued by the Office of Management
and Budget. Hospitals that have been adversely affected by this
new definition received a blended (50/50) wage index based on
the old and new wage geographic definitions for one year.
Further, CMS has applied an occupational mix adjustment factor
to the wage index amounts. However, because of a court order
issued on April 3, 2006, the final rates for FFY 2007 fully
(i.e., at 100%) adjust the wage indices for occupational mix. We
estimate that this will increase our Medicare payments by
approximately $0.3 million during 2007.
The Medicare Geographic Classification Review Board
(MGCRB) was established by Congress in 1989 and set
forth criteria to use in issuing its decisions concerning the
geographic reclassification of hospitals as rural or urban for
prospective payment purposes. Hospitals seeking
reclassification, except for sole community hospitals and rural
referral centers, must prove close proximity to the area in
which they seek reclassification. In addition to close
proximity, a hospital seeking reclassification for purposes of
using another areas wage index must prove that the
hospitals incurred wage costs are comparable to hospital
wage costs in the other area.
The following table lists the Companys increases in
reimbursement as a result of Medicare geographic
reclassifications for the years presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Hospitals
|
|
|
Increase in
|
|
|
|
Reclassified
|
|
|
Reimbursement
|
|
|
2002
|
|
|
13
|
|
|
$
|
9.7
|
|
2003
|
|
|
14
|
|
|
|
10.7
|
|
2004
|
|
|
14
|
|
|
|
11.7
|
|
2005
|
|
|
23
|
|
|
|
20.8
|
|
2006
|
|
|
23
|
|
|
|
24.3
|
|
20
Post-Acute Care Transfer Policy. When a
patient is transferred from one acute care facility to another
acute care facility, the transferring hospital receives a per
diem payment with total payment limited to the full DRG amount
that would have been made if the patient were discharged without
being transferred. Beginning in FFY 1999, the transfer policy
was expanded to cover patients discharged to a post-acute care
setting. Initially, this policy applied to cases assigned to one
of ten DRGs that had high volumes of cases discharged to
post-acute care. The law gave CMS authority to expand the number
of DRGs for FFY 2001 and subsequent years. CMS established
criteria for determining the DRGs that should be included and
extended in the policy to cover 29 DRGs in FFY 2004. This change
reduced our Medicare reimbursement by approximately
$0.7 million annually. In FFY 2005, CMS found that no
additional DRGs met the criteria. However, CMS revised the list
of DRGs to adjust for one current post-acute transfer DRG that
was split into two new DRGs, resulting in 30 DRGs subject to the
policy. Effective October 1, 2005, CMS expanded the
post-acute transfer policy from 30 DRGs to 182 DRGs, resulting
in an approximately $6.0 million additional reduction in
our Medicare inpatient PPS payments for FFY 2006. CMS further
expanded the list to 192 DRGs during FFY 2007; however we
do not anticipate any material increase in payment reductions
for 2007.
Inpatient Rehabilitation and the 75%
Rule. Historically, freestanding rehabilitation
hospitals and rehabilitation units within acute care hospitals
(collectively, IRFs) received cost-based
reimbursement from Medicare under an exemption from the acute
care PPS. In order to qualify for cost-based reimbursement for
IRFs, hospitals were required to have 75% of their patients in
one or more of ten medical conditions (the 75%
Rule). The Balanced Budget Act of 1997 and its
implementing regulations replaced the traditional IRF cost-based
methodology, however, with a PPS system. This new IRF-PPS became
effective on January 1, 2002.
On April 30, 2004, CMS revised criteria for classifying
hospitals as IRFs increasing the number of qualifying medical
conditions from 10 to 13, but reducing the total number of
eligible patients based upon revised definitions of the
conditions. In anticipation of the considerable difficulty many
IRFs might have satisfying the revised 75% Rule, CMS established
a phase-in period for compliance, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Qualifying
|
|
|
Co-Morbidities
|
|
|
|
|
Cost Reporting Period Beginning
|
|
Patient Mix
|
|
|
Apply (Y/N)(1)
|
|
|
Patient Mix Affected
|
|
|
July 1, 2004-June 30,
2005
|
|
|
50
|
%
|
|
|
Y
|
|
|
|
Medicare and Total
|
|
July 1, 2005-June 30,
2006
|
|
|
60
|
%
|
|
|
Y
|
|
|
|
Medicare and Total
|
|
July 1, 2006-June 30,
2007
|
|
|
60
|
%
|
|
|
Y
|
|
|
|
Medicare and Total
|
|
July 1, 2007-June 30,
2008
|
|
|
65
|
%
|
|
|
Y
|
|
|
|
Medicare and Total
|
|
July 1, 2008 and thereafter
|
|
|
75
|
%
|
|
|
N
|
|
|
|
Medicare and Total
|
|
|
|
|
(1) |
|
Patients with certain co-morbidities (additional health
conditions) may count towards the minimum patient mix
established by the revised 75% Rule during the phase-in period. |
Any IRF that fails to meet the requirements of the 75% Rule is
subject to prospective reclassification as an acute care
hospital. The effect of this reclassification would be to change
Medicare prospective IRF payment rates to lower acute care
payment rates. Such rates are approximately 64% lower than these
IRF payment rates. We have reduced admissions in an attempt to
achieve compliance with the current phase-in schedule for the
revised 75% Rule.
On August 18, 2006, CMS published a final rule that updates
the IRF-PPS for FFY 2007. The final rule:
|
|
|
|
|
increases the market basket payments by 3.3%;
|
|
|
|
incorporates downward adjustments for reimbursement (resulting
in an overall decrease of approximately 2.6%) in response to
coding changes;
|
|
|
|
continues the payment rate adjustment of 21.3% for IRFs in rural
areas; and
|
|
|
|
increases the outlier payment threshold for cases with unusually
high costs.
|
21
We currently operate 19 IRFs for which services are reimbursed
under the IRF-PPS. The following table lists our historical
Medicare IRF payments for the years presented (in millions):
|
|
|
|
|
|
|
IRF
|
|
|
|
Reimbursement
|
|
|
2002
|
|
$
|
12.5
|
|
2003
|
|
|
18.4
|
|
2004
|
|
|
20.9
|
|
2005
|
|
|
29.5
|
|
2006
|
|
|
31.0
|
|
Inpatient Psychiatric. As of December 31,
2006, we operated eleven inpatient psychiatric units. Payments
to PPS-exempt psychiatric hospitals and units were based upon
reasonable cost, subject to a
cost-per-discharge
target (the Tax Equity and Fiscal Responsibility Act of 1982
limits) for cost reporting periods beginning before
January 1, 2005. These limits were updated annually by a
market basket index. The update to a hospitals target
amount for its cost reporting periods in fiscal years 2003, 2004
and 2005 was a market basket of 3.5%, 3.4% and 3.3%,
respectively. Caps had been established for the
cost-per-discharge
target at the
75th percentile
for each category of PPS-exempt hospitals and units. For cost
reporting periods beginning on or after October 1, 2002,
payments to these PPS-exempt hospitals and units were no longer
subject to these caps. However, if a PPS-exempt hospital or unit
was subject to the cap in the cost report for the year prior to
October 1, 2002, such limitation was included in its future
target amount. The
cost-per-discharge
for new hospitals and hospital units could not exceed 110% of
the national median target rate for hospitals in the same
category.
On November 15, 2004, CMS adopted a rule to implement a PPS
for inpatient hospital services furnished in psychiatric
hospitals and psychiatric units of general, acute care hospitals
and critical access hospitals (IPF PPS). The new
prospective payment system replaced the cost-based system for
reporting periods beginning on or after January 1, 2005.
IPF PPS is a per diem prospective payment system with
adjustments to account for certain patient and facility
characteristics. IPF PPS contains an outlier policy
for extraordinarily costly cases and an adjustment to a
facilitys base payment if it maintains a full-service
emergency department. IPF PPS is being implemented over a
three-year transition period with full payment under PPS to
begin in the fourth year. Also, CMS has included a stop-loss
provision to ensure that hospitals avoid significant losses
during the transition. CMS has established the IPF PPS payment
rate in a manner intended to be budget neutral and has adopted a
July 1 update cycle. Thus, the initial IPF PPS per diem
payment rate was effective for the
18-month
period January 1, 2005 through June 30, 2006. On
May 1, 2006, CMS released its final IPF PPS regulation for
July 1, 2006 through June 30, 2007, which states that
IPF PPS rates increased an average of 4.3% effective
July 1, 2006.
The following table lists our historical Medicare inpatient
psychiatric payments for the years presented (in millions):
|
|
|
|
|
|
|
Medicare Inpatient
|
|
|
|
Psychiatric Payments
|
|
|
2002
|
|
$
|
4.6
|
|
2003
|
|
|
4.9
|
|
2004
|
|
|
5.8
|
|
2005
|
|
|
13.1
|
|
2006
|
|
|
16.9
|
|
Skilled Nursing Facilities and Swing Beds. As
of December 31, 2006, we operated eight hospital-based
skilled nursing facilities (SNFs) and 26
hospitals utilizing swing beds. The SNF PPS was implemented in
1998 and replaced a cost-based payment system. Under the SNF
PPS, providers receive a per diem payment from Medicare if a SNF
patient admission was immediately preceded by a hospital stay of
at least three days. In response to criticism that the SNF PPS
reimbursement was inadequate, Congress initiated several
temporary payment adjustments. Two of these payment adjustments,
which were authorized under the Balanced Budget
22
Refinement Act of 1999 (BBRA) and the Benefits
Improvement and Protection Act of 2000 (BIPA), were
to remain in effect until CMS comprehensively refined the SNF
PPS. These payment add-ons, a 20% adjustment for medically
complex resource utilization groups (RUGs) and a
6.7% adjustment for rehabilitation RUGs, terminated on
December 31, 2005. Through December 31, 2005, payments
were based on 44 RUGs and covered all costs, such as diagnostic
tests, supplies and pharmacy expenses.
Beginning January 1, 2006, the RUG system has been modified
by the addition of nine new RUGs intended to capture some of the
sickest and most costly SNF patients. As a result of the
addition of the new RUGs, which CMS interprets as a SNF PPS
refinement, the two payment add-ons have been
removed at the end of 2005 and replaced on January 1, 2006
with a new 8.41% add-on that is applied to the nursing component
of each of the 53 RUGs, including the nine new RUGs. For FFY
2004, SNF PPS payment rates were increased by the full market
basket of 3.0% coupled with a 3.26% increase to reflect the
difference between the market basket forecast and the actual
market basket increase from the start of the SNF PPS in July
1998. For both FFYs 2006 and 2007, SNF PPS payment rates were
increased by a market basket update of 3.1%.
The following table lists our historical Medicare inpatient SNF
RUG payments for the years presented (in millions):
|
|
|
|
|
|
|
Medicare Inpatient
|
|
|
|
SNF RUG Payments
|
|
|
2002
|
|
$
|
6.3
|
|
2003
|
|
|
4.8
|
|
2004
|
|
|
4.0
|
|
2005
|
|
|
6.3
|
|
2006
|
|
|
8.7
|
|
Certain small, rural hospitals are allowed to enter into a
Medicare swing-bed agreement, under which the hospital can use
its beds to provide either acute or SNF care, as needed. These
services furnished by rural hospitals are paid under the SNF
PPS. The swing-bed provision represents a hybrid benefit and,
although the services furnished are SNF services, the provider
of services is a hospital.
The following table lists our historical Medicare swing-bed RUG
payments for the years presented (in millions):
|
|
|
|
|
|
|
Medicare Inpatient
|
|
|
|
Swing-Bed RUG Payments
|
|
|
2002
|
|
$
|
3.4
|
|
2003
|
|
|
2.4
|
|
2004
|
|
|
3.7
|
|
2005
|
|
|
4.0
|
|
2006
|
|
|
3.9
|
|
Critical Access Hospitals. During 2006, we
operated three CAHs. This category of hospitals was established
in the BBA to support small, limited service hospitals in rural
areas. Prior to the enactment of the MMA, Medicare paid CAHs on
the basis of their Medicare allowable costs. The MMA increased
these payments to 101% of Medicare allowable costs. Effective
January 1, 2006, the MMA eliminated the authority of states
to waive distance criteria for CAH status if a hospital is
designated as a necessary provider. This provision includes a
grandfathering provision that allows a CAH designated as a
necessary provider in its states rural health plan before
the effective date to be permitted to maintain its necessary
provider designation.
23
The following table lists our historical Medicare
critical-access hospital payments for the years presented (in
millions):
|
|
|
|
|
|
|
Medicare Critical-Access
|
|
|
|
Hospital Payments
|
|
|
2002
|
|
$
|
2.3
|
|
2003
|
|
|
4.0
|
|
2004
|
|
|
5.4
|
|
2005
|
|
|
5.3
|
|
2006
|
|
|
9.3
|
|
Graduate Medical Education. Hospitals and
hospital-based providers receive payment for training and
instructing residents in approved direct graduate medical
education (GME) residency teaching programs. The
direct GME payment is for costs, including the direct costs of
salaries and fringe benefits of interns and residents and
teachers salaries, associated with an approved residency
teaching program in medicine, osteopathy, dentistry and
podiatry. We have historically received little or no GME
payments until 2005, when we received $0.4 million. We
received $1.0 million in GME payments during 2006.
Indirect Medical Education. Prospective
payment hospitals that have residents in an approved graduate
medical education program receive an additional payment for a
Medicare discharge to reflect the higher patient care costs of
teaching hospitals relative to non-teaching hospitals. This
Indirect Medical Education (IME) adjustment factor
is calculated using a hospitals ratio of residents to beds
and a formula multiplier. The formula is traditionally described
in terms of a certain percentage increase in payment for every
10% increase in the
resident-to-bed
ratio. We have historically received little or no Medicare IME
payments until 2005, when we received $0.8 million. In
2006, we received $0.7 million in IME payments.
Outpatient Payments. BBRA established a PPS
for outpatient hospital services that commenced on
August 1, 2000. Outpatient services are assigned ambulatory
payment classifications (APCs), with associated
specific relative weights, which are multiplied by an APC
conversion factor. The APC conversion factors are $56.983,
$59.511 and $61.468 for 2005, 2006 and 2007, respectively. Prior
to August 1, 2000, outpatient services were paid at the
lower of customary charges or on a reasonable cost basis.
BBRA eliminated the anticipated average reduction of 5.7% for
various Medicare outpatient payments under the Balanced Budget
Act of 1997 (BBA). Under BBRA, outpatient payment
reductions for non-urban hospitals with 100 beds or less were
postponed until December 31, 2003. Fifteen of our hospitals
qualified for this hold harmless relief. Payment
reductions under Medicare outpatient PPS for non-urban hospitals
with greater than 100 beds and urban hospitals were mitigated
through a corridor reimbursement approach, pursuant to which a
percentage of such reductions were reimbursed through
December 31, 2003. Substantially all of our remaining
hospitals qualified for relief under this provision. MMA
extended the hold harmless provision for non-urban hospitals
with 100 beds or less and expanded the provision to include sole
community hospitals for cost reporting periods beginning in 2004
until December 31, 2005. DRA extended these payments for
three years but at a reduced amount. Payments for 2006 were 95%
and for 2007 and 2008 will be 90% and 85%, respectively, of the
hold harmless amount.
The following table lists our historical Medicare outpatient
payments for the years presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
Medicare Hold Harmless Payments
|
|
|
|
Outpatient Payments
|
|
|
(Included in Medicare Outpatient Payments)
|
|
|
2002
|
|
$
|
45.5
|
|
|
$
|
0.5
|
|
2003
|
|
|
56.7
|
|
|
|
0.6
|
|
2004
|
|
|
71.2
|
|
|
|
0.1
|
|
2005
|
|
|
142.1
|
|
|
|
|
|
2006
|
|
|
178.5
|
|
|
|
|
|
Home Health Payments. As of December 31,
2006, we operated twelve home health agencies. Home health
payments are reimbursed based on a PPS. For a two-year period
beginning April 1, 2001, BIPA
24
increased Medicare payments 10.0% for home health services
furnished in specific rural areas. This provision expired on
March 31, 2003. Home health PPS rates for 2003, which
became effective October 1, 2002, were effectively
decreased by 4.9%. The market basket rate increase for calendar
year 2005 was 3.1%, which was reduced 0.8% as mandated by MMA,
and resulted in a net increase of the
60-day
episode of care rate of 2.3%. MMA included several changes to
home health services, including a 5% additional payment for
those home health services furnished in rural areas for one
year, effective April 1, 2004. DRA froze 2006 Medicare
payments but reinstated the 5% rural payment add-on for 2006
only. The home health market basket rate increase for FFY 2007
is 3.3%. Beginning in 2007, home health agencies that do not
submit quality data would receive a 2% decrease in the market
basket update.
The following table lists our historical Medicare home health
payments for the years presented (in millions):
|
|
|
|
|
|
|
Medicare Home
|
|
|
|
Health Payments
|
|
|
2002
|
|
$
|
0.2
|
|
2003
|
|
|
1.9
|
|
2004
|
|
|
1.2
|
|
2005
|
|
|
8.2
|
|
2006
|
|
|
12.7
|
|
Sole Community Hospitals and Medicare Dependent
Hospitals. A sole community hospital
(SCH) is generally the only hospital within a
35-mile
radius. Medicare has special payment provisions for SCHs,
including higher outpatient reimbursement. As of
December 31, 2006, 17 of our hospitals qualify as SCHs
under Medicare regulations. Special payment provisions related
to SCHs may include a higher inpatient reimbursement rate, which
is based on a selected base years hospital-specific costs
trended forward. Eight of our 17 SCH hospitals receive the
higher hospital-specific rate. In addition, the TRICARE program
that provides medical insurance benefits to government employees
has special payment provisions for SCHs.
As of December 31, 2006, we operated four Medicare
Dependent Hospitals (MDHs), one of which lost its
MDH classification effective January 1, 2007 because of its
lower mix of Medicare patients. We estimate that this will
reduce our Medicare reimbursement by approximately
$0.3 million in 2007. Historically, MDHs were paid based on
the federal rate or, if higher, the federal rate plus 50% of the
difference between the federal rate and the updated
hospital-specific rate. This provision was scheduled to expire
for discharges beginning October 1, 2006. DRA extended MDH
status for qualifying hospitals through discharges occurring
before October 1, 2011. Additionally, effective
October 1, 2006, the hospital-specific portion of the
payment was increased from 50% to 75% and the 12% cap on
Medicare DSH payments to MDHs was eliminated. We estimate that
these changes will positively affect our three MDHs by
approximately $1.0 million in 2007.
Rural Health Clinics. As of December 31,
2006, we operated seven rural health clinics. A rural health
clinic is an outpatient facility that is primarily engaged in
furnishing physicians and other medical and health
services and that meets other requirements designated to ensure
the health and safety of individuals served by the clinic. The
clinic must be located in a medically under-served area that is
not urbanized as defined by the U.S. Bureau of Census.
Payment to rural health clinics for covered services is made by
means of an
all-inclusive
rate for each visit. Prior to 2005, we received approximately
$0.3 million in Medicare rural health clinic payments
annually. We received approximately $1.7 million and
$3.6 million in Medicare rural health clinic payments in
2005 and 2006, respectively.
Hospice Payments. Medicare beneficiaries who
are terminally ill are eligible to receive hospice benefits in
lieu of most other Medicare benefits. Hospices are paid a
specific amount for each day a beneficiary is in their care. The
daily reimbursement amount is different depending on the type of
care being provided to the beneficiary on a particular day. The
total amount a hospice can receive for each beneficiary is
capped at an annual level. We received approximately
$1.2 million and $2.3 million in Medicare hospice
payments for one of our hospitals in 2005 and 2006, respectively.
25
Medicare Bad Debt Reimbursement. Under
Medicare, the costs attributable to the deductible and
coinsurance amounts which remain unpaid by the Medicare
beneficiary can be added to the Medicare share of allowable
costs as cost reports are filed. Hospitals generally receive
interim pass-through payments during the cost report year which
were determined by the fiscal intermediary from the prior cost
report filing.
Bad debts must meet the following criteria to be allowable:
|
|
|
|
|
the debt must be related to covered services and derived from
deductible and coinsurance amounts;
|
|
|
|
the provider must be able to establish that reasonable
collection efforts were made;
|
|
|
|
the debt was actually uncollectible when claimed as
worthless; and
|
|
|
|
sound business judgment established that there was no likelihood
of recovery at any time in the future.
|
The amounts uncollectible from specific beneficiaries are to be
charged off as bad debts in the accounting period in which the
accounts are deemed to be worthless. In some cases, an amount
previously written off as a bad debt and allocated to the
program may be recovered in a subsequent accounting period. In
these cases, the recoveries must be used to reduce the cost of
beneficiary services for the period in which the collection is
made. In determining reasonable costs for hospitals, the amount
of bad debts otherwise treated as allowable costs is reduced by
30%.
The following table lists our historical Medicare bad debt
payments for the years presented (in millions):
|
|
|
|
|
|
|
Medicare Bad
|
|
|
|
Debt Payments
|
|
|
2002
|
|
$
|
4.1
|
|
2003
|
|
|
5.2
|
|
2004
|
|
|
6.9
|
|
2005
|
|
|
13.4
|
|
2006
|
|
|
16.9
|
|
26
Medicaid
Medicaid, a joint federal-state program that is administered by
the states, provides hospital benefits to qualifying individuals
who are unable to afford care. Amounts received under the
Medicaid program are generally significantly less than the
hospitals customary charges for the services provided.
Most state Medicaid payments are made under a PPS or under
programs that negotiate payment levels with individual
hospitals. The federal government and many states have or may
significantly reduce Medicaid funding. This could adversely
affect future levels of Medicaid payments received by our
hospitals. DRA gives states greater control over their Medicaid
programs and allows states to impose new co-payments and
deductibles on Medicaid recipients.
The following table summarizes our Medicaid revenues from
continuing operations, general reimbursement methodologies and
cost reporting requirements by state:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
State
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Reimbursement Methodologies
|
|
Requirements
|
|
|
(In millions)
|
|
|
|
|
|
|
Alabama
|
|
$
|
1.7
|
|
|
$
|
5.8
|
|
|
$
|
6.6
|
|
|
$
|
15.8
|
|
|
$
|
22.4
|
|
|
IP: Cost-related rates, not
retrospective
|
|
Informational only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
Arizona
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.9
|
|
|
|
13.5
|
|
|
IP: Per diem rates, not
retrospective
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
1.4
|
|
|
IP: Cost-based
|
|
Inpatient cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
Colorado
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
2.5
|
|
|
IP: DRG-based
|
|
Outpatient cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: 72% of allowable cost and fee
schedule
|
|
|
Florida
|
|
|
3.4
|
|
|
|
3.0
|
|
|
|
4.5
|
|
|
|
5.2
|
|
|
|
6.5
|
|
|
IP: Per diem
|
|
Rate setting, cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Per visit/per line item
|
|
|
Indiana
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
1.5
|
|
|
IP: DRG-based
|
|
Informational only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
Kansas
|
|
|
1.6
|
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
3.3
|
|
|
|
3.1
|
|
|
IP: DRG-based
|
|
Informational only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
Kentucky
|
|
|
36.0
|
|
|
|
32.4
|
|
|
|
40.5
|
|
|
|
43.2
|
|
|
|
51.2
|
|
|
IP: DRG-based
|
|
Outpatient cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Cost-based, flat rate, fee
schedule
|
|
|
Louisiana
|
|
|
3.7
|
|
|
|
3.6
|
|
|
|
4.3
|
|
|
|
16.9
|
|
|
|
21.7
|
|
|
IP: Per diem
|
|
Outpatient cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Primarily 87% of allowable
cost and fee schedule
|
|
|
Mississippi
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
11.7
|
|
|
IP: Per diem
|
|
Rate setting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Prospective rate
|
|
|
Nevada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
2.6
|
|
|
IP: Per diem rates, not
retrospective
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
New Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
16.1
|
|
|
IP: DRG-based with cost-based
capital
|
|
IP capital and OP cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Cost-based and fee schedule
|
|
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
4.1
|
|
|
IP: Cost-based
|
|
IP capital and OP cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Cost-based
|
|
|
Tennessee
|
|
|
20.6
|
|
|
|
22.4
|
|
|
|
24.2
|
|
|
|
23.6
|
|
|
|
20.1
|
|
|
IP: DRG-based
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.9
|
|
|
|
12.2
|
|
|
IP: DRG-based
|
|
OP cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Cost-based and fee schedule
|
|
|
Utah
|
|
|
7.9
|
|
|
|
8.4
|
|
|
|
8.7
|
|
|
|
8.1
|
|
|
|
7.9
|
|
|
IP: Negotiated percentage of charges
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Primarily 93% of charges and
fee schedule
|
|
|
Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3
|
|
|
|
25.9
|
|
|
IP: DRG-based with cost-based
capital
|
|
IP capital and OP cost settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Cost-based
|
|
|
West Virginia
|
|
|
0.6
|
|
|
|
9.3
|
|
|
|
9.4
|
|
|
|
7.1
|
|
|
|
12.0
|
|
|
IP: DRG-based
|
|
Informational only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
Wyoming
|
|
|
4.8
|
|
|
|
5.2
|
|
|
|
5.5
|
|
|
|
6.8
|
|
|
|
7.7
|
|
|
IP: Prospective, based on per
discharge
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OP: Fee schedule
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80.3
|
|
|
$
|
92.2
|
|
|
$
|
105.5
|
|
|
$
|
171.4
|
|
|
$
|
244.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IP Inpatient
OP Outpatient
27
The following table lists our historical Medicaid
disproportionate share and similar state-funded payments, which
payments are included in the Medicaid revenues listed in the
above table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid Disproportionate Share Payments
|
|
State
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Alabama
|
|
$
|
0.3
|
|
|
$
|
0.6
|
|
|
$
|
1.7
|
|
|
$
|
3.7
|
|
|
$
|
1.7
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
Kansas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
0.4
|
|
Kentucky
|
|
|
5.9
|
|
|
|
3.4
|
|
|
|
4.9
|
|
|
|
4.9
|
|
|
|
6.4
|
|
Louisiana
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
Mississippi
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
0.9
|
|
Nevada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
New Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
Tennessee
|
|
|
0.2
|
|
|
|
0.9
|
|
|
|
1.6
|
|
|
|
1.2
|
|
|
|
2.2
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
2.5
|
|
West Virginia
|
|
|
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
0.9
|
|
Wyoming
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.5
|
|
|
$
|
5.8
|
|
|
$
|
9.0
|
|
|
$
|
15.3
|
|
|
$
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Cost Reports
Hospitals participating in the Medicare and some Medicaid
programs, whether paid on a reasonable cost basis or under a
PPS, are required to meet certain financial reporting
requirements. Federal and, where applicable, state regulations
require submission of annual cost reports identifying medical
costs and expenses associated with the services provided by each
hospital to Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and some
Medicaid programs are subject to routine governmental audits.
These audits may result in adjustments to the amounts ultimately
determined to be payable to us under these reimbursement
programs. Finalization of these audits often takes several
years. Providers may appeal any final determination made in
connection with an audit.
HMOs,
PPOs and Other Private Insurers
In addition to government programs, our hospitals are reimbursed
by differing types of private payors including HMOs, PPOs, other
private insurance companies and employers. To attract additional
volume, most of our hospitals offer discounts from established
charges to certain large group purchasers of healthcare
services. These discount programs often limit our ability to
increase charges in response to increasing costs. Generally,
patients covered by HMOs, PPOs and other private insurers will
be responsible for certain co-payments and deductibles.
Self-Pay
Self-pay revenues are derived from patients who do not have any
form of healthcare coverage. The revenues associated with
self-pay patients are generally reported at our gross charges.
We evaluate these patients, after the patients medical
condition is determined to be stable, for qualifications of
Medicaid or other governmental assistance programs, as well as
our local hospitals policy for charity/indigent care. A
significant portion of self-pay patients are admitted through
the emergency department and often require high-acuity
treatment. High-acuity treatment is more costly to provide and,
therefore, results in higher billings. Over the past few years,
we have seen an increase in the number of self-pay patients at
our hospitals, which are the least collectible of all accounts.
28
We provide care to certain patients that qualify under the local
charity/indigent care policy at each of our hospitals. We
discount a charity/indigent care patients charges against
our revenues and do not report such discounts in our provision
for doubtful accounts as it is our policy not to pursue
collection of amounts related to these patients.
The following table lists our historical self-pay revenues and
charity/indigent care write-offs for the years presented (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Pay
|
|
|
Charity/Indigent Care
|
|
|
Combined
|
|
|
|
Revenues
|
|
|
Write-Offs
|
|
|
Total
|
|
|
2002
|
|
$
|
57.6
|
|
|
$
|
3.5
|
|
|
$
|
61.1
|
|
2003
|
|
|
75.7
|
|
|
|
5.1
|
|
|
|
80.8
|
|
2004
|
|
|
92.3
|
|
|
|
7.7
|
|
|
|
100.0
|
|
2005
|
|
|
226.9
|
|
|
|
24.0
|
|
|
|
250.9
|
|
2006
|
|
|
309.6
|
|
|
|
42.4
|
|
|
|
352.0
|
|
Indigent
Care Programs
Memorial Medical Center of Las Cruces (MMC), which
is located in Las Cruces, New Mexico, participates in two
indigent care programs:
|
|
|
|
|
Expanded Care Program, which is funded by both the City of Las
Cruces and Dona Ana County; and
|
|
|
|
Sole Community Provider Program, which is funded by both Dona
Ana County and the federal government.
|
The Expanded Care Program funds MMC approximately
$6.0 million per year until the expiration date of
June 1, 2007. MMC must provide a certain level of charity
care to receive these funds. MMC currently receives
approximately $23.5 million annually under the Sole
Community Provider Program. The Sole Community Provider Program
is not tied to specific claims, as the funding levels are
determined in October of each year by both Dona Ana County and
the federal government.
Competition
Hospitals,
Specialized Care Providers and Physicians
We compete with other hospitals and healthcare service providers
for patients. The competition among hospitals and other
healthcare service providers for patients has intensified in
recent years. In all but four of the communities in which our
hospitals are located, our hospitals face no direct hospital
competition because there are no other hospitals in these
communities. However, these hospitals do face competition from
hospitals outside of their communities, including hospitals in
the market area and nearby urban areas that may provide more
comprehensive services. Patients in our primary service areas
may travel to these other hospitals for a variety of reasons,
including the need for services we do not offer, physician
referrals or being sent by managed care plans. Some of these
competing hospitals use equipment and services more specialized
than those available at our hospitals. Patients who require
specialized services from these other hospitals may subsequently
shift their preferences to those hospitals for services we
provide. In addition, some of the hospitals that compete with us
are owned by tax-supported governmental agencies or
not-for-profit
entities supported by endowments and charitable contributions.
Not only do these hospitals receive local tax funds, endowments
and charitable contributions, but they also are generally not
required to pay sales, property and income taxes as we are.
We also face increasing competition from other specialized care
providers, including outpatient surgery, oncology, physical
therapy and diagnostic centers, as well as competing services
rendered in physician offices. To the extent that other
providers are successful in developing specialized outpatient
facilities, our market share for those specialized services will
likely decrease. Some of our hospitals have developed
specialized outpatient facilities where necessary to compete
with these other providers. Physician competition also has
29
increased as physicians, in some cases, have become equity
owners in surgery centers and outpatient diagnostic centers, to
which they refer patients.
State certificate of need laws, which place limitations on a
hospitals ability to expand hospital services and add new
equipment, also may have the effect of restricting competition.
Of the 19 states where we operate hospitals, nine have
certificate of need laws (Alabama, Florida, Kentucky,
Mississippi, Nevada, South Carolina, Tennessee, Virginia and
West Virginia). The application process for approval of
additional covered services, new facilities, changes in
operations and capital expenditures is, therefore, highly
competitive in these states and these laws operate as a barrier
to entry for new competitors while potentially restricting our
ability to further expand in these markets. In the other states
in which we operate that do not have certificate of need laws,
this barrier to entry does not exist and we have experienced
increased competition in these states.
The number and quality of the physicians on a hospitals
staff are important factors in determining a hospitals
competitive advantage. Physicians decide whether a patient is
admitted to the hospital and the procedures to be performed. We
believe that physicians refer patients to a hospital primarily
on the basis of the patients needs, the quality of other
physicians on the medical staff, the location of the hospital,
the breadth and scope of services offered at the hospitals
facilities, and other personal and professional considerations
relative to management of the hospitals.
Hospital
Acquisitions
A key element of our business strategy is expansion through the
acquisition of acute care hospitals in non-urban markets. The
competition to acquire these type of hospitals is significant.
Our principal competitors for acquisitions have included Health
Management Associates, Inc., Community Health Systems, Inc.,
Triad Hospitals, Inc. and newly capitalized
start-up
companies. We intend to acquire hospitals that are similar to
those we currently operate by adhering to our selective
acquisition strategy. In appropriate circumstances, we also
intend to acquire other types of healthcare service providers,
such as ambulatory surgery centers and diagnostic imaging
centers, located in our markets, which we believe will
complement services provided at the hospital.
Employees
and Medical Staff
At December 31, 2006, we had approximately 20,000
employees, including approximately 5,200 part-time
employees. Nurses, therapists, lab technicians, facility
maintenance staff and the administrative staff of hospitals are
the majority of our employees. Approximately 200 of our
employees are subject to collective bargaining agreements. We
consider our employee relations to be generally good. While some
of our hospitals experience union organizing activity from time
to time, we do not currently expect these efforts to materially
affect our future operations.
Our hospitals are staffed by licensed physicians who have been
admitted to the medical staff of our individual hospitals. Any
licensed physician may apply to be admitted to the medical staff
of any of our hospitals, but admission to the medical staff must
be approved by the hospitals medical staff and the local
board of trustees of the hospital in accordance with established
credentialing criteria. We had approximately 2,000 admitting
physicians on staff at our hospitals at December 31, 2006.
In addition, we had approximately 200 employed physicians.
Government
Regulation
Overview. All participants in the healthcare
industry are required to comply with extensive government
regulations at the federal, state and local levels. Under these
laws and regulations, hospitals must meet requirements for
licensure and qualify to participate in government programs,
including the Medicare and Medicaid programs. These requirements
relate to the adequacy of medical care, equipment, personnel,
operating policies and procedures, maintenance of adequate
records, rate-setting, compliance with building codes and
environmental protection laws. If we fail to comply with
applicable laws and regulations, we may be subject to criminal
penalties and civil sanctions, and our hospitals may lose their
licenses and ability to participate in government programs. In
addition, government regulations frequently change. When
regulations
30
change, we may be required to make changes in our facilities,
equipment, personnel and services so that our hospitals remain
licensed and qualified to participate in these programs. We
believe that our hospitals are in substantial compliance with
current federal, state and local regulations and standards.
Hospitals are subject to periodic inspection by federal, state
and local authorities to determine their compliance with
applicable regulations and requirements necessary for licensing
and certification. All of our hospitals are currently licensed
under appropriate state laws and are qualified to participate in
Medicare and Medicaid programs. In addition, as of
December 31, 2006, all of our hospitals, except for
Bluegrass Community Hospital, were accredited by The Joint
Commission. The Joint Commission accreditation indicates that a
hospital satisfies the applicable health and administrative
standards to participate in Medicare and Medicaid.
Utilization Review. Federal law contains
numerous provisions designed to ensure that services rendered by
hospitals to Medicare and Medicaid patients meet professionally
recognized standards, are medically necessary and that claims
for reimbursement are properly filed. These provisions include a
requirement that a sampling of admissions of Medicare and
Medicaid patients must be reviewed by peer review organizations,
which review the appropriateness of Medicare and Medicaid
patient admissions and discharges, the quality of care provided,
the validity of DRG classifications and the appropriateness of
cases of extraordinary length of stay or cost. Peer review
organizations may deny payment for services provided, or assess
fines and also have the authority to recommend to the Department
of Health and Human Services (DHHS) that a provider
which is in substantial noncompliance with the standards of the
peer review organization be excluded from participation in the
Medicare program. Utilization review is also a requirement of
most non-governmental managed care organizations.
Fraud and Abuse Laws. Participation in the
Medicare
and/or
Medicaid programs is heavily regulated by federal statutes and
regulations. If a hospital fails to comply substantially with
the numerous federal laws governing a facilitys
activities, the hospitals participation in the Medicare
and/or
Medicaid programs may be terminated
and/or civil
or criminal penalties may be imposed. For example, a hospital
may lose its ability to participate in the Medicare
and/or
Medicaid programs if it performs any of the following acts:
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making claims to Medicare
and/or
Medicaid for services not provided or misrepresenting actual
services provided in order to obtain higher payments;
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paying money to induce the referral of patients or purchase of
items or services where such items or services are reimbursable
under a federal or state health program; or
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failing to provide appropriate emergency medical screening
services to any individual who comes to a hospitals campus
or otherwise failing to properly treat and transfer emergency
patients.
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The Health Insurance Portability and Accountability Act of 1996
(HIPAA) broadened the scope of the fraud and abuse
laws by adding several criminal statutes that are not related to
receipt of payments from a federal healthcare program. HIPAA
created civil penalties for proscribed conduct, including
upcoding and billing for medically unnecessary goods or
services. HIPAA established new enforcement mechanisms to combat
fraud and abuse. These new mechanisms include a bounty system,
where a portion of the payments recovered is returned to the
government agencies, as well as a whistleblower program. HIPAA
also expanded the categories of persons that may be excluded
from participation in federal and state healthcare programs.
The anti-kickback provision of the Social Security Act prohibits
the payment, receipt, offer or solicitation of anything of
value, whether in cash or in kind, with the intent of generating
referrals or orders for services or items covered by a federal
or state healthcare program. Violations of the anti-kickback
statute may be punished by criminal and civil fines, exclusion
from federal and state healthcare programs, imprisonment and
damages up to three times the total dollar amount involved.
The Office of Inspector General (OIG) of DHHS is
responsible for identifying fraud and abuse activities in
government programs. In order to fulfill its duties, the OIG
performs audits, investigations and
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inspections. In addition, it provides guidance to healthcare
providers by identifying types of activities that could violate
the anti-kickback statute. The OIG has identified the following
hospital/physician incentive arrangements as potential
violations:
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payment of any incentive by a hospital each time a physician
refers a patient to the hospital;
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use of free or significantly discounted office space or
equipment;
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provision of free or significantly discounted billing, nursing
or other staff services;
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free training (other than compliance training) for a
physicians office staff, including management and
laboratory technique training;
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guarantees which provide that if a physicians income fails
to reach a predetermined level, the hospital will pay any
portion of the remainder;
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low-interest or interest-free loans, or loans which may be
forgiven if a physician refers patients to the hospital;
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payment of the costs for a physicians travel and expenses
for conferences;
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payment of services which require few, if any, substantive
duties by the physician or which are in excess of the fair
market value of the services rendered; or
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purchasing goods or services from physicians at prices in excess
of their fair market value.
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We have a variety of financial relationships with physicians who
refer patients to our hospitals, including employment contracts,
leases, joint ventures, independent contractor agreements and
professional service agreements. Physicians may also own shares
of our common stock. We provide financial incentives to recruit
physicians to relocate to communities served by our hospitals.
These incentives for relocation include minimum revenue
guarantees and, in some cases, loans. The OIG is authorized to
publish regulations outlining activities and business
relationships that would be deemed not to violate the
anti-kickback statute. These regulations are known as safe
harbor regulations. Failure to comply with the safe harbor
regulations does not make conduct illegal, but instead the safe
harbors delineate standards that, if complied with, protect
conduct that might otherwise be deemed in violation of the
anti-kickback statute. We seek to structure each of our
arrangements with physicians to fit as closely as possible
within an applicable safe harbor. However, not all of our
business arrangements fit wholly within safe harbors, so we
cannot guarantee that these arrangements will not be scrutinized
by government authorities or, if scrutinized, that they will be
determined to be in compliance with the anti-kickback statute or
other applicable laws. The failure of a particular activity to
comply with the safe harbor regulations does not mean that the
activity violates the anti-kickback statute. We believe that all
of our business arrangements are in full compliance with the
anti-kickback statute. If we violate the anti-kickback statute,
we would be subject to criminal and civil penalties
and/or
possible exclusion from participating in Medicare, Medicaid or
other governmental healthcare programs.
The Social Security Act also includes a provision commonly known
as the Stark law. This law prohibits physicians from
referring Medicare and Medicaid patients to selected types of
healthcare entities in which they or any of their immediate
family members have ownership or a compensation relationship.
These types of referrals are commonly known as self
referrals. Sanctions for violating the Stark law include
civil monetary penalties, assessments equal to twice the dollar
value of each service rendered for an impermissible referral and
exclusion from Medicare and Medicaid programs. There are
ownership and compensation arrangement exceptions to the
self-referral prohibition. One exception allows a physician to
make a referral to a hospital that is not a specialty hospital
if the physician owns an interest in the entire hospital, as
opposed to an ownership interest in a department of the
hospital. Another exception allows a physician to refer patients
to a healthcare entity in which the physician has an ownership
interest if the entity is located in a rural area, as defined in
the statute. There are also exceptions for many of the customary
financial arrangements between physicians and facilities,
including employment contracts, leases and recruitment
agreements. We have structured our financial arrangements with
physicians to comply with the statutory exceptions included in
the Stark law and regulations.
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Many states in which we operate also have adopted, or are
considering adopting, laws similar to the federal anti-kickback
and Stark laws. Some of these state laws apply even if the
government is not the payor. These statutes typically provide
criminal and civil penalties as remedies. While there is little
precedent for the interpretation or enforcement of these state
laws, we have attempted to structure our financial relationships
with physicians and others in light of these laws. However, if a
state determines that we have violated such a law, we would be
subject to criminal and civil penalties.
Corporate Practice of Medicine and
Fee-Splitting. Some states have laws that
prohibit unlicensed persons or business entities, including
corporations or business organizations that own hospitals, from
employing physicians. Some states also have adopted laws that
prohibit direct or indirect payments or fee-splitting
arrangements between physicians and unlicensed persons or
business entities. Possible sanctions for violations of these
restrictions include loss of a physicians license, civil
and criminal penalties and rescission of business arrangements.
These laws vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies. We
attempt to structure our arrangements with healthcare providers
to comply with the relevant state laws and the few available
regulatory interpretations.
Emergency Medical Treatment and Active Labor
Act. All of our facilities are subject to the
Emergency Medical Treatment and Active Labor Act
(EMTALA). This federal law requires any hospital
that participates in the Medicare program to conduct an
appropriate medical screening examination of every person who
presents to the hospitals emergency department for
treatment and, if the patient is suffering from an emergency
medical condition, to either stabilize that condition or make an
appropriate transfer of the patient to a facility that can
handle the condition. The obligation to screen and stabilize
emergency medical conditions exists regardless of a
patients ability to pay for treatment. There are severe
penalties under EMTALA if a hospital fails to screen or
appropriately stabilize or transfer a patient or if the hospital
delays appropriate treatment in order to first inquire about the
patients ability to pay. Penalties for violations of
EMTALA include civil monetary penalties and exclusion from
participation in the Medicare program. In addition, an injured
patient, the patients family or a medical facility that
suffers a financial loss as a direct result of another
hospitals violation of the law can bring a civil suit
against that other hospital.
During 2003, CMS published a final rule clarifying a
hospitals duties under EMTALA. In the final rule, CMS
clarified when a patient is considered to be on a
hospitals property for purposes of treating the person
pursuant to EMTALA. CMS stated that off-campus facilities such
as specialty clinics, surgery centers and other facilities that
lack emergency departments should not be subject to EMTALA, but
that these locations must have a plan explaining how the
location should proceed in an emergency situation such as
transferring the patient to the closest hospital with an
emergency department. CMS further clarified that hospital-owned
ambulances could transport a patient to the closest emergency
department instead of to the hospital that owns the ambulance.
CMSs rules did not specify on-call physician
requirements for an emergency department, but provided a
subjective standard stating that on-call hospital
schedules should meet the hospitals and communitys
needs. Although we believe that our hospitals comply with
EMTALA, we cannot predict whether CMS will implement new
requirements in the future and whether our hospitals will comply
with any new requirements.
Federal False Claims Act. The federal False
Claims Act prohibits providers from knowingly submitting false
claims for payment to the federal government. This law has been
used not only by the federal government, but also by individuals
who bring an action on behalf of the government under the
laws qui tam or whistleblower
provisions. When a private party brings a qui tam action under
the federal False Claims Act, the defendant will generally not
be aware of the lawsuit until the government makes a
determination whether it will intervene and take a lead in the
litigation.
Civil liability under the federal False Claims Act can be up to
three times the actual damages sustained by the government plus
civil penalties for each separate false claim. There are many
potential bases for liability under the federal False Claims
Act, including claims submitted pursuant to a referral found to
violate the anti-kickback statute. Although liability under the
federal False Claims Act arises when an entity knowingly submits
a false claim for reimbursement to the federal government, the
federal False Claims Act defines the term knowingly
broadly. Although simple negligence generally will not give rise
to liability
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under the federal False Claims Act, submitting a claim with
reckless disregard to its truth or falsity can constitute
knowingly submitting a false claim.
Healthcare Reform. The healthcare industry
continues to attract much legislative interest and public
attention. MMA introduced changes to the Medicare program. Many
of MMAs changes went into effect January 1, 2006. MMA
establishes a voluntary prescription drug benefit, provides
federal subsidies to plan sponsors that provide prescription
drug benefits to Medicare-eligible retirees, substantially
adjusts
Medicare+Choice
and provides favorable payment adjustments for rural hospitals.
MMA also provides favorable tax treatment for individual health
savings accounts. In addition, MMA authorizes MedPAC to study
the effects of home health and rural hospital reimbursement in
current and anticipated reimbursement methodologies.
In recent years, Medicaid enrollment has grown as more people
became eligible for the program. At the same time, healthcare
costs have been rising, forcing states to address Medicaid
cost-containment. Healthcare costs, demographics, erosion of
employer-sponsored health coverage and potential changes in
federal Medicaid policies continue to put pressure on state
Medicaid programs. Policymakers in many states are evaluating
the Medicaid programs in their states and considering reforms.
Also, the number of persons without health insurance has risen.
We anticipate that the federal and state governments will
continue to introduce legislative proposals to modify the cost
and efficiency of the healthcare delivery system to provide
coverage for more or all persons.
Conversion Legislation. Many states have
adopted legislation regarding the sale or other disposition of
hospitals operated by
not-for-profit
entities. In states that do not have such legislation, the
attorneys general have demonstrated an interest in these
transactions under their general obligations to protect
charitable assets. These legislative and administrative efforts
primarily focus on the appropriate valuation of the assets
divested and the use of the proceeds of the sale by the
not-for-profit
seller. These reviews and, in some instances, approval processes
can add additional time to the closing of a
not-for-profit
hospital acquisition. Future actions by state legislators or
attorneys general may seriously delay or even prevent our
ability to acquire certain hospitals.
Certificates of Need. The construction of new
facilities, the acquisition or expansion of existing facilities
and the addition of new services and expensive equipment at our
facilities may be subject to state laws that require prior
approval by state regulatory agencies. These certificate of need
laws generally require that a state agency determine the public
need and give approval prior to the construction or acquisition
of facilities or the addition of new services. We operate
hospitals in nine states that have adopted certificate of need
laws Alabama, Florida, Kentucky, Mississippi,
Nevada, South Carolina, Tennessee, Virginia and West Virginia.
If we fail to obtain necessary state approval, we will not be
able to expand our facilities, complete acquisitions or add new
services at our facilities in these states. Violation of these
state laws may result in the imposition of civil sanctions or
the revocation of hospital licenses. All other states in which
we operate do not require a certificate of need prior to the
initiation of new healthcare services. In these other states,
our facilities are subject to competition from other providers
who may choose to enter the market by developing new facilities
or services.
HIPAA Transaction, Privacy and Security
Requirements. Federal regulations issued pursuant
to HIPAA contain, among other measures, provisions that require
us to implement very significant and potentially expensive new
computer systems, employee training programs and business
procedures. The federal regulations are intended to protect the
privacy of healthcare information and encourage electronic
commerce in the healthcare industry.
Among other things, HIPAA requires healthcare facilities to use
standard data formats and code sets established by DHHS when
electronically transmitting information in connection with
several transactions, including health claims and equivalent
encounter information, healthcare payment and remittance advice
and health claim status. We have implemented or upgraded
computer systems utilizing a third party vendor, as appropriate,
at our facilities and at our corporate headquarters to comply
with the new transaction and code set regulations and have
tested these systems with several of our payors.
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HIPAA also requires DHHS to issue regulations establishing
standard unique health identifiers for individuals, employers,
health plans and healthcare providers to be used in connection
with the standard electronic transactions. DHHS published on
January 23, 2004 the final rule establishing the standard
for the unique health identifier for healthcare providers. All
healthcare providers, including our facilities, will be required
to obtain a new National Provider Identifier to be used in
standard transactions instead of other numerical identifiers
beginning no later than May 23, 2007. We cannot predict
whether our facilities may experience payment delays during the
transition to the new identifier. Our facilities have fully
implemented use of the Employer Identification Number as the
standard unique health identifier for employers.
HIPAA regulations also require our facilities to comply with
standards to protect the confidentiality, availability and
integrity of patient health information, by establishing and
maintaining reasonable and appropriate administrative, technical
and physical safeguards to ensure the integrity, confidentiality
and the availability of electronic health and related financial
information. The security standards were designed to protect
electronic information against reasonably anticipated threats or
hazards to the security or integrity of the information and to
protect the information against unauthorized use or disclosure.
We expect that the security standards will require our
facilities to implement business procedures and training
programs, though the regulations do not mandate use of a
specific technology. We have performed comprehensive security
risk assessments and are currently in the remediation process
for the systems/devices that have been identified as having the
highest levels of vulnerability. This will be an ongoing process
as we update, upgrade, or purchase new systems/technology.
DHHS has also established standards for the privacy of
individually identifiable health information. These privacy
standards apply to all health plans, all healthcare
clearinghouses and healthcare providers, such as our facilities,
that transmit health information in an electronic form in
connection with standard transactions, and apply to individually
identifiable information held or disclosed by a covered entity
in any form. These standards impose extensive administrative
requirements on our facilities and require compliance with rules
governing the use and disclosure of this health information, and
they require our facilities to impose these rules, by contract,
on any business associate to whom we disclose such information
in order for them to perform functions on our facilities
behalf. In addition, our facilities will continue to remain
subject to any state laws that are more restrictive than the
privacy regulations issued under HIPAA. These laws vary by state
and could impose additional penalties. Compliance with these
standards requires significant commitment and action by us.
Patient Safety and Quality Improvement Act of
2005. On July 29, 2005, the President signed
the Patient Safety and Quality Improvement Act of 2005, which
has the goal of reducing medical errors and increasing patient
safety. This legislation establishes a confidential reporting
structure in which providers can voluntarily report
Patient Safety Work Product (PSWP) to
Patient Safety Organizations (PSOs).
Under the system, PSWP is made privileged, confidential and
legally protected from disclosure. PSWP does not include
medical, discharge or billing records or any other original
patient or provider records but does include information
gathered specifically in connection with the reporting of
medical errors and improving patient safety. This legislation
does not preempt state or federal mandatory disclosure laws
concerning information that does not constitute PSWP. PSOs will
be certified by the Secretary of the DHHS for three-year periods
after the Secretary develops applicable certification criteria.
PSOs will analyze PSWP, provide feedback to providers and may
report non-identifiable PSWP to a database. In addition, PSOs
are expected to generate patient safety improvement strategies.
We will monitor the progress of these voluntary reporting
programs and we anticipate that we will participate in some form
when the details are available.
California Seismic
Standards. Californias Alfred E. Alquist
Hospital Facilities Seismic Safety Act (the Alquist
Act) requires that the California Building Standards
Commission adopt earthquake performance categories, seismic
evaluation procedures, standards and timeframes for upgrading
certain facilities, and seismic retrofit building standards.
These regulations require hospitals to meet seismic performance
standards to ensure that they are capable of providing medical
services to the public after an earthquake or other disaster.
The Building Standards Commission completed its adoption of
evaluation criteria and retrofit standards in 1998.
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The Alquist Act requires that within three years after the
Building Standards Commission had adopted evaluation criteria
and retrofit standards:
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hospitals in California must conduct seismic evaluation and
submit these evaluations to the Office of Statewide Health
Planning and Development, Facilities Development Division for
its review and approval;
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hospitals in California must identify the most critical
nonstructural systems that represent the greatest risk of
failure during an earthquake and submit timetables for upgrading
these systems to the Office of Statewide Health Planning and
Development, Facilities Development Division for its review and
approval; and
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hospitals in California must prepare a plan and compliance
schedule for each regulated building demonstrating the steps a
hospital will take to bring the hospital buildings into
substantial compliance with the regulations and standards.
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We are required to conduct engineering studies at our California
facility (Colorado River Medical Center), which was acquired in
the Province business combination, to determine whether and to
what extent modifications to this facility will be required. To
date, we have conducted engineering studies and implemented
compliance plans for our California facility that satisfy all
current requirements. We may be required to make significant
capital expenditures in the future to comply with the seismic
standards, which could impact our earnings.
State Hospital Rate-Setting Activity. We
currently operate three hospitals in West Virginia, one of which
is held for sale. The West Virginia Health Care Authority
requires that requests for increases in hospital charges be
submitted annually. Requests for rate increases are reviewed by
the West Virginia Health Care Authority and are either approved
at the amount requested, approved for lower amounts than
requested, or are rejected. As a result, in West Virginia, our
ability to increase our rates to compensate for increased costs
per admission is limited and the operating margins for our
hospitals located in West Virginia may be adversely affected if
we are not able to increase our rates as our expenses increase.
We can provide no assurance that other states in which we
operate hospitals will not enact similar rate-setting laws in
the future.
Medical Malpractice Tort Law Reform. Medical
malpractice tort law has historically been maintained at the
state level. All states have laws governing medical liability
lawsuits. Over half of the states have limits on damages awards.
Almost all states have eliminated joint and several liability in
malpractice lawsuits, and many states have established limits on
attorney fees. In 2006, most states had bills introduced in
their legislative sessions to address medical malpractice tort
reform. Proposed solutions include enacting limits on
non-economic damages, malpractice insurance reform, and
gathering lawsuit claims data from malpractice insurance
companies and the courts for the purpose of assessing the
connection between malpractice settlements and premium rates.
Reform legislation has also been proposed, but not adopted, at
the federal level that could preempt additional state
legislation in this area.
Environmental Regulation. Our healthcare
operations generate medical waste that must be disposed of in
compliance with federal, state and local environmental laws,
rules and regulations. Our operations, as well as our purchases
and sales of healthcare facilities, are also subject to
compliance with various other environmental laws, rules and
regulations. Such compliance costs are not significant and we do
not anticipate that such compliance costs will be significant in
the future.
Regulatory
Compliance Program
It is our policy to conduct our business with integrity and in
compliance with the law. We have in place and continue to
enhance a company-wide compliance program which focuses on all
areas of regulatory compliance including billing, reimbursement
and cost reporting practices.
