Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-11239
---------------------
HCA - THE HEALTHCARE COMPANY
(Exact Name of Registrant as Specified in its Charter)
---------------------
DELAWARE 75-2497104
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE PARK PLAZA 37203
NASHVILLE, TENNESSEE (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (615) 344-9551
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $.01 Par Value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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 [X] No [ ]
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 Registrant's 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. [ ]
As of February 28, 2001, there were outstanding 522,461,600 shares of the
Registrant's Voting Common Stock and 21,000,000 shares of the Registrant's
Nonvoting Common Stock. As of February 28, 2001 the aggregate market value of
the Common Stock held by non-affiliates was approximately $19.5 billion. For
purposes of the foregoing calculation only, the Registrant's directors and
executive officers, the HCA 401(k) Plan, the EPIC Profit Sharing Plan and the
Healthtrust 401(k) Retirement Program have been deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
INDEX
PAGE
REFERENCE
---------
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 34
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 35
Item 6. Selected Financial Data..................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 38
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 52
Item 8. Financial Statements and Supplementary Data................. 52
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 53
Item 11. Executive Compensation...................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 53
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 54
2
3
PART I
ITEM 1. BUSINESS
GENERAL
HCA - The Healthcare Company is one of the leading health care services
companies in the United States. At December 31, 2000, the Company operated 196
hospitals, comprised of 179 general, acute care hospitals, 8 psychiatric
hospitals, and 9 hospitals included in joint ventures, which are accounted for
using the equity method. In addition, the Company operated 78 freestanding
surgery centers, 3 of which are accounted for using the equity method. The
Company's facilities are located in 24 states, England and Switzerland. The
terms "Company" and "HCA" as used herein refer to HCA - The Healthcare Company
and its affiliates unless otherwise stated or indicated by context. The term
"affiliates" means direct and indirect subsidiaries of HCA - The Healthcare
Company and partnerships and joint ventures in which such subsidiaries are
partners.
HCA's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost-effective
manner possible. HCA's general, acute care hospitals usually provide a full
range of services to accommodate such medical specialties as internal medicine,
general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics,
as well as diagnostic and emergency services. Outpatient and ancillary health
care services are provided by HCA's general, acute care hospitals and through
HCA's freestanding outpatient surgery and diagnostic centers, and rehabilitation
facilities. HCA's psychiatric hospitals provide a full range of mental health
care services through inpatient, partial hospitalization and outpatient
settings. HCA also operates preferred provider organizations in 47 states and
the District of Columbia.
The Company, through various predecessor entities, began operations on July
1, 1988. The Company was incorporated in Nevada in January 1990 and
reincorporated in Delaware in September 1993. HCA's principal executive offices
are located at One Park Plaza, Nashville, Tennessee 37203, and its telephone
number is (615) 344-9551.
Prior to 1997, the Company grew substantially through a series of corporate
mergers and acquisitions of individual facilities. In September 1993, the
Company, then known as Columbia Healthcare Corporation, acquired Galen Health
Care, Inc. ("Galen") in a merger accounted for as a pooling of interests. In
February 1994, the Company acquired HCA-Hospital Corporation of America in a
merger accounted for as a pooling of interests and changed its name to
Columbia/HCA Healthcare Corporation. In September 1994, the Company acquired
Medical Care America, Inc. ("MCA") in a transaction accounted for as a purchase,
and in April 1995, the Company acquired Healthtrust, Inc. - The Hospital Company
("Healthtrust") in a merger accounted for as a pooling of interests. During the
1993-1996 time period, the Company also completed numerous joint ventures and
other acquisitions of health care assets.
In July 1997, following the inception of a Federal investigation into its
business practices, the Company made substantial changes to its executive
management and initiated a plan to restructure its operations to create a
smaller and more focused company. Since July 1997, the Company has reduced the
number of hospitals it operates by more than 42%, or 144 hospitals, and the
number of surgery centers by 48%, or 71 centers. In addition, the Company sold
substantially all of its home health operations and various other non-core
assets, including three of the four units acquired in the August 1997
acquisition of Value Health, Inc. ("Value Health"). Included in the reduction of
hospitals and surgery centers were the spin-offs of LifePoint Hospitals, Inc.
("LifePoint") and Triad Hospitals, Inc. ("Triad") creating two independent
publicly traded companies, which together operated 57 hospitals at the time of
the spin-offs in May 1999. In May 2000, Columbia/HCA Healthcare Corporation
changed its name to HCA - The Healthcare Company. In December 2000, HCA
completed the sale of 116 medical office buildings to MedCap Properties, LLC, in
which HCA maintains a minority interest.
The Company continues to be the subject of governmental investigations into
and litigation relating to its business practices. In 2000, the Company agreed
to settle all criminal and certain civil claims relating to these matters. The
Company continues to work closely with the appropriate governmental authorities
to resolve the remaining civil matters. The Company is also named in various
other legal proceedings, which include qui tam
3
4
actions, shareholder derivative and class action suits filed in Federal court,
shareholder derivative actions filed in state courts, patient/payer actions and
general liability claims. The Company is defending these actions vigorously. See
Item 3 -- "Legal Proceedings."
BUSINESS STRATEGY
HCA's business strategy is to be a comprehensive provider of quality health
care services in the most cost-effective manner and consistent with the
Company's ethics and compliance program, Corporate Integrity Agreement and
governmental regulations. HCA also seeks to enhance financial performance by
increasing utilization of, and improving operating efficiencies in, the
Company's facilities. To achieve these objectives, HCA pursues the following
strategies:
- emphasize a "patients first" philosophy and a commitment to ethics and
compliance;
- focus on strong assets in select, core communities;
- develop comprehensive local health care networks with a broad range of
health care services;
- grow through increased patient volume, expansion of specialty and
outpatient services and selective acquisitions;
- improve operating efficiencies through enhanced cost management and
resource utilization, and the implementation of shared services
initiatives;
- recruit and develop and maintain relationships with physicians;
- streamline and decentralize management, consistent with HCA's local
focus; and
- effectively allocate capital to maximize return on investments.
HCA and the health care industry, in general, are facing many challenges,
including the growing number of uninsured, the availability and rising cost of
labor, reimbursement pressures from government and non-government payers and the
increasing costs of supplies, pharmaceuticals and new technologies. As a
response to these challenges, HCA is implementing a shared services initiative.
This initiative is a company-wide program designed to reduce operating costs and
provide additional resources for patient care by consolidating hospitals'
back-office functions such as billing and collections and standardizing and
upgrading financial services. In addition, HCA is implementing company-wide
supply improvement and distribution programs that include consolidating
purchasing functions regionally, combining warehouses and developing division-
based procurement programs. The Company has also undertaken both company-wide
and market-based initiatives to enhance recruitment and retention efforts.
HEALTH CARE FACILITIES
HCA currently owns, manages or operates hospitals, ambulatory surgery
centers, diagnostic centers, radiation and oncology therapy centers,
comprehensive outpatient rehabilitation and physical therapy centers and various
other facilities.
At December 31, 2000, HCA operated 179 general, acute care hospitals with
40,105 licensed beds and an additional 9 hospitals with 2,715 licensed beds that
are operated through joint ventures which are accounted for using the equity
method. Most of HCA's general, acute care hospitals provide medical and surgical
services, including inpatient care, intensive care, cardiac care, diagnostic
services and emergency services. The general, acute care hospitals also provide
outpatient services such as outpatient surgery, laboratory, radiology,
respiratory therapy, cardiology and physical therapy. Each hospital has an
organized medical staff and a local board of trustees or governing board, made
up of members of the local community.
Like most hospitals, HCA's hospitals do not engage in extensive medical
research and education programs. However, some of HCA's hospitals are affiliated
with medical schools and may participate in the clinical rotation of medical
students and other education programs.
4
5
At December 31, 2000, HCA operated 8 psychiatric hospitals with 904
licensed beds. HCA's psychiatric hospitals provide therapeutic programs
including child, adolescent and adult psychiatric care, adult and adolescent
alcohol and drug abuse treatment and counseling.
Other outpatient health care facilities operated by HCA include ambulatory
surgery centers, diagnostic centers, comprehensive outpatient rehabilitation and
physical therapy centers, outpatient radiation and oncology therapy centers and
various other facilities. These outpatient services are an integral component of
the Company's strategy to develop a comprehensive health care network in select
communities.
In addition to providing capital resources, HCA makes available a variety
of management services to its health care facilities, including ethics and
compliance programs; national supply contracts; equipment purchasing and leasing
contracts; accounting, financial and clinical systems; governmental
reimbursement assistance; construction planning and coordination; information
technology systems and solutions; legal counsel; personnel management and
internal audit.
SOURCES OF REVENUE
Hospital revenues depend upon inpatient occupancy levels, the ancillary
services and therapy programs ordered by physicians and provided to patients,
the volume of outpatient procedures and the charges or negotiated payment rates
for such services. Charges and reimbursement rates for inpatient services vary
significantly depending on the type of service (e.g., medical/surgical,
intensive care or psychiatric) and the geographic location of the hospital.
HCA receives payment for patient services from the Federal government
primarily under the Medicare program, state governments under their respective
Medicaid or similar programs, HMOs, PPOs and private insurers, as well as
directly from patients. The approximate percentages of patient revenues from
continuing operations of the Company's facilities from such sources were as
follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
----- ----- -----
Medicare.................................................... 28% 29% 30%
Medicaid.................................................... 7% 7% 6%
Managed care................................................ 40% 37% 32%
Other sources............................................... 25% 27% 32%
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and persons
with end-stage renal disease. Medicaid is a Federal-state program, administered
by the states, which provides hospital benefits to qualifying individuals who
are unable to afford care. Substantially all of HCA's hospitals are certified as
health care services providers for persons covered under Medicare and Medicaid
programs. Amounts received under the Medicare and Medicaid programs are
generally significantly less than the hospital's established charges for the
services provided.
To attract additional volume, most of HCA's hospitals offer discounts from
established charges to certain large group purchasers of health care services,
including Blue Cross, other private insurance companies, employers, HMOs, PPOs
and other managed care plans. Blue Cross is a private health care program that
funds hospital benefits through independent plans that vary in each state. These
discount programs limit HCA's ability to increase charges in response to
increasing costs. See "Competition." Patients are generally not responsible for
any difference between established hospital charges and amounts reimbursed for
such services under Medicare, Medicaid, some Blue Cross plans, HMOs or PPOs, but
are responsible to the extent of any exclusions, deductibles or co-insurance
features of their coverage. The amount of such exclusions, deductibles and
co-insurance has been increasing each year. Collection of amounts due from
individuals is typically more difficult than from governmental or third-party
payers.
5
6
Medicare
Under the Medicare program, HCA receives reimbursement under a prospective
payment system ("PPS") for inpatient and outpatient hospital services.
Psychiatric, long-term care, rehabilitation, specially designated children's
hospitals and certain designated cancer research hospitals, as well as
psychiatric or rehabilitation units that are distinct parts of a hospital and
meet Health Care Financing Administration ("HCFA") criteria for exemption, are
currently exempt from PPS and are reimbursed on a cost-based system, subject to
certain cost limits.
Under inpatient PPS, fixed payment amounts per inpatient discharge are
established based on the patient's assigned diagnosis related group ("DRG").
DRGs classify treatments for illnesses according to the estimated intensity of
hospital resources necessary to furnish care for each principal diagnosis. DRG
weights are based upon a statistically normal distribution of severity. When the
cost of treatment for certain patients falls well outside the normal
distribution, providers typically receive additional "outlier" payments. DRG
payments do not consider a specific hospital's cost, but are adjusted for area
wage differentials. The majority of inpatient capital costs for acute care
facilities are reimbursed on a prospective payment system based on DRG weights
multiplied by a geographically adjusted Federal rate.
DRG rates are updated and DRG weights are recalibrated each Federal fiscal
year and have been affected by several recent Federal enactments. The index used
to adjust the DRG rates (the "market basket") gives consideration to the
inflation experienced by hospitals and entities outside of the health care
industry in purchasing goods and services. However, for several years the
percentage increases to the DRG rates have been lower than the percentage
increases in the costs of goods and services purchased by hospitals. In Federal
fiscal year 2000, the DRG rate increase was 1.1%. The Medicare, Medicaid, and
SCHIP Benefit Improvement and Protection Act of 2000 ("BIPA") was enacted in
December 2000. Under BIPA, the DRG update for discharges from October 1, 2000
through April 1, 2001 will be market basket minus 1.1% (or 2.3%), and for
discharges from April 1, 2001 through September 30, 2001 will be market basket
plus 1.1% (or 4.5%). BIPA provides for DRG rate updates in Federal fiscal years
2002 and 2003 of market basket minus 0.55%.
Historically, the Medicare program has set aside 5.1% of Medicare inpatient
payments to pay for outlier cases. During Federal fiscal years 1999 and 2000,
Medicare has projected that payments for cost outlier cases have exceeded the
5.1% and has increased the cost threshold for Federal fiscal years 2000 and
2001, which will reduce total payments for outlier cases.
Traditionally, outpatient services provided at general, acute care
hospitals typically were reimbursed by Medicare at the lower of customary
charges, a blend of fee schedule amounts and costs that are subject to limits,
or actual costs, subject to limits. On August 1, 2000, HCFA began reimbursing
hospital outpatient services (and certain Medicare Part B services furnished to
hospital inpatients who have no Part A coverage) on a PPS basis. All services
paid under the new PPS for hospital outpatient services are classified into
groups called ambulatory payment classifications ("APCs"). Services in each APC
are similar clinically and in terms of the resources they require. A payment
rate is established for each APC. Depending on the services provided, a hospital
may be paid for more than one APC for a patient visit. The APC rates are based
on the rates that would have been in effect January 1, 1999, updated by the rate
of increase in the hospital market basket minus one percentage point, or 1.9%.
Under BIPA, the update to the outpatient PPS rates for calendar year 2001 will
be market basket, or 3.4%, to be achieved by an update of market basket plus
0.32% for services on or after April 1, 2001. The update scheduled for 2002 as
provided for under BIPA will be market basket minus 1%. While the rules and
implementation of outpatient PPS are complex, the Company does not anticipate a
material financial impact as a result of the implementation of outpatient PPS.
HCFA will continue to use existing fee schedules to pay for physical,
occupational and speech therapies, durable medical equipment, clinical
diagnostic laboratory services and nonimplantable orthotics and prosthetics.
Freestanding ambulatory surgery centers are reimbursed on a fee schedule.
Payments to PPS-exempt hospitals and units (e.g., inpatient psychiatric,
rehabilitation and long-term hospital services) are currently based upon
reasonable cost, subject to a cost per discharge target (the TEFRA limits).
These limits are updated annually by a market basket index. The update to a
hospital's target amount for its cost reporting period beginning in fiscal year
2000 was one of 0%, 0.4% or 2.9%. The update to a
6
7
hospital's target amount for its cost reporting period beginning in fiscal year
2001 will be one of 0%, 0.9%, 3.15% or 3.4%, depending on the hospital's or
unit's costs in relation to its rate-of-increase limit. Furthermore, limits have
been established for the cost per discharge target at the 75th percentile for
each category of PPS-exempt hospitals and hospital units. In addition, the cost
per discharge for new hospitals and hospital units cannot exceed 110% of the
national median target rate for hospitals in the same category.
The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999
("BBRA") required HCFA to develop and implement budget-neutral PPS systems for
both psychiatric and long-term hospitals for cost reporting periods beginning on
or after October 1, 2002. As of December 31, 2000, the Company had 58
psychiatric units, eight psychiatric hospitals and one long-term care hospital.
Historically, Medicare reimbursed skilled nursing facilities ("SNF") on the
basis of actual costs, subject to certain limits. The Balanced Budget Act of
1997 ("BBA-97") required the establishment of a prospective payment system for
Medicare skilled nursing facilities under which facilities will be paid a per
diem rate for virtually all covered services. The new payment system is being
phased in over three cost reporting periods, starting with cost reporting
periods beginning on or after July 1, 1998. BBRA and BIPA made changes to the
SNF payment rates, which should impact the BBA-97 provisions in a manner
favorable to the Company. As of December 31, 2000, the Company had 82 skilled
nursing units.
BBA-97 mandates a prospective payment system for inpatient rehabilitation
services for Medicare cost reporting periods beginning after September 30, 2000;
however, implementation has been delayed. Implementation is not anticipated
until later in 2001. Further, BIPA made changes to inpatient rehabilitation
payment rates, which should impact the BBA-97 provisions in a manner favorable
to the Company. As of December 31, 2000, the Company had 58 rehabilitation
hospitals and hospital units.
Medicaid
Medicaid programs are funded jointly by the Federal government and the
states and are administered by states under an approved plan. Most state
Medicaid program payments are made under a PPS or are based on negotiated
payment levels with individual hospitals. Medicaid reimbursement is often less
than a hospital's cost of services. The Federal government and many states are
currently considering significant reductions in the level of Medicaid funding
while at the same time expanding Medicaid benefits, which could adversely affect
future levels of Medicaid reimbursement received by the Company's hospitals. As
permitted by law, certain states in which the Company operates have adopted
broad-based provider taxes to fund their Medicaid programs. The impact of these
taxes upon the Company has not been materially adverse. However, the Company is
unable to predict whether any additional broad-based provider taxes will be
adopted by the states in which it operates and, accordingly, is unable to assess
the effect of such additional taxes on its results of operations or financial
position.
Annual Cost Reports
All hospitals participating in the Medicare and 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 the submission of annual cost reports covering the revenue,
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 Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to the Company under these reimbursement
programs. These audits often require several years to reach the final
determination of amounts due to the Company under these programs. Providers also
have rights of appeal, and it is common to contest issues raised in audits of
prior years' reports. While the annual audits of many of the Company's cost
reports had been previously delayed, the audits have been resumed. The Company
believes these audits have been, and are anticipated to be, more intensive as a
result of the governmental investigations and litigation pertaining to the
Company. Although the final outcomes of these audits and the nature and amounts
of any adjustments are difficult to predict, HCA believes that adequate
provisions have been made in its financial statements for
7
8
adjustments that may result from these audits and that final resolution of the
contested issues will not have a material adverse effect upon its results of
operations or financial position.
Reviews of previously submitted annual cost reports and the cost report
preparation process are areas included in the ongoing governmental
investigations and litigation relating to these issues. The Company remains
unable to predict the outcome of these investigations and litigation; however,
if the Company or any of its facilities were found to be in violation of Federal
or state laws relating to Medicare, Medicaid or similar programs, the Company
could be subject to substantial monetary fines, civil penalties and exclusion
from participation in the Medicare and Medicaid programs. Any such sanctions
could have a material adverse effect on the financial position and results of
operations of the Company. See Item 3 -- "Legal Proceedings."
Managed Care
Pressures to control the costs of health care have resulted in increases in
the percentage of admissions and revenues attributable to managed care payers.
The percentage of HCA's admissions attributable to managed care payers increased
from 41% for the year ended December 31, 1999 to 42% for the year ended December
31, 2000. The percentage of HCA's revenues attributable to managed care payers
increased from 37% for the year ended December 31, 1999 to 40% for the year
ended December 31, 2000. HCA expects that the trend toward increasing
percentages of admissions and revenues related to managed care payers will
continue in the future. HCA generally receives lower payments for similar
services from managed care payers than from traditional commercial/indemnity
insurers. Managed care contracts are typically negotiated for one to two year
terms. While HCA has generally received average price increases of five to six
percent from managed care payers during the previous two years, there can be no
assurance that the Company will continue to receive increases in the future.
Commercial Insurance
HCA's hospitals provide services to individuals covered by traditional
private health care insurance. Private insurance carriers make direct payments
to such hospitals or, in some cases, reimburse their policyholders based upon
the particular hospital's established charges and the particular coverage
provided in the insurance policy.
Commercial insurers are continuing efforts to limit the costs of hospital
services by adopting discounted payment mechanisms, including prospective
payment or DRG-based payment systems for more inpatient and outpatient services.
To the extent that such efforts are successful, reduced levels of reimbursement
may have a negative impact on the operating results of HCA's hospitals.
Future health care legislation or other changes in the administration or
interpretation of governmental health programs or reductions in the price
increases or amounts received from managed care, commercial insurance or other
payers could have a material adverse effect on the financial position and
results of operations of the Company.
HOSPITAL UTILIZATION
HCA believes that the most important factors relating to the overall
utilization of a hospital are the quality and market position of the hospital
and the number and quality of physicians providing patient care within the
facility. Generally, HCA believes that the ability of a hospital to be a market
leader is determined by its breadth of services, level of technology, emphasis
on quality of care and convenience for patients and physicians. Other factors
which impact utilization include the growth in local population, local economic
conditions and market penetration of managed care programs.
8
9
The following table sets forth certain operating statistics for hospitals
owned by HCA. Hospital operations are subject to certain seasonal fluctuations,
including decreases in patient utilization during holiday periods and increases
in the cold weather months.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Number of hospitals at end of period(a)........ 187 195 281 309 319
Number of licensed beds at end of period (b)... 41,009 42,484 53,693 60,643 61,931
Weighted average licensed beds(c).............. 41,659 46,291 59,104 61,096 62,708
Admissions(d).................................. 1,553,500 1,625,400 1,891,800 1,915,100 1,895,400
Equivalent admissions(e)....................... 2,300,800 2,425,100 2,875,600 2,901,400 2,826,000
Average length of stay (days)(f)............... 4.9 4.9 5.0 5.0 5.1
Average daily census(g)........................ 20,952 22,002 25,719 26,006 26,583
Occupancy rate (h)............................. 50% 48% 44% 43% 42%
- ---------------
(a) Excludes 9 facilities in 2000, 12 facilities in 1999, 24 facilities in 1998,
27 facilities in 1997 and 22 facilities in 1996 that are not consolidated
(accounted for using the equity method) for financial reporting purposes.
(b) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(c) Represents the average number of licensed beds, weighted based on periods
owned.
(d) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to HCA's hospitals and is used by management
and certain investors as a general measure of inpatient volume.
(e) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general measure
of combined inpatient and outpatient volume.
(f) Represents the average number of days admitted patients stay in HCA's
hospitals.
(g) Represents the average number of patients in HCA's hospital beds each day.
(h) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms.
Hospitals have experienced shifts from inpatient to outpatient care as well
as decreases in average lengths of inpatient stay, primarily as a result of
improvements in technology and clinical practices and hospital payment changes
by Medicare, insurance carriers, managed care programs and self-insured
employers. These changes generally encourage the utilization of outpatient,
rather than inpatient, services whenever possible, and shorter lengths of stay
for inpatient care.
COMPETITION
Generally, other hospitals in the local communities served by most of HCA's
hospitals provide services similar to those offered by HCA's hospitals.
Additionally, in the past several years the number of freestanding outpatient
surgery and diagnostic centers in the geographic areas in which HCA operates has
increased significantly. As a result, most of HCA's hospitals operate in an
increasingly competitive environment. The rates charged by HCA's hospitals are
intended to be competitive with those charged by other local hospitals for
similar services. In some cases, competing hospitals are more established than
HCA's hospitals. Some competing hospitals are owned by tax-supported government
agencies and many others by not-for-profit entities which may be supported by
endowments and charitable contributions and are exempt from sales, property and
income taxes. Such exemptions and support are not available to HCA's hospitals.
In addition, in certain localities served by HCA there are large teaching
hospitals that provide highly specialized facilities, equipment and services
which may not be available at most of HCA's hospitals. Psychiatric hospitals
9
10
frequently attract patients from areas outside their immediate locale and,
therefore, HCA's psychiatric hospitals compete with both local and regional
hospitals, including the psychiatric units of general, acute care hospitals.
HCA believes that its hospitals compete within local communities on the
basis of many factors, including the quality of care, ability to attract and
retain quality physicians, location, breadth of services, technology offered and
prices charged. HCA's strategies are designed, and management believes that its
hospitals are positioned, to be competitive.
One of the most significant factors in the competitive position of a
hospital is the number and quality of physicians affiliated with the hospital.
Although physicians may at any time terminate their affiliation with a hospital
operated by HCA, the Company's hospitals seek to retain physicians of varied
specialties on the hospitals' medical staffs and to attract other qualified
physicians. HCA believes that physicians refer patients to a hospital primarily
on the basis of the quality and scope of services it renders to patients and
physicians, the quality of physicians on the medical staff, the location of the
hospital and the quality of the hospital's facilities, equipment and employees.
Accordingly, HCA strives to maintain quality facilities, equipment, employees
and services for physicians and their patients.