This regulatory compliance program is intended to help ensure
that high standards of conduct are maintained in the operation
of our business and that policies and procedures are implemented
so that employees act in full compliance with all applicable
laws, regulations and company policies. Under the
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regulatory compliance program, every employee, certain
contractors involved in patient care, and coding and billing,
receive initial and periodic legal compliance and ethics
training. In addition, we regularly monitor our ongoing
compliance efforts and develop and implement policies and
procedures designed to foster compliance with the law. The
program also includes a mechanism for employees to report,
without fear of retaliation, any suspected legal or ethical
violations to their supervisors, designated compliance officers
in our hospitals, our compliance hotline or directly to our
corporate compliance office.
Risk
Management and Insurance
We retain a substantial portion of our professional and general
liability risks through a self-insured retention
(SIR) insurance program administered in-house by our
risk and insurance department with assistance from our insurance
brokers. Our SIR for professional and general liability risks is
$20.0 million per claim in all states except Florida. Our
SIR in Florida is currently $10.0 million per claim because
of the high volatility of risk in this state. We maintain
professional and general liability insurance with unrelated
commercial insurance carriers to provide for losses in excess of
the SIR.
Our workers compensation program has a $1.0 million
deductible for each loss in all states except for West Virginia
and Wyoming. Workers compensation in West Virginia and
Wyoming operates under a program mandated and administrated by
each state. Recent changes in the workers compensation
laws in West Virginia will allow self-insurance and commercial
programs to be offered beginning January 1, 2007.
We also maintain directors and officers, property
and other types of insurance coverage with unrelated commercial
carriers. Our directors and officers liability
insurance coverage for current officers and directors is a
program that protects us as well as the individual director or
officer. The limits provided by the directors and
officers policy are based on numerous factors, including
the commercial insurance market. We maintain property insurance
through an unrelated commercial insurance company. We maintain
large property insurance deductibles with respect to our
facilities in coastal regions because of the high wind exposure
and the related cost of such coverage. We have four locations
that are considered a high exposure to named-storm risk and
carry a deductible of 3% of their respective property values.
In March 2006, we were approved by the Cayman Islands Monetary
Authority to operate a captive insurance company under the name
Point of Life Indemnity, Ltd. (POLI). This captive
insurance company, which operates as our wholly-owned
subsidiary, issues malpractice insurance policies to our
employed physicians and certain voluntary attending physicians
at our hospitals in West Virginia. We anticipate that POLI will
be used for other insurance programs in the future, including
providing malpractice coverage to employed and voluntary
attending physicians at our other hospitals.
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Item 1A.
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Factors
That May Affect Future Results
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We make forward-looking statements in this report and in other
reports and proxy statements we file with the SEC. In addition,
our senior management makes forward-looking statements orally to
analysts, investors, the media and others. Broadly speaking,
forward-looking statements include:
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projections of our revenues, net income, earnings per share,
capital expenditures, cash flows, debt repayments, interest
rates, certain operating statistics and data or other financial
items;
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descriptions of plans or objectives of our management for future
operations or services, including pending acquisitions and
divestitures;
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interpretations of Medicare and Medicaid law and their effects
on our business; and
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descriptions of assumptions underlying or relating to any of the
foregoing.
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In this report, for example, we make forward-looking statements
discussing our expectations about:
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investment in and integration of our acquisitions;
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liabilities associated with and other effects resulting from our
recent acquisitions;
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future financial performance and condition;
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future liquidity and capital resources;
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future cash flows;
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existing and future debt and equity structure;
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our strategic goals;
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our business strategy and operating philosophy;
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demographic trends;
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competition with other hospital companies and healthcare service
providers;
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our compliance with federal, state and local regulations;
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our stock compensation arrangements;
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executive compensation;
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our hedging arrangements;
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supply and information technology costs;
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changes in interest rates;
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our plans as to the payment of dividends;
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future acquisitions, dispositions and joint ventures;
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development of de novo facilities;
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tax-related liabilities;
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industry trends;
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the efforts of insurers and other payors, healthcare providers
and others to contain healthcare costs;
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reimbursement changes;
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patient volumes and related revenues;
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risk management and insurance;
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recruiting and retention of clinical personnel;
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future capital expenditures;
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expected changes in certain expenses;
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our contractual obligations;
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the completion of projects under construction;
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the impact of changes in our critical accounting estimates;
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claims and legal actions relating to professional liabilities
and other matters;
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non-GAAP measures;
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the impact and applicability of new accounting
standards; and
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physician recruiting and retention.
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Forward-looking statements discuss matters that are not
historical facts. Because they discuss future events or
conditions, forward-looking statements often include words such
as can, could, may,
should, believe, will,
would, expect, project,
estimate, anticipate, plan,
intend, target, continue
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or similar expressions. Do not unduly rely on forward-looking
statements, which give our expectations about the future and are
not guarantees. Forward-looking statements speak only as of the
date they are made. We do not undertake any obligation to update
our forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events.
There are several factors, some beyond our control that could
cause results to differ significantly from our expectations.
Some of these factors are described below under Risk
Factors. Other factors, such as market, operational,
liquidity, interest rate and other risks, are described
elsewhere in this report (see, for example, Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Liquidity and Capital Resources and
Part II, Item 7A. Quantitative and Qualitative
Disclosures about Market Risk). Any factor described in this
report could by itself, or together with one or more factors,
adversely affect our business, results of operations
and/or
financial condition. There may be factors not described in this
report that could also cause results to differ from our
expectations.
Risk
Factors
We
have substantial indebtedness and we may incur significant
amounts of additional indebtedness in the future which could
affect our ability to finance operations and capital
expenditures, pursue desirable business opportunities or
successfully operate our business in the future.
We have substantial indebtedness. As of December 31, 2006,
our consolidated debt was approximately $1,670.3 million.
We also have the ability to incur significant amounts of
additional indebtedness, subject to the conditions imposed by
the terms of our credit agreements and the agreements or
indentures governing any additional indebtedness that we incur
in the future. Our credit facility contains an uncommitted
accordion feature that permits us to borrow at a
later date additional aggregate principal amounts of up to
$400.0 million under the term loan component,
$200.0 million of which is available as of
December 31, 2006, and up to $100.0 million under the
revolving loan component, subject to the receipt of commitments
and the satisfaction of other conditions. Our ability to repay
or refinance our indebtedness will depend upon our future
ability to monetize our interests in our hospital assets and our
operating performance, which may be affected by general
economic, financial, competitive, regulatory, business and other
factors beyond our control.
Although we believe that our future operating cash flow,
together with available financing arrangements, will be
sufficient to fund our operating requirements, our leverage and
debt service obligations could have important consequences,
including the following:
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Under our credit facility, we are required to satisfy and
maintain specified financial ratios and tests. Failure to comply
with these obligations may cause an event of default which, if
not cured or waived, could require us to repay substantial
indebtedness immediately. Moreover, if debt repayment is
accelerated, we will be subject to higher interest rates on our
debt obligations as a result of these covenants and our credit
ratings may be adversely impacted.
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We may be vulnerable in the event of downturns and adverse
changes in our hospitals businesses, in our industry, or
in the economy generally, such as the implementation by the
government of further limitations on reimbursement under
Medicare and Medicaid, because of our need for increased cash
flow.
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We may have difficulty obtaining additional financing at
favorable interest rates to meet our requirements for working
capital, capital expenditures, acquisitions, general corporate
or other purposes.
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We will be required to dedicate a substantial portion of our
cash flow to the payment of principal and interest on
indebtedness, which will reduce the amount of funds available
for operations, capital expenditures and future acquisitions.
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Any borrowings we incur at variable interest rates expose us to
increases in interest rates generally.
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A breach of any of the restrictions or covenants in our debt
agreements could cause a cross-default under other debt
agreements. We may be required to pay our indebtedness
immediately if we default on any of the numerous financial or
other restrictive covenants contained in the debt agreements. It
is not certain whether we will have, or will be able to obtain,
sufficient funds to make these accelerated
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payments. If any senior debt is accelerated, our assets may not
be sufficient to repay such indebtedness and our other
indebtedness.
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In the event of a default, we may be forced to pursue one or
more alternative strategies, such as restructuring or
refinancing our indebtedness, selling assets, reducing or
delaying capital expenditures or seeking additional equity
capital. There can be no assurances that any of these strategies
could be effected on satisfactory terms, if at all, or that
sufficient funds could be obtained to make these accelerated
payments.
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We
may continue to see the growth of uninsured and patient
due accounts; deterioration in the collectibility of these
accounts could adversely affect our results of operations and
cash flows.
The primary collection risks associated with our accounts
receivable relate to the uninsured patient accounts and patient
accounts for which the primary insurance carrier has paid the
amounts covered by the applicable agreement, but patient
responsibility amounts (deductibles and co-payments) remain
outstanding. The provision for doubtful accounts relates
primarily to amounts due directly from patients.
The amount of our provision for doubtful accounts is based on
our assessments of historical collection trends, business and
economic conditions, trends in federal and state governmental
and private employer health coverage and other collection
indicators. A continuation in trends that results in increasing
the proportion of accounts receivable being comprised of
uninsured accounts and deterioration in the collectibility of
these accounts could adversely affect our collections of
accounts receivable, cash flows and results of operations.
We are
exposed to interest rate changes.
We are exposed to market risk related to changes in interest
rates. As of December 31, 2006, we had outstanding debt of
$1,670.3 million, 85.7% or $1,431.9 million of which
was subject to variable rates of interest. We entered into an
interest rate swap agreement effective November 30, 2006
with a maturity date of May 30, 2011, to manage our
exposure to these fluctuations. Our interest rate swap decreases
our variable rate debt as a percentage of our outstanding debt
from 85.7% to 31.8% as of December 31, 2006. The interest
rate swap converts a portion of our indebtedness to a fixed rate
with a decreasing notional amount starting at
$900.0 million at an annual fixed rate of 5.585%. The
notional amount of the swap agreement represents a balance used
to calculate the exchange of cash flows and is not an asset or
liability. Any market risk or opportunity associated with this
swap agreement is offset by the opposite market impact on the
related debt. Our credit risk related to this agreement is
considered low because the swap agreement is with a creditworthy
financial institution. See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations Market Risk.
If
our access to HCA-Information Technology and Services,
Inc.s information systems is restricted or we are not able
to integrate changes to our existing information systems or
information systems of acquired hospitals, our operations could
suffer.
Our business depends significantly on effective information
systems to process clinical and financial information.
Information systems require an ongoing commitment of significant
resources to maintain and enhance existing systems and develop
new systems in order to keep pace with continuing changes in
information processing technology. We rely heavily on
HCA-Information Technology and Services, Inc., or HCA-IT, for
information systems. Under a contract with a term that will
expire on December 31, 2009,
HCA-IT
provides us with financial, clinical, patient accounting and
network information services. We do not control HCA-ITs
systems, and if these systems fail or are interrupted, if our
access to these systems is limited in the future or if HCA-IT
develops systems more appropriate for the urban healthcare
market and not suited for our hospitals, our operations could
suffer.
HCA has recently been taken private in a leveraged buyout. We do
not know of HCAs future plans for the information systems
and its support of such systems. We also do not know if HCA-IT
is committed to extend our contract beyond 2009. System
conversions are costly, time consuming and disruptive for
physicians
40
and employees. Should we decide to convert away from systems
provided by HCA-IT, such implementation could be costly and
materially affect our results of operations.
In addition, as new information systems are developed in the
future, we will need to integrate them into our existing
systems. Evolving industry and regulatory standards, such as
HIPAA regulations, may require changes to our information
systems in the future. We may not be able to integrate new
systems or changes required to our existing systems or systems
of acquired hospitals in the future effectively or on a
cost-efficient basis.
A key element of our long-term business strategy is growth
through the acquisition of additional acute care hospitals. Our
acquisition activity requires transitions from, and the
integration of, various information systems that are used by the
hospitals we acquire. If we experience difficulties with the
integration of the information systems of acquired hospitals, we
could suffer, among other things, operational disruptions and
increases in administrative expenses.
If
our fair value declines, a material non-cash charge to earnings
from impairment of our goodwill could result.
We recorded a significant portion of the Province purchase price
as goodwill. We have also recorded as goodwill a portion of the
purchase price for many of our hospital acquisitions. At
December 31, 2006, we had approximately
$1,581.3 million of goodwill on our consolidated balance
sheet. We expect to recover the carrying value of this goodwill
through our future cash flows. We evaluate annually, based on
our fair value, whether the carrying value of our goodwill is
impaired. If the carrying value of our goodwill is impaired, we
may incur a material non-cash charge to earnings.
We
may have difficulty acquiring hospitals on favorable terms and,
because of regulatory scrutiny, acquiring
not-for-profit
entities.
One element of our business strategy is expansion through the
acquisition of acute care hospitals in non-urban markets. We
face significant competition to acquire other attractive
non-urban hospitals, and we may not find suitable acquisitions
on favorable terms. Our principal competitors for acquisitions
have included Health Management Associates, Inc., Community
Health Systems, Inc., Triad Hospitals, Inc. and newly
capitalized
start-up
companies. We may not be able to obtain financing, if necessary,
for any acquisitions or joint ventures that we might make or may
be required to borrow at higher rates and on less favorable
terms. We may incur or assume additional indebtedness as a
result of acquisitions. Our failure to acquire non-urban
hospitals consistent with our growth plans could prevent us from
increasing our revenues.
The cost of an acquisition could result in a dilutive effect on
our results of operations, depending on various factors,
including the amount paid for the acquisition, the acquired
hospitals results of operations, allocation of purchase
price, effects of subsequent legislation and limitations on rate
increases. In the past, we have occasionally experienced
temporary delays in improving the operating margins or
effectively integrating the operations of our acquired
hospitals. In the future, if we are unable to improve the
operating margins of acquired hospitals, operate them profitably
or effectively integrate their operations, we may be unable to
achieve our growth strategy.
In recent years, the legislatures and attorneys general of
several states have become more interested in sales of hospitals
by
not-for-profit
entities. This heightened scrutiny may increase the cost and
difficulty, or prevent the completion, of transactions with
not-for-profit
organizations in the future.
We
may encounter numerous business risks in acquiring additional
hospitals and may have difficulty operating and integrating
those hospitals. As a result, we may be unable to achieve our
growth strategy.
We may be unable to timely and effectively integrate the
hospitals that we acquire with our ongoing operations. We may
experience delays in implementing operating procedures and
systems in newly acquired hospitals. Integrating a new hospital
could be expensive and time consuming and could disrupt our
ongoing business, negatively affect cash flow and distract
management and other key personnel. In addition, acquisition
activity requires transitions from, and the integration of,
operations and, usually, information systems that are
41
used by acquired hospitals. We will rely heavily on HCA for
information systems integration as part of a contractual
arrangement for information technology services. We may not be
successful in causing HCA to convert our newly acquired
hospitals information systems, including those used by the
Province hospitals, in a timely manner.
In addition, we also may acquire businesses, including the
Province hospitals, with unknown or contingent liabilities for
past activities of acquired businesses, including liabilities
for failure to comply with healthcare laws and regulations,
medical and general professional liabilities, workers
compensation liabilities, previous tax liabilities and
unacceptable business practices. Although we have historically
obtained, and we intend to continue to obtain, contractual
indemnification from sellers covering these matters, we did not
obtain indemnification in the Province business combination and
any indemnification obtained from other sellers may be
insufficient to cover material claims or liabilities for past
activities of acquired businesses.
If
we do not effectively recruit and retain qualified physicians,
nurses, medical technicians and other healthcare professionals,
our ability to deliver healthcare services efficiently will be
adversely affected.
Physicians generally direct our hospital admissions and
services. Our success, in part, depends on the number and
quality of physicians on our hospitals medical staffs, the
admissions practices of these physicians and the maintenance of
good relations with these physicians. Only a limited number of
physicians practice in the non-urban communities where our
hospitals are located. The primary method we employ to add or
expand medical services is the recruitment of new physicians
into our communities.
The success of our recruiting efforts will depend on several
factors. In general, there is a shortage of specialty care
physicians. We face intense competition in the recruitment and
retention of specialists because of the difficulty in convincing
these individuals of the benefits of practicing or remaining in
practice in non-urban communities. If the growth rate slows in
the non-urban communities where our hospitals operate, then we
could experience difficulty attracting and retaining physicians
to practice in our communities. Generally, the top ten attending
physicians within each of our facilities represent approximately
69% and 67% of our inpatient revenues and admissions,
respectively. The loss of one or more of these physicians could
cause a material reduction in our revenues, which could take
significant time to replace given the challenges we face in
recruiting and retaining physicians. We may not be able to
recruit all of the physicians we have targeted. In addition, we
may incur increased malpractice expense if the quality of such
physicians does not meet our expectations.
There is generally a shortage of nurses and certain medical
technicians in the healthcare field. Our hospitals may be forced
to hire contract personnel, which tend to be more expensive than
full-time employed staff if they are unable to recruit and
retain full-time employees. The shortage of nurses and medical
technicians may affect our ability to deliver healthcare
services efficiently.
Our
revenues may decline if federal or state programs reduce our
Medicare or Medicaid payments or if managed care companies
reduce reimbursement amounts. In addition, the financial
condition of purchasers of healthcare services and healthcare
cost containment initiatives may limit our revenues and
profitability.
In 2006, we derived 44.8% of our revenues from the Medicare and
Medicaid programs. In recent years, federal and state
governments have made significant changes in the Medicare and
Medicaid programs. A number of states have incurred budget
deficits and adopted legislation designed to reduce their
Medicaid expenditures and to reduce Medicaid enrollees.
Employers have also passed more healthcare benefit costs on to
employees to reduce the employers health insurance
expenses. This trend has caused the self-pay/deductible
component of healthcare services to become more common. This
payor shifting increases collection costs and reduces overall
collections.
During the past several years, major purchasers of healthcare,
such as federal and state governments, insurance companies and
employers, have undertaken initiatives to revise payment
methodologies and monitor healthcare costs. As part of their
efforts to contain healthcare costs, purchasers increasingly are
demanding discounted fee structures or the assumption by
healthcare providers of all or a portion of the financial risk
42
through prepaid capitation arrangements, often in exchange for
exclusive or preferred participation in their benefit plans. We
expect efforts to impose greater discounts and more stringent
cost controls by government and other payors to continue,
thereby reducing the payments we receive for our services. In
addition, these payors have instituted policies and procedures
to substantially reduce or limit the use of inpatient services.
Our revenues are especially concentrated in a small number
of states which will make us particularly sensitive to
regulatory and economic changes in those states.
Our revenues are particularly sensitive to regulatory and
economic changes in Kentucky, Virginia, Louisiana, New Mexico,
Tennessee, Alabama, West Virginia and Texas. The following table
(which includes the revenues of the Province hospitals since
April 15, 2005, the date of the Province business
combination) contains our revenues and revenues as a percentage
of our total revenues by state for each of these states for the
years presented (dollars in millions):
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Revenue Concentration by State
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Amount
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% of Total Revenues
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2005
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2006
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2005
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2006
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Kentucky
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$
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387.0
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$
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404.0
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21.0
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%
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16.6
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%
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Virginia
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189.5
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341.9
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10.3
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14.0
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Louisiana
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171.1
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211.3
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9.3
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8.7
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New Mexico
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136.7
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210.9
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7.4
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8.6
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Tennessee
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191.7
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199.6
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10.4
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8.2
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Alabama
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162.5
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186.5
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8.8
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7.6
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West Virginia
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78.3
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151.7
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4.3
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6.2
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Texas
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95.8
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136.3
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5.2
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5.6
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$
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1,412.6
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$
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1,842.2
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76.7
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%
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75.5
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%
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Accordingly, any change in the current demographic, economic,
competitive or regulatory conditions in the above-mentioned
states could have an adverse effect on our business, financial
condition, results of operations
and/or
prospects.
Other hospitals and outpatient facilities provide services
similar to those which we offer. In addition, physicians provide
services in their offices that could be provided in our
hospitals. These factors may increase the level of competition
we face and may therefore adversely affect our revenues,
profitability and market share.
Competition among hospitals and other healthcare service
providers, including outpatient facilities, has intensified in
recent years, and we compete with other hospitals, including
larger tertiary care centers located in larger metropolitan
areas, and with physicians who provide services in their offices
which would otherwise be provided in our hospitals. Although the
hospitals which compete with us may be a significant distance
away from our facilities, patients in our markets may migrate on
their own to, may be referred by local physicians to, or may be
encouraged by their health plan to travel to these hospitals.
Furthermore, some of the hospitals which compete with us may use
equipment and services more specialized than those available at
our hospitals. Also, some of the hospitals that compete with our
facilities are owned by tax-supported governmental agencies or
not-for-profit
entities supported by endowments and charitable contributions.
These hospitals, in most instances, are also exempt from paying
sales, property and income taxes.
In 2005, CMS began making public performance data relating to
ten quality measures that hospitals submit in connection with
their Medicare reimbursement. If any of our hospitals should
achieve poor results (or results that are lower than our
competitors) on these ten quality criteria, patient volumes
could decline. In the future, other trends toward clinical
transparency may have an unanticipated impact on our competitive
position and patient volume.
43
We also face increasing competition from other specialized care
providers, including outpatient surgery, oncology, physical
therapy and diagnostic centers (including many in which
physicians may have an ownership interest), as well as competing
services rendered in physician offices. Some of our hospitals
may develop outpatient facilities where necessary to compete
effectively. However, to the extent that other providers are
successful in developing outpatient facilities, our market share
for these services will likely decrease in the future. Moreover,
many of our current hospitals attempt to attract patients from
surrounding counties and communities, including communities in
which a competing facility exists. However, if our competitors
are able to make capital improvements and expand services at
their facilities, we may be unable to attract patients away from
these facilities in the future.
If we do not continually enhance our hospitals with the
most recent technological advances in diagnostic and surgical
equipment, our ability to maintain and expand our markets will
be adversely affected.
Technological advances, potentially with respect to
computer-assisted tomography scanner (CTs), magnetic resonance
imaging (MRIs) and positron emission tomography scanner (PETs)
equipment continue to evolve. In addition, the manufacturers of
such equipment often provide incentives to try to increase their
sales, including providing favorable financing to higher credit
risk organizations. In an effort to compete, we must continually
assess our equipment needs and upgrade our equipment as a result
of technological improvements. Such equipment costs often range
from $0.8 million to $4.5 million each, exclusive of
any related construction costs.
Physicians generally direct the majority of hospital admissions
and services. In addition, competition among hospitals and
service providers including outpatient facilities and services
performed in physician offices for patients has intensified in
recent years. We compete with other hospitals including larger
tertiary care centers located in metropolitan areas. We believe
that the direction of the patient flow correlates directly to
the level and intensity of such diagnostic equipment.
We are subject to governmental regulation, and may be
subjected to allegations that we have failed to comply with
governmental regulations which could result in sanctions that
reduce our revenues and profitability.
All participants in the healthcare industry are required to
comply with many laws and regulations at the federal, state and
local government levels. These laws and regulations require that
hospitals meet various requirements, including those relating to
the adequacy of medical care, equipment, personnel, operating
policies and procedures, billing and cost reports, payment for
services and supplies, maintenance of adequate records, privacy,
compliance with building codes and environmental protection. If
we fail to comply with applicable laws and regulations, we could
suffer civil or criminal penalties, including the loss of our
licenses to operate our hospitals and our ability to participate
in the Medicare, Medicaid and other federal and state healthcare
programs.
Significant media and public attention recently has focused on
the hospital industry as a result of ongoing investigations
related to referrals, physician recruiting practices, cost
reporting and billing practices, laboratory and home healthcare
services and physician ownership and joint ventures involving
hospitals. Federal and state government agencies have announced
heightened and coordinated civil and criminal enforcement
efforts. In addition, the OIG (which is responsible for
investigating fraud and abuse activities in government programs)
and the U.S. Department of Justice periodically establish
enforcement initiatives that focus on specific billing practices
or other suspected areas of abuse. In January 2005, the OIG
issued Supplemental Compliance Program Guidance for Hospitals
that focuses on hospital compliance risk areas. Some of the risk
areas highlighted by the OIG include correct outpatient
procedure coding, revising admission and discharge policies to
reflect current CMS rules, submitting appropriate claims for
supplemental payments such as pass-through costs and outlier
payments and a general discussion of the fraud and abuse risks
related to financial relationships with referral sources.
In public statements, governmental authorities have taken
positions on issues for which little official interpretation was
previously available. Some of these positions appear to be
inconsistent with common
44
practices within the industry but have not previously been
challenged. Moreover, some government investigations that have
in the past been conducted under the civil provisions of federal
law are now being conducted as criminal investigations under the
Medicare fraud and abuse laws.
The laws and regulations with which we must comply are complex
and subject to change. In the future, different interpretations
or enforcement of these laws and regulations could subject our
practices to allegations of impropriety or illegality or could
require us to make changes in our facilities, equipment,
personnel, services, capital expenditure programs and operating
expenses.
Finally, we are subject to various federal, state and local
statutes and ordinances regulating the discharge of materials
into the environment. Our healthcare operations generate medical
waste, such as pharmaceuticals, biological materials and
disposable medical instruments that must be disposed of in
compliance with federal, state and local environmental laws,
rules and regulations. Our operations are also subject to
various other environmental laws, rules and regulations.
Environmental regulations also may apply when we renovate or
refurbish hospitals, particularly older facilities.
We may be subjected to actions brought by the government
under anti-fraud and abuse provisions or by individuals on the
governments behalf under the False Claims Acts
qui tam or whistleblower provisions.
Companies in the healthcare industry are subject to Medicare and
Medicaid anti-fraud and abuse provisions, known as the
anti-kickback statute. As a company in the
healthcare industry, we are subject to the anti-kickback
statute, which prohibits some business practices and
relationships related to items or services reimbursable under
Medicare, Medicaid and other federal healthcare programs. For
example, the anti-kickback statute prohibits healthcare service
providers from paying or receiving remuneration to induce or
arrange for the referral of patients or purchase of items or
services covered by a federal or state healthcare program. If
regulatory authorities determine that any of our hospitals
arrangements violate the anti-kickback statute, we could be
subject to liabilities under the Social Security Act, including:
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criminal penalties;
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civil monetary penalties; and/or
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exclusion from participation in Medicare, Medicaid or other
federal healthcare programs, any of which could impair our
ability to operate one or more of our hospitals profitably.
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Whistleblower provisions allow private individuals to bring
actions on behalf of the government alleging that the defendant
has defrauded the federal government. Defendants found to be
liable under the False Claims Act may be required to pay three
times the actual damages sustained by the government, plus
mandatory civil penalties ranging between $5,500 and $11,000 for
each separate false claim.
There are many potential bases for liability under the False
Claims Act. Liability often arises when an entity knowingly
submits a false claim for reimbursement to the federal
government. The False Claims Act defines the term
knowingly broadly. Although simple negligence will
not give rise to liability under the False Claims Act,
submitting a claim with reckless disregard for its truth or
falsity constitutes a knowing submission under the
False Claims Act and, therefore, will give rise to liability.
In some cases, whistleblowers or the federal government have
taken the position that providers who allegedly have violated
other statutes, such as the anti-kickback statute and the Stark
Law, have thereby submitted false claims under the False Claims
Act. In addition, a number of states have adopted their own
false claims provisions as well as their own whistleblower
provisions whereby a private party may file a civil lawsuit in
state court.
Although we intend and will endeavor to conduct our business in
compliance with all applicable federal and state fraud and abuse
laws, many of these laws are broadly worded and may be
interpreted or applied in ways that cannot be predicted.
Therefore, we cannot assure you that our arrangements or
business practices will not be subject to government scrutiny or
be found to be in compliance with applicable fraud and abuse
laws.
45
We may be subject to liabilities because of malpractice
and related legal claims brought against our hospitals. If we
become subject to these claims, we could be required to pay
significant damages, which may not be covered by
insurance.
We may be subject to medical malpractice lawsuits and other
legal actions arising out of the operations of our owned and
leased hospitals. These actions may involve large claims and
significant defense costs. In an effort to resolve one or more
of these matters, we may choose to negotiate a settlement.
Amounts we pay to settle any of these matters may be material.
To mitigate a portion of this risk, we maintain professional
malpractice liability and general liability insurance coverage
for these potential claims in amounts above our self-insured
retention level that we believe to be appropriate for our
operations. However, some of these claims could exceed the scope
of the coverage in effect, or coverage of particular claims
could be denied. It is possible that successful claims against
us that are within the self-insured retention level amounts,
when considered in the aggregate, could have an adverse effect
on our results of operations, cash flows, financial condition or
liquidity. Furthermore, insurance coverage in the future may not
continue to be available at a cost allowing us to maintain
adequate levels of insurance with acceptable self-insured
retention level amounts. Also, one or more of our insurance
carriers may become insolvent and unable to fulfill its
obligation to defend, pay or reimburse us when that obligation
becomes due. In addition, physicians using our hospitals may be
unable to obtain insurance on acceptable terms.
Certificate of need laws and regulations regarding
licenses, ownership and operation may impair our future
expansion in some states.
Some states require prior approval for the purchase,
construction and expansion of healthcare facilities, based on
the states determination of need for additional or
expanded healthcare facilities or services. Nine states in which
we currently operate hospitals require a certificate of need for
capital expenditures exceeding a prescribed amount, changes in
bed capacity or services, and for certain other planned
activities. We may not be able to obtain certificates of need
required for expansion activities in the future. In addition,
all of the states in which we operate facilities require
hospitals and most healthcare providers to maintain one or more
licenses. If we fail to obtain any required certificate of need
or license, our ability to operate or expand operations in those
states could be impaired.
In states without certificate of need laws, competing
providers of healthcare services are able to expand and
construct facilities without the need for significant regulatory
approval.
In the ten states in which we operate that do not require
certificates of need for the purchase, construction and
expansion of healthcare facilities or services, competing
healthcare providers face low barriers to entry and expansion.
If competing providers of healthcare services are able to
purchase, construct or expand healthcare facilities without the
need for regulatory approval, we may face decreased market share
and revenues in those markets.
We are subject to significant corporate regulation as a
public company and failure to comply with all applicable
regulations could subject us to liability or negatively affect
our stock price.
As a publicly traded company, we are subject to a significant
body of regulation, including the Sarbanes-Oxley Act of 2002.
While we have developed and instituted a corporate compliance
program based on what we believe are the current best practices
in corporate governance and continue to update this program in
response to newly implemented or changing regulatory
requirements, we cannot provide assurance that we are or will be
in compliance with all potentially applicable corporate
regulations. For example, we cannot provide assurance that in
the future our management will not find a material weakness in
connection with its annual review of our internal control over
financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act. We also cannot provide assurance that we
could correct any such weakness to allow our management to
assess the effectiveness of our internal control over financial
reporting as of the end of our fiscal year in time to enable our
independent registered public accounting firm to state that such
assessment will have been fairly stated in our Annual Report on
Form 10-K
or state that we have maintained effective internal control over
financial reporting as of the end of our fiscal year. Compliance
with these regulations, and any changes in our internal control
over financial reporting in response to our internal evaluations
may be expensive and time-consuming
46
and may negatively impact our results of operations. If we fail
to comply with any of these regulations, we could be subject to
a range of regulatory actions, fines or other sanctions or
litigation. If we must disclose any material weakness in our
internal control over financial reporting, our stock price could
decline.
Our
revenues and volume trends may be adversely affected by certain
factors over which we have no control relevant to the markets in
which we have hospitals, including weather
conditions.
Our revenues and volume trends are dependent on many factors,
including physicians clinical decisions and availability,
payor programs shifting to a more outpatient-based environment,
whether or not certain services are offered, seasonal and severe
weather conditions, including the effects of extreme low
temperatures, hurricanes and tornados, earthquakes, current
local economic and demographic changes, the intensity and timing
of yearly flu outbreaks and the judgment of the
U.S. Centers for Disease Control on the strains of flu that
may circulate in the United States. Any of these factors could
have a material adverse effect on our revenues and volume
trends, and none of these factors will be within the control of
our management.
Different
interpretations of accounting principles could have a material
adverse effect on our results of operations or financial
condition.
Generally accepted accounting principles are complex,
continually evolving and may be subject to varied interpretation
by us, our independent registered public accounting firm and the
SEC. Such varied interpretations could result from differing
views related to specific facts and circumstances. Differences
in interpretation of generally accepted accounting principles
could have a material adverse effect on our results of
operations or financial condition.
Our
stock price has been and may continue to be volatile; any
significant decline may result in litigation.
The trading price of our common stock has been and may continue
to be subject to wide fluctuations. This may result in
stockholder lawsuits, which could divert managements time
away from operations and could result in higher legal fees and
proxy costs.
Our stock price may fluctuate in response to a number of events
and factors, including:
|
|
|
|
|
issues associated with integration of the hospitals that we
acquire;
|
|
|
|
actual or anticipated quarterly variations in operating results,
particularly if they differ from investors expectations;
|
|
|
|
changes in financial estimates and recommendations by securities
analysts;
|
|
|
|
changes in government regulations as they relate to
reimbursement and operational policies and procedures;
|
|
|
|
the operating and stock price performance of other companies
that investors may deem comparable;
|
|
|
|
changes in overall economic factors in our markets; and
|
|
|
|
news reports relating to trends or events in our markets.
|
Broad market and industry fluctuations may adversely affect the
price of our common stock, regardless of our operating
performance.
As a result of the above factors, we could be subjected to
potential activist stockholder lawsuits. Such lawsuits are time
consuming and expensive. Among other things, such lawsuits
divert managements time and attention from operations and
can also cause distractions among employee-stockholders, who are
more long-term focused. Such lawsuits also force us to incur
substantial legal fees and proxy costs in defending our position.
47
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
We have no unresolved SEC staff comments.
Information with respect to our hospitals and our other
properties can be found in Part I, Item 1.
Business, Properties.
|
|
Item 3.
|
Legal
Proceedings.
|
General. We are, from time to time, subject to
claims and suits arising in the ordinary course of business,
including claims for damages for personal injuries, medical
malpractice, breach of contracts, wrongful restriction of or
interference with physicians staff privileges and
employment related claims. In certain of these actions,
plaintiffs request payment for damages, including punitive
damages that may not be covered by insurance. We are currently
not a party to any pending or threatened proceeding, which, in
managements opinion, would have a material adverse effect
on our business, financial condition or results of operations.
Americans with Disabilities Act Claims. The
Americans with Disabilities Act, or the ADA, generally requires
that public accommodations be made accessible to disabled
persons. On January 12, 2001, a class action lawsuit was
filed in the United States District Court for the Eastern
District of Tennessee against each of Historic LifePoints
hospitals alleging non-compliance with the accessibility
guidelines of the ADA. The lawsuit does not seek any monetary
damages, but seeks injunctive relief requiring facility
modification, where necessary, to meet ADA guidelines, in
addition to attorneys fees and costs. We are currently
unable to estimate the costs that could be associated with
modifying these facilities because these costs are negotiated
and determined on a facility-by- facility basis and, therefore,
have varied and will continue to vary significantly among
facilities. In January 2002, the District Court certified the
class action and issued a scheduling order that requires the
parties to complete discovery and inspection for approximately
six facilities per year. We are vigorously defending the
lawsuit, recognizing our obligation to correct any deficiencies
in order to comply with the ADA. As of December 31, 2006,
the plaintiffs have conducted inspections at 27 of our
hospitals. To date, the District Court approved the settlement
agreements between the parties relating to 13 of our facilities.
We are now moving forward in implementing facility modifications
in accordance with the terms of the settlement. We have
completed corrective work on three facilities for a cost of
$1.0 million. We currently anticipate that the costs
associated with ten other facilities that have court approved
settlement agreements will range from $5.1 million to
$7.0 million.
While the former Province facilities, Danville Regional Medical
Center and Wythe County Community Hospital are not parties to
this lawsuit, if these facilities become subject to the class
action lawsuit, we may be required to expand significant capital
expenditures at one or more of these facilities in order to
comply with the ADA, and our financial position and results of
operations could be adversely affected as a result. The
plaintiff in this lawsuit has represented to the court that it
will amend the lawsuit to add our acquired facilities and
dismiss the divested facilities. Noncompliance with the
requirements of the ADA could result in the imposition of fines
against us by the federal government, or the award of damages
from us to individuals.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
We had no matters submitted to a vote of the stockholders during
the quarter ended December 31, 2006.
48
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Market
Information for Common Stock
Our common stock is listed on the NASDAQ Global Select Market
under the symbol LPNT. The high and low sales prices
per share of our common stock were as follows for the periods
presented:
|
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|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
45.53
|
|
|
$
|
33.24
|
|
Second Quarter
|
|
|
51.10
|
|
|
|
41.67
|
|
Third Quarter
|
|
|
51.51
|
|
|
|
40.78
|
|
Fourth Quarter
|
|
|
44.47
|
|
|
|
36.29
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
37.01
|
|
|
$
|
28.27
|
|
Second Quarter
|
|
|
36.40
|
|
|
|
29.21
|
|
Third Quarter
|
|
|
37.20
|
|
|
|
30.89
|
|
Fourth Quarter
|
|
|
36.94
|
|
|
|
32.60
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter (through
February 2, 2007)
|
|
$
|
34.93
|
|
|
$
|
32.74
|
|
Periods prior to April 15, 2005 reflect the high and low
bid prices of Historic LifePoint common stock, as quoted on the
NASDAQ National Market. On February 2, 2007, the last
reported sales price for our common stock on the NASDAQ Global
Select Market was $34.88 per share.
Stockholders
As of January 31, 2007, there were 57,365,822 shares
of our common stock held by 5,421 holders of record.
Dividends
We have never declared or paid cash dividends on our common
stock. We intend to retain future earnings to finance the growth
and development of our business and, accordingly, do not
currently intend to declare or pay any cash dividends on our
common stock. Our board of directors will evaluate our future
earnings, results of operations, financial condition and capital
requirements in determining whether to declare or pay cash
dividends. Delaware law prohibits us from paying any dividends
unless we have capital surplus or net profits available for this
purpose. In addition, our credit facilities impose restrictions
on our ability to pay dividends. Please refer to Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Liquidity and Capital Resources in this
report for more information.
Recent
Sales of Unregistered Securities
None.
Recent
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
None.
Equity
Compensation Plan Information
The following table provides aggregate information as of
December 31, 2006, with respect to shares of common stock
that may be issued under our existing equity compensation plans,
including the LifePoint
49
Hospitals, Inc. 1998 Long-Term Incentive Plan (the
Incentive Plan), the LifePoint Hospitals, Inc.
Outside Directors Stock and Incentive Compensation Plan (the
Outside Directors Plan), the LifePoint Hospitals,
Inc. Management Stock Purchase Plan (the Management Stock
Purchase Plan) and the LifePoint Hospitals, Inc. Employee
Stock Purchase Plan (the Employee Stock Purchase
Plan):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Available for Future
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Issuance Under Equity
|
|
|
|
Exercise of Outstanding
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Options, Warrants and
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity Compensation Plans Approved
by Security Holders
|
|
|
4,162,648
|
(1)
|
|
$
|
30.19
|
(2)
|
|
|
3,693,128
|
(3)
|
Equity Compensation Plans not
Approved by Security Holders
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,162,648
|
|
|
$
|
30.19
|
|
|
|
3,693,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the following: |
|
|
|
|
|
4,007,163 shares of common stock to be issued upon exercise of
outstanding stock options granted under the Incentive Plan;
|
|
|
|
114,361 shares of common stock to be issued upon exercise of
outstanding stock options granted under the Outside Directors
Plan;
|
|
|
|
16,624 shares of common stock to be issued upon the vesting of
deferred stock units outstanding under the Outside Directors
Plan; and
|
|
|
|
24,500 shares of common stock to be issued upon the vesting of
restricted stock units outstanding under the Outside Directors
Plan.
|
|
|
|
(2) |
|
Upon vesting, deferred stock units and restricted stock units
are settled for shares of common stock on a one-for-one basis.
Accordingly, the deferred stock units and restricted stock units
have been excluded for purposes of computing the
weighted-average exercise price. |
|
(3) |
|
Includes the following: |
|
|
|
|
|
3,432,376 shares of common stock available for issuance
under the Incentive Plan;
|
|
|
|
76,123 shares of common stock available for issuance under
the Management Stock Purchase Plan;
|
|
|
|
148,499 shares of common stock available for issuance under
the Outside Directors Plan; and
|
|
|
|
36,130 shares of common stock available for issuance under
the Employee Stock Purchase Plan.
|
50
|
|
Item 6.
|
Selected
Financial Data.
|
The table below contains selected financial data of our company
for, or as of the end of, each of the five years ended
December 31, 2006. The selected financial data is derived
from our audited consolidated financial statements. In April
2005, we completed the Province business combination. The
results of operations of Province are included in our results of
operations beginning April 16, 2005. The timing of
acquisitions and divestitures completed during the years
presented affects the comparability of the selected financial
data. Please refer to Part I, Item 1. Business,
Acquisitions and Dispositions, for
additional information which affects the comparability of the
selected financial data. The selected financial data excludes
the operations as well as assets of our discontinued operations
in our consolidated financial statements. Additionally, we have
recognized certain transaction and debt retirement costs as
discussed in our audited consolidated financial statements
during the periods presented that affected the comparability of
the selected financial data. You should read this table in
conjunction with the consolidated financial statements and
related notes included elsewhere in this report and in
Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions, except per share amounts)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
702.3
|
|
|
$
|
861.7
|
|
|
$
|
928.8
|
|
|
$
|
1,841.5
|
|
|
$
|
2,439.7
|
|
Income from continuing operations
|
|
|
42.2
|
|
|
|
69.4
|
|
|
|
85.9
|
|
|
|
79.0
|
|
|
|
142.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.13
|
|
|
$
|
1.86
|
|
|
$
|
2.32
|
|
|
$
|
1.57
|
|
|
$
|
2.56
|
|
Diluted
|
|
$
|
1.09
|
|
|
$
|
1.78
|
|
|
$
|
2.18
|
|
|
$
|
1.55
|
|
|
$
|
2.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37.5
|
|
|
|
37.2
|
|
|
|
37.0
|
|
|
|
50.1
|
|
|
|
55.6
|
|
Diluted
|
|
|
38.6
|
|
|
|
43.3
|
|
|
|
42.8
|
|
|
|
53.2
|
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (as of end
of year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital, excluding assets
held for sale
|
|
$
|
66.8
|
|
|
$
|
101.5
|
|
|
$
|
115.4
|
|
|
$
|
181.2
|
|
|
$
|
195.9
|
|
Property and equipment, net
|
|
|
335.3
|
|
|
|
437.9
|
|
|
|
495.5
|
|
|
|
1,296.3
|
|
|
|
1,373.6
|
|
Total assets (including assets
held for sale)
|
|
|
733.5
|
|
|
|
799.0
|
|
|
|
890.4
|
|
|
|
3,224.6
|
|
|
|
3,638.4
|
|
Long-term debt, including amounts
due within one year
|
|
|
250.0
|
|
|
|
270.0
|
|
|
|
221.0
|
|
|
|
1,516.3
|
|
|
|
1,670.3
|
|
Stockholders equity
|
|
|
357.6
|
|
|
|
394.3
|
|
|
|
509.5
|
|
|
|
1,287.8
|
|
|
|
1,450.0
|
|
51
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
We recommend that you read this discussion together with our
consolidated financial statements and related notes included
elsewhere in this report. Unless otherwise indicated, all
relevant financial and statistical information included herein
relates to our continuing operations.
Overview
During 2006, we have focused on managing our hospitals in an
environment of lower admissions, integrating our 2005 and 2006
hospital acquisitions, recruiting and retaining physicians and
appropriately investing capital in our hospitals. The following
table reflects our summarized operating results for the years
presented (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
982.8
|
|
|
$
|
1,841.5
|
|
|
$
|
2,439.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
85.9
|
|
|
$
|
79.0
|
|
|
$
|
142.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from
continuing operations
|
|
$
|
2.18
|
|
|
$
|
1.55
|
|
|
$
|
2.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in the Companys Chief Executive Officer and
Chairman
Effective June 26, 2006, Executive Vice President William
F. Carpenter III, was named our President and Chief
Executive Officer. Mr. Carpenter replaced Kenneth C.
Donahey, who retired after serving five years as our Chairman,
President and Chief Executive Officer. In addition, on
June 25, 2006, Mr. Donahey resigned from our board of
directors and Mr. Carpenter was elected by our board of
directors to fill the vacancy resulting from
Mr. Donaheys resignation. Furthermore, our lead
Director, Owen G. Shell, Jr., was elected as our Chairman
of the Board as of June 26, 2006.
Effective June 25, 2006, we entered into a Separation
Agreement with Mr. Donahey that terminated the Employment
Agreement between us and Mr. Donahey. Mr. Donahey has
and will receive $3.5 million in two equal installments, on
December 27, 2006 and June 27, 2007, together with a
payment to cover any liability for federal excise tax he may
incur as a result of the receipt of such payments. The
confidentiality provisions of the Employment Agreement remain in
effect for 36 months. In accordance with the terms of his
pre-existing option agreements, Mr. Donahey may exercise
his stock options that were vested at the time of his retirement
over a period of three years after his retirement date. He
received insurance benefits comparable to those available to our
executives for a period of two years. We also agreed to a mutual
release of claims, except for any indemnity claims to which
Mr. Donahey may be entitled and for breaches of the
Separation Agreement. For a period of one year, Mr. Donahey
agreed not to compete with us in non-urban hospitals, diagnostic
imaging or surgery centers, and the physician recruitment
business, subject to certain limitations, and he agreed not to
induce or encourage the departure of our employees.
As a result of Mr. Donaheys retirement, we incurred
an additional net pre-tax compensation expense of approximately
$2.0 million ($1.2 million net of income taxes), or a
decrease in diluted earnings per share of $0.02, for 2006. This
compensation expense consists of the $3.5 million of
installment payments, as described above, offset by a
$1.5 million pre-tax reversal of stock compensation expense
resulting from the forfeiture of his unvested stock options and
nonvested stock.
Stock-Based
Compensation
Effective January 1, 2006, we adopted the fair value
recognition provisions of Statement of Financial Accounting
Standard (SFAS) No. 123(R), Share-Based
Payment (SFAS No. 123(R)), using the
modified prospective transition method. Under that transition
method, compensation expense that we recognize beginning on that
date includes: (i) compensation expense for all stock-based
payments granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123 Accounting for Stock-Based
Compensation (SFAS No. 123); and
(ii) compensation expense for all stock-based payments
granted on or after January 1, 2006, based on the grant
52
date fair value estimated in accordance with the provisions of
SFAS No. 123(R). Because we elected to use the
modified prospective transition method, results for prior
periods have not been restated.
Prior to January 1, 2006, we accounted for our stock-based
employee compensation plans under the measurement and
recognition provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB No. 25), and related
Interpretations, as permitted by SFAS No. 123. We did
not record any stock-based employee compensation expense for
options granted under our stock-based incentive plans prior to
January 1, 2006, as all options granted under those plans
had exercise prices equal to the fair market value of our common
stock on the date of grant. In accordance with
SFAS No. 123 and SFAS No. 148, prior to
January 1, 2006, we disclosed our pro forma net income or
loss and pro forma net income or loss per share as if we had
applied the fair value-based method in measuring compensation
expense for our stock-based incentive programs.
The table below summarizes the compensation expense for stock
options that we recorded for continuing operations in accordance
with SFAS No. 123(R) for 2006 (in millions, except for
per share amounts). The impact of the adoption of
SFAS No. 123(R) on discontinued operations was nominal
for this period.
|
|
|
|
|
Reduction of income from
continuing operations before income taxes (included in salaries
and benefits)
|
|
$
|
5.7
|
|
Income tax benefit
|
|
|
(2.1
|
)
|
|
|
|
|
|
Reduction of income from
continuing operations
|
|
$
|
3.6
|
|
|
|
|
|
|
Reduction of income per share from
continuing operations:
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.06
|
|
|
|
|
|
|
The following table summarizes our total stock-based
compensation expense as well as the related total recognized tax
benefits for the last three years (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005(a)
|
|
|
2006
|
|
|
Nonvested stock
|
|
$
|
1.8
|
|
|
$
|
6.5
|
|
|
$
|
7.5
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
1.8
|
|
|
$
|
6.5
|
|
|
$
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits on stock-based
compensation expense
|
|
$
|
0.6
|
|
|
$
|
2.4
|
|
|
$
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This excludes the $4.0 million ($2.5 million, net of
income taxes) of compensation expense we recognized that was the
result of the accelerated vesting of nonvested stock due to the
Province business combination. |
As of December 31, 2006, there was $30.6 million of
total unrecognized compensation cost related to all of our stock
compensation arrangements. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures. We
expect to recognize that cost over a weighted average period of
2.3 years.
Companies were required to make an accounting policy decision
under SFAS No. 123 about whether to use a
forfeiture-rate assumption or to begin accruing compensation
cost for all awards granted (i.e., assume no forfeitures) and
then subsequently reverse compensation costs for forfeitures
when they occurred. Under SFAS No. 123(R), companies
are required to: (i) estimate the number of awards for
which it is probable that the requisite service will be
rendered; and (ii) update that estimate as new information
becomes available through the vesting date. We have historically
recognized our pro-forma stock option expense using an estimated
forfeiture rate. However, we also had a policy (prior to
January 1, 2006) of recognizing the effect of
forfeitures as they occurred for our nonvested stock. Under
SFAS No. 123(R), we were required to make a one-time
cumulative adjustment that increased income by
$1.1 million, or $0.7 million net of income taxes
($0.01 net income per share, basic and diluted) as of
January 1, 2006, to adjust our compensation cost for those
nonvested awards that are not expected to vest. This adjustment
is reported in our consolidated statement of operations as a
cumulative effect of change in accounting principle, net of
income taxes, for 2006.
53
Physician
Minimum Revenue Guarantees
In November 2005, the Financial Accounting Standards Board (the
FASB) issued FASB Staff Position
No. FIN 45-3,
Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners
(FSP
FIN 45-3),
which served as an amendment to FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), by adding minimum
revenue guarantees to the list of example contracts to which
FIN 45 applies. Under FSP
FIN 45-3,
a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. One example cited in FSP
FIN 45-3
involves a guarantee provided by a healthcare entity to a
non-employed physician in order to recruit such physician to
move to the entitys geographical area and establish a
private practice. In the example, the healthcare entity also
agreed to make payments to the relocated physician if the gross
revenue or gross receipts generated by the physicians new
practice during a specified time period did not equal or exceed
predetermined monetary thresholds. Because this example in FSP
FIN 45-3
is similar to certain of our physician recruiting commitments,
we believe it falls under the accounting guidance of FSP
FIN 45-3.
FSP
FIN 45-3
was effective for new physician minimum revenue guarantees
issued or modified on or after January 1, 2006. We adopted
FSP
FIN 45-3
effective January 1, 2006. For physician minimum revenue
guarantees issued before January 1, 2006, we expensed the
advances as they were paid to the physicians, which were
typically over a period of one year. Under FSP
FIN 45-3,
we record a contract-based intangible asset and related
guarantee liability for new physician minimum revenue guarantees
entered into after January 1, 2006 and amortize the
contract-based intangible asset to physician recruiting expense
over the period of the physician contract, which is typically
five years. As of December 31, 2006, our liability balance
for contract-based physician minimum revenue guarantees was
$11.0 million, which is included in other current
liabilities on our consolidated balance sheet.
The following table summarizes the impact of adopting FSP
FIN 45-3
during 2006 (in millions, except per share amounts):
|
|
|
|
|
Increase of income from continuing
operations before income taxes (included in other operating
expenses)
|
|
$
|
8.7
|
|
Provision for income taxes
|
|
|
(3.4
|
)
|
|
|
|
|
|
Increase of income from continuing
operations
|
|
$
|
5.3
|
|
|
|
|
|
|
Increase of income per share from
continuing operations:
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
|
|
|
|
|
Hospital
Acquisitions
We seek to identify and acquire selected hospitals in non-urban
communities. The Province business combination in April 2005
provided a unique opportunity for us to acquire 21 hospitals in
non-urban communities, while diversifying our economic and
geographic base. Additionally, our July 1, 2006 acquisition
of two of the hospitals from HCA and our other 2005 hospital
acquisitions fit into our plan of pursuing a strategy of
acquiring hospitals that are the sole or a significant market
provider of healthcare services in their communities. In
evaluating a hospital for acquisition, we focus on a variety of
factors. One factor we consider is the number of patients that
are traveling outside of the community for healthcare services.
Another factor we consider is the hospitals prior
operating history and our ability to implement new healthcare
services. In addition, we review the local demographics and
expected future trends. Upon acquiring a facility, we quickly
work to integrate the hospital into our operating practices.
Please refer to the Acquisitions section in
Part I, Item 1. Business for a table of our
hospital acquisitions since our inception in 1999. Please refer
to Note 2 to our consolidated financial statements included
elsewhere in this report for further discussion of acquisitions
that we made in 2004, 2005 and 2006.
54
In connection with the finalization of the purchase price
allocations of both Danville Regional Medical Center
(DRMC) and Province, we recognized a reduction in
depreciation expense of approximately $13.5 million
($8.1 million net of income taxes), or $0.14 per
diluted share during 2006. This decreased depreciation expense
was the result of lower fair values of certain property and
equipment established by the third-party valuation firm than
originally anticipated in the preliminary purchase price
allocations.
Havasu
Joint Venture
Effective September 1, 2006, we formed a joint venture with
certain physicians in the Lake Havasu City area. We contributed
cash and substantially all of the assets used in the operations
of Havasu Regional Medical Center, excluding real estate and
home health assets, and the physicians contributed substantially
all the assets of Havasu Surgery Center, an outpatient surgical
center. We retain an approximately 96% equity interest in the
joint venture.
Business
Combination with Province Healthcare Company
On April 15, 2005, we completed the business combination
with Province Healthcare Company. As a result of the business
combination, each of Historic LifePoint and Province is now a
wholly owned subsidiary of LifePoint Hospitals, Inc., a new
public company formed in connection with the business
combination. We believe that the Province business combination
has provided and will continue to provide efficiencies for our
operations and enhance our ability to compete effectively. As a
result of the Province business combination and subsequent
acquisitions, we are more geographically and financially
diversified in our asset base, increasing our operations from
nine states to 19 states. Please refer to Note 2 of
our consolidated financial statements included elsewhere in this
report for more information regarding the Province business
combination. Our results of operations include the operations of
the former hospitals of Province beginning April 16, 2005.
Discontinued
Operations
From time to time, we may evaluate our facilities and sell
assets which we believe may no longer fit with our long-term
strategy for various reasons. In connection with the acquisition
of four facilities from HCA, effective July 1, 2006, we
entered into a plan to divest two hospitals, St. Josephs
Hospital located in Parkersburg, West Virginia, and Saint
Francis Hospital located in Charleston, West Virginia. We sold
Saint Francis Hospital effective January 1, 2007, and
anticipate selling St. Josephs Hospital by mid-2007.
During the second quarter of 2005, subsequent to the Province
business combination, we committed to a plan to divest three
hospitals acquired from Province. These three hospitals were:
Medical Center of Southern Indiana located in Charlestown,
Indiana; Ashland Regional Medical Center located in Ashland,
Pennsylvania; and Palo Verde Hospital located in Blythe,
California. We divested Palo Verde Hospital on January 1,
2006 by terminating our lease of that hospital and returning the
hospital to the Hospital District of Palo Verde. We completed
the sale of both Medical Center of Southern Indiana and Ashland
Regional Medical Center to Saint Catherine Healthcare effective
May 1, 2006. On March 31, 2006, we sold Smith County
Memorial Hospital to Sumner Regional Health System. On
March 31, 2005, we sold Bartow Memorial Hospital to Health
Management Associates, Inc. Please refer to Note 3 of our
consolidated financial statements included elsewhere in this
report for more information on our discontinued operations.
55
The following table reflects our summarized operating results of
discontinued operations for the years presented (in millions,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
46.8
|
|
|
$
|
61.7
|
|
|
$
|
108.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
(0.2
|
)
|
|
$
|
0.4
|
|
|
$
|
(0.9
|
)
|
Impairment of assets
|
|
|
|
|
|
|
(5.8
|
)
|
|
|
|
|
Gain (loss) on sale of hospitals
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
(0.2
|
)
|
|
$
|
(6.1
|
)
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
from discontinued operations
|
|
$
|
(0.1
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Challenges
We anticipate increasing our revenues and profitability on both
a long-term and short-term basis. However, we have the following
internal and external key challenges to overcome:
|
|
|
|
|
Increases in Provision for Doubtful
Accounts. We have experienced an increase in our
provision for doubtful accounts during recent years. These
increases were the result of an increased number of uninsured
patients and an increase in co-payments and deductibles from
healthcare plan design changes. These changes increase
collection costs and reduce overall cash collections.
|
|
|
|
|
|
Our provision for doubtful accounts on a consolidated basis was
as follows for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Doubtful Accounts
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
22.7
|
|
|
$
|
25.2
|
|
|
$
|
68.6
|
|
Second Quarter
|
|
|
21.2
|
|
|
|
45.3
|
|
|
|
60.2
|
|
Third Quarter
|
|
|
26.2
|
|
|
|
63.0
|
|
|
|
73.9
|
|
Fourth Quarter
|
|
|
24.4
|
|
|
|
63.8
|
|
|
|
71.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94.5
|
|
|
$
|
197.3
|
|
|
$
|
273.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenues decrease when we write-off patient accounts
identified as charity and indigent care. Our hospitals write-off
a portion of a patients account upon the determination
that the patient qualifies under the hospitals
charity/indigent care policy. In the event that a patient
account was previously classified as self-pay when the
determination of charity/indigent status is made, a
corresponding reduction in the provision for doubtful accounts
may occur.
|
|
|
|
The following table reflects our consolidated charity and
indigent care write-offs for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charity and Indigent Care Write-Offs
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
1.9
|
|
|
$
|
1.8
|
|
|
$
|
6.0
|
|
Second Quarter
|
|
|
2.4
|
|
|
|
6.3
|
|
|
|
12.2
|
|
Third Quarter
|
|
|
1.7
|
|
|
|
8.4
|
|
|
|
11.6
|
|
Fourth Quarter
|
|
|
1.8
|
|
|
|
9.5
|
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7.8
|
|
|
$
|
26.0
|
|
|
$
|
46.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The provision for doubtful accounts, as well as charity and
indigent care write-offs, relate primarily to self-pay revenues.
The following table reflects our quarterly consolidated self-pay
revenues, net of charity and indigent care write-offs, for the
periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Pay Revenues
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
23.1
|
|
|
$
|
26.9
|
|
|
$
|
73.8
|
|
Second Quarter
|
|
|
23.3
|
|
|
|
56.9
|
|
|
|
73.3
|
|
Third Quarter
|
|
|
28.8
|
|
|
|
74.1
|
|
|
|
88.3
|
|
Fourth Quarter
|
|
|
25.7
|
|
|
|
71.6
|
|
|
|
75.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100.9
|
|
|
$
|
229.5
|
|
|
$
|
310.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows our consolidated revenue days
outstanding reflected in our consolidated net accounts
receivable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Days Outstanding in
|
|
|
|
Accounts Receivable
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
March 31
|
|
|
40.1
|
|
|
|
37.2
|
|
|
|
39.6
|
|
June 30
|
|
|
38.8
|
|
|
|
41.0
|
|
|
|
40.7
|
|
September 30
|
|
|
40.6
|
|
|
|
42.0
|
|
|
|
45.1
|
|
December 31
|
|
|
38.7
|
|
|
|
40.5
|
|
|
|
43.1
|
|
The following table shows our adjusted consolidated revenue days
outstanding reflected in our consolidated net accounts
receivable as of the dates indicated. Revenues are adjusted by
subtracting the provision for doubtful accounts during the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
Revenue Days Outstanding in
|
|
|
|
Accounts Receivable
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
March 31
|
|
|
44.0
|
|
|
|
40.9
|
|
|
|
44.7
|
|
June 30
|
|
|
42.4
|
|
|
|
45.2
|
|
|
|
45.5
|
|
September 30
|
|
|
45.2
|
|
|
|
47.3
|
|
|
|
50.5
|
|
December 31
|
|
|
42.6
|
|
|
|
45.6
|
|
|
|
48.1
|
|
The approximate percentages of billed hospital receivables
(which is a component of total accounts receivable) are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Insured receivables
|
|
|
40.6
|
%
|
|
|
37.1
|
%
|
Uninsured receivables (including
co-payments and deductibles)
|
|
|
59.4
|
|
|
|
62.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
The approximate percentages of billed hospital receivables in
summarized aging categories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
0 to 60 days
|
|
|
51.4
|
%
|
|
|
49.3
|
%
|
61 to 150 days
|
|
|
20.9
|
|
|
|
21.3
|
|
Over 150 days
|
|
|
27.7
|
|
|
|
29.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to implement a number of operating strategies as
they relate to cash collections. However, if the trend of
increasing self-pay revenues continues, our results of
operations and financial position in the future could be
materially adversely affected.
|
|
|
|
|
|
Physician Recruitment and
Retention. Recruiting and retaining both primary
care physicians and specialists for our non-urban communities is
a key to increasing revenues, patient volumes and the value that
the communities place on our hospitals. The medical staffs at
our hospitals are typically small and our revenues are
negatively affected by the loss of physicians. Our management
believes that continuing to add specialists should help our
hospitals increase volumes by offering new services. During
2006, we recruited 182 new admitting physicians and spent
$26.3 million in cash on physician recruitment, including
physician minimum revenue guarantee payments. We plan to recruit
approximately 172 new admitting physicians during 2007.
|
A summary of activity related to our admitting physicians during
2006 is as follows:
|
|
|
|
|
|
|
Admitting
|
|
|
|
Physicians
|
|
|
December 31, 2005
|
|
|
1,832
|
|
Recruited
|
|
|
182
|
|
Departed
|
|
|
(82
|
)
|
Additions from two HCA hospitals
(acquired effective July 1, 2006)
|
|
|
132
|
|
|
|
|
|
|
December 31, 2006
|
|
|
2,064
|
|
|
|
|
|
|
|
|
|
|
|
Substantial Indebtedness. Our consolidated
debt was $1,670.3 million as of December 31, 2006, and
we incurred $103.5 million of net interest expense during
2006. We entered into an interest rate swap agreement effective
as of November 30, 2006 with a maturity date of
May 30, 2011. The interest rate swap converts a portion of
our indebtedness to a fixed interest rate with a decreasing
notional amount starting at $900.0 million at an annual
fixed rate of 5.585%. Our substantial indebtedness increases our
cost of capital, decreases our net income and reduces the amount
of funds available for operations, capital expenditures and
future acquisitions. We are in compliance with our financial
debt covenants as of December 31, 2006 and believe we will
be in compliance with them throughout 2007. It is not our intent
to maintain large cash balances, and we will focus on reducing
our indebtedness during 2007.
|
|
|
|
Medicare Changes. We have experienced changes
with respect to governmental reimbursement that are affecting
our growth. Effective October 1, 2005, CMS expanded the
post-acute transfer policy from 30 diagnosis related groups
(DRGs) to 182 DRGs resulting in an approximate
$6.0 million reduction in our Medicare inpatient PPS
payments for FFY 2006. CMS further expanded the list to 192 DRGs
during FFY 2007; however we do not anticipate any material
increase in payment reductions for 2007. On February 8,
2006, the DRA was signed into law. This law includes measures
related to quality reporting and
pay-for-performance,
the inpatient rehabilitation facility 75% Rule and Medicaid
cuts. Part I, Item 1. Business, Sources
of Revenue in this report contains a detailed
discussion of provisions that affect our Medicare reimbursement.
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Integration of Acquired Hospitals. During 2005
and 2006, we acquired numerous hospitals in several
transactions. The process of integrating the operations of these
hospitals could cause an interruption of,
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or loss of momentum in, the activities of our business. However,
we are dedicated to devoting significant management attention
and resources to integrating the business practices and
operations of our recently acquired hospitals.
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Shortage of Clinical Personnel and Increased Contract Labor
Usage. In recent years, many hospitals, including
some of the hospitals we own, have encountered difficulty in
recruiting and retaining nursing and certain medical
technicians. When we are unable to staff our nursing and certain
medical technician positions, we are required to use contract
labor to ensure adequate patient care. Contract labor generally
costs more per hour than employed labor. We have adopted a
number of human resources strategies in an attempt to improve
our ability to recruit and retain nursing and certain medical
technicians. However, we expect that staffing issues related to
nurses and certain medical technicians will continue in the
future.
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Challenges in Professional and General Liability
Costs. Professional and general liability costs
remain a challenge to us, and we expect this pressure to
continue in the future. In recent years, we have incurred
favorable loss experience, as reflected in our external
actuarial reports. We have implemented enhanced risk management
processes for monitoring professional and general liability
claims and managing in high-risk areas.
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Increases in Supply Costs. During the past few
years, we have experienced an increase in supply costs as a
percentage of revenues, especially in the areas of
pharmaceutical, orthopedic, oncology and cardiac supplies. We
participate in a group purchasing organization in an attempt to
achieve lower supply costs from our vendors. Because of the
fixed reimbursement nature of most governmental and commercial
payor arrangements, we may not be able to recover supply cost
increases through increased revenues.
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Increases in Information Technology Costs and Costs of
Integration. Our acquisition activity requires transitions
from, and the integration of, various information systems that
are used by hospitals we acquire. We rely heavily on HCA-IT for
information systems integration pursuant to our contractual
arrangement for information technology services. Recently, the
number of hospitals we operated increased significantly. This
resulted in significant increases in our information technology
costs.
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Summary
Each of our challenges are intensified by our inability to
control related trends and the associated risks. Therefore, our
actual results may differ from our expectations. To maintain or
improve operating margins in the future, we must, among other
things, increase patient volumes through physician recruiting,
relationships and retention while controlling the costs of
providing services.
Revenue
Sources
Our hospitals generate revenues by providing healthcare services
to our patients. The majority of these healthcare services are
directed by physicians. We are paid for these healthcare
services from a number of different sources, depending upon the
patients medical insurance coverage. Primarily, we are
paid by governmental Medicare and Medicaid programs, commercial
insurance, including managed care organizations, and directly by
the patient. The amounts we are paid for providing healthcare
services to our patients vary depending upon the payor.
Governmental payors generally pay significantly less than the
hospitals customary charges for the services provided.
Please refer to Part I, Item 1. Business,
Sources of Revenue for a detailed
discussion of our revenue sources.
Revenues from governmental payors, such as Medicare and
Medicaid, are controlled by complex rules and regulations that
stipulate the amount a hospital is paid for providing healthcare
services. Our compliance with these rules and regulations
requires an extensive effort to ensure we remain eligible to
participate in these governmental programs. In addition, these
rules and regulations are subject to frequent changes as a
result of legislative and administrative action on both the
federal and the state levels. For these reasons, revenues from
governmental programs change frequently and require us to
monitor regularly the environment in which these governmental
programs operate.
59
Revenues from HMOs, PPOs and other private insurers are subject
to contracts and other arrangements that require us to discount
the amounts we customarily charge for healthcare services. These
discounted arrangements often limit our ability to increase
charges in response to increasing costs. We actively negotiate
with these payors to seek to maintain or increase the pricing of
our healthcare services. Insured patients are generally not
responsible for any difference between customary hospital
charges and the amounts received from commercial insurance
payors. However, insured patients are responsible for payments
not covered by insurance, such as exclusions, deductibles and
co-payments.
Self-pay revenues are primarily generated through the treatment
of uninsured patients. Our hospitals experienced an increase in
self-pay revenues during the past few years.
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Critical
Accounting Estimates
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires us
to make estimates and assumptions that affect reported amounts
and related disclosures. We consider an accounting estimate to
be critical if:
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it requires assumptions to be made that were uncertain at the
time the estimate was made; and
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changes in the estimate or different estimates that could have
been made could have a material impact on our consolidated
results of operations or financial condition.
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Our management has discussed the development and selection of
these critical accounting estimates with the audit committee of
our Board of Directors and with our independent registered
public accounting firm, and they both have reviewed the
disclosure presented below relating to our critical accounting
estimates.
The table of critical accounting estimates is not intended to be
a comprehensive list of all of our accounting policies that
require estimates. We believe that of our significant accounting
policies, as discussed in Note 1 of our consolidated
financial statements included elsewhere in this report, the
estimates discussed below involve a higher degree of judgment
and complexity. We believe the current assumptions and other
considerations used to estimate amounts reflected in our
consolidated financial statements are appropriate. However, if
actual experience differs from the assumptions and other
considerations used in estimating amounts reflected in our
consolidated financial statements, the resulting changes could
have a material adverse effect on our consolidated results of
operations and our financial condition.
The table that follows presents information about our critical
accounting estimates, as well as the effects of hypothetical
changes in the material assumptions used to develop each
estimate:
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Allowance for doubtful
accounts and provision for doubtful accounts
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Accounts receivable primarily consist of amounts due from third-party payors and patients. Our ability to collect outstanding receivables is critical to our results of operations and cash flows. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables
to their estimated net realizable value. The primary uncertainty lies with uninsured patient receivables and deductibles, co-payments or other amounts due from individual patients.
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The largest component of bad
debts in our patient accounts receivable relates to accounts for
which patients are responsible, which we refer to as patient
responsibility accounts or self- pay accounts. These accounts
include both amounts payable by uninsured patients and
co-payments and deductibles payable by insured patients. In
general, we attempt to collect deductibles, co-payments and
self-pay accounts prior to the time of service for
non-emergency care. If we do not collect these patient
responsibility accounts prior to the delivery of care, the
accounts are handled through our billing and collections
processes.
We verify each patients insurance coverage as early as
possible
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If self-pay revenues during 2006
were changed by 1%, our 2006 after-tax income from continuing
operations would change by approximately $1.9 million or
diluted earnings per share of $0.03.
This is only one example of reasonably possible sensitivity
scenarios. The process of determining the allowance requires us
to estimate uncollectible patient accounts that are highly
uncertain and requires a high degree of judgment. Our estimates
may be impacted by changes in regional economic conditions,
business office operations, payor mix and trends in federal or
state governmental healthcare coverage.
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Allowance for doubtful
accounts and provision for doubtful accounts (continued)
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Our allowance for doubtful
accounts, included in our balance sheets as of December
31 was as follows (in millions):
2006 $328.1; and
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before a scheduled admission or
procedure, including with respect to eligibility, benefits and
authorization/pre-certification requirements, in order to notify
patients of the amounts for which they will be responsible. We
attempt to verify insurance coverage within a reasonable amount
of time for all emergency room visits and urgent admissions in
compliance with the Emergency Medical Treatment and Active Labor
Act.
In general, we perform the following steps in collecting
accounts receivable:
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A significant increase in our provision for doubtful accounts
(as a percentage of revenues) would lower our earnings. This
would adversely affect our results of operations, financial
condition, liquidity and future access to capital
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2005
$252.9
Our provision for doubtful accounts, included in our results
of operations, was as follows (in millions):
2006 $266.7
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if possible, cash collection of deductibles,
co-payments and self-pay accounts prior to or at the time
service is provided;
billing and
follow-up
with third party payors;
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2005 $189.4; and
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2004 $85.4
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collection calls;
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utilization of collection agencies; and
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if collection efforts are unsuccessful, write
off of the accounts.
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Our policy is to write off accounts after all collection efforts have failed, which is typically no longer than one year after the date of discharge of the patient. Patient responsibility accounts represent the majority of our write-offs. All of our hospitals retain third-party collection agencies for billing and collection of delinquent accounts. At most of our
hospitals, more than one collection agency is used
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Allowance for doubtful
accounts and provision for doubtful accounts (continued)
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to promote competition and
improve performance results. The selection of collection
agencies and the timing of referral of an account to a
collection agency vary among hospitals. Generally, we do not
write off accounts prior to utilizing the services of a
collection agency. Once collection efforts have proven
unsuccessful, an account is written off from our patient
accounting system against the allowance for doubtful accounts.
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We determine the adequacy of the allowance for doubtful accounts utilizing a number of analytical tools and benchmarks. No single statistic or measurement alone determines the adequacy of the allowance.
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As it relates to our recently- acquired hospitals, we monitor trends in revenues and cash collections on a monthly basis for 18 to 24 months subsequent to the acquisition on a facility-by-facility basis.
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As it relates to our core hospitals, which we refer to as same- hospital, we monitor the revenue trends by payor classification on a month-by-month basis along with the composition of our accounts receivable agings. This review is focused primarily on trends in self-pay revenues, accounts receivable, co-payment receivables and historic payment patterns.
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In addition, we analyze other factors such as revenue days in accounts receivable and we review admissions and charges by physicians, primarily focusing on recently recruited physicians.
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Allowance for doubtful
accounts and provision for doubtful accounts (continued)
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The allowance for doubtful accounts relating to the former Province facilities increased by $21.0 million during 2005, which resulted in a decrease in our diluted earnings per share of $0.25 for 2005, to conform the former Province facilities allowance for doubtful accounts to our critical accounting estimate. This adjustment constituted a change in
the estimation process from the former Province critical accounting estimate and is reflected as transaction costs in our consolidated statement of operations for 2005. The adjustment is the result of our review of Provinces patient accounts receivable and the application of the same assumptions and processes we use.
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Revenue recognition/Allowance for contractual discounts
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We recognize revenues in the
period in which services are provided. Accounts receivable
primarily consist of amounts due from third-party payors and
patients. Amounts we receive for treatment of patients covered
by governmental programs, such as Medicare and Medicaid, and
other third-party payors such as HMOs, PPOs and other private
insurers, are generally less than our established billing
rates.
Accordingly, our gross revenues and accounts receivable are
reduced to net realizable value through an allowance for
contractual discounts. Approximately 83.5% of our revenues
during 2006 relate to discounted charges.
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Revenues are recorded at estimated net amounts due from patients, third- party payors and others for healthcare services provided. We utilize multiple patient accounting systems. Therefore, estimates for contractual allowances are calculated using computerized and manual processes depending on the type of payor involved and the patient accounting system used by each
of our hospitals. In certain hospitals, the contractual allowances are calculated by a computerized system based on payment terms for each payor. In other hospitals, the contractual allowances are determined manually using historical collections for each type of payor. For all hospitals, certain manual estimates are used in calculating contractual allowances based on
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Revenue
recognition/Allowance for contractual discounts
(continued)
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The sources of these revenues were as follows (as a percentage of total revenues):
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historical collections from
payors that are not significant or have not entered into a
contract with us. All contractual adjustments regardless of type
of payor or method of calculation are reviewed and compared to
actual experience.
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Medicare 34.8%;
Medicaid 10.0%; and
Managed care 38.7%.
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Governmental payors
The majority of services performed on Medicare and Medicaid
patients are reimbursed at predetermined reimbursement rates.
The differences between the established billing rates (i.e.,
gross charges) and the predetermined reimbursement rates are
recorded as contractual discounts and deducted from gross
charges. Under this prospective reimbursement system, there is
no adjustment or settlement of the difference between the actual
cost to provide the service and the predetermined reimbursement
rates.
Discounts for retrospectively cost-based revenues, which were
more prevalent in periods before 2000, are estimated based on
historical and current factors and are adjusted in future
periods when settlements of filed cost reports are received.
Final settlements under these programs are subject to adjustment
based on administrative review and audit by third party
intermediaries, which can take several years to resolve
completely.
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Governmental payors
Because the laws and regulations governing the Medicare and
Medicaid programs are complex and subject to change, the
estimates of contractual discounts we record could change by
material amounts. Adjustments related to final settlements
increased our revenues by the following amounts (in millions):
2006 $13.7
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2005 $9.4; and
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2004 $10.6
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Managed care
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Managed care
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Accounts receivable primarily consist of amounts due from third party payors and patients. Amounts we receive for the
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If our overall estimated contractual discount percentage on all of our managed care revenues during 2006 were changed by 1%,
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Revenue
recognition/Allowance for contractual discounts
(continued)
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treatment of patients covered by
HMOs, PPOs and other private insurers are generally less than
our established billing rates. We include contractual allowances
as a reduction to revenues in our financial statements based on
payor specific identification and payor specific factors for
rate increases and denials.
For most managed care plans, estimated contractual allowances
are adjusted to actual contractual allowances as cash is
received and claims are reconciled. We evaluate the following
criteria in developing the estimated contractual allowance
percentages each month: historical contractual allowance trends
based on actual claims paid by managed care payors; review of
contractual allowance information reflecting current contract
terms; consideration and analysis of changes in payor mix
reimbursement levels; and other issues that may impact
contractual allowances.
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our 2006 after-tax income from
continuing operations would change by approximately
$6.1 million. This is only one example of reasonably
possible sensitivity scenarios. The process of determining the
allowance requires us to estimate the amount expected to be
received based on payor contract provisions, historical
collection data as well as other factors and requires a high
degree of judgment. It is impacted by changes in managed care
contracts and other related factors.
A significant increase in our estimate of contractual
discounts would lower our earnings. This would adversely affect
our results of operations, financial condition, liquidity and
future access to capital.
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Applying our process to the accounts receivable from Provinces third-party payors resulted in a $5.4 million charge and decreased our diluted earnings per share by $0.07 during 2005 to conform the former Province facilities allowance for contractual discounts to our critical accounting estimate. This adjustment constituted a change in the estimation
process from the former Province critical accounting estimate and is reflected as transaction costs in our consolidated statement of operations for 2005. The
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Revenue
recognition/Allowance for contractual discounts
(continued)
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adjustment is the result of our
review of Provinces patient accounts receivable and the
application of the same assumptions and processes we use.
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Accounting for stock-based compensation
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We issue stock options and other stock-based awards to our key employees and directors under various stockholder- approved stock-based compensation plans. We currently have four types of stock- based awards outstanding under these plans: stock options; nonvested stock; restricted stock units; and deferred stock units. Prior to January 1, 2006, we accounted
for our stock-based employee compensation plans under the measurement and recognition provisions of APB No. 25, as permitted by SFAS No. 123. We did not record any stock-based employee compensation expense for options granted under our stock-based incentive plans prior to January 1, 2006, as all options granted under those plans had exercise prices equal to the fair market
value of our common stock on the date of grant. We also did not record any compensation expense in connection with our Employee Stock Purchase Plan prior to January 1, 2006, as the purchase price of the stock was not less than 85% of the lower of the fair market value of our common stock at the beginning of each offering period or at the end of each purchase period. In accordance with SFAS
No. 123 and SFAS No. 148, prior to January 1, 2006, we disclosed our pro forma net income or loss and pro forma net income or loss per
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In January 2006, we changed from
the Black-Scholes-Merton option valuation model
(BSM) to a lattice-based option valuation
model, the Hull-White II Valuation Model (HW-
II). We prefer the HW-II over the BSM because the HW-II
considers characteristics of fair value option pricing, such as
an options contractual term and the probability of
exercise before the end of the contractual term, that are not
available under the BSM. In addition, the complications
surrounding the expected term of an option are material, as
clarified by the SECs focus on the matter in SAB 107.
Given the reasonably large pool of our unexercised options, we
believe a lattice model that specifically addresses this fact
and models a full term of exercises is the most appropriate and
reliable means of valuing our stock options. We used a third
party to assist in developing the assumptions used in estimating
the fair values of stock options granted during 2006.
We estimated the fair value of stock options granted during
2006 using the HW-II lattice option valuation model and a single
option award approach. We are amortizing the fair value on a
straight-line basis over the requisite service periods of the
awards, which are the vesting
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The fair value calculations of our stock option grants are affected by assumptions that are believed to be reasonable based upon the facts and circumstances at the time of grant. Changes in our volatility estimates can materially affect the fair values of our stock option grants. If our estimated weighted-average volatility during 2006 were 10% higher, our 2006 after-tax
income from continuing operations would decrease by approximately $0.3 million, or less than $0.01 per diluted share.
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Accounting for stock-based
compensation
(continued)
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share as if we had applied the
fair value-based method in measuring compensation expense for
our stock-based incentive programs.
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periods of three years. The stock
options that were granted during 2004, 2005 and 2006 vest 33.3%
on each grant anniversary date over three years of continued
employment.
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Effective January 1, 2006,
we adopted the fair value recognition provisions of
SFAS No. 123(R), using the modified prospective
transition method. Under that transition method, compensation
expense that we recognize beginning on that date includes:
(i) compensation expense for all stock-based payments
granted prior to, but not yet vested as of, January 1,
2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123; and
(ii) compensation expense for all stock-based payments
granted on or after January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of
SFAS No. 123(R). Because we elected to use the
modified prospective transition method, results for prior
periods have not been restated. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 (SAB 107),
which provides supplemental implementation guidance for
SFAS No. 123(R). We have applied the provisions of
SAB 107 in our adoption of SFAS No. 123(R).
We determine the fair value of nonvested stock grants based on
the closing price of our common stock on the grant date. The
nonvested stock requires no payment from employees and
directors, and stock-based compensation expense is recorded
equally over the vesting periods (three to five years).
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The weighted-average fair value per share of stock options
granted by us during 2006 was $11.15. The following table shows
the weighted average assumptions we used to develop the fair
value estimates under our stock option valuation model for 2006
and the paragraphs below this table summarizes each assumption:
Expected
volatility 32.8%
Risk free interest
rate (range) 4.38% - 5.21% Expected
dividends
Average expected
term
(years) 5.4
Population Stratification
Under SFAS No. 123(R), a company should aggregate
individual awards into relatively homogeneous groups with
respect to exercise and post-vesting employment behaviors for
the purpose of refining the expected term assumption, regardless
of the valuation technique used to estimate the fair value. In
addition, SAB 107 clarifies that a company may generally
make a reasonable fair value estimate with as few as one or two
groupings. We have stratified our employee population into two
groups: (i) Insiders, who are the
Section 16 filers under SEC rules; and (ii) Non-
insiders, who are the rest of the employee
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
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Assumptions/Approach Used
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Sensitivity Analysis
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Accounting for stock-based
compensation
(continued)
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Our stock-based compensation, included in our results of
operations, was as follows (in millions):
2006 $13.2;
2005 $6.5; and
2004 $1.8
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population. We derived this
stratification based on the analysis of our historical exercise
patterns, excluding certain extraordinary events.
Expected Volatility
Volatility is a measure of the tendency of investment returns
to vary around a long-term average rate. Historical volatility
is still an appropriate starting point for setting this
assumption under SFAS No. 123(R). According to
SFAS No. 123(R), companies should also consider how
future experience may differ from the past. This may require
using other factors to adjust historical volatility, such as
implied volatility, peer-group volatility and the range and
mean- reversion of volatility estimates over various historical
periods. SFAS No. 123(R) and SAB 107 acknowledge
that there is likely to be a range of reasonable estimates for
volatility. In addition, SFAS No. 123(R) requires that
if a best estimate cannot be made, management should use the
mid-point in the range of reasonable estimates for volatility.
Effective January 1, 2006 we estimate the volatility of our
common stock at the date of grant based on both historical
volatility and implied volatility from traded options on our
common stock, consistent with SFAS No. 123(R) and
SAB 107.
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Risk-Free Interest Rate
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Lattice models require risk-free interest rates for all
potential times of exercise obtained by using a grant-date yield
curve. A lattice
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Nature of Critical Estimate Item
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|
Assumptions/Approach Used
|
|
|
Sensitivity Analysis
|
Accounting for stock-based
compensation
(continued)
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model would therefore require the
yield curve for the entire time period during which employees
might exercise their options. We base the risk-free rate on the
implied yield in effect at the time of option grant on
U.S. Treasury zero-coupon issues with equivalent remaining
terms.
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Expected Dividends
|
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|
We have never paid any cash dividends on our common stock and
do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of
zero.
|
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|
Pre-Vesting Forfeitures
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|
Pre-vesting forfeitures do not affect the fair value
calculation, but they affect the expense calculation.
SFAS No. 123(R) requires us to estimate pre- vesting
forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those
estimates. We have used historical data to estimate pre-vesting
option forfeitures and record share-based compensation expense
only for those awards that are expected to vest. For purposes of
calculating pro forma information under SFAS No. 123
for periods prior to January 1, 2006, we also used an
estimated forfeiture rate.
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Post-Vesting Cancellations
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|
Post-vesting cancellations include vested options that are
cancelled, exercised or expire unexercised.
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70
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Balance Sheet or
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Income Statement Caption/
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Nature of Critical Estimate Item
|
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|
Assumptions/Approach Used
|
|
|
Sensitivity Analysis
|
Accounting for stock-based
compensation
(continued)
|
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|
Lattice models treat post-vesting
cancellations and voluntary early exercise behavior as two
separate assumptions. We used historical data to estimate
post-vesting cancellations.
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|
Expected Term
|
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|
SFAS No. 123(R) calls for an
extinguishment calculation, dependent upon how
long a granted option remains outstanding before it is fully
extinguished. While extinguishment may result from exercise, it
can also result from cancellation (post-vesting) or expiration
at the contractual term. Expected term is an output in lattice
models so we do not have to determine this amount.
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Goodwill and accounting for business combinations
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|
Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies.
|
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|
We follow the guidance in
Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets, and test
goodwill for impairment using a fair value approach. We are
required to test for impairment at least annually, absent some
triggering event that would accelerate an impairment assessment.
On an ongoing basis, absent any impairment indicators, we
perform our goodwill impairment testing as of October 1 of
each year. We determine fair value using widely accepted
valuation techniques, including discounted cash flow and market
multiple analyses. These types of analyses require us to make
assumptions and estimates regarding future cash flows, industry
economic factors and the
|
|
|
We performed our annual testing
for goodwill impairment as of October 1, 2004, 2005 and
2006 using the methodology described here, and determined that
no goodwill impairment existed. If actual future results are not
consistent with our assumptions and estimates, we may be
required to record goodwill impairment charges in the future.
Our estimate of fair value of acquired assets and assumed
liabilities are based upon assumptions believed to be reasonable
based upon current facts and circumstances. If 10% of the non-
depreciable assets acquired during 2006 were allocated to a
depreciable asset with an average life of 20 years,
depreciation expense would have
|
71
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|
Balance Sheet or
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|
Income Statement Caption/
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|
Nature of Critical Estimate Item
|
|
|
Assumptions/Approach Used
|
|
|
Sensitivity Analysis
|
Goodwill and accounting for
business combinations
(continued)
|
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|
Our goodwill included in our consolidated balance sheets as of December 31 for the following years was as follows (in millions):
|
|
|
profitability of future business
strategies.
|
|
|
increased by approximately
$0.4 million in 2006.
|
2006 $1,581.3; and
|
|
|
|
|
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|
2005 $1,449.9
|
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|
The increase in our goodwill during 2006 was primarily the result of the acquisition of the two hospitals from HCA and the final purchase price allocations for the Province business combination and the acquisition of DRMC. Please refer to Note 4 to our consolidated financial statements included elsewhere in this report for a detailed rollforward of our goodwill.
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|
The purchase price of acquisitions are allocated to the assets acquired and liabilities assumed based upon their respective fair values and subject to change during the twelve month period subsequent to the acquisition date. We engage independent third-party valuation firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such
valuations require us to make significant estimates and assumptions, including projections of future events and operating performance.
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|
Fair value estimates are derived from independent appraisals,
established market values of comparable assets, or internal
calculations of estimated future net cash flows. Our estimate of
future cash flows is based on
|
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72
|
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|
Balance Sheet or
|
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|
|
Income Statement Caption/
|
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|
Nature of Critical Estimate Item
|
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|
Assumptions/Approach Used
|
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|
Sensitivity Analysis
|
Goodwill and accounting for
business combinations
(continued)
|
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|
assumptions and projections we
believe to be currently reasonable and supportable. Our
assumptions take into account revenue and expense growth rates,
patient volumes, changes in payor mix, and changes in
legislation and other payor payment patterns.
|
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|
Professional and general liability claims
|
|
|
|
|
|
|
We are subject to potential
medical malpractice lawsuits and other claims. To mitigate a
portion of this risk, we maintained insurance for individual
malpractice claims exceeding a self-insured retention amount.
For 2004, our self-insured retention level was
$10.0 million. For 2005 and 2006, we increased our
self-insured retention levels to $15.0 million and
$20.0 million, respectively. We maintained self-insured
retention at $10.0 million for our sole facility located in
Florida. Additionally, certain of our facilities operate in
states having state specific medical malpractice programs. We
have commercial insurance policies for claims in excess of
$50,000 in the following states: Colorado; Indiana; and Kansas.
The state program in Louisiana limits our medical malpractice
retention to $100,000.
Each year, we obtain quotes from various malpractice insurers
with respect to the cost of obtaining medical malpractice
insurance coverage. We compare these quotes to our most recent
actuarially determined estimates of losses at various
self-insured retention levels. Accordingly,
|
|
|
Our reserves for professional
and general liability claims are based upon independent
actuarial calculations, which consider historical claims data,
demographic considerations, severity factors and other actuarial
assumptions in the determination of reserve estimates. Reserve
estimates are discounted to present value using a 5.0% discount
rate.
During the first quarter of 2005, we revised our reserve
estimation process by obtaining independent actuarial
calculations every quarter, rather than twice each year, from
two actuarial firms. Our estimated reserve for professional and
general liability claims will be significantly affected if
current and future claims differ from historical trends. While
we monitor reported claims closely and consider potential
outcomes as estimated by our independent actuaries when
determining our professional and general liability reserves, the
complexity of the claims, the extended period of time to settle
the claims and the wide range of potential outcomes complicates
the estimation process. In addition, certain states have passed
varying forms of tort reform which attempt to limit the amount
of
|
|
|
Actuarial calculations include a
large number of variables that may significantly impact the
estimate of ultimate losses that are recorded during a reporting
period. Professional judgment is used by each actuary in
determining their loss estimates by selecting factors that are
considered appropriate by the actuary for our specific
circumstances. Changes in assumptions used by our independent
actuaries with respect to demographics and geography, industry
trends, development patterns and judgmental selection of other
factors may impact our recorded reserve levels and our results
of operations.
We derive our estimates for financial reporting purposes by
using a mathematical average of our actuarial results. Changes
in our initial estimates of professional and general liability
claims are non-cash charges and accordingly, there would be no
material impact on our liquidity or capital resources.
|
73
|
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|
|
Balance Sheet or
|
|
|
|
|
|
|
Income Statement Caption/
|
|
|
|
|
|
|
Nature of Critical Estimate Item
|
|
|
Assumptions/Approach Used
|
|
|
Sensitivity Analysis
|
Professional and general
liability claims
(continued)
|
|
|
|
|
|
|
changes in insurance costs affect
the self-insurance retention level we choose each year. As
insurance costs have increased in recent years, we have accepted
a higher level of risk in self- insured retention levels.
The reserve for professional and general liability claims
included in our consolidated balance sheets as of December
31 was as follows (in millions):
2006 $61.8; and
2005 $55.3
The reserve for professional and general liability claims
reflects the current estimate of all outstanding losses,
including incurred but not reported losses, based upon actuarial
calculations as of the balance sheet date. The loss estimates
included in the actuarial calculations may change in the future
based upon updated facts and circumstances.
|
|
|
medical malpractice awards. If
such laws are passed in the states where our hospitals are
located, our loss estimates could decrease.
We use the valuations of two actuaries and average their
results in determining our recorded reserve levels on a
quarterly basis. This averaging process results in a refined
estimation approach that we believe produces a more reliable
estimate of ultimate losses.
We currently receive actuarial calculations each quarter from
two separate actuarial firms. Province did not use the services
of either of these actuarial firms. Upon conforming the
hospitals that we acquired from Province to our methodology by
obtaining valuations from each of our actuarial firms and
averaging the results, the reserves for professional and general
liability claims were increased by $6.8 million. The impact
of this change decreased our diluted earnings per share by $0.09
for the second quarter of 2005 and is included in transaction
costs in our consolidated statement of operations.
|
|
|
|
The total expense for professional and general liability coverage, included in our consolidated results of operations, was as follows (in millions):
|
|
|
|
|
|
|
2006 $19.7;
|
|
|
|
|
|
|
2005 $19.3; and
|
|
|
|
|
|
|
2004 $5.4
|
|
|
|
|
|
|
Our expense for professional and general liability coverage each year includes the actuarially
|
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|
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|
74
|
|
|
|
|
|
|
Balance Sheet or
|
|
|
|
|
|
|
Income Statement Caption/
|
|
|
|
|
|
|
Nature of Critical Estimate Item
|
|
|
Assumptions/Approach Used
|
|
|
Sensitivity Analysis
|
Professional and general
liability claims
(continued)
|
|
|
|
|
|
|
determined estimate of losses for
the current year, including claims incurred but not reported;
the change in the estimate of losses for prior years based upon
actual claims development experience as compared to prior
actuarial projections; the insurance premiums for losses in
excess of our self-insured retention levels; the administrative
costs of the insurance program and interest expense related to
the discounted portion of the liability. The 2005 expense also
includes $6.8 million of transaction costs recorded to
conform the hospitals that we acquired from Province to our
methodology for determining medical malpractice reserves.
|
|
|
|
|
|
|
Accounting for income taxes
|
|
|
|
|
|
|
Deferred tax assets generally
represent items that will result in a tax deduction in future
years for which we have already recorded the tax benefit in our
income statement. We assess the likelihood that deferred tax
assets will be recovered from future taxable income. To the
extent we believe that recovery is not probable, a valuation
allowance is established. To the extent we establish a valuation
allowance or increase this allowance, we must include an expense
as part of the income tax provision in our results of
operations. Our deferred tax asset balances in our consolidated
balance sheets as of December 31 for the following years
were as follows (in millions):
2006 $133.5; and
2005 $97.0
|
|
|
The first step in determining
the deferred tax asset valuation allowance is identifying
reporting jurisdictions where we have a history of tax and
operating losses or are projected to have losses in future
periods as a result of changes in operational performance. We
then determine if a valuation allowance should be established
against the deferred tax assets for that reporting
jurisdiction.
The second step is to determine the amount of the valuation
allowance. We will generally establish a valuation allowance
equal to the net deferred tax asset (deferred tax assets less
deferred tax liabilities) related to the jurisdiction identified
in step one of the analysis. In certain cases, we may not reduce
the valuation allowance by the amount of the deferred tax
liabilities depending on the nature and timing of future
|
|
|
Our deferred tax liabilities
exceeded our deferred tax assets by $39.3 million as of
December 31, 2006, excluding the impact of valuation
allowances. Historically, we have produced federal taxable
income. Therefore, we believe that the likelihood of our not
realizing the federal tax benefit of our deferred tax assets is
remote.
However, we do have subsidiaries with a history of tax losses
in certain state jurisdictions and, based upon those historical
tax losses, we assumed that the subsidiaries would not be
profitable in the future for those states tax purposes. If
our assertion regarding the future profitability of those
subsidiaries were incorrect, then our deferred tax assets would
be understated by the amount of the valuation allowance of
$32.0 million at December 31, 2006.
|
|
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|
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|
75
|
|
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|
|
|
|
Balance Sheet or
|
|
|
|
|
|
|
Income Statement Caption/
|
|
|
|
|
|
|
Nature of Critical Estimate Item
|
|
|
Assumptions/Approach Used
|
|
|
Sensitivity Analysis
|
Accounting for income taxes
(continued)
|
|
|
|
|
|
|
Our valuation allowances for
deferred tax assets in our consolidated balance sheets as of
December 31 for the following years were as follows (in
millions):
2006 $32.0; and
2005 $5.7
In addition, significant judgment is required in determining
and assessing the impact of certain tax-related contingencies.
We establish accruals when, despite our belief that our tax
return positions are fully supportable, it is probable that we
have incurred a loss related to tax contingencies and the loss
or range of loss can be reasonably estimated. We adjust the
accruals related to tax contingencies as part of our provision
for income taxes in our results of operations based upon
changing facts and circumstances, such as progress of a tax
audit, development of industry related examination issues, as
well as legislative, regulatory or judicial developments. A
number of years may elapse before a particular matter, for which
we have established an accrual, is audited and resolved.
|
|
|
taxable income attributable to
deferred tax liabilities.
In assessing tax contingencies, we identify tax issues that we
believe may be challenged upon examination by the taxing
authorities. We also assess the likelihood of sustaining tax
benefits associated with tax planning strategies and reduce tax
benefits based on managements judgment regarding such
likelihood. We compute the tax and related interest on each
contingency. We then determine the amount of loss, or reduction
in tax benefits based upon the foregoing and reflect such amount
as a component of the provision for income taxes in the
reporting period.
During each reporting period, we assess the facts and
circumstances related to recorded tax contingencies. If tax
contingencies are no longer deemed probable based upon new facts
and circumstances, the contingency is reflected as a reduction
of the provision for income taxes in the current period.
|
|
|
The IRS may propose adjustments for items we have failed to
identify as tax contingencies. If the IRS were to propose and
sustain assessments equal to 10% of our taxable income for 2006,
we would incur $9.1 million of additional tax payments for
2006 plus applicable penalties and interest.
|
|
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76
Results
of Operations
The following definitions apply throughout the remaining portion
of Managements Discussion and Analysis of Financial
Condition and Results of Operations:
Admissions. Represents the total number of
patients admitted (in the facility for a period in excess of
23 hours) to our hospitals and used by management and
investors as a general measure of inpatient volume.
bps. Basis point change.
Continuing operations. Continuing operations
information excludes the operations of hospitals which are
classified as discontinued operations.
Emergency room visits. Represents the total
number of hospital-based emergency room visits.
Equivalent admissions. Management and
investors use equivalent admissions as a general measure of
combined inpatient and outpatient volume. We compute equivalent
admissions by multiplying admissions (inpatient volume) by the
outpatient factor (the sum of gross inpatient revenue and gross
outpatient revenue and then dividing the resulting amount by
gross inpatient revenue). The equivalent admissions computation
equates outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a
general measure of combined inpatient and outpatient volume.
ESOP. Employee stock ownership plan. The ESOP
is a defined contribution retirement plan that covers
substantially all of our employees.
Medicare case mix index. Refers to the acuity
or severity of illness of an average Medicare patient at our
hospitals.
N/A. Not applicable.
N/M. Not meaningful.
Outpatient surgeries. Outpatient surgeries are
those surgeries that do not require admission to our hospitals.
Same-hospital. Same-hospital information
includes 49 hospitals operated during the three months ended
December 31, 2005 and 2006. Same-hospital information
includes the operations of Valley View Medical Center, which was
opened during November 2005 and replaced Colorado River Medical
Center, which was converted to a critical access hospital. In
addition, the same-hospital information includes the operations
of Guyan Valley Hospital, which we voluntarily closed and ceased
operations effective December 29, 2006. The costs of
corporate overhead and discontinued operations are excluded from
same-hospital information.
77
Operating
Results Summary
The following tables present summaries of results of operations
for the three months ended December 31, 2005 and 2006 and
for the years ended December 31, 2004, 2005 and 2006
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Revenues
|
|
$
|
556.2
|
|
|
|
100.0
|
%
|
|
$
|
640.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
224.6
|
|
|
|
40.4
|
|
|
|
248.4
|
|
|
|
38.8
|
|
Supplies
|
|
|
78.0
|
|
|
|
14.0
|
|
|
|
90.6
|
|
|
|
14.1
|
|
Other operating expenses
|
|
|
94.2
|
|
|
|
17.0
|
|
|
|
112.6
|
|
|
|
17.6
|
|
Provision for doubtful accounts
|
|
|
61.9
|
|
|
|
11.1
|
|
|
|
69.2
|
|
|
|
10.8
|
|
Depreciation and amortization
|
|
|
32.6
|
|
|
|
5.9
|
|
|
|
32.8
|
|
|
|
5.1
|
|
Interest expense, net
|
|
|
21.9
|
|
|
|
3.9
|
|
|
|
27.3
|
|
|
|
4.3
|
|
Debt retirement costs
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
513.3
|
|
|
|
92.3
|
|
|
|
580.9
|
|
|
|
90.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interests and income taxes
|
|
|
42.9
|
|
|
|
7.7
|
|
|
|
59.7
|
|
|
|
9.3
|
|
Minority interests in earnings of
consolidated entities
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
42.6
|
|
|
|
7.6
|
|
|
|
59.5
|
|
|
|
9.3
|
|
Provision for income taxes
|
|
|
16.6
|
|
|
|
2.9
|
|
|
|
22.0
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
26.0
|
|
|
|
4.7
|
%
|
|
$
|
37.5
|
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Revenues
|
|
$
|
982.8
|
|
|
|
100.0
|
%
|
|
$
|
1,841.5
|
|
|
|
100.0
|
%
|
|
$
|
2,439.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
402.3
|
|
|
|
40.9
|
|
|
|
739.6
|
|
|
|
40.2
|
|
|
|
960.6
|
|
|
|
39.4
|
|
Supplies
|
|
|
127.8
|
|
|
|
13.0
|
|
|
|
250.4
|
|
|
|
13.6
|
|
|
|
340.1
|
|
|
|
13.9
|
|
Other operating expenses
|
|
|
163.7
|
|
|
|
16.7
|
|
|
|
308.3
|
|
|
|
16.7
|
|
|
|
421.6
|
|
|
|
17.3
|
|
Provision for doubtful accounts
|
|
|
85.4
|
|
|
|
8.7
|
|
|
|
189.4
|
|
|
|
10.3
|
|
|
|
266.7
|
|
|
|
10.9
|
|
Depreciation and amortization
|
|
|
47.4
|
|
|
|
4.7
|
|
|
|
100.4
|
|
|
|
5.4
|
|
|
|
111.1
|
|
|
|
4.6
|
|
Interest expense, net
|
|
|
12.5
|
|
|
|
1.3
|
|
|
|
60.1
|
|
|
|
3.3
|
|
|
|
103.5
|
|
|
|
4.2
|
|
Debt retirement costs
|
|
|
1.5
|
|
|
|
0.2
|
|
|
|
12.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Transaction costs
|
|
|
|
|
|
|
|
|
|
|
43.2
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
840.6
|
|
|
|
85.5
|
|
|
|
1,703.6
|
|
|
|
92.5
|
|
|
|
2,203.6
|
|
|
|
90.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interests and income taxes
|
|
|
142.2
|
|
|
|
14.5
|
|
|
|
137.9
|
|
|
|
7.5
|
|
|
|
236.1
|
|
|
|
9.7
|
|
Minority interests in earnings of
consolidated entities
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
0.1
|
|
|
|
1.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
141.2
|
|
|
|
14.4
|
|
|
|
136.8
|
|
|
|
7.4
|
|
|
|
234.8
|
|
|
|
9.6
|
|
Provision for income taxes
|
|
|
55.3
|
|
|
|
5.7
|
|
|
|
57.8
|
|
|
|
3.1
|
|
|
|
92.6
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
85.9
|
|
|
|
8.7
|
%
|
|
$
|
79.0
|
|
|
|
4.3
|
%
|
|
$
|
142.2
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
For
the Three Months Ended December 31, 2005 and
2006
Revenues
The increase in our revenues for the quarter ended
December 31, 2006 compared to the quarter ended
December 31, 2005 was primarily the result of the third
quarter 2006 acquisition of two facilities from HCA, and an
increase in equivalent admissions and revenues per equivalent
admission for both continuing operations and on a same-hospital
basis.
Adjustments to estimated reimbursement amounts increased our
revenues by $2.7 million and $3.6 million for the
quarters ended December 31, 2005 and 2006, respectively.
The following table shows the sources of our revenues for the
quarters ended December 31, 2005 and 2006 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
$
|
556.2
|
|
|
$
|
592.9
|
|
|
$
|
36.7
|
|
|
|
6.6
|
%
|
Two former HCA facilities
|
|
|
|
|
|
|
47.0
|
|
|
|
47.0
|
|
|
|
N/A
|
|
Other
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
556.2
|
|
|
$
|
640.6
|
|
|
$
|
84.4
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the sources of our revenues for the
quarters ended December 31 of the years indicated,
expressed as percentages of total revenues, including
adjustments to estimated reimbursement amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
Same-Hospital
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Medicare
|
|
|
35.9
|
%
|
|
|
34.8
|
%
|
|
|
35.9
|
%
|
|
|
34.6
|
%
|
Medicaid
|
|
|
8.9
|
|
|
|
10.5
|
|
|
|
8.9
|
|
|
|
10.5
|
|
HMOs, PPOs and other private
insurers
|
|
|
41.4
|
|
|
|
39.3
|
|
|
|
41.4
|
|
|
|
38.9
|
|
Self-Pay
|
|
|
12.8
|
|
|
|
11.7
|
|
|
|
12.8
|
|
|
|
12.2
|
|
Other
|
|
|
1.0
|
|
|
|
3.7
|
|
|
|
1.0
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
The following table shows the key drivers of our revenues for
the quarters ended December 31, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Admissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
45,233
|
|
|
|
46,021
|
|
|
|
788
|
|
|
|
1.7
|
%
|
Continuing operations
|
|
|
45,233
|
|
|
|
50,666
|
|
|
|
5,433
|
|
|
|
12.0
|
|
Equivalent admissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
86,717
|
|
|
|
90,441
|
|
|
|
3,724
|
|
|
|
4.3
|
|
Continuing operations
|
|
|
86,717
|
|
|
|
98,426
|
|
|
|
11,709
|
|
|
|
13.5
|
|
Revenues per equivalent admission:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
$
|
6,414
|
|
|
$
|
6,555
|
|
|
$
|
141
|
|
|
|
2.2
|
|
Continuing operations
|
|
$
|
6,414
|
|
|
$
|
6,508
|
|
|
$
|
94
|
|
|
|
1.5
|
|
Medicare case mix index:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
1.24
|
|
|
|
1.22
|
|
|
|
(0.02
|
)
|
|
|
(1.6
|
)
|
Continuing operations
|
|
|
1.24
|
|
|
|
1.21
|
|
|
|
(0.03
|
)
|
|
|
(2.4
|
)
|
Average length of stay (days):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Inpatient surgeries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
13,409
|
|
|
|
13,368
|
|
|
|
(41
|
)
|
|
|
(0.3
|
)
|
Continuing operations
|
|
|
13,409
|
|
|
|
14,721
|
|
|
|
1,312
|
|
|
|
9.8
|
|
Outpatient surgeries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
32,796
|
|
|
|
33,935
|
|
|
|
1,139
|
|
|
|
3.5
|
|
Continuing operations
|
|
|
32,796
|
|
|
|
36,623
|
|
|
|
3,827
|
|
|
|
11.7
|
|
Emergency room visits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
202,000
|
|
|
|
207,276
|
|
|
|
5,276
|
|
|
|
2.6
|
|
Continuing operations
|
|
|
202,000
|
|
|
|
223,121
|
|
|
|
21,121
|
|
|
|
10.5
|
|
Outpatient factor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
1.92
|
|
|
|
1.97
|
|
|
|
0.05
|
|
|
|
2.6
|
|
Continuing operations
|
|
|
1.92
|
|
|
|
1.94
|
|
|
|
0.02
|
|
|
|
1.0
|
|
Number of hospitals at end of
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
49
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
49
|
|
|
|
50
|
|
|
|
1
|
|
|
|
2.0
|
|
Licensed beds at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
5,333
|
|
|
|
5,197
|
|
|
|
(136
|
)
|
|
|
(2.6
|
)
|
Continuing operations
|
|
|
5,333
|
|
|
|
5,697
|
|
|
|
364
|
|
|
|
6.8
|
|
Weighted-average licensed beds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
5,364
|
|
|
|
5,205
|
|
|
|
(159
|
)
|
|
|
(3.0
|
)
|
Continuing operations
|
|
|
5,364
|
|
|
|
5,705
|
|
|
|
341
|
|
|
|
6.4
|
|
80
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits expense
for the three months ended December 31, 2005 and 2006
(dollars in millions, except for salaries and benefits per
equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
171.7
|
|
|
|
30.9
|
%
|
|
$
|
193.2
|
|
|
|
30.2
|
%
|
|
$
|
21.5
|
|
|
|
12.6
|
%
|
Stock-based compensation
|
|
|
2.3
|
|
|
|
0.4
|
|
|
|
3.7
|
|
|
|
0.6
|
|
|
|
1.4
|
|
|
|
68.9
|
|
Employee benefits
|
|
|
36.7
|
|
|
|
6.6
|
|
|
|
36.3
|
|
|
|
5.7
|
|
|
|
(0.4
|
)
|
|
|
(1.4
|
)
|
Contract labor
|
|
|
10.2
|
|
|
|
1.8
|
|
|
|
13.0
|
|
|
|
2.0
|
|
|
|
2.8
|
|
|
|
26.4
|
|
ESOP expense
|
|
|
3.7
|
|
|
|
0.7
|
|
|
|
2.2
|
|
|
|
0.3
|
|
|
|
(1.5
|
)
|
|
|
(41.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
224.6
|
|
|
|
40.4
|
%
|
|
$
|
248.4
|
|
|
|
38.8
|
%
|
|
$
|
23.8
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
93.6
|
|
|
|
N/A
|
|
|
|
89.1
|
|
|
|
N/A
|
|
|
|
(4.5
|
)
|
|
|
(4.8
|
)
|
Salaries and benefits per
equivalent admission
|
|
|
2,465
|
|
|
|
N/A
|
|
|
|
2,431
|
|
|
|
N/A
|
|
|
$
|
34
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office salaries and
benefits
|
|
$
|
7.2
|
|
|
|
1.3
|
%
|
|
$
|
10.0
|
|
|
|
1.6
|
%
|
|
$
|
2.8
|
|
|
|
38.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
166.3
|
|
|
|
29.9
|
%
|
|
$
|
171.5
|
|
|
|
28.9
|
%
|
|
$
|
5.2
|
|
|
|
3.1
|
|
Stock-based compensation
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
0.9
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
54.0
|
|
Employee benefits
|
|
|
36.6
|
|
|
|
6.6
|
|
|
|
32.9
|
|
|
|
5.6
|
|
|
|
(3.7
|
)
|
|
|
(10.1
|
)
|
Contract labor
|
|
|
10.2
|
|
|
|
1.8
|
|
|
|
12.7
|
|
|
|
2.1
|
|
|
|
2.5
|
|
|
|
24.3
|
|
ESOP expense
|
|
|
3.7
|
|
|
|
0.7
|
|
|
|
1.9
|
|
|
|
0.3
|
|
|
|
(1.8
|
)
|
|
|
(46.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
217.4
|
|
|
|
39.1
|
%
|
|
$
|
219.9
|
|
|
|
37.1
|
%
|
|
$
|
2.5
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
93.6
|
|
|
|
N/A
|
|
|
$
|
88.7
|
|
|
|
N/A
|
|
|
|
(4.9
|
)
|
|
|
(5.2
|
)
|
Salaries and benefits per
equivalent admission
|
|
$
|
2,455
|
|
|
|
N/A
|
|
|
$
|
2,422
|
|
|
|
N/A
|
|
|
$
|
(33
|
)
|
|
|
(1.3
|
)
|
Our salaries and benefits increased for the quarter ended
December 31, 2006 compared to the quarter ended
December 31, 2005, primarily as a result of the third
quarter 2006 acquisition of two facilities from HCA, increases
in contract labor and stock-based compensation, partially offset
by a decrease in ESOP expense. Salaries and benefits as a
percentage of revenues decreased for both continuing operations
and on a same-hospital basis as a result of effective management
of our salary costs and changes in our employee health benefits.