Another major factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services. HMOs and PPOs attempt to direct and control the use of
hospital services through managed care programs and to obtain discounts from
hospitals' established charges. In addition, employers and traditional health
insurers are increasingly interested in containing costs through negotiations
with hospitals for managed care programs and discounts from established charges.
Generally, hospitals compete for service contracts with group health care
services purchasers on the basis of price, market reputation, geographic
location, quality and range of services, quality of the medical staff and
convenience. The importance of obtaining contracts with managed care
organizations varies from community to community depending on the market
strength of such organizations.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and facilities, make capital
expenditures and otherwise make changes in operations, may also have the effect
of restricting competition. In those states which have no CON laws or which set
relatively high levels of expenditures before they become reviewable by state
authorities, competition in the form of new services, facilities and capital
spending is more prevalent. HCA has not experienced, and does not expect to
experience, any material adverse effects from state CON requirements or from the
imposition, elimination or relaxation of such requirements. See "Regulation and
Other Factors."
HCA, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs and
strong competition for patients. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
HCA's operations in the future.
The hospital industry and HCA's hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
occupancy rates continue to be negatively affected by payer-required
pre-admission authorization, utilization review and by payer pressure to
maximize outpatient and alternative health care delivery services for less
acutely ill patients. Increased competition, admissions constraints and payer
pressures are expected to continue. To meet these challenges, HCA intends to
expand many of its facilities to better enable the provision of a comprehensive
array of outpatient services, offer discounts to private payer groups, upgrade
facilities and equipment and offer new programs and services.
REGULATION AND OTHER FACTORS
Licensure, Certification and Accreditation
Health care facility construction and operation are subject to Federal,
state and local regulations relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, maintenance of adequate records,
fire prevention, rate-setting and compliance with building codes and
environmental protection laws. Facilities are subject to periodic inspection by
governmental and other authorities to assure
10
11
continued compliance with the various standards necessary for licensing and
accreditation. HCA believes that its health care facilities are properly
licensed under appropriate state laws. Substantially all of HCA's general, acute
care hospitals are certified for participation in the Medicare program and are
accredited by the Joint Commission on Accreditation of Healthcare Organizations
("Joint Commission"). Certain of HCA's psychiatric hospitals do not participate
in these programs. If any facility were to lose its Joint Commission
accreditation or otherwise loses its certification under the Medicare program,
the facility would be unable to receive reimbursement from the Medicare and
Medicaid programs. Management believes that HCA's facilities are in substantial
compliance with current applicable Federal, state, local and independent review
body regulations and standards. The requirements for licensure, certification
and accreditation are subject to change and, in order to remain qualified, it
may be necessary for HCA to make changes in its facilities, equipment, personnel
and services.
Certificates of Need
In some states in which HCA operates hospitals, the construction of new
facilities, the acquisition of existing facilities and the addition of new beds
or services may be subject to review by state regulatory agencies under a CON
program. Such laws generally require appropriate state agency determination of
public need and approval prior to the addition of beds or services or certain
other capital expenditures. Failure to obtain necessary state approval can
result in the inability to expand facilities, complete an acquisition or change
ownership. Further, violation may result in the imposition of civil or, in some
cases, criminal sanctions, the denial of Medicare or Medicaid reimbursement or
the revocation of a facility's license.
State Rate Review
Some states in which HCA operates hospitals have adopted legislation
mandating rate or budget review for hospitals or have adopted taxes on hospital
revenues, assessments or licensure fees to fund indigent health care within the
state. In the aggregate, state rate or budget review and indigent tax provisions
have not materially adversely affected HCA's results of operations. HCA is
unable to predict whether any additional state rate or budget review or indigent
tax provisions will be adopted and, accordingly, is unable to assess the effect
thereof on its results of operations or financial position.
Utilization Review
Federal law contains numerous provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards and are medically necessary and that claims for
reimbursement are properly filed. These provisions include a requirement that a
sampling of admissions of Medicare and Medicaid patients must be reviewed by
peer review organizations ("PROs"), to assess 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. PROs may deny payment for services
provided, may assess fines and also have the authority to recommend to the
Department of Health and Human Services ("HHS") that a provider, which is in
substantial noncompliance with the appropriate standards, be excluded from
participating in the Medicare program. Most non-governmental managed care
organizations also require utilization review.
Federal Health Care Program Regulations
Participation in any Federal health care program, including the Medicare
and Medicaid programs, is heavily regulated by statute and regulation. If a
hospital fails to substantially comply with the numerous conditions of
participation in the Medicare and Medicaid programs or performs certain
prohibited acts, the hospital's participation in the Federal health care
programs may be terminated, or civil or criminal penalties may be imposed under
certain provisions of the Social Security Act.
Among these provisions is a section of the Social Security Act known as the
Anti-kickback Statute. This law prohibits providers and others from soliciting,
receiving, offering or paying, directly or indirectly, any remuneration with the
intent of generating referrals or orders for services or items covered by a
Federal health
11
12
care program. Courts have interpreted this statute broadly. Violations of the
Anti-kickback Statute may be punished by a criminal fine of up to $50,000 for
each violation or imprisonment, civil money penalties of up to $50,000 and
damages of up to three times the total amount of the remuneration, and exclusion
from participation in Federal health care programs, including Medicare and
Medicaid.
The Office of Inspector General at the Department of Health and Human
Services ("OIG"), among other regulatory agencies, is responsible for
identifying and eliminating fraud, abuse and waste. The OIG carries out this
mission through a nationwide program of audits, investigations and inspections.
In order to provide guidance to health care providers, the OIG has from time to
time issued "Special Fraud Alerts" that do not have the force of law, but
identify features of transactions that may indicate that the transactions
violate the Anti-kickback Statute or other Federal health care laws. The OIG has
identified several incentive arrangements as suspect practices, including: (a)
payment of any incentive by the hospital each time a physician refers a patient
to the hospital, (b) the use of free or significantly discounted office space or
equipment in facilities usually located close to the hospital, (c) provision of
free or significantly discounted billing, nursing or other staff services, (d)
free training for a physician's office staff in areas such as management
techniques and laboratory techniques, (e) guarantees which provide that, if the
physician's income fails to reach a predetermined level, the hospital will pay
any portion of the remainder, (f) low-interest or interest-free loans, or loans
which may be forgiven if a physician refers patients to the hospital, (g)
payment of the costs of a physician's travel and expenses for conferences, (h)
coverage on the hospital's group health insurance plans at an inappropriately
low cost to the physician, (i) payment for services (which may include
consultations at the hospital) which require few, if any, substantive duties by
the physician, or payment for services in excess of the fair market value of
services rendered, (j) purchasing goods or services from physicians at prices in
excess of their fair market value, or (k) "gainsharing," the practice of giving
physicians a share of any reduction in a hospital's costs for patient care
attributable in part to the physician's efforts. The OIG has encouraged persons
having information about hospitals who offer the above types of incentives to
physicians to report such information to the OIG.
As authorized by Congress, the OIG has published final safe harbor
regulations that outline categories of activities that are deemed protected from
prosecution under the Anti-kickback Statute. Currently there are safe harbors
for various activities, including the following: investment interests, space
rental, equipment rental, practitioner recruitment, personal services and
management contracts, sale of practice, referral services, warranties,
discounts, employees, group purchasing organizations, waiver of beneficiary
coinsurance and deductible amounts, managed care arrangements, obstetrical
malpractice insurance subsidies, investments in group practices, ambulatory
surgery centers, and referral agreements for specialty services. Certain of the
Company's current arrangements, including joint ventures, do not qualify for
safe harbor protection.
The fact that conduct or a business arrangement does not fall within a safe
harbor does not automatically render the conduct or business arrangement illegal
under the Anti-kickback Statute. The conduct and business arrangements, however,
do risk increased scrutiny by government enforcement authorities. Although the
Company believes that its arrangements with physicians have been structured to
comply with current law and available interpretations, there can be no assurance
that regulatory authorities that enforce these laws will not determine that
these financial arrangements violate the Anti-kickback Statute or other
applicable laws. This determination could subject the Company to liabilities
under the Social Security Act, including criminal penalties, civil monetary
penalties and exclusion from participation in Medicare, Medicaid or other
Federal health care programs, any of which could have a material adverse effect
on its business, financial condition or results of operations.
The Social Security Act also includes a provision commonly known as the
"Stark Law." This law prohibits physicians from referring Medicare and Medicaid
patients to entities with which they or any of their immediate family members
have a financial relationship for the provision of certain designated health
services that are reimbursable by Medicare, including inpatient and outpatient
hospital services. Sanctions for violating the Stark Law include civil monetary
penalties of up to $15,000 per prohibited service provided, assessments equal to
twice the dollar value of each such service provided and exclusion from the
Medicare and Medicaid programs. The statute also provides for a penalty of up to
$100,000 for a circumvention scheme. There are exceptions to the self-referral
prohibition, including an exception for a physician's ownership interest in an
12
13
entire hospital, as opposed to an ownership interest in a hospital department.
There are also exceptions for many of the customary financial arrangements
between physicians and providers, including employment contracts, leases and
recruitment agreements.
On January 4, 2001, HHS issued final regulations, subject to comment,
intended to clarify parts of the Stark Law and some of the exceptions to it.
These regulations are considered the first phase of a two-phase process, with
the remaining regulations to be published at an unknown future date. The Company
cannot predict the final form that these regulations will take or the effect
that the final regulations will have on its operations.
Many states in which HCA operates also have laws that prohibit payments to
physicians for patient referrals similar to the Anti-kickback Statute and
self-referral legislation similar to the Stark Law. The scope of these state
laws is broad, since they often apply regardless of the source of payment for
care, and little precedent exists for their interpretation or enforcement. These
statutes typically provide for criminal and civil penalties as well as loss of
licensure.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
broadened the scope of certain fraud and abuse laws by adding several criminal
provisions for health care fraud offenses that apply to all health benefit
programs. This Act also created new enforcement mechanisms to combat fraud and
abuse, including the Medicare Integrity Program and an incentive program under
which individuals can receive up to $1,000 for providing information on Medicare
fraud and abuse that leads to the recovery of at least $100 of Medicare funds.
In addition, Federal enforcement officials now have the ability to exclude from
Medicare and Medicaid any investors, officers and managing employees associated
with business entities that have committed health care fraud, even if the
officer or managing employee had no knowledge of the fraud. HIPAA also
established a new violation for the payment of inducements to Medicare or
Medicaid beneficiaries in order to influence those beneficiaries to order or
receive services from a particular provider or practitioner. HIPAA was followed
by BBA-97, which created additional fraud and abuse provisions, including civil
penalties for contracting with an individual or entity that the provider knows
or should know is excluded from a Federal health care program.
The Social Security Act also imposes criminal and civil penalties for
making false claims to Medicare and Medicaid. False claims include, but are not
limited to, billing for services not rendered or for misrepresenting actual
services rendered in order to obtain higher reimbursement, billing for
unnecessary goods and services, and cost report fraud. Like the Anti-kickback
Statute, these provisions are very broad. Careful and accurate coding of claims
for reimbursement, including cost reports, must be performed to avoid liability.
The Company's operations could be adversely affected by the failure of its
arrangements to comply with the Anti-kickback Statute, the Stark Law, billing
laws and regulations, current state laws or other legislation or regulation in
these areas adopted in the future. The Company is unable to predict whether
other legislation or regulations at the Federal or state level in any of these
areas will be adopted, what form such legislation or regulations may take or
their impact on the Company. The Company is continuing to enter into new
financial arrangements with physicians and other providers in a manner
structured to comply in all material respects with these laws. There can be no
assurance, however, that (i) governmental officials charged with the
responsibility for enforcing these laws will not assert that the Company is in
violation thereof or (ii) such statutes will ultimately be interpreted by the
courts in a manner consistent with the Company's interpretation.
Medicare Regulations and Fraud and Abuse are areas included in the ongoing
government investigation of the Company. See Item 3 -- "Legal Proceedings."
The Federal False Claims Act and Similar State Laws
A factor affecting the health care industry today is the use of the Federal
False Claims Act and, in particular, actions brought by individuals on the
government's behalf under the False Claims Act's "qui tam" or whistleblower
provisions. Whistleblower provisions allow private individuals to bring actions
on behalf of the government alleging that the defendant has defrauded the
Federal government. Qui tam actions are among the types of lawsuits faced by the
Company. See Item 3 -- "Legal Proceedings."
13
14
When a defendant is determined by a court of law to be liable under the
False Claims Act, the defendant may be required to pay three times the actual
damages sustained by the government, plus mandatory civil penalties of between
$5,500 and $11,000 for each separate false claim. Settlements entered into prior
to litigation usually involve a less severe damages methodology. 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. Thus,
although simple negligence will not give rise to liability under the False
Claims Act, submitting a claim with reckless disregard to its truth or falsity
constitutes "knowing" submission under the False Claims Act and, therefore, will
qualify for 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. A number of states in which
the Company operates 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.
Administrative Simplification and Privacy Requirements
The Administrative Simplification Provisions of HIPAA require the use of
uniform electronic data transmission standards for health care claims and
payment transactions submitted or received electronically. These provisions are
intended to encourage electronic commerce in the health care industry. On August
17, 2000, HHS published final regulations establishing electronic data
transmission standards that all health care providers must use when submitting
or receiving certain health care transactions electronically. Compliance with
these regulations is required by October 16, 2002. The Company cannot predict
the impact that these regulations, when fully implemented, will have on its
operations.
The Administrative Simplification Provisions also require HHS to adopt
standards to protect the security and privacy of health-related information. HHS
proposed regulations containing security standards on August 12, 1998. These
proposed security regulations have not been finalized, but as proposed would
require health care providers to implement organizational and technical
practices to protect the security of electronically maintained or transmitted
health-related information. In addition, HHS released final regulations
containing privacy standards in December 2000. These privacy regulations are
scheduled to become effective April 2001 and compliance with these regulations
is required by April 2003. Therefore, these privacy regulations could be further
amended prior to the compliance date. However, as currently drafted, the privacy
regulations will extensively regulate the use and disclosure of individually
identifiable health-related information, whether communicated electronically, on
paper or orally. The regulations also provide patients with significant new
rights related to understanding and controlling how their health information is
used or disclosed. The security regulations, as proposed, and the privacy
regulations could impose significant costs on HCA's facilities in order to
comply with these standards. The Company cannot predict the final form that
these regulations will take or the impact that final regulations, when fully
implemented, will have on its operations.
Violations of the Administrative Simplification Provisions could result in
civil penalties of up to $25,000 per type of violation in each calendar year and
criminal penalties of up to $250,000 per violation. In addition, there are
numerous legislative and regulatory initiatives at the Federal and state levels
addressing patient privacy concerns. Facilities will continue to remain subject
to any Federal or state laws that are more restrictive than the privacy
regulations issued under the Administrative Simplification Provisions. These
statutes vary and could impose additional penalties.
EMTALA
All of HCA's hospitals 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 hospital's emergency room 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 patient's ability to pay for
treatment. There are
14
15
severe penalties under EMTALA if a hospital refuses to screen or appropriately
stabilize or transfer a patient or if the hospital delays appropriate treatment
in order to first inquire about the patient's 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
patient's family or a medical facility that suffers a financial loss as a direct
result of another hospital's violation of the law can bring a civil suit against
the hospital.
The government broadly interprets EMTALA to cover situations in which
patients do not actually present to a hospital's emergency room but present to a
hospital-based clinic or are transported in a hospital-owned ambulance. The
government also has expressed its intent to investigate and enforce EMTALA
violations actively in the future. Moreover, patients are increasingly including
EMTALA violation allegations in malpractice lawsuits. Management believes HCA's
hospitals operate in substantial compliance with EMTALA. However, there can be
no assurance that the regulatory authorities empowered to investigate a Company
hospital will not conclude that it has violated EMTALA, or that a patient or
other party will not sue a hospital alleging a violation of EMTALA.
Corporate Practice of Medicine/Fee Splitting
Some of the states in which HCA operates have laws that prohibit
corporations and other entities from employing physicians and practicing
medicine for a profit or that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of,
particular providers for medical products and services. Possible sanctions for
violation of these restrictions include loss of license and civil and criminal
penalties. These statutes vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies. Although HCA
exercises care in an effort to structure its arrangements with health care
providers to comply with the relevant state statutes, and although management
believes that HCA is in substantial compliance with these laws, there can be no
assurance that (i) governmental officials charged with responsibility for
enforcing these laws will not assert that HCA or certain transactions in which
it is involved are in violation of such laws and (ii) such state laws will
ultimately be interpreted by the courts in a manner consistent with the
practices of HCA.
Health Care Industry Investigations
Significant media and public attention has focused in recent years on the
hospital industry. The Company is currently the subject of various Federal and
state investigations and litigation. See Item 3 -- "Legal Proceedings."
The Company's substantial Medicare, Medicaid and other governmental
billings result in heightened scrutiny of its operations. The Company continues
to monitor these and all other aspects of its business and has developed a
comprehensive ethics and compliance program that is designed to meet or exceed
applicable Federal guidelines and industry standards. However, because the law
in this area is complex and constantly evolving, the Company cannot give
assurances that ongoing or future governmental investigations or litigation will
not result in interpretations that are inconsistent with industry practices,
including the Company's.
It is possible that governmental entities could initiate investigations or
litigation in the future at facilities operated by HCA and that such matters
could result in significant penalties to the Company, as well as adverse
publicity. It is also possible that HCA's executives and managers could be
included in governmental investigations or litigation or named as defendants in
private litigation. The positions taken by authorities in any such matters
relating to the Company, its executives or managers or other health care
providers and the liabilities or penalties that may be imposed could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Health Care Reform
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. In recent
years, various legislative proposals have been introduced or proposed in
15
16
Congress and in some state legislatures that would effect major changes in the
health care system, either nationally or at the state level. Many states have
enacted or are considering enacting measures designed to reduce their Medicaid
expenditures and change private health care insurance. Most states, including
the states in which the Company operates, have applied for and been granted
Federal waivers from current Medicaid regulations to allow them to serve some or
all of their Medicaid participants through managed care providers. The Company
is unable to predict the future course of Federal, state or local health care
legislation. There can be no assurance that future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have a material adverse effect on HCA's business,
financial condition or results of operations.
Compliance Program and Corporate Integrity Agreement
The Company maintains a comprehensive ethics and compliance program that is
designed to meet or exceed applicable Federal guidelines and industry standards.
The program is intended to monitor and raise awareness of various regulatory
issues among employees and to emphasize the importance of complying with
governmental laws and regulations. As part of the ethics and compliance program,
the Company provides annual ethics and compliance training to its employees and
encourages all employees to report any violations to their supervisor, an ethics
and compliance officer or a toll-free telephone ethics line.
In December 2000, the Company entered into a Corporate Integrity Agreement
("CIA") with the OIG. The CIA is structured to assure the Federal government of
the Company's overall Medicare compliance and specifically covers DRG coding,
outpatient laboratory billing, outpatient PPS billing and physician relations.
The CIA resulted in a waiver of the government's discretionary right to exclude
any of the Company's operations from participation in the Medicare program for
matters settled in the Civil and Administrative Settlement Agreement with the
Civil Division of the Department of Justice. The CIA will be effective for eight
years. See Item 3 -- "Legal Proceedings." Breach of the CIA could subject the
Company to substantial monetary penalties and exclusion from participation in
the Medicare and Medicaid programs. Any such sanctions could have a material
adverse effect on the Company's financial position and results of operations.
Conversion Legislation
Many states have enacted or are considering enacting laws affecting the
conversion or sale of not-for-profit hospitals. These laws, in general, include
provisions relating to attorney general approval, advance notification and
community involvement. In addition, state attorneys general in states without
specific conversion legislation may exercise authority over these transactions
based upon existing law. In many states there has been an increased interest in
the oversight of not-for-profit conversions. The adoption of conversion
legislation and the increased review of not-for-profit hospital conversions may
limit HCA's ability to grow through acquisitions of not-for-profit hospitals.
Revenue Ruling 98-15
In March 1998, the IRS issued guidance regarding the tax consequences of
joint ventures between for-profit and not-for-profit hospitals. As a result of
the tax ruling, the IRS has proposed and may in the future propose to revoke the
tax-exempt or public charity status of certain not-for-profit entities which
participate in such joint ventures or to treat joint venture income as unrelated
business taxable income. HCA is continuing to review the impact of the tax
ruling on its existing joint ventures, or the development of future ventures,
and is consulting with its joint venture partners and tax advisers to develop
appropriate courses of action. In January 2001, a not-for-profit entity which
participates in a joint venture with HCA filed a refund suit in Federal District
Court seeking to recover taxes, interest and penalties assessed by the IRS in
connection with the IRS's proposed revocation of the not-for-profit entity's
tax-exempt status. In the event that the not-for-profit entity's tax-exempt
status is upheld, the IRS has proposed to treat the not-for-profit entity's
share of joint venture income as unrelated business taxable income. HCA is not a
party to this lawsuit.
The tax ruling or any adverse determination by the IRS or the courts
regarding the tax-exempt or public charity status of a not-for-profit partner or
the characterization of joint venture income as unrelated business
16
17
taxable income could limit joint venture development with not-for-profit
hospitals, require the restructuring of certain existing joint ventures with
not-for-profits and influence the exercise of "put agreements" (that require HCA
to purchase the partner's interest in the joint venture) by certain existing
joint venture partners.
ENVIRONMENTAL MATTERS
HCA is subject to various Federal, state and local statutes and ordinances
regulating the discharge of materials into the environment. Management does not
believe that HCA will be required to expend any material amounts in order to
comply with these laws and regulations or that compliance will materially affect
its capital expenditures, results of operations or financial position.
INSURANCE
As is typical in the health care industry, HCA is subject to claims and
legal actions by patients in the ordinary course of business. Through a
wholly-owned insurance subsidiary, HCA insures a substantial portion of its
professional and general liability risks. The Company's health care facilities
are insured by the insurance subsidiary for losses of up to $25 million per
occurrence, a portion of which is reinsured with unrelated commercial carriers.
The Company also maintains professional and general liability insurance with
unrelated commercial carriers for losses in excess of amounts insured by its
insurance subsidiary.
The Company and its insurance subsidiary maintain allowances for
professional liability risks which totalled $1.4 billion at December 31, 2000.
Management considers such allowances, which are based on actuarially determined
estimates, to be adequate for such liability risks. Any losses incurred in
excess of the established allowances for loss will be reflected as a charge to
HCA's earnings. Any losses incurred in excess of amounts funded and maintained
with commercial excess liability insurance carriers will be funded from HCA's
working capital. While HCA's cash flow has been adequate to provide for
professional and general liability claims in the past, there can be no assurance
that such amounts will continue to be adequate. If payments for professional and
general liability claims exceed actuarily determined estimates, the results of
operations and financial condition of HCA could be adversely affected.
EMPLOYEES AND MEDICAL STAFFS
At December 31, 2000, HCA had approximately 164,000 employees, including
approximately 11,000 part-time employees. The Company is subject to various
state and Federal laws that regulate wages, hours, benefits and other terms and
conditions relating to employment. Employees at 11 hospitals are represented by
various labor unions. HCA considers its employee relations to be satisfactory.
While HCA's hospitals experience union organizational activity from time to
time, HCA does not expect such efforts to materially affect its future
operations. HCA's hospitals, like most hospitals, have experienced labor costs
rising faster than the general inflation rate. In some markets nurse and medical
support personnel availability has become a significant operating issue to
health care providers. This shortage may require the Company to enhance wages
and benefits to recruit and retain nurses and other medical personnel or to hire
more expensive temporary personnel. There can be no assurance as to future
availability and cost of qualified medical personnel. References herein to
"employees" refer to employees of affiliates of HCA.
HCA's hospitals are staffed by licensed physicians who have been accepted
to the medical staff of individual hospitals. With certain exceptions,
physicians generally are not employees of HCA's hospitals. However, some
physicians provide services in HCA's hospitals under contracts, which generally
describe a term of service, provide and establish the duties and obligations of
such physicians, require the maintenance of certain performance criteria and fix
compensation for such services. Any licensed physician may apply to be accepted
to the medical staff of any of HCA's hospitals, but acceptance to the staff must
be approved by the hospital's medical staff and the appropriate governing board
of the hospital in accordance with established credentialling criteria. Members
of the medical staffs of HCA's hospitals often also serve on the medical staffs
of other hospitals and may terminate their affiliation with a hospital at any
time.