Contract labor as a percentage of revenues on both a continuing
operations and on a same-hospital basis increased primarily
because of a higher utilization of contract nurses due to volume
increases. We are implementing strategies in an effort to reduce
contract labor by recruiting and retaining nurses and other
clinical personnel.
The increase in our stock-based compensation on a continuing
operations and same-hospital basis was the result of our
adoption of SFAS No. 123(R) effective January 1,
2006, and the additional nonvested stock awards outstanding
during the quarter ended December 31, 2006, compared to the
quarter ended December 31,
81
2005. The adoption of SFAS No. 123(R) required us to
start recognizing the cost of employee stock options in our
consolidated statement of operations, which was approximately
$1.4 million during the quarter ended December 31,
2006. Please refer to the sections entitled Stock-Based
Compensation and Critical Accounting Estimates
in this Part II, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Note 7 of our consolidated financial
statements included elsewhere in this report for a discussion of
our adoption of SFAS No. 123(R) and the impact of this
new accounting standard on our financial statements.
Our workers compensation expense, which is a part of our
employee benefits expense, decreased from $4.2 million
during the quarter ended December 31, 2005 to a credit of
$0.7 million during the quarter ended December 31,
2006, as a result of a $1.6 million credit related to our
annual independent actuarial review during the quarter ended
December 31, 2006, compared to a charge of
$1.3 million for our annual independent actuarial review
during the quarter ended December 31, 2005. In addition, we
recognized a $1.8 million credit during the quarter ended
December 31, 2006 related to our independent
administrators reconciliation of prepaid expenses. The
favorable annual independent actuarial review during the quarter
ended December 31, 2006 was the result of our
implementation of risk management programs and quality care
programs instituted during 2006.
Our ESOP expense has two components: common stock and cash.
Shares of our common stock are allocated ratably to employee
accounts at a rate of 23,306 shares per month. The ESOP
expense amount for the common stock component is determined
using the average market price of our common stock released to
participants in the ESOP. The decrease in ESOP expense in the
quarter ended December 31, 2006 compared to the quarter
ended December 31, 2005 on both a continuing operations and
on a same-hospital basis was primarily the result of a lower
average market price of our common stock during the quarter
ended December 31, 2006 ($34.49 per share) compared to
the quarter ended December 31, 2005 ($39.38 per
share). The cash component is discretionary and is impacted by
the amount of forfeitures in the ESOP. There were no
discretionary cash contributions during the quarter ended
December 31, 2006 compared to a $3.2 million
discretionary cash contribution during the quarter ended
December 31, 2005.
Supplies
The following table summarizes our supplies expense for the
three months ended December 31, 2005 and 2006 (dollars in
millions, except for supplies per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
%
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies
|
|
$
|
78.0
|
|
|
$
|
90.6
|
|
|
$
|
12.6
|
|
|
|
16.4
|
%
|
Supplies as a percentage of
revenues
|
|
|
14.0
|
%
|
|
|
14.1
|
%
|
|
|
10
|
bps
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
895
|
|
|
$
|
916
|
|
|
$
|
21
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies
|
|
$
|
77.6
|
|
|
$
|
82.1
|
|
|
$
|
4.5
|
|
|
|
5.8
|
%
|
Supplies as a percentage of
revenues
|
|
|
14.0
|
%
|
|
|
13.8
|
%
|
|
|
(20
|
)bps
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
892
|
|
|
$
|
904
|
|
|
$
|
12
|
|
|
|
1.3
|
%
|
Our supplies expense increased for the quarter ended
December 31, 2006 compared to the quarter ended
December 31, 2005, primarily as a result of the third
quarter 2006 acquisition of two facilities from HCA and
increases in supplies per equivalent admission on both a
continuing operations and same-hospital basis. Supplies as a
percentage of revenues increased slightly for continuing
operations but decreased on a same-hospital basis as a result of
effective management of our supply costs and increased synergies
as a result of our participation in a group purchasing
organization. Supplies per equivalent admission for continuing
82
operations and on a same-hospital basis increased slightly as a
result of rising supply costs particularly related to higher
utilization of cardiology, orthopedic and other implantable
devices.
Other
Operating Expenses
The following table summarizes our other operating expenses for
the three months ended December 31, 2005 and 2006 (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
9.0
|
|
|
|
1.6
|
%
|
|
$
|
14.9
|
|
|
|
2.3
|
%
|
|
$
|
5.9
|
|
|
|
64.6
|
%
|
Utilities
|
|
|
11.5
|
|
|
|
2.1
|
|
|
|
12.0
|
|
|
|
1.9
|
|
|
|
0.5
|
|
|
|
4.4
|
|
Repairs and maintenance
|
|
|
10.6
|
|
|
|
1.9
|
|
|
|
13.9
|
|
|
|
2.2
|
|
|
|
3.3
|
|
|
|
31.6
|
|
Rents and leases
|
|
|
5.2
|
|
|
|
0.9
|
|
|
|
7.0
|
|
|
|
1.1
|
|
|
|
1.8
|
|
|
|
31.9
|
|
Insurance
|
|
|
5.1
|
|
|
|
0.9
|
|
|
|
3.8
|
|
|
|
0.6
|
|
|
|
(1.3
|
)
|
|
|
(23.0
|
)
|
Physician recruiting
|
|
|
6.7
|
|
|
|
1.2
|
|
|
|
4.4
|
|
|
|
0.7
|
|
|
|
(2.3
|
)
|
|
|
(35.7
|
)
|
Contract services
|
|
|
20.2
|
|
|
|
3.6
|
|
|
|
27.7
|
|
|
|
4.3
|
|
|
|
7.5
|
|
|
|
36.7
|
|
Non-income taxes
|
|
|
7.2
|
|
|
|
1.3
|
|
|
|
8.6
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
20.4
|
|
Other
|
|
|
18.7
|
|
|
|
3.5
|
|
|
|
20.3
|
|
|
|
3.1
|
|
|
|
1.6
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94.2
|
|
|
|
17.0
|
%
|
|
$
|
112.6
|
|
|
|
17.6
|
%
|
|
$
|
18.4
|
|
|
|
19.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office other operating
expenses
|
|
$
|
6.1
|
|
|
|
1.2
|
%
|
|
$
|
7.1
|
|
|
|
1.1
|
%
|
|
$
|
1.0
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital other operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
9.0
|
|
|
|
1.6
|
%
|
|
$
|
13.3
|
|
|
|
2.2
|
%
|
|
$
|
4.3
|
|
|
|
48.7
|
|
Utilities
|
|
|
11.3
|
|
|
|
2.0
|
|
|
|
11.0
|
|
|
|
1.9
|
|
|
|
(0.3
|
)
|
|
|
(2.4
|
)
|
Repairs and maintenance
|
|
|
10.5
|
|
|
|
1.9
|
|
|
|
12.8
|
|
|
|
2.2
|
|
|
|
2.3
|
|
|
|
21.8
|
|
Rents and leases
|
|
|
5.0
|
|
|
|
0.9
|
|
|
|
5.7
|
|
|
|
1.0
|
|
|
|
0.7
|
|
|
|
12.9
|
|
Insurance
|
|
|
4.4
|
|
|
|
0.8
|
|
|
|
1.7
|
|
|
|
0.3
|
|
|
|
(2.7
|
)
|
|
|
(61.5
|
)
|
Physician recruiting
|
|
|
6.7
|
|
|
|
1.2
|
|
|
|
4.1
|
|
|
|
0.7
|
|
|
|
(2.6
|
)
|
|
|
(38.5
|
)
|
Contract services
|
|
|
18.2
|
|
|
|
3.3
|
|
|
|
22.1
|
|
|
|
3.7
|
|
|
|
3.9
|
|
|
|
21.5
|
|
Non-income taxes
|
|
|
7.1
|
|
|
|
1.3
|
|
|
|
7.3
|
|
|
|
1.2
|
|
|
|
0.2
|
|
|
|
3.1
|
|
Other
|
|
|
15.9
|
|
|
|
2.8
|
|
|
|
16.7
|
|
|
|
2.8
|
|
|
|
0.8
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88.1
|
|
|
|
15.8
|
%
|
|
$
|
94.7
|
|
|
|
16.0
|
%
|
|
$
|
6.6
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our other operating expenses are generally not volume driven.
The increase in other operating expenses for the quarter ended
December 31, 2006 compared to the quarter ended
December 31, 2005 was primarily attributable to the
acquisition of two facilities from HCA during the third quarter
of 2006 and increased contract services and professional fees,
partially offset by decreases in physician recruiting expense
and favorable trends in our risk management programs. We
incurred increased clinical and physician-related fees as well
as increased contract service fees related to our conversions of
the patient accounting applications at our acquired facilities.
Additionally, professional fees increased on a continuing
operations and same-hospital basis for anesthesiology, radiology
and emergency room services. Finally, other expenses increased
primarily as a result of an increase in our HCA-IT fees because
of more hospitals utilizing the HCA-IT systems as a result of
our recent acquisitions.
83
As discussed in Note 4 of our consolidated financial
statements included elsewhere in this report, we adopted FSP
FIN 45-3
effective January 1, 2006. The impact of this adoption
decreased our physician recruiting expense by approximately
$3.0 million, or $1.9 million net of income taxes, and
increased our diluted earnings per share by $0.03 for the
quarter ended December 31, 2006.
During the quarter ended December 31, 2006, we incurred
favorable loss experience, as reflected in our external
actuarial reports compared to the quarter ended
December 31, 2005. Throughout 2006, we implemented enhanced
risk management processes for monitoring professional and
general liability claims and managing in high-risk areas.
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for the three months ended December 31, 2005 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
61.9
|
|
|
$
|
69.2
|
|
|
$
|
7.3
|
|
|
|
11.8
|
%
|
Percentage of revenues
|
|
|
11.1
|
%
|
|
|
10.8
|
%
|
|
|
(30
|
)bps
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
8.9
|
|
|
$
|
14.4
|
|
|
$
|
5.5
|
|
|
|
61.0
|
%
|
Percentage of revenues
|
|
|
0.7
|
%
|
|
|
1.0
|
%
|
|
|
30
|
bps
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
61.9
|
|
|
$
|
64.9
|
|
|
$
|
3.0
|
|
|
|
4.7
|
%
|
Percentage of revenues
|
|
|
11.1
|
%
|
|
|
10.9
|
%
|
|
|
(20
|
)bps
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
8.9
|
|
|
$
|
12.2
|
|
|
$
|
3.3
|
|
|
|
37.1
|
%
|
Percentage of revenues
|
|
|
0.7
|
%
|
|
|
0.9
|
%
|
|
|
20
|
bps
|
|
|
N/M
|
|
The increase in our provision for doubtful accounts for the
quarter ended December 31, 2006 compared to the quarter
ended December 31, 2005 was primarily attributable to the
acquisition of two facilities from HCA during the third quarter
of 2006 and same-hospital revenue growth. As a percentage of
revenues from continuing operations and on a same-hospital
basis, the provision for doubtful accounts decreased for the
quarter ended December 31, 2006 compared to the quarter
ended December 31, 2005, primarily because of an increase
in charity care write-offs. The provision for doubtful accounts
relates principally to self-pay amounts due from patients. The
provision and allowance for doubtful accounts are critical
accounting estimates and are further discussed in Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Critical Accounting Estimates.
The increase in charity care write-offs for the quarter ended
December 31, 2006 compared to the quarter ended
December 31, 2005 was primarily attributable to the
acquisition of two facilities from HCA during the third quarter
of 2006 and same-hospital revenue growth. We do not report a
charity/indigent care patients charges in revenues or in
the provision for doubtful accounts as it is our policy not to
pursue collection of amounts related to these patients.
Depreciation
and Amortization
Depreciation and amortization expense increased slightly for the
quarter ended December 31, 2006 compared to the quarter
ended December 31, 2005, primarily as a result of the
acquisition of two facilities from HCA during the third quarter
of 2006 partially offset by lower depreciation during the
quarter ended December 31, 2006 compared to the quarter
ended December 31, 2005 as a result of the final purchase
price allocations of both Danville Regional Medical Center
(DRMC) and Province during 2006, which had the effect of
reducing the amounts allocated to property and equipment and our
corresponding estimate for depreciation.
84
The following table sets forth our depreciation and amortization
expense for the three months ended December 31, 2005 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Same-hospital
|
|
$
|
32.1
|
|
|
|
29.5
|
|
|
$
|
(2.6
|
)
|
|
|
(8.9
|
)%
|
Two former HCA facilities
|
|
|
|
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
N/M
|
|
Corporate office
|
|
|
0.5
|
|
|
|
1.7
|
|
|
|
1.2
|
|
|
|
252.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32.6
|
|
|
|
32.8
|
|
|
$
|
0.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
The following table summarizes our interest expense for the
three months ended December 31, 2005 and 2006 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility, including
commitment fees
|
|
$
|
19.9
|
|
|
$
|
26.9
|
|
|
$
|
7.0
|
|
Province
71/2% senior
subordinated notes
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
31/4% convertible
notes
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
|
|
Other
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.0
|
|
|
|
29.2
|
|
|
|
7.2
|
|
Amortization of deferred loan costs
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest
expense allocation
|
|
|
(0.2
|
)
|
|
|
(2.3
|
)
|
|
|
(2.1
|
)
|
Interest income
|
|
|
(0.5
|
)
|
|
|
(0.4
|
)
|
|
|
0.1
|
|
Capitalized interest
|
|
|
(0.7
|
)
|
|
|
(0.5
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21.9
|
|
|
$
|
27.3
|
|
|
$
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense during the quarter ended
December 31, 2006 compared to the quarter ended
December 31, 2005 was primarily a result of the increases
in debt associated with the acquisition of four facilities from
HCA (two of which are included as discontinued operations) and
increases in interest rates on our variable rate debt. Our
weighted-average monthly interest-bearing debt balance increased
from $1,495.5 million during the three months ended
December 31, 2005 to $1,724.5 million during the same
period in 2006. Additionally, the one-month LIBO rate was 4.39%
and 5.35% at December 31, 2005 and 2006, respectively. For
a further discussion of our long-term debt, see Liquidity
and Capital Resources-Debt in this Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
85
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for the three months ended December 31, 2005 and 2006
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Provision for income taxes
|
|
$
|
16.6
|
|
|
$
|
22.0
|
|
|
$
|
5.4
|
|
Effective income tax rate
|
|
|
38.9
|
%
|
|
|
37.0
|
%
|
|
|
(190
|
)bps
|
Our provision for income taxes increased primarily because of
higher income from continuing operations during the quarter
ended December 31, 2006 as compared to the same period in
2005 and an increase in the valuation allowance against deferred
tax assets for state net operating loss carryforwards. The
provision for the quarter ended December 31, 2006, however,
was favorably impacted, as the decreased effective income tax
rate indicates, by tax credits recognized in our 2005 income tax
returns that were greater than those recognized in the 2005 tax
provision and by reductions in our tax contingency reserves as
statutes of limitations on tax years lapsed during the quarter
ended December 31, 2006.
For
the Years Ended December 31, 2005 and 2006
Revenues
The increase in our revenues was primarily the result of an
increase in revenues per equivalent admission, the acquisition
of two facilities from HCA during the third quarter of 2006, the
Province business combination during the second quarter of 2005,
as well as the other 2005 hospital acquisitions.
Adjustments to estimated reimbursement amounts increased our
revenues by $9.4 million and $13.7 million for 2005
and 2006, respectively.
The following table shows the key drivers of our revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Admissions
|
|
|
154,029
|
|
|
|
191,644
|
|
|
|
37,615
|
|
|
|
24.4
|
%
|
Equivalent admissions
|
|
|
299,740
|
|
|
|
373,897
|
|
|
|
74,157
|
|
|
|
24.7
|
|
Revenues per equivalent admission
|
|
$
|
6,144
|
|
|
$
|
6,525
|
|
|
$
|
381
|
|
|
|
6.2
|
|
Medicare case mix index
|
|
|
1.22
|
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
Average length of stay (days)
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Inpatient surgeries
|
|
|
44,623
|
|
|
|
56,651
|
|
|
|
12,028
|
|
|
|
27.0
|
|
Outpatient surgeries
|
|
|
116,804
|
|
|
|
142,113
|
|
|
|
25,309
|
|
|
|
21.7
|
|
Emergency room visits
|
|
|
699,978
|
|
|
|
860,531
|
|
|
|
160,553
|
|
|
|
22.9
|
|
Outpatient factor
|
|
|
1.95
|
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
Number of hospitals at end of
period
|
|
|
49
|
|
|
|
50
|
|
|
|
1.0
|
|
|
|
2.0
|
|
Licensed beds at end of period
|
|
|
5,333
|
|
|
|
5,697
|
|
|
|
364
|
|
|
|
6.8
|
|
Weighted-average licensed beds
|
|
|
4,478
|
|
|
|
5,485
|
|
|
|
1,007
|
|
|
|
22.5
|
|
86
The following table shows the sources of our revenues for the
years indicated, expressed as percentages of total revenues,
including adjustments to estimated reimbursement amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
Medicare
|
|
|
36.5
|
%
|
|
|
34.8
|
%
|
|
|
|
|
Medicaid
|
|
|
9.3
|
|
|
|
10.0
|
|
|
|
|
|
HMOs, PPOs and other private
insurers
|
|
|
38.8
|
|
|
|
38.7
|
|
|
|
|
|
Self-Pay
|
|
|
12.3
|
|
|
|
12.7
|
|
|
|
|
|
Other
|
|
|
3.1
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits
expenses for 2005 and 2006 (dollars in millions, except for
salaries and benefits per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
565.9
|
|
|
|
30.7
|
%
|
|
$
|
739.3
|
|
|
|
30.3
|
%
|
|
$
|
173.4
|
|
|
|
30.6
|
%
|
Stock-based compensation
|
|
|
6.5
|
|
|
|
0.4
|
|
|
|
13.2
|
|
|
|
0.5
|
|
|
|
6.7
|
|
|
|
103.5
|
|
Employee benefits
|
|
|
126.0
|
|
|
|
6.9
|
|
|
|
146.8
|
|
|
|
6.1
|
|
|
|
20.8
|
|
|
|
16.5
|
|
Contract labor
|
|
|
26.5
|
|
|
|
1.4
|
|
|
|
48.1
|
|
|
|
2.0
|
|
|
|
21.6
|
|
|
|
81.3
|
|
ESOP expense
|
|
|
14.7
|
|
|
|
0.8
|
|
|
|
13.2
|
|
|
|
0.5
|
|
|
|
(1.5
|
)
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
739.6
|
|
|
|
40.2
|
%
|
|
$
|
960.6
|
|
|
|
39.4
|
%
|
|
$
|
221.0
|
|
|
|
29.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
89.3
|
|
|
|
N/A
|
|
|
|
89.9
|
|
|
|
N/A
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Salaries and benefits per
equivalent admission
|
|
$
|
2,312
|
|
|
|
N/A
|
|
|
$
|
2,446
|
|
|
|
N/A
|
|
|
$
|
134
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office salaries and
benefits
|
|
$
|
29.1
|
|
|
|
1.6
|
%
|
|
$
|
43.8
|
|
|
|
1.8
|
%
|
|
$
|
14.7
|
|
|
|
50.5
|
|
Our salaries and benefits increased primarily as a result of
increases in contract labor and stock-based compensation
expense, the retirement of our former Chief Executive Officer,
the acquisition of two facilities from HCA during the third
quarter of 2006, the Province business combination during the
second quarter of 2005, as well as the other 2005 hospital
acquisitions partially offset by a decrease in our ESOP expense.
Salaries and benefits as a percentage of revenues decreased
primarily as a result of effective management of our salary
costs and changes in our employee health benefits. Contract
labor as a percentage of revenues increased primarily because of
a higher utilization of contract nurses due to volume increases
and nursing shortages in 2006. We are implementing strategies to
reduce contract labor by recruiting and retaining nurses and
other clinical personnel.
The increase in our stock-based compensation was the result of
our adoption of SFAS No. 123(R) effective
January 1, 2006 and the additional nonvested stock awards
outstanding during 2006 as compared to 2005. The adoption of
SFAS No. 123(R) required us to start recognizing the
cost of employee stock options in our consolidated statement of
operations, which was approximately $5.7 million during
2006. Please refer to the sections above entitled
Stock-Based Compensation and Critical
Accounting Estimates in this Part II, Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 7
87
of our consolidated financial statements included elsewhere in
this report for a discussion of our adoption of
SFAS No. 123(R) and the impact of this new accounting
standard on our financial statements.
Our corporate office salaries and benefits during the year ended
December 31, 2006 were unfavorably impacted by the
retirement of our former Chief Executive Officer, Kenneth
Donahey. As a result of his retirement, we incurred additional
net compensation expense of approximately $2.0 million
($1.2 million net of income taxes) during the year ended
December 31, 2006. This amount consists of
$3.5 million of installment payments offset by a
$1.5 million reversal of stock compensation expense due to
the forfeiture of his unvested stock options and nonvested stock.
Our ESOP expense has two components: common stock and cash.
Shares of our common stock are allocated ratably to employee
accounts at a rate of 23,306 shares per month. The ESOP
expense amount for the common stock component is determined
using the average market price of our common stock released to
participants in the ESOP. The decrease in ESOP expense for 2006
compared to 2005 was the result of a lower average market price
of our common stock during 2006 ($33.06 per share) compared
to 2005 ($42.52 per share). The cash component is
discretionary and is impacted by the amount of forfeitures in
the ESOP. There were $3.2 million and $3.9 million of
discretionary cash contributions during 2005 and 2006,
respectively.
Supplies
The following table summarizes our supplies expense for 2005 and
2006 (dollars in millions, except for supplies per equivalent
admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Supplies
|
|
$
|
250.4
|
|
|
$
|
340.1
|
|
|
$
|
89.7
|
|
|
|
35.8
|
%
|
Supplies as a percentage of
revenues
|
|
|
13.6
|
%
|
|
|
13.9
|
%
|
|
|
30
|
bps
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
834
|
|
|
$
|
906
|
|
|
$
|
72
|
|
|
|
8.6
|
%
|
Our supplies expense increased primarily as a result of an
increase in supplies per equivalent admission, the acquisition
of two facilities from HCA during the third quarter of 2006, the
Province business combination during the second quarter of 2005,
as well as the other 2005 hospital acquisitions. Supplies as a
percentage of revenues and supplies per equivalent admission
increased as a result of rising supply costs particularly
related to higher utilization of cardiology, pharmacy,
orthopedic and other implantable devices. In addition, we
experienced higher supply costs as a percentage of revenues at
our two facilities acquired from HCA than at our other hospitals.
88
Other
Operating Expenses
The following table summarizes our other operating expenses for
2005 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
28.3
|
|
|
|
1.5
|
%
|
|
$
|
46.6
|
|
|
|
1.9
|
%
|
|
$
|
18.3
|
|
|
|
64.7
|
%
|
Utilities
|
|
|
34.7
|
|
|
|
1.9
|
|
|
|
47.4
|
|
|
|
1.9
|
|
|
|
12.7
|
|
|
|
36.4
|
|
Repairs and maintenance
|
|
|
35.1
|
|
|
|
1.9
|
|
|
|
50.6
|
|
|
|
2.1
|
|
|
|
15.5
|
|
|
|
44.2
|
|
Rents and leases
|
|
|
17.9
|
|
|
|
1.0
|
|
|
|
24.7
|
|
|
|
1.0
|
|
|
|
6.8
|
|
|
|
36.6
|
|
Insurance
|
|
|
18.3
|
|
|
|
1.0
|
|
|
|
25.9
|
|
|
|
1.1
|
|
|
|
7.6
|
|
|
|
41.9
|
|
Physician recruiting
|
|
|
21.9
|
|
|
|
1.2
|
|
|
|
17.6
|
|
|
|
0.7
|
|
|
|
(4.3
|
)
|
|
|
(19.6
|
)
|
Contract services
|
|
|
64.0
|
|
|
|
3.5
|
|
|
|
94.8
|
|
|
|
3.9
|
|
|
|
30.8
|
|
|
|
48.1
|
|
Non-income taxes
|
|
|
26.7
|
|
|
|
1.4
|
|
|
|
34.8
|
|
|
|
1.5
|
|
|
|
8.1
|
|
|
|
30.2
|
|
Other
|
|
|
61.4
|
|
|
|
3.3
|
|
|
|
79.2
|
|
|
|
3.2
|
|
|
|
17.8
|
|
|
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
308.3
|
|
|
|
16.7
|
%
|
|
$
|
421.6
|
|
|
|
17.3
|
%
|
|
$
|
113.3
|
|
|
|
36.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office other operating
expenses
|
|
$
|
21.3
|
|
|
|
1.2
|
%
|
|
$
|
27.8
|
|
|
|
1.1
|
%
|
|
$
|
6.5
|
|
|
|
30.4
|
|
Our other operating expenses are generally not volume driven.
The increase in other operating expenses was primarily
attributable to the acquisition of two facilities from HCA
during the third quarter of 2006, the Province business
combination during the second quarter of 2005, as well as the
other 2005 hospital acquisitions partially offset by a decrease
in our physician recruiting expense. Our other expense increased
as a result of more hospitals utilizing the HCA-IT systems
because of these recent acquisitions. Additionally, we incurred
increased clinical and physician-related fees as well as
increased contract service fees related to our conversions of
the patient accounting applications at our acquired facilities.
Our professional and general liability insurance expense
increased from $19.3 million during 2005 to
$19.7 million during 2006, as a result of the acquisition
of two facilities from HCA during the third quarter of 2006, the
Province business combination during the second quarter of 2005,
as well as the other 2005 hospital acquisitions. Furthermore, we
incurred $2.1 million in other operating expenses during
2006 as a result of a stockholder lawsuit.
As discussed in Note 4 of our consolidated financial
statements included elsewhere in this report, we adopted FSP
FIN 45-3
effective January 1, 2006. The impact of this adoption
decreased our physician recruiting expense by approximately
$8.7 million, or $5.3 million net of income taxes, and
increased our diluted earnings per share by $0.09 during 2006.
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for 2005 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Provision for doubtful accounts
|
|
$
|
189.4
|
|
|
$
|
266.7
|
|
|
$
|
77.3
|
|
|
|
40.8
|
%
|
Percentage of revenues
|
|
|
10.3
|
%
|
|
|
10.9
|
%
|
|
|
60
|
bps
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
24.0
|
|
|
$
|
42.4
|
|
|
$
|
18.4
|
|
|
|
76.9
|
%
|
Percentage of revenues
|
|
|
0.6
|
%
|
|
|
0.8
|
%
|
|
|
20
|
bps
|
|
|
N/M
|
|
The increase in our provision for doubtful accounts was
primarily attributable to the acquisition of two facilities from
HCA during the third quarter of 2006, the Province business
combination during the second quarter of 2005, as well as the
other 2005 hospital acquisitions. The provision for doubtful
accounts, as well
89
as charity care write-offs, relates principally to self-pay
amounts due from patients. Exclusive of the increase in self-pay
revenues as a result of acquisitions, our self-pay revenues
increased in 2006 as compared to 2005 partially as a result of
the changes in the eligibility requirements of certain Medicaid
programs. Other factors influencing this increase were the
increased number of uninsured patients and healthcare plan
design changes that resulted in increased co-payments and
deductibles. The provision and allowance for doubtful accounts
are critical accounting estimates and are further discussed in
Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Critical Accounting Estimates.
The increase in charity care write-offs was primarily
attributable to the acquisition of two facilities from HCA
during the third quarter of 2006, the Province business
combination during the second quarter of 2005, as well as the
other 2005 hospital acquisitions. We do not report a
charity/indigent care patients charges in revenues or in
the provision for doubtful accounts as it is our policy not to
pursue collection of amounts related to these patients.
Depreciation
and Amortization
Depreciation and amortization expense increased primarily as a
result of the acquisition of two facilities from HCA during the
third quarter of 2006, the Province business combination during
the second quarter of 2005, as well as the other 2005 hospital
acquisitions partially offset by a decrease in depreciation
expense for DRMC and Province. As a result of the final purchase
price allocations of both DRMC and Province, we incurred a net
reduction in our depreciation expense of approximately
$13.5 million during 2006.
The following table sets forth our depreciation and amortization
expense for 2005 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Hospital operations
|
|
$
|
99.4
|
|
|
$
|
119.4
|
|
|
$
|
20.0
|
|
|
|
20.1
|
%
|
Purchase price allocation
adjustment
|
|
|
|
|
|
|
(13.5
|
)
|
|
|
(13.5
|
)
|
|
|
N/M
|
|
Corporate office
|
|
|
1.0
|
|
|
|
5.2
|
|
|
|
4.2
|
|
|
|
400.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100.4
|
|
|
$
|
111.1
|
|
|
$
|
10.7
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
Interest
Expense
The following table summarizes our interest expense for 2005 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility, including
commitment fees
|
|
$
|
51.1
|
|
|
$
|
96.8
|
|
|
$
|
45.7
|
|
Senior subordinated credit
agreement
|
|
|
2.1
|
|
|
|
|
|
|
|
(2.1
|
)
|
41/2% convertible
notes
|
|
|
4.5
|
|
|
|
|
|
|
|
(4.5
|
)
|
Province
41/4% convertible
notes
|
|
|
0.3
|
|
|
|
|
|
|
|
(0.3
|
)
|
Province
71/2% senior
subordinated notes
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.2
|
|
31/4% convertible
notes
|
|
|
2.8
|
|
|
|
7.3
|
|
|
|
4.5
|
|
Other
|
|
|
0.4
|
|
|
|
1.1
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61.5
|
|
|
|
105.7
|
|
|
|
44.2
|
|
Amortization of deferred loan costs
|
|
|
4.1
|
|
|
|
5.3
|
|
|
|
1.2
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest
expense allocation
|
|
|
(0.6
|
)
|
|
|
(4.4
|
)
|
|
|
(3.8
|
)
|
Interest income
|
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
Capitalized interest
|
|
|
(3.0
|
)
|
|
|
(1.2
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60.1
|
|
|
$
|
103.5
|
|
|
$
|
43.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense was primarily a result of the
increases in debt associated with the acquisition of four
facilities from HCA (two of which are included as discontinued
operations) during the third quarter of 2006, the Province
business combination during the second quarter of 2005, the
other 2005 hospital acquisitions as well as increases in
interest rates on our variable rate debt. Our weighted-average
monthly interest-bearing debt balance increased from
$1,138.6 million during 2005 compared to
$1,642.7 million during 2006. For a further discussion of
our long-term debt, see Part II, Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and
Capital Resources-Debt.
Debt
Retirement Costs
Debt retirement costs of $12.2 million were incurred during
2005. Debt retirement costs incurred during 2005 were as follows
(in millions):
|
|
|
|
|
Legal fees paid for retirement of
assumed Province debt, our convertible notes and previous credit
facility
|
|
$
|
1.2
|
|
Tender premiums paid on
convertible notes
|
|
|
4.8
|
|
Deferred loan costs expensed on
tender of our convertible notes and previous credit facility
|
|
|
5.7
|
|
Creditor fees and other expenses
|
|
|
0.5
|
|
|
|
|
|
|
|
|
$
|
12.2
|
|
|
|
|
|
|
91
Transaction
Costs
Transaction costs of $43.2 million were incurred during
2005 in connection with the Province business combination,
comprised of the following (in millions):
|
|
|
|
|
Adjustment to Province acquired
accounts receivable
|
|
$
|
26.4
|
|
Adjustment to Province assumed
liabilities, primarily related to professional and general
liability claims
|
|
|
7.3
|
|
Retention bonuses paid to former
Province employees
|
|
|
4.2
|
|
Compensation expense (primarily
restricted stock vesting from change in control)
|
|
|
5.3
|
|
|
|
|
|
|
|
|
$
|
43.2
|
|
|
|
|
|
|
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for 2005 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Provision for income taxes
|
|
$
|
57.8
|
|
|
$
|
92.6
|
|
|
$
|
34.8
|
|
Effective income tax rate
|
|
|
42.3
|
%
|
|
|
39.4
|
%
|
|
|
(290
|
)bps
|
The increase in our provision for income taxes was primarily a
result of higher income from continuing operations during 2006
as compared to 2005 partially offset by a lower effective tax
rate for 2006 compared to 2005. The effective tax rate for 2005
was higher as a result of several non-deductible expenses
incurred during the period relating to the Province business
combination. During 2005, we incurred non-deductible
compensation relating to the early vesting of nonvested stock
awards, for which the tax impact of the non-deductible costs was
recorded entirely in 2005.
92
For
the Years Ended December 31, 2004 and 2005
Revenues
Our revenues increased primarily as a result of an increase in
revenues per equivalent admission, the Province business
combination during the second quarter of 2005 and the other 2005
hospital acquisitions.
Adjustments to estimated reimbursement amounts increased our
revenues by $10.6 million for 2004 compared to
$9.4 million for 2005.
The table below shows the key drivers of our revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2004
|
|
|
2005
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Admissions
|
|
|
90,331
|
|
|
|
154,029
|
|
|
|
63,698
|
|
|
|
70.5
|
%
|
Equivalent admissions
|
|
|
180,752
|
|
|
|
299,740
|
|
|
|
118,988
|
|
|
|
65.8
|
|
Revenues per equivalent admission
|
|
$
|
5,438
|
|
|
$
|
6,144
|
|
|
$
|
706
|
|
|
|
13.0
|
|
Medicare case mix index
|
|
|
1.18
|
|
|
|
1.22
|
|
|
|
0.04
|
|
|
|
3.4
|
|
Average length of stay (days)
|
|
|
4.0
|
|
|
|
4.2
|
|
|
|
0.2
|
|
|
|
5.0
|
|
Inpatient surgeries
|
|
|
26,120
|
|
|
|
44,623
|
|
|
|
18,503
|
|
|
|
70.8
|
|
Outpatient surgeries
|
|
|
74,869
|
|
|
|
116,804
|
|
|
|
41,935
|
|
|
|
56.0
|
|
Emergency room visits
|
|
|
411,050
|
|
|
|
699,978
|
|
|
|
288,928
|
|
|
|
70.3
|
|
Outpatient factor
|
|
|
2.00
|
|
|
|
1.95
|
|
|
|
(0.05
|
)
|
|
|
(2.5
|
)
|
Number of hospitals at end of
period
|
|
|
28
|
|
|
|
49
|
|
|
|
21
|
|
|
|
75.0
|
|
Licensed beds at end of period
|
|
|
2,625
|
|
|
|
5,333
|
|
|
|
2,708
|
|
|
|
103.2
|
|
Weighted-average licensed beds
|
|
|
2,629
|
|
|
|
4,478
|
|
|
|
1,849
|
|
|
|
70.3
|
|
The table below shows the sources of our revenues for the years
indicated, expressed as percentages of total revenues, including
adjustments to estimated reimbursement amounts:
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Medicare
|
|
|
36.7
|
%
|
|
|
36.5
|
%
|
Medicaid
|
|
|
11.1
|
|
|
|
9.3
|
|
HMOs, PPOs and other private
insurers
|
|
|
38.8
|
|
|
|
38.8
|
|
Self-Pay
|
|
|
9.4
|
|
|
|
12.3
|
|
Other
|
|
|
4.0
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
93
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits
expenses for 2004 and 2005 (dollars in millions, except for
salaries and benefits per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2004
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
309.0
|
|
|
|
31.4
|
%
|
|
$
|
565.9
|
|
|
|
30.7
|
%
|
|
$
|
256.9
|
|
|
|
83.1
|
%
|
Stock-based compensation
|
|
|
1.8
|
|
|
|
0.2
|
|
|
|
6.5
|
|
|
|
0.4
|
|
|
|
4.7
|
|
|
|
272.0
|
|
Employee benefits
|
|
|
70.3
|
|
|
|
7.2
|
|
|
|
126.0
|
|
|
|
6.9
|
|
|
|
55.7
|
|
|
|
79.2
|
|
Contract labor
|
|
|
12.1
|
|
|
|
1.2
|
|
|
|
26.5
|
|
|
|
1.4
|
|
|
|
14.4
|
|
|
|
119.6
|
|
ESOP expense
|
|
|
9.1
|
|
|
|
0.9
|
|
|
|
14.7
|
|
|
|
0.8
|
|
|
|
5.6
|
|
|
|
61.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
402.3
|
|
|
|
40.9
|
%
|
|
$
|
739.6
|
|
|
|
40.2
|
%
|
|
$
|
337.3
|
|
|
|
83.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
83.9
|
|
|
|
N/A
|
|
|
|
89.3
|
|
|
|
N/A
|
|
|
|
5.4
|
|
|
|
6.4
|
|
Salaries and benefits per
equivalent admission
|
|
$
|
2,060
|
|
|
|
N/A
|
|
|
|
2,312
|
|
|
|
N/A
|
|
|
$
|
252
|
|
|
|
12.2
|
|
Corporate office salaries and
benefits
|
|
$
|
18.2
|
|
|
|
1.8
|
%
|
|
$
|
29.1
|
|
|
|
1.6
|
%
|
|
$
|
10.9
|
|
|
|
60.3
|
|
Our salaries and benefits increased primarily as a result of
increased contract labor, the Province business combination and
the other 2005 hospital acquisitions. Salaries and benefits as a
percentage of revenues decreased as a result of effective
management of our salary costs. Contract labor as a percentage
of revenues increased because of a higher utilization of
contract labor at the former Province hospitals and the other
2005 hospital acquisitions.
Supplies
The following table summarizes our supplies expense for 2004 and
2005 (dollars in millions, except for supplies per equivalent
admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2004
|
|
|
2005
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Supplies
|
|
$
|
127.8
|
|
|
$
|
250.4
|
|
|
$
|
122.6
|
|
|
|
96.0
|
%
|
Supplies as a percentage of
revenues
|
|
|
13.0
|
%
|
|
|
13.6
|
%
|
|
|
60bps
|
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
702
|
|
|
$
|
834
|
|
|
$
|
132.0
|
|
|
|
18.8
|
%
|
Our supplies expense increased primarily as a result of an
increase in supplies per equivalent admission, the Province
business combination and the other 2005 hospital acquisitions.
Supplies as a percentage of revenues and supplies per equivalent
admission increased as a result of rising supply costs,
particularly related to cardiology, pharmacy, orthopedic
implants and laboratory. In addition, we experienced higher
supply costs as a percentage of revenues at our other 2005
hospital acquisitions than at our other hospitals.
94
Other
Operating Expenses
The following table summarizes our other operating expenses for
2004 and 2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2004
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
12.4
|
|
|
|
1.3
|
%
|
|
$
|
28.3
|
|
|
|
1.5
|
%
|
|
$
|
15.9
|
|
|
|
128.9
|
%
|
Utilities
|
|
|
16.4
|
|
|
|
1.7
|
|
|
|
34.7
|
|
|
|
1.9
|
|
|
|
18.3
|
|
|
|
112.1
|
|
Repairs and maintenance
|
|
|
20.0
|
|
|
|
2.0
|
|
|
|
35.1
|
|
|
|
1.9
|
|
|
|
15.1
|
|
|
|
75.3
|
|
Rents and leases
|
|
|
9.4
|
|
|
|
1.0
|
|
|
|
17.9
|
|
|
|
1.0
|
|
|
|
8.5
|
|
|
|
91.1
|
|
Insurance
|
|
|
8.4
|
|
|
|
0.8
|
|
|
|
18.3
|
|
|
|
1.0
|
|
|
|
9.9
|
|
|
|
120.6
|
|
Physician recruiting
|
|
|
14.7
|
|
|
|
1.5
|
|
|
|
21.9
|
|
|
|
1.2
|
|
|
|
7.2
|
|
|
|
49.2
|
|
Contract services
|
|
|
31.6
|
|
|
|
3.2
|
|
|
|
64.0
|
|
|
|
3.5
|
|
|
|
32.4
|
|
|
|
101.9
|
|
Non-income taxes
|
|
|
15.6
|
|
|
|
1.6
|
|
|
|
26.7
|
|
|
|
1.4
|
|
|
|
11.1
|
|
|
|
71.6
|
|
Other
|
|
|
35.2
|
|
|
|
3.6
|
|
|
|
61.4
|
|
|
|
3.3
|
|
|
|
26.2
|
|
|
|
74.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163.7
|
|
|
|
16.7
|
%
|
|
$
|
308.3
|
|
|
|
16.7
|
%
|
|
$
|
144.6
|
|
|
|
88.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office other operating
expenses
|
|
$
|
11.4
|
|
|
|
1.2
|
%
|
|
$
|
21.3
|
|
|
|
1.2
|
%
|
|
$
|
9.9
|
|
|
|
86.5
|
|
Our other operating expenses are generally not volume driven.
The large increase in other operating expenses was attributed to
the Province business combination and the other 2005 hospital
acquisitions. Our professional and general liability expense was
$19.3 million for 2005 compared to $5.4 million for
2004. Additionally, other expenses increased primarily as a
result of an increase in our HCA-IT fees because of more
hospitals utilizing the HCA-IT systems and additional
information system conversion fees as a result of our recent
acquisitions.
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for 2004 and 2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2004
|
|
|
2005
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Provision for doubtful accounts
|
|
$
|
85.4
|
|
|
$
|
189.4
|
|
|
$
|
104.0
|
|
|
|
121.8
|
%
|
Percentage of revenues
|
|
|
8.7
|
%
|
|
|
10.3
|
%
|
|
|
160bps
|
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
7.7
|
|
|
$
|
24.0
|
|
|
$
|
16.3
|
|
|
|
209.0
|
%
|
Percentage of revenues
|
|
|
0.4
|
%
|
|
|
0.6
|
%
|
|
|
20bps
|
|
|
|
N/M
|
|
The provision for doubtful accounts related primarily to
self-pay amounts due from patients. Our provision for doubtful
accounts increased because of a combination of broad economic
factors, including the increased number of uninsured patients,
healthcare plan design changes that resulted in increased
co-payments and deductibles, the effects of hurricanes Katrina
and Rita, and changes in the eligibility requirements of certain
Medicaid programs. The provision and allowance for doubtful
accounts are critical accounting estimates and are further
discussed under Part II, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Critical Accounting Estimates.
95
Depreciation
and Amortization
Depreciation and amortization expense increased primarily as a
result of the Province business combination and the other 2005
hospital acquisitions. The following table sets forth our
depreciation and amortization expense for the years presented
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2004
|
|
|
2005
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Hospital operations
|
|
$
|
47.0
|
|
|
$
|
99.4
|
|
|
$
|
52.4
|
|
|
|
111.1
|
%
|
Corporate office
|
|
|
0.4
|
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
165.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47.4
|
|
|
$
|
100.4
|
|
|
$
|
53.0
|
|
|
|
171.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
The following table summarizes our interest expense for 2004 and
2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
|
2004
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior bank credit facility,
including commitment fees
|
|
$
|
1.2
|
|
|
$
|
|
|
|
$
|
(1.2
|
)
|
Senior credit facility, including
commitment fees
|
|
|
|
|
|
|
51.1
|
|
|
|
51.1
|
|
Senior subordinated credit
agreement
|
|
|
|
|
|
|
2.1
|
|
|
|
2.1
|
|
41/2% convertible
notes
|
|
|
10.6
|
|
|
|
4.5
|
|
|
|
(6.1
|
)
|
Province
41/4% convertible
notes
|
|
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Province
71/2% senior
subordinated notes
|
|
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
31/4% convertible
notes
|
|
|
|
|
|
|
2.8
|
|
|
|
2.8
|
|
Other
|
|
|
0.7
|
|
|
|
0.4
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.5
|
|
|
|
61.5
|
|
|
|
49.0
|
|
Amortization of deferred loan costs
|
|
|
1.5
|
|
|
|
4.1
|
|
|
|
2.6
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest
expense allocation
|
|
|
(0.1
|
)
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
Interest income
|
|
|
(0.3
|
)
|
|
|
(1.9
|
)
|
|
|
(1.6
|
)
|
Capitalized interest
|
|
|
(1.1
|
)
|
|
|
(3.0
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12.5
|
|
|
$
|
60.1
|
|
|
$
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense during 2005 is primarily a
direct result of the increases in debt associated with the
Province business combination and the DRMC acquisition. Our
weighted-average monthly debt balance increased from
$235.5 million during 2004 to $1,138.6 million in
2005. For a further discussion, see Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Liquidity and Capital Resources-Debt.
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for 2004 and 2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
|
2004
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Provision for income taxes
|
|
$
|
55.3
|
|
|
$
|
57.8
|
|
|
$
|
2.5
|
|
Effective income tax rate
|
|
|
39.1
|
%
|
|
|
42.3
|
%
|
|
|
320bps
|
|
96
The increase in the effective income tax rate in 2005 as
compared to 2004 related primarily to the non-deductibility of
certain transaction costs, higher ESOP expense and an increase
in the valuation allowance against deferred tax assets.
Liquidity
and Capital Resources
Liquidity
Our primary sources of liquidity are cash flows provided by our
operations and our debt borrowings. We believe that our
internally generated cash flows and amounts available under our
debt agreements will be adequate to service existing debt,
finance internal growth, expend funds on capital expenditures
and fund certain small to mid-size hospital acquisitions. It is
not our intent to maintain large cash balances.
The following table presents summarized cash flow information
for the years ended December 31 for the periods indicated
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net cash flows provided by
continuing operating activities
|
|
$
|
146.9
|
|
|
$
|
293.8
|
|
|
$
|
261.3
|
|
Less: Purchase of property and
equipment
|
|
|
82.0
|
|
|
|
169.1
|
|
|
|
199.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free operating cash flow
|
|
|
64.9
|
|
|
|
124.7
|
|
|
|
61.8
|
|
Acquisitions
|
|
|
(30.5
|
)
|
|
|
(963.6
|
)
|
|
|
(281.3
|
)
|
Proceeds from sale of hospitals
|
|
|
|
|
|
|
32.5
|
|
|
|
69.0
|
|
Proceeds from borrowings
|
|
|
30.0
|
|
|
|
1,967.0
|
|
|
|
260.0
|
|
Payments on borrowings
|
|
|
(79.9
|
)
|
|
|
(1,156.9
|
)
|
|
|
(110.0
|
)
|
Payment of debt issue costs
|
|
|
|
|
|
|
(40.7
|
)
|
|
|
(1.0
|
)
|
Proceeds from exercise of stock
options
|
|
|
10.2
|
|
|
|
43.6
|
|
|
|
0.5
|
|
Other
|
|
|
0.8
|
|
|
|
(1.4
|
)
|
|
|
(1.8
|
)
|
Cash flows from operations
provided by (used in) discontinued operations
|
|
|
2.5
|
|
|
|
7.6
|
|
|
|
(15.4
|
)
|
Cash flows from investing
activities used in discontinued operations
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
$
|
(2.0
|
)
|
|
$
|
11.8
|
|
|
$
|
(18.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-GAAP metric of free operating cash flow is an important
liquidity measure for us. Our computation of free operating cash
flow consists of net cash flow provided by continuing operations
less cash flows used for purchases of property and equipment. We
believe that free operating cash flow is useful to investors and
management as a measure of the ability of our business to
generate cash and is also utilized for debt repayments.
Computations of free operating cash flow may differ from company
to company. Therefore, free operating cash flow should be used
as a complement to, and in conjunction with, our consolidated
statements of cash flows presented in our consolidated financial
statements included elsewhere in the report.
Working
Capital
Our net working capital and current ratio at December 31,
2004, 2005 and 2006 are summarized as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Total current assets
|
|
$
|
242.2
|
|
|
$
|
433.3
|
|
|
$
|
614.2
|
|
Total current liabilities
|
|
|
82.3
|
|
|
|
230.1
|
|
|
|
303.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
159.9
|
|
|
$
|
203.2
|
|
|
$
|
311.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current ratio
|
|
|
2.94
|
|
|
|
1.88
|
|
|
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
Capital
Expenditures
Our management believes that capital expenditures in key areas
at our hospitals should increase our local market share and help
persuade patients to obtain healthcare services within their
communities.
The following table reflects our capital expenditures for the
years indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Capital projects, including de
novo hospitals
|
|
$
|
52.5
|
|
|
$
|
94.0
|
|
|
$
|
118.8
|
|
Routine
|
|
|
21.6
|
|
|
|
50.7
|
|
|
|
61.9
|
|
Purchase of building
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
Information systems
|
|
|
7.9
|
|
|
|
21.2
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82.0
|
|
|
$
|
169.1
|
|
|
$
|
199.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense (excluding
2006 price purchase allocation adjustments of $13.5 million)
|
|
$
|
46.6
|
|
|
$
|
99.1
|
|
|
$
|
95.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of capital expenditures to
depreciation expense
|
|
|
176.0
|
%
|
|
|
170.6
|
%
|
|
|
208.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have a formal and intensive review procedure for the
authorization of capital expenditures. The most important
financial measure of acceptability for a discretionary capital
project is whether its projected discounted cash flow return on
investment exceeds our cost of capital. We will continue to
invest in modern technologies, emergency rooms and operating
room expansions, the construction of medical office buildings
for physician expansion and reconfiguring the flow of patient
care.
Debt
An analysis and roll-forward of our long-term debt during 2006
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
|
|
|
Payments of
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
Debt Borrowings
|
|
|
Borrowings
|
|
|
Other
|
|
|
December 31, 2006
|
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term B Loans
|
|
$
|
1,281.9
|
|
|
$
|
50.0
|
|
|
$
|
(10.0
|
)
|
|
$
|
|
|
|
$
|
1,321.9
|
|
Revolving Credit Loans
|
|
|
|
|
|
|
210.0
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
110.0
|
|
Province
71/2% Senior
Subordinated Notes
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
Province
41/4% Convertible
Subordinated Notes
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
31/4% Convertible
Senior Subordinated Debentures
|
|
|
225.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225.0
|
|
Other, including capital leases
|
|
|
3.2
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
4.5
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,516.3
|
|
|
$
|
260.0
|
|
|
$
|
(110.5
|
)
|
|
$
|
4.5
|
|
|
$
|
1,670.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
We use leverage, or our debt to total capitalization ratio, to
make financing decisions. The incurrence of additional debt
during 2006 was related primarily to the acquisition of the four
hospitals from HCA. The following table illustrates our
financial statement leverage and the classification of our debt
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Current portion of long-term debt
|
|
$
|
0.5
|
|
|
$
|
0.7
|
|
|
$
|
0.2
|
|
Long-term debt
|
|
|
1,515.8
|
|
|
|
1,669.6
|
|
|
|
153.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,516.3
|
|
|
|
1,670.3
|
|
|
|
154.0
|
|
Total stockholders equity
|
|
|
1,287.8
|
|
|
|
1,450.0
|
|
|
|
162.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
2,804.1
|
|
|
$
|
3,120.3
|
|
|
$
|
316.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to total capitalization
|
|
|
54.1
|
%
|
|
|
53.5
|
%
|
|
|
(60
|
)bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
|
15.5
|
%
|
|
|
14.3
|
%
|
|
|
|
|
Variable rate debt*
|
|
|
84.5
|
|
|
|
85.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
84.8
|
%
|
|
|
86.2
|
%
|
|
|
|
|
Subordinated debt
|
|
|
15.2
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Effective November 30, 2006, we entered into an interest
rate swap agreement to mitigate our floating rate risk on our
outstanding variable rate borrowings which converts
$900.0 million of our variable rate debt to an annual fixed
rate of 5.585%. The above calculation does not consider the
effect of our interest rate swap. Our interest rate swap
decreases our variable rate debt as a percentage of our
outstanding debt from 85.7% to 31.8% as of December 31,
2006. Please refer to the Capital Resources
Interest Rate Swap section below for a discussion of our
interest rate swap agreement. |
Capital
Resources
Senior
Secured Credit Facilities
Terms
On April 15, 2005, in connection with the Province Business
Combination, we entered into a Credit Agreement with Citicorp
North America, Inc. (CITI), as administrative agent
and the lenders party thereto, Bank of America, N.A., CIBC World
Markets Corp., SunTrust Bank and UBS Securities LLC, as
co-syndication agents and Citigroup Global Markets Inc., as sole
lead arranger and sole book runner, as amended and restated,
supplemented or otherwise modified from time to time, (the
Credit Agreement). The Credit Agreement provides for
secured term B loans up to $1,250.0 million maturing on
April 15, 2012 (the Term B Loans) and revolving
loans of up to $300.0 million maturing on April 15,
2012 (the Revolving Loans). In addition, the Credit
Agreement, as amended, provides that we may request additional
tranches of Term B Loans up to $400.0 million and
additional tranches of Revolving Loans up to
$100.0 million. The Credit Agreement is guaranteed on a
senior secured basis by our subsidiaries with certain limited
exceptions. The Term B Loans are subject to mandatory
prepayments in the event of transactions such as net proceeds
from asset sales up to $600.0 million, certain equity
issuances, certain debt issuances and insurance proceeds. In
addition, the Term B Loans are subject to additional mandatory
prepayments with a certain percentage of excess cash flow as
specifically defined in the Credit Agreement. As amended, the
Credit Agreement provides for letters of credit up to
$75.0 million.
99
Borrowings
and Payments
On April 15, 2005, in connection with the Province business
combination, we made two Term B Loan borrowings under the Credit
Agreement that totaled $1,250.0 million. The outstanding
principal balances of the Term B Loans were scheduled to be
repaid in consecutive quarterly installments of approximately
$3.1 million each over six years beginning on June 30,
2005. However, we made early installment payments under the Term
B Loans totaling $118.1 million and $10.0 million
during the years ended December 31, 2005 and 2006,
respectively. These installment payments extinguished our
required repayments through March 31, 2011. The remaining
balances of the Term B Loans are scheduled to be repaid in 2011
and 2012 in four installments totaling $1,321.9 million.