17
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of HCA as of February 28, 2001, were as follows:
NAME AGE POSITION(S)
---- --- -----------
Thomas F. Frist, Jr., M.D............ 62 Chairman of the Board
Jack O. Bovender, Jr................. 55 President, Chief Executive Officer and Director
David G. Anderson.................... 53 Senior Vice President -- Finance and Treasurer
Richard M. Bracken................... 48 President -- Western Group
Victor L. Campbell................... 54 Senior Vice President
Rosalyn S. Elton..................... 39 Senior Vice President -- Operations Finance
James A. Fitzgerald, Jr.............. 46 Senior Vice President -- Contracts and Operations
Support
V. Carl George....................... 57 Senior Vice President -- Development
Jay Grinney.......................... 49 President -- Eastern Group
Samuel N. Hazen...................... 40 Chief Financial Officer -- Western Group
Frank M. Houser, M.D................. 60 Senior Vice President -- Quality and Medical
Director
R. Milton Johnson.................... 44 Senior Vice President and Controller
Patricia T. Lindler.................. 53 Senior Vice President -- Government Programs
A. Bruce Moore, Jr................... 41 Senior Vice President -- Operations Administration
Philip R. Patton..................... 48 Senior Vice President -- Human Resources
Gregory S. Roth...................... 44 President -- Ambulatory Surgery Group
William B. Rutherford................ 37 Chief Financial Officer -- Eastern Group
Joseph N. Steakley................... 46 Senior Vice President -- Internal Audit & Consulting
Services
Beverly B. Wallace................... 50 Senior Vice President -- Revenue Cycle Operations
Management
Robert A. Waterman................... 47 Senior Vice President and General Counsel
Noel Brown Williams.................. 46 Senior Vice President and Chief Information Officer
Alan R. Yuspeh....................... 51 Senior Vice President -- Ethics, Compliance and
Corporate Responsibility
Thomas F. Frist, Jr., M.D. serves as Chairman of our Board of Directors and
remains an executive officer of the Company after stepping down as Chief
Executive Officer in January 2001. Dr. Frist served as our Chief Executive
Officer and Chairman from July 1997 to January 2001. Previously, he served as
Vice Chairman of the Board of the Company from April 1995 until July 1997. From
February 1994 to April 1995, he was Chairman of the Board of the Company. Dr.
Frist was Chairman of the Board, President and Chief Executive Officer of
HCA-Hospital Corporation of America from 1988 to February 1994.
Jack O. Bovender, Jr. was appointed our President and Chief Executive
Officer on January 8, 2001. Mr. Bovender served as President and Chief Operating
Officer of the Company from August 1997 to January 2001. Mr. Bovender was
appointed as a Director of the Company in July 1999. From April 1994 to August
1997, he was retired after serving as Chief Operating Officer of HCA-Hospital
Corporation of America from 1992 until 1994. Prior to 1992, Mr. Bovender held
several senior level positions with HCA-Hospital Corporation of America.
David G. Anderson has served as Senior Vice President -- Finance and
Treasurer of the Company since July 1999. Mr. Anderson served as Vice
President -- Finance of the Company from September 1993 to July 1999 and was
elected to the additional position of Treasurer in November 1996. From March
1993 until September 1993, Mr. Anderson served as Vice President -- Finance and
Treasurer of Galen Health Care, Inc. From July 1988 to March 1993, Mr. Anderson
served as Vice President -- Finance and Treasurer of Humana Inc.
Richard M. Bracken has served as President -- Western Group of the Company
since August 1997. From January 1995 to August 1997, Mr. Bracken served as
President of the Pacific Division of the Company. From July 1993 to December
1994, he served as President of Nashville Healthcare Network, Inc. From
18
19
December 1981 to June 1993, he served in various hospital Chief Executive
Officer and Administrator positions with HCA-Hospital Corporation of America.
Victor L. Campbell has served as Senior Vice President of the Company since
February 1994. Prior to that time, Mr. Campbell served as HCA-Hospital
Corporation of America's Vice President for Investor, Corporate and Government
Relations. Mr. Campbell joined HCA-Hospital Corporation of America in 1972. Mr.
Campbell is currently a director of the Federation of American Health Systems
and serves on the operations committee of the American Hospital Association.
Rosalyn S. Elton has served as Senior Vice President -- Operations Finance
of the Company since July 1999. Ms. Elton served as Vice President -- Operations
Finance of the Company from August 1993 to July 1999. From October 1990 to
August 1993, Ms. Elton served as Vice President -- Financial Planning and
Treasury for the Company.
James A. Fitzgerald, Jr. has served as Senior Vice President -- Contracts
and Operations Support of the Company since July 1999. Mr. Fitzgerald served as
Vice President -- Contracts and Operations Support of the Company from 1994 to
July 1999. From 1993 to 1994, he served as the Vice President of Operations
Support for HCA-Hospital Corporation of America. From July 1981 to 1993, Mr.
Fitzgerald served as Director of Internal Audit for HCA-Hospital Corporation of
America.
V. Carl George has served as Senior Vice President -- Development of the
Company since July 1999. Mr. George served as Vice President -- Development of
the Company from April 1995 to July 1999. From September 1987 to April 1995, Mr.
George served as Director of Development for Healthtrust. Prior to working for
Healthtrust, Mr. George served with HCA-Hospital Corporation of America in
various positions.
Jay Grinney has served as President -- Eastern Group of the Company since
March 1996. From October 1993 to March 1996, Mr. Grinney served as President of
the Greater Houston Division of the Company. From November 1992 to October 1993,
Mr. Grinney served as Chief Operating Officer of the Houston Region of the
Company. From June 1990 to November 1992, Mr. Grinney served as President and
Chief Executive Officer of Rosewood Medical Center in Houston, Texas.
Samuel N. Hazen has served as Chief Financial Officer -- Western Group of
the Company since August 1995. Mr. Hazen served as Chief Financial
Officer -- North Texas Division of the Company from February 1994 to July 1995.
Prior to that time, Mr. Hazen served in various hospital and regional Chief
Financial Officer positions with Humana Inc. and Galen Health Care, Inc.
Frank M. Houser, M.D. has served as Senior Vice President -- Quality and
Medical Director of the Company since November 1997. Dr. Houser served as
President -- Physician Management Services of the Company from May 1996 to
November 1997. Dr. Houser served as President of the Georgia Division of the
Company from December 1994 to May 1996. From May 1993 to December 1994, Dr.
Houser served as the Medical Director of External Operations at The Emory
Clinic, Inc. in Atlanta, Georgia. Dr. Houser served as State Public Health
Director, Georgia Department of Human Resources from July 1991 to May 1993.
R. Milton Johnson has served as Senior Vice President and Controller of the
Company since July 1999. Mr. Johnson served as Vice President and Controller of
the Company from November 1998 to July 1999. Prior to that time, Mr. Johnson
served as Vice President -- Tax of the Company from April 1995 to October 1998.
Prior to that time, Mr. Johnson served as Director of Tax of Healthtrust from
September 1987 to April 1995.
Patricia T. Lindler has served as Senior Vice President -- Government
Programs of the Company since July 1999. Ms. Lindler served as Vice
President -- Reimbursement of the Company from September 1998 to July 1999.
Prior to that time, Ms. Lindler was the President of Health Financial
Directions, Inc. from March 1995 to November 1998. From September 1980 to
February 1995, Ms. Lindler served as Director of Reimbursement of the Company's
Florida Group.
A. Bruce Moore, Jr. has served as Senior Vice President -- Operations
Administration since July 1999. Mr. Moore served as Vice President -- Operations
Administration of the Company from September 1997 to July 1999. From October
1996 to September 1997, Mr. Moore served as Vice President -- Benefits of the
19
20
Company. Mr. Moore served as Vice President of Compensation of the Company from
March 1995 until October 1996. From February 1994 to March 1995, Mr. Moore
served as Director -- Compensation of the Company. Mr. Moore also served as
Director -- Compensation for HCA-Hospital Corporation of America from November
1987 until February 1994.
Philip R. Patton has served as Senior Vice President -- Human Resources of
the Company since September 1998. Mr. Patton served as Vice President of Human
Resources of Quorum Health Group, Inc. from 1996 to August 1998. From 1994 to
1996, Mr. Patton served as a part-time consultant and community volunteer after
serving as Senior Vice President of Human Resources of HCA-Hospital Corporation
of America from 1979 to 1994.
Gregory S. Roth has served as President -- Ambulatory Surgery Group of the
Company since July 1998. From May 1997 to July 1998, Mr. Roth served as Senior
Vice President -- Ambulatory Surgery Division of the Company. Mr. Roth served as
Chief Financial Officer -- Ambulatory Surgery Division of the Company from
January 1995 to May 1997. Prior to that time, Mr. Roth held various
multi-facility and hospital chief financial officer positions with OrNda
HealthCorp and EPIC Healthcare Group, Inc.
William B. Rutherford has served as Chief Financial Officer -- Eastern
Group of the Company since January 1996. From 1994 to January 1996, Mr.
Rutherford served as Chief Financial Officer -- Georgia Division of the Company.
Prior to that time, Mr. Rutherford held several positions with HCA-Hospital
Corporation of America, including Director of Internal Audit and Director of
Operations Support.
Joseph N. Steakley has served as Senior Vice President -- Internal Audit &
Consulting Services of the Company since July 1999. Mr. Steakley served as Vice
President -- Internal Audit & Consulting Services from November 1997 to July
1999. From December 1975 until October 1997, Mr. Steakley worked for Ernst &
Young LLP where he served as a partner from October 1989.
Beverly B. Wallace has served as Senior Vice President -- Revenue Cycle
Operations Management of the Company since July 1999. Ms. Wallace served as Vice
President -- Managed Care of the Company from July 1998 to July 1999. From 1997
to 1998, Ms. Wallace served as President -- Homecare Division of the Company.
From 1996 to 1997, Ms. Wallace served as Chief Financial Officer -- Nashville
Division of the Company. From 1994 to 1996, Ms. Wallace served as Chief
Financial Officer -- Mid-American Division of the Company.
Robert A. Waterman has served as Senior Vice President and General Counsel
of the Company since November 1997. Mr. Waterman served as a partner in the law
firm of Latham & Watkins from September 1993 to October 1997; he was also Chair
of the firm's healthcare group during 1997.
Noel Brown Williams has served as Senior Vice President and Chief
Information Officer of the Company since October 1997. From October 1996 to
September 1997, Ms. Williams served as Chief Information Officer for American
Service Group/Prison Health Services, Inc. From September 1995 to September
1996, Ms. Williams worked as an independent consultant. From June 1993 to June
1995, Ms. Williams served as Vice President, Information Services for HCA
Information Services. From February 1979 to June 1993, she held various
positions with HCA-Hospital Corporation of America Information Services.
Alan R. Yuspeh has served as Senior Vice President -- Ethics, Compliance
and Corporate Responsibility of the Company since October 1997. From September
1991 until October 1997, Mr. Yuspeh was a partner with the law firm of Howrey &
Simon. As a part of his law practice, Mr. Yuspeh served from 1987 to 1997 as
Coordinator of the Defense Industry Initiative on Business Ethics and Conduct.
20
21
ITEM 2. PROPERTIES
The following table lists, by state, the number of hospitals (general,
acute care and psychiatric), directly or indirectly, owned and operated by the
Company as of December 31, 2000:
LICENSED
STATE HOSPITALS BEDS
- ----- --------- --------
Alaska...................................................... 1 254
California.................................................. 8 2,103
Colorado.................................................... 6 2,063
Florida..................................................... 42 10,272
Georgia..................................................... 18 2,945
Idaho....................................................... 2 473
Illinois.................................................... 1 153
Indiana..................................................... 2 460
Kansas...................................................... 1 760
Kentucky.................................................... 3 732
Louisiana................................................... 13 2,132
Mississippi................................................. 1 130
Nevada...................................................... 2 880
New Hampshire............................................... 2 295
North Carolina.............................................. 1 60
Oklahoma.................................................... 6 1,236
South Carolina.............................................. 5 1,003
Tennessee................................................... 12 2,385
Texas....................................................... 40 9,508
Utah........................................................ 6 902
Virginia.................................................... 11 2,899
Washington.................................................. 1 119
West Virginia............................................... 4 1,020
INTERNATIONAL
Switzerland................................................. 2 220
United Kingdom.............................................. 6 720
--- ------
196 43,724
=== ======
In addition to the hospitals listed in the above table, HCA, directly or
indirectly operates 78 freestanding surgery centers. HCA also operates medical
office buildings in conjunction with some of its hospitals. These office
buildings are primarily occupied by physicians who practice at HCA's hospitals.
HCA owns and maintains its headquarters in approximately 580,000 square
feet of space in five office buildings in Nashville, Tennessee.
HCA's headquarters, hospitals and other facilities are suitable for their
respective uses and are, in general, adequate for HCA's present needs. The
Company's properties are subject to various Federal, state and local statutes
and ordinances regulating their operation. Management does not believe that
compliance with such statutes and ordinances will materially affect the
Company's financial position or results from operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is facing significant legal challenges. The Company is the
subject of various government investigations, qui tam actions, shareholder
derivative and class action suits filed in Federal court, shareholder derivative
actions filed in state court, patient/payer actions and general liability
claims.
21
22
GOVERNMENT INVESTIGATIONS AND LITIGATION
The Company continues to be the subject of governmental investigations and
litigation relating to its business practices. Additionally, the Company is a
defendant in several qui tam actions brought by private parties on behalf of the
United States of America, some of which have been unsealed and served on the
Company. The Company is aware of additional qui tam actions that remain under
seal. There could also be other sealed qui tam cases of which it is unaware.
On December 14, 2000, the Company announced that it had entered into a Plea
Agreement with the Criminal Division of the Department of Justice and various
U.S. Attorney's Offices (the "Plea Agreement") and a Civil and Administrative
Settlement Agreement with the Civil Division of the Department of Justice (the
"Civil Agreement"). As discussed below, the agreements resolve all Federal
criminal issues outstanding against the Company and, subject to court approval,
certain issues involving Federal civil claims by or on behalf of the government
against the Company relating to DRG coding, outpatient laboratory billing and
home health issues. The Company also entered into a Corporate Integrity
Agreement ("CIA") with the Office of Inspector General of the Department of
Health and Human Services.
Pursuant to the Plea Agreement, the Company and its affiliates received a
full release from criminal liability for conduct arising from or relating to
billing and reimbursement for services provided pursuant to Federal health care
benefit programs regarding: Medicare cost reports; violations of the
Anti-kickback Statute or the Physician Self-referral law, and any other conduct
involving relations with referral sources and those in a position to influence
referral sources; DRG billing; laboratory billing; the acquisition of home
health agencies; and the provision of services by home health agencies. In
addition, the government agreed not to prosecute the Company for other possible
criminal offenses which are or have been under investigation by the Department
of Justice arising from or relating to billing and reimbursement for services
provided pursuant to Federal health care benefit programs. The Plea Agreement
provided that the Company pay the government approximately $95 million, which
payment was made during the first quarter of 2001, and that two non-operating
subsidiaries enter certain criminal pleas, which pleas were entered in January
2001.
The Civil Agreement covers the following issues: DRG coding for calendar
years 1990-1997; outpatient laboratory billings for calendar years 1989-1997;
home health community education for Medicare cost report years 1994-1997; home
health billing for calendar years 1995-1998; and certain home health management
transactions for Medicare cost report years 1993-1998. The Civil Agreement
provides that in return for releases on these issues, the Company will pay the
government approximately $745 million, with interest accruing from May 18, 2000
to the payment date at a rate of 6.5%. The civil payment will be made upon
receipt of court approval of the Civil Agreement, which is expected to occur
during the second quarter of 2001. The civil issues that are not covered by the
Civil Agreement include claims related to cost reports and physician relations
issues.
Under the Civil Agreement, the Company's existing Letter of Credit
Agreement with the Department of Justice will be reduced from $1 billion to $250
million at the time of the settlement payment, which is expected to occur during
the second quarter of 2001. Any future civil settlement or court ordered
payments related to cost report or physician relations issues will reduce the
remaining amount of the letter of credit dollar for dollar. The amount of any
such future settlement or court ordered payments is not related to the remaining
amount of the letter of credit.
The CIA is structured to assure the government of the Company's overall
Medicare compliance and specifically covers DRG coding, outpatient laboratory
billing, outpatient PPS billing and physician relations. The CIA resulted in a
waiver of the government's discretionary right to exclude any of the Company's
operations from participation in the Medicare program for matters settled in the
Civil Agreement.
The Company remains the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
22
23
The Company continues to cooperate in government investigations. Given the
scope of the ongoing investigations and litigation, the Company expects other
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future.
While management remains unable to predict the outcome of any of the
ongoing investigations and litigation or the initiation of any additional
investigations or litigation, were the Company to be found in violation of
Federal or state laws relating to Medicare, Medicaid or similar programs or
breach of the CIA, the Company could be subject to substantial monetary fines,
civil and criminal penalties and/or exclusion from participation in the Medicare
and Medicaid programs. Any such sanctions could have a material adverse effect
on the Company's financial position, results of operations and liquidity. (See
Note 2 -- Investigations and Agreements to Settle Certain Government Claims and
Note 11 -- Contingencies in the Notes to Consolidated Financial Statements.)
LAWSUITS
Qui Tam Actions
Several qui tam actions have been brought by private parties ("relators")
on behalf of the United States and have been unsealed and served on the Company.
To the best of the Company's knowledge the actions allege, in general, that the
Company and certain affiliates violated the False Claims Act, 31 U.S.C.
sec. 3729 et seq., for improper claims submitted to the government for
reimbursement. The lawsuits generally seek damages of three times the amount of
all Medicare or Medicaid claims (involving false claims) presented by the
defendants to the Federal government, civil penalties of not less than $5,000 or
more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and
costs. In many instances there are additional common law claims. There are also
qui tam cases that have been unsealed but have not yet been served on the
Company. Finally, the Company is aware of additional qui tam actions that remain
under seal. There may be other sealed qui tam cases of which it is unaware.
On February 12, 1999, the United States filed a motion before the Judicial
Panel on Multidistrict Litigation ("MDL") seeking to transfer and consolidate,
pursuant to 28 U.S.C. sec. 1407, qui tam actions against the Company, including
those sealed and unsealed, for purposes of discovery and pretrial matters, to
the United States District Court for the District of Columbia. The MDL Panel
granted the motion and all of the qui tam cases subject to the motion have been
consolidated to the U.S. District Court of the District of Columbia. There are
some qui tam actions that remain outside of the consolidation.
On January 30, 2001, the District Court in the District of Columbia entered
an order establishing an initial schedule for the consolidated qui tam cases.
Among other things, the Court ordered that for those qui tam cases which will be
dismissed in full or in part pursuant to the Civil Agreement, the parties must
file motions to dismiss by February 14, 2001. The Court ordered that, by March
15, 2001, the government must make an intervention decision on the remaining
cases and file and serve a Complaint for those cases in which it intervenes. On
March 15, 2001, the government filed its notice of intervention or notice
declining intervention in each qui tam action in the MDL proceeding. In each
case where the government intervened, it served the complaint on the Company. In
those cases where the government declined intervention, the respective relators
were required to serve the complaint by March 15, 2001 or within 15 days after
the government's notice declining intervention, whichever is later.
The unsealed qui tam Complaints included in the consolidated MDL proceeding
include the following:
In October 1998, the U.S. District Court for the Middle District of Florida
unsealed United States ex rel. Alderson v. Columbia/HCA et al, Case No.
97-2-35-CIV-T-23E. The case had been pending under seal since 1992, and is a qui
tam action alleging various violations of the Federal False Claims Act
concerning the Company's claims for reimbursement under various Federal programs
including Medicare, Medicaid and other Federally funded programs. The complaint
focuses on the alleged creation of certain "cost reserves" in connection with
the preparation of hospital cost reports submitted for the purpose of Federal
reimbursement. On October 1, 1998, the government intervened in this case and on
March 15, 2001, served the amended complaint on the Company. In December 1998,
the U.S. District for the Middle District of Florida unsealed
23
24
United States, ex rel. Schilling v. Columbia/HCA, Civil Action No.
96-1264-CIV-T-23B. The case alleges violations of the False Claims Act, also
concerning cost reporting issues. On December 30, 1998, the government
intervened in this case and, on March 15, 2001, the government served the
amended complaint on the Company. Certain claims alleging home health issues
have been dismissed as being covered by the Civil Agreement.
On July 31, 1998, the U.S. District Court for the Western District of
Texas, unsealed United States ex rel. Sara Ortega v. Columbia/HCA Healthcare
Corp., et al. No. EP 95-CA-259H. The case had been pending under seal since
1995, and alleges various violations of the False Claims Act concerning
statements made to the Joint Commission in order to be eligible for Medicare
payments, thereby allegedly rending false the defendants' claims for Medicare
reimbursement. In 1997, the relator filed an amended complaint alleging other
issues, including DRG upcoding, physician referral violations and certain cost
reporting issues. In September 1998, the government intervened in some of these
allegations, but not the allegations relating to the Joint Commission issues.
The court has dismissed the DRG upcoding allegations as being covered by the
Civil Agreement. On March 15, 2001, the government moved to dismiss relator's
kickback allegations and certain of the relator's cost report allegations on
jurisdictional grounds. The government also withdrew its intervention on one
cost-shifting allegation. The government retained intervention in the surviving
cost-shifting allegations. The first amended complaint was served on the Company
on March 9, 2001.
The matter of United States ex rel. James Thompson v. Columbia/HCA
Healthcare Corp., et al., Civ. Action No. C-95-110 was filed on March 10, 1995
in the United States District Court for the Southern District of Texas. The
relator alleges that the Company engaged in improper financial arrangements with
physicians to induce referrals. The defendants filed a motion to dismiss the
second amended complaint in November 1995 which was granted by the court in July
1996. In August 1996, the relator appealed to the United States Court of Appeals
for the Fifth Circuit, and in October 1997, the Fifth Circuit affirmed in part
and vacated and remanded in part the trial court's rulings. Defendants filed a
Second Amended Motion to Dismiss which was denied on August 18, 1998. On August
21, 1998, relator filed a Third Amended Complaint. Discovery in this matter is
currently stayed. Effective February 16, 2001, the government intervened in this
case and, on March 15, 2001, served its amended complaint on the Company.
The matter of United States ex rel. Scott Pogue v. Diabetes Treatment
Centers of America, Inc., et al., Civil Action No. 3-94-0515, was filed under
seal on June 23, 1994 in the United States District Court for the Middle
District of Tennessee. On February 6, 1995, the United States filed its Notice
of Non-Intervention and on that same date, the District Court ordered the
complaint unsealed. In general, the relator contends that sums paid to
physicians by the Diabetes Treatment Centers of America, who served as medical
directors at a hospital affiliated with the Company, were unlawful payments for
the referrals of their patients. The relator filed a motion for partial summary
judgment. The court ordered the relator's motion for partial summary judgment
stricken. The relator did not file an amended motion for summary judgment. The
government has declined to intervene in this case.
In June 1998, the case United States ex rel. Joseph "Mickey" Parslow v.
Columbia/HCA Healthcare Corporation and Curative Health Services, Incorporated,
No 98-1260-CIV-T-23F, in the Middle District of Florida, Tampa Division, was
filed. The government intervened in this action on March 31, 1999. This action
alleges that the Company submitted false claims relating to contracts with
Curative for the management of certain wound care centers. The complaint further
alleges that management fees paid to Curative were excessive and not reasonable
and that the claims for reimbursement for these management fees violated the
Anti-kickback Statute. On March 15, 2001, the government withdrew its
intervention as to claims regarding alleged excessive management fees and filed
and served its complaint on the Company covering all remaining counts.
The case United States ex rel. Lanni v. Curative Health Services, et al.,
98 Civ. 2501 (S.D. N.Y.) was filed on April 8, 1998 in the United States
District Court for the Southern District of New York. The complaint makes
allegations similar to those in the Parslow case, and Company affiliated
entities are named in that suit. The government has intervened in the case, in
part, in order to seek dismissal of any outpatient
24
25
laboratory claims covered by the Civil Agreement and has dismissed those
allegations. On March 15, 2001, the government intervened in certain of the
remaining claims and served its complaint on the Company.
The matter of United States ex rel. McLendon v. Columbia/HCA, et al., Civ.
No. 1 97 CV 0890, was filed under seal on April 4, 1997 in the U.S. District
Court for the Northern District of Georgia, Atlanta Division. On July 19, 1999,
the court unsealed this action. The complaint alleges that the Company acted to
illegally obtain Medicare reimbursement for costs incurred in purchasing home
health agencies. The complaint also alleges that the Company illegally billed
Medicare for certain sales and marketing activities and for certain home care
visits. The government has intervened in this action and has served the
complaint. On February 16, 2001, the court dismissed this case as released under
the Civil Agreement.
In August 1999, the Company was made aware that the case of United States
ex rel. Tonya M. Atchison v. Col/HCA Healthcare, Inc., El Paso Healthcare
System, Ltd. Columbia West Radiology Group, P.A. West Texas Radiology Group, Rio
Grande Physicians' Services Inc., El Paso Nurses Unlimited inc., El Paso
Healthcare Systems Limited, and El Paso Healthcare Systems United Partnership,
No. EP 97-CA234, was unsealed in the U.S. District Court for the Western
District of Texas and the Company was served on or about September 16, 1999. In
general, the complaint alleges that the defendants submitted false claims
regarding the 72-hour rule, cost reports and central business office billings,
wrote off bad debt on international patients, inflated financial information on
the sale of a hospital, improperly billed pharmacy and radiology charges,
improperly billed skilled nursing facility charges, improperly accounted for
discounts and rebates, improperly billed certified first assistants in surgery,
home health visits, senior health centers, diabetic treatment and wound care
center. The Company has filed a motion to extend the time within which to
respond to the complaint. In 1997, the relator also filed a case, United States
ex rel. Atchison v. Columbia/HCA Healthcare, Inc., Civ. Action No. 3-97-0571
(M.D. Tenn.) in the United States District Court for the Middle District of
Tennessee alleging the same violations. The court has dismissed claims relating
to the home health issues as being covered by the Civil Agreement. On March 15,
2001, the government declined to intervene on both complaints.
In December 1997, United States ex rel. Michael R. Marine v. Columbia
Aventura Medical Center, et al., Case No. 97-4368 (S.D. Fla.) was filed in the
United States District Court for the Southern District of Florida. In general,
the case alleges that the Company engaged in improper cost shifting between
facilities to improperly maximize reimbursement and then filing false claims on
its cost reports. The government intervened on February 11, 2000. On March 15,
2001, the government withdrew its intervention on certain claims and served the
complaint on the Company.
In 1997, United States ex rel. Adams v. Columbia/HCA Healthcare Corp., Civ.
Action No. SA-97-CA-1230 (W.D. Tex.) was filed in the United States District
Court for the Western District of Texas. In general, the complaint alleges that
the Company engaged in improper financial arrangements with physicians to induce
referrals, in violation of the Anti-kickback Statute. On March 15, 2001, the
government declined to intervene in this case.
In August 1997, United States ex rel. Baker, Trent & Ekery v. Columbia/HCA
Healthcare Corp., et al., Civ. Action No. SA-97-CA-0955 (W.D. Tex.) was filed in
the United States District Court for the Western District of Texas. In general,
the case alleges that the Company engaged in improper financial arrangements
with physicians to induce referrals in violation of the Anti-kickback Statute as
well as engaging in improper cost shifting, allegedly creating the filing of
false cost report claims. On March 15, 2001, the government declined to
intervene in this case.
In 1996, United States ex rel. King v. Columbia/HCA Healthcare Corp., et
al., Civ. Action No. EP-96-CA-342 (W.D. Tex.) was filed in the United States
District Court for the Western District of Texas. In general, the case alleges
that the Company engaged in improper financial relationships with physicians to
induce referrals in violation of the Anti-kickback Statute as well as other
alleged improper cost reporting practices in violation of the False Claims Act,
including improper billing, laboratory fraud, falsification of records,
upcoding, and lack of certification to perform specific services. On March 15,
2001, the government intervened in part and declined to intervene as to the
billing fraud allegations. The government served the complaint on the Company.
25
26
On September 2, 1997, United States ex rel. Ann Mroz v. Columbia/HCA
Healthcare Corp., Civ. Action No. 97-2828 (S.D. Fla.) was filed in the United
States District Court for the Southern District of Florida. This case alleges
that a Company hospital engaged in improper arrangements with physicians to
induce referrals in violation of the Anti-kickback Statute. On March 15, 2001,
the government intervened in this case and served the complaint on the Company.
In 1998, United States ex rel Barrett and Goodwin v. Columbia/HCA
Healthcare Corp., et al., Civ. Action No. H-98-0861 (S.D. Tex.) was filed in the
United States District Court for the Southern District of Texas. In general, the
complaint alleges that the Company engaged in improper financial arrangements
with physicians to induce referrals in violation of the Anti-kickback Statute as
well as improper upcoding of DRG codes. On March 15, 2001, the government
declined to intervene in this case.
In 1996, United States ex rel Rappaport v. Hospital Corp. of America, et
al., Civ. Action No. CV 96-N-1491-S (A)(N.D. Ala.) was filed in the United
States District Court for the Northern District of Alabama. In general, the
complaint alleges the Company engaged in improper financial arrangements with
physicians to induce referrals in violation of the Anti-kickback Statute as well
as upcoding, improper lab billing, cost-shifting and other improper cost
reporting practices in violation of the False Claims Act. On February 16, 2001
the court dismissed the DRG upcoding claims. On March 9, 2000, the government
declined to intervene in this case.
In 1999, United States ex rel. Hampton v. Columbia/HCA Healthcare Corp., et
al., Civ. Action No. 5:99-CV-59-2 (M.D. Ga.) was filed in the United States
District Court for the Middle District of Georgia. In general, the case alleges
improper billing and improper practices with regard to home health agencies. The
government has intervened in this case for the purpose of dismissing the
relator's home health claims as being covered by the Civil Agreement. On March
15, 2001, the government moved to dismiss the claims. The government also
declined to intervene in the kickback allegations. The relator served the
complaint on the Company on March 15, 2001.
In 1998, United States ex rel. Buck v. St. Petersburg General Hospital, et
al., Civ. Action No. 98-1631-CIV-T26B (M.D. Fla.) was filed in United States
District Court for the Middle District of Florida. In general, the complaint
alleges that the Company improperly billed Medicare for private rooms for
patients when they were actually put in semi-private rooms. On December 27,
1999, the government declined to intervene in this case.
In 1997, United States ex rel. Hockett, Thompson & Staley v. Columbia/HCA
Healthcare Corp., et al., Civ. Action No. 97-MC-29-A (W.D. Va.) was filed in the
United States District Court for the Western District of Virginia. In general,
the case alleges that the Company filed false claims in connection with the
filing of its cost reports by improper inflation of cost basis relating to the
gero-psych ward. On March 15, 2001, the government declined to intervene in this
case.
In 1997, United States ex rel. Christian, Long & Kuhn v. Columbia Homecare
Group, Inc., et al., Civ. Action No. CA-H-97-3083 (S.D. Tex.) was filed in the
United States District Court for the Southern District of Texas. In general, the
complaint alleges improper billing with respect to home health agencies and
other false claims in connection with the filing of cost reports. On February
16, 2001, the court dismissed the case.
In 1998, United States ex rel. Scussel v. Patton Medical. Inc. et al, Civ.
Action No. 4:98-CV-145 (M.D. Ga.) was filed in the United States District Court
for the Middle District of Georgia. In general, the complaint alleges that the
Company entered into an improper referral arrangement with a durable medical
equipment supplier. On February 2, 2001, the government declined to intervene in
this case. On March 8, 2001, the Company was served with a complaint by the
relator.
In 1999, United States ex rel. McCready v. Columbia North Monroe Hospital,
Civil Action No. 99-1099M was filed in the United States District Court for the
Western District of Louisiana. In general, the case alleges that a Company
hospital failed to timely transfer patients to the rehabilitation unit, a
practice which allegedly resulted in improper cost allocation to the hospital's
acute care services and thus improperly increased reimbursement. On February 13,
2001, the government declined to intervene in this case.
26
27
In 1996, United States ex rel. Health Outcomes v. Columbia Medical Center
East, et al., Civ. Action No. 96-1552 (E.D. Pa.) was filed in the United States
District Court for the Eastern District of Pennsylvania. In general, the
complaint alleges improper upcoding of DRG codes. The government has intervened
for the purpose of dismissing the claims covered by the Civil Agreement. On
February 16, 2001, the court dismissed this case.
In 1999, United States ex rel. Cianci v. Columbia/HCA Healthcare Corp., et
al., was filed in United States District Court for the Middle District of
Florida. The complaint alleges improper upcoding of DRG codes. On February 13,
2001, the government intervened in this case for the purpose of dismissing the
claims in the complaint. The relator has objected to the dismissal.
In 1995, United States ex rel. Wyman & Rothfeder v. Healthtrust, Inc. et
al., Civ. Action No. 2:95CV-0079-K (D. Utah) was filed in the United States
District Court for the District of Utah. In general, the case alleges improper
billing of laboratory tests. On February 16, 2001, the court dismissed this
action in its entirety as being covered by the Civil Agreement.
In August 1997, United States ex rel. Boston v. Columbia/HCA Healthcare
Corp., No. 3-97-CV1943-R (N.D. Tex.), was filed in the United States District
Court for the Northern District of Texas. In general, the Complaint alleges
improper billing relating to home health agencies. The government has intervened
in this action for the purpose of dismissing the claims covered by the Civil
Agreement, and on February 16, 2001, the court dismissed the case.
Shareholder Derivative and Class Action Complaints Filed in the U.S. District
Courts
During the April 1997 to October 1997 period, numerous securities class
action and derivative lawsuits were filed in the United States District Court
for the Middle District of Tennessee against the Company and a number of its
current and former directors, officers and/or employees.
On October 10, 1997, the court entered an order consolidating the
above-mentioned securities class action claims into a single-captioned case,
Morse, Sidney, et al. v. R. Clayton McWhorter, et al., Case No. 3-97-0370. All
of the other individual securities class action lawsuits were administratively
closed by the court. The consolidated Morse lawsuit is a purported class action
seeking the certification of a class of persons or entities who acquired the
Company's common stock from April 9, 1994 to September 9, 1997. The consolidated
lawsuit was brought against the Company, Richard Scott, David Vandewater, Thomas
Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt, Magdalena Averhoff, M.D.,
T. Michael Long and Donald S. MacNaughton. The lawsuit alleges, among other
things, that the defendants committed violations of the Federal securities laws
by materially inflating the Company's revenues and earnings through a number of
practices, including upcoding, maintaining reserve cost reports, disseminating
false and misleading statements, cost shifting, illegal reimbursements, improper
billing, unbundling and violating various Medicare laws. The lawsuit seeks
damages, costs and expenses.
On October 10, 1997, the court entered an order consolidating the
above-mentioned derivative law claims into a single-captioned case, McCall, H.
Carl, as Comptroller of the State of New York and as Trustee of the New York
State Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare
Corporation v. Richard L. Scott, et al., No. 3-97-0838. All of the other
derivative lawsuits were administratively closed by the court. The consolidated
McCall lawsuit was brought against the Company, Thomas Frist, Jr., Richard L.
Scott, David T. Vandewater, R. Clayton McWhorter, Magdalena Averhoff, M.D.,
Frank S. Royal, M.D., T. Michael Long, William T. Young and Donald S.
MacNaughton. The lawsuit alleges, among other things, derivative claims against
the individual defendants that they intentionally or negligently breached their
fiduciary duties to the Company by authorizing, permitting or failing to prevent
the Company from engaging in various schemes involving improperly increasing
revenue, upcoding, improper cost reporting, improper referrals, improper
acquisition practices and overbilling. In addition, the lawsuit asserts a
derivative claim against some of the individual defendants for breaching their
fiduciary duties by allegedly engaging in improper insider trading. The lawsuit
seeks restitution, damages, recoupment of fines or penalties paid by the
Company, restitution and pre-judgment interest against the alleged insider
trading defendants, and costs and expenses. In addition, the lawsuit seeks
orders: (i) prohibiting the Company from paying individual
27
28
defendants employment benefits; (ii) terminating all improper business
relationships with individual defendants; and (iii) requiring the Company to
implement effective corporate governance and internal control mechanisms
designed to monitor compliance with Federal and state laws and ensure reports to
the Board of material violations.
The defendants filed motions to dismiss in both the Morse and McCall
lawsuits. These motions were referred to the Magistrate Judge for consideration.
In June 1998, the Magistrate Judge recommended that the court grant the motions
to dismiss in both cases. Plaintiffs in both cases filed objections to the
Magistrate's recommendations with the District Court, and defendants filed
responsive pleadings. In September 1999, the District Court entered an order
granting the defendants' motion to dismiss McCall, H. Carl, as Comptroller of
the State of New York and as Trustee of the New York State Retirement Fund,
derivatively on behalf of Columbia/HCA Healthcare Corporation v. Richard L.
Scott, et al., No. 3-97-0838 with prejudice. The plaintiffs in the McCall
lawsuit have filed an appeal from that order. Defendants filed their brief in
opposition to the appeal in March 2000. The Sixth Circuit panel heard oral
argument on December 7, 2000, and on February 13, 2001, entered an order
reversing in part and remanding the case to the trial court. The defendants have
filed a motion with the Sixth Circuit Court of Appeals for reconsideration, or
in the alternative, certification to the Delaware Supreme Court.
On July 28, 2000, the District Court entered an order granting the
defendants' motions to dismiss in Morse. The District Court's order dismissed
Morse with prejudice. On or about August 10, 2000, plaintiffs filed a motion to
alter or amend judgment and for leave to file an amended complaint and requested
oral argument on their motion. The plaintiffs' motion to alter or amend was
denied in October 2000. On October 18, 2000, plaintiffs filed their Notice of
Appeal.
Shareholder Derivative Actions Filed in State Courts
Several derivative actions have been filed in state courts by certain
purported stockholders of the Company against certain of the Company's current
and former officers and directors alleging breach of fiduciary duty, and failure
to take reasonable steps to ensure that the Company did not engage in illegal
practices thereby exposing the Company to significant damages.
Two purported derivative actions entitled Barron, Evelyn, et al. v.
Magdelena Averhoff, et al., (Civil Action No. 15822NC), filed on July 22, 1997,
and Kovalchick, John E. v. Magdelena Averhoff, et al., (Civil Action No.
15829NC), filed on July 29, 1997, have been filed in the Court of Chancery of
the State of Delaware in and for New Castle County. The actions were brought on
behalf of the Company by certain purported shareholders of the Company against
certain of the Company's current and former officers and directors. The suits
seek damages, attorneys' fees and costs. In the Barron lawsuit, plaintiffs also
seek an Order (i) requiring individual defendants to return to the Company all
salaries or remunerations paid them by the Company, together with proceeds of
the sale of the Company's stock made in breach of their fiduciary duties; (ii)
prohibiting the Company from paying any individual defendant any benefits
pursuant to the terms of employment, consulting or partnership agreements; and
(iii) terminating all improper business relationships between the Company and
any individual defendant. In the Kovalchick lawsuit, plaintiffs also seek an
Order (i) requiring individual defendants to return to the Company all salaries
or remunerations paid to them by the Company and all proceeds from the sale of
the Company's stock made in breach of their fiduciary duties; (ii) requiring
that an impartial Compliance Committee be appointed to meet regularly; and (iii)
requiring that the Company be prohibited from paying any director/defendant any
benefits pursuant to terms of employment, consulting or partnership agreements.
The parties have stipulated to a temporary stay of the Kovalchick lawsuit.
Plaintiffs in both Barron and Kovalchick have granted the defendants an
indefinite extension of time to respond to the Complaints. On August 14, 1997, a
similar purported derivative action entitled State Board of Administration of
Florida, the public pension fund of the State of Florida in behalf of itself and
in behalf of all other stockholders of Columbia/HCA Healthcare Corporation
derivatively in behalf of Columbia/HCA Healthcare Corporation vs. Magdalena
Averhoff, et al., (No. 97-2729), was filed in the Circuit Court in Davidson
County, Tennessee on behalf of the Company by certain purported shareholders of
the Company against certain of the Company's current and former directors and
officers. These lawsuits seek damages and costs as well as orders (i) enjoining
the Company from paying benefits to individual defendants;
28
29
(ii) requiring termination of all improper business relationships with
individual defendants; (iii) requiring the Company to provide for independent
public directors; and (iv) requiring the Company to put in place proper
mechanisms of corporate governance. The court has entered an order temporarily
staying the lawsuit.
The matter of Louisiana State Employees Retirement System, a public pension
fund of the State of Louisiana, in behalf of itself and in behalf of all other
stockholders of Columbia/HCA Healthcare Corporation derivatively in behalf of
Columbia/HCA Healthcare Corporation v. Magdalena Averhoff, et al., another
derivative action, was filed on March 19, 1998 in the Circuit Court of the
Eleventh Judicial Circuit, Dade County, Florida, General Jurisdiction Division
(Case No. 98-6050 CA04), and the defendants removed it to the United States
District Court, Southern District of Florida (Case No. 98-814-CIV). The suit
alleges, among other things, breach of fiduciary duties resulting in damage to
the Company. The lawsuit seeks damages from the individual defendants to be paid
to the Company and attorneys' fees, costs and expenses. In addition, the lawsuit
seeks orders (i) requiring the individual defendants to pay to the Company all
benefits received by them from the Company; (ii) enjoining the Company from
paying any benefits to individual defendants; (iii) requiring that defendants
terminate all improper business relationships with the Company and any
individual defendants; (iv) requiring that the Company provide for appointment
of a majority of independent public directors; and (v) requiring that the
Company put in place proper mechanisms of corporate governance. On August 10,
1998, the court transferred this case to the United States District Court,
Middle District of Tennessee (Case No. 3:98-0846). By agreement of the parties,
the case has been administratively closed pending the outcome of the court's
ruling on the defendants' motions to dismiss the McCall action referred to
above. As a result of the court's September 1, 1999, order dismissing the McCall
lawsuit, this lawsuit was also dismissed with prejudice. The plaintiffs in this
lawsuit have filed an appeal from that order. Defendants filed their brief in
opposition to the appeal in March 2000. The Sixth Circuit panel heard oral
argument on December 7, 2000, and on February 13, 2001, entered an order
reversing in part and remanding the case to the trial court. The defendants have
a filed motion with the Sixth Circuit Court of Appeals for reconsideration, or
in the alternative, certification to the Delaware Supreme Court. (See Carl H.
McCall, as Comptroller of the State of New York and as Trustee of the New York
State Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare
Corporation v. Richard L. Scott, et al., above.)
The Company intends to pursue the defense of these Federal and state
shareholder derivative and class action complaints vigorously.
Patient/Payer Actions and Other Class Actions
The Company is a party to several purported class action lawsuits which
have been filed by patients and/or payers against the Company and/or certain of
its current and former officers and directors alleging, in general, improper and
fraudulent billing, overcharging, coding and physician referrals, as well as
other violations of law. Certain of the lawsuits have been conditionally
certified as class actions.
The matter of In re: Columbia/HCA Healthcare Corporation Billing Practices
Litigation, Master File No. MDL 1227, was commenced by Order of the MDL Panel
entered on June 11, 1998 granting the Company's petition to consolidate the
Boyson and Operating Engineers cases for pretrial purposes in the Middle
District of Tennessee pursuant to 28 U.S.C. 1407. Three other cases (see cases
below) that have been consolidated with Boyson and Operating Engineers in the
MDL proceeding are (i) Board of Trustees of the Carpenters & Millwrights of
Houston & Vicinity Welfare Trust Fund, (ii) Board of Trustees of the Texas
Ironworkers' Health Benefit Plan, and (iii) Tennessee Laborers Health and
Welfare Fund. On September 21, 1998, the plaintiffs in five consolidated cases
filed a Coordinated Class Action Complaint, which the Company answered on
October 13, 1998. The plaintiffs seek certification of two proposed classes
including all private individuals and all employee welfare benefit plans that
have paid for health-related goods or services provided by the Company. The
plaintiffs allege, among other things, that the Company has engaged in a pattern
and practice of inflating charges, concealing the true nature of patients'
illnesses, providing unnecessary medical care, and billing for services never
rendered. The plaintiffs seek damages, attorneys' fees and costs, as well as
disgorgement and injunctive relief. A scheduling order was entered that provided
for class certification motions to be filed by February 22, 1999 and for
discovery to be completed by June 30, 1999. In February 1999, plaintiffs filed a
motion to extend the time periods in the scheduling order, which was granted by
the court on
29
30
August 24, 1999. However, the court has not entered a new scheduling order.
Effective November 2, 1999, a sixth case, The United Paperworkers International
Union, et al. v. Columbia/HCA Healthcare Corporation, et al., was transferred by
the MDL Panel for consolidated pretrial proceedings. On December 30, 1999,
plaintiffs filed a motion seeking leave to file a first amended coordinated
complaint. On March 15, 2000, the court entered an order granting the
plaintiffs' motion. The amended complaint did not include Board of Trustees of
the Texas Ironworkers' Health Benefit Plan as a plaintiff but added a new
plaintiff, Board of Trustees of the Pipefitters Local 522 Hospital, Medical and
Life Benefit Fund. Defendants have filed an answer to the amended complaint. The
parties are currently engaged in discovery pending a ruling on plaintiffs'
motion to modify the case schedule. In addition, in an order and memorandum
opinion dated April 12, 2000, the Court ordered the Company to produce to the
plaintiffs certain documents that the Company listed as subject to the
attorney-client privilege and/or the attorney work product doctrine on privilege
logs. The Company appealed the court's decision to the United States Court of
Appeals for the Sixth Circuit. The matter has been fully briefed in the Court of
Appeals. No oral argument date has been set.
The matter of Boyson, Cordula, on behalf of herself and all others
similarly situated v. Columbia/HCA Healthcare Corporation was filed on September
8, 1997 in the United States District Court for the Middle District of
Tennessee, Nashville Division (Civil Action No. 3-97-0936). The original
complaint, which sought certification of a national class comprised of all
persons or entities who have paid for medical services provided by the Company,
alleges, among other things, that the Company has engaged in a pattern and
practice of (i) inflating diagnosis and medical treatments of its patients to
receive larger payments from the purported class members; (ii) providing
unnecessary medical care; and (iii) billing for services never rendered. This
lawsuit seeks injunctive relief requiring the Company to perform an accounting
to identify and disgorge medical bill overcharges. It also seeks damages,
attorneys' fees, interest and costs. In an Order entered on June 11, 1998 by the
MDL Panel, other lawsuits against the Company were consolidated with the Boyson
case in the Middle District of Tennessee. The amended complaint in Boyson was
withdrawn and superseded by the Coordinated Class Action Complaint filed in the
MDL proceeding on September 21, 1998. (See In re: Columbia/HCA Healthcare
Corporation Billing Practices Litigation.)
The matter of Operating Engineers Local No. 312 Health & Welfare Fund, on
behalf of itself and as representative of a class of those similarly situated v.
Columbia/HCA Healthcare Corporation was filed on August 6, 1997 in the United
States District Court for the Eastern District of Texas, Civil Action No.
597CV203. The original complaint alleged violations of the Racketeering
Influenced and Corrupt Organization Act ("RICO") based on allegations that the
defendant employed one or more schemes or artifices to defraud the plaintiff and
purported class members through fraudulent billing for services not performed,
fraudulent overcharging in excess of correct rates and fraudulent concealment
and misrepresentation. In October 1997, the Company filed a motion to transfer
venue and to dismiss the lawsuit on jurisdiction and venue grounds because the
RICO claims are deficient. The motion to transfer was denied on January 23,
1998. The motion to dismiss was also denied. In February 1998, defendant filed a
petition with the MDL Panel to consolidate this case with Boyson for pretrial
proceedings in the Middle District of Tennessee. During the pendency of the
motion to consolidate, plaintiff amended its Complaint to add allegations under
the Employee Retirement Income Security Act of 1974 ("ERISA") as well as state
law claims. The amended complaint seeks damages, attorneys' fees and costs, as
well as disgorgement and injunctive relief. The MDL Panel granted defendant's
motion to consolidate in June 1998, and this action was transferred to the
Middle District of Tennessee. The amended complaint in Operating Engineers was
withdrawn and superseded by the Coordinated Class Action Complaint filed in the
MDL proceeding on September 21, 1998. (See In re: Columbia/HCA Healthcare
Corporation Billing Practices Litigation.)
On April 24, 1998, two matters, Board of Trustees of the Carpenters &
Millwrights of Houston & Vicinity Welfare Trust Fund v. Columbia/HCA Healthcare
Corporation, Case No. 598CV157, and Board of Trustees of the Texas Ironworkers'
Health Benefit Plan v. Columbia/HCA Healthcare Corporation, Case No. 598CV158,
were filed in the United States District Court for the Eastern District of
Texas. The original Complaint in these suits alleged violations of RICO only.