On June 30, 2005, in connection with the DRMC acquisition,
we borrowed $150.0 million in the form of Revolving Loans.
On August 23, 2005, we executed an incremental facility
amendment borrowing $150.0 million in the form of
incremental Term B Loans, the proceeds of which were used to pay
the $150.0 million borrowed under the Revolving Loans.
During March 2006, we borrowed $10.0 million under the
Credit Agreement for general corporate purposes. The outstanding
principal and interest were repaid before the end of March 2006.
On June 30, 2006, we borrowed $50.0 million in the
form of Term B Loans and $200.0 million in Revolving Loans
to finance the acquisition of the four hospitals from HCA.
During the fourth quarter of 2006, we repaid $90.0 million
on our outstanding Revolving Loans, which included a repayment
of $40.4 million from the proceeds of the sale of Saint
Francis Hospital, as discussed in Note 13 to our
consolidated financial statements included elsewhere in this
report.
Letters
of Credit and Availability
As of December 31, 2006, we had $30.4 million in
letters of credit outstanding under the Revolving Loans that
were related to the self-insured retention level of our general
and professional liability insurance and workers
compensation programs as security for payment of claims. Under
the terms of the Credit Agreement, Revolving Loans available for
borrowing were $259.6 million as of December 31, 2006
including the $100.0 million available under the additional
tranche. Under the terms of the Credit Agreement, Term B Loans
available for borrowing were $200.0 million as of
December 31, 2006, all of which is available under the
additional tranche.
Interest
Rates
Interest on the outstanding balances of the Term B Loans is
payable, at our option, at CITIs base rate (the alternate
base rate or ABR) plus a margin of 0.625%
and/or at an
adjusted London Interbank Offered Rate (Adjusted LIBO
rate) plus a margin of 1.625%. Interest on the Revolving
Loans is payable at ABR plus a margin for ABR Revolving Loans or
Adjusted LIBO rate plus a margin for eurodollar Revolving Loans.
The margin on ABR Revolving Loans ranges from 0.25% to 1.25%
based on the total leverage ratio being less than 2.00:1.00 to
greater than 4.50:1.00. The margin on the Eurodollar Revolving
Loans ranges from 1.25% to 2.25% based on the total leverage
ratio being less than 2.00:1.00 to greater than 4.50:1.00.
As of December 31, 2006, the applicable annual interest
rates under the Term B Loans and Revolving Loans were 6.98% and
7.10%, respectively, which were based on the one-month Adjusted
LIBO rate plus the applicable margin. The one-month Adjusted
LIBO rate was 5.35% at December 31, 2006. The
weighted-average applicable annual interest rate for the year
ended December 31, 2006 under the Term B Loans was 6.74%.
Covenants
The Credit Agreement requires us to satisfy certain financial
covenants, including a minimum interest coverage ratio and a
maximum total leverage ratio, as set forth in the Credit
Agreement. The minimum interest coverage ratio can be no less
than 3.50:1.00 for all periods ending after December 31,
2005. These calculations are based on the trailing four
quarters. The maximum total leverage ratios cannot exceed
4.75:1.00 for the periods ending on September 30, 2005
through December 31, 2006; 4.50:1.00 for the periods ending
on March 31, 2007 through December 31, 2007; 4.25:1.00
for the periods ending on March 31, 2008 through
100
December 31, 2008; 4.00:1.00 for the periods ending on
March 31, 2009 through December 31, 2009; and
3.75:1.00 for the periods ending thereafter. In addition, on an
annualized basis, we are also limited with respect to amounts we
may spend on capital expenditures. Such amounts cannot exceed
12% of revenues for the year ending December 31, 2006, and
cannot exceed 10% thereafter.
The financial covenant requirements and ratios are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level at
|
|
|
|
Requirement
|
|
|
December 31, 2006
|
|
|
Minimum Interest Coverage Ratio
|
|
|
³3.50:1.00
|
|
|
|
4.55
|
|
Maximum Total Leverage Coverage
Ratio
|
|
|
£4.75:1.00
|
|
|
|
3.52
|
|
Capital Expenditure Ratio
|
|
|
£12%
|
|
|
|
7.7
|
%
|
In addition, the Credit Agreement contains customary affirmative
and negative covenants, which among other things, limit our
ability to incur additional debt, create liens, pay dividends,
effect transactions with our affiliates, sell assets, pay
subordinated debt, merge, consolidate, enter into acquisitions,
and effect sale leaseback transactions.
Our Credit Agreement does not contain provisions that would
accelerate the maturity date of the loans under the Credit
Agreement upon a downgrade in our credit rating. However, a
downgrade in our credit rating could adversely affect our
ability to obtain other capital sources in the future and could
increase our costs of borrowings.
Interest
Rate Swap
On June 1, 2006, we entered into an interest rate swap
agreement with CITI as counterparty. The interest rate swap
agreement, as amended, was effective as of November 30,
2006 and has a maturity date of May 30, 2011. We entered
into the interest rate swap agreement to mitigate the floating
interest rate risk on a portion of our outstanding variable rate
borrowings. The interest rate swap agreement requires us to make
quarterly fixed rate payments to CITI calculated on a notional
amount as set forth in the schedule below at an annual fixed
rate of 5.585% while CITI will be obligated to make quarterly
floating payments to us based on the three-month LIBO rate on
the same referenced notional amount. Notwithstanding the terms
of the interest rate swap transaction, we are ultimately
obligated for all amounts due and payable under the Credit
Agreement.
Notional
Schedule
|
|
|
|
|
Date Range
|
|
Notional Amount
|
|
|
November 30, 2006 to
November 30, 2007
|
|
$
|
900.0 million
|
|
November 30, 2007 to
November 28, 2008
|
|
$
|
750.0 million
|
|
November 28, 2008 to
November 30, 2009
|
|
$
|
600.0 million
|
|
November 30, 2009 to
November 30, 2010
|
|
$
|
450.0 million
|
|
November 30, 2010 to
May 30, 2011
|
|
$
|
300.0 million
|
|
The fair value of the interest rate swap agreement is the amount
at which it could be settled, based on estimates obtained from
CITI. We have designated the interest rate swap as a cash flow
hedge instrument, which is recorded in our accompanying balance
sheet at its fair value.
We assess the effectiveness of our cash flow hedge instrument on
a quarterly basis. We completed an assessment of the cash flow
hedge instrument at December 31, 2006, and determined the
hedge to be highly effective in accordance with
SFAS No. 133. The amount of hedge ineffectiveness of
our cash flow hedge instrument is not material. The interest
rate swap agreement exposes us to credit risk in the event of
non-performance by CITI. However, we do not anticipate
non-performance by CITI. We do not hold or issue derivative
financial instruments for trading purposes. The fair value of
our interest rate swap at December 31, 2006, reflected a
liability of approximately $14.7 million and is included in
professional and general liability claims and other liabilities
in our consolidated balance sheet. The interest rate swap
reflects a liability balance as of December 31, 2006
because of a recent decrease in market interest rates.
101
31/4% Convertible
Senior Subordinated Debentures due August 15,
2025
On August 10, 2005, we sold $225.0 million of our
31/4% Convertible
Senior Subordinated Debentures due 2025
(31/4% Debentures).
The net proceeds were approximately $218.4 million and were
used to repay the indebtedness under the Senior Subordinated
Credit Agreement, described above, and for working capital and
general corporate purposes. The
31/4% Debentures
bear interest at the rate of
31/4% per
year, payable semi-annually on February 15 and August 15.
The
31/4% Debentures
are convertible (subject to certain limitations imposed by the
Credit Agreement) under the following circumstances: (1) if
the price of our common stock reaches a specified threshold
during the specified periods; (2) if the trading price of
the
31/4% Debentures
has been called for redemption; or (3) if specified
corporate transactions or other specified events occur. Subject
to certain exceptions, we will deliver cash and shares of our
common stock, as follows: (i) an amount in cash (the
principal return) equal to the lesser of
(a) the principal amount of the
31/4% Debentures
surrendered for conversion and (b) the product of the
conversion rate and the average price of our common stock, as
set forth in the indenture governing the securities (the
conversion value); and (ii) if the conversion value
is greater than the principal return, an amount in shares of our
common stock. Our ability to pay the principal return in cash is
subject to important limitations imposed by the Credit Agreement
and other indebtedness we may incur in the future. Based on the
terms of the Credit Agreement, in certain circumstances, even if
any of the foregoing conditions to conversion have occurred, the
31/4% Debentures
will not be convertible and holders of the
31/4% Debentures
will not be able to declare an event of default under the
31/4% Debentures.
The conversion rate for the
31/4% Debentures
is initially 16.3345 shares of our common stock per $1,000
principal amount of
31/4% Debentures
(subject to adjustment in certain events). This is equivalent to
a conversion price of $61.22 per share of common stock. In
addition, if certain corporate transactions that constitute a
change of control occur on or prior to February 20, 2013,
we will increase the conversion rate in certain circumstances,
unless such transaction constitutes a public acquirer change of
control and the Company elects to modify the conversion rate
into public acquirer common stock. Since the principal portion
of the
31/4% Debentures
is payable only in cash and our common stock price during the
year ended December 31, 2005 was trading below the
conversion price of $61.22 per share, there are no
potential common shares related to the
31/4% Debentures
included in our earnings per share calculations.
On or after February 20, 2013, we may redeem for cash some
or all of the
31/4% Debentures
at any time at a price equal to 100% of the principal amount of
the
31/4% Debentures
to be purchased, plus any accrued and unpaid interest. Holders
may require us to purchase for cash some or all of the
31/4% Debentures
on February 15, 2013, February 15, 2015 and
February 15, 2020 or upon the occurrence of a fundamental
change, at 100% of the principal amount of the
31/4%
Debentures to be purchased, plus any accrued and unpaid interest.
The indenture for the
31/4% Debentures
does not contain any financial covenants or any restrictions on
the payment of dividends, the incurrence of senior or secured
debt or other indebtedness, or the issuance or repurchase of
securities by us. The indenture contains no covenants or other
provisions to protect holders of the
31/4% Debentures
in the event of a highly leveraged transaction or fundamental
change.
Senior
Subordinated Credit Agreement
On June 15, 2005, we entered into a $192.0 million
Senior Subordinated Credit Agreement with CITI. The net proceeds
of the borrowings were used to pay the redemption price plus
accrued and unpaid interest totaling $190.2 million for the
extinguishment of our
41/2% Convertible
Subordinated Notes due June 1, 2009.
We repaid the Senior Subordinated Credit Agreement on
August 4, 2005 in connection with the issuance of our
31/4% Convertible
Senior Subordinated Debentures due August 10, 2025. We
cannot borrow additional amounts under this credit agreement. We
incurred a charge to debt retirement costs of $2.1 million
related to the deferred loan costs during the year ended
December 31, 2005 in connection with the repayment of
borrowings under the Senior Subordinated Credit Agreement.
102
Previous
Credit Facilities
In connection with the Province business combination, we repaid
the $27.0 million outstanding principal balance under the
Province senior credit facility. At the time of the Province
business combination, we had no amounts outstanding under our
prior senior credit facility.
Province
71/2% Senior
Subordinated Notes
In connection with the Province business combination,
approximately $193.9 million of the $200.0 million
outstanding principal amount of Provinces
71/2%
Senior Subordinated Notes due 2013 (the
71/2% Notes)
was purchased and subsequently retired. The fair value assigned
to the
71/2% Notes
in the Province purchase price allocation included tender
premiums of $19.5 million paid in connection with the debt
retirement.
The supplemental indenture incorporating the amendments to the
indenture governing the
71/2% Notes
in connection with Provinces consent solicitation with
respect to the
71/2% Notes
became operative on April 15, 2005 and is binding upon the
holders of any
71/2% Notes
that were not tendered pursuant to such tender offer.
The remaining $6.1 million outstanding principal amount of
71/2% Notes
bears interest at the rate of
71/2%
payable semi-annually on June 1 and December 1. We may
redeem all or a portion of the
71/2% Notes
on or after June 1, 2008, at the then current redemption
prices, plus accrued and unpaid interest. The
71/2% Notes
are unsecured and subordinated to our existing and future senior
indebtedness. The supplemental indenture contains no material
covenants or restrictions.
Province
41/4% Convertible
Subordinated Notes
In connection with the Province business combination,
approximately $172.4 million of the $172.5 million
outstanding principal amount of Provinces
41/4%
Convertible Subordinated Notes due 2008 was purchased and
subsequently retired. The fair value assigned to the Province
41/4% Convertible
Subordinated Notes due 2008 in the Province purchase price
allocation included tender premiums of $12.1 million paid
in connection with the debt retirement.
Province
41/2% Convertible
Subordinated Notes
In connection with the Province business combination, Province
redeemed all of the $76.0 million outstanding principal
amount of our
41/2% Convertible
Subordinated Notes due 2005, at a redemption price of 100.9% of
our principal amount, plus accrued and unpaid interest to, but
excluding, May 16, 2005, the redemption date.
Historic
LifePoints
41/2% Convertible
Subordinated Notes
On June 15, 2005, Historic LifePoint called for redemption
all of the $221.0 million outstanding principal amount of
our
41/2% Convertible
Subordinated Notes due June 1, 2009 (the
41/2% Notes),
at a redemption price of 102.571% of the principal amount, plus
accrued and unpaid interest to, but excluding, the redemption
date. The
41/2% Notes
were convertible at the option of the holder into shares of our
common stock at a conversion price of $47.36. The closing market
price of our common stock on the date of redemption was $48.74.
Prior to the redemption date, holders of approximately
$35.9 million in the aggregate principal amount of the
41/2% Notes
elected to convert their notes into an aggregate of
757,482 shares of our common stock. Approximately
$185.1 million in aggregate principal amount of the
41/2% Notes
was redeemed at the redemption price of 102.571% of the
principal amount or approximately $189.9 million. Deferred
finance costs of $3.1 million, bond premiums of
$4.8 million and legal and other fees of $0.1 million
were expensed and included in debt retirement costs for the year
ended December 31, 2005. Deferred finance costs of
$0.7 million were subtracted from the $35.9 million of
principal converted and included in stockholders equity as
part of the conversion to equity.
103
Debt
Ratings
Our debt is rated by three credit rating agencies designated as
Nationally Recognized Statistical Rating Organizations by the
SEC:
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Moodys Investors Service, Inc. (Moodys);
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Standard & Poors Rating Services,
(S&P); and
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Fitch Ratings.
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A credit rating reflects an assessment by the rating agency of
the credit risk associated with particular securities we issue,
based on information provided by us and other sources. Credit
ratings are not recommendations to buy, sell or hold securities
and are subject to revision or withdrawal at any time by the
assigning rating agency. Each rating agency may have different
criteria for evaluating company risk and, therefore, ratings
should be evaluated independently for each rating agency. Lower
credit ratings generally result in higher borrowing costs and
reduced access to capital markets. Our recent ratings are
primarily a reflection of the rating agencies concern
regarding our higher leverage, increased activity in
acquisitions and our ability to pay down our outstanding debt.
The following chart summarizes our credit ratings history and
the outlooks assigned since our inception in 1999:
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Moodys
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Senior
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Senior Implied
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S&P
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Fitch Ratings
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Unsecured
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Issuer
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Issuer
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Issuer
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Date
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Issuer Rating
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Rating
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Outlook
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Rating
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Outlook
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Rating
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Outlook
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April 1999
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B+
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Stable
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October 1999
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B1
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Stable
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B+
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Stable
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February 2001
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B1
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Positive
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B+
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Stable
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May 2001
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Ba3
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Stable
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B+
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Stable
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June 2001
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B2
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Ba3
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Stable
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BB( )
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Stable
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June 2002
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B2
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Ba3
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Stable
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BB( )
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Stable
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December 2003
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B2
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Ba3
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Stable
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BB
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Stable
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August 2004
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B2
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Ba3
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Negative
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BB
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Negative
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March 2005
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B2
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Ba3
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Stable
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BB
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Stable
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July 2005
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B2
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Ba3
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Stable
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BB
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Negative
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May 2006
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B2
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Ba3
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Stable
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BB
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Negative
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BB( )
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Stable
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January 2007
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B2
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Ba3
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Stable
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BB( )
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Stable
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BB( )
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Stable
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Liquidity
and Capital Resources Outlook
We expect the level of capital expenditures in 2007 to be in a
range of $180.0 million to $200.0 million. We have
large projects in process at a number of our facilities. We are
reconfiguring some of our hospitals to more effectively
accommodate patient services and restructuring existing surgical
capacity in some of our hospitals to permit additional patient
volume and a greater variety of services. At December 31,
2006, we had projects under construction with an estimated
additional cost to complete and equip of approximately
$115.1 million. We anticipate that these projects will be
completed over the next two years. See Note 8 to our
consolidated financial statements included elsewhere in this
report for a discussion of required capital expenditures for
certain facilities. We anticipate funding these expenditures
through cash provided by operating activities, available cash
and borrowings available under our credit arrangements.
Our business strategy contemplates the selective acquisition of
additional hospitals and other healthcare service providers, and
we regularly review these potential acquisitions. These
acquisitions may, however, require additional financing. We
regularly evaluate opportunities to sell additional equity or
debt securities, obtain credit facilities from lenders or
restructure our long-term debt or equity for strategic reasons
or to
104
further strengthen our financial position. The sale of
additional equity or convertible debt securities could result in
additional dilution to our stockholders.
We have never declared or paid cash dividends on our common
stock. We intend to retain future earnings to finance the growth
and development of our business and, accordingly, do not
currently intend to declare or pay any cash dividends on our
common stock. Our Board of Directors will evaluate our future
earnings, results of operations, financial condition and capital
requirements in determining whether to declare or pay cash
dividends. Delaware law prohibits us from paying any dividends
unless we have capital surplus or net profits available for this
purpose. In addition, our credit facilities impose restrictions
on our ability to pay dividends.
We believe that cash flows from operations, amounts available
under our credit facility and our anticipated access to capital
markets are sufficient to fund the purchase prices for any
potential acquisitions, meet expected liquidity needs, including
repayment of our debt obligations, planned capital expenditures
and other expected operating needs over the next three years.
Contractual
Obligations, Commitments and Off-Balance Sheet
Arrangements
Contractual
Obligations
We have various contractual obligations, which are recorded as
liabilities in our consolidated financial statements. Other
items, such as certain purchase commitments and other executory
contracts, are not recognized as liabilities in our consolidated
financial statements but are required to be disclosed. For
example, we are required to make certain minimum lease payments
for the use of property under certain of our operating lease
agreements.
The following table summarizes our significant contractual
obligations as of December 31, 2006 and the future periods
in which such obligations are expected to be settled in cash (in
millions):
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Payment Due by Period
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Contractual Obligations
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Total
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2007
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2008-2009
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2010-2011
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After 2011
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Long-term debt obligations(a)
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$
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2,301.5
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$
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109.8
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$
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218.6
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$
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1,191.5
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$
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781.6
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Capital lease obligations
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9.4
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1.1
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2.0
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1.9
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4.4
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Operating lease obligations(b)
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59.5
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14.7
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18.9
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9.2
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16.7
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Other long-term liabilities(c)
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2.6
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0.3
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0.4
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0.4
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1.5
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Purchase obligations(d)
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194.2
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95.8
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90.2
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3.2
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5.0
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2,567.2
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221.7
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$
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330.1
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$
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1,206.2
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$
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809.2
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(a) |
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Included in long-term debt obligations are principal and
interest owed on our outstanding debt obligations, giving
consideration to our interest rate swap agreement. These
obligations are explained further in Note 6 to our
consolidated financial statements included elsewhere in this
report. We used the 6.98% and 7.10% effective interest rates at
December 31, 2006 for our $1,321.9 million outstanding
Term B Loans and $110.0 million outstanding Revolving
Credit Loans, respectively, to estimate interest payments on
these variable rate debt instruments. Our interest rate swap
agreement requires us to make quarterly interest payments at an
annual fixed rate of 5.585% while the counterparty is obligated
to make quarterly floating payments to us based on the
three-month LIBO rate on a decreasing notional amount. Our
calculation for long-term debt obligations includes an estimate
for the net result of these payments between us and the
counterparty using the difference between our required annual
fixed rate of 5.585% and the three-month LIBO rate in effect as
of December 31, 2006 of 5.370% based on the effective
notional amounts for the indicated period. Holders of our
$225.0 million outstanding
31/4% Debentures
may require us to purchase for cash some or all of the
31/4% Debentures
on February 15, 2013, February 15, 2015, and
February 15, 2020. For purposes of the above table, we
assumed that our
31/4% Debentures
would be outstanding during its entire term, which ends on
August 15, 2025. |
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(b) |
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This reflects our future minimum operating lease payments. We
enter into operating leases in the normal course of business.
Substantially all of our operating lease agreements have fixed
payment terms based on |
105
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the passage of time. Some lease agreements provide us with the
option to renew the lease. Our future operating lease
obligations would change if we exercised these renewal options
and if we entered into additional operating lease agreements.
Please refer to Note 8 to our consolidated financial
statements included elsewhere in this report for more
information regarding our operating leases. |
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(c) |
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We had a $82.3 million other long-term liability balance on
our consolidated balance sheet as of December 31, 2006.
This balance reflected a $61.8 million reserve for
professional and general liability claims, an interest rate swap
liability balance of $14.7 million and $5.8 related to
other liabilities. We excluded the $61.8 million reserve
for professional and general liability claims, the
$14.7 million interest rate swap liability and
$2.6 million of other liabilities because of the
uncertainty of the dollar amounts to be ultimately paid as well
as the timing of such amounts. Please refer to Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Critical Accounting Estimates Professional and
General Liability Claims in this report for more
information. |
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(d) |
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The following table summarizes our significant purchase
obligations as of December 31, 2006 and the future periods
in which such obligations are expected to be settled in cash (in
millions): |
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Payment Due by Period
|
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Purchase Obligations
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Total
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2007
|
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2008-2009
|
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2010-2011
|
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After 2011
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HCA-IT services(e)
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$
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88.6
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$
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27.9
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$
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60.7
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$
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$
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Capital expenditure obligations(f)
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22.2
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10.0
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8.0
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4.2
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Physician commitments(g)
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11.0
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11.0
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GEMS obligations(h)
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19.8
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15.8
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4.0
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Other purchase obligations(i)
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52.6
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31.1
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17.5
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3.2
|
|
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0.8
|
|
|
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|
|
|
|
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|
|
|
|
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194.2
|
|
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95.8
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$
|
90.2
|
|
|
$
|
3.2
|
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$
|
5.0
|
|
|
|
|
|
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|
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(e) |
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HCA-IT provides various information systems services, including,
but not limited to, financial, clinical, patient accounting and
network information services to us under a contract that expires
on December 31, 2009. The amounts are based on estimated
fees that will be charged to our hospitals as of
December 31, 2006 with an annual fee increase that is
capped by the consumer price index increase. We used a 4.0%
annual rate increase as the estimated consumer price index
increase for the contract period. These fees will increase if we
acquire additional hospitals and use HCA-IT for information
system conversion services at the acquired hospitals. |
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(f) |
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We had projects under construction with an estimated additional
cost to complete and equip of approximately $115.1 million
as of December 31, 2006. Because we can terminate
substantially all of the related construction contracts at any
time without paying a termination fee, these costs are excluded
from the above table except for amounts contractually committed
by us. In addition, as discussed in Part I, Item 3.
Legal Proceedings of this report, we may be required to
make significant expenditures in order to bring our facilities
into compliance with the ADA. We are currently unable to
estimate the costs that could be associated with modifying our
facilities because these costs are negotiated and determined on
a
facility-by-facility
basis and, therefore, have varied and will continue to vary
significantly among facilities. |
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(g) |
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In consideration for a physician relocating to one of the
communities in which our hospitals are located and agreeing to
engage in private practice for the benefit of the respective
community, we may advance certain amounts of money to a
physician, normally over a period of one year, to assist in
establishing the physicians practice. We have committed to
advance a maximum amount of approximately $43.1 million at
December 31, 2006. The actual amount of such commitments to
be subsequently advanced to physicians is estimated at
$11.0 million and often depends upon the financial results
of a physicians private practice during the guarantee
period. |
|
(h) |
|
General Electric Medical Services (GEMS) provides
diagnostic imaging equipment maintenance and bio-medical
services to us pursuant to a contract that expires on
March 31, 2008. The amounts in this table reflect our
obligation based on the equipment we owned as of
December 31, 2006. |
|
(i) |
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Reflects our minimum commitments to purchase goods or services
under non-cancelable contracts as of December 31, 2006. |
106
Legal
and Tax Matters
As disclosed in Note 5 and Note 8 to our consolidated
financial statements included elsewhere in this report, we have
exposure for certain tax and legal matters.
Off-Balance
Sheet Arrangements
We had standby letters of credit outstanding of approximately
$30.4 million as of December 31, 2006, all of which
relates to the self-insured retention levels of our professional
and general liability insurance and workers compensation
programs as security for the payment of claims.
Recently
Issued Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Instruments,
(SFAS No. 155), which amends
SFAS No. 133 and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS No. 155
allows financial instruments that have embedded derivatives to
be accounted for as a whole (eliminating the need to bifurcate
the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis.
SFAS No. 155 also clarifies and amends certain other
provisions of SFAS No. 133 and SFAS No. 140.
This statement is effective for all financial instruments
acquired or issued in fiscal years beginning after
September 15, 2006. We do not expect the adoption of this
new standard to have a material impact on our financial
position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes.
FIN 48 also prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. In addition, FIN 48 provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The
provisions of FIN 48 are to be applied to all tax positions
upon initial adoption of this standard. Only tax positions that
meet the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized
upon adoption of FIN 48. The cumulative effect of applying
the provisions of FIN 48 should be reported as an
adjustment to the opening balance of retained earnings for that
fiscal year. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. We are
evaluating the impact of the adoption of FIN 48 but do not
currently expect the adoption of this new standard to have a
material impact on our financial position, results of operations
or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and expands disclosures required for fair value
measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods
within those fiscal years. The provisions for SFAS 157 are
to be applied prospectively as of the beginning of the fiscal
year in which it is initially applied, except in limited
circumstances including certain positions in financial
instruments that trade in active markets as well as certain
financial and hybrid financial instruments initially measured
under SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133) using the transaction price
method. In these circumstances, the transition adjustment,
measured as the difference between the carrying amounts and the
fair values of those financial instruments at the date
SFAS No. 157 is initially applied, shall be recognized
as a cumulative-effect adjustment to the opening balance of
retained earnings for the fiscal year in which
SFAS No. 157 is initially applied. We do not
anticipate that the adoption of SFAS No. 157 will have
a material impact on our financial position, results of
operations or cash flows.
Segment
Reporting
We operate in one reportable operating segment
healthcare services. SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information
(SFAS No. 131), establishes standards for
the
107
way that public business enterprises report information about
operating segments in annual consolidated financial statements.
Although we have five operating divisions, under the aggregation
criteria set forth in SFAS No. 131, we only operate in
one reportable operating segment healthcare services.
Under SFAS No. 131, two or more operating segments may
be aggregated into a single operating segment for financial
reporting purposes if aggregation is consistent with the
objective and basic principles of SFAS No. 131, if the
segments have similar economic characteristics, and if the
segments are similar in each of the following areas:
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the nature of the products and services;
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the nature of the production processes;
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the type or class of customer for their products and services;
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the methods used to distribute their products or provide their
services; and
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if applicable, the nature of the regulatory environment, for
example, banking, insurance, or public utilities.
|
We meet each of the aggregation criteria for the following
reasons:
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the treatment of patients in a hospital setting is the only
material source of revenues for each of our operating divisions;
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the healthcare services provided by each of our operating
divisions are generally the same;
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the healthcare services provided by each of our operating
divisions are generally provided to similar types of patients,
which are patients in a hospital setting;
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the healthcare services are primarily provided by the direction
of affiliated or employed physicians and by the nurses, lab
technicians and others employed or contracted at each of our
hospitals; and
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the healthcare regulatory environment is generally similar for
each of our operating divisions.
|
Because we meet each of the criteria set forth above and each of
our operating divisions has similar economic characteristics,
our management aggregates our results of operations in one
reportable operating segment.
Inflation
The healthcare industry is labor-intensive. Wages and other
expenses increase during periods of inflation and when labor
shortages in marketplaces occur. In addition, suppliers pass
along rising costs to us in the form of higher prices. Private
insurers pass along their rising costs in the form of lower
reimbursement to us. Our ability to pass on these increased
costs in increased rates is limited because of increasing
regulatory and competitive pressures and the fact that the
majority of our revenues are fee-based. Accordingly,
inflationary pressures could have a material adverse effect on
our results of operations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
The following discussion relates to our exposure to market risk
based on changes in interest rates:
Outstanding
Debt
We are exposed to market risk related to changes in interest
rates. We entered into an interest rate swap agreement effective
November 30, 2006, with a maturity date of May 30,
2011 to manage our exposure to these fluctuations. The interest
rate swap converts a portion of our indebtedness to a fixed rate
with a decreasing notional amount starting at
$900.0 million at an annual fixed rate of 5.585%. The
notional amount of the swap agreement represents a balance used
to calculate the exchange of cash flows and is not an asset or
liability. Any market risk or opportunity associated with this
swap agreement is offset by the opposite market
108
impact on the related debt. Our credit risk related to this
agreement is low because the swap agreement is with a
creditworthy financial institution.
As of December 31, 2006, we had outstanding debt of
$1,670.3 million, 85.7% or $1,431.9 million, of which
was subject to variable rates of interest. As of
December 31, 2006, the fair value of our outstanding
variable rate debt approximates its carrying value and the fair
value of our $225.0 million
31/4%
Debentures was approximately $202.5 million, based on the
quoted market prices at December 29, 2006.
Based on a hypothetical 100 basis point increase in
interest rates, the potential annualized decrease in our future
pre-tax earnings would be approximately $14.3 million as of
December 31, 2006. The estimated change to our interest
expense is determined considering the impact of hypothetical
interest rates on our borrowing cost and debt balances. These
analyses do not consider the effects, if any, of the potential
changes in our credit ratings or the overall level of economic
activity. Further, in the event of a change of significant
magnitude, our management would expect to take actions intended
to further mitigate our exposure to such change.
Cash
Balances
Certain of our outstanding cash balances are invested overnight
with high credit quality financial institutions. We do not have
significant exposure to changing interest rates on invested cash
at December 31, 2006. As a result, the interest rate market
risk implicit in these investments at December 31, 2006, if
any, is low.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
Information with respect to this Item is contained in our
consolidated financial statements beginning on
Page F-1
of this report.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
We did not experience a change in or disagreement with our
accountants during the year ended December 31, 2006.
|
|
Item 9A.
|
Controls
and Procedures.
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this report pursuant to
Exchange Act
Rule 13a-15.
Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls
and procedures were effective in ensuring that information
required to be disclosed by us (including our consolidated
subsidiaries) in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported on
a timely basis.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we have included a report of managements assessment of the
design and operating effectiveness of our internal controls as
part of this report. Our independent registered public
accounting firm also attested to, and reported on,
managements assessment of the effectiveness of internal
control over financial reporting. Managements report and
the independent registered public accounting firms
attestation report are included in our consolidated financial
statements beginning on
page F-1
of this report under the captions entitled
Managements Report on Internal Control Over
Financial Reporting and Report of Independent
Registered Public Accounting Firm on Internal Control Over
Financial Reporting.
We acquired four hospitals from HCA during 2006 (two of which
are classified as held for sale/discontinued operations as of
December 31, 2006 and for the period from the effective
date of the acquisition of July 1, 2006 through
December 31, 2006) and excluded all four of these
hospitals from our assessment of the effectiveness of our
internal control over financial reporting. During 2006, these
hospitals contributed
109
approximately $185.0 million or 7.3% of our total revenues
(including revenues from discontinued operations of
approximately $94.0 million) and, as of December 31,
2006, accounted for approximately $228.1 million or 11.1%
of our total assets, excluding goodwill (including
$115.2 million of assets held for sale).
Changes
in Internal Control Over Financial Reporting
There has been no change in our internal control over financial
reporting during the fourth quarter ended December 31, 2006
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
110
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Executive
Officers
Information with respect to our executive officers is
incorporated by reference to the information contained under the
caption Compensation of Executive Officers
Executive Officers of the Company included in our proxy
statement relating to our 2007 annual meeting of stockholders.
Code of
Ethics
Our Board of Directors expects its members, as well as our
officers and employees, to act ethically at all times and to
acknowledge in writing their adherence to the policies
comprising our Code of Conduct, which is known as Common
Ground, and, as applicable, our Code of Ethics for Senior
Financial Officers and Chief Executive Officer (Code of
Ethics). The Code of Ethics and Common Ground are posted
on our website located at www.lifepointhospitals.com
under the heading Corporate Governance. We
intend to disclose any amendments to our Code of Ethics and any
waiver from a provision of our code, as required by the SEC, on
our website within four business days following such amendment
or waiver.
Directors
Information with respect to our directors is incorporated by
reference to the information contained under the caption
Proposal 1: Election of Directors included in
our proxy statement relating to our 2007 annual meeting of
stockholders.
Compliance
with Section 16(a) of the Exchange Act
Information with respect to compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by
reference to the information contained under the caption
General Information Section 16(a)
Beneficial Ownership Reporting Compliance included in our
proxy statement relating to our 2007 annual meeting of
stockholders.
Stockholder
Nominees
Information with respect to the procedures by which stockholders
may recommend nominees to the Board of Directors is incorporated
by reference to the information contained under the caption
Governance of the Company and Practices of the Board of
Directors Director Nomination Process included
in our proxy statement relating to our 2007 annual meeting of
stockholders.
Audit and
Compliance Committee
Information with respect to the Audit and Compliance Committee
is incorporated by reference to the information contained under
the caption Audit and Compliance Committee Report
included in our proxy statement relating to our 2007 annual
meeting of stockholders.
|
|
Item 11.
|
Executive
Compensation.
|
This information is incorporated by reference to the information
contained under the captions Compensation Discussion and
Analysis, Compensation of Executive Officers,
Compensation Committee Report and Governance
of the Company and Practices of the Board of
Directors Compensation Committee Interlocks and
Insider Participation, and Compensation of
Directors, included in our proxy statement relating to our
2007 annual meeting of stockholders.
111
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
This information is incorporated by reference to the information
contained under the captions Security Ownership of Certain
Beneficial Owners and Management, Compensation of
Executive Officers Potential Payments Upon
Termination or Change in Control Change in Control
Arrangements and Compensation of Executive
Officers Summary Compensation Table
Executive Severance and Restrictive Covenant Agreement with
Mr. Carpenter included in our proxy statement
relating to our 2007 annual meeting of stockholders.
Information concerning our equity compensation plans are
included in Part II, Item 5. of this report under the
caption Equity Compensation Plan Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
This information is incorporated by reference to the information
contained under the captions Governance of the Company and
Practices of the Board of Directors Certain
Relationships and Related Transactions and
Governance of the Company and Practices of the Board of
Directors Independence of Directors included
in our proxy statement relating to our 2007 annual meeting of
stockholders.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
This information is incorporated by reference to the information
contained under the caption Proposal 2: Ratification
of Selection of Independent Registered Public Accounting
Firm included in our proxy statement relating to our 2007
annual meeting of stockholders.
112
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) Index to Consolidated Financial Statements, Financial
Statement Schedules and Exhibits:
(1) Consolidated Financial Statements:
See Item 8 in this report.
The consolidated financial statements required to be included in
Part II, Item 8, Financial Statements and Supplementary
Data, begin on
Page F-1
and are submitted as a separate section of this report.
(2) Consolidated Financial Statement
Schedules:
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes in this report.
(3) Exhibits:
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
3
|
.1
|
|
|
|
Amended and Restated Certificate
of Incorporation (incorporated by reference from exhibits to the
Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on April 15,
2005,
File No. 333-124093).
|
|
3
|
.2
|
|
|
|
Second Amended and Restated Bylaws
of LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated October 16, 2006,
File No. 000-51251).
|
|
4
|
.1
|
|
|
|
Form of Specimen Stock Certificate
(incorporated by reference from exhibits to the Registration
Statement on
Form S-4,
as amended, filed by Historic LifePoint Hospitals, Inc. on
October 25, 2004,
File No. 333-119929).
|
|
4
|
.2
|
|
|
|
Form of 3.25% Convertible
Senior Subordinated Debenture due 2025 (included as part of
Exhibit 4.8 hereto.) (incorporated by reference from
exhibits to LifePoint Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251).
|
|
4
|
.3
|
|
|
|
Registration Rights Agreement,
dated August 10, 2005, between LifePoint Hospitals, Inc.
and Citigroup Global Markets Inc. as Representatives of the
Initial Purchasers (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251).
|
|
4
|
.4
|
|
|
|
Rights Agreement, dated as of
April 15, 2005, by and between LifePoint Hospitals, Inc.
and National City Bank, as Rights Agent (incorporated by
reference from exhibits to the Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on April 15,
2005, File
No. 333-124093).
|
|
4
|
.5
|
|
|
|
Subordinated Indenture, dated as
of May 27, 2003, between Province Healthcare Company and
U.S. Bank Trust National Association, as Trustee
(incorporated by reference from exhibits to Province Healthcare
Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003, File
No. 001-31320).
|
|
4
|
.6
|
|
|
|
First Supplemental Indenture to
Subordinated Indenture, dated as of May 27, 2003, by and
among Province Healthcare Company and U.S. Bank National
Association, as Trustee, relating to Province Healthcare
Companys
71/2% Senior
Subordinated Notes due 2013 (incorporated by reference from
exhibits to Province Healthcare Companys Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2003, File
No. 001-31320).
|
|
4
|
.7
|
|
|
|
Second Supplemental Indenture to
Subordinated Indenture, dated as of April 1, 2005, by and
among Province Healthcare Company and U.S. Bank National
Association, as Trustee (incorporated by reference from exhibits
to Province Healthcare Companys Current Report on
Form 8-K
dated April 5, 2005, File
No. 001-31320).
|
|
4
|
.8
|
|
|
|
Indenture, dated as of
October 10, 2001, between Province Healthcare Company and
National City Bank, including the forms of Province Healthcare
Companys
41/4% Convertible
Subordinated Notes due 2008 (incorporated by reference from
exhibits to the Registration Statement on
Form S-3,
filed by Province Healthcare Company on December 20, 2001,
File
No. 333-75646).
|
113
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
4
|
.9
|
|
|
|
First Supplemental Indenture,
dated as of April 15, 2005, by and among Province
Healthcare Company, LifePoint Hospitals, Inc. and U.S. Bank
National Association (as successor in interest to National City
Bank), as trustee to the Indenture dated as of October 10,
2001, relating to Province Healthcare Companys
41/4% Convertible
Subordinated Notes due 2008 (incorporated by reference from
exhibits to the Historic LifePoint Hospitals, Inc. Current
Report on
Form 8-K
dated April 15, 2005,
File No. 000-29818.
|
|
4
|
.10
|
|
|
|
Indenture, dated August 10,
2005, between LifePoint Hospitals, Inc. and Citibank, N.A., as
Trustee (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251).
|
|
10
|
.1
|
|
|
|
Tax Sharing and Indemnification
Agreement, dated May 11, 1999, by and among Columbia/HCA,
LifePoint Hospitals, Inc. and Triad Hospitals, Inc.
(incorporated by reference from exhibits to Historic LifePoint
Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999,
File No. 000-29818).
|
|
10
|
.2
|
|
|
|
Benefits and Employment Matters
Agreement, dated May 11, 1999 by and among Columbia/HCA,
LifePoint Hospitals, Inc. and Triad Hospitals, Inc.
(incorporated by reference from exhibits to Historic LifePoint
Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999,
File No. 000-29818).
|
|
10
|
.3
|
|
|
|
Insurance Allocation and
Administration Agreement, dated May 11, 1999, by and among
Columbia/ HCA, LifePoint Hospitals, Inc. and Triad Hospitals,
Inc. (incorporated by reference from exhibits to Historic
LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999,
File No. 000-29818).
|
|
10
|
.4
|
|
|
|
Computer and Data Processing
Services Agreement dated May 11, 1999 by and between
Columbia Information Systems, Inc. and LifePoint Hospitals, Inc.
(incorporated by reference from exhibits to Historic LifePoint
Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999,
File No. 000-29818).
|
|
10
|
.5
|
|
|
|
Amendment to Computer and Data
Processing Services Agreement, dated April 28, 2004, by and
between HCA-Information Technology and Services, Inc. and
LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to Historic LifePoint Hospitals Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2004, File
No. 000-29818).
|
|
10
|
.6
|
|
|
|
Comprehensive Service Agreement
for Diagnostic Imaging and Biomedical Services, executed on
January 7, 2005, between LifePoint Hospital Holdings, Inc.
and GE Healthcare Technologies (incorporated by reference from
exhibits to Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2004, File
No. 000-29818.
|
|
10
|
.7
|
|
|
|
Corporate Integrity Agreement
dated as of December 21, 2000 by and between the Office of
Inspector General of the Department of Health and Human Services
and LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2000, File
No. 000-29818).
|
|
10
|
.8
|
|
|
|
Amendment to the Corporate
Integrity Agreement, dated April 29, 2002, between the
Office of Inspector General of the Department of Health and
Human Services and LifePoint Hospitals, Inc. (incorporated by
reference from exhibits to Historic LifePoint Hospitals
Annual Report on
Form 10-K
for the year ended December 31, 2002, File
No. 000-29818).
|
|
10
|
.9
|
|
|
|
Letter from the Office of
Inspector General of the Department of Health and Human
Services, dated October 15, 2002 (incorporated by reference
from exhibits to Historic LifePoint Hospitals Annual
Report on
Form 10-K
for the year ended December 31, 2002, File
No. 000-29818).
|
|
10
|
.10
|
|
|
|
Letter from the Office of
Inspector of the Department of Health and Human Services, dated
December 18, 2003 (incorporated by reference from exhibits
to Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2004, File
No. 000-29818).
|
|
10
|
.11
|
|
|
|
Letter from the Office of
Inspector of the Department of Health and Human Services, dated
March 3, 2004 (incorporated by reference from exhibits to
Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2004, File
No. 000-29818).
|
|
10
|
.12
|
|
|
|
Amended and Restated 1998 Long
Term Incentive Plan (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated July 7, 2005, File
No. 000-51251).
|
114
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
10
|
.13
|
|
|
|
LifePoint Hospitals, Inc.
Executive Performance Incentive Plan (incorporated by reference
from Appendix C to Historic LifePoint Hospitals Proxy
Statement dated April 28, 2004, File
No. 000-29818).
|
|
10
|
.14
|
|
|
|
Form of LifePoint Hospitals, Inc.
Nonqualified Stock Option Agreement (incorporated by reference
from exhibits to LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005, File
No. 000-51251).
|
|
10
|
.15
|
|
|
|
Form of LifePoint Hospitals, Inc.
Restricted Stock Award Agreement (incorporated by reference from
exhibits to LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005,
File No. 000-51251).
|
|
10
|
.16
|
|
|
|
Form of LifePoint Hospitals, Inc.
Deferred Restricted Stock Award (incorporated by reference from
exhibits to LifePoint Hospitals Current Report on
Form 8-K
dated May 12, 2006, file
No. 000-51251).
|
|
10
|
.17
|
|
|
|
LifePoint Hospitals, Inc. Employee
Stock Purchase Plan (incorporated by reference from exhibits to
Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2001,
File No. 000-29818).
|
|
10
|
.18
|
|
|
|
First Amendment to the LifePoint
Hospitals, Inc. Employee Stock Purchase Plan (incorporated by
reference from exhibits to the Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on June 2,
2003, File
No. 333-105775).
|
|
10
|
.19
|
|
|
|
Second Amendment To Employee Stock
Purchase Plan (incorporated by reference from exhibits to
LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006,
File No. 000-51251).
|
|
10
|
.20
|
|
|
|
LifePoint Hospitals, Inc. Change
in Control Severance Plan (incorporated by reference from
exhibits to Historic LifePoint Hospitals Current Report on
Form 8-K
dated May 16, 2002, File
No. 000-29818).
|
|
10
|
.21
|
|
|
|
LifePoint Hospitals, Inc.
Management Stock Purchase Plan, as amended and restated
(incorporated by reference from exhibits to Historic LifePoint
Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2002, File
No. 000-29818).
|
|
10
|
.22
|
|
|
|
Form of Outside Directors
Restricted Stock Agreement (incorporated by reference from
exhibits to LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006,
File No. 000-51251).
|
|
10
|
.23
|
|
|
|
Summary of LifePoint Hospitals,
Inc. Non-Employee Director Compensation (incorporated by
reference from exhibits to LifePoint Hospitals Current
Report on
Form 8-K
dated May 12, 2006, File
No. 000-51251).
|
|
10
|
.24
|
|
|
|
LifePoint Hospitals, Inc. Outside
Directors Stock and Incentive Compensation Plan (incorporated by
reference from exhibits to Historic LifePoint Hospitals
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999, File
No. 000-29818).
|
|
10
|
.25
|
|
|
|
Amendment to the LifePoint
Hospitals, Inc. Outside Directors Stock and Incentive
Compensation Plan (incorporated by reference from
Appendix B to Historic LifePoint Hospitals Proxy
Statement dated April 28, 2004, File
No. 000-29818).
|
|
10
|
.26
|
|
|
|
Second Amendment to the LifePoint
Hospitals, Inc. Outside Directors Stock and Incentive
Compensation Plan (incorporated by reference from exhibits to
LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006, File
No. 000-51251).
|
|
10
|
.27
|
|
|
|
Employment Agreement of Kenneth C.
Donahey, as amended and restated (incorporated by reference from
exhibits to Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2004, File
No. 000-29818).
|
|
10
|
.28
|
|
|
|
Separation Agreement dated
June 26, 2006, by and between LifePoint CSGP, LLC and
Kenneth C. Donahey (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated June 26, 2006, File
No. 000-51251).
|
|
10
|
.29
|
|
|
|
Consulting Agreement, dated as of
August 15, 2004, by and between LifePoint Hospitals, Inc.
and Martin S. Rash (incorporated by reference from
Appendix A to the Registration Statement on
Form S-4,
as amended, filed by LifePoint Hospitals, Inc. on
October 25, 2004, File
No. 333-119929).
|
115
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
10
|
.30
|
|
|
|
Credit Agreement, dated as of
April 15, 2005, by and among LifePoint Hospitals, Inc., as
borrower, the lenders referred to therein, Citicorp North
America, Inc. as administrative agent, Bank of America, N.A.,
CIBC World Markets Corp., SunTrust Bank, UBS Securities LLC, as
co syndication agents and Citigroup Global Markets, Inc., as
sole lead arranger and sole bookrunner (incorporated by
reference from exhibits to Historic LifePoint Hospitals
Current Report on
Form 8-K
dated April 15, 2005, File
No. 000-29818).
|
|
10
|
.31
|
|
|
|
Incremental Facility Amendment
dated August 23, 2005, among LifePoint Hospitals, Inc., as
borrower, Citicorp North America, Inc., as administrative agent
and the lenders party thereto (incorporated by reference from
exhibits to LifePoint Hospitals Current Report on
Form 8-K
dated August 23, 2005,
File No. 000-51251).
|
|
10
|
.32
|
|
|
|
Amendment No. 2 to the Credit
Agreement, dated October 14, 2005, among LifePoint
Hospitals, Inc. as borrower, Citicorp North America, Inc., as
administrative agent and the lenders party thereto (incorporated
by reference from exhibits to LifePoint Hospitals Current
Report on
Form 8-K
dated October 18, 2005, File
No. 000-51251).
|
|
10
|
.33
|
|
|
|
Incremental Facility Amendment
No. 3 to the Credit Agreement, dated June 30, 2006
among LifePoint Hospitals, Inc. as borrower, Citicorp North
America, Inc. as administrative agent and the lenders party
thereto. (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K
dated June 30, 2006, File
No. 000-51251).
|
|
10
|
.34
|
|
|
|
Incremental Facility Amendment
No. 4 to the Credit Agreement, dated September 8,
2006, among LifePoint Hospitals, Inc. as borrower, Citicorp
North America, Inc. as administrative agent and the lenders
party thereto (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated September 12, 2006, File
No. 000-51251).
|
|
10
|
.35
|
|
|
|
ISDA 2002 Master Agreement, dated
as of June 1, 2006, between Citibank, N.A. and LifePoint
Hospitals, Inc. (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K/A
dated September 8, 2006, File
No. 000-51251).
|
|
10
|
.36
|
|
|
|
Schedule to the ISDA 2002 Master
Agreement (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K/A
dated September 8, 2006, File
No. 000-51251).
|
|
10
|
.37
|
|
|
|
Confirmation, dated as of
June 2, 2006, between LifePoint Hospitals, Inc. and
Citibank, N.A. (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K/A
dated September 8, 2006, File
No. 000-51251).
|
|
10
|
.38
|
|
|
|
Stock Purchase Agreement, dated
July 14, 2005, by HCA Inc. and LifePoint Hospitals, Inc.
(incorporated by reference from exhibits to LifePoint
Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, File
No. 000-51251).
|
|
10
|
.39
|
|
|
|
Amendment to the Stock Purchase
Agreement, dated June 2, 2006 (incorporated by reference
from exhibits to LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, File
No. 000-51251).
|
|
10
|
.40
|
|
|
|
Repurchase Agreement, dated
June 30, 2006, by and between HCA Inc. and LifePoint
Hospitals, Inc. (incorporated by reference from exhibits to
LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, File
No. 000-51251).
|
|
10
|
.41
|
|
|
|
Executive Severance and
Restrictive Covenant Agreement by and between LifePoint CSGP,
LLC and William F. Carpenter III, dated December 11,
2006 (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K
dated December 15, 2006, File
No. 000-51251).
|
|
12
|
.1
|
|
|
|
Ratio of Earnings to Fixed Charges
|
|
21
|
.1
|
|
|
|
List of Subsidiaries
|
|
23
|
.1
|
|
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
31
|
.1
|
|
|
|
Certification of the Chief
Executive Officer of LifePoint Hospitals, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
|
|
Certification of the Chief
Financial Officer of LifePoint Hospitals, Inc. pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
|
116
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
32
|
.1
|
|
|
|
Certification of the Chief
Executive Officer of LifePoint Hospitals, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of the Chief
Financial Officer of LifePoint Hospitals, Inc. pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
|
117
Compensation
Plans and Arrangements
The following is a list of all of our compensation plans and
arrangements filed as exhibits to this annual report on
Form 10-K:
|
|
|
|
1.
|
LifePoint Hospitals, Inc. Amended and Restated 1998 Long Term
Incentive Plan, as amended (filed as Exhibit 10.12)
|
|
|
2.
|
LifePoint Hospitals, Inc. Executive Performance Incentive Plan
(filed as Exhibit 10.13)
|
|
|
3.
|
Form of LifePoint Hospitals, Inc. Nonqualified Stock Option
Agreement (filed as Exhibit 10.14)
|
|
|
4.
|
Form of LifePoint Hospitals, Inc. Restricted Stock Award
Agreement (filed as Exhibit 10.15)
|
|
|
5.
|
Form of LifePoint Hospitals, Inc. Deferred Restricted Stock
Award (filed as Exhibit 10.16)
|
|
|
6.
|
LifePoint Hospitals, Inc. Employee Stock Purchase Plan, as
amended (filed as Exhibits 10.17, 10.18, 10.19)
|
|
|
7.
|
LifePoint Hospitals, Inc. Change in Control Severance Plan
(filed as Exhibit 10.20)
|
|
|
8.
|
LifePoint Hospitals, Inc. Management Stock Purchase Plan, as
amended and restated (filed as Exhibit 10.21)
|
|
|
|
|
9.
|
Form of Outside Directors Restricted Stock Agreement
(filed as Exhibit 10.22)
|
|
|
|
|
10.
|
LifePoint Hospitals, Inc. Outside Directors Stock and Incentive
Compensation Plan (filed as Exhibits 10.23, 10.24, 10.25,
10.26)
|
|
|
|
|
11.
|
Employment Agreement of Kenneth C. Donahey, as amended and
restated (filed as Exhibit 10.27)
|
|
|
|
|
12.
|
Separation Agreement of Kenneth C. Donahey (filed as
Exhibit 10.28)
|
|
|
13.
|
Executive Severance and Restrictive Covenant Agreement of
William F. Carpenter III (filed as exhibit 10.41)
|
118
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
F-1
Managements
Report on Internal Control Over Financial Reporting
Management of LifePoint Hospitals, Inc. is responsible for the
preparation, integrity and fair presentation of its published
consolidated financial statements. The financial statements have
been prepared in accordance with U.S. generally accepted
accounting principles and, as such, include amounts based on
judgments and estimates made by management. The Company also
prepared the other information included in the annual report and
is responsible for its accuracy and consistency with the
consolidated financial statements.
Management is also responsible for establishing and maintaining
effective internal control over financial reporting. The
Companys internal control over financial reporting
includes those policies and procedures that pertain to the
Companys ability to record, process, summarize and report
reliable financial data. The Company maintains a system of
internal control over financial reporting, which is designed to
provide reasonable assurance to the Companys management
and board of directors regarding the preparation of reliable
published financial statements and safeguarding of the
Companys assets. The system includes a documented
organizational structure and division of responsibility,
established policies and procedures, including a code of conduct
to foster a strong ethical climate, which are communicated
throughout the Company, and the careful selection, training and
development of our people.
The Board of Directors, acting through its Audit and Compliance
Committee, is responsible for the oversight of the
Companys accounting policies, financial reporting and
internal control. The Audit and Compliance Committee of the
Board of Directors is comprised entirely of outside directors
who are independent of management. The Audit and Compliance
Committee is responsible for the appointment and compensation of
the independent registered public accounting firm. It meets
periodically with management, the independent registered public
accounting firm and the internal auditors to ensure that they
are carrying out their responsibilities. The Audit and
Compliance Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial,
accounting and auditing procedures of the Company in addition to
reviewing the Companys financial reports. Internal
auditors monitor the operation of the internal control system
and report findings and recommendations to management and the
Audit and Compliance Committee. Corrective actions are taken to
address control deficiencies and other opportunities for
improving the system as they are identified. The independent
registered public accounting firm and the internal auditors have
full and unlimited access to the Audit and Compliance Committee,
with or without management, to discuss the adequacy of internal
control over financial reporting, and any other matters which
they believe should be brought to the attention of the Audit and
Compliance Committee.
Management recognizes that there are inherent limitations in the
effectiveness of any system of internal control over financial
reporting, including the possibility of human error and the
circumvention or overriding of internal control. Accordingly,
even effective internal control over financial reporting can
provide only reasonable assurance with respect to financial
statement preparation and may not prevent or detect
misstatements. Further, because of changes in conditions, the
effectiveness of internal control over financial reporting may
vary over time.
The Company assessed its internal control system as of
December 31, 2006 in relation to criteria for effective
internal control over financial reporting described in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its assessment, the Company has
determined that, as of December 31, 2006, its system of
internal control over financial reporting was effective.