Plaintiffs in both cases principally alleged that in order to inflate its
revenues and profits, defendant engaged in fraudulent billing for services not
performed, fraudulent overcharging in excess of correct rates and fraudulent
concealment and misrepresentation. These
30
31
suits seek damages, attorneys' fees and costs, as well as disgorgement and
injunctive relief. Plaintiffs subsequently amended their complaint to add
allegations under ERISA as well as state law claims. These suits have been
consolidated by the MDL Panel with Boyson and transferred to the Middle District
of Tennessee for pretrial proceedings. The amended complaints in these suits
were withdrawn and superseded by the Coordinated Class Action Complaint filed in
the MDL proceeding on September 21, 1998. (See In re: Columbia/HCA Healthcare
Corporation Billing Practices Litigation.)
The matter of Tennessee Laborers Health and Welfare Fund, on behalf of
itself and all others similarly situated vs. Columbia/HCA Healthcare
Corporation, Case No. 3-98-0437, was filed in the United States District Court
of the Middle District of Tennessee, Nashville Division, on May 14, 1998. The
lawsuit seeks certification of a national class comprised of all employee
welfare benefit plans that have paid for medical services provided by the
Company. This case involves allegations under ERISA, as well as state law claims
which are similar to those alleged in Boyson. Plaintiff, an Employee Welfare
Benefit Plan, alleges that defendant violated the terms of the Plan documents by
overbilling the Plans, including but not limited to, exaggerating the severity
of illnesses, providing unnecessary treatment, billing for services not rendered
and other methods of overbilling and further violated the terms of the Plan
documents by taking Plan assets in payment of such improper bills. Plaintiff
further alleges that defendant intentionally concealed or suppressed the true
nature of its patients' illnesses, and the actual treatment provided to those
patients, and its improper billing. The suit seeks injunctive relief in the form
of an accounting, damages, attorneys' fees, interest and costs. This suit has
been consolidated by the court with Boyson and the other cases transferred by
the MDL Panel to the Middle District of Tennessee. The complaint in Tennessee
Laborers was withdrawn and superseded with the filing of the Coordinated Class
Action Complaint in the MDL proceeding on September 21, 1998. (See In re:
Columbia/HCA Healthcare Corporation Billing Practices Litigation.)
The matter of The United Paper Workers International Union, et al. v.
Columbia/HCA Healthcare Corporation, et al., was filed on September 3, 1998 in
the Circuit Court for Washington County, Tennessee, Civil Action No. 19350. The
lawsuit contains billing fraud allegations similar to those in the Ferguson case
and seeks certification of a national class comprised of all self-insured
employers who paid or were obligated to pay any portion of a bill for, among
other things, pharmaceuticals, medical supplies or medical services. The suit
seeks declaratory relief, damages, interest, attorneys' fees and other
litigation costs. In addition, the suit seeks an Order (i) requiring defendants
to provide an accounting to plaintiffs and class members who overpaid or were
obligated to overpay, (ii) requiring defendants to disgorge all monies illegally
collected from plaintiffs and the class, and (iii) rescinding all contracts of
defendants with plaintiffs and all class members. Following the service of this
complaint on the Company on August 20, 1999, the Company subsequently removed
this lawsuit to the United States District Court for the Eastern District of
Tennessee and it was conditionally transferred by the MDL Panel to the Middle
District of Tennessee for consolidated pretrial proceedings with In re:
Columbia/HCA Healthcare Corporation Billing Practices Litigation and was later
formally joined in plaintiffs' amended complaint (See In re: Columbia/HCA
Healthcare Corporation Billing Practices Litigation.)
The matter of Brown, Nancy, individually and on behalf of all others
similarly situated v. Columbia/HCA Healthcare Corporation was filed on November
16, 1995, in the Fifteenth Judicial Circuit Court in and for Palm Beach County,
Florida, Case No. 95-9102 AD. The suit alleges that Palms West Hospital charged
excessive amounts for goods and services associated with patient care and
treatment, including items such as pharmaceuticals, medical supplies, laboratory
tests, medical equipment and related medical services such as x-rays. The suit
seeks the certification of a nationwide class, and damages for patients who have
paid bills for the allegedly unreasonable portion of the charges as well as
interest, attorneys' fees and costs. In response to defendant's amended motion
to dismiss filed in January 1996, plaintiff amended the Complaint and defendant
subsequently filed an answer and defenses in June 1996. On October 15, 1997,
Harald Jackson moved to intervene in the lawsuit (see case below). The court
denied Jackson's motion on December 19, 1997. To date, discovery is proceeding
and no class has been certified.
The matter of Jackson, Harald F., individually and on behalf of all others
similarly situated v. Columbia/HCA Healthcare Corporation was initially filed as
a motion to intervene in the Brown matter (above) in October 1997 in the
Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida. The
31
32
court denied Jackson's motion on December 19, 1997, and Jackson subsequently
filed a Complaint in the same state court on December 23, 1997, Case No.
97-011419-AI. This suit seeks certification of a national class of persons or
entities who were allegedly overcharged for medical services by the Company
through an alleged practice of systematically and unlawfully inflating prices,
concealing its practice of inflating prices, and engaging in, and concealing, a
uniform practice of overbilling. The proposed class is broad enough to encompass
all private payers, including individuals, insurers and health and welfare
plans. This suit seeks damages on behalf of the plaintiff and individual members
of the class as well as interest, attorneys' fees and costs. In January 1998,
the case was removed to the United States District Court, Southern District of
Florida, Case No. 98-CIV-8050. In February 1998, Jackson filed an amended
complaint, and the case was remanded to state court. The Company has filed
motions in response to the amended complaint which are pending. Jackson moved to
transfer the case to the judge handling the Brown case which is also pending,
but the motion to transfer was denied on April 8, 1999. Discovery has commenced.
Jane Doe and her husband, John Doe, on their own behalf, and on behalf of
all other persons similarly situated vs. HCA Health Services of Tennessee, Inc.,
d/b/a HCA Donelson Hospital n/k/a Summit Medical Center is a class action suit
filed on August 17, 1992 in the First Circuit Court for Davidson County,
Tennessee, Case No. 92C-2041. The suit principally alleges that Summit Medical
Center's ("Summit") charges for hospital services and supplies for medical
services (a hysterectomy in the plaintiff's case) exceeded the reasonable costs
of its goods and services, that the overcharges constitute a breach of contract
and an unfair or deceptive trade practice as well as a breach of the duty of
good faith and fair dealing. This suit seeks damages, costs and attorneys' fees.
In addition, the suit seeks a declaratory judgment recognizing plaintiffs'
rights to be free from predatory billing and collection practices and an Order
(i) requiring defendants to notify plaintiff class members of entry of
declaratory judgment and (ii) enjoining defendants from further efforts to
collect charges from the plaintiffs. In 1997, this case was certified as a class
action consisting of all past, present and future patients at Summit. In July
1997, Summit filed a Motion for Summary Judgment. In March 1998, the court
denied the Motion for Summary Judgment and ordered the parties into mediation.
In June 1998, the Court of Appeals denied defendant's application for permission
to appeal the trial court's denial of the summary judgment motion. Summit filed
an application for permission to appeal to the Supreme Court of Tennessee, which
the Supreme Court granted on November 9, 1998, and remanded the case to the
Court of Appeals for review on the merits. On August 27, 1999, the Court of
Appeals issued an opinion affirming the trial court's denial of Summit's Motion
for Summary Judgment. Summit filed an application for permission to appeal to
the Tennessee Supreme Court in October 1999. On December 10, 1999, the Tennessee
Supreme Court granted permission for the Tennessee Hospital Association and
Adventist Health System Sunbelt Healthcare Corporation to file an amicus brief
in this case. On October 3, 2000, the Tennessee Supreme Court heard oral
arguments in this case.
Ferguson, Charles, on behalf of himself and all other similarly situated v.
Columbia/HCA Healthcare Corporation, et al. was filed on September 16, 1997 in
the Circuit Court for Washington County, Tennessee, Civil Action No. 18679. This
lawsuit seeks certification of a national class comprised of all individuals and
entities who paid or were responsible for payment of any portion of a bill for
medical care or treatment provided by the Company and alleges, among other
things, that the Company engaged in billing fraud by excessively billing
patients for services rendered, billing patients for services not rendered or
not medically necessary, uniformly using improper codes to report patient
diagnosis, and improperly and illegally recruiting doctors to refer patients to
the Company's hospitals. The proposed class is broad enough to encompass all
private payers, including individuals, insurers and health and welfare plans.
The suit seeks damages, interest, attorneys' fees, costs and expenses. In
addition, the suit seeks an Order (i) requiring defendants to provide an
accounting of plaintiffs and class members who overpaid or were obligated to
overpay; and (ii) requiring defendants to disgorge all monies illegally
collected from plaintiffs and the class. Plaintiff filed a Motion for Class
Certification in September 1997. No ruling has been made on the motion. In
December 1997, the Company filed a Motion for Summary Judgment which was denied.
In January 1998, plaintiff filed a Motion for Leave to File a Second Amended
Class Action Complaint to add an additional class representative which was
granted but the court dismissed the claims asserted by the additional plaintiff.
In June 1998, plaintiff filed a Motion for Leave of Court to File a Third
Amended Class Action Complaint, and in October 1998 plaintiff filed a Motion for
Leave of Court to File a Fourth Amended Class Action Complaint. Both proposed
32
33
Amended Complaints seek to add new named plaintiffs to represent the proposed
class. Both seek to add additional allegations of billing fraud, including
improper billing for laboratory tests, inducing doctors to perform unnecessary
medical procedures, improperly admitting patients from emergency rooms and
maximizing patients' lengths of stay as inpatients in order to increase charges,
and improperly inducing doctors to refer patients to the Company's home health
care units or psychiatric hospitals. Both seek an additional order that the
Company's contracts with plaintiffs and all class members are rescinded and that
the Company must repay all monies received from plaintiffs and the class
members. The court has not ruled on either Motion for Leave to Amend. Discovery
is underway in the case. The Company in September 1998 filed another Motion for
Summary Judgment contesting the standing of the named plaintiffs to bring the
alleged claims. That motion has not been ruled on by the court. Amended motions
for summary judgment were filed in January 2000. Those motions have not yet been
ruled on by the court.
The matter of Hoop, Kemp, et al. v. Columbia/HCA Health Corporation, et al.
was filed on August 18, 1997 in the District Court of Johnson County, Texas,
Civil Action No. 249-171-97. This suit seeks certification of a Texas class
comprised of persons who paid for any portion of an improper or fraudulent bill
for medical services rendered by any Texas facility owned or operated by the
Company. The suit seeks damages, attorneys' fees, costs and expenses, as well as
restitution to plaintiffs and the class in the amount by which defendants have
been unjustly enriched and equitable and injunctive relief. The lawsuit
principally alleges that the Company perpetrated a fraudulent scheme that
consisted of systematic and routine overbilling through false and inaccurate
bills, including padding, billing for services never provided, and exaggerating
the seriousness of patients' illnesses. The lawsuit also alleges that the
Company systematically entered into illegal kickback schemes with doctors for
patient referrals. The Company filed its answer in November 1997 denying the
claims. Discovery has commenced.
The matter of Ultimate Home Healthcare, Inc., on behalf of itself and all
other entities similarly situated in the states of Tennessee, Texas, Florida and
Georgia v. Columbia/HCA Healthcare Corporation, Columbia Homecare Group, Olsten
Corporation, and Olsten Health Management a/k/a Hospital Contract Management
Services was filed in the United States District Court for the Middle District
of Tennessee on June 14, 2000, as Civil Case No. 3-00-0560. The case is filed as
a purported class action on behalf of home health care companies and agencies
that conducted business in Tennessee, Texas, Florida and Georgia during the
years 1994 through 1996. On July 21, 2000 an amended complaint was filed. The
amended complaint alleges violations of civil RICO, antitrust and consumer
protection laws, and other business torts arising out of transactions and
operations in which the Company's affiliates purchased home health care
agencies, or assets of agencies, from Olsten Corporation affiliates. The
District Court dismissed plaintiff's RICO, intentional interference with
prospective economic advantage, and unjust enrichment claims. The complaint
seeks compensatory and punitive damages in an unstated amount plus costs and
attorneys' fees. The suit is in its early stages. The Company has filed a
response denying the allegations.
The Company intends to pursue the defense of these class actions
vigorously.
While it is premature to predict the outcome of the qui tam, shareholder
derivative and class action lawsuits, the amounts in question are substantial.
It is possible that an adverse resolution, individually or in the aggregate,
could have a material adverse impact on the Company's liquidity, financial
position and results of operations. See Note 2 -- Investigations and Agreements
to Settle Certain Government Claims and Note 11 -- Contingencies in the Notes to
Consolidated Financial Statements
General Liability and Other Claims
The matter of Landgraff, Anne M. and Gina Magarian, on behalf of the
Columbia/HCA Stock Bonus Plan v. Columbia/HCA Healthcare Corporation of America,
et al. was originally filed on November 7, 1997 in the United States District
Court for the Northern District of Georgia, Atlanta Division, Civil Action No.
97-CV-3381 and transferred by agreement of the parties to the United States
District Court for the Middle District of Tennessee, Civil Action No. 3-98-0090.
The plaintiffs filed a second amended complaint on April 24, 1998 against the
Company and certain members of the Company's Retirement Committee during 1997
alleging breach of fiduciary duty owed to the participants in the Company's
Stock Bonus Plan by failing to sell the Plan holdings of Company stock based
upon knowledge of material public and non-public adverse
33
34
information and by failing to act solely in the interests and for the benefit of
the participants. The suit generally alleges that the defendants fraudulently
concealed information from the public and fraudulently inflated the Company's
stock price through billing fraud, overcharges, inaccurate Medicare cost reports
and illegal kickbacks for physician referrals. The suit seeks an order allowing
the plaintiffs to proceed on behalf of the plan as in a derivative action, a
judgment for compensatory and restitutionary damages for the losses allegedly
experienced by the Plan because of breaches of fiduciary duty, an order
transferring management of the plan to a competent, neutral third-party, and an
award of pre-judgment interest, reasonable attorneys' fees and costs. A bench
trial was held from June 8 through July 1, 1999. Additional oral arguments were
held on March 23, 2000. On May 24, 2000, the court issued a memorandum opinion
and an order dismissing the plaintiffs' action with prejudice and entered a
judgment in favor of defendants. The court ruled that the defendants did not
breach their fiduciary duty to the Stock Bonus Plan. On June 12, 2000,
plaintiffs filed a notice of appeal.
On December 4, 1997, a lawsuit captioned Florida Software Systems, Inc., a
Florida corporation v. Columbia/HCA Healthcare Corporation, a Delaware
corporation was filed in the United States District Court for the Middle
District of Florida (Civil Action No. 97-2866-C.V.-T-17b). The lawsuit alleges
that the defendant breached an agreement under which Florida Software Systems,
Inc. was allegedly granted the exclusive right to provide medical claims
management for certain claims made by the Company for payment to any third-party
payers in connection with the rendering of medical care or services. The lawsuit
alleges claims for fraud, breach of implied contract and breach of contract. The
lawsuit seeks damages, attorneys' fees and costs in excess of $2 billion, as
well as injunctive relief. The court denied the plaintiff's motion for a
preliminary injunction. On October 15, 1998, the Company filed a counterclaim
and third-party complaint against Florida Software Systems, Inc., Receivable
Dynamics Inc., Nevada Communications Corporation, Norman R. Dobiesz, Maureen
Donovan Dobiesz, Stuart M. Lopata, and Samuel A. Greco (a former senior officer
at the Company). The counterclaim alleges racketeering, conspiracy, breach of
fiduciary duty, and breach of contract. Defendants in the counterclaim and
third-party complaint have filed answers to the counterclaim and third-party
complaint. Discovery has been conducted and several dispositive motions are
pending with the court. A related pending lawsuit, Nevada Communications
Corporation, a Delaware Corporation v. Columbia/HCA Healthcare Corporation, a
Delaware Corporation, which was filed in the 12th Judicial Circuit Court for
Manatee County, Florida (Civil Action No. CA 98-3039) involves similar issues
and alleges a breach of a telecommunications contract. The Company has filed a
counterclaim containing allegations similar to the counterclaim in the Florida
Software lawsuit. A trial on the Nevada Communications matter is set for April
9, 2001.
Two law firms representing groups of health insurers have approached the
Company and alleged that the Company's affiliates may have overcharged or
otherwise improperly billed the health insurers for various types of medical
care during the time frame from 1994 through 1997. The Company has engaged in
discussions with these law firms, but no litigation has been filed. The Company
is unable to determine if litigation will be filed, and if filed, what damages
would be asserted.
The Company intends to pursue the defense of these actions and prosecution
of its counterclaims and third-party claims vigorously.
The Company from time to time is a party to certain proceedings in the
United States Tax Court and the United States Court of Federal Claims. For a
description of those proceedings, see Note 7 -- Income Taxes in the Notes to
Consolidated Financial Statements.
The Company is also subject to claims and suits arising in the ordinary
course of business, including claims for personal injuries or for wrongful
restriction of, or interference with, physicians' staff privileges. In certain
of these actions the claimants have asked for punitive damages against the
Company, which may not be covered by insurance. In the opinion of management,
the ultimate resolution of these pending claims and legal proceedings will not
have a material adverse effect on the Company's results of operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
34
35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HCA's Common Stock is traded on the New York Stock Exchange, Inc. (the
"NYSE") (symbol "HCA"). The table below sets forth, for the calendar quarters
indicated, the high and low sales prices per share reported on the NYSE
Composite Tape for HCA's Common Stock. HCA completed the spin-offs of LifePoint
and Triad through a distribution of one share of LifePoint common stock and one
share of Triad common stock for every 19 shares of HCA's common stock
outstanding. The sales prices for periods prior to May 11, 1999 have been
restated to reflect the effect of the spin-offs of LifePoint and Triad.
HIGH LOW
------ ------
2000
First Quarter............................................. $32.44 $18.75
Second Quarter............................................ 32.44 23.69
Third Quarter............................................. 39.06 29.75
Fourth Quarter............................................ 45.25 37.25
1999
First Quarter............................................. $23.67 $16.38
Second Quarter............................................ 27.47 17.44
Third Quarter............................................. 25.63 20.19
Fourth Quarter............................................ 29.44 20.25
At the close of business on February 28, 2001, there were approximately
17,081 holders of record of HCA's Common Stock and one holder of record of HCA's
Nonvoting Common Stock.
HCA currently pays a regular quarterly dividend of $.02 per share. While it
is the present intention of HCA's Board of Directors to continue paying a
quarterly dividend of $.02 per share, the declaration and payment of future
dividends by HCA will depend upon many factors, including HCA's earnings,
financial condition, business needs, capital and surplus and regulatory
considerations.
35
36
ITEM 6. SELECTED FINANCIAL DATA
HCA - THE HEALTHCARE COMPANY
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
SUMMARY OF OPERATIONS:
Revenues.................................................... $ 16,670 $ 16,657 $ 18,681 $ 18,819 $ 18,786
Salaries and benefits....................................... 6,639 6,694 7,766 7,631 7,205
Supplies.................................................... 2,640 2,645 2,901 2,722 2,655
Other operating expenses.................................... 3,085 3,251 3,816 4,263 3,689
Provision for doubtful accounts............................. 1,255 1,269 1,442 1,420 1,196
Depreciation and amortization............................... 1,033 1,094 1,247 1,238 1,143
Interest expense............................................ 559 471 561 493 488
Equity in earnings of affiliates............................ (126) (90) (112) (68) (173)
Settlement with Federal government.......................... 840 -- -- -- --
Gains on sales of facilities................................ (34) (297) (744) -- --
Impairment of long-lived assets............................. 117 220 542 442 --
Restructuring of operations and investigation related
costs..................................................... 62 116 111 140 --
--------- --------- --------- --------- ---------
16,070 15,373 17,530 18,281 16,203
--------- --------- --------- --------- ---------
Income from continuing operations before minority interests
and income taxes.......................................... 600 1,284 1,151 538 2,583
Minority interests in earnings of consolidated entities..... 84 57 70 150 141
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes....... 516 1,227 1,081 388 2,442
Provision for income taxes.................................. 297 570 549 206 981
--------- --------- --------- --------- ---------
Income from continuing operations........................... 219 657 532 182 1,461
Discontinued operations, net of income taxes:
Income (loss) from operations of discontinued
businesses.............................................. -- -- (80) 12 44
Loss on disposals of discontinued businesses.............. -- -- (73) (443) --
Cumulative effect of accounting change, net of income
taxes..................................................... -- -- -- (56) --
--------- --------- --------- --------- ---------
Net income (loss)..................................... $ 219 $ 657 $ 379 $ (305) $ 1,505
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Income from continuing operations......................... $ .39 $ 1.12 $ .82 $ .28 $ 2.17
Discontinued operations:
Income (loss) from operations of discontinued
businesses............................................ -- -- (.12) .02 .07
Loss on disposals of discontinued businesses............ -- -- (.11) (.67) --
Cumulative effect of accounting change.................... -- -- -- (.09) --
--------- --------- --------- --------- ---------
Net income (loss)..................................... $ .39 $ 1.12 $ .59 $ (.46) $ 2.24
========= ========= ========= ========= =========
Shares used in computing basic earnings (loss) per share (in
thousands)................................................ 555,553 585,216 643,719 657,931 670,774
Diluted earnings (loss) per share:
Income from continuing operations......................... $ .39 $ 1.11 $ .82 $ .27 $ 2.15
Discontinued operations:
Income (loss) from operations of discontinued
businesses............................................ -- -- (.12) .02 .07
Loss on disposals of discontinued businesses............ -- -- (.11) (.67) --
Cumulative effect of accounting change.................... -- -- -- (.08) --
--------- --------- --------- --------- ---------
Net income (loss)..................................... $ .39 $ 1.11 $ .59 $ (.46) $ 2.22
========= ========= ========= ========= =========
Shares used in computing diluted earnings (loss) per share
(in thousands)............................................ 567,685 591,029 646,649 663,090 677,886
Cash dividends per common share............................. $ .08 $ .08 $ .08 $ .07 $ .08
Redemption of preferred stock purchase rights............... -- -- -- $ .01 --
36
37
HCA - THE HEALTHCARE COMPANY
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31 -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
FINANCIAL POSITION:
Assets.................................................... $ 17,568 $ 16,885 $ 19,429 $ 22,002 $ 21,116
Working capital........................................... 312 480 446 1,818 1,551
Net assets of discontinued operations..................... -- -- -- 841 212
Long-term debt, including amounts due within one year..... 6,752 6,444 6,753 9,408 6,982
Minority interests in equity of consolidated entities..... 572 763 765 836 836
Forward purchase contracts and put options................ 769 -- -- -- --
Stockholders' equity...................................... 4,405 5,617 7,581 7,250 8,609
CASH FLOW DATA:
Cash provided by operating activities..................... $ 1,547 $ 1,223 $ 1,916 $ 1,483 $ 2,589
Cash provided by (used in) investing activities........... (1,087) 925 970 (2,746) (2,219)
Cash provided by (used in) financing activities........... (336) (2,255) (2,699) 1,260 (489)
OPERATING DATA:
Number of hospitals at end of period(a)................... 187 195 281 309 319
Number of licensed beds at end of period(b)............... 41,009 42,484 53,693 60,643 61,931
Weighted average licensed beds(c)......................... 41,659 46,291 59,104 61,096 62,708
Admissions(d)............................................. 1,553,500 1,625,400 1,891,800 1,915,100 1,895,400
Equivalent admissions(e).................................. 2,300,800 2,425,100 2,875,600 2,901,400 2,826,000
Average length of stay (days)(f).......................... 4.9 4.9 5.0 5.0 5.1
Average daily census(g)................................... 20,952 22,002 25,719 26,006 26,538
Occupancy(h).............................................. 50% 48% 44% 43% 42%
- ---------------
(a) Excludes 9 facilities in 2000, 12 facilities in 1999, 24 facilities in 1998,
27 facilities in 1997 and 22 facilities in 1996 that are not consolidated
(accounted for using the equity method) for financial reporting purposes.
(b) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(c) Weighted average licensed beds represents the average number of licensed
beds, weighted based on periods owned.
(d) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to HCA's hospitals and is used by management
and certain investors as a general measure of inpatient volume.
(e) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general measure
of combined inpatient and outpatient volume.
(f) Represents the average number of days admitted patients stay in HCA's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(g) Represents the average number of patients in HCA's hospital beds each day.
(h) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms.
37
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Selected Financial Data and the accompanying consolidated financial
statements present certain information with respect to the financial position,
results of operations and cash flows of HCA - The Healthcare Company which
should be read in conjunction with the following discussion and analysis. The
terms "HCA" or the "Company" as used herein refer to HCA - The Healthcare
Company and its affiliates unless otherwise stated or indicated by context. The
term "affiliates" means direct and indirect subsidiaries of HCA - The Healthcare
Company and partnerships and joint ventures in which such subsidiaries are
partners.