The Company acquired four hospitals from HCA Inc. during 2006
(two of which are classified as held for sale/discontinued
operations as of December 31, 2006 and for the period from
the effective date of the acquisition of July 1, 2006
through December 31, 2006). The Company excluded all four
of these hospitals from its assessment of and conclusion on the
effectiveness of its internal control over financial reporting.
During 2006, these hospitals contributed approximately
$185.0 million or 7.3% of the Companys total revenues
(including revenues from discontinued operations of
approximately $94.0 million) and, as of December 31,
2006, accounted for approximately $228.1 million or 11.1%
of its total assets, excluding goodwill (including
$115.2 million of assets held for sale).
The consolidated financial statements have been audited by the
independent registered public accounting firm, Ernst &
Young LLP, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of
stockholders, the Board of Directors and committees of the
Board. Reports of the independent registered public accounting
firm, which includes the independent registered public
accounting firms attestation of managements
assessment of internal controls, are also presented within this
document.
|
|
|
/s/ William F. Carpenter III
|
|
/s/ Michael J. Culotta
|
Chief Executive Officer and
President
|
|
Chief Financial Officer
|
Brentwood, Tennessee
February 6, 2007
F-2
Report of
Independent Registered Public Accounting Firm on Internal
Control
Over Financial Reporting
The Board of Directors and Stockholders of LifePoint Hospitals,
Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that LifePoint Hospitals, Inc. (the
Company) maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Managements Report on
Internal Control over Financial Reporting, managements
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of the four hospitals acquired from HCA Inc. during
2006 (two of which are classified as held for sale and
considered discontinued operations as of December 31, 2006
and for the period from the effective date of the acquisition of
July 1, 2006 through December 31, 2006). These
hospitals constituted $228.1 million of total assets, including
$115.2 million of assets held for sale, and $6.3 million of net
assets, as of December 31, 2006, and $185.0 million of
total revenues, including revenues from discontinued operations
of $94 million, and $4.8 million of net income, including
$1.5 million of income from discontinued operations for the
period then ended. Our audit of internal control over financial
reporting of the Company also did not include an evaluation of
the internal control over financial reporting of the four
hospitals acquired from HCA Inc.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of LifePoint Hospitals, Inc. as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2006, and our report dated February 6,
2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 6, 2007
F-3
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of LifePoint Hospitals,
Inc.
We have audited the accompanying consolidated balance sheets of
LifePoint Hospitals, Inc. (the Company) as of
December 31, 2005 and 2006, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2006. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of LifePoint Hospitals, Inc. at
December 31, 2005 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1, Note 4 and Note 7 to the
consolidated financial statements, the Company adopted
SFAS No. 123(R), Share-Based Payment, and FSP
FIN 45-3,
Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or its Owners,
effective January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 6,
2007 expressed an unqualified opinion thereon.
Nashville, Tennessee
February 6, 2007
F-4
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30.4
|
|
|
$
|
12.2
|
|
Accounts receivable, less
allowances for doubtful accounts of $252.9 and $328.1 at
December 31, 2005 and 2006, respectively
|
|
|
256.8
|
|
|
|
325.9
|
|
Inventories
|
|
|
56.9
|
|
|
|
66.9
|
|
Assets held for sale
|
|
|
22.0
|
|
|
|
115.2
|
|
Prepaid expenses
|
|
|
12.0
|
|
|
|
13.0
|
|
Income taxes receivable
|
|
|
|
|
|
|
11.2
|
|
Deferred tax assets
|
|
|
44.2
|
|
|
|
49.2
|
|
Other current assets
|
|
|
11.0
|
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
433.3
|
|
|
|
614.2
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
64.4
|
|
|
|
80.0
|
|
Buildings and improvements
|
|
|
986.9
|
|
|
|
1,085.2
|
|
Equipment
|
|
|
540.3
|
|
|
|
610.8
|
|
Construction in progress (estimated
cost to complete and equip after December 31, 2006 is
$115.1)
|
|
|
77.8
|
|
|
|
72.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,669.4
|
|
|
|
1,848.1
|
|
Accumulated depreciation
|
|
|
(373.1
|
)
|
|
|
(474.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,296.3
|
|
|
|
1,373.6
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs, net
|
|
|
35.4
|
|
|
|
31.1
|
|
Intangible assets, net
|
|
|
4.2
|
|
|
|
33.7
|
|
Other
|
|
|
5.5
|
|
|
|
4.5
|
|
Goodwill
|
|
|
1,449.9
|
|
|
|
1,581.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,224.6
|
|
|
$
|
3,638.4
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
85.6
|
|
|
$
|
108.6
|
|
Accrued salaries
|
|
|
58.7
|
|
|
|
69.0
|
|
Other current liabilities
|
|
|
71.6
|
|
|
|
124.8
|
|
Income taxes payable
|
|
|
13.7
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230.1
|
|
|
|
303.1
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,515.8
|
|
|
|
1,669.6
|
|
Deferred income taxes
|
|
|
124.0
|
|
|
|
120.5
|
|
Professional and general liability
claims and other liabilities
|
|
|
60.3
|
|
|
|
82.3
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of
consolidated entities
|
|
|
6.6
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value; 10,000,000 shares authorized; no shares issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value;
90,000,000 shares authorized; 57,102,882 and
57,365,018 shares issued and outstanding at
December 31, 2005 and 2006, respectively
|
|
|
0.6
|
|
|
|
0.6
|
|
Capital in excess of par value
|
|
|
1,053.1
|
|
|
|
1,044.4
|
|
Unearned ESOP compensation
|
|
|
(9.7
|
)
|
|
|
(6.4
|
)
|
Unearned compensation on nonvested
stock
|
|
|
(31.0
|
)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(9.6
|
)
|
Retained earnings
|
|
|
274.8
|
|
|
|
421.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,287.8
|
|
|
|
1,450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,224.6
|
|
|
$
|
3,638.4
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
982.8
|
|
|
$
|
1,841.5
|
|
|
$
|
2,439.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
402.3
|
|
|
|
739.6
|
|
|
|
960.6
|
|
Supplies
|
|
|
127.8
|
|
|
|
250.4
|
|
|
|
340.1
|
|
Other operating expenses
|
|
|
163.7
|
|
|
|
308.3
|
|
|
|
421.6
|
|
Provision for doubtful accounts
|
|
|
85.4
|
|
|
|
189.4
|
|
|
|
266.7
|
|
Depreciation and amortization
|
|
|
47.4
|
|
|
|
100.4
|
|
|
|
111.1
|
|
Interest expense, net
|
|
|
12.5
|
|
|
|
60.1
|
|
|
|
103.5
|
|
Debt retirement costs
|
|
|
1.5
|
|
|
|
12.2
|
|
|
|
|
|
Transaction costs
|
|
|
|
|
|
|
43.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
840.6
|
|
|
|
1,703.6
|
|
|
|
2,203.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interests and income taxes
|
|
|
142.2
|
|
|
|
137.9
|
|
|
|
236.1
|
|
Minority interests in earnings of
consolidated entities
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
141.2
|
|
|
|
136.8
|
|
|
|
234.8
|
|
Provision for income taxes
|
|
|
55.3
|
|
|
|
57.8
|
|
|
|
92.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
85.9
|
|
|
|
79.0
|
|
|
|
142.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of
income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
(0.2
|
)
|
|
|
0.4
|
|
|
|
(0.9
|
)
|
Impairment of assets
|
|
|
|
|
|
|
(5.8
|
)
|
|
|
|
|
Gain (loss) on sale of hospitals
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
(0.2
|
)
|
|
|
(6.1
|
)
|
|
|
3.3
|
|
Cumulative effect of change in
accounting principle, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
85.7
|
|
|
$
|
72.9
|
|
|
$
|
146.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.32
|
|
|
$
|
1.57
|
|
|
$
|
2.56
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.12
|
)
|
|
|
0.06
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.31
|
|
|
$
|
1.45
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.18
|
|
|
$
|
1.55
|
|
|
$
|
2.53
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.12
|
)
|
|
|
0.06
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.17
|
|
|
$
|
1.43
|
|
|
$
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and
dilutive securities outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37.0
|
|
|
|
50.1
|
|
|
|
55.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
42.8
|
|
|
|
53.2
|
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
85.7
|
|
|
$
|
72.9
|
|
|
$
|
146.2
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) from discontinued
operations
|
|
|
0.2
|
|
|
|
6.1
|
|
|
|
(3.3
|
)
|
Cumulative effect of change in
accounting principle, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
Stock-based compensation
|
|
|
1.8
|
|
|
|
6.5
|
|
|
|
13.2
|
|
ESOP expense (non-cash portion)
|
|
|
9.1
|
|
|
|
12.0
|
|
|
|
9.3
|
|
Depreciation and amortization
|
|
|
47.4
|
|
|
|
100.4
|
|
|
|
111.1
|
|
Amortization of deferred loan costs
|
|
|
1.5
|
|
|
|
4.0
|
|
|
|
5.3
|
|
Debt retirement costs
|
|
|
1.5
|
|
|
|
12.2
|
|
|
|
|
|
Transaction costs
|
|
|
|
|
|
|
43.2
|
|
|
|
|
|
Minority interests in earnings of
consolidated entities
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.3
|
|
Deferred income taxes (benefit)
|
|
|
4.4
|
|
|
|
(3.2
|
)
|
|
|
45.2
|
|
Reserve for professional and
general liability claims, net
|
|
|
(0.2
|
)
|
|
|
1.8
|
|
|
|
6.2
|
|
Excess tax benefits from employee
stock plans
|
|
|
6.2
|
|
|
|
8.9
|
|
|
|
|
|
Increase (decrease) in cash from
operating assets and liabilities, net of effects from
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(14.1
|
)
|
|
|
(26.1
|
)
|
|
|
(52.1
|
)
|
Inventories and other current assets
|
|
|
(6.5
|
)
|
|
|
9.4
|
|
|
|
(11.3
|
)
|
Accounts payable and accrued
expenses
|
|
|
12.0
|
|
|
|
23.1
|
|
|
|
21.5
|
|
Income taxes payable / receivable
|
|
|
(0.1
|
)
|
|
|
20.3
|
|
|
|
(28.5
|
)
|
Other
|
|
|
(3.0
|
)
|
|
|
1.2
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities-continuing operations
|
|
|
146.9
|
|
|
|
293.8
|
|
|
|
261.3
|
|
Net cash provided by (used in)
operating activities-discontinued operations
|
|
|
2.5
|
|
|
|
7.6
|
|
|
|
(15.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
149.4
|
|
|
|
301.4
|
|
|
|
245.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(82.0
|
)
|
|
|
(169.1
|
)
|
|
|
(199.5
|
)
|
Acquisitions, net of cash acquired
|
|
|
(30.5
|
)
|
|
|
(963.6
|
)
|
|
|
(281.3
|
)
|
Other
|
|
|
(1.1
|
)
|
|
|
0.3
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities-continuing operations
|
|
|
(113.6
|
)
|
|
|
(1,132.4
|
)
|
|
|
(484.4
|
)
|
Net cash provided by investing
activities-discontinued operations
|
|
|
|
|
|
|
31.5
|
|
|
|
69.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(113.6
|
)
|
|
|
(1,100.9
|
)
|
|
|
(415.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
|
30.0
|
|
|
|
1,967.0
|
|
|
|
260.0
|
|
Payments of borrowings
|
|
|
(79.9
|
)
|
|
|
(1,156.9
|
)
|
|
|
(110.0
|
)
|
Proceeds from exercise of stock
options
|
|
|
10.2
|
|
|
|
43.6
|
|
|
|
0.6
|
|
Proceeds from employee stock
purchase plans
|
|
|
|
|
|
|
2.2
|
|
|
|
3.0
|
|
Payment of debt issue costs
|
|
|
|
|
|
|
(40.7
|
)
|
|
|
(1.0
|
)
|
Other
|
|
|
1.9
|
|
|
|
(3.9
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(37.8
|
)
|
|
|
811.3
|
|
|
|
151.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(2.0
|
)
|
|
|
11.8
|
|
|
|
(18.2
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
20.6
|
|
|
|
18.6
|
|
|
|
30.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
18.6
|
|
|
$
|
30.4
|
|
|
$
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
12.1
|
|
|
$
|
55.7
|
|
|
$
|
107.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
$
|
1.1
|
|
|
$
|
3.0
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
44.6
|
|
|
$
|
32.0
|
|
|
$
|
75.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
LIFEPOINT
HOSPITALS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2004, 2005 and 2006
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
Unearned
|
|
|
Compensation
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
ESOP
|
|
|
on Nonvested
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Compensation
|
|
|
Stock
|
|
|
Loss
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
Balance at December 31, 2003
|
|
|
37.9
|
|
|
$
|
0.4
|
|
|
$
|
301.7
|
|
|
$
|
(16.1
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
137.2
|
|
|
$
|
(28.9
|
)
|
|
$
|
394.3
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85.7
|
|
|
|
|
|
|
|
85.7
|
|
Non-cash ESOP compensation earned
|
|
|
|
|
|
|
|
|
|
|
6.2
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.4
|
|
Exercise of stock options,
including tax benefits and other
|
|
|
0.8
|
|
|
|
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.4
|
|
Stock activity in connection with
employee stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
1.8
|
|
Nonvested stock issued to key
employees and outside directors, net of forfeitures
|
|
|
0.2
|
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of nonvested stock
grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
38.9
|
|
|
|
0.4
|
|
|
|
332.6
|
|
|
|
(12.9
|
)
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
222.8
|
|
|
|
(28.9
|
)
|
|
|
509.5
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72.9
|
|
|
|
|
|
|
|
72.9
|
|
Non-cash ESOP compensation earned
|
|
|
|
|
|
|
|
|
|
|
8.8
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.0
|
|
Exercise of stock options,
including tax benefits and other
|
|
|
1.5
|
|
|
|
|
|
|
|
52.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52.6
|
|
Stock activity in connection with
employee stock purchase plans
|
|
|
0.1
|
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
(1.0
|
)
|
Nonvested stock issued to key
employees and outside directors, net of forfeitures
|
|
|
0.8
|
|
|
|
|
|
|
|
37.2
|
|
|
|
|
|
|
|
(37.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of nonvested stock
grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.7
|
|
Common stock issued in connection
with the Province Business Combination
|
|
|
15.0
|
|
|
|
0.2
|
|
|
|
595.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595.9
|
|
Change of control vesting in
connection with the Province Business Combination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
Conversion of Convertible Notes to
common stock
|
|
|
0.8
|
|
|
|
|
|
|
|
35.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.2
|
|
Retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18.5
|
)
|
|
|
28.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
57.1
|
|
|
|
0.6
|
|
|
|
1,053.1
|
|
|
|
(9.7
|
)
|
|
|
(31.0
|
)
|
|
|
|
|
|
|
274.8
|
|
|
|
|
|
|
|
1,287.8
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146.2
|
|
|
|
|
|
|
|
146.2
|
|
Net change in fair value of
interest rate swap, net of tax benefit of $5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(9.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unearned
compensation on nonvested stock balance upon adoption of
SFAS No. 123(R)
|
|
|
|
|
|
|
|
|
|
|
(31.0
|
)
|
|
|
|
|
|
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash ESOP compensation earned
|
|
|
|
|
|
|
|
|
|
|
6.4
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.7
|
|
Exercise of stock options,
including tax benefits and other
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
Stock activity in connection with
employee stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
Stock-based
compensation nonvested stock
|
|
|
|
|
|
|
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.5
|
|
Stock-based
compensation stock options
|
|
|
|
|
|
|
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.8
|
|
Nonvested stock issued to key
employees, net of forfeitures
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
57.4
|
|
|
$
|
0.6
|
|
|
$
|
1,044.4
|
|
|
$
|
(6.4
|
)
|
|
$
|
|
|
|
$
|
(9.6
|
)
|
|
$
|
421.0
|
|
|
$
|
|
|
|
$
|
1,450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
LIFEPOINT
HOSPITALS, INC.
December 31,
2006
|
|
Note 1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization
LifePoint Hospitals, Inc. is a holding company that is one of
the largest owners and operators of general acute care hospitals
in non-urban communities in the United States. Its subsidiaries
own or lease their respective facilities and other assets.
Unless the context otherwise indicates, references in this
report to LifePoint, the Company,
we, our or us are references
to LifePoint Hospitals, Inc.,
and/or its
wholly-owned and majority-owned subsidiaries. Any reference
herein to its hospitals, facilities or employees refers to the
hospitals, facilities or employees of subsidiaries of LifePoint
Hospitals, Inc.
At December 31, 2006, the Company operated 52 hospitals,
including one hospital that was sold effective January 1,
2007, and one hospital that is held for sale. In all but five of
the communities in which its hospitals are located, LifePoint is
the only provider of acute care hospital services. The
Companys hospitals are geographically diversified across
19 states: Alabama, Arizona, California, Colorado, Florida,
Indiana, Kansas, Kentucky, Louisiana, Mississippi, Nevada, New
Mexico, South Carolina, Tennessee, Texas, Utah, Virginia, West
Virginia and Wyoming.
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and all subsidiaries and entities
controlled by the Company through the Companys direct or
indirect ownership of a majority interest and exclusive rights
granted to the Company as the sole general partner of such
entities. All significant intercompany accounts and transactions
within the Company have been eliminated in consolidation.
Use of
Estimates
The preparation of the accompanying consolidated financial
statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the current year presentation. Effective January 1, 2006,
the Company reclassified its LifePoint Employee Stock Ownership
Plan (the ESOP) expense into its salaries and
benefits expense because its ESOP expense consists partially of
cash payments. ESOP expense for all prior periods has been
reclassified to conform to the 2006 presentation. These
reclassifications, along with the reclassification of the
Companys discontinued operations, have no impact on its
total assets, liabilities, stockholders equity, net income
or cash flows. Unless noted otherwise, discussions in these
notes pertain to the Companys continuing operations.
Discontinued
Operations
In accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), the Company
has presented the operating results, financial position and cash
flows of Bartow Memorial Hospital (Bartow), Ashland
Regional Medical Center (Ashland), Medical Center of
Southern Indiana (Southern Indiana), Palo Verde
Hospital (Palo Verde), Smith County Memorial
Hospital (Smith County), St. Josephs Hospital
(St. Josephs) and Saint Francis Hospital
(Saint Francis) as discontinued operations in the
accompanying consolidated financial statements. The results of
operations of these seven hospitals have been reflected as
discontinued operations, net of taxes, in the accompanying
consolidated statements of operations and certain
F-9
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets of these seven hospitals are reflected as assets held for
sale prior to disposal in the accompanying consolidated balance
sheets, as further described in Note 3.
General
and Administrative Costs
The majority of the Companys expenses are cost of
revenue items. Costs that could be classified as
general and administrative by the Company would
include its corporate overhead costs, which were
$30.3 million, $51.5 million and $77.2 million
for the years ended December 31, 2004, 2005 and 2006,
respectively.
Fair
Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, accounts receivable and accounts
payable approximate fair value because of the short-term
maturity of these instruments.
31/4% Convertible
Senior Subordinated Debentures. The
Companys
31/4%
Convertible Senior Subordinated Debentures were the only
significant long-term debt instrument where the carrying amount
differed from the fair value as of December 31, 2005 and
2006. As of December 31, 2005, the carrying amount and the
fair value of the liability were approximately
$225.0 million and $207.0 million, respectively. As of
December 31, 2006, the carrying amount and the fair value
of the liability were approximately $225.0 million and
$202.5 million, respectively. The carrying amounts of the
Companys remaining long-term debt instruments approximate
fair value, as they are subject to variable rates of interest.
The fair value of the Companys
31/4% Convertible
Senior Subordinated Debentures was based on the quoted prices at
December 30, 2005 and December 29, 2006.
Interest Rate Swap. The fair value of the
Companys interest rate swap agreement is the amount at
which it could be settled, based on estimates obtained from the
counterparty. The Company has designated its interest rate swap
as a cash flow hedge instrument which is recorded in the
Companys consolidated balance sheet at its fair value. The
Companys interest rate swap is further described in
Note 6.
Revenue
Recognition and Allowance for Contractual
Discounts
The Company recognizes revenues in the period in which services
are performed. Accounts receivable primarily consist of amounts
due from third-party payors and patients. Amounts the Company
receives for treatment of patients covered by governmental
programs such as Medicare and Medicaid and other third-party
payors such as health maintenance organizations, preferred
provider organizations and other private insurers are generally
less than the Companys established billing rates.
Accordingly, the revenues and accounts receivable reported in
the Companys consolidated financial statements are
recorded at the amount expected to be received.
The Company derives a significant portion of its revenues from
Medicare, Medicaid and other payors that receive discounts from
its established billing rates. The Company must estimate the
total amount of these discounts to prepare its consolidated
financial statements. The Medicare and Medicaid regulations and
various managed care contracts under which these discounts must
be calculated are complex and are subject to interpretation and
adjustment. The Company estimates the allowance for contractual
discounts on a payor-specific basis given its interpretation of
the applicable regulations or contract terms. These
interpretations sometimes result in payments that differ from
the Companys estimates. Additionally, updated regulations
and contract renegotiations occur frequently, necessitating
regular review and assessment of the estimation process by
management. Changes in estimates related to the allowance for
contractual discounts affect revenues reported in the
Companys consolidated statements of operations.
F-10
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Self-pay revenues are derived primarily from patients who do not
have any form of healthcare coverage. The revenues associated
with self-pay patients are generally reported at the
Companys gross charges. The Company evaluates these
patients, after the patients medical condition is
determined to be stable, for their ability to pay based upon
federal and state poverty guidelines, qualifications for
Medicaid or other governmental assistance programs, as well as
the local hospitals policy for charity/indigent care. The
Company provides care without charge to certain patients that
qualify under the local charity/indigent care policy of each of
its hospitals. For the years ended December 31, 2004, 2005
and 2006, the Company estimates services provided under its
charity/indigent care programs approximated $7.7 million,
$24.0 million and $42.4 million, respectively. The
Company does not report a charity/indigent care patients
charges in revenues or in the provision for doubtful accounts as
it is the Companys policy not to pursue collection of
amounts related to these patients.
Settlements under reimbursement agreements with third-party
payors are estimated and recorded in the period the related
services are rendered and are adjusted in future periods as
final settlements are determined. There is at least a reasonable
possibility that recorded estimates will change by a material
amount in the near term. The net adjustments to estimated
third-party payor settlements resulted in increases to revenues
from continuing operations of $7.4 million,
$9.4 million and $13.7 million, increases to net
income by approximately $4.5 million, $5.4 million and
$8.3 million, and increases to diluted earnings per share
by approximately $0.10, $0.10 and $0.15, (exclusive of the
matter discussed in the following paragraph for the year ended
December 31, 2004) for the years ended
December 31, 2004, 2005, and 2006, respectively. The net
estimated third party payor settlements (due from) due to the
Company as of December 31, 2005 and 2006 and included in
other current liabilities and accounts receivable, less
allowances for doubtful accounts, respectively, in the
accompanying consolidated balance sheets were approximately
$(3.0) million and $3.0 million, respectively. The
Companys management believes that adequate provisions have
been made for adjustments that may result from final
determination of amounts earned under these programs.
During 2003, the Company received correspondence from one of its
fiscal intermediaries questioning a particular Medicare
disproportionate share designation at one of its hospitals. The
hospital had maintained this designation since 2001 and the
fiscal intermediary had previously approved this designation.
The Company and the fiscal intermediary worked together and
contacted the Centers for Medicare and Medicaid Services
(CMS) for resolution of the designation. In the
interim, the Company reduced revenues by $3.2 million
during 2003, representing the three-year difference in
reimbursement from this change in designation. The Company
received notification from CMS in 2004 reconfirming the original
designation. Based upon the favorable resolution of this issue,
the Company increased revenues by $3.2 million in 2004.
Laws and regulations governing Medicare and Medicaid programs
are complex and subject to interpretation. The Company believes
that it is in compliance with all applicable laws and
regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing
that would have a material effect on the Companys
financial statements. Compliance with such laws and regulations
can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties
and exclusion from the Medicare and Medicaid programs.
Concentration
of Revenues
During the years ended December 31, 2004, 2005, and 2006,
approximately 47.8%, 45.8% and 44.8%, respectively, of the
Companys revenues from continuing operations related to
patients participating in the Medicare and Medicaid programs.
The Companys management recognizes that revenues and
receivables from government agencies are significant to the
Companys operations, but it does not believe that there
are significant credit risks associated with these government
agencies. The Companys management does not believe that
there are any other significant concentrations of revenues from
any particular payor that would subject the Company to any
significant credit risks in the collection of its accounts
receivable.
F-11
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys revenues are particularly sensitive to
regulatory and economic changes in certain states where the
Company generates significant revenues. The following is an
analysis by state of revenues as a percentage of the
Companys total revenues for those states in which the
Company generates significant revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
|
|
|
|
|
|
|
|
|
|
in State as of
|
|
|
Percentage of Total Revenues
|
|
State
|
|
December 31, 2006
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Kentucky
|
|
|
8
|
|
|
|
35.7
|
%
|
|
|
21.0
|
%
|
|
|
16.6
|
%
|
Virginia
|
|
|
4
|
|
|
|
|
|
|
|
10.3
|
|
|
|
14.0
|
|
Louisiana
|
|
|
6
|
|
|
|
4.6
|
|
|
|
9.3
|
|
|
|
8.7
|
|
New Mexico
|
|
|
2
|
|
|
|
|
|
|
|
7.4
|
|
|
|
8.7
|
|
Tennessee
|
|
|
6
|
|
|
|
18.3
|
|
|
|
10.4
|
|
|
|
8.2
|
|
Alabama
|
|
|
5
|
|
|
|
11.1
|
|
|
|
8.8
|
|
|
|
7.6
|
|
West Virginia
|
|
|
2
|
|
|
|
8.1
|
|
|
|
4.3
|
|
|
|
6.2
|
|
Texas
|
|
|
3
|
|
|
|
|
|
|
|
5.2
|
|
|
|
5.6
|
|
Arizona
|
|
|
2
|
|
|
|
|
|
|
|
3.6
|
|
|
|
5.5
|
|
The following is an analysis by state of Medicaid payments as a
percentage of the Companys total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
|
|
|
|
|
|
|
|
|
|
in State as of
|
|
|
Percentage of Total Revenues
|
|
State
|
|
December 31, 2006
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Kentucky
|
|
|
8
|
|
|
|
4.1
|
%
|
|
|
2.3
|
%
|
|
|
2.1
|
%
|
Virginia
|
|
|
4
|
|
|
|
|
|
|
|
0.4
|
|
|
|
1.1
|
|
Alabama
|
|
|
5
|
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
0.9
|
|
Louisiana
|
|
|
6
|
|
|
|
0.4
|
|
|
|
0.9
|
|
|
|
0.9
|
|
Tennessee
|
|
|
6
|
|
|
|
2.5
|
|
|
|
1.3
|
|
|
|
0.8
|
|
New Mexico
|
|
|
2
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.7
|
|
Arizona
|
|
|
2
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.6
|
|
Texas
|
|
|
3
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
West Virginia
|
|
|
2
|
|
|
|
1.0
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Mississippi
|
|
|
1
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Utah
|
|
|
2
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
0.3
|
|
Wyoming
|
|
|
2
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
0.3
|
|
Florida
|
|
|
1
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Kansas
|
|
|
1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.1
|
|
Nevada
|
|
|
1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Colorado
|
|
|
1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
South Carolina
|
|
|
1
|
|
|
|
|
|
|
|
*
|
|
|
|
0.1
|
|
Indiana
|
|
|
1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
California
|
|
|
1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
F-12
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable
securities with original maturities of three months or less. The
Company places its cash in financial institutions that are
federally insured.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consist of amounts due from
third-party payors and patients. The Companys ability to
collect outstanding receivables is critical to its results of
operations and cash flows. To provide for accounts receivable
that could become uncollectible in the future, the Company
establishes an allowance for doubtful accounts to reduce the
carrying value of such receivables to their estimated net
realizable value. The primary uncertainty of such allowances
lies with uninsured patient receivables and deductibles,
co-payments or other amounts due from individual patients.
The Company has an established process to determine the adequacy
of the allowance for doubtful accounts that relies on a number
of analytical tools and benchmarks to arrive at a reasonable
allowance. No single statistic or measurement determines the
adequacy of the allowance for doubtful accounts. Some of the
analytical tools that the Company utilizes include, but are not
limited to, historical cash collection experience, revenue
trends by payor classification and revenue days in accounts
receivable. Accounts receivable are written off after collection
efforts have been followed in accordance with the Companys
policies.
A summary of activity in the Companys allowance for
doubtful accounts is as follows (in millions):
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Balances
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Additions
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Accounts
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at
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Charged to
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Written Off,
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Balances
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Beginning
|
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Costs and
|
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Net of
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at End
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of Year
|
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Expenses(a)
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Recoveries
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Acquisitions
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of Year
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Allowance for doubtful accounts:
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|
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|
|
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|
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Year ended December 31, 2004
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$
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111.7
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|
$
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94.7
|
|
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$
|
(102.8
|
)
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$
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|
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$
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103.6
|
|
Year ended December 31, 2005
|
|
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103.6
|
|
|
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216.1
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|
|
|
(172.8
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)
|
|
|
106.0
|
|
|
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252.9
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|
Year ended December 31, 2006
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|
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252.9
|
|
|
|
273.7
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(198.5
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)
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328.1
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|
(a) |
|
Additions charged to costs and expenses include amounts related
to the Companys continuing and discontinued operations in
the Companys accompanying consolidated financial
statements. |
Inventories
Inventories are stated at the lower of cost
(first-in,
first-out) or market and are composed of purchased items. These
inventory items are primarily operating supplies used in the
direct or indirect treatment of patients.
Long-Lived
Assets
(a) Property
and Equipment
Property and equipment acquired in connection with business
combinations are recorded at estimated fair value as determined
by third party valuation firms in accordance with the purchase
method of accounting as prescribed in SFAS No. 141
Business Combinations
(SFAS No. 141). Other acquisitions of
property and equipment are recorded at cost. Routine maintenance
and repairs are charged to expense as incurred. Expenditures
that increase capacities or extend useful lives are capitalized.
Fully depreciated assets are retained in property and equipment
accounts until they are disposed of. Allocated interest on funds
used to pay for the construction or purchase of major capital
additions is included in the cost of each capital addition.
F-13
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation is computed by applying the straight-line method
over the estimated useful lives of buildings and improvements
and equipment. Assets under capital leases are amortized using
the straight-line method over the shorter of the estimated
useful life of the assets or life of the lease term, excluding
any lease renewals, unless the lease renewals are reasonably
assured. Useful lives are as follows:
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Years
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Buildings and improvements
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10 40
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Equipment
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3 10
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|
Assets under capital leases:
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Buildings and improvements
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10 40
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Equipment
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3 5
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|
Depreciation expense from continuing operations was
$46.6 million, $99.1 million and $109.4 million
for the years ended December 31, 2004, 2005 and 2006,
respectively. Amortization expense related to assets under
capital leases is included in depreciation expense.
As of December 31, 2006, the majority of the Companys
assets under capital leases are primarily comprised of prepaid
capital leases. The Companys assets under capital leases
are set forth in the following table at December 31 (in
millions):
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2005
|
|
|
2006
|
|
|
Buildings and improvements
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$
|
140.9
|
|
|
$
|
200.8
|
|
Equipment
|
|
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18.4
|
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159.3
|
|
|
|
219.4
|
|
Accumulated amortization
|
|
|
(11.8
|
)
|
|
|
(21.7
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)
|
|
|
|
|
|
|
|
|
|
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$
|
147.5
|
|
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$
|
197.7
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The Company evaluates its long-lived assets for possible
impairment whenever circumstances indicate that the carrying
amount of the asset, or related group of assets, may not be
recoverable from estimated future cash flows, in accordance with
SFAS No. 144. Fair value estimates are derived from
independent appraisals, established market values of comparable
assets, or internal calculations of estimated future net cash
flows. The Companys estimates of future cash flows are
based on assumptions and projections it believes to be
reasonable and supportable. The Companys assumptions take
into account revenue and expense growth rates, patient volumes,
changes in payor mix, and changes in legislation and other payor
payment patterns. These assumptions vary by type of facility.
The Company incurred a $5.8 million impairment charge
during the year ended December 31, 2005, as further
described in Note 3.
(b) Deferred
Loan Costs
The Company records deferred loan costs for expenditures related
to acquiring or issuing new debt instruments. These expenditures
include bank fees and premiums as well as attorneys and
filing fees. The Company amortizes these deferred loan costs
over the life of the respective debt instrument using the
effective interest method.
(c) Goodwill
and Intangible Assets
The Company accounts for its acquisitions in accordance with
SFAS No. 141 using the purchase method of accounting.
Goodwill represents the excess of the cost of an acquired entity
over the net amounts assigned to assets acquired and liabilities
assumed. Under SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill and intangible assets with
indefinite lives are reviewed by the Company at least annually
for
F-14
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impairment. The Company performed its annual impairment tests as
of October 1, 2004, 2005 and 2006, and did not incur an
impairment charge. The Companys business comprises a
single reportable operating reporting unit for impairment test
purposes.
The Companys intangible assets relate to contract-based
physician minimum revenue guarantees, certificates of need and
non-competition agreements. Contract-based physician revenue
guarantees and non-competition agreements are amortized over the
terms of the agreements. The certificates of need were
determined to have indefinite lives by an independent appraiser
and, accordingly, are not amortized. The Companys goodwill
and intangible assets are further described in Note 4.
Physician
Minimum Revenue Guarantees
The Company has committed to provide certain financial
assistance pursuant to recruiting agreements, or physician
minimum revenue guarantees, with various physicians
practicing in the communities it serves. In consideration for a
physician relocating to one of its communities and agreeing to
engage in private practice for the benefit of the respective
community, the Company may advance certain amounts of money to a
physician, to assist in establishing his or her practice.
In November 2005, the Financial Accounting Standards Board (the
FASB) issued FASB Staff Position
No. FIN 45-3,
Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners
(FSP
FIN 45-3),
which served as an amendment to FASB Interpretation No. 45,
Guarantors Accounting Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), by adding minimum
revenue guarantees to the list of example contracts to which
FIN 45 applies. Under FSP
FIN 45-3,
a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. One example cited in FSP
FIN 45-3
involves a guarantee provided by a healthcare entity to a
non-employed physician in order to recruit the physician to move
to the entitys geographical area and establish a private
practice. In the example, the healthcare entity also agreed to
make payments to the relocated physician if the gross revenue or
gross receipts generated by the physicians new practice
during a specified time period did not equal or exceed
predetermined monetary thresholds. Because this example in FSP
FIN 45-3
is similar to certain of the Companys physician recruiting
commitments, the Company believes it falls under the accounting
guidance of FSP
FIN 45-3.
FSP
FIN 45-3
was effective for new physician minimum revenue guarantees
issued or modified on or after January 1, 2006. The Company
adopted FSP
FIN 45-3
effective January 1, 2006. For physician minimum revenue
guarantees issued before January 1, 2006, the Company
expensed the advances as they were paid to the physicians, which
was typically over a period of one year. Under FSP
FIN 45-3,
the Company records a contract-based intangible asset and
related guarantee liability for new physician minimum revenue
guarantees entered into after January 1, 2006 and amortizes
the contract-based intangible asset to other operating expenses
over the period of the physician contract, which is typically
five years. The Companys physician minimum revenue
guarantees are further described in Note 4 and Note 8.
The impact of adopting FSP
FIN 45-3
is summarized in Note 4.
Income
Taxes
The Company accounts for income taxes using the asset and
liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The
Company assesses the likelihood that deferred tax assets will be
recovered from future taxable income. To
F-15
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the extent the Company believes that recovery is not likely, a
valuation allowance is established. To the extent the Company
establishes a valuation allowance or increases this allowance,
the Company must include an expense within the provision for
income taxes in the consolidated statements of operations.
Point
of Life Indemnity, Ltd.
In March 2006, the Company was approved by the Cayman Islands
Monetary Authority to operate a captive insurance company under
the name Point of Life Indemnity, Ltd. This captive insurance
company, which operates as a wholly-owned subsidiary of the
Company, issues malpractice insurance policies to the
Companys voluntary attending physicians at the
Companys hospitals in West Virginia. When earned, fees
charged to voluntary attending physicians are included in
revenues in the accompanying consolidated statements of
operations and approximated $1.3 million during 2006.
Reserves for the current estimate of the related outstanding
claims, including incurred but not reported losses, are included
as a component of the Companys reserves for professional
and general liability claims and other liabilities in the
accompanying consolidated balance sheet as of December 31,
2006 and are determined based upon actuarial calculations as
discussed below.
Professional
and General Liability Claims
Given the nature of the Companys operating environment,
the Company is subject to potential medical malpractice lawsuits
and other claims as part of providing healthcare services. To
mitigate a portion of this risk, the Company maintained
insurance for individual malpractice claims exceeding
$10.0 million, $15.0 million and $20.0 million in
the years ended December 31, 2004, 2005 and 2006,
respectively, with the exception of the Companys
facilities operated in Florida, which retained
$10.0 million limits during each of the years ended
December 31, 2004, 2005 and 2006, and facilities located in
states having state-specific medical malpractice programs.
The Companys reserves for professional and general
liability claims are based upon independent actuarial
calculations, which consider historical claims data, demographic
considerations, severity factors, and other actuarial
assumptions in determining reserve estimates, which are
discounted to present value using a 5.0% discount rate. The
reserve for professional and general liability claims as of the
balance sheet date reflects the current estimate of all
outstanding losses, including incurred but not reported losses.
The loss estimates included in the actuarial calculations may
change in the future based upon updated facts and circumstances.
The reserve for professional and general liability claims was
$55.3 million and $61.8 million at December 31,
2005 and 2006, respectively.
The Companys expense for professional and general
liability claims each year includes: the actuarially determined
estimate of losses for the current year, including claims
incurred but not reported; the change in the estimate of losses
for prior years based upon actual claims development experience
as compared to prior actuarial projections; the insurance
premiums for losses in excess of the Companys self-insured
retention level; the administrative costs of the insurance
program; and interest expense related to the discounted portion
of the liability. The total expense recorded for professional
and general liability claims from continuing operations,
including the transaction costs discussed below, for the years
ended December 31, 2004, 2005 and 2006, was approximately
$5.4 million, $19.3 million and $19.7 million,
respectively.
The Company ceased receiving reserve estimates from one of the
three independent actuaries that had historically been used to
calculate loss reserve estimates during the year ended
December 31, 2004. This change in the Companys
estimation process reduced its reserve levels and related
professional and general liability insurance expense by
$4.0 million, which increased net income by
$2.5 million ($0.06 net income per diluted share), for
the year ended December 31, 2004. The Company obtained
actuarial valuations with respect to reserves for professional
and general liability claims semi-annually from its two
independent actuaries in 2004. The mathematically averaged
results of the updated actuarial valuations from these two
actuaries
F-16
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reduced the Companys reserve estimates for years prior to
2004 by $2.4 million, which reduced its professional and
general liability expense in the year ended December 31,
2004. This change increased the Companys net income and
diluted earnings per share by approximately $1.5 million
and $0.03 per diluted share, respectively, during the year
ended December 31, 2004. The Company started to receive its
actuarial valuations of its reserves for professional and
general liability claims quarterly (it was previously
semi-annually), during the year ended December 31, 2005.
The results of the quarterly valuations from the two independent
actuarial firms reduced the Companys reserve levels of
professional and general liability claims for the years prior to
2005 by approximately $11.0 million. As a result, this
reduced the Companys related professional and general
liability insurance expense by $11.0 million, which
increased the Companys net income by approximately
$6.6 million ($0.13 net income per diluted share), for
the year ended December 31, 2005.
The Company obtained actuarial valuations for the facilities
acquired in connection with the Province Business Combination
effective April 15, 2005, as further discussed in
Note 2, to conform to the Companys methodology with
respect to reserves for professional and general liability
claims. The results of the actuarial valuations increased the
balance sheet reserve for professional and general liability
claims of the facilities acquired in connection with the
Province Business Combination by $6.8 million, or
$4.2 million net of income taxes ($0.08 net income per
diluted share). This adjustment was recorded as transaction
costs in the Companys consolidated statement of operations
for the year ended December 31, 2005.
The results of the quarterly valuations from the two independent
actuarial firms reduced the Companys reserve levels of
professional and general liability claims for the years prior to
2006 by approximately $11.8 million, during the year ended
December 31, 2006. As a result, this reduced the
Companys related professional and general liability
insurance expense by $11.8 million, which increased the
Companys net income by approximately $7.2 million
($0.13 net income per diluted share), for the year ended
December 31, 2006.
Workers
Compensation Reserves
Given the nature of the Companys operating environment, it
is subject to potential workers compensation claims as
part of providing healthcare services. To mitigate a portion of
this risk, the Company maintained insurance for individual
workers compensation claims exceeding approximately
$0.5 million for the year ended December 31, 2004, and
$1.0 million for the years ended December 31, 2005 and
2006. The Companys facilities located in West Virginia and
Wyoming are required to participate in state-specific programs
rather than the Companys established program.
The Companys reserve for workers compensation is
based upon an independent actuarial calculation, which considers
historical claims data, demographic considerations, development
patterns, severity factors and other actuarial assumptions.
Reserve estimates are discounted to present value using a 5.0%
discount rate and are revised on an annual basis. The reserve
for workers compensation claims at the balance sheet date
reflects the current estimate of all outstanding losses,
including incurred but not reported losses, based upon an
actuarial calculation. The loss estimates included in the
actuarial calculation may change based upon updated facts and
circumstances. The Companys reserve for workers
compensation claims was $12.9 million and
$10.7 million at December 31, 2005 and 2006,
respectively.
The Companys expense for workers compensation claims
each year includes: the actuarially determined estimate of
losses for the current year, including claims incurred but not
reported; the change in the estimate of losses for prior years
based upon actual claims development experience as compared to
prior actuarial projections; the insurance premiums for losses
in excess of the Companys self-insured retention level;
the administrative costs of the insurance program; and interest
expense related to the discounted portion of the liability. The
total expense recorded for workers compensation claims
from continuing operations for the
F-17
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years ended December 31, 2004, 2005 and 2006 was
approximately $4.5 million, $10.4 million and
$9.6 million, respectively.
Self-Insured
Medical Benefits
The Company is self-insured for substantially all of the medical
expenses and benefits of its employees. The reserve for medical
benefits primarily reflects the current estimate of incurred but
not reported losses, based upon an actuarial calculation of the
incurred but not reported lag period as of the balance sheet
date. The undiscounted reserve for self-insured medical benefits
was $9.4 million and $13.7 million at
December 31, 2005 and 2006, respectively.
Minority
Interests in Consolidated Entities
The consolidated financial statements include all assets,
liabilities, revenues, and expenses of less-than-100%-owned
entities that the Company controls. Accordingly, the Company
recorded minority interests in the earnings and equity of such
entities. The Company records adjustments to minority interest
for the allocable portion of income or loss to which the
minority interest holders are entitled based upon their portion
of certain of the subsidiaries that they own.
Segment
Reporting
The Company operates in one reportable operating
segment healthcare services. SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131),
establishes standards for the way that public business
enterprises report information about operating segments in
annual consolidated financial statements. Although the Company
had five operating divisions in 2006, under the aggregation
criteria set forth in SFAS No. 131, it only operates
in one reportable operating segment healthcare
services.
Under SFAS No. 131, two or more operating segments may
be aggregated into a single operating segment for financial
reporting purposes if aggregation is consistent with the
objective and basic principles of SFAS No. 131, if the
segments have similar economic characteristics, and if the
segments are similar in each of the following areas:
|
|
|
|
|
the nature of the products and services;
|
|
|
|
the nature of the production processes;
|
|
|
|
the type or class of customer for their products and services;
|
|
|
|
the methods used to distribute their products or provide their
services; and
|
|
|
|
if applicable, the nature of the regulatory environment, for
example, banking, insurance, or public utilities.
|
The Company meets each of the aggregation criteria for the
following reasons:
|
|
|
|
|
the treatment of patients in a hospital setting is the only
material source of revenues for each of the Companys
operating divisions;
|
|
|
|
the healthcare services provided by each of the Companys
operating divisions are generally the same;
|
|
|
|
the healthcare services provided by each of the Companys
operating divisions are generally provided to similar types of
patients, which are patients in a hospital setting;
|
F-18
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
the healthcare services are primarily provided by the direction
of affiliated or employed physicians and by the nurses, lab
technicians and others or contracted at each of the
Companys hospitals; and
|
|
|
|
the healthcare regulatory environment is generally similar for
each of the Companys operating divisions.
|
Because the Company meets each of the criteria set forth above
and each of the Companys operating divisions has similar
economic characteristics, the Companys management
aggregates its results of operations in one reportable operating
segment.
Stock-Based
Compensation
The Company issues stock options and other stock-based awards to
key employees and directors under various stockholder-approved
stock-based compensation plans, as described in Note 7.
Prior to January 1, 2006, the Company accounted for its
stock-based employee compensation plans under the measurement
and recognition provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25), and related
Interpretations, as permitted by SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123). The Company did not record
any stock-based employee compensation expense for options
granted under its stock-based incentive plans prior to
January 1, 2006, as all options granted under those plans
had exercise prices equal to the fair market value of the
Companys common stock on the day prior to the date of the
grant. The Company also did not record any compensation expense
in connection with its Employee Stock Purchase Plan
(ESPP) prior to January 1, 2006, as the
purchase price of the stock was not less than 85% of the lower
of the fair market values of its common stock at the beginning
of each offering period or at the end of each purchase period.
Also, in accordance with APB 25, the Company recorded
compensation expense for its nonvested stock awards. In
accordance with SFAS No. 123 and
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, prior
to January 1, 2006, the Company disclosed its pro forma net
income or loss and pro forma expense for its stock-based
incentive programs.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS No. 123(R),
Share-Based Payment
(SFAS No. 123(R)), using the modified
prospective transition method. Under that transition method,
compensation expense that the Company recognized for the year
ended December 31, 2006, included: (i) compensation
expense for all stock-based payments granted prior to, but not
yet vested as of, January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions
of SFAS No. 123; and (ii) compensation expense
for all stock-based payments granted on or after January 1,
2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). Because the
Company elected to use the modified prospective transition
method, results for prior periods have not been restated. In
March 2005, the U.S. Securities and Exchange Commission
(the SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107), which
provides supplemental implementation guidance for
SFAS No. 123(R). The Company has applied the provision
of SAB 107 in its adoption of SFAS No. 123(R).
The impact of adopting SFAS No. 123(R) and the
assumptions used to calculate the fair value of stock-based
compensation is set forth in Note 7.
Earnings
(Loss) Per Share
Earnings (loss) per share (EPS) is based on the
weighted average number of common shares outstanding and
dilutive stock options, convertible notes, when dilutive, and
restricted shares, adjusted for the shares issued to the ESOP.
As the ESOP shares are committed to be released, the shares
become outstanding for EPS calculations. In addition, the
numerator, net income, is adjusted for interest expense related
to the Companys convertible notes, discussed further in
Note 6, when dilutive. The computation of the
Companys basic and diluted EPS is set forth in Note 9.
F-19
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recently
Issued Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Instruments
(SFAS No. 155), which amends
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133), and
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS No. 140).
SFAS No. 155 allows financial instruments that have
been accounted for as embedded derivatives to be accounted for
as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole
instrument on a fair value basis. SFAS No. 155 also
clarifies and amends certain other provisions of
SFAS No. 133 and SFAS No. 140. This
statement is effective for all financial instruments acquired or
issued in fiscal years beginning after September 15, 2006.
The Company does not expect the adoption of this new standard to
have a material impact on its financial position, results of
operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes.
FIN 48 also prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. In addition, FIN 48 provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The
provisions of FIN 48 are to be applied to all tax positions
upon initial adoption of this standard. Only tax positions that
meet the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized as
an adjustment to the opening balance of retained earnings (or
other appropriate components of equity) for that fiscal year.
The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006. The Company is
evaluating the impact of the adoption of FIN 48 but does
not currently expect the adoption of this new standard to have a
material impact on the Companys financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and expands disclosures required for fair value
measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods
within those fiscal years. The provisions of
SFAS No. 157 are to be applied prospectively as of the
beginning of the fiscal year in which it is initially applied,
except in limited circumstances including certain positions in
financial instruments that trade in active markets as well as
certain financial and hybrid financial instruments initially
measured under SFAS No. 133 using the transaction
price method. In these circumstances, the transition adjustment,
measured as the difference between the carrying amounts and the
fair values of those financial instruments at the date
SFAS No. 157 is initially applied, shall be recognized
as a cumulative-effect adjustment to the opening balance of
retained earnings for the fiscal year in which
SFAS No. 157 is initially applied. The Company does
not anticipate that the adoption of SFAS No. 157 will
have a material impact on its financial position, results of
operations or cash flows.
Acquisitions
2006
Four HCA
Hospitals
Effective July 1, 2006, the Company completed its
acquisition of four hospitals from HCA Inc. (HCA)
for a purchase price of $239.0 million plus specific
working capital and capital expenditures as set forth in the
purchase agreement. The four facilities that the Company
acquired were 200-bed Clinch Valley Medical Center, Richlands,
Virginia; 325-bed St. Josephs, Parkersburg, West Virginia;
155-bed Saint Francis, Charleston, West Virginia; and 369-bed
Raleigh General Hospital, Beckley, West Virginia. The Company
borrowed $250.0 million under its Credit Agreement to pay
for this acquisition, as further discussed in Note 6.
F-20
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the purchase method of accounting, the total purchase
price was allocated to the net tangible and intangible assets
based upon their estimated fair values as of July 1, 2006.
The excess of the purchase price over the estimated fair value
of the net tangible and intangible assets is recorded as
goodwill. The results of operations of these facilities are
included in LifePoints results of operations beginning
July 1, 2006.
The purchase price allocation for the four former HCA hospitals
has been prepared on a preliminary basis and is subject to
changes as new facts and circumstances emerge. The Company has
engaged a third-party valuation firm to complete a valuation of
certain acquired assets and liabilities, primarily real
property, equipment and certain intangible assets. After the
valuation is complete, the Company will adjust the purchase
price allocation to reflect the final values.
The preliminary fair values of assets acquired and liabilities
assumed at the date of acquisition were as follows (in millions):
|
|
|
|
|
Inventories
|
|
$
|
13.0
|
|
Prepaid expenses
|
|
|
1.6
|
|
Other current assets
|
|
|
0.7
|
|
Property and equipment
|
|
|
151.5
|
|
Other long-term assets
|
|
|
0.1
|
|
Goodwill
|
|
|
99.0
|
|
|
|
|
|
|
Total assets acquired, excluding
cash
|
|
|
265.9
|
|
|
|
|
|
|
Accounts payable
|
|
|
0.4
|
|
Accrued salaries
|
|
|
5.6
|
|
Other current liabilities
|
|
|
2.2
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
8.2
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
257.7
|
|
|
|
|
|
|
The Company has classified St. Josephs and Saint
Francis as assets held for sale/discontinued operations,
consistent with the provisions of SFAS No. 144,
effective as of the acquisition date of July 1, 2006, as
further discussed in Note 3.
Havasu
Joint Venture
Effective September 1, 2006, Havasu Surgery Center, Inc.,
(HSC), an Arizona corporation owned by physicians
and other individuals transferred substantially all of its
assets to Havasu Regional Medical Center, LLC, a newly-formed
Delaware limited liability company (the Havasu LLC),
in exchange for all of the Class A units in the Havasu LLC,
plus cash. Also effective September 1, 2006, PHC-Lake
Havasu, Inc., a wholly owned subsidiary of the Company which
operated Havasu Regional Medical Center (HRMC),
contributed to the Havasu LLC substantially all of the assets
used in the operation of HRMC (except for real estate and home
health assets), plus cash, in exchange for all of the
Class B units in the Havasu LLC (the Class B
Units). The Class B Units represent approximately a
96% equity interest in the Havasu LLC. The Company accounted for
the HSC transaction as an acquisition with a purchase price of
approximately $27.0 million, which consisted of
$18.9 million in cash and a non-cash $8.1 million
capital contribution from the minority physician partners.
Goodwill recognized in connection with the acquisition of the
HSC totaled $9.0 million. The purchase price allocation for
HSC has been prepared on a preliminary basis and is subject to
change as new facts and circumstances emerge.
F-21
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquisitions
2005
Business
Combination with Province Healthcare Company
On April 15, 2005 (the Effective Date),
pursuant to the Agreement and Plan of Merger, dated as of
August 15, 2004, by and among Historic LifePoint Hospitals,
Inc. (formerly LifePoint Hospitals, Inc.) (Historic
LifePoint), the Company, Lakers Acquisition Corp.
(LifePoint Merger Sub), Pacers Acquisition Corp.
(Province Merger Sub) and Province Healthcare
Company (Province), as amended by Amendment
No. 1 to Agreement and Plan of Merger, dated as of
January 25, 2005, and Amendment No. 2 to Agreement and
Plan of Merger, dated as of March 15, 2005 (as amended, the
Merger Agreement), the Company acquired all of the
outstanding capital stock of each of Historic LifePoint and
Province through the merger of LifePoint Merger Sub with and
into Historic LifePoint, with Historic LifePoint continuing as
the surviving corporation of such merger (the LifePoint
Merger), and the merger of Province Merger Sub with and
into Province, with Province continuing as the surviving
corporation of such merger, (the Province Merger,
and together with the LifePoint Merger, the Province
Business Combination). As a result of the Province
Business Combination, each of Historic LifePoint and Province is
now a wholly owned subsidiary of the Company.
Pursuant to the Merger Agreement, on the Effective Date, the
shares of Common Stock, par value $0.01 per share, of
Historic LifePoint (Historic LifePoint Common Stock)
outstanding as of the Effective Date were deemed to be converted
into shares of common stock, par value $0.01 per share, of
the Company (Company Common Stock) on a
one-for-one
basis without any action required to be taken by the holders of
such shares of Historic LifePoint Common Stock. Each share of
common stock, par value $0.01 per share, of Province
outstanding as of the Effective Date (other than any shares with
respect to which appraisal rights had been perfected) was
converted into the right to receive $11.375 in cash and 0.2917
of a share of Company Common Stock. The Company issued
15.0 million shares of its common stock, assumed
$511.6 million of Provinces outstanding debt and paid
$586.3 million of cash to the stockholders and option
holders of Province.
As a result of the Province Business Combination, the Company
became the successor issuer to Historic LifePoint under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), and succeeded to Historic LifePoints reporting
obligations thereunder. Pursuant to
Rule 12g-3(c)
promulgated under the Exchange Act, the outstanding shares of
Company Common Stock, together with the associated rights to
purchase preferred stock issued pursuant to the Rights
Agreement, dated as of April 15, 2005 (as it may be amended
and supplemented from time to time, the Rights
Agreement), between the Company and National City Bank, as
Rights Agent, are deemed to be registered under
paragraph (g) of Section 12 of the Exchange Act.