FORWARD-LOOKING STATEMENTS
This "Annual Report on Form 10-K" includes certain disclosures which
contain "forward-looking statements." Forward-looking statements include all
statements that do not relate solely to historical or current facts, and can be
identified by the use of words like "may," "believe," "will," "expect,"
"project," "estimate," "anticipate," "plan," "initiative" or "continue." These
forward-looking statements are based on the current plans and expectations of
the Company and are subject to a number of known and unknown uncertainties and
risks, many of which are beyond the Company's control, that could significantly
affect current plans and expectations and the Company's future financial
condition and results. These factors include, but are not limited to, (i) the
outcome of the known and unknown litigation and governmental investigations and
litigation involving the Company's business practices including the ability to
negotiate, execute and timely consummate definitive settlement agreements in the
government's civil cases and to obtain court approval thereof, (ii) the highly
competitive nature of the health care business, (iii) the efforts of insurers,
health care providers and others to contain health care costs, (iv) possible
changes in the Medicare and Medicaid programs that may impact reimbursements to
health care providers and insurers, (v) changes in Federal, state or local
regulation affecting the health care industry, (vi) the possible enactment of
Federal or state health care reform, (vii) the ability to attract and retain
qualified management and personnel, including affiliated physicians, nurses and
medical support personnel, (viii) liabilities and other claims asserted against
the Company, (ix) fluctuations in the market value of the Company's common
stock, (x) ability to complete the share repurchase program and to settle
related forward purchase contracts, (xi) changes in accounting practices, (xii)
changes in general economic conditions, (xiii) future divestitures which may
result in additional charges, (xiv) changes in revenue mix and the ability to
enter into and renew managed care provider arrangements on acceptable terms,
(xv) the availability and terms of capital to fund the expansion of the
Company's business, (xvi) changes in business strategy or development plans,
(xvii) slowness of reimbursement, (xviii) the ability to implement the Company's
shared services and other initiatives, (xix) the outcome of pending and future
tax audits and litigation associated with the Company's tax positions, (xx) the
outcome of the Company's continuing efforts to monitor, maintain and comply with
appropriate laws, regulations, policies and procedures and the Company's
corporate integrity agreement with the government, (xxi) increased reviews of
the Company's cost reports, (xxii) the ability to maintain and increase patient
volumes and control the costs of providing services, and (xxiii) other risk
factors. As a consequence, current plans, anticipated actions and future
financial condition and results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. You are
cautioned not to unduly rely on such forward-looking statements when evaluating
the information presented in this report, including in "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
INVESTIGATIONS AND AGREEMENTS TO SETTLE CERTAIN GOVERNMENT CLAIMS
The Company continues to be the subject of governmental investigations into
and litigation relating to its business practices. Additionally, the Company is
a defendant in several qui tam actions brought by private parties on behalf of
the United States of America, some of which have been unsealed and served on the
Company. The Company is aware of additional qui tam actions that remain under
seal. There could also be other sealed qui tam cases of which it is unaware.
38
39
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
INVESTIGATIONS AND AGREEMENTS TO SETTLE CERTAIN GOVERNMENT CLAIMS (CONTINUED)
On December 14, 2000, the Company announced that it had entered into a Plea
Agreement with the Criminal Division of the Department of Justice and various
U.S. Attorney's Offices (the "Plea Agreement") and a Civil and Administrative
Settlement Agreement with the Civil Division of the Department of Justice (the
"Civil Agreement"). As discussed below, the agreements resolve all Federal
criminal issues outstanding against the Company and, subject to court approval,
certain issues involving Federal civil claims by or on behalf of the government
against the Company relating to DRG coding, outpatient laboratory billing and
home health issues. The Company also entered into a Corporate Integrity
Agreement ("CIA") with the Office of Inspector General of the Department of
Health and Human Services.
Pursuant to the Plea Agreement, the Company and its affiliates received a
full release from criminal liability for conduct arising from or relating to
billing and reimbursement for services provided pursuant to Federal health care
benefit programs regarding: Medicare cost reports; violations of the
Anti-kickback Statute or the Physician Self-referral law, and any other conduct
involving relations with referral sources and those in a position to influence
referral sources; DRG billing; laboratory billing; the acquisition of home
health agencies; and the provision of services by home health agencies. In
addition, the government agreed not to prosecute the Company for other possible
criminal offenses which are or have been under investigation by the Department
of Justice arising from or relating to billing and reimbursement for services
provided pursuant to Federal health care benefit programs. The Plea Agreement
provided that the Company pay the government approximately $95 million, which
payment was made during the first quarter of 2001, and that two non-operating
subsidiaries enter certain criminal pleas, which pleas were entered in January
2001.
The Civil Agreement covers the following issues: DRG coding for calendar
years 1990-1997; outpatient laboratory billings for calendar years 1989-1997;
home health community education for Medicare cost report years 1994-1997; home
health billing for calendar years 1995-1998; and certain home health management
transactions for Medicare cost report years 1993-1998. The Civil Agreement
provides that in return for releases on these issues, the Company will pay the
government $745 million, with interest accruing from May 18, 2000 to the payment
date at a rate of 6.5%. The civil payment will be made upon receipt of court
approval of the Civil Agreement, which is expected to occur during the second
quarter of 2001. The civil issues that are not covered by the Civil Agreement
include claims related to cost reports and physician relations issues.
Under the Civil Agreement, the Company's existing Letter of Credit
Agreement with the Department of Justice will be reduced from $1 billion to $250
million at the time of the settlement payment, which is expected to occur during
the second quarter of 2001. Any future civil settlement or court ordered
payments related to cost report or physician relations issues will reduce the
remaining amount of the letter of credit dollar for dollar. The amount of any
such future settlement or court ordered payments is not related to the remaining
amount of the letter of credit.
The CIA is structured to assure the government of the Company's overall
Medicare compliance and specifically covers DRG coding, outpatient laboratory
billing, outpatient prospective payment system ("PPS") billing and physician
relations. The CIA resulted in a waiver of the government's discretionary right
to exclude any of the Company's operations from participation in the Medicare
Program for matters settled in the Civil Agreement.
The Company remains the subject of a formal order of investigation by the
Securities and Exchange Commission (the "SEC"). The Company understands that the
investigation includes the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
39
40
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
INVESTIGATIONS AND AGREEMENTS TO SETTLE CERTAIN GOVERNMENT CLAIMS (CONTINUED)
The Company continues to cooperate in the governmental investigations.
Given the scope of the ongoing investigations and litigation, the Company
expects other investigative and prosecutorial activity to occur in these and
other jurisdictions in the future.
While management is unable to predict the outcome of any of the ongoing
investigations and litigation or the initiation of any additional investigations
or litigation, were the Company to be found in violation of Federal or state
laws relating to Medicare, Medicaid or similar programs or breach of the CIA,
the Company could be subject to substantial monetary fines, civil and criminal
penalties and/or exclusion from participation in the Medicare and Medicaid
programs. Any such sanctions or losses could have a material adverse effect on
the Company's financial position, results of operations and liquidity. (See Note
2 -- Investigations and Agreements to Settle Certain Government Claims and Note
11 -- Contingencies in the Notes to Consolidated Financial Statements and Part
I, Item 3: Legal Proceedings.)
BUSINESS STRATEGY
HCA's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost-effective
manner and consistent with the Company's ethics and compliance program, the CIA
and governmental regulations. HCA also seeks to enhance financial performance by
increasing utilization and improving operating efficiencies of the Company's
facilities. To achieve these objectives, HCA pursues the following strategies:
- Emphasize a "patients first" philosophy and a commitment to ethics and
compliance: HCA is committed to a values-based corporate culture that
prioritizes the care and improvement of human life above all else. The
values highlighted by the Company's corporate culture -- compassion,
honesty, integrity, fairness, loyalty, respect and kindness -- are the
cornerstone of HCA. To reinforce the Company's dedication to these values
and to ensure integrity in all that HCA does, the Company has developed
and implemented a comprehensive ethics and compliance program that
articulates a high set of values and behavioral standards. HCA believes
that this program has reinforced the Company's dedication to excellent
patient care.
- Focus on strong assets in select, core communities: HCA focuses on
communities where the Company is or can be the number one or number two
health care provider. To achieve this goal, management initiated a
comprehensive restructuring process in 1997 that has transformed HCA into
a smaller, more focused company. This restructuring allows HCA to focus
its efforts on core communities, which are typically located in urban
areas characterized by highly integrated health care facility networks.
This restructuring included the divestiture of home health operations and
the Value Health business units, the spin-offs of LifePoint and Triad to
HCA's stockholders, and the sales of various other hospitals and surgery
centers outside HCA's strategic locations. HCA intends to continue to
optimize core assets through selected divestitures, acquisitions and
capital expenditures.
- Develop comprehensive local health care networks with a broad range of
health care services: HCA seeks to operate each of the Company's
facilities as part of a network with other health care facilities that
HCA's affiliates own or operate within a common region. Being a
comprehensive provider of quality health care services in selected
communities should enable the Company to attract and serve patients and
physicians.
- Grow through increased patient volume, expansion of specialty and
outpatient services and selective acquisitions: HCA intends to identify
opportunities in areas where demand for comprehensive health services is
not adequately met. Expansion of specialty services should strengthen the
Company's health care delivery networks and attract new patients. To
support this expansion, HCA plans to actively
40
41
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
BUSINESS STRATEGY (CONTINUED)
recruit additional specialists. Recognizing that within the health care
industry, the shift from inpatient to outpatient care is likely to
continue, HCA intends to enhance the access to and the capabilities of
the Company's outpatient services by devoting additional capital
resources to outpatient facilities.
- Improve operating efficiencies through enhanced cost management and
resource utilization, and the implementation of shared services
initiatives: HCA has initiated several measures to improve the financial
performance of the Company's facilities. To address labor costs, HCA
implemented in many communities a flexible staffing model. To curtail
supply cost, HCA formed a group purchasing organization that allows the
Company to achieve better pricing in negotiating purchasing and supply
contracts. In addition, as HCA grows in select core markets, the Company
should continue to benefit from economies of scale, including supply
chain efficiencies and volume discount cost savings. The Company expects
to be able to reduce operating costs and to be better positioned to work
with health maintenance organizations, preferred provider organizations
and employers, by sharing certain services among several facilities in
the same market.
- Recruit, develop and maintain relationships with physicians: HCA plans
to actively recruit physicians to enhance patient care and fulfill the
needs of the communities the Company serves. HCA believes that recruiting
and retaining quality physicians is essential to being a premier provider
of health care services.
- Streamline and decentralize management, consistent with our local
focus: HCA's strategy to streamline and decentralize the Company's
management structure affords management of the Company's facilities
greater flexibility to make decisions that are specific to the respective
local communities. This operating structure creates a more nimble,
responsive organization.
- Effectively allocate capital to maximize return on
investments: Management carefully evaluates investment opportunities and
invests in projects that add to the primary objective of providing
comprehensive, high-quality health care services in the most
cost-effective manner. HCA maintains and replaces equipment, renovates
and constructs replacement facilities and adds new services to increase
the attractiveness of the Company's hospitals and other facilities to
patients and physicians. In addition, HCA evaluates acquisitions that
complement the Company's strategies and assesses opportunities to enhance
stockholder value, including repayment of indebtedness and stock
repurchases.
RESULTS OF OPERATIONS
Revenue/Volume Trends
HCA's revenues are affected by pressure on payment rates by government,
managed care providers and others. Under the Balanced Budget Act of 1997
("BBA-97"), the Company's reimbursement from the Medicare and Medicaid programs
was reduced. Subsequent to BBA-97, two relief bills were passed by Congress. The
Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") was
passed in November 1999 and was primarily directed at reducing potential future
Medicare cuts that would have occurred as a result of BBA-97. The Medicare,
Medicaid and SCHIP Benefit Improvement and Protection Act of 2000 ("BIPA") was
enacted in December 2000. Under BIPA, HCA believes it may realize Medicare rate
increases over the next five years. BBA-97 contained a requirement that the
Health Care Financing Administration adopt a prospective payment system ("PPS")
for outpatient hospital services, which was implemented during August 2000. The
outpatient PPS has not had a measurable effect on the Company's financial
results. The Company and the health care industry continue to experience a shift
in business from Medicare and indemnity insurance to managed care. HCA generally
receives lower payments per patient under managed care plans thereby reducing
revenues, earnings and cash flows. Payer pressure to
41
42
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue/Volume Trends (Continued)
utilize outpatient and alternative health care delivery services also presents a
challenge to the Company and the health care industry in general. Admissions
related to Medicare, Medicaid and managed care plans and other discounted
arrangements for the years ended December 31, 2000, 1999 and 1998 are set forth
below.
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
---- ---- ----
Medicare................................................ 37% 38% 39%
Medicaid................................................ 11% 11% 11%
Managed care and other discounted....................... 42% 41% 39%
Other................................................... 10% 10% 11%
--- --- ---
100% 100% 100%
=== === ===
The approximate percentages of inpatient revenues from continuing
operations of the Company's facilities related to Medicare, Medicaid and managed
care plans and other discounted arrangements for the years ended December 31,
2000, 1999 and 1998 are set forth below.
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
---- ---- ----
Medicare................................................ 40% 42% 44%
Medicaid................................................ 8% 8% 7%
Managed care and other discounted....................... 38% 33% 28%
Other................................................... 14% 17% 21%
--- --- ---
100% 100% 100%
=== === ===
Payment pressure by payers for patients to utilize outpatient or
alternative delivery services and increasing percentages of patient volume being
related to patients participating in managed care plans are expected to present
ongoing challenges. The challenges presented by these trends are enhanced by
HCA's inability to control these trends and the associated risks. To maintain
and improve its operating margins in future periods, HCA must increase patient
volumes while controlling the cost of providing services.
Management believes that the proper response to these challenges includes
the delivery of a broad range of quality health care services to physicians and
patients, with operating decisions being made by the local management teams and
local physicians, and a focus on reducing operating costs through implementation
of its shared services initiative.
42
43
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue/Volume Trends (Continued)
The following are comparative summaries of results from continuing
operations for the years ended December 31, 2000, 1999 and 1998 (dollars in
millions, except per share amounts):
2000 1999 1998
--------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
Revenues............................................ $16,670 100.0 $16,657 100.0 $18,681 100.0
Salaries and benefits............................... 6,639 39.8 6,694 40.2 7,766 41.6
Supplies............................................ 2,640 15.8 2,645 15.9 2,901 15.5
Other operating expenses............................ 3,085 18.6 3,251 19.5 3,816 20.4
Provision for doubtful accounts..................... 1,255 7.5 1,269 7.6 1,442 7.7
Depreciation and amortization....................... 1,033 6.2 1,094 6.6 1,247 6.7
Interest expense.................................... 559 3.4 471 2.8 561 3.0
Equity in earnings of affiliates.................... (126) (0.8) (90) (0.5) (112) (0.6)
Settlement with Federal government.................. 840 5.0 -- -- -- --
Gains on sales of facilities........................ (34) (0.2) (297) (1.8) (744) (4.0)
Impairment of long-lived assets..................... 117 0.7 220 1.3 542 2.9
Restructuring of operations and investigation
related costs..................................... 62 0.4 116 0.7 111 0.6
------- ----- ------- ----- ------- -----
16,070 96.4 15,373 92.3 17,530 93.8
------- ----- ------- ----- ------- -----
Income before minority interests and income taxes... 600 3.6 1,284 7.7 1,151 6.2
Minority interests in earnings of consolidated
entities.......................................... 84 0.5 57 0.3 70 0.4
------- ----- ------- ----- ------- -----
Income before income taxes.......................... 516 3.1 1,227 7.4 1,081 5.8
Provision for income taxes.......................... 297 1.8 570 3.5 549 3.0
------- ----- ------- ----- ------- -----
Net income.......................................... $ 219 1.3 $ 657 3.9 $ 532 2.8
======= ===== ======= ===== ======= =====
Basic earnings per share............................ $ .39 $ 1.12 $ .82
Diluted earnings per share.......................... $ .39 $ 1.11 $ .82
% changes from prior year:
Revenues.......................................... 0.1% (10.8)% (0.7)%
Income before income taxes........................ (58.0) 13.5 178.8
Net income........................................ (66.7) 23.6 191.2
Basic earnings per share.......................... (65.2) 36.6 192.9
Diluted earnings per share........................ (64.9) 35.4 203.7
Admissions(a)..................................... (4.4) (14.1) (1.4)
Equivalent admissions(b).......................... (5.1) (15.7) (1.1)
Revenue per equivalent admission.................. 5.5 5.7 0.3
Same facility % changes from prior year(c):
Revenues.......................................... 6.2 5.3 (0.2)
Admissions(a)..................................... 2.8 2.7 0.4
Equivalent admissions(b).......................... 2.6 2.5 1.4
Revenue per equivalent admission.................. 3.6 2.7 (1.5)
- ---------------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to HCA's hospitals and is used by management
and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general measure
of combined inpatient and outpatient volume.
(c) Same facility information excludes the operations of hospitals and their
related facilities which were either acquired or divested during the current
and prior year.
43
44
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 2000 and 1999
Income before income taxes decreased 58% to $516 million in 2000 from $1.2
billion in 1999 and pretax margins decreased to 3.1% in 2000 from 7.4% in 1999.
The decrease was due primarily to the settlement with the Federal government
related to civil and criminal issues that resulted in a pretax charge of $840
million in 2000. See Note 2 -- Investigations and Agreements to Settle Certain
Government Claims in the Notes to Consolidated Financial Statements.
Revenues increased 0.1%, though the number of hospitals operated was
reduced to 187 hospitals at December 31, 2000 from 195 hospitals at the end of
1999. On a same facility basis, admissions and revenues increased 2.8% and 6.2%,
resulting in a 3.6% increase in revenue per equivalent admission. The increases
in revenue per equivalent admission of 5.5% on a consolidated basis and 3.6% on
a same facility basis from 1999 to 2000, were primarily the result of successes
achieved during 2000 in renegotiating and renewing certain managed care
contracts on more favorable terms to the Company.
Salaries and benefits, as a percentage of revenues, decreased from 40.2% in
1999 to 39.8% in 2000. The 5.5% increase in revenue per equivalent admission,
while salaries and benefits per equivalent admission increased 4.5%, was a
primary factor for the decrease. HCA continues to experience cost pressures in
this area due to a tight labor market for health care professionals.
Supply costs decreased as a percentage of revenues to 15.8% in 2000 from
15.9% in 1999. HCA's shared services initiatives, orthopedic and cardiovascular
contracting initiatives and improved pricing through HCA's group purchasing
organization have all played roles in the Company's ability to improve in this
area.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes), as a percentage of revenues, decreased to 18.6%
in 2000 from 19.5% in 1999 due primarily to the restructuring of operations
discussed in Note 3 -- Restructuring of Operations in the Notes to Consolidated
Financial Statements. The other operating expenses, as a percentage of revenues,
for the facilities included in the spin-offs of Triad and LifePoint were 22.4%
for 1999, and the other operating expenses, as a percentage of revenues, for the
facilities included in the Company's National Group were 27.8% for 1999. Another
factor in the improvement in other operating expenses related to certain
insurance subsidiary funds being reallocated among investment managers,
resulting in the recognition of previously unrealized gains that decreased other
operating expenses by approximately $27 million during 2000.
Provision for doubtful accounts, as a percentage of revenues, decreased to
7.5% in 2000 from 7.6% in 1999; however, the Company continues to experience
trends that make it difficult to maintain or reduce the provision for doubtful
accounts as a percentage of revenues. These trends include payer mix shifts to
managed care plans (resulting in increased amounts of patient co-payments and
deductibles), increased pricing, delays in payments and the denial of claims by
managed care payers and increases in the volume of health care services provided
to uninsured patients in certain of HCA's facilities.
Equity in earnings of affiliates increased as a percentage of revenues to
0.8% in 2000 from 0.5% in 1999 due to improved operations during 2000 at certain
of HCA's joint ventures accounted for using the equity method and an impairment
charge related to one of our equity investment entities in the third quarter of
1999 (resulting in an $11 million expense).
Depreciation and amortization decreased as a percentage of revenues to 6.2%
in 2000 from 6.6% in 1999, primarily due to depreciation expense remaining
relatively flat while revenues increased.
Interest expense increased to $559 million in 2000 compared to $471 million
in 1999, primarily as a result of an increase in the average outstanding debt in
2000 compared to 1999, an increase in the general level of
44
45
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 2000 and 1999 (Continued)
interest rates during 2000 compared to 1999 and the additional interest expense
of approximately $30 million recognized during 2000 related to the settlement
with the Federal government. The average interest rates for the Company's
borrowings increased from 7.8% at December 31, 1999 to 8.1% at December 31,
2000.
During 2000 and 1999, respectively, the Company incurred $62 million and
$116 million of restructuring of operations and investigation related costs. In
2000, these costs included $51 million of professional fees (legal and
accounting) related to the governmental investigations and $11 million of other
costs. In 1999, restructuring of operations and investigation related costs
included $77 million of professional fees (legal and accounting) related to the
governmental investigations, $5 million of severance and $34 million of other
costs (including certain costs related to completing the spin-offs of LifePoint
and Triad). See Note 4 -- Restructuring of Operations and Investigation Related
Costs in the Notes to Consolidated Financial Statements.
During 2000, the Company recognized a pretax gain of $34 million ($16
million after-tax) on the sales of three hospitals. During 1999, the Company
recognized a pretax gain of $297 million ($164 million after-tax) on the sale of
three hospitals and certain related health care facilities. Proceeds from the
sales were used to repay bank borrowings. See Note 3 -- Restructuring of
Operations in the Notes to Consolidated Financial Statements.
During 2000, the Company identified and initiated plans to sell or replace
during 2001, 4 consolidating hospitals and certain other assets. The carrying
value for the hospitals and other assets to be divested was reduced to fair
value based upon estimates of sales values, for a total non-cash, pretax charge
of $117 million. See Note 3 -- Restructuring of Operations in the Notes to
Consolidated Financial Statements.
During 1999, the Company identified and initiated, or revised, plans to
divest or close 23 consolidating hospitals and four non-consolidating hospitals.
The carrying value for the hospitals and other assets to be divested was reduced
to fair value based upon estimates of sales values, for a total non-cash, pretax
charge of $220 million. See Note 3 -- Restructuring of Operations in the Notes
to Consolidated Financial Statements.
Minority interests increased as a percentage of revenues to 0.5% in 2000
from 0.3% in 1999 due to improved operations at certain joint ventures.
The effective income tax rate was 57.6% in 2000 and 46.5% in 1999. The
increase was due primarily to the settlement with the Federal government and a
valuation allowance in 2000, and nondeductible intangible assets related to
gains on sales of facilities and impairment of long-lived assets during both
periods. If the effect of the settlement with the Federal government, the
valuation allowance, the nondeductible intangible assets and the related
amortization were excluded, the effective income tax rate would have been
approximately 39% for both 2000 and 1999.
Years Ended December 31, 1999 and 1998
Income before income taxes increased 13.5% to $1.2 billion in 1999 from
$1.1 billion in 1998 and pretax margins increased to 7.4% in 1999 from 5.8% in
1998. The increase in pretax income was primarily the result of reductions from
1998 to 1999 in salaries and benefits and other operating expenses, as a
percentage of revenues.
Revenues decreased 10.8% to $16.7 billion in 1999 from $18.7 billion in
1998 due to the reduction from 281 hospitals at December 31, 1998 to 195
hospitals at December 31, 1999. During 1999, HCA substantially completed a
restructuring of its operations by completing the spin-offs of LifePoint and
Triad and the sales of
45
46
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 1999 and 1998 (Continued)
24 hospital facilities. On a same facility basis, both admissions and revenue
per equivalent admission increased 2.7% from 1998 to 1999, resulting in a 5.3%
increase in revenues. The increases in revenue per equivalent admission of 5.7%
on a consolidated basis and 2.7% on a same facility basis from 1998 to 1999,
were primarily the result of successes achieved during 1999 in renegotiating and
renewing certain managed care contracts on more favorable terms.
Salaries and benefits, as a percentage of revenues, decreased from 41.6% in
1998 to 40.2% in 1999. The 5.7% increase in revenue per equivalent admission was
a primary factor for the decrease. In addition, HCA was more successful in
adjusting staffing levels to correspond with the equivalent admission growth
rates (man hours per equivalent admission decreased approximately 3% compared to
1998).
Supply costs increased as a percentage of revenues to 15.9% in 1999 from
15.5% in 1998 due to an increase in the cost of supplies per equivalent
admission related to the increasing costs of new technology and pharmaceuticals.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) decreased as a percentage of revenues from 20.4%
in 1998 to 19.5% in 1999 due to certain fixed costs such as contract services,
rents, leases, and utilities remaining relatively flat while revenue per
equivalent admission was increasing. A decline in professional fees, due to the
sales of certain teaching facilities which had costs for medical directorships,
also contributed to the decrease.
Provision for doubtful accounts, as a percentage of revenues, decreased
slightly to 7.6% in 1999 from 7.7% in 1998. HCA continues to experience trends
that make it difficult to maintain or reduce the provision for doubtful accounts
as a percentage of revenues. These trends include payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles), delays in payments and the denial of claims by managed care payers
and increases in the volume of health care services provided to uninsured
patients in certain of the Company's facilities.
Depreciation and amortization remained relatively flat as a percentage of
revenues at 6.6% in 1999 versus 6.7% in 1998.
Interest expense decreased to $471 million in 1999 compared to $561 million
in 1998 primarily as a result of a decrease in average outstanding debt during
1999 compared to 1998. The spin-offs and facility sales resulted in the receipt
of cash proceeds in 1999 and in the third and fourth quarters of 1998 which were
used to pay down borrowings.
Equity in earnings of affiliates remained relatively flat as a percentage
of revenues at 0.5% in 1999 and 0.6% in 1998.
During 1999, the Company recognized a pretax gain of $297 million ($164
million after-tax) on the sale of three hospitals and certain related health
care facilities. Proceeds from the sales were used to repay bank borrowings.
During 1998, the Company recognized a pretax gain of $744 million ($365
million after-tax) on the sale of certain hospitals and surgery centers. The net
gain includes a pretax gain of $570 million ($335 million after-tax) on the sale
of 21 hospitals to a consortium of not-for-profit entities, a pretax gain of
$203 million ($50 million after-tax) on the sale of 34 surgery centers, and a
pretax loss of $29 million ($20 million after-
46
47
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 1999 and 1998 (Continued)
tax) on the sale of 6 hospitals and other facilities. See Note
3 -- Restructuring of Operations in the Notes to Consolidated Financial
Statements.
During 1999, the Company also identified and initiated, or revised, plans
to divest or close during 1999 and 2000, 23 consolidating hospitals and 4
non-consolidating hospitals. The carrying value for the hospitals and other
assets expected to be sold was reduced to fair value based upon estimates of
sales values, for a total non-cash, pretax charge of $220 million. See Note
3 -- Restructuring of Operations in the Notes to Consolidated Financial
Statements.
During 1998, management identified and initiated plans to sell or close 23
consolidating hospitals, 1 non-consolidating hospital and a group of the
Company's medical office buildings. The carrying value for the hospitals and
other facilities was reduced to fair value, based upon estimates of sales values
resulting in a non-cash, pretax impairment charge of $542 million ($175 million
of the total impairment charge was related to the medical office buildings). See
Note 3 -- Restructuring of Operations in the Notes to Consolidated Financial
Statements.
During 1999 and 1998, respectively, the Company incurred $116 million and
$111 million of restructuring of operations and investigation related costs. In
1999, these costs included $77 million of professional fees (legal and
accounting) related to the governmental investigations, $5 million of severance
costs and $34 million of other costs. In 1998, restructuring of operations and
investigation related costs included $96 million of professional fees (legal and
accounting) related to the governmental investigations, $5 million of severance
costs and $10 million of other costs. See Note 4 -- Restructuring of Operations
and Investigation Related Costs in the Notes to Consolidated Financial
Statements.
Minority interests decreased slightly as a percentage of revenues to 0.3%
in 1999 from 0.4% in 1998.
The effective income tax rates were 46.5% in 1999 and 50.8% in 1998 due to
non-deductible intangible assets related to gains on sales of facilities and
impairments of long-lived assets. If the effect of the non-deductible intangible
assets and the related amortization were excluded, the effective income tax rate
would have been approximately 39% for both 1999 and 1998.
Liquidity and Capital Resources
Cash provided by continuing operating activities totaled $1.5 billion in
2000 compared to $1.2 billion in 1999 and $1.9 billion in 1998. The increase in
cash provided by continuing operating activities during 2000 was primarily due
to an increase in net income, excluding settlement with Federal government,
gains on sales of facilities and impairment of long-lived assets. The decrease
from 1998 to 1999 was primarily due to an increase in tax payments and an
increase in accounts receivables and other current assets. During 1998, HCA
applied for and received a refund of approximately $350 million resulting from
excess estimated tax payments made in 1997, which were based upon more
profitable prior periods.
Working capital totaled $312 million at December 31, 2000 and $480 million
at December 31, 1999. At December 31, 2000 current liabilities included an $840
million accrual for the settlement with the Federal government. See Note
2 -- Investigations and Agreements to Settle Certain Government Claims in the
Notes to Consolidated Financial Statements.
Cash used in investing activities was approximately $1.1 billion in 2000
compared to cash provided by investing activities of approximately $0.9 billion
and $1.0 billion in 1999 and 1998, respectively. Excluding acquisitions, capital
expenditures were $1.2 billion in 2000 and $1.3 billion in 1999 and 1998,
respectively.
47
48
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Planned capital expenditures in 2001 are expected to approximate $1.3 billion.
At December 31, 2000, there were projects under construction, which had an
estimated additional cost to complete and equip over the next five years of
approximately $1.6 billion. HCA expects to finance capital expenditures with
internally generated and borrowed funds. Available sources of capital include
amounts available under HCA's revolving credit facility (the "Credit Facility")
(approximately $888 million and $789 million as of December 31, 2000 and
February 28, 2001, respectively) and anticipated access to public and private
debt markets. Management believes that its capital expenditure program is
adequate to expand, improve and equip its existing health care facilities. HCA's
restructuring of operations (spin-offs and asset sales) resulted in the receipt
of cash proceeds of approximately $1.8 billion in 1999 and $2.8 billion in 1998.
HCA expended $350 million and $215 million for acquisitions and investments
in and advances to affiliates (generally interests in joint ventures that are
accounted for using the equity method) during 2000 and 1998, respectively.
HCA has various agreements with joint venture partners whereby the partners
have an option to sell or "put" their interests in the joint venture back to
HCA, within specific periods at fixed prices or prices based on certain
formulas. The combined put price under all such agreements was approximately
$386 million at December 31, 2000. During 2000, two of HCA's joint venture
partners exercised their put options whereby HCA purchased the partners'
interests in the joint ventures for approximately $95 million. During 1999, no
put options were exercised; however, HCA did sell or spin-off the Company's
interest in four joint ventures. One additional joint venture was dissolved
during 1999, with each partner resuming the operation of the facilities they had
previously contributed to the joint venture. During April 1998, one of HCA's
joint venture partners exercised its put option whereby HCA purchased the
partner's interest in the joint venture for approximately $40 million. HCA
cannot predict if, or when, other joint venture partners will exercise such
options.
During the first quarter of 1998, the Internal Revenue Service ("IRS")
issued guidance regarding certain tax consequences of joint ventures between
for-profit and not-for-profit hospitals. As a result of the tax ruling, the IRS
has proposed and may in the future propose to revoke the tax-exempt or public
charity status of certain not-for-profit entities, which participate in such
joint ventures, or to treat joint venture income as unrelated business taxable
income. HCA is continuing to review the impact of the tax ruling on its existing
joint ventures, or the development of future ventures, and is consulting with
its joint venture partners and tax advisers to develop appropriate courses of
action. In January 2001, a not-for-profit entity which participates in a joint
venture with HCA filed a refund suit in Federal District Court seeking to
recover taxes, interest and penalties assessed by the IRS in connection with the
IRS' proposed revocation of the not-for-profit entity's tax-exempt status. In
the event that the not-for-profit entity's tax-exempt status is upheld, the IRS
has proposed to treat the not-for-profit entity's share of joint venture income
as unrelated business taxable income. HCA is not a party to this lawsuit. The
tax ruling or any adverse determination by the IRS or the courts regarding the
tax-exempt or public charity status of a not-for-profit partner or the
characterization of joint venture income as unrelated business taxable income
could limit joint venture development with not-for-profit hospitals, require the
restructuring of certain existing joint ventures with not-for-profits and
influence the exercise of the put agreements by certain existing joint venture
partners.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.7 billion at December 31,
2000 and 1999.
48
49
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Cash flows used in financing activities totaled approximately $336 million
during 2000, $2.3 billion during 1999 and $2.7 billion during 1998. The cash
flows provided by continuing operating activities and investing activities were
primarily used to repurchase HCA's common stock in 2000 and 1999, and to pay
down debt during 1999 and 1998.
In March 2000, HCA announced that its Board of Directors authorized the
repurchase of up to $1 billion of the Company's common stock. Certain financial
organizations purchased approximately 19.4 million shares of the Company's
common stock for $535 million during 2000, utilizing forward purchase contracts.
During 2000, HCA settled forward purchase contracts representing approximately
11.7 million shares at a cost of $300 million. In accordance with the terms of
the contracts, approximately 7.7 million shares at a cost of $235 million remain
outstanding until settled by the Company. As part of this stock repurchase
program, HCA sold 3.8 million put options which remain outstanding at December
31, 2000, each of which entitles the holder to sell HCA's stock to HCA at a
specified price on a specified date. These put options expire on various dates
through March 27, 2001 and have exercise prices ranging from $34.17 to $37.00
per share, with an average exercise price of $35.66 per share. HCA expects to
repurchase the remaining stock associated with the March 2000 repurchase
authorization through open market purchases, privately negotiated transactions,
forward purchase contracts or by utilizing the sale of additional put options.
At the November 2000 meeting of the Emerging Issues Task Force ("EITF"),
the SEC provided guidance that in situations where public companies having
outstanding equity derivative contracts that are not compliant with the EITF
guidance in Issue 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock" ("Issue 00-19")
are required to reclassify the maximum amount of the potential cash obligation
(the forward price in a forward stock purchase contract or the strike price for
a written put option) to temporary equity. Pursuant to this guidance, HCA
reclassified $769 million ($752 million related to outstanding forward purchase
contracts under the March 2000 and November 1999 repurchase authorizations and
$17 million related to written put options) from common equity to temporary
equity at December 31, 2000 (prior year amounts were not restated).
In November 1999, HCA announced that its Board of Directors had authorized
the repurchase of up to $1 billion of its common stock. During 2000, HCA settled
forward purchase contracts representing approximately 18.7 million shares at a
cost of $539 million. In accordance with the terms of the forward purchase
contracts, the shares purchased remain outstanding until the Company settles the
forward purchase contracts. Approximately 15.7 million shares at a cost of $460
million remain outstanding until the forward purchase contracts are settled by
HCA.
In 1999, HCA expended approximately $1.9 billion to complete the repurchase
of approximately 81.9 million of its shares through open market purchases and
the settlement of accelerated and forward purchase contracts.
In connection with the Company's share repurchase programs, the Company
entered into a Letter of Credit Agreement with the United States Department of
Justice. As part of the agreement, the Company provided the government with
letters of credit totaling $1 billion. The settlement reached with the
government in December 2000, as discussed in Note 2 -- Investigations and
Agreements to Settle Certain Government Claims in the Notes to Consolidated
Financial Statements, provides that the letters of credit will be reduced from
$1 billion to $250 million at the time of the civil settlement payment. The
civil settlement payment is anticipated during the first six months of 2001. In
addition, the settlement provides that any future civil
49
50
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
payments on cost reports or physician relations will reduce, but are not related
to, the remaining amount of the letters of credit dollar for dollar.
The resolution of the remaining government investigations and litigation,
and the various other lawsuits and legal proceedings that have been asserted
could result in substantial liabilities to the Company. The ultimate liabilities
cannot be reasonably estimated, as to the timing or amounts, at this time;
however, it is possible that the resolution of certain of the contingencies
could have a material adverse effect on the Company's results of operations,
financial position and liquidity.
During March 1999, HCA entered into a $1.0 billion term loan (the "1999
Term Loan"). Borrowings under this loan were used to fund the $1.0 billion share
repurchase program approved in February 1999. See Note 12 -- Capital Stock and
Stock Repurchases in the Notes to Consolidated Financial Statements. During
1998, HCA entered into a $1.0 billion term loan agreement (the "1998 Term Loan")
with several banks which matures February 2002.
In March 2000, HCA entered into the $1.2 billion term loan (the "2000 Term
Loan"). Proceeds from the 2000 Term Loan were used in the first quarter of 2000
to retire the outstanding balance under the 1999 Term Loan and to reduce
outstanding loans under the Credit Facility. The 2000 Term Loan was repaid in
January 2001.
In May 2000, an English subsidiary of HCA entered into a $168 million Term
Facility Agreement ("English Term Loan") with a bank. The term loan was used to
purchase the ownership interest of HCA's 50/50 joint venture partner in England
and to refinance existing indebtedness. The English Term Loan was repaid in
November 2000.
In August 2000, HCA issued $750 million of 8.75% notes due September 1,
2010. Proceeds from the notes were used to reduce outstanding loans under the
Credit Facility by $350 million, reduce the outstanding balance under the 2000
Term Loan by $200 million and to settle $200 million of forward purchase
contracts related to HCA's common stock.
In September 2000, HCA issued $500 million of floating rate notes due
September 19, 2002. Proceeds from the notes were used to reduce the outstanding
balance under the 2000 Term Loan.
In November 2000, HCA issued approximately $217 million of 8.75% notes due
November 1, 2010. Proceeds from the notes were used to repay the outstanding
balance under the English Term Loan and for general corporate purposes.
In December 2000, HCA filed a "shelf" registration statement and prospectus
with the SEC relating to $1.5 billion in debt securities.
In January 2001, the Company issued $500 million of 7.875% notes due 2011.
Proceeds from the notes were used to retire the outstanding balance under the
2000 Term Loan.
The Credit Facility and the 1998 Term Loan contain customary covenants
which include (i) limitations on additional debt, (ii) limitations on sales of
assets, mergers and changes of ownership, and (iii) maintenance of certain
interest coverage ratios. HCA is currently in compliance with all such
covenants.
In February 1998, Moody's Investors Service downgraded the Company's senior
debt rating to Ba2. At the same time, Fitch IBCA downgraded the Company's senior
debt rating to BBB-. In February 1999, Standard & Poor's downgraded the
Company's senior debt rating to BB+.
50
51
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Management believes that cash flows from operations, amounts available
under the Credit Facility and the Company's access to debt markets are
sufficient to meet expected liquidity needs during 2001.
MARKET RISK
HCA is exposed to market risk related to changes in interest rates and
market values of securities. HCA currently is not using derivative instruments
to offset the market risk exposure of the investments in debt or equity
securities of HCA's wholly-owned insurance subsidiary or to alter the interest
rate characteristics of HCA's debt instruments.
The investments in debt and equity securities of HCA's wholly-owned
insurance subsidiary were $1.2 billion and $423 million, respectively, at
December 31, 2000. These investments are carried at fair value with changes in
unrealized gains and losses being recorded as adjustments to stockholders'
equity. The fair value of investments is generally based on quoted market
prices. Changes in interest rates and market values of securities are not
expected to be material in relation to the financial position and operating
results of HCA.
With respect to HCA's interest-bearing liabilities, approximately $1.9
billion of long-term debt at December 31, 2000 is subject to variable rates of
interest, while the remaining balance in long-term debt of $4.9 billion at
December 31, 2000 is subject to fixed rates of interest. HCA's variable interest
rate is affected by both the general level of U.S. interest rates and the
Company's credit rating. HCA's variable rate debt is comprised of the Company's
Credit Facility of which interest is payable generally at LIBOR plus 0.45% to
1.5% (depending on HCA's credit ratings), bank term loans of which interest is
payable generally at LIBOR plus 0.75% to 2.5%, and floating rate notes of which
interest is payable at LIBOR plus 1.5%. Due to increases in LIBOR, the average
rate for the Company's Credit Facility increased from 6.1% for the year ended
December 31, 1999 to 7.2% for the year ended December 31, 2000, and the average
rate for the Company's term loans increased from 6.7% for the year ended
December 31, 1999 to 7.9% for the year ended December 31, 2000. The estimated
fair value of HCA's total long-term debt was $6.6 billion at December 31, 2000.
The estimates of fair value are based upon the quoted market prices for the same
or similar issues of long-term debt with the same maturities. Based on a
hypothetical 1% increase in interest rates, the potential annualized losses in
future pretax earnings would be approximately $19 million. The impact of such a
change in interest rates on the carrying value of long-term debt would not be
significant. The estimated changes to interest expense and the fair value of
long-term debt are determined considering the impact of hypothetical interest
rates on HCA's borrowing cost and long-term debt balances. To mitigate the
impact of fluctuations in interest rates, HCA generally targets a portion of its
debt portfolio at a fixed rate. HCA has not, during 2000, 1999 or 1998,
participated in any interest rate swap agreements.
Foreign operations and the related market risks associated with foreign
currency are currently insignificant to HCA's results of operations and
financial position.
EFFECTS OF INFLATION AND CHANGING PRICES
Various Federal, state and local laws have been enacted that, in certain
cases, limit HCA's ability to increase prices. Revenues for acute care hospital
services rendered to Medicare patients are established under the Federal
government's prospective payment system. Total Medicare revenues approximated
28% in 2000, 29% in 1999 and 30% in 1998 of HCA's total revenues.
Management believes that hospital industry operating margins have been, and
may continue to be, under significant pressure because of changes in payer mix
and growth in operating expenses in excess of the increase
51
52
HCA - THE HEALTHCARE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
EFFECTS OF INFLATION AND CHANGING PRICES (CONTINUED)
in prospective payments under the Medicare program. In addition, as a result of
increasing regulatory and competitive pressures, HCA's ability to maintain
operating margins through price increases to non-Medicare patients is limited.
IRS DISPUTES
HCA is contesting income taxes and related interest proposed by the IRS for
prior years aggregating approximately $202 million as of December 31, 2000.
Management believes that final resolution of these disputes will not have a
material adverse effect on the results of operations or liquidity of HCA. See
Note 7 -- Income Taxes in the Notes to Consolidated Financial Statements for a
description of the pending IRS disputes.
During 2000, HCA and the IRS filed a Stipulated Settlement with the Tax
Court regarding the IRS' proposed disallowance of certain acquisition-related
costs, executive compensation and systems conversion costs which were deducted
in calculating taxable income and the methods of accounting used by certain
subsidiaries for calculating taxable income related to vendor rebates and
governmental receivables. The settlement resulted in the payment of tax and
interest of $156 million and had no impact on HCA's results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
"Market Risk" under Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is contained in the Company's
consolidated financial statements indicated in the Index on Page F-1 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
52
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth under the heading
"Election of Directors" in the definitive proxy materials of the Company to be
filed in connection with its 2001 Annual Meeting of Stockholders, except for the
information regarding executive officers of the Company, which is contained in
Item 1 of Part I of this Annual Report on Form 10-K. The information required by
this Item contained in such definitive proxy materials is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the heading
"Executive Compensation" in the definitive proxy materials of the Company to be
filed in connection with its 2001 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth under the heading "Stock
Ownership" in the definitive proxy materials of the Company to be filed in
connection with its 2001 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth under the heading
"Certain Relationships and Related Transactions" in the definitive proxy
materials of the Company to be filed in connection with its 2001 Annual Meeting
of Stockholders, which information is incorporated herein by reference.
53
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
1. Financial Statements. The accompanying index to financial statements on
page F-1 of this Annual Report on Form 10-K is provided in response to this
item.
2. List of Financial Statement Schedules. All schedules are omitted
because the required information is either not present, not present in material
amounts or presented within the financial statements.
3. List of Exhibits
3.1 -- Restated Certificate of Incorporation of the Company, as
amended (filed as Exhibit 1 to the Company's Form 8-A/A,
Amendment No. 1 dated October 19, 2000, and incorporated
herein by reference).
3.2 -- Second Amended and Restated Bylaws of the Company (filed as
Exhibit 3 to the Company's Form 8-A/A, Amendment No. 1,
dated October 19, 2000, and incorporated herein by
reference).
4.1 -- Specimen Certificate for shares of Common Stock, par value
$0.01 per share, of the Company (filed as Exhibit 4 to the
Company's Form 8-A/A, Amendment No. 1, dated October 19,
2000, and incorporated herein by reference).
4.2 -- Registration Rights Agreement, dated as of March 16, 1989,
by and among HCA-Hospital Corporation of America and the
persons listed on the signature pages thereto (filed as
Exhibit (g)(24) to Amendment No. 3 to the Schedule 13E-3
filed by HCA-Hospital Corporation of America, Hospital
Corporation of America and The HCA Profit Sharing Plan on
March 22, 1989, and incorporated herein by reference).
4.3 -- Assignment and Assumption Agreement, dated as of February
10, 1994, between HCA-Hospital Corporation of America and
the Company relating to the Registration Rights Agreement,
as amended (filed as Exhibit 4.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993, and incorporated herein by reference).
4.4(a) -- $2 Billion Credit Agreement, dated as of February 10, 1994
(the "Credit Facility"), among the Company, the Several
Banks and Other Financial Institutions, and Chemical Bank as
Agent and as CAF Loan Agent (filed as Exhibit 4.10 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, and incorporated herein by
reference).
4.4(b) -- Agreement and Amendment to the Credit Facility, dated as of
September 26, 1994 (filed as Exhibit 4.10 to the Company's
Registration Statement on Form S-4 (File No. 33-56803), and
incorporated herein by reference).
4.4(c) -- Agreement and Amendment to the Credit Facility, dated as of
February 28, 1996 (filed as Exhibit 4.10(c) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, and incorporated herein by reference).
4.4(d) -- Agreement and Amendment to the Credit Facility, dated as of
February 26, 1997 (filed as Exhibit 4.10(d) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and incorporated herein by reference).
4.4(e) -- Agreement and Amendment to the Credit Facility, dated as of
June 17, 1997 (filed as Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference).
4.4(f) -- Second Amendment to the Credit Facility, dated as of
February 3, 1998 (filed as Exhibit 4.10(f) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997, and incorporated herein by reference).
54
55
4.4(g) -- Third Amendment to the Credit Facility, dated as of March 26, 1998 (filed as Exhibit 4.10(g) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by
reference).
4.4(h) -- Fourth Amendment to the Credit Facility, dated as of July 10, 1998 (filed as Exhibit 10(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and incorporated
herein by reference).
4.4(i) -- Fifth Amendment to the Credit Facility, dated as of March 30, 1999 (filed as Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and incorporated herein
by reference).
4.4(j) -- Sixth Amendment to the Credit Facility, dated as of June 23, 2000 (filed as Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein
by reference).
4.5(a) -- Indenture, dated as of December 15, 1993 between the Company and The First National Bank of Chicago,
as Trustee (filed as Exhibit 4.11 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, and incorporated herein by reference).
4.5(b) -- First Supplemental Indenture, dated as of May 25, 2000 between the Company and Bank One Trust
Company, N.A., as Trustee (filed as Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, and incorporated herein by reference).
4.6(a) -- $1 Billion Credit Agreement, dated as of July 10, 1998 among the Registrant, The Several Banks and
other Financial Institutions and NationsBank, N.A. as Documentation Agent, The Bank of Nova Scotia
and Deutsche Bank Securities, as Co-Syndication Agents and The Chase Manhattan Bank, as Agent (filed
as Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, and incorporated herein by reference).
4.6(b) -- First Amendment to the July 1998 $1 Billion Agreement, dated as of March 30, 1999 (filed as Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and
incorporated herein by reference).
4.6(c) -- Second Amendment to the July 1998 $1 Billion Credit Agreement, dated as of June 23, 2000 (filed as
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference).
4.7 -- $1 Billion Credit Agreement, dated as of March 30, 1999 among the Company, The Several Banks and
Other Financial Institutions, Chase Securities Inc., as Lead Arranger and Sole Book Manager,
NationsBank, N.A., as Documentation Agent, The Bank of New York, The Bank of Nova Scotia, and
Toronto-Dominion (Texas), Inc., as Co-Syndication Agents, Deutsche Bank AG New York Branch and/or
Cayman Islands Branch and Fleet National Bank, as Co-Agents, SunTrust Bank, Nashville, N.A. and
Wachovia Bank, N.A., as Lead Managers and The Chase Manhattan Bank, as Administrative Agent (filed as
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
and incorporated herein by reference).