As a result of the Province Business Combination, the Company
retired the Historic LifePoint treasury stock of
$28.9 million as of April 15, 2005.
In connection with the closing of the Province Business
Combination, shares of Historic LifePoint Common Stock, which
had been listed and traded on the Nasdaq National Market under
the ticker symbol LPNT, ceased to be listed and
traded on the Nasdaq National Market. However, shares of Company
Common Stock are now listed and traded on the NASDAQ Global
Select Market under the ticker symbol LPNT.
Management of the Company believes that the Province Business
Combination provides and will continue to provide efficiencies
and enhance LifePoints ability to compete effectively in
complementary markets. As a result of the Province Business
Combination, the Company is more geographically and financially
diversified in its asset base. The results of operations of
Province are included in LifePoints results of operations
beginning April 16, 2005.
Based on $42.79, the
20-day
weighted average Historic LifePoint stock price as of
April 12, 2005, and the number of shares of Province Common
Stock outstanding on such date, LifePoint issued an aggregate of
F-22
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
15.0 million shares of Company Common Stock to Province
stockholders and paid Province stockholders an aggregate of
$586.3 million in cash, pursuant to the terms of the Merger
Agreement.
The total purchase price of the Province Business Combination
was as follows (in millions):
|
|
|
|
|
Fair value of Company Common Stock
issued
|
|
$
|
596.0
|
|
Cash
|
|
|
586.3
|
|
Fair value of assumed Province
debt obligations
|
|
|
511.6
|
|
Severance and Province stock
option costs
|
|
|
73.8
|
|
Direct transaction costs
|
|
|
30.5
|
|
|
|
|
|
|
|
|
$
|
1,798.2
|
|
|
|
|
|
|
Under the purchase method of accounting, the total purchase
price as shown in the table above was allocated to
Provinces net tangible and intangible assets based upon
their estimated fair values as of April 15, 2005. The
excess of the purchase price over the estimated fair value of
the net tangible and intangible assets is recorded as goodwill.
The estimated fair value of Company Common Stock issued was
based on the $39.63 Historic LifePoint average share price as of
February 22, 2005, which is in accordance with Emerging
Issues Task Force Issue Number
99-12,
Determination of the Measurement Date for the Market Price
of Acquirer Securities Issued in a Purchase Business
Combination (EITF
No. 99-12).
As stated in paragraph 7 in
EITF No. 99-12,
the measurement date is the earliest date, from the date the
terms of the acquisition are agreed to and announced to the date
of final application of the formula pursuant to the acquisition
agreement, on which subsequent applications of the formula do
not result in a change in the number of shares or the amount of
other consideration.
The purchase price allocation for the Province Business
Combination was finalized during the second quarter of 2006. The
Company engaged a third-party valuation firm that completed a
valuation of acquired assets and assumed liabilities of the
Province Business Combination. In connection with the
finalization of the purchase price allocation, the Company
reduced the net deferred tax liabilities recorded in the
preliminary purchase price allocation by $49.0 million, in
accordance with SFAS No. 109, Accounting for
Income Taxes, to remove the tax-deductible goodwill
cumulative temporary difference and to account for adjustments
made to the fair value acquired and liabilities assumed in
purchase accounting.
F-23
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values of assets acquired and liabilities assumed at
the date of acquisition were as follows (in millions):
|
|
|
|
|
Cash
|
|
$
|
2.7
|
|
Accounts receivable, net
|
|
|
122.1
|
|
Inventories
|
|
|
21.0
|
|
Prepaid expenses
|
|
|
4.6
|
|
Other current assets
|
|
|
15.7
|
|
Property and equipment
|
|
|
575.6
|
|
Other long-term assets
|
|
|
15.8
|
|
Goodwill
|
|
|
1,177.3
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,934.8
|
|
|
|
|
|
|
Accounts payable
|
|
|
33.0
|
|
Accrued salaries
|
|
|
28.1
|
|
Other current liabilities
|
|
|
43.4
|
|
Long-term debt
|
|
|
511.6
|
|
Professional and general liability
claims and other liabilities
|
|
|
30.1
|
|
Minority interests in equity of
consolidated entities
|
|
|
2.0
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
648.2
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,286.6
|
|
|
|
|
|
|
A significant amount of the goodwill will not be deductible for
income tax purposes due to the structure of the Province
Business Combination. In connection with the Province Business
Combination, the Company recognized a pretax charge for
transaction costs of $43.2 million in the year ended
December 31, 2005, which comprised of the following (in
millions):
|
|
|
|
|
Adjustment to Province acquired
accounts receivable
|
|
$
|
26.4
|
|
Adjustment to Province assumed
liabilities, primarily related to professional and general
liability claims
|
|
|
7.3
|
|
Retention bonuses paid to former
Province employees
|
|
|
4.2
|
|
Compensation expense, primarily
restricted stock vesting from change in control
|
|
|
5.3
|
|
|
|
|
|
|
|
|
$
|
43.2
|
|
|
|
|
|
|
The adjustment to acquired accounts receivable reflects the
impact of conforming Provinces accounting treatment
regarding the estimation of the net realizable value of accounts
receivable to the Companys accounting policy. The
adjustment to assumed liabilities primarily represents the
results of the Companys third-party actuarial valuations
of professional and general liability claims assumed in the
Province Business Combination. In addition, the Company expensed
as transaction costs the bonus amounts paid to retain employees
from Province that are employed by the Company and compensation
expense primarily related to the
change-of-control
vesting of the Companys non-vested stock grants at
April 15, 2005.
Subsequent to the Province Business Combination, the Company
committed to a disposal plan related to three of the hospitals
acquired from Province as further discussed in Note 3.
F-24
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
2005 Acquisitions
On June 1, 2005, the Company consummated its agreement with
the Wythe County Community Hospital (WCCH) to lease
the 104-bed facility located in Wytheville, Virginia for a term
of 30 years. Included in the transaction were certain
working capital and major moveable equipment purchased as part
of the lease agreement. The lease was finalized with a payment
of $49.8 million, including working capital, to WCCH.
Goodwill totaled $20.4 million, all of which is expected to
be deductible for tax purposes.
Effective July 1, 2005, the Company acquired 350-bed
Danville Regional Medical Center (DRMC) and related
assets in Danville, Virginia for $210.0 million. Goodwill
totaled $137.6 million, all of which is expected to be
deductible for tax purposes.
The acquisitions of WCCH and DRMC (the 2005
Acquisitions) were accounted for using the purchase method
of accounting. The results of operations of the 2005
Acquisitions are included in the Companys results of
operations beginning on their acquisition dates. The purchase
prices of the 2005 Acquisitions were allocated to the assets
acquired and liabilities assumed based upon their respective
fair values as determined by a third-party valuation firm.
Impact of
Final Valuations of Fixed Assets
In connection with the finalization of the purchase price
allocations of both DRMC and Province, the Company recognized a
reduction in depreciation expense of approximately
$13.5 million ($8.1 million, net of income taxes), or
$0.14 per diluted share, during the year ended
December 31, 2006. This decreased depreciation expense was
the result of lower fair values of certain property and
equipment established by the third-party valuation firm than
originally anticipated in the preliminary purchase price
allocations.
Acquisition
2004
Effective July 1, 2004, the Company acquired the 106-bed
River Parishes Hospital in LaPlace, Louisiana from Universal
Health Services, Inc. for approximately $24.8 million in
cash, including certain working capital and direct acquisition
costs. The Company borrowed from its then existing revolving
credit facility and paid the purchase price for this acquisition
on June 30, 2004. The hospital is located approximately
30 miles west of New Orleans, Louisiana and is the only
hospital located in St. John the Baptist Parish. Goodwill
totaled approximately $5.7 million, all of which is
expected to be deductible for tax purposes.
Unaudited
Pro Forma Results of Operations
The following unaudited pro forma results of operations of the
Company assume that the Province Business Combination occurred
on January 1, 2004. The pro forma amounts include certain
adjustments, including interest expense and taxes. Additionally,
the pro forma amounts reflect the final value allocations of
certain property and equipment by the third-party valuation firm
for both DRMC and Province, which as previously discussed were
lower than originally anticipated in the preliminary purchase
price allocations.
As a result of the Province Business Combination, the Company
recognized a non-recurring pre-tax charge for transaction costs
of $43.2 million. The Company also recognized non-recurring
pre-tax charges for debt retirement costs of $1.5 million
and $12.2 million for the years ended December 31,
2004 and 2005, respectively. These non-recurring charges are
reflected in the following unaudited pro forma results
operations for the years ended December 31, 2004 and 2005.
In addition, the pro forma amounts include adjustments that give
effect to the pro forma operations of DRMC, WCCH, Memorial
Medical Center of Las Cruces (located in Las Cruces, New Mexico)
and River Parishes Hospital as if they were all acquired on
January 1, 2004. The pro forma results of operations for
the Companys 2006 acquisitions have not been included
because the continuing operations of these acquisitions are not
considered material to the Company.
F-25
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These unaudited pro forma results are not necessarily indicative
of the actual results of operations that would have been
achieved, nor are they necessarily indicative of future results
of operations (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Revenues
|
|
$
|
2,091.5
|
|
|
$
|
2,227.9
|
|
Income from continuing operations
|
|
|
138.9
|
|
|
|
104.7
|
|
Net income
|
|
|
135.5
|
|
|
|
97.6
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.66
|
|
|
$
|
1.92
|
|
Net income
|
|
$
|
2.60
|
|
|
$
|
1.79
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.53
|
|
|
$
|
1.88
|
|
Net income
|
|
$
|
2.48
|
|
|
$
|
1.75
|
|
|
|
Note 3.
|
Discontinued
Operations
|
Two
Former HCA Hospitals
In connection with the acquisition of four hospitals from HCA
effective July 1, 2006, the Companys management
committed to a plan to divest two of the acquired hospitals, St.
Josephs and Saint Francis. In September 2006, the Company
announced the signing of two separate definitive agreements for
the sale of these two hospitals, subject to customary closing
conditions. The Company sold Saint Francis effective
January 1, 2007, as further discussed in Note 13, and
it anticipates selling St. Josephs during mid-2007.
Smith
County Memorial Hospital
In February 2006, the Company announced that it entered into a
definitive agreement to sell Smith County, which is located
in Carthage, Tennessee, to Sumner Regional Health System. The
Company completed the sale of Smith County effective
March 31, 2006 and recognized a gain on the sale of
approximately $3.8 million, net of income taxes
($0.07 per diluted share) during the year ended
December 31, 2006.
Three
Former Province Hospitals
During the second quarter of 2005, subsequent to the Province
Business Combination, the Companys management committed to
a plan to divest three hospitals acquired in the Province
Business Combination. These three hospitals were Southern
Indiana, Ashland, and Palo Verde. The Company completed the sale
of both Southern Indiana and Ashland to Saint Catherine
Healthcare effective May 1, 2006. The Company divested Palo
Verde on December 31, 2005 by terminating the lease of that
hospital and returning it to the Hospital District of Palo
Verde. In connection with the disposal of Palo Verde Hospital,
the Company recognized an impairment charge of
$5.8 million, net of income taxes, or $0.10 loss per
diluted share, in discontinued operations in the year ended
December 31, 2005. The impairment charge related to the
assets of
F-26
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Palo Verde Hospital disposed by the Company for which it
received $1.0 million of consideration. The following table
sets forth the components of the impairment charge (in millions):
|
|
|
|
|
Current assets
|
|
$
|
4.2
|
|
Property and equipment
|
|
|
1.7
|
|
Goodwill
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
8.9
|
|
Income tax benefit
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
$
|
5.8
|
|
|
|
|
|
|
Bartow
Memorial Hospital
During the third quarter of 2004, the Company committed to a
plan to divest Bartow, which is located in Bartow, Florida. On
March 31, 2005, the Company sold Bartow and recognized a
net loss on the sale of approximately $0.8 million, most of
which related to tax expense attributable to non-deductible
goodwill.
Impact
of Discontinued Operations
The results of operations, net of income taxes, of Bartow,
Southern Indiana, Ashland, Palo Verde, Smith County, St.
Josephs and Saint Francis are reflected in the
accompanying consolidated financial statements as discontinued
operations in accordance with SFAS No. 144. All prior
periods have been reclassified to conform to this presentation
for all periods presented. These required reclassifications to
the prior period consolidated financial statements did not
impact the Companys total assets, liabilities,
stockholders equity, net income or cash flows.
The Company allocated $0.1 million, $0.6 million and
$4.4 million for the years ended December 31, 2004,
2005 and 2006, respectively, of interest expense to discontinued
operations. For those assets being disposed that were part of an
acquisition group for which specifically identifiable debt was
incurred, the allocation of interest expense to discontinued
operations is based on the ratio of the net assets being
disposed to the sum of total net assets of the acquisition group
plus the debt incurred. For those asset acquisitions for which
specifically identifiable debt was not incurred, the allocation
of interest expense to discontinued operations is based on the
ratio of net assets to be sold to the sum of total net assets of
the Company plus the Companys total outstanding debt.
The revenues and income (loss) before income taxes of
discontinued operations for the years ended December 31,
2004, 2005 and 2006 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
46.8
|
|
|
$
|
61.7
|
|
|
$
|
108.4
|
|
Income (loss) before income taxes
|
|
|
(0.1
|
)
|
|
|
0.7
|
|
|
|
(0.5
|
)
|
F-27
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the components of and the changes
in the Companys assets held for sale for the year ended
December 31, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and
|
|
|
|
|
|
|
Current
|
|
|
Property and
|
|
|
Intangible Assets,
|
|
|
|
|
|
|
Assets
|
|
|
Equipment
|
|
|
Net
|
|
|
Total
|
|
|
Balance at December 31, 2005
|
|
$
|
1.6
|
|
|
$
|
14.7
|
|
|
$
|
5.7
|
|
|
$
|
22.0
|
|
Sale of Smith County
|
|
|
(0.3
|
)
|
|
|
(6.0
|
)
|
|
|
(5.7
|
)
|
|
|
(12.0
|
)
|
Sale of Southern Indiana and
Ashland
|
|
|
(1.3
|
)
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
(10.0
|
)
|
Saint Francis and St. Josephs
|
|
|
8.3
|
|
|
|
106.5
|
|
|
|
0.4
|
|
|
|
115.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
8.3
|
|
|
$
|
106.5
|
|
|
$
|
0.4
|
|
|
$
|
115.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4.
|
Goodwill
and Intangible Assets
|
The following table presents the changes in the carrying amount
of goodwill for the years ended December 31, 2005 and 2006
(in millions):
|
|
|
|
|
Balance at December 31, 2004
|
|
$
|
138.7
|
|
Purchase price allocation for
Province Business Combination
|
|
|
1,176.4
|
|
Purchase price allocation for 2005
Acquisitions
|
|
|
137.8
|
|
Impairment recognized in
discontinued operations
|
|
|
(3.0
|
)
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,449.9
|
|
Goodwill acquired as part of
acquisitions during 2006
|
|
|
108.7
|
|
Consideration adjustments and
adjustments to purchase price allocations for 2005 Acquisitions
and Province Business Combination
|
|
|
22.7
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
1,581.3
|
|
|
|
|
|
|
F-28
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the components of the
Companys intangible assets at December 31 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net
|
|
Class of Intangible Asset
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract-based physician minimum
revenue guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
21.0
|
|
|
$
|
(1.7
|
)
|
|
$
|
19.3
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-competition agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
16.6
|
|
|
$
|
(4.8
|
)
|
|
$
|
11.8
|
|
2005
|
|
|
5.9
|
|
|
|
(3.1
|
)
|
|
|
2.8
|
|
Total amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
37.6
|
|
|
$
|
(6.5
|
)
|
|
$
|
31.1
|
|
2005
|
|
|
5.9
|
|
|
|
(3.1
|
)
|
|
|
2.8
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of need
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
2.6
|
|
|
$
|
|
|
|
$
|
2.6
|
|
2005
|
|
|
1.4
|
|
|
|
|
|
|
|
1.4
|
|
Total intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
40.2
|
|
|
$
|
(6.5
|
)
|
|
$
|
33.7
|
|
2005
|
|
|
7.3
|
|
|
|
(3.1
|
)
|
|
|
4.2
|
|
Contract-Based
Physician Minimum Revenue Guarantees
As discussed in Note 1, under FSP
FIN 45-3,
the Company records a contract-based intangible asset and a
related guarantee liability for each new physician minimum
revenue guarantee contract entered into after January 1,
2006. The contract-based intangible asset is amortized into
physician recruiting expense over the period of the physician
contract, which is typically five years. As of December 31,
2006, the Companys liability balance for contract-based
physician minimum revenue guarantees was $11.0 million,
which is included in other current liabilities in the
accompanying consolidated balance sheet.
The following table summarizes the impact of adopting FSP
FIN 45-3
during the year ended December 31, 2006 (in millions,
except per share amounts):
|
|
|
|
|
Increase of income from continuing
operations before income taxes (included in other operating
expenses)
|
|
$
|
8.7
|
|
Provision for income taxes
|
|
|
(3.4
|
)
|
|
|
|
|
|
Increase of income from continuing
operations
|
|
$
|
5.3
|
|
|
|
|
|
|
Increase of income per share from
continuing operations:
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
|
|
|
|
|
Non-Competition
Agreements
As discussed in Note 2, in connection with the acquisition
of HSC on September 1, 2006, the Company entered into
non-competition agreements with the physician-owners of this
facility. These non-competition
F-29
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreements were valued at approximately $10.8 million in
the aggregate by an independent appraiser and are amortized on a
straight-line basis over the term of the agreements.
Certificates
of Need
The construction of new facilities, the acquisition or expansion
of existing facilities and the addition of new services and
certain equipment at the Companys facilities may be
subject to state laws that require prior approval by state
regulatory agencies. These certificate of need laws generally
require that a state agency determine the public need and give
approval prior to the construction or acquisition of facilities
or the addition of new services. The Company operates hospitals
in certain states that have adopted certificate of need laws. If
the Company fails to obtain necessary state approval, the
Company will not be able to expand its facilities, complete
acquisitions or add new services at its facilities in these
states. An independent appraiser values each certificate of need
when the Company acquires a hospital. In addition, these
intangible assets were determined to have indefinite lives and,
accordingly, are not amortized.
Amortization
Expense
Amortization expense for the Companys intangible assets,
including physician minimum revenue guarantee expense under FSP
FIN 45-3,
were as follows during the years ended December 31, 2004,
2005 and 2006 (in millions):
|
|
|
|
|
2004
|
|
$
|
0.8
|
|
2005
|
|
|
1.3
|
|
2006
|
|
|
3.4
|
|
Total estimated amortization expense for the Companys
intangible assets during the next five years and thereafter are
as follows (in millions):
|
|
|
|
|
2007
|
|
$
|
6.1
|
|
2008
|
|
|
5.3
|
|
2009
|
|
|
5.2
|
|
2010
|
|
|
4.6
|
|
2011
|
|
|
2.9
|
|
Thereafter
|
|
|
7.0
|
|
|
|
|
|
|
|
|
$
|
31.1
|
|
|
|
|
|
|
F-30
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes for the years ended
December 31, 2004, 2005 and 2006 consists of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
48.0
|
|
|
$
|
52.7
|
|
|
$
|
50.0
|
|
State
|
|
|
2.3
|
|
|
|
6.9
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50.3
|
|
|
|
59.6
|
|
|
|
55.2
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3.7
|
|
|
|
(1.3
|
)
|
|
|
32.5
|
|
State
|
|
|
2.0
|
|
|
|
(2.8
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.7
|
|
|
|
(4.1
|
)
|
|
|
31.4
|
|
Increase (decrease) in valuation
allowance
|
|
|
(0.7
|
)
|
|
|
2.3
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55.3
|
|
|
$
|
57.8
|
|
|
$
|
92.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in the valuation allowance in 2005 and 2006 were
primarily the result of state net operating loss carryforwards
that management believes may not be fully utilized because of
the uncertainty regarding the Companys ability to generate
taxable income in certain states. The decrease in the valuation
allowance in 2004 was primarily the result of utilization of
previously reserved state net operating loss carryforwards.
Various subsidiaries have state net operating loss carryforwards
in the aggregate of approximately $477.3 million (primarily
in Alabama, Florida, Indiana, Louisiana, Pennsylvania, South
Carolina, Tennessee and West Virginia) with expiration dates
through the year 2026.
A reconciliation of the statutory federal income tax rate to the
Companys effective income tax rate on income from
continuing operations before income taxes for the years ended
December 31, 2004, 2005 and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal
income tax benefit
|
|
|
2.7
|
|
|
|
3.0
|
|
|
|
1.7
|
|
ESOP expense
|
|
|
1.5
|
|
|
|
2.2
|
|
|
|
1.0
|
|
Valuation allowance
|
|
|
(0.3
|
)
|
|
|
1.1
|
|
|
|
1.7
|
|
Other items, net
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
39.2
|
%
|
|
|
42.3
|
%
|
|
|
39.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes result from temporary differences in the
recognition of assets, liabilities, revenues and expenses for
financial accounting and tax purposes. Sources of these
differences and the related tax effects are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(151.0
|
)
|
|
$
|
(152.7
|
)
|
Prepaid expenses
|
|
|
(6.2
|
)
|
|
|
(6.9
|
)
|
Other
|
|
|
(13.9
|
)
|
|
|
(13.2
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax
liabilities
|
|
|
(171.1
|
)
|
|
|
(172.8
|
)
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
38.2
|
|
|
|
43.7
|
|
Employee compensation
|
|
|
16.9
|
|
|
|
23.7
|
|
Professional liability claims
|
|
|
21.5
|
|
|
|
24.4
|
|
Other
|
|
|
20.4
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
97.0
|
|
|
|
133.5
|
|
Valuation allowance
|
|
|
(5.7
|
)
|
|
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
91.3
|
|
|
|
101.5
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
|
$
|
(79.8
|
)
|
|
$
|
(71.3
|
)
|
|
|
|
|
|
|
|
|
|
The balance sheet classification of deferred income tax assets
(liabilities) at December 31 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Current
|
|
$
|
44.2
|
|
|
$
|
49.2
|
|
Long-term
|
|
|
(124.0
|
)
|
|
|
(120.5
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(79.8
|
)
|
|
$
|
(71.3
|
)
|
|
|
|
|
|
|
|
|
|
The Companys income taxes receivable (payable) balance was
$(13.7) million and $11.2 million at December 31, 2005
and 2006, respectively. The tax benefits associated with the
Companys employee stock-based compensation plans were
$6.2 million, $8.9 million and $0.1 million for
the years ended December 31, 2004, 2005 and 2006,
respectively. These tax benefits reduced current taxes payable,
increased capital in excess of par value, and increased deferred
tax assets attributable to state net operating loss
carryforwards by $8.9 million and $0.1 million in 2005
and 2006, respectively.
During 2003, the Internal Revenue Service (IRS)
notified the Company regarding its findings related to the
examination of the Companys tax returns for the years
ended December 31, 1999, 2000 and 2001. The Company reached
a partial settlement with the IRS on all issues except for the
Companys method of determining its bad debt deduction, for
which the IRS has proposed an additional assessment of
$7.4 million. All of the adjustments proposed by the IRS
are temporary differences. The IRS has delayed final settlement
of this assessment until resolution of certain pending court
proceedings related to the use of this bad debt deduction method
by HCA. On October 4, 2004, HCA was denied certiorari on
its appeal of this matter to the United States Supreme Court.
The Company intends to reach resolution of its IRS examination
after the final settlement of HCAs tax years preceding the
spin-off of the Company from HCA. Because of the complexity of
the computations involved, neither the Company nor HCA is able
to estimate when the final settlement of these tax years will
occur. The Company applied its 2002 federal income tax refund in
the amount of
F-32
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$6.6 million as a deposit against any potential settlement
to forestall the tolling of interest on such settlement beyond
the March 15, 2003 deposit date.
On April 7, 2005, Province received notification from the
IRS of its intention to examine Provinces federal income
tax return for the year ended December 31, 2003. The
Companys management believes that adequate provisions have
been reflected in the consolidated financial statements to
satisfy any issues that may arise in the audit of the 2003 tax
return based upon current facts and circumstances.
On April 15, 2005, the Company received notification from
the IRS of its intention to examine the Companys federal
income tax return for the year ended December 31, 2003. In
addition, during the second quarter of 2006, the IRS notified
the Company of its intention to examine select items within the
Companys federal income tax returns for the year ended
December 31, 2002, thereby allowing the IRS to incorporate
any carryforward adjustments from the examination of the 1999
through 2001 federal income tax returns. The Companys
management believes that adequate provisions have been reflected
in the consolidated financial statements to satisfy final
resolution of the remaining disputed issue on the 1999 through
2001 audits as well as any issues that may arise in the audit of
the 2003 tax return based upon current facts and circumstances.
HCA and the Company entered into a tax sharing and
indemnification agreement as part of the 1999 spin-off
transaction. Under the agreement, HCA maintains full control and
absolute discretion with regard to any combined or consolidated
tax filings for periods prior to the 1999 spin-off transaction.
In addition, the agreement provides that HCA will generally be
responsible for all taxes that are allocable to periods prior to
the 1999 spin-off transaction and HCA and the Company will each
be responsible for its own tax liabilities for periods after the
1999 spin-off transaction.
The tax sharing and indemnification agreement does not have an
impact on the realization of deferred tax assets or the payment
of deferred tax liabilities of the Company, except to the extent
that the temporary differences give rise to such deferred tax
assets and liabilities after the 1999 spin-off transaction and
are adjusted as a result of final tax settlements after the 1999
spin-off transaction. In the event of such adjustments, the tax
sharing and indemnification agreement provides for certain
payments between HCA and the Company, as appropriate.
F-33
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of the following at December 31,
2005 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Senior Borrowings:
|
|
|
|
|
|
|
|
|
Credit Agreement:
|
|
|
|
|
|
|
|
|
Term B Loans
|
|
$
|
1,281.9
|
|
|
$
|
1,321.9
|
|
Revolving Credit Loans
|
|
|
|
|
|
|
110.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,281.9
|
|
|
|
1,431.9
|
|
|
|
|
|
|
|
|
|
|
Subordinated Borrowings:
|
|
|
|
|
|
|
|
|
Province
71/2% Senior
Subordinated Notes
|
|
|
6.1
|
|
|
|
6.1
|
|
Province
41/4% Convertible
Subordinated Notes, due 2008
|
|
|
0.1
|
|
|
|
0.1
|
|
31/4% Convertible
Senior Subordinated Debentures, due 2025
|
|
|
225.0
|
|
|
|
225.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231.2
|
|
|
|
231.2
|
|
Capital leases/other
|
|
|
3.2
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,516.3
|
|
|
|
1,670.3
|
|
Less: current portion
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,515.8
|
|
|
$
|
1,669.6
|
|
|
|
|
|
|
|
|
|
|
Maturities of the Companys long-term debt at
December 31, 2006 are as follows for the years indicated
(in millions):
|
|
|
|
|
2007
|
|
$
|
0.7
|
|
2008
|
|
|
0.8
|
|
2009
|
|
|
0.6
|
|
2010
|
|
|
0.7
|
|
2011
|
|
|
992.2
|
|
Thereafter
|
|
|
675.3
|
|
|
|
|
|
|
|
|
$
|
1,670.3
|
|
|
|
|
|
|
Senior
Secured Credit Facilities
Terms
On April 15, 2005, in connection with the Province Business
Combination, the Company entered into a Credit Agreement with
Citicorp North America, Inc. (CITI), as
administrative agent and the lenders party thereto, Bank of
America, N.A., CIBC World Markets Corp., SunTrust Bank and UBS
Securities LLC, as
co-syndication
agents and Citigroup Global Markets Inc., as sole lead arranger
and sole book runner, as amended and restated, supplemented or
otherwise modified from time to time, (the Credit
Agreement). The Credit Agreement provides for secured term
B loans up to $1,250.0 million maturing on April 15,
2012 (the Term B Loans) and revolving loans of
up to $300.0 million maturing on April 15, 2012 (the
Revolving Loans). In addition, the Credit Agreement,
as amended, provides that the Company may request additional
tranches of Term B Loans up to $400.0 million and
additional tranches of Revolving Loans up to
$100.0 million. The Credit Agreement is guaranteed on a
senior secured basis by the Companys subsidiaries with
certain limited exceptions. The Term B Loans are subject to
mandatory prepayments in the event of transactions such as net
proceeds from asset sales up to $600.0 million, certain
equity issuances, certain debt issuances and insurance proceeds.
In addition, the Term B Loans are subject to additional
mandatory
F-34
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prepayments with a certain percentage of excess cash flow as
specifically defined in the Credit Agreement. As amended, the
Credit Agreement provides for letters of credit up to
$75.0 million.
Borrowings
and Payments
On April 15, 2005, in connection with the Province Business
Combination, the Company made two Term B Loan borrowings
under the Credit Agreement that totaled $1,250.0 million.
The outstanding principal balances of the Term B Loans were
scheduled to be repaid in consecutive quarterly installments of
approximately $3.1 million each over six years beginning on
June 30, 2005. However, the Company made early installment
payments under the Term B Loans totaling $118.1 million and
$10.0 million during the years ended December 31, 2005
and 2006, respectively. These installment payments extinguished
the Companys required repayments through March 31,
2011. The remaining balances of the Term B Loans are scheduled
to be repaid in 2011 and 2012 in four installments totaling
$1,321.9 million.
On June 30, 2005, in connection with the DRMC acquisition,
the Company borrowed $150.0 million in the form of
Revolving Loans. On August 23, 2005, the Company executed
an incremental facility amendment borrowing $150.0 million
in the form of incremental Term B Loans thereunder, the proceeds
of which were used to pay the $150.0 million borrowed under
the Revolving Loans. During March 2006, the Company borrowed
$10.0 million under the Credit Agreement for general
corporate purposes. The outstanding principal and interest were
repaid before the end of March 2006. On June 30, 2006, the
Company borrowed $50.0 million in the form of Term B Loans
and $200.0 million in Revolving Loans to finance the
acquisition of the four hospitals from HCA. During the fourth
quarter of 2006, the Company repaid $90.0 million on its
outstanding Revolving Loans, which included a repayment of
$40.4 million from the proceeds of the sale of Saint
Francis, as discussed in Note 13.
Letters
of Credit and Availability
As of December 31, 2006, the Company had $30.4 million
in letters of credit outstanding under the Revolving Loans which
was related to the self-insured retention level of the
Companys general and professional liability insurance and
workers compensation programs as security for payment of
claims. Under the terms of the Credit Agreement, Revolving Loans
available for borrowing were $259.6 million as of
December 31, 2006 including the $100.0 million
available under the additional tranche. Under the terms of the
Credit Agreement, Term B Loans available for borrowing were
$200.0 million as of December 31, 2006, all of which
is available under the additional tranche.
Interest
Rates
Interest on the outstanding balances of the Term B Loans is
payable, at the Companys option, at CITIs base rate
(the alternate base rate or ABR) plus a margin of
0.625%
and/or at an
adjusted London Interbank Offered Rate (Adjusted LIBO
rate) plus a margin of 1.625%. Interest on the Revolving
Loans is payable at ABR plus a margin for ABR Revolving Loans or
Adjusted LIBO rate plus a margin for eurodollar Revolving Loans.
The margin on ABR Revolving Loans ranges from 0.25% to 1.25%
based on the total leverage ratio being less than 2.00:1.00 to
greater than 4.50:1.00. The margin on the eurodollar Revolving
Loans ranges from 1.25% to 2.25% based on the total leverage
ratio being less than 2.00:1.00 to greater than 4.50:1.00.
As of December 31, 2006, the applicable annual interest
rates under the Term B Loans and Revolving Loans were 6.98% and
7.10%, respectively, which were based on the one-month Adjusted
LIBO rate plus the applicable margin. The one-month Adjusted
LIBO rate was 5.35% at December 31, 2006. The
weighted-average applicable annual interest rate for the year
ended December 31, 2006 under the Term B Loans was 6.74%.
F-35
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Covenants
The Credit Agreement requires the Company to satisfy certain
financial covenants, including a minimum interest coverage ratio
and a maximum total leverage ratio, as set forth in the Credit
Agreement. The minimum interest coverage ratio can be no less
than 3.50:1.00 for all periods ending after December 31,
2005. These calculations are based on the trailing four
quarters. The maximum total leverage ratios cannot exceed
4.75:1.00 for the periods ending on September 30, 2005
through December 31, 2006; 4.50:1.00 for the periods ending
on March 31, 2007 through December 31, 2007; 4.25:1.00
for the periods ending on March 31, 2008 through
December 31, 2008; 4.00:1.00 for the periods ending on
March 31, 2009 through December 31, 2009; and
3.75:1.00 for the periods ending thereafter. In addition, on an
annualized basis, the Company is also limited with respect to
amounts it may spend on capital expenditures. Such amounts
cannot exceed 12% of revenues for the year ending
December 31, 2006, and cannot exceed 10% thereafter.
The financial covenant requirements and ratios are as follows:
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Level at
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Requirement
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December 31,2006
|
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|
Minimum Interest Coverage Ratio
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³3.50:1.00
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4.55
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Maximum Total Leverage Coverage
Ratio
|
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£4.75:1.00
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3.52
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Capital Expenditure Ratio
|
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£12%
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7.7
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%
|
In addition, the Credit Agreement contains customary affirmative
and negative covenants, which among other things, limit the
Companys ability to incur additional debt, create liens,
pay dividends, effect transactions with the Companys
affiliates, sell assets, pay subordinated debt, merge,
consolidate, enter into acquisitions, and effect sale leaseback
transactions.
The Companys Credit Agreement does not contain provisions
that would accelerate the maturity date of the loans under the
Credit Agreement upon a downgrade in its credit rating. However,
a downgrade in the Companys credit rating could adversely
affect its ability to obtain other capital sources in the future
and could increase its costs of borrowings.
Senior
Subordinated Credit Agreement
On June 15, 2005, the Company entered into a
$192.0 million Senior Subordinated Credit Agreement with
CITI. The net proceeds of the borrowings were used to pay the
redemption price plus accrued and unpaid interest totaling
$190.2 million, for the extinguishment of LifePoints
41/2% Convertible
Subordinated Notes due June 1, 2009.
The Company repaid the Senior Subordinated Credit Agreement on
August 4, 2005 in connection with the issuance of its
31/4% Convertible
Senior Subordinated Debentures due August 10, 2025. The
Company cannot borrow additional amounts under this credit
agreement. The Company incurred a charge to debt retirement
costs of $2.1 million related to the deferred loan costs
during the year ended December 31, 2005 in connection with
the repayment of borrowings under the Senior Subordinated Credit
Agreement.
31/4% Convertible
Senior Subordinated Debentures due August 15,
2025
On August 10, 2005, the Company sold $225.0 million of
its
31/4% Convertible
Senior Subordinated Debentures due 2025
(31/4% Debentures).
The net proceeds were approximately $218.4 million and were
used to repay the indebtedness under the Senior Subordinated
Credit Agreement, described above, and for working capital and
general corporate purposes. The
31/4% Debentures
bear interest at the rate of
31/4% per
year, payable semi-annually on February 15 and August 15.
The
31/4% Debentures
are convertible (subject to certain limitations imposed by the
Credit Agreement) under the following circumstances: (1) if
the price of the Companys common stock reaches a specified
F-36
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
threshold during the specified periods; (2) if the trading
price of the
31/4% Debentures
has been called for redemption; or (3) if specified
corporate transactions or other specified events occur. Subject
to certain exceptions, the Company will deliver cash and shares
of its common stock, as follows: (i) an amount in cash (the
principal return) equal to the lesser of
(a) the principal amount of the
31/4% Debentures
surrendered for conversion and (b) the product of the
conversion rate and the average price of its common stock, as
set forth in the indenture governing the securities (the
conversion value); and (ii) if the conversion value
is greater than the principal return, an amount in shares of its
common stock. The Companys ability to pay the principal
return in cash is subject to important limitations imposed by
the Credit Agreement and other indebtedness the Company may
incur in the future. Based on the terms of the Credit Agreement,
in certain circumstances, even if any of the foregoing
conditions to conversion have occurred, the
31/4% Debentures
will not be convertible and holders of the
31/4%
Debentures will not be able to declare an event of default under
the
31/4%
Debentures.
The conversion rate for the
31/4% Debentures
is initially 16.3345 shares of the Companys common
stock per $1,000 principal amount of
31/4% Debentures
(subject to adjustment in certain events). This is equivalent to
a conversion price of $61.22 per share of common stock. In
addition, if certain corporate transactions that constitute a
change of control occur on or prior to February 20, 2013,
the Company will increase the conversion rate in certain
circumstances, unless such transaction constitutes a public
acquirer change of control and the Company elects to modify the
conversion rate into public acquirer common stock. Since the
principal portion of the 3
1/4% Debentures
is payable only in cash and the Companys common stock
price during the year ended December 31, 2005 was trading
below the conversion price of $61.22 per share, there are
no potential common shares related to the
31/4% Debentures
included in the Companys earnings per share calculations.
On or after February 20, 2013, the Company may redeem for
cash some or all of the
31/4% Debentures
at any time at a price equal to 100% of the principal amount of
the
31/4% Debentures
to be purchased, plus any accrued and unpaid interest. Holders
may require the Company to purchase for cash some or all of the
31/4% Debentures
on February 15, 2013, February 15, 2015 and
February 15, 2020 or upon the occurrence of a fundamental
change, at 100% of the principal amount of the
31/4% Debentures
to be purchased, plus any accrued and unpaid interest.
The indenture for the
31/4% Debentures
does not contain any financial covenants or any restrictions on
the payment of dividends, the incurrence of senior or secured
debt or other indebtedness, or the issuance or repurchase of
securities by the Company. The indenture contains no covenants
or other provisions to protect holders of the
31/4% Debentures
in the event of a highly leveraged transaction or fundamental
change.
Previous
Credit Facilities
In connection with the Province Business Combination, the
Company repaid the $27.0 million outstanding principal
balance under the Province senior credit facility. At the time
of the Province Business Combination, the Company had no amounts
outstanding under its prior senior credit facility.
Province
71/2% Senior
Subordinated Notes
In connection with the Province Business Combination,
approximately $193.9 million of the $200.0 million
outstanding principal amount of Provinces
71/2%
Senior Subordinated Notes due 2013 (the
71/2% Notes)
was purchased and subsequently retired. The fair value assigned
to the
71/2% Notes
in the Province purchase price allocation included tender
premiums of $19.5 million paid in connection with the debt
retirement.
The supplemental indenture incorporating the amendments to the
indenture governing the
71/2% Notes
in connection with Provinces consent solicitation with
respect to such
71/2% Notes
became operative on April 15, 2005 and is binding upon the
holders of any 7
1/2% Notes
that were not tendered pursuant to such tender offer.
F-37
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The remaining $6.1 million outstanding principal amount of
71/2% Notes
bears interest at the rate of
71/2%
payable semi-annually on June 1 and December 1. The
Company may redeem all or a portion of the
71/2% Notes
on or after June 1, 2008, at the then current redemption
prices, plus accrued and unpaid interest. The
71/2% Notes
are unsecured and subordinated to the Companys existing
and future senior indebtedness. The supplemental indenture
contains no material covenants or restrictions.
Province
41/4% Convertible
Subordinated Notes
In connection with the Province Business Combination,
approximately $172.4 million of the $172.5 million
outstanding principal amount of Provinces
41/4%
Convertible Subordinated Notes due 2008 was purchased and
subsequently retired. The fair value assigned to the Province
41/4% Convertible
Subordinated Notes due 2008 in the Province purchase price
allocation included tender premiums of $12.1 million paid
in connection with the debt retirement.
Province
41/2% Convertible
Subordinated Notes
In connection with the Province Business Combination, Province
redeemed all of the $76.0 million outstanding principal
amount of its
41/2% Convertible
Subordinated Notes due 2005, at a redemption price of 100.9% of
its principal amount, plus accrued and unpaid interest to, but
excluding, May 16, 2005, the redemption date.
Historic
LifePoints
41/2% Convertible
Subordinated Notes
On June 15, 2005, Historic LifePoint called for redemption
all of the $221.0 million outstanding principal amount of
its
41/2% Convertible
Subordinated Notes due June 1, 2009, at a redemption price
of 102.571% of the principal amount, plus accrued and unpaid
interest to, but excluding, the redemption date. The
41/2% Convertible
Subordinated Notes were convertible at the option of the holder
into shares of the Companys common stock at a conversion
price of $47.36. The closing market price of the Companys
common stock on the date of redemption was $48.74.
Prior to the redemption date, holders of approximately
$35.9 million in the aggregate principal amount of the
41/2% Convertible
Subordinated Notes due June 1, 2009, elected to convert
their notes into an aggregate of 757,482 shares of the
Companys common stock. Approximately $185.1 million
in aggregate principal amount of the
41/2% Convertible
Subordinated Notes due June 1, 2009, was redeemed at the
redemption price of 102.571% of the principal amount or
approximately $189.9 million. Deferred finance costs of
$3.1 million, bond premium of $4.8 million and legal
and other fees of $0.1 million were expensed and included
in debt retirement costs for the year ended December 31,
2005. Deferred finance costs of $0.7 million were
subtracted from the $35.9 million of principal converted
and included in stockholders equity as part of the
conversion to equity.
Interest
Rate Swap
On June 1, 2006, the Company entered into an interest rate
swap agreement with CITI as counterparty. The interest rate swap
agreement, as amended, was effective as of November 30,
2006 and has a maturity date of May 30, 2011. The Company
entered into the interest rate swap agreement to mitigate the
floating interest rate risk on a portion of its outstanding
variable rate borrowings. The interest rate swap agreement
requires the Company to make quarterly fixed rate payments to
CITI calculated on a notional amount as set forth in the
schedule below at an annual fixed rate of 5.585% while CITI will
be obligated to make quarterly floating payments to the Company
based on the three-month LIBO rate on the same referenced
notional amount.
F-38
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notwithstanding the terms of the interest rate swap transaction,
the Company is ultimately obligated for all amounts due and
payable under the Credit Agreement.
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Notional Schedule
|
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Date Range
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Notional Amount
|
|
|
November 30, 2006 to
November 30, 2007
|
|
$
|
900.0 million
|
|
November 30, 2007 to
November 28, 2008
|
|
$
|
750.0 million
|
|
November 28, 2008 to
November 30, 2009
|
|
$
|
600.0 million
|
|
November 30, 2009 to
November 30, 2010
|
|
$
|
450.0 million
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|
November 30, 2010 to
May 30, 2011
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|
$
|
300.0 million
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|
The fair value of the interest rate swap agreement is the amount
at which it could be settled, based on estimates obtained from
CITI. The Company has designated the interest rate swap as a
cash flow hedge instrument, which is recorded in the
Companys accompanying balance sheet at its fair value.
The Company assesses the effectiveness of its cash flow hedge
instrument on a quarterly basis. The Company completed an
assessment of the cash flow hedge instrument at
December 31, 2006, and determined the hedge to be highly
effective in accordance with SFAS No. 133. The amount
of hedge ineffectiveness of the Companys cash flow hedge
instrument is not material. The interest rate swap agreement
exposes the Company to credit risk in the event of
non-performance by CITI. However, the Company does not
anticipate non-performance by CITI. The Company does not hold or
issue derivative financial instruments for trading purposes. The
fair value of the Companys interest rate swap at
December 31, 2006, reflected a liability of approximately
$14.7 million and is included in professional and general
liability claims and other liabilities in the Companys
consolidated balance sheet. The interest rate swap reflects a
liability balance as of December 31, 2006 because of a
recent decrease in market interest rates.
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|
Note 7.
|
Stockholders
Equity
|
Preferred
Stock
The Companys Amended and Restated Certificate of
Incorporation provides that up to 10,000,000 shares of
preferred stock may be issued, of which 90,000 shares have
been designated as Series A Junior Participating Preferred
Stock, par value $0.01 per share. The Board of Directors
has the authority to issue preferred stock in one or more series
and to fix for each series the voting powers (full, limited or
none), and the designations, preferences and relative,
participating, optional or other special rights and
qualifications, limitations or restrictions on the stock and the
number of shares constituting any series and the designations of
this series, without any further vote or action by the
stockholders. Because the terms of the preferred stock may be
fixed by the Board of Directors without stockholder action, the
preferred stock could be issued quickly with terms calculated to
defeat a proposed takeover or to make the removal of the
Companys management more difficult.
Preferred
Stock Purchase Rights
Pursuant to the Companys stockholders rights plan,
each outstanding share of common stock is accompanied by one
preferred stock purchase right. Each right entitles the
registered holder to purchase from the Company one
one-thousandth of a share of Series A Junior Participating
Preferred Stock of the Company (Series A Preferred
Stock) at a price of $35 per one one-thousandth of a
share, subject to adjustment.
Each share of Series A Preferred Stock will be entitled,
when, as and if declared, to a preferential quarterly dividend
payment in an amount equal to the greater of $10 or 1,000 times
the aggregate of all dividends declared per share of common
stock. In the event of liquidation, dissolution or winding up,
the holders of Series A Preferred Stock will be entitled to
a minimum preferential liquidation payment equal to
$1,000 per share, plus an amount equal to accrued and
unpaid dividends and distributions on the stock,
F-39
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
whether or not declared, to the date of such payment, but will
be entitled to an aggregate payment of 1,000 times the payment
made per share of common stock. The rights are not exercisable
until the rights distribution date as defined in the
stockholders rights plan. The rights will expire on
May 7, 2009, unless the expiration date is extended or
unless the rights are earlier redeemed or exchanged.
The rights have certain anti-takeover effects. The rights will
cause substantial dilution to a person or group that attempts to
acquire the Company on terms not determined by the
Companys Board of Directors to be in the best interests of
all of the Companys stockholders. The rights should not
interfere with any merger or other business combination approved
by the Board of Directors.
Common
Stock
Holders of the Companys common stock are entitled to one
vote for each share held of record on all matters on which
stockholders may vote. There are no preemptive, conversion,
redemption or sinking fund provisions applicable to our common
stock. In the event of liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the
assets available for distribution, subject to any prior rights
of any holders of preferred stock then outstanding. Delaware law
prohibits the Company from paying any dividends unless it has
capital surplus or net profits available for this purpose. In
addition, the Companys Credit Agreement imposes
restrictions on its ability to pay dividends.
Comprehensive
Income (Loss)
Comprehensive income (loss) consists of two components: net
income and other comprehensive income (loss). Other
comprehensive income (loss) refers to revenues, expenses, gains
and losses that under SFAS No. 130, Reporting
Comprehensive Income, are recorded as an element of
stockholders equity but are excluded from net income. For
the years ended December 31, 2004 and 2005, the Company had
no items of comprehensive income (loss) recorded directly to
stockholders equity. Accordingly, comprehensive income
(loss) was equivalent to net income during these years.
During the year ended December 31, 2006, the Company
entered into an interest rate swap agreement, which the Company
has designated as a cash flow hedge in accordance with
SFAS No. 133. The changes in the fair value of the
interest rate swap during the year ended December 31, 2006
resulted in a comprehensive loss of $14.6 million, or
$9.6 million net of income taxes. If the interest rate swap
does not remain highly effective as a cash flow hedge, the
derivatives gain or loss reported through comprehensive
income (loss) will be reclassified into earnings.
ESOP
Compensation
The ESOP is a defined contribution retirement plan that covers
substantially all of the Companys employees. When the ESOP
was established in 1999, the ESOP purchased from the Company
approximately 8.3% of the Companys outstanding common
stock at fair market value (approximately 2.8 million
shares at $11.50 per share). The purchase was primarily
financed by the ESOP issuing a promissory note to the Company,
which is being repaid annually in equal installments over a
10-year
period beginning December 31, 1999. The Company makes
contributions to the ESOP which the ESOP uses to repay the loan.
The Companys stock acquired by the ESOP is held in a
suspense account and is being allocated to participants at book
value from the suspense account as the loan is repaid over a
10-year
period.
The loan to the ESOP is recorded as unearned ESOP compensation
in the accompanying consolidated balance sheets. Reductions are
made to unearned ESOP compensation as shares are committed to be
released to participants at cost. Shares are deemed to be
committed to be released ratably during each period as the
employees perform services. Shares are allocated ratably to
employee accounts over a period of 10 years
F-40
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(1999 through 2008). As the shares are committed to be released,
the shares become outstanding for earnings per share
calculations.
The Companys ESOP expense has two components: common stock
and cash. Shares of the Companys common stock are
allocated ratably to employee accounts at a rate of
23,306 shares per month. The ESOP expense amount for the
common stock component is determined using the average market
price of the Companys common stock released to
participants in the ESOP. The cash component is discretionary
and is impacted by the amount of forfeitures in the ESOP. There
were $3.2 million and $3.9 million of discretionary
cash contributions during the years ended December 31, 2005
and 2006, respectively.
The Companys ESOP expense was $9.4 million,
$14.7 million and $13.2 million for the years ended
December 31, 2004, 2005 and 2006, respectively. There was
an additional $0.5 million and $0.4 million of ESOP
expense allocated to discontinued operations for the years ended
December 31, 2005 and 2006, respectively. The ESOP expense
tax deduction attributable to released shares is fixed at
$3.2 million per year. The fair value of unreleased shares
was $15.7 million at December 31, 2006.
The ESOP shares as of December 31, 2006 were as follows:
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|
|
|
|
Allocated shares
|
|
|
2,237,375
|
|
Shares committed to be released
|
|
|
|
|
Unreleased shares
|
|
|
559,344
|
|
|
|
|
|
|
Total ESOP shares
|
|
|
2,796,719
|
|
|
|
|
|
|
Stock-Based
Compensation
Impact of
the Adoption of SFAS No. 123(R)
The table below summarizes the compensation expense for stock
options that the Company recorded for continuing operations in
accordance with SFAS No. 123(R) for the year ended
December 31, 2006 (in millions, except for per share
amounts). The impact of the adoption of
SFAS No. 123(R) on discontinued operations was nominal
for this period.
|
|
|
|
|
Reduction of income from
continuing operations before income taxes (included in salaries
and benefits)
|
|
$
|
5.7
|
|
Income tax benefit
|
|
|
(2.1
|
)
|
|
|
|
|
|
Reduction of income from
continuing operations
|
|
$
|
3.6
|
|
|
|
|
|
|
Reduction of income per share from
continuing operations:
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.06
|
|
|
|
|
|
|
Companies were required to make an accounting policy decision
under SFAS No. 123 about whether to use a
forfeiture-rate assumption or to begin accruing compensation
cost for all awards granted (i.e., assume no forfeitures) and
then subsequently reverse compensation costs for forfeitures
when they occurred. Under SFAS No. 123(R), companies
are required to: (i) estimate the number of awards for
which it is probable that the requisite service will be
rendered; and (ii) update that estimate as new information
becomes available through the vesting date. The Company has
historically recognized its pro-forma stock option expense using
an estimated forfeiture rate. However, the Company also had a
policy (prior to January 1, 2006) of recognizing the
effect of forfeitures as they occurred for its nonvested stock.
Under SFAS No. 123(R), the Company was required to
make a one-time cumulative adjustment that increased income by
$1.1 million, or $0.7 million net of income taxes
($0.01 net income per share, basic and diluted) as of
January 1, 2006, to adjust its
F-41
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation cost for those nonvested awards that are not
expected to vest. This adjustment is reported in the
consolidated statement of operations as a cumulative effect of
change in accounting principle, net of income taxes, for the
year ended December 31, 2006.
Prior to the adoption of SFAS No. 123(R), the Company
presented unearned compensation on nonvested stock as a separate
component of stockholders equity. In accordance with the
provisions of SFAS No. 123(R), on January 1,
2006, the Company reclassified the balance in unearned
compensation on nonvested stock to capital in excess of par
value on its balance sheet.
Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits for tax deductions resulting from the
exercise of stock options as operating cash flows on its
statements of cash flows. SFAS No. 123(R) requires
that the cash flows resulting from the tax benefits for tax
deductions in excess of the compensation expense recorded for
those options (excess tax benefits) be classified as financing
cash flows. Accordingly, the Company classified a nominal amount
in excess tax benefits as financing cash inflows rather than as
operating cash inflows on its statement of cash flows for the
year ended December 31, 2006.
SFAS No. 123(R) also requires companies to calculate
an initial pool of excess tax benefits available at
the adoption date to absorb any unused deferred tax assets that
may be recognized under SFAS No. 123(R). The pool
includes the net excess tax benefits that would have been
recognized if the Company had adopted SFAS No. 123 for
recognition purposes on its effective date. The Company has
elected to calculate the pool of excess tax benefits under the
alternative transition method described in FSP
FAS No. 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards,
which also specifies the method the Company must use to
calculate excess tax benefits reported on the statement of cash
flows. The pool of excess tax benefits at the adoption date of
January 1, 2006 was $9.3 million.
Description
of Stock-Based Compensation Plans
1998
Long-Term Incentive Plan
The Companys 1998 Long-Term Incentive Plan
(LTIP), as amended, authorizes
13,625,000 shares of the Companys common stock for
issuance as of December 31, 2006. The LTIP authorizes the
grant of stock options, stock appreciation rights and other
stock-based awards to officers and employees of the Company.
Options to purchase shares granted to the Companys
employees under this plan were granted with an exercise price
equal to the fair market value on the day prior to the date of
grant. These options become ratably exercisable beginning one
year from the date of grant to three years after the date of
grant. All options granted under this plan expire ten years from
the date of grant. Options to purchase 906,300, 785,813 and
918,245 shares were granted to the Companys employees
during the years ended December 31, 2004, 2005 and 2006,
respectively, under this plan with an exercise price equal to
the fair market value on the date of grant.
The Companys outstanding nonvested stock awards have a
cliff-vesting period ranging three to five years from the grant
date and a majority contain no vesting requirements other than
continued employment of the employee. There are certain
nonvested stock awards that require the vesting be contingent
upon the satisfaction of certain financial goals in addition to
continued employment of the employee, which is further discussed
below in this Note. The Company granted 175,000, 880,451 and
393,844 shares of nonvested stock awards to certain key
employees under the LTIP during the years ended
December 31, 2004, 2005 and 2006, respectively.
Vesting of awards granted under the LTIP may be accelerated in
the event of disability or death of a participant or change of
control of the Company. As of April 15, 2005, vesting for
all nonvested outstanding options, except for those granted in
December 2004, and vesting for all outstanding nonvested stock
awards under the LTIP were accelerated as a result of the
Province Business Combination, as further discussed in
Note 2.
F-42
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Outside
Directors Stock and Incentive Compensation Plan
The Company also has an Outside Directors Stock and Incentive
Compensation Plan (ODSICP) for which
375,000 shares of the Companys common stock have been
reserved for issuance. There were no options granted under this
plan during the years ended December 31, 2004, 2005 or
2006. The outstanding options under this plan become exercisable
beginning in part from the date of grant to three years after
the date of grant and expire ten years after grant.