4.8(a) -- $1.2 Billion Credit Agreement, dated as of March 13, 2000 among the Company, The Several Banks and
other Financial Institutions, Chase Securities Inc., as Lead Arranger and Sole Book Manager, Bank of
America, N.A., as Documentation Agent and Co-Arranger, The Bank of Nova Scotia, as Syndication Agent
and Co-Arranger, Deutsche Bank AG New York and/or Cayman Islands Branches, as Syndication Agent and
Co-Arranger, The Bank of New York, as Co-Arranger, The Industrial Bank of Japan, Limited, as
Co-Arranger, Citicorp USA, as Lead Manager, SunTrust Bank, as Lead Manager, Wachovia Bank, N.A., as
Lead Manager and The Chase Manhattan Bank, as Administrative Agent (filed as Exhibit 4.11 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by
reference).
55
56
4.8(b) -- First Amendment to the March 2000 $1.2 Billion Credit
Agreement, dated as of June 23, 2000 (filed as Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, and incorporated herein by
reference).
4.9 -- Distribution Agreement dated as of May 11, 1999 by and among
the Company, LifePoint Hospitals, Inc. and Triad Hospitals,
Inc. (filed as Exhibit 99 to the Company's Current Report on
Form 8-K dated May 11, 1999, and incorporated herein by
reference).
10.1 -- Amended and Restated Agreement and Plan of Merger among the
Company, CVH Acquisition Corporation and Value Health, Inc.
dated as of April 14, 1997 (filed as Exhibit 2 to the
Company's Current Report on Form 8-K dated April 22, 1997,
and incorporated herein by reference).
10.2 -- Agreement and Plan of Merger among the Company, COL
Acquisition Corporation and Healthtrust, Inc. -- The
Hospital Company, dated as of October 4, 1994 (filed as
Exhibit 2 to the Company's Registration Statement on Form
S-4 (File No. 33-56803), and incorporated herein by
reference).
10.3 -- Agreement and Plan of Merger among the Company, CHOS
Acquisition Corporation and HCA-Hospital Corporation of
America, dated as of October 2, 1993 (filed as Exhibit 2 to
the Company's Registration Statement on Form S-4 (File No.
33-50735), and incorporated herein by reference).
10.4 -- Agreement and Plan of Merger between Galen Health Care,
Inc., and the Company, dated as of June 10, 1993 (filed as
Exhibit 2 to the Company's Registration Statement on Form
S-4 (File No. 33-49773), and incorporated herein by
reference).
10.5 -- Columbia Hospital Corporation Stock Option Plan (filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990, and
incorporated herein by reference).*
10.6(a) -- Amended and Restated Columbia/HCA Healthcare Corporation
1992 Stock and Incentive Plan (filed as Exhibit 10.7(b) to
the Company's Annual Report on From 10-K for the fiscal year
ended December 31, 1998, and incorporated herein by
reference).*
10.6(b) -- First Amendment to Amended and Restated Columbia/HCA
Healthcare Corporation 1992 Stock and Incentive Plan (filed
as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, and
incorporated herein by reference).*
10.7 -- Columbia Hospital Corporation Outside Directors Nonqualified
Stock Option Plan (filed as Exhibit 28.1 to the Company's
Registration Statement on Form S-8 (File No. 33-55272), and
incorporated herein by reference).*
10.8 -- HCA-Hospital Corporation of America 1989 Nonqualified Stock
Option Plan, as amended through December 16, 1991 (filed as
Exhibit 10(g) to HCA-Hospital Corporation of America's
Registration Statement on Form S-1 (File No. 33-44906), and
incorporated herein by reference).*
10.9 -- HCA-Hospital Corporation of America Nonqualified Initial
Option Plan (filed as Exhibit 4.6 to the Company's
Registration Statement on Form S-3 (File No. 33-52379), and
incorporated herein by reference).*
10.10 -- Form of Indemnity Agreement with certain officers and
directors (filed as Exhibit 10(kk) to Galen Health Care,
Inc.'s Registration Statement on Form 10, as amended, and
incorporated herein by reference).
10.11 -- Form of Galen Health Care, Inc. 1993 Adjustment Plan (filed
as Exhibit 4.15 to the Company's Registration Statement on
Form S-8 (File No. 33-50147), and incorporated herein by
reference).*
10.12 -- Columbia/HCA Healthcare Corporation 1997 Annual Incentive
Plan (filed as Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996,
and incorporated herein by reference).*
56
57
10.13 -- HCA-Hospital Corporation of America 1992 Stock Compensation Plan (filed as Exhibit 10(t) to
HCA-Hospital Corporation of America's Registration Statement on Form S-1 (File No. 33-44906), and
incorporated herein by reference).*
10.14 -- Separation Agreement between the Company and Richard L. Scott dated July 25, 1997 (filed as Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and
incorporated herein by reference).*
10.15 -- Separation Agreement between the Company and David T. Vandewater dated July 25, 1997 (filed as
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997, and incorporated herein by reference).*
10.16 -- Columbia/HCA Healthcare Corporation Directors Fees/Compensation Policy as revised May 14, 1998 (filed
as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, and incorporated herein by reference).*
10.17(a) -- Columbia/HCA Healthcare Corporation Outside Directors Stock and Incentive Compensation Plan, as
amended and restated (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, and incorporated herein by reference).*
10.17(b) -- First Amendment to the Columbia/HCA Healthcare Corporation Outside Directors Stock and Incentive
Compensation Plan, as amended and restated September 23, 1999, dated as of May 25, 2000 (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference).*
10.18 -- HCA -- The Healthcare Company Amended and Restated 1995 Management Stock Purchase Plan (filed as
Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, and incorporated herein by reference).*
10.19 -- Letter Agreement between the Company and Robert Waterman dated October 31, 1997 (filed as Exhibit
10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and
incorporated herein by reference).*
10.20 -- Form of Restricted Stock Purchase Agreement between BNA Associates, Inc. and individuals listed on
Schedule A (filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, and incorporated herein by reference).
10.21 -- Columbia/HCA Healthcare Corporation 1999 Performance Equity Incentive Plan (filed as Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and
incorporated herein by reference).*
10.22 -- Columbia/HCA Healthcare Corporation 2000 Performance Equity Incentive Plan (filed as Exhibit 10 to
the Company's Quarterly Report on Form 10-K for the quarter ended March 31, 2000, and incorporated
herein by reference).*
10.23 -- Letter of Credit Agreement dated February 11, 1999 between the Company and the United States of
America (filed as Exhibit 99 to the Company's Current Report on Form 8-K dated February 23, 1999, and
incorporated herein by reference).
10.24 -- Columbia/HCA Healthcare Corporation 2000 Equity Incentive Plan (filed as Exhibit A to the Company's
Proxy Statement for the Annual Meeting of Stockholders on May 25, 2000, and incorporated herein by
reference).*
10.25 -- Columbia/HCA Healthcare Corporation 2000 Incentive and Retention Plan (filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein
by reference).*
10.26 -- Form of Restricted Stock Award Agreement of OneSource Med, Inc. (filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein
by reference).*
57
58
10.27 -- Letter Agreement, dated May 25, 2000, between the Company
and R. Clayton McWhorter (filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by reference).*
10.28 -- Civil and Administrative Settlement Agreement, dated
December 14, 2000 between the Company, the United States
Department of Justice and others (filed as Exhibit 99.2 to
the Company's Current Report on Form 8-K dated December 20,
2000, and incorporated herein by reference).
10.29 -- Plea Agreement, dated December 14, 2000 between the Company,
Columbia Homecare Group, Inc., Columbia Management
Companies, Inc. and the United States Department of Justice
(filed as Exhibit 99.3 to the Company's Current Report on
Form 8-K dated December 20, 2000, and incorporated herein by
reference).
10.30 -- Corporate Integrity Agreement, dated December 14, 2000
between the Company and the Office of Inspector General of
the United States Department of Health and Human Services
(filed as Exhibit 99.4 to the Company's Current Report on
Form 8-K dated December 20, 2000, and incorporated herein by
reference).
10.31 -- Limited Liability Company Interest Purchase Agreement, dated
as of November 30, 2000, between JV Investor, LLC,
Healthtrust, Inc. -- The Hospital Company and each of the
investors listed therein (which agreement is filed
herewith).
12 -- Statement re Computation of Ratio of Earnings to Fixed
Charges.
21 -- List of Subsidiaries.
23 -- Consent of Ernst & Young LLP.
- ---------------
* Management compensatory plan or arrangement.
(b) Reports on Form 8-K.
On November 7, 2000, the Company filed a report on Form 8-K which announced
the issuance of L150 million of 8.75% notes due 2010.
On December 20, 2000, the Company filed a report on Form 8-K which
announced an agreement to resolve pending criminal issues and other allegations
involved in the government investigation of the Company.
58
59
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.
HCA - THE HEALTHCARE COMPANY
By: /s/ JACK O. BOVENDER, JR.
-------------------------------------
Jack O. Bovender, Jr.
Chief Executive Officer
Dated: March 29, 2001
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 and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THOMAS F. FRIST, JR., M.D. Chairman of the Board March 29, 2001
- -----------------------------------------------------
Thomas F. Frist, Jr., M.D.
/s/ JACK O. BOVENDER, JR. President, Chief Executive March 29, 2001
- ----------------------------------------------------- Officer, and Director
Jack O. Bovender, Jr.
/s/ R. MILTON JOHNSON Senior Vice President and March 29, 2001
- ----------------------------------------------------- Controller (Principal
R. Milton Johnson Accounting Officer)
/s/ MAGDALENA H. AVERHOFF, M.D. Director March 29, 2001
- -----------------------------------------------------
Magdalena H. Averhoff, M.D.
/s/ J. MICHAEL COOK Director March 29, 2001
- -----------------------------------------------------
J. Michael Cook
/s/ MARTIN FELDSTEIN Director March 29, 2001
- -----------------------------------------------------
Martin Feldstein
/s/ FREDERICK W. GLUCK Director March 29, 2001
- -----------------------------------------------------
Frederick W. Gluck
/s/ GLENDA A. HATCHETT Director March 29, 2001
- -----------------------------------------------------
Glenda A. Hatchett
/s/ T. MICHAEL LONG Director March 29, 2001
- -----------------------------------------------------
T. Michael Long
59
60
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN H. MCARTHUR Director March 29, 2001
- -----------------------------------------------------
John H. McArthur
/s/ THOMAS S. MURPHY Director March 29, 2001
- -----------------------------------------------------
Thomas S. Murphy
/s/ KENT C. NELSON Director March 29, 2001
- -----------------------------------------------------
Kent C. Nelson
/s/ CARL E. REICHARDT Director March 29, 2001
- -----------------------------------------------------
Carl E. Reichardt
/s/ FRANK S. ROYAL, M.D. Director March 29, 2001
- -----------------------------------------------------
Frank S. Royal, M.D.
60
61
HCA - THE HEALTHCARE COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Income Statements for the years ended
December 31, 2000, 1999 and 1998....................... F-3
Consolidated Balance Sheets, December 31, 2000 and 1999... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................... F-6
Notes to Consolidated Financial Statements................ F-7
Quarterly Consolidated Financial Information
(Unaudited)............................................ F-31
F-1
62
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
HCA - The Healthcare Company
We have audited the accompanying consolidated balance sheets of HCA - The
Healthcare Company as of December 31, 2000 and 1999 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 HCA - The
Healthcare Company at December 31, 2000 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Nashville, Tennessee
February 5, 2001
F-2
63
HCA - THE HEALTHCARE COMPANY
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
------- ------- -------
Revenues.................................................... $16,670 $16,657 $18,681
Salaries and benefits....................................... 6,639 6,694 7,766
Supplies.................................................... 2,640 2,645 2,901
Other operating expenses.................................... 3,085 3,251 3,816
Provision for doubtful accounts............................. 1,255 1,269 1,442
Depreciation and amortization............................... 1,033 1,094 1,247
Interest expense............................................ 559 471 561
Equity in earnings of affiliates............................ (126) (90) (112)
Settlement with Federal government.......................... 840 -- --
Gains on sales of facilities................................ (34) (297) (744)
Impairment of long-lived assets............................. 117 220 542
Restructuring of operations and investigation related
costs..................................................... 62 116 111
------- ------- -------
16,070 15,373 17,530
------- ------- -------
Income from continuing operations before minority interests
and income taxes.......................................... 600 1,284 1,151
Minority interests in earnings of consolidated entities..... 84 57 70
------- ------- -------
Income from continuing operations before income taxes....... 516 1,227 1,081
Provision for income taxes.................................. 297 570 549
------- ------- -------
Income from continuing operations........................... 219 657 532
Discontinued operations:
Loss from operations of discontinued businesses, net of
income tax benefit of $26.............................. -- -- (80)
Loss on disposals of discontinued businesses.............. -- -- (73)
------- ------- -------
Net income........................................ $ 219 $ 657 $ 379
======= ======= =======
Basic earnings per share:
Income from continuing operations......................... $ 0.39 $ 1.12 $ .82
Discontinued operations:
Loss from operations of discontinued businesses........ -- -- (.12)
Loss on disposals of discontinued businesses........... -- -- (.11)
------- ------- -------
Net income........................................ $ 0.39 $ 1.12 $ .59
======= ======= =======
Diluted earnings per share:
Income from continuing operations......................... $ 0.39 $ 1.11 $ .82
Discontinued operations:
Loss from operations of discontinued businesses........ -- -- (.12)
Loss on disposals of discontinued businesses........... -- -- (.11)
------- ------- -------
Net income........................................ $ 0.39 $ 1.11 $ .59
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
64
HCA - THE HEALTHCARE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 1999
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 314 $ 190
Accounts receivable, less allowance for doubtful accounts
of $1,583 and $1,567................................... 2,211 1,873
Inventories............................................... 396 383
Income taxes receivable................................... 197 178
Other..................................................... 1,335 973
------- -------
4,453 3,597
Property and equipment, at cost:
Land...................................................... 793 813
Buildings................................................. 6,021 6,108
Equipment................................................. 7,045 6,721
Construction in progress.................................. 431 442
------- -------
14,290 14,084
Accumulated depreciation.................................. (5,810) (5,594)
------- -------
8,480 8,490
Investments of insurance subsidiary......................... 1,371 1,457
Investments in and advances to affiliates................... 779 654
Intangible assets, net of accumulated amortization of $785
and $644.................................................. 2,155 2,319
Other....................................................... 330 368
------- -------
$17,568 $16,885
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 693 $ 657
Accrued salaries.......................................... 352 403
Other accrued expenses.................................... 1,135 897
Government settlement accrual............................. 840 --
Long-term debt due within one year........................ 1,121 1,160
------- -------
4,141 3,117
Long-term debt.............................................. 5,631 5,284
Professional liability risks, deferred taxes and other
liabilities............................................... 2,050 2,104
Minority interests in equity of consolidated entities....... 572 763
Forward purchase contracts and put options.................. 769 --
Stockholders' equity:
Common stock $.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; outstanding
521,991,700 voting shares and 21,000,000 nonvoting
shares -- 2000 and 543,272,900 voting shares and
21,000,000 nonvoting shares -- 1999.................... 5 6
Capital in excess of par value............................ -- 951
Other..................................................... 9 8
Accumulated other comprehensive income.................... 52 53
Retained earnings......................................... 4,339 4,599
------- -------
4,405 5,617
------- -------
$17,568 $16,885
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
65
HCA - THE HEALTHCARE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS)
COMMON STOCK CAPITAL IN ACCUMULATED
--------------- EXCESS OF OTHER
SHARES PAR PAR COMPREHENSIVE RETAINED
(000) VALUE VALUE OTHER INCOME EARNINGS TOTAL
------- ----- ---------- ----- ------------- -------- -------
Balances, December 31, 1997.................. 641,452 $ 6 $ 3,480 $13 $ 92 $3,659 $ 7,250
Comprehensive income:
Net income............................... 379 379
Other comprehensive income (loss):
Net unrealized losses on investment
securities.......................... (13) (13)
Foreign currency translation
adjustments......................... 1 1
---- ------ -------
Total comprehensive income.......... (12) 379 367
Cash dividends............................. (52) (52)
Stock repurchases.......................... (4,076) (98) (98)
Stock options exercised, net............... 1,623 37 37
Employee benefit plan issuances............ 2,983 71 71
Other...................................... 596 8 (2) 6
------- --- ------- --- ---- ------ -------
Balances, December 31, 1998.................. 642,578 6 3,498 11 80 3,986 7,581
Comprehensive income:
Net income............................... 657 657
Other comprehensive loss:
Net unrealized losses on investment
securities.......................... (18) (18)
Foreign currency translation
adjustments......................... (9) (9)
---- ------ -------
Total comprehensive income.......... (27) 657 630
Cash dividends............................. (44) (44)
Stock repurchases.......................... (81,855) (1,930) (1,930)
Stock options exercised, net............... 719 15 (1) 14
Employee benefit plan issuances............ 2,840 56 56
Spin-offs of LifePoint and Triad........... (687) (687)
Other...................................... (9) (1) (2) (3)
------- --- ------- --- ---- ------ -------
Balances, December 31, 1999.................. 564,273 6 951 8 53 4,599 5,617
Comprehensive income:
Net income............................. 219 219
Other comprehensive income (loss):
Net unrealized losses on investment
securities.......................... (6) (6)
Foreign currency translation
adjustments......................... 5 5
---- ------ -------
Total comprehensive income.......... (1) 219 218
Cash dividends............................. (44) (44)
Stock repurchases.......................... (30,363) (1) (873) (874)
Stock options exercised, net............... 6,564 191 191
Employee benefit plan issuances............ 2,431 52 52
Reclassification of forward purchase
contracts and put options to temporary
equity................................... (334) (435) (769)
Other...................................... 87 13 1 14
------- --- ------- --- ---- ------ -------
Balances, December 31, 2000.................. 542,992 $ 5 $ -- $ 9 $ 52 $4,339 $ 4,405
======= === ======= === ==== ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
66
HCA - THE HEALTHCARE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS)
2000 1999 1998
------- ------- -------
Cash flows from continuing operating activities:
Net income................................................ $ 219 $ 657 $ 379
Adjustments to reconcile net income to net cash provided
by continuing operating activities:
Provision for doubtful accounts...................... 1,255 1,269 1,442
Depreciation and amortization........................ 1,033 1,094 1,247
Income taxes......................................... (219) (66) 351
Settlement with Federal government................... 840 -- --
Gains on sales of facilities......................... (34) (297) (744)
Impairment of long-lived assets...................... 117 220 542
Loss from discontinued operations.................... -- -- 153
Increase (decrease) in cash from operating assets and
liabilities:
Accounts receivable............................... (1,678) (1,463) (1,229)
Inventories and other assets...................... 90 (119) (39)
Accounts payable and accrued expenses............. (147) (110) (177)
Other................................................ 71 38 (9)
------- ------- -------
Net cash provided by continuing operating
activities...................................... 1,547 1,223 1,916
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (1,155) (1,287) (1,255)
Acquisition of hospitals and health care entities......... (350) -- (215)
Spin-off of facilities to stockholders.................... -- 886 --
Disposal of hospitals and health care entities............ 327 805 2,060
Change in investments..................................... 106 565 (294)
Investment in discontinued operations, net................ -- -- 677
Other..................................................... (15) (44) (3)
------- ------- -------
Net cash provided by (used in) investing
activities...................................... (1,087) 925 970
------- ------- -------
Cash flows from financing activities:
Issuance of long-term debt................................ 2,980 1,037 3
Net change in bank borrowings............................. (500) 200 (2,514)
Repayment of long-term debt............................... (2,058) (1,572) (147)
Issuances (repurchases) of common stock, net.............. (677) (1,884) 8
Payment of cash dividends................................. (44) (44) (52)
Other..................................................... (37) 8 3
------- ------- -------
Net cash used in financing activities............. (336) (2,255) (2,699)
------- ------- -------
Change in cash and cash equivalents......................... 124 (107) 187
Cash and cash equivalents at beginning of period............ 190 297 110
------- ------- -------
Cash and cash equivalents at end of period.................. $ 314 $ 190 $ 297
======= ======= =======
Interest payments........................................... $ 489 $ 475 $ 566
Income tax payments, net of refunds......................... $ 516 $ 634 $ (139)
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
67
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Reporting Entity
HCA - The Healthcare Company is a holding company whose affiliates own and
operate hospitals and related health care entities. The term "affiliates"
includes direct and indirect subsidiaries of HCA - The Healthcare Company and
partnerships and joint ventures in which such subsidiaries are partners. At
December 31, 2000, these affiliates owned and operated 187 hospitals, 75
freestanding surgery centers and provided extensive outpatient and ancillary
services. Affiliates of HCA are also partners in joint ventures that own and
operate 9 hospitals and 3 freestanding surgery centers which are accounted for
using the equity method. The Company's facilities are located in 24 states,
England and Switzerland. The terms "HCA" or the "Company" as used in this annual
report on Form 10-K refer to HCA - The Healthcare Company and its affiliates
unless otherwise stated or indicated by context.
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The consolidated financial statements include all subsidiaries and entities
controlled by HCA. "Control" is generally defined by HCA as ownership of a
majority of the voting interest of an entity. Significant intercompany
transactions have been eliminated. Investments in entities which HCA does not
control, but in which it has a substantial ownership interest and can exercise
significant influence, are accounted for using the equity method.
HCA has completed various acquisitions and joint venture transactions that
have been recorded under the purchase method of accounting. Accordingly, the
accounts of these entities have been consolidated with those of HCA for periods
subsequent to the acquisition of controlling interests.
Revenues
HCA's health care facilities have entered into agreements with third-party
payers, including government programs and managed care health plans, under which
the facilities are paid based upon established charges, the cost of providing
services, predetermined rates per diagnosis, fixed per diem rates or discounts
from established charges.
Revenues are recorded at estimated amounts due from patients and
third-party payers for the health care services provided. Settlements under
reimbursement agreements with third-party payers are estimated and recorded in
the period the related services are rendered. Laws and regulations governing the
Medicare and Medicaid programs are complex and subject to interpretation. As a
result, there is at least a reasonable possibility that recorded estimates will
change by a material amount. The estimated reimbursement amounts are adjusted in
subsequent periods as cost reports are prepared and filed and as final
settlements are determined (in relation to certain government programs,
primarily Medicare, this is generally referred to as the "cost report" filing
and settlement process). The adjustments to estimated reimbursement amounts
resulted in increases to revenues of $168 million, $94 million and $37 million
in 2000, 1999 and 1998, respectively. In association with the ongoing Federal
investigations into certain of the Company's business practices, the applicable
governmental agencies had substantially ceased the processing of final
settlements of the Company's cost reports. Since the cost reports were not being
settled, the Company has not been receiving the updated information, which prior
to 1998, was the basis used by the Company to adjust estimated settlement
amounts. During 2000, the governmental agencies and their fiscal intermediaries
resumed the cost report audit process and the audits that have been or will be
conducted are anticipated to be more intensive than in years prior to the
inception of the ongoing Federal investigation. Management believes that
adequate
F-7
68
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Revenues (Continued)
provisions have been made for adjustments that may result from final
determination of amounts earned under these programs.
HCA provides care without charge to patients who are financially unable to
pay for the health care services they receive. Because HCA does not pursue
collection of amounts determined to qualify as charity care, they are not
reported in revenues.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with a maturity
of three months or less when purchased. Carrying values of cash and cash
equivalents approximate fair value due to the short-term nature of these
instruments.
Accounts Receivable
HCA receives payments for services rendered from Federal and state agencies
(under the Medicare, Medicaid and Tricare programs), managed care health plans,
commercial insurance companies, employers and patients. During the years ended
December 31, 2000 and 1999, approximately 28% and 29%, respectively, of HCA's
revenues related to patients participating in the Medicare program. HCA
recognizes that revenues and receivables from government agencies are
significant to its operations, but does not believe that there are significant
credit risks associated with these government agencies. The Company does not
believe that there are any other significant concentrations of revenues from any
particular payer that would subject it to any significant credit risks in the
collection of its accounts receivable.
Additions to the allowance for doubtful accounts are made by means of the
provision for doubtful accounts. Accounts written off as uncollectible are
deducted from the allowance and subsequent recoveries are added.
The amount of the provision for doubtful accounts is based upon
management's assessment of historical and expected net collections, business and
economic conditions, trends in Federal and state governmental health care
coverage and other collection indicators. The primary tool used in management's
assessment is an annual, detailed review of historical collections and
write-offs at facilities that represent a majority of the Company's revenues and
accounts receivable. The results of the detailed review of collections
experience are compared to the allowance amount at the beginning of the review
period and the allowance amount for the current period is evaluated based upon
the historical experience, adjusted for changes in trends and conditions.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Long-lived Assets
Depreciation expense, computed using the straight-line method, was $931
million in 2000, $976 million in 1999 and $1.122 billion in 1998. Buildings and
improvements are depreciated over estimated useful lives ranging