The ODSICP further provides that non-employee directors may
elect to receive, in lieu of any portion of their annual
retainer (in multiples of 25%), a deferred stock unit award. A
deferred stock unit represents the right to receive a specified
number of shares of the Companys common stock. The shares
are paid, subject to the election of the non-employee director,
either two years following the date of the award or at the end
of the directors service on the Board of Directors. The
number of shares of the Companys common stock to be paid
under a deferred stock unit award is equal to the value of the
cash retainer that the non-employee director has elected to
forego, divided by the fair market value of the Companys
common stock on the date of the award. The Company recognizes a
nominal stock-based compensation expense amount under this plan.
As of December 31, 2006, there were 16,624 deferred stock
units outstanding under the ODSICP.
The Company granted 21,000 and 31,500 shares of nonvested
stock awards to its outside directors under the ODSICP during
the years ended December 31, 2004 and 2005, respectively.
The outstanding nonvested stock awards granted under the ODSICP
vest three years from the grant date and contain no vesting
requirements other than continued service of the director.
Vesting may be accelerated in the event of disability or death
of a participant or change of control of the Company. As of
April 15, 2005, vesting for all nonvested outstanding stock
options and outstanding nonvested stock awards under the ODSICP
were accelerated as a result of the Province Business
Combination, as further discussed in Note 2.
On May 9, 2006, pursuant to the ODSICP, the Companys
Board of Directors, upon recommendation of the compensation
committee of the Board of Directors, approved the grant of 3,500
restricted stock unit awards to each of the seven members of the
Board of Directors who are not employees of the Company or any
of its subsidiaries. This award will be fully vested and no
longer subject to forfeiture upon the earliest of any of the
following conditions to occur: (i) the date that is
immediately prior to the date of the 2007 Annual Meeting of
Stockholders of the Company; (ii) the death or disability
of the non-employee director; or (iii) events described in
Section 7.1 of the ODSICP. Generally, such shares will be
forfeited in their entirety unless the individual continues to
serve as a director of the Company on the day prior to the 2007
Annual Meeting of Stockholders. The non-employee directors
receipt of shares of common stock pursuant to the restricted
stock unit award is deferred until the first business day
following the earliest to occur of (i) the third
anniversary of the date of grant, or (ii) the date the
non-employee director ceases to be a member of the
Companys Board of Directors.
ESPP
The Company sponsors an employee stock purchase plan which
allows employees to purchase shares of the Companys common
stock at a discount. There were 300,000 shares of the
Companys common stock reserved for issuance under this
plan at December 31, 2006. Prior to January 1, 2006
the ESPP provided for employees to purchase shares of the
Companys common stock at a price equal to 85% of the lower
of the closing price on the first day or last day of a six month
interval. Effective January 1, 2006, the plan was amended
to be in compliance with the safe harbor rules of
SFAS No. 123(R) so that the plan is not compensatory
under the new standard and no expense is recognized. The Company
received $0.7 million, $1.6 million and
$2.2 million for the issuance of common stock under this
plan during the years ended December 31, 2004, 2005 and
2006, respectively.
F-43
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Presented below is a summary of activity under the ESPP for
2004, 2005 and 2006:
|
|
|
|
|
|
|
Shares Available
|
|
|
|
for Issuance
|
|
|
December 31, 2003
|
|
|
189,323
|
|
Issuances
|
|
|
(27,924
|
)
|
|
|
|
|
|
December 31, 2004
|
|
|
161,399
|
|
Issuances
|
|
|
(53,422
|
)
|
|
|
|
|
|
December 31, 2005
|
|
|
107,977
|
|
Issuances
|
|
|
(71,847
|
)
|
|
|
|
|
|
December 31, 2006
|
|
|
36,130
|
|
|
|
|
|
|
MSPP
The Company has a Management Stock Purchase Plan
(MSPP) which provides to certain designated
employees an opportunity to purchase restricted shares of the
Companys common stock at a 25% discount through payroll
deductions over six-month intervals. There were
250,000 shares of the Companys common stock reserved
for issuance under this plan at December 31, 2006. Such
shares are subject to a three-year
cliff-vesting
period. As of April 15, 2005, vesting for all outstanding
nonvested shares of MSPP restricted stock were accelerated as a
result of the Province Business Combination, as further
discussed in Note 2. The Company redeems shares from
employees upon vesting of the MSPP restricted stock for minimum
statutory tax withholding purposes. The Company redeemed 3,760
and 21,084 shares upon vesting of the MSPP restricted stock
during the years ended December 31, 2004 and 2005,
respectively. There were no redemptions during the year ended
December 31, 2006, because there were no MSPP shares vested
during that year. The Company recognizes a nominal stock-based
compensation expense amount under this plan as a result of the
relatively small number of participants in the MSPP. The Company
received $0.4 million, $0.6 million and
$0.8 million for the issuance of stock under this plan
during the years ended December 31, 2004, 2005 and 2006,
respectively. As of December 31, 2006, there were 38,770
restricted shares outstanding under the MSPP.
Presented below is a summary of activity under the MSPP for
2004, 2005 and 2006:
|
|
|
|
|
|
|
Shares Available
|
|
|
|
for Issuance
|
|
|
December 31, 2003
|
|
|
144,534
|
|
Forfeitures
|
|
|
7,704
|
|
Issuances
|
|
|
(25,932
|
)
|
|
|
|
|
|
December 31, 2004
|
|
|
126,306
|
|
Forfeitures
|
|
|
857
|
|
Issuances
|
|
|
(22,037
|
)
|
|
|
|
|
|
December 31, 2005
|
|
|
105,126
|
|
Forfeitures
|
|
|
2,176
|
|
Issuances
|
|
|
(31,179
|
)
|
|
|
|
|
|
December 31, 2006
|
|
|
76,123
|
|
|
|
|
|
|
F-44
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
Change in
Stock Option Valuation Model
In January 2006, the Company changed from the
Black-Scholes-Merton option valuation model (BSM) to
a lattice-based option valuation model, the Hull-White II
Valuation Model (HW-II). The Company prefers the
HW-II over the BSM because the HW-II considers characteristics
of fair value option pricing, such as an options
contractual term and the probability of exercise before the end
of the contractual term, that are not available under the BSM.
In addition, the complications surrounding the expected term of
an option are material, as clarified by the SECs focus on
the matter in SAB 107. Given the reasonably large pool of
the Companys unexercised options, the Company believes a
lattice model that specifically addresses this fact and models a
full term of exercises is the most appropriate and reliable
means of valuing its stock options. The Company used a third
party to assist in developing the assumptions used in estimating
the fair values of stock options granted for the year ended
December 31, 2006.
Valuation
The Company estimated the fair value of stock options granted
during the year ended December 31, 2006 using the HW-II
lattice option valuation model and a single option award
approach. The Company estimated the fair value of stock options
granted prior to January 1, 2006 using the BSM valuation
model. The Company is amortizing the fair value on a
straight-line basis over the requisite service periods of the
awards, which are the vesting periods of three years. The stock
options that were granted during the year ended
December 31, 2006 vest 33.3% on each grant anniversary date
over three years of continued employment.
The following table shows the weighted average assumptions the
Company used to develop the fair value estimates under its
option valuation models and the resulting estimates of
weighted-average fair value per share of stock options granted
during the indicated years:
|
|
|
|
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Expected volatility
|
|
53.1%
|
|
54.7%
|
|
32.8%
|
Risk free interest rate (range)
|
|
2.11 - 3.43%
|
|
3.76 - 4.34%
|
|
4.38 - 5.21%
|
Expected dividends
|
|
|
|
|
|
|
Average expected term (years)
|
|
3.0
|
|
4.0
|
|
5.4
|
Fair value per share of stock
options granted
|
|
$12.66
|
|
$19.62
|
|
$11.15
|
Population
Stratification
Under SFAS No. 123(R), a company should aggregate
individual awards into relatively homogeneous groups with
respect to exercise and post-vesting employment behaviors for
the purpose of refining the expected term assumption, regardless
of the valuation technique used to estimate the fair value. In
addition, SAB 107 clarifies that a company may generally
make a reasonable fair value estimate with as few as one or two
groupings. The Company has stratified its employee population
into two groups: (i) Insiders, who are the
Section 16 filers under SEC rules; and
(ii) Non-insiders, who are the rest of the
employee population. The Company derived this stratification
based on the analysis of its historical exercise patterns,
excluding certain extraordinary events.
Expected
Volatility
Volatility is a measure of the tendency of investment returns to
vary around a long-term average rate. Historical volatility is
an appropriate starting point for setting this assumption under
SFAS No. 123(R). According to
SFAS No. 123(R), companies should also consider how
future experience may differ from the past. This may require
using other factors to adjust historical volatility, such as
implied volatility, peer-group
F-45
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
volatility and the range and mean-reversion of volatility
estimates over various historical periods.
SFAS No. 123(R) and SAB 107 acknowledge that
there is likely to be a range of reasonable estimates for
volatility. In addition, SFAS No. 123(R) requires that
if a best estimate cannot be made, management should use the
mid-point in the range of reasonable estimates for volatility.
Effective January 1, 2006, the Company estimates the
volatility of its common stock at the date of grant based on
both historical volatility and implied volatility from traded
options on the Companys common stock, consistent with
SFAS No. 123(R) and SAB 107.
Risk-Free
Interest Rate
Lattice models require risk-free interest rates for all
potential times of exercise obtained by using a grant-date yield
curve. A lattice model would, therefore, require the yield curve
for the entire time period during which employees might exercise
their options. The Company bases the risk-free rate on the
implied yield in effect at the time of option grant on
U.S. Treasury zero-coupon issues with equivalent remaining
terms.
Expected
Dividends
The Company has never paid any cash dividends on its common
stock and does not anticipate paying any cash dividends in the
foreseeable future. Consequently, it uses an expected dividend
yield of zero.
Pre-Vesting
Forfeitures
Pre-vesting forfeitures do not affect the fair value
calculation, but they affect the expense calculation.
SFAS No. 123(R) requires the Company to estimate
pre-vesting forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ
from those estimates. The Company has used historical data to
estimate pre-vesting option forfeitures and record share-based
compensation expense only for those awards that are expected to
vest. For purposes of calculating pro forma information under
SFAS No. 123 for periods prior to January 1,
2006, the Company also used an estimated forfeiture rate.
Post-Vesting
Cancellations
Post-vesting cancellations include vested options that are
cancelled, exercised or expire unexercised. Lattice models treat
post-vesting cancellations and voluntary early exercise behavior
as two separate assumptions. The Company used historical data to
estimate post-vesting cancellations.
Expected
Term
SFAS No. 123(R) calls for an
extinguishment calculation, dependent upon how long
a granted option remains outstanding before it is fully
extinguished. While extinguishment may result from exercise, it
can also result from cancellation (post-vesting) or expiration
at the contractual term. Expected term is an output in lattice
models so the Company does not have to determine this amount.
F-46
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
A summary of stock option activity under both the LTIP and
ODSICP during the year ended December 31, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Fair
|
|
|
Total
|
|
|
Intrinsic
|
|
|
Contractual
|
|
Stock Options
|
|
of Shares
|
|
|
Price
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value(a)
|
|
|
Term
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
(In years)
|
|
|
Outstanding at December 31,
2005
|
|
|
3,559,674
|
|
|
$
|
29.98
|
|
|
$
|
12.24
|
|
|
$
|
43.6
|
|
|
$
|
32.4
|
|
|
|
7.17
|
|
Exercisable at December 31,
2005
|
|
|
2,794,401
|
|
|
$
|
26.60
|
|
|
$
|
10.26
|
|
|
$
|
28.7
|
|
|
$
|
32.4
|
|
|
|
N/A
|
|
Granted
|
|
|
918,245
|
|
|
|
33.24
|
|
|
|
11.15
|
|
|
|
10.2
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Forfeited (pre-vest cancellation)
|
|
|
(302,974
|
)
|
|
|
37.74
|
|
|
|
15.59
|
|
|
|
(4.7
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Exercised
|
|
|
(30,327
|
)
|
|
|
17.62
|
|
|
|
6.38
|
|
|
|
(0.2
|
)
|
|
|
0.5
|
|
|
|
N/A
|
|
Expired (post-vest cancellation)
|
|
|
(23,094
|
)
|
|
|
36.92
|
|
|
|
15.72
|
|
|
|
(0.4
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Vested
|
|
|
238,317
|
|
|
|
42.31
|
|
|
|
19.50
|
|
|
|
4.7
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
4,121,524
|
|
|
$
|
30.19
|
|
|
$
|
11.77
|
|
|
$
|
48.5
|
|
|
$
|
24.5
|
|
|
|
6.14
|
|
Exercisable at December 31,
2006
|
|
|
2,979,297
|
|
|
$
|
27.87
|
|
|
$
|
11.00
|
|
|
$
|
32.8
|
|
|
$
|
24.1
|
|
|
|
5.07
|
|
|
|
|
(a) |
|
The aggregate intrinsic value represents the difference between
the underlying stocks market price and the stock
options exercise price. |
The total intrinsic value of stock options exercised during the
years ended December 31, 2004 and 2005 was
$17.8 million and $22.0 million, respectively. The
Company received $10.2 million, $43.6 million and
$0.5 million in cash from stock option exercises for the
years ended December 31, 2004, 2005 and 2006, respectively.
The actual tax benefit realized for the tax deductions from
stock option exercises of the stock-based payment arrangements
totaled $6.2 million and $8.9 million for the years
ended December 31, 2004 and 2005. There was a nominal
amount of actual tax benefits realized for the tax deductions
from stock option exercises for the year ended December 31,
2006.
As of December 31, 2006, there was $10.1 million of
total unrecognized compensation cost related to stock option
compensation arrangements under the LTIP. Total unrecognized
compensation cost will be adjusted for future changes in
estimated forfeitures. The Company expects to recognize that
cost over a weighted average period of 1.8 years.
Nonvested
Stock
The fair value of nonvested stock is determined based on the
closing price of the Companys common stock on the day
prior to the grant date. The nonvested stock requires no payment
from employees and directors, and stock-based compensation
expense is recorded equally over the vesting periods (three to
five years).
F-47
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of nonvested stock activity under both the LTIP and
ODSICP, including 24,500 restricted stock units granted under
the ODSICP, during the year ended December 31, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Total
|
|
|
Aggregate
|
|
Nonvested Shares
|
|
of Shares
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Outstanding at December 31,
2005
|
|
|
865,034
|
|
|
$
|
42.76
|
|
|
$
|
37.0
|
|
|
$
|
32.4
|
|
Granted
|
|
|
418,344
|
|
|
|
33.23
|
|
|
|
13.9
|
|
|
|
N/A
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited (pre-vest cancellation)
|
|
|
(268,644
|
)
|
|
|
40.34
|
|
|
|
(10.8
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
1,014,734
|
|
|
$
|
39.47
|
|
|
$
|
40.1
|
|
|
$
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006, the Company
granted 135,500 shares of nonvested stock awards under the
LTIP to certain senior executives, 50,000 of which were
forfeited when Mr. Donahey retired during June 2006. These
nonvested stock awards are included in the above table. In
addition to requiring continuing service of an employee, the
vesting of these nonvested stock awards is contingent upon the
satisfaction of certain financial goals, specifically related to
the achievement of budgeted annual revenues and earnings
targets. Under the LTIP, if these goals are achieved, the
nonvested stock awards will cliff-vest three years after the
grant date. The fair value for each of these nonvested stock
awards was determined based on the closing price of the
Companys common stock on the day prior to the grant date
and assumes that the performance goals will be achieved. These
performance goals were met during the year ended
December 31, 2006. If these performance goals were not met,
no compensation expense would have been recognized and any
recognized compensation expense would have been reversed.
As of December 31, 2006, there was $20.5 million of
total unrecognized compensation cost related to nonvested stock
compensation arrangements granted under both the LTIP and
ODSICP. Total unrecognized compensation cost will be adjusted
for future changes in estimated forfeitures. The Company expects
to recognize that cost over a weighted average period of
2.5 years.
F-48
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comparable
Disclosures
As discussed above, the Company accounted for stock-based
compensation under the fair value method of
SFAS No. 123(R) during the year ended
December 31, 2006. Prior to January 1, 2006, the
Company accounted for stock-based compensation under the
provisions of APB No. 25. Accordingly, the Company recorded
stock-based compensation expense for its nonvested stock and did
not record stock-based compensation expense for its stock
options and ESPP for the years ended December 31, 2004 and
2005. The following table illustrates the effect on the
Companys net income and net income per share for the years
ended December 31, 2004, 2005 and 2006 if it had applied
the fair value recognition provisions of SFAS No. 123
to stock-based compensation using the BSM valuation model (in
millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005(a)
|
|
|
2006
|
|
|
Net income, as reported in prior
period(b)
|
|
$
|
85.7
|
|
|
$
|
72.9
|
|
|
|
|
|
Add: Stock-based compensation
expense included in reported net income, net of income taxes
|
|
|
1.1
|
|
|
|
6.7
|
|
|
|
|
|
Less: Stock-based compensation
expense determined under fair value based method for all awards,
net of income taxes(c)
|
|
|
(9.0
|
)
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, including stock-based
compensation(d)
|
|
$
|
77.8
|
|
|
$
|
63.1
|
|
|
$
|
146.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported in
prior period(b)
|
|
$
|
2.31
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic including
stock-based compensation(d)
|
|
$
|
2.10
|
|
|
$
|
1.26
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported in
prior period(b)
|
|
$
|
2.17
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted including
stock-based compensation(d)
|
|
$
|
1.99
|
|
|
$
|
1.24
|
|
|
$
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
All outstanding stock options as of April 15, 2005, except
for 28,500 stock options granted in December 2004, and all
outstanding nonvested stock awards became fully vested on
April 15, 2005, as a result of the Province Business
Combination and the change of control provisions in the
Companys stock-based compensation plans. The estimated pro
forma after-tax charge the Company would have incurred during
the year ended December 31, 2005 as a result of the
accelerated vesting of stock options was $4.9 million. In
addition, as a result of the accelerated vesting of nonvested
stock awards, the Company recognized an after-tax charge of
$2.5 million for the year ended December 31, 2005. |
|
(b) |
|
Net income and net income per share as reported for periods
prior to January 1, 2006 did not include stock-based
compensation expense for stock options and the Companys
ESPP because it did not adopt the recognition provisions of
SFAS No. 123. |
|
(c) |
|
Stock-based compensation expense for periods prior to
January 1, 2006 is calculated based on the pro forma
application of SFAS No. 123. |
|
(d) |
|
Net income and net income per share including stock-based
compensation for periods prior to January 1, 2006 are based
on the pro forma application of SFAS No. 123. |
F-49
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summary
of Stock-Based Compensation
The following table summarizes the Companys stock benefit
activity for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
Nonvested Stock
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Stock Units
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Outstanding
|
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
December 31, 2003
|
|
|
2,640,452
|
|
|
|
4,393,442
|
|
|
$
|
23.91
|
|
|
|
|
|
|
$
|
|
|
|
|
9,478
|
|
Increases in shares available
(approved by stockholders)
|
|
|
2,200,000
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option grants
|
|
|
(906,300
|
)
|
|
|
906,300
|
|
|
|
33.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock unit grants
|
|
|
(2,376
|
)
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
2,376
|
|
Deferred stock units vested
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
(1,544
|
)
|
Nonvested stock grants
|
|
|
(196,000
|
)
|
|
|
|
|
|
|
N/A
|
|
|
|
196,000
|
|
|
|
33.67
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
(774,635
|
)
|
|
|
13.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option cancellations
|
|
|
165,526
|
|
|
|
(165,526
|
)
|
|
|
33.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock cancellations
|
|
|
10,000
|
|
|
|
|
|
|
|
N/A
|
|
|
|
(10,000
|
)
|
|
|
33.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
3,911,302
|
|
|
|
4,359,581
|
|
|
|
27.43
|
|
|
|
186,000
|
|
|
|
33.70
|
|
|
|
10,310
|
|
Increases in shares available
(approved by stockholders)
|
|
|
2,000,000
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option grants
|
|
|
(785,813
|
)
|
|
|
785,813
|
|
|
|
42.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock unit grants
|
|
|
(2,088
|
)
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
2,088
|
|
Deferred stock units vested
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
(1,230
|
)
|
Nonvested stock grants
|
|
|
(911,951
|
)
|
|
|
|
|
|
|
N/A
|
|
|
|
911,951
|
|
|
|
42.76
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
(1,515,080
|
)
|
|
|
28.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option cancellations
|
|
|
70,640
|
|
|
|
(70,640
|
)
|
|
|
40.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change of control vesting
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
(186,000
|
)
|
|
|
33.67
|
|
|
|
|
|
Nonvested stock cancellations
|
|
|
46,917
|
|
|
|
|
|
|
|
N/A
|
|
|
|
(46,917
|
)
|
|
|
42.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
4,329,007
|
|
|
|
3,559,674
|
|
|
|
29.98
|
|
|
|
865,034
|
|
|
|
42.76
|
|
|
|
11,168
|
|
Stock option grants
|
|
|
(918,245
|
)
|
|
|
918,245
|
|
|
|
33.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock unit grants
|
|
|
(6,255
|
)
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
6,255
|
|
Deferred stock units vested
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
(799
|
)
|
Nonvested stock grants
|
|
|
(418,344
|
)
|
|
|
|
|
|
|
N/A
|
|
|
|
418,344
|
|
|
|
33.23
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
(30,327
|
)
|
|
|
17.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option cancellations
|
|
|
326,068
|
|
|
|
(326,068
|
)
|
|
|
37.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock cancellations
|
|
|
268,644
|
|
|
|
|
|
|
|
N/A
|
|
|
|
(268,644
|
)
|
|
|
40.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
3,580,875
|
|
|
|
4,121,524
|
|
|
$
|
30.19
|
|
|
|
1,014,734
|
|
|
$
|
39.47
|
|
|
|
16,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys total
stock-based compensation expense as well as the total recognized
tax benefits related thereto for the last three years (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005(a)
|
|
|
2006
|
|
|
Nonvested stock
|
|
$
|
1.8
|
|
|
$
|
6.5
|
|
|
$
|
7.5
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
1.8
|
|
|
$
|
6.5
|
|
|
$
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits on stock-based
compensation expense
|
|
$
|
0.6
|
|
|
$
|
2.4
|
|
|
$
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This excludes the $4.0 million ($2.5 million, net of
income taxes) of compensation expense the Company recognized
that was the result of the accelerated vesting of nonvested
stock due to the Province Business Combination. |
The Company did not capitalize any stock-based compensation cost
for the years ended December 31, 2004, 2005 and 2006. As of
December 31, 2006, there was $30.6 million of total
unrecognized compensation cost related to all of the
Companys stock compensation arrangements. Total
unrecognized compensation cost may be adjusted for future
changes in estimated forfeitures. The Company expects to
recognize that cost over a weighted-average period of
2.3 years.
|
|
Note 8.
|
Commitments
and Contingencies
|
Americans
with Disabilities Act Claim
The Americans with Disabilities Act (ADA) generally
requires that public accommodations be made accessible to
disabled persons. On January 12, 2001, Access Now, Inc., a
disability rights organization, filed a class action lawsuit in
the United States District Court for the Eastern District of
Tennessee (District Court), against each of the
Companys hospitals alleging non-compliance with the
accessibility guidelines under the ADA. The lawsuit does not
seek any monetary damages, but seeks injunctive relief requiring
facility modification, where necessary, to meet the ADA
guidelines, in addition to attorneys fees and costs. The
Company is currently unable to estimate the costs that could be
associated with modifying these facilities because these costs
are negotiated and determined on a
facility-by-facility
basis and, therefore, have varied and will continue to vary
significantly among facilities. In January 2002, the District
Court certified the class action and issued a scheduling order
that requires the parties to complete discovery and inspection
for approximately six facilities per year. The Company is
vigorously defending the lawsuit, recognizing the Companys
obligation to correct any deficiencies in order to comply with
the ADA. As of December 31, 2006, the plaintiffs have
conducted inspections at 27 of the Companys hospitals,
including the now divested Smith County. To date, the
District Court approved the settlement agreements between the
parties relating to 13 of the Companys facilities. The
Company is now moving forward in implementing facility
modifications in accordance with the terms of the settlement.
The Company has completed remedial work on three facilities for
an aggregate cost of $1.0 million. The Company currently
anticipates that the aggregate costs associated with ten other
facilities that are subject to court approved settlement
agreements will range from $5.1 million to
$7.0 million.
While the former Province facilities, DRMC and WCCH are not the
subject of this lawsuit, if these facilities become subject to
the class action lawsuit, the Company may be required to expend
significant capital expenditures at one or more of these
facilities in order to comply with the ADA, and the
Companys financial position and results of operations
would be adversely affected as a result. The plaintiff in this
lawsuit has represented to the District Court that it will amend
the lawsuit to add to the Companys acquired facilities and
dismiss the divested facilities. Noncompliance with the
requirements of the ADA could result in the
F-51
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
imposition of fines against the Company by the federal
government or the payment of damages by the Company.
Legal
Proceedings and General Liability Claims
The Company is, from time to time, subject to claims and suits
arising in the ordinary course of business, including claims for
damages for personal injuries, medical malpractice, breach of
contracts, wrongful restriction of or interference with
physicians staff privileges and employment related claims.
In certain of these actions, plaintiffs request payment for
damages, including punitive damages that may not be covered by
insurance. The Company is currently not a party to any pending
or threatened proceeding, which, in managements opinion,
would have a material adverse effect on the Companys
business, financial condition or results of operations.
Physician
Commitments
The Company has committed to provide certain financial
assistance pursuant to recruiting agreements with various
physicians practicing in the communities it serves. In
consideration for a physician relocating to one of its
communities and agreeing to engage in private practice for the
benefit of the respective community, the Company may advance
certain amounts of money to a physician, normally over a period
of one year, to assist in establishing the physicians
practice. The Company has committed to advance a maximum amount
of approximately $43.1 million at December 31, 2006.
The actual amount of such commitments to be subsequently
advanced to physicians is estimated at $11.0 million and
often depends upon the financial results of a physicians
private practice during the guarantee period. Generally, amounts
advanced under the recruiting agreements may be forgiven pro
rata over a period of 48 months contingent upon the
physician continuing to practice in the respective community.
Pursuant to the Companys standard physician recruiting
agreement, any breach or non-fulfillment by a physician under
the physician recruiting agreement gives the Company the right
to recover any payments made to the physician under the
agreement. The Company adopted FSP
FIN 45-3
effective January 1, 2006, which affects the accounting for
advances to physicians, as further discussed in Note 1 and
Note 4.
Capital
Expenditure Commitments
The Company is reconfiguring some of its facilities to more
effectively accommodate patient services and restructuring
existing surgical capacity in some of its hospitals to permit
additional patient volume and a greater variety of services. The
Company had incurred approximately $72.1 million in
uncompleted projects as of December 31, 2006, which is
included in construction in progress in the Companys
accompanying consolidated balance sheet. At December 31,
2006, the Company had projects under construction with an
estimated cost to complete and equip of approximately
$115.1 million.
Pursuant to the asset purchase agreement for DRMC, the Company
has agreed to expend at least $11.3 million for capital
expenditures and improvements before July 1, 2008. The
Company has incurred approximately $3.5 million of the
required capital expenditures and improvements as of
December 31, 2006.
The Company agreed in connection with the lease of WCCH to make
capital expenditures or improvements to the hospital of a value
not less than $10.3 million prior to June 1, 2008, and
an additional $4.2 million, for an aggregate total of
$14.5 million, before June 1, 2013. The Company has
incurred approximately $2.4 million of the required capital
expenditures and improvements as of December 31, 2006.
The Company currently leases a 45-bed hospital in Ennis, Texas.
The City of Ennis has approved the construction of a new
facility to replace Ennis Regional Medical Center at an
estimated cost of $35.0 million. The City of Ennis has
agreed to fund $15.0 million of this cost. The project
calls for the Company to fund the $20.0 million difference
in exchange for a
40-year
prepaid lease. The construction began during the first
F-52
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quarter of 2006 and the Company anticipates the replacement
facility will be completed in the second quarter of 2007.
There are required annual capital expenditure commitments in
connection with several of the Companys other facilities.
In accordance with the purchase agreements for the Martinsville,
Virginia; Las Cruces, New Mexico; and Los Alamos, New
Mexico facilities, the Company is obligated to make ongoing
annual expenditures based on a percentage of net revenues.
Acquisitions
The Company has historically acquired businesses with prior
operating histories. Acquired companies, including the former
Province hospitals, may have unknown or contingent liabilities,
including liabilities for failure to comply with healthcare laws
and regulations, medical and general professional liabilities,
workers compensation liabilities, previous tax liabilities and
unacceptable business practices. Although the Company institutes
policies designed to conform practices to its standards
following completion of acquisitions, there can be no assurance
that the Company will not become liable for past activities 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. The Company was not indemnified by Province in connection
with the Province Business Combination.
Leases
The Company leases real estate properties, buildings, vehicles
and equipment under cancelable and non-cancelable leases. The
leases expire at various times and have various renewal options.
Certain leases that meet the lease capitalization criteria in
accordance with SFAS No. 13, Accounting for
Leases, as amended, have been recorded as an asset and
liability at the net present value of the minimum lease payments
at the inception of the lease. Interest rates used in computing
the net present value of the lease payments are based on the
Companys incremental borrowing rate at the inception of
the lease. Rental expense of operating leases for the years
ended December 31, 2004, 2005 and 2006 was
$9.4 million, $17.9 million and $24.7 million,
respectively.
Future minimum lease payments at December 31, 2006, for
those leases having an initial or remaining non-cancelable lease
term in excess of one year are as follows for the years
indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital Lease
|
|
|
|
|
|
|
Leases
|
|
|
Obligations
|
|
|
Total
|
|
|
2007
|
|
$
|
14.7
|
|
|
$
|
1.1
|
|
|
$
|
15.8
|
|
2008
|
|
|
10.5
|
|
|
|
1.1
|
|
|
|
11.6
|
|
2009
|
|
|
8.4
|
|
|
|
0.9
|
|
|
|
9.3
|
|
2010
|
|
|
5.4
|
|
|
|
0.9
|
|
|
|
6.3
|
|
2011
|
|
|
3.8
|
|
|
|
1.0
|
|
|
|
4.8
|
|
Thereafter
|
|
|
16.7
|
|
|
|
4.4
|
|
|
|
21.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59.5
|
|
|
|
9.4
|
|
|
$
|
68.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: interest portion
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations under
capital leases
|
|
|
|
|
|
$
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Tax
Matters
See Note 5 for a discussion of the Companys
contingent tax matters.
|
|
Note 9.
|
Earnings
(Loss) Per Share
|
The following table sets forth the computation of basic and
diluted earnings (loss) per share for the years ended
December 31, 2004, 2005 and 2006 (dollars and shares in
millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings
(loss) per share income from continuing operations
|
|
$
|
85.9
|
|
|
$
|
79.0
|
|
|
$
|
142.2
|
|
Interest on convertible notes, net
of taxes
|
|
|
7.3
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per
share income from continuing operations
|
|
|
93.2
|
|
|
|
82.3
|
|
|
|
142.2
|
|
Income (loss) from discontinued
operations, net of income taxes
|
|
|
(0.2
|
)
|
|
|
(6.1
|
)
|
|
|
3.3
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93.0
|
|
|
$
|
76.2
|
|
|
$
|
146.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings
(loss) per share weighted average shares outstanding
|
|
|
37.0
|
|
|
|
50.1
|
|
|
|
55.6
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock benefit plans
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
0.7
|
|
Convertible notes
|
|
|
5.0
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
(loss) per share adjusted weighted average shares
|
|
|
42.8
|
|
|
|
53.2
|
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.32
|
|
|
$
|
1.57
|
|
|
$
|
2.56
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.12
|
)
|
|
|
0.06
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.31
|
|
|
$
|
1.45
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.18
|
|
|
$
|
1.55
|
|
|
$
|
2.53
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.12
|
)
|
|
|
0.06
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.17
|
|
|
$
|
1.43
|
|
|
$
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Change in
the Companys Chief Executive Officer and
Chairman
|
Effective June 26, 2006, Executive Vice President William
F. Carpenter III, was named President and Chief Executive
Officer of the Company. Mr. Carpenter replaced Kenneth C.
Donahey, who retired after serving five years as the
Companys Chairman, President and Chief Executive Officer.
In addition, on June 25, 2006, Mr. Donahey resigned
from the Companys Board of Directors and
Mr. Carpenter was elected by the Companys Board of
Directors to fill the vacancy resulting from
Mr. Donaheys resignation. In addition, the
F-54
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys Lead Director, Owen G. Shell, Jr., was
elected as the Companys Chairman of the Board as of
June 26, 2006.
Effective June 25, 2006, LifePoint CSGP, LLC, a subsidiary
of the Company, entered into a Separation Agreement with
Mr. Donahey that terminated the employment agreement
between LifePoint CSGP, LLC and Mr. Donahey (the
Employment Agreement). Mr. Donahey has and will
receive $3.5 million in two equal installments, on
December 27, 2006 and June 27, 2007, together with a
payment to cover any liability for federal excise tax he may
incur as a result of the receipt of such payments. The
confidentiality provisions of the Employment Agreement remain in
effect for 36 months. In accordance with the terms of his
pre-existing option agreements, Mr. Donahey may exercise
his stock options that were vested at the time of his retirement
over a period of three years after his retirement date. He will
receive insurance benefits comparable to those available to
Company executives for a period of two years. The Company and
Mr. Donahey also agreed to a mutual release of claims,
except for any indemnity claims to which Mr. Donahey may be
entitled and for breaches of the Separation Agreement.
Mr. Donahey agreed not to compete with the Company for a
period of one year in non-urban hospitals, diagnostic/imaging or
surgery centers, and the physician recruitment business, subject
to certain limitations, and he agreed not to induce or encourage
the departure of Company employees for a period of one year.
As a result of Mr. Donaheys retirement, the Company
incurred additional net pre-tax compensation expense of
approximately $2.0 million ($1.2 million net of income
taxes), or a decrease in diluted earnings per share of
$0.02, for the year ended December 31, 2006. This
compensation expense consists of the $3.5 million in cash
payments, as described above, offset by a $1.5 million
pre-tax reversal of stock compensation expense resulting from
the forfeiture of his unvested stock options and nonvested stock.
|
|
Note 11.
|
Other
Current Liabilities
|
The following table provides information regarding the
Companys other current liabilities, which are included in
the accompanying consolidated balance sheets at December 31
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Cash received in advance in
connection with the sale of Saint Francis (see Note 13)
|
|
$
|
|
|
|
$
|
40.4
|
|
Accrued interest related to
long-term debt
|
|
|
13.6
|
|
|
|
11.3
|
|
Workers compensation
liability
|
|
|
12.9
|
|
|
|
10.7
|
|
Medical benefits liability
|
|
|
9.4
|
|
|
|
13.7
|
|
Physician minimum revenue
guarantee liability
|
|
|
|
|
|
|
11.0
|
|
Other
|
|
|
35.7
|
|
|
|
37.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71.6
|
|
|
$
|
124.8
|
|
|
|
|
|
|
|
|
|
|
F-55
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 12.
|
Unaudited
Quarterly Financial Information
|
The quarterly interim financial information shown below has been
prepared by the Companys management and is unaudited. It
should be read in conjunction with the audited consolidated
financial statements appearing herein (dollars in millions,
except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Revenues
|
|
$
|
272.0
|
|
|
$
|
464.4
|
|
|
$
|
548.9
|
|
|
$
|
556.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
25.8
|
|
|
$
|
(3.1
|
)
|
|
$
|
30.3
|
|
|
$
|
26.0
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
0.8
|
|
|
|
0.6
|
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
Impairment of assets
|
|
|
|
|
|
|
(4.7
|
)
|
|
|
(0.2
|
)
|
|
|
(0.9
|
)
|
Gain (loss) on sale of hospitals
|
|
|
(0.8
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
(0.7
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25.8
|
|
|
$
|
(7.1
|
)
|
|
$
|
29.6
|
|
|
$
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.68
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.55
|
|
|
$
|
0.47
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.07
|
)
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.68
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.54
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.63
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.54
|
|
|
$
|
0.46
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.07
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.63
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.53
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Revenues
|
|
$
|
589.6
|
|
|
$
|
569.2
|
|
|
$
|
640.3
|
|
|
$
|
640.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
33.8
|
|
|
$
|
36.4
|
|
|
$
|
34.5
|
|
|
$
|
37.5
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
(0.2
|
)
|
|
|
(1.3
|
)
|
|
|
(0.2
|
)
|
|
|
0.8
|
|
Gain (loss) on sale of hospitals
|
|
|
3.8
|
|
|
|
(0.3
|
)
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
3.6
|
|
|
|
(1.6
|
)
|
|
|
0.4
|
|
|
|
0.9
|
|
Cumulative effect of change in
accounting principle
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
38.1
|
|
|
$
|
34.8
|
|
|
$
|
34.9
|
|
|
$
|
38.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.61
|
|
|
$
|
0.65
|
|
|
$
|
0.62
|
|
|
$
|
0.67
|
|
Discontinued operations
|
|
|
0.07
|
|
|
|
(0.02
|
)
|
|
|
0.01
|
|
|
|
0.02
|
|
Cumulative effect of change in
accounting principle
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.69
|
|
|
$
|
0.63
|
|
|
$
|
0.63
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.60
|
|
|
$
|
0.65
|
|
|
$
|
0.61
|
|
|
$
|
0.66
|
|
Discontinued operations
|
|
|
0.07
|
|
|
|
(0.03
|
)
|
|
|
0.01
|
|
|
|
0.02
|
|
Cumulative effect of change in
accounting principle
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.68
|
|
|
$
|
0.62
|
|
|
$
|
0.62
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13.
|
Subsequent
Events
|
Effective January 1, 2007, the Company completed the sale
of Saint Francis to Herbert J. Thomas Memorial Hospital
Association. Proceeds from the sale of approximately
$40.4 million in cash, were received by the Company on
December 29, 2006, and were used to pay down a portion of
the Companys outstanding debt, the payment of which is
reflected in the accompanying consolidated balance sheet as of
December 31, 2006. Additionally, the Company recorded a
$40.4 million liability reflecting the advanced receipt of
the cash proceeds, which is included in other current
liabilities on the accompanying consolidated balance sheet as of
December 31, 2006, as disclosed in Note 11. Since the
effective date of the transaction was January 1, 2007, no
gain or loss was recognized in connection with the disposal of
Saint Francis for the year ended December 31, 2006.
F-57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Brentwood, State of
Tennessee, on February 6, 2007.
LIFEPOINT HOSPITALS, INC.
|
|
|
|
By:
|
/s/ WILLIAM
F. CARPENTER III
|
William F. Carpenter III
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the date
indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ OWEN
G. SHELL, JR.
Owen
G. Shell, Jr.
|
|
Chairman of the Board of Directors
|
|
February 6, 2007
|
|
|
|
|
|
/s/ WILLIAM
F. CARPENTER III
William
F. Carpenter III
|
|
Chief Executive Officer,
President and Director
(Principal Executive Officer)
|
|
February 6, 2007
|
|
|
|
|
|
/s/ MICHAEL
J. CULOTTA
Michael
J. Culotta
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
February 6, 2007
|
|
|
|
|
|
/s/ GARY
D. WILLIS
Gary
D. Willis
|
|
Chief Accounting Officer
(Principal Accounting Officer)
|
|
February 6, 2007
|
|
|
|
|
|
/s/ RICHARD
H.
EVANS Richard
H. Evans
|
|
Director
|
|
February 6, 2007
|
|
|
|
|
|
/s/ DEWITT
EZELL,
JR. DeWitt
Ezell, Jr
|
|
Director
|
|
February 6, 2007
|
|
|
|
|
|
/s/ MICHAEL
P.
HALEY Michael
P. Haley
|
|
Director
|
|
February 6, 2007
|
|
|
|
|
|
/s/ RICKI
TIGERT
HELFER Ricki
Tigert Helfer
|
|
Director
|
|
February 6, 2007
|
|
|
|
|
|
/s/ WILLIAM
V.
LAPHAM William
V. Lapham
|
|
Director
|
|
February 6, 2007
|
|
|
|
|
|
/s/ JOHN
E. MAUPIN, JR.,
D.D.S John
E. Maupin, Jr., D.D.S
|
|
Director
|
|
February 6, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
3
|
.1
|
|
|
|
Amended and Restated Certificate
of Incorporation (incorporated by reference from exhibits to the
Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on April 15,
2005, File
No. 333-124093).
|
|
3
|
.2
|
|
|
|
Second Amended and Restated Bylaws
of LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated October 16, 2006, File
No. 000-51251).
|
|
4
|
.1
|
|
|
|
Form of Specimen Stock Certificate
(incorporated by reference from exhibits to the Registration
Statement on
Form S-4,
as amended, filed by Historic LifePoint Hospitals, Inc. on
October 25, 2004, File
No. 333-119929).
|
|
4
|
.2
|
|
|
|
Form of 3.25% Convertible
Senior Subordinated Debenture due 2025 (included as part of
Exhibit 4.8 hereto.) (incorporated by reference from
exhibits to LifePoint Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251).
|
|
4
|
.3
|
|
|
|
Registration Rights Agreement,
dated August 10, 2005, between LifePoint Hospitals, Inc.
and Citigroup Global Markets Inc. as Representatives of the
Initial Purchasers (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251).
|
|
4
|
.4
|
|
|
|
Rights Agreement, dated as of
April 15, 2005, by and between LifePoint Hospitals, Inc.
and National City Bank, as Rights Agent (incorporated by
reference from exhibits to the Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on April 15,
2005, File
No. 333-124093).
|
|
4
|
.5
|
|
|
|
Subordinated Indenture, dated as
of May 27, 2003, between Province Healthcare Company and
U.S. Bank Trust National Association, as Trustee
(incorporated by reference from exhibits to Province Healthcare
Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003, File
No. 001-31320).
|
|
4
|
.6
|
|
|
|
First Supplemental Indenture to
Subordinated Indenture, dated as of May 27, 2003, by and
among Province Healthcare Company and U.S. Bank National
Association, as Trustee, relating to Province Healthcare
Companys 7
1/2% Senior
Subordinated Notes due 2013 (incorporated by reference from
exhibits to Province Healthcare Companys Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2003, File
No. 001-31320).
|
|
4
|
.7
|
|
|
|
Second Supplemental Indenture to
Subordinated Indenture, dated as of April 1, 2005, by and
among Province Healthcare Company and U.S. Bank National
Association, as Trustee (incorporated by reference from exhibits
to Province Healthcare Companys Current Report on
Form 8-K
dated April 5, 2005, File
No. 001-31320).
|
|
4
|
.8
|
|
|
|
Indenture, dated as of
October 10, 2001, between Province Healthcare Company and
National City Bank, including the forms of Province Healthcare
Companys
41/4% Convertible
Subordinated Notes due 2008 (incorporated by reference from
exhibits to the Registration Statement on
Form S-3,
filed by Province Healthcare Company on December 20, 2001,
File
No. 333-75646).
|
|
4
|
.9
|
|
|
|
First Supplemental Indenture,
dated as of April 15, 2005, by and among Province
Healthcare Company, LifePoint Hospitals, Inc. and U.S. Bank
National Association (as successor in interest to National City
Bank), as trustee to the Indenture dated as of October 10,
2001, relating to Province Healthcare Companys
41/4% Convertible
Subordinated Notes due 2008 (incorporated by reference from
exhibits to the Historic LifePoint Hospitals, Inc. Current
Report on
Form 8-K
dated April 15, 2005, File
No. 000-29818.
|
|
4
|
.10
|
|
|
|
Indenture, dated August 10,
2005, between LifePoint Hospitals, Inc. and Citibank, N.A., as
Trustee (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251).
|
|
10
|
.1
|
|
|
|
Tax Sharing and Indemnification
Agreement, dated May 11, 1999, by and among Columbia/HCA,
LifePoint Hospitals, Inc. and Triad Hospitals, Inc.
(incorporated by reference from exhibits to Historic LifePoint
Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999, File
No. 000-29818).
|
|
10
|
.2
|
|
|
|
Benefits and Employment Matters
Agreement, dated May 11, 1999 by and among Columbia/HCA,
LifePoint Hospitals, Inc. and Triad Hospitals, Inc.
(incorporated by reference from exhibits to Historic LifePoint
Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999, File
No. 000-29818).
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
10
|
.3
|
|
|
|
Insurance Allocation and
Administration Agreement, dated May 11, 1999, by and among
Columbia/ HCA, LifePoint Hospitals, Inc. and Triad Hospitals,
Inc. (incorporated by reference from exhibits to Historic
LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999, File
No. 000-29818).
|
|
10
|
.4
|
|
|
|
Computer and Data Processing
Services Agreement dated May 11, 1999 by and between
Columbia Information Systems, Inc. and LifePoint Hospitals, Inc.
(incorporated by reference from exhibits to Historic LifePoint
Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999, File
No. 000-29818).
|
|
10
|
.5
|
|
|
|
Amendment to Computer and Data
Processing Services Agreement, dated April 28, 2004, by and
between HCA-Information Technology and Services, Inc. and
LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to Historic LifePoint Hospitals Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2004, File
No. 000-29818).
|
|
10
|
.6
|
|
|
|
Comprehensive Service Agreement
for Diagnostic Imaging and Biomedical Services, executed on
January 7, 2005, between LifePoint Hospital Holdings, Inc.
and GE Healthcare Technologies (incorporated by reference from
exhibits to Historic LifePoint Hospitals Annual report on
Form 10-K
for the year ended December 31, 2004, File
No. 000-29818.
|
|
10
|
.7
|
|
|
|
Corporate Integrity Agreement
dated as of December 21, 2000 by and between the Office of
Inspector General of the Department of Health and Human Services
and LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2000, File
No. 000-29818).
|
|
10
|
.8
|
|
|
|
Amendment to the Corporate
Integrity Agreement, dated April 29, 2002, between the
Office of Inspector General of the Department of Health and
Human Services and LifePoint Hospitals, Inc. (incorporated by
reference from exhibits to Historic LifePoint Hospitals
Annual Report on
Form 10-K
for the year ended December 31, 2002, File
No. 000-29818).
|
|
10
|
.9
|
|
|
|
Letter from the Office of
Inspector General of the Department of Health and Human
Services, dated October 15, 2002 (incorporated by reference
from exhibits to Historic LifePoint Hospitals Annual
Report on
Form 10-K
for the year ended December 31, 2002, File
No. 000-29818).
|
|
10
|
.10
|
|
|
|
Letter from the Office of
Inspector of the Department of Health and Human Services, dated
December 18, 2003 (incorporated by reference from exhibits
to Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2004, File
No. 000-29818).
|
|
10
|
.11
|
|
|
|
Letter from the Office of
Inspector of the Department of Health and Human Services, dated
March 3, 2004 (incorporated by reference from exhibits to
Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2004, File
No. 000-29818).
|
|
10
|
.12
|
|
|
|
Amended and Restated 1998 Long
Term Incentive Plan (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated July 7, 2005, File
No. 000-51251).
|
|
10
|
.13
|
|
|
|
LifePoint Hospitals, Inc.
Executive Performance Incentive Plan (incorporated by reference
from Appendix C to Historic LifePoint Hospitals Proxy
Statement dated April 28, 2004, File
No. 000-29818).
|
|
10
|
.14
|
|
|
|
Form of LifePoint Hospitals, Inc.
Nonqualified Stock Option Agreement (incorporated by reference
from exhibits to LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005, File
No. 000-51251).
|
|
10
|
.15
|
|
|
|
Form of LifePoint Hospitals, Inc.
Restricted Stock Award Agreement (incorporated by reference from
exhibits to LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005, File
No. 000-51251).
|
|
10
|
.16
|
|
|
|
Form of LifePoint Hospitals, Inc.
Deferred Restricted Stock Award (incorporated by reference from
exhibits to LifePoint Hospitals Current Report on
Form 8-K
dated May 12, 2006, file
No. 000-51251).
|
|
10
|
.17
|
|
|
|
LifePoint Hospitals, Inc. Employee
Stock Purchase Plan (incorporated by reference from exhibits to
Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2001, File
No. 000-29818).
|
|
10
|
.18
|
|
|
|
First Amendment to the LifePoint
Hospitals, Inc. Employee Stock Purchase Plan (incorporated by
reference from exhibits to the Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on June 2,
2003, File
No. 333-105775).
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
10
|
.19
|
|
|
|
Second Amendment To Employee Stock
Purchase Plan (incorporated by reference from exhibits to
LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006, File
No. 000-51251).
|
|
10
|
.20
|
|
|
|
LifePoint Hospitals, Inc. Change
in Control Severance Plan (incorporated by reference from
exhibits to Historic LifePoint Hospitals Current Report on
Form 8-K
dated May 16, 2002, File
No. 000-29818).
|
|
10
|
.21
|
|
|
|
LifePoint Hospitals, Inc.
Management Stock Purchase Plan, as amended and restated
(incorporated by reference from exhibits to Historic LifePoint
Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2002, File
No. 000-29818).
|
|
10
|
.22
|
|
|
|
Form of Outside Directors
Restricted Stock Agreement (incorporated by reference from
exhibits to LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006, File
No. 000-51251).
|
|
10
|
.23
|
|
|
|
Summary of LifePoint Hospitals,
Inc. Non-Employee Director Compensation (incorporated by
reference from exhibits to LifePoint Hospitals Current
Report on
Form 8-K
dated May 12, 2006, File
No. 000-51251).
|
|
10
|
.24
|
|
|
|
LifePoint Hospitals, Inc. Outside
Directors Stock and Incentive Compensation Plan (incorporated by
reference from exhibits to Historic LifePoint Hospitals
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 1999, File
No. 000-29818).
|
|
10
|
.25
|
|
|
|
Amendment to the LifePoint
Hospitals, Inc. Outside Directors Stock and Incentive
Compensation Plan (incorporated by reference from
Appendix B to Historic LifePoint Hospitals Proxy
Statement dated April 28, 2004, File
No. 000-29818).
|
|
10
|
.26
|
|
|
|
Second Amendment to the LifePoint
Hospitals, Inc. Outside Directors Stock and Incentive
Compensation Plan (incorporated by reference from exhibits to
LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006, File
No. 000-51251).
|
|
10
|
.27
|
|
|
|
Employment Agreement of Kenneth C.
Donahey, as amended and restated (incorporated by reference from
exhibits to Historic LifePoint Hospitals Annual Report on
Form 10-K
for the year ended December 31, 2004, File
No. 000-29818).
|
|
10
|
.28
|
|
|
|
Separation Agreement dated
June 26, 2006, by and between LifePoint CSGP, LLC and
Kenneth C. Donahey (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated June 26, 2006, File
No. 000-51251).
|
|
10
|
.29
|
|
|
|
Consulting Agreement, dated as of
August 15, 2004, by and between LifePoint Hospitals, Inc.
and Martin S. Rash (incorporated by reference from
Appendix A to the Registration Statement on
Form S-4,
as amended, filed by LifePoint Hospitals, Inc. on
October 25, 2004, File
No. 333-119929).
|
|
10
|
.30
|
|
|
|
Credit Agreement, dated as of
April 15, 2005, by and among LifePoint Hospitals, Inc., as
borrower, the lenders referred to therein, Citicorp North
America, Inc. as administrative agent, Bank of America, N.A.,
CIBC World Markets Corp., SunTrust Bank, UBS Securities LLC, as
co syndication agents and Citigroup Global Markets, Inc., as
sole lead arranger and sole bookrunner (incorporated by
reference from the exhibits filed to Historic LifePoint
Hospitals Current Report on
Form 8-K,
dated April 15, 2005, File
No. 000-29818).
|
|
10
|
.31
|
|
|
|
Incremental Facility Amendment
dated August 23, 2005, among LifePoint Hospitals, Inc., as
borrower, Citicorp North America, Inc., as administrative agent
and the lenders party thereto (incorporated by reference from
exhibits to LifePoint Hospitals Current Report on
Form 8-K
dated August 23, 2005, File
No. 000-51251).
|
|
10
|
.32
|
|
|
|
Amendment No. 2 to the Credit
Agreement, dated October 14, 2005, among LifePoint
Hospitals, Inc. as borrower, Citicorp North America, Inc., as
administrative agent and the lenders party thereto (incorporated
by reference from exhibits to LifePoint Hospitals Current
Report on
Form 8-K
dated October 18, 2005, File
No. 000-51251).
|
|
10
|
.33
|
|
|
|
Incremental Facility Amendment
No. 3 to the Credit Agreement, dated June 30, 2006
among LifePoint Hospitals, Inc. as borrower, Citicorp North
America, Inc. as administrative agent and the lenders party
thereto. (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K
dated June 30, 2006, File
No. 000-51251).
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibits
|
|
|
10
|
.34
|
|
|
|
Incremental Facility Amendment
No. 4 to the Credit Agreement, dated September 8,
2006, among LifePoint Hospitals, Inc. as borrower, Citicorp
North America, Inc. as administrative agent and the lenders
party thereto (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated September 12, 2006, File
No. 000-51251).
|
|
10
|
.35
|
|
|
|
ISDA 2002 Master Agreement, dated
as of June 1, 2006, between Citibank, N.A. and LifePoint
Hospitals, Inc. (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K/A
dated September 8, 2006, File
No. 000-51251).
|
|
10
|
.36
|
|
|
|
Schedule to the ISDA 2002 Master
Agreement (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K/A
dated September 8, 2006, File
No. 000-51251).
|
|
10
|
.37
|
|
|
|
Confirmation, dated as of
June 2, 2006, between LifePoint Hospitals, Inc. and
Citibank, N.A. (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K/A
dated September 8, 2006, File
No. 000-51251).
|
|
10
|
.38
|
|
|
|
Stock Purchase Agreement, dated
July 14, 2005, by HCA Inc. and LifePoint Hospitals, Inc.
(incorporated by reference from exhibits to LifePoint
Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, File
No. 000-51251).
|
|
10
|
.39
|
|
|
|
Amendment to the Stock Purchase
Agreement, dated June 2, 2006 (incorporated by reference
from exhibits to LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, File
No. 000-51251).
|
|
10
|
.40
|
|
|
|
Repurchase Agreement, dated
June 30, 2006, by and between HCA Inc. and LifePoint
Hospitals, Inc. (incorporated by reference from exhibits to
LifePoint Hospitals Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, File
No. 000-51251).
|
|
10
|
.41
|
|
|
|
Executive Severance and
Restrictive Covenant Agreement by and between LifePoint CSGP,
LLC and William F. Carpenter III, dated December 11,
2006 (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K
dated December 15, 2006, File
No. 000-51251).
|
|
12
|
.1
|
|
|
|
Ratio of Earnings to Fixed Charges.
|
|
21
|
.1
|
|
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
31
|
.1
|
|
|
|
Certification of the Chief
Executive Officer of LifePoint Hospitals, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
|
|
Certification of the Chief
Financial Officer of LifePoint Hospitals, Inc. pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
|
|
32
|
.1
|
|
|
|
Certification of the Chief
Executive Officer of LifePoint Hospitals, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of the Chief
Financial Officer of LifePoint Hospitals, Inc. pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
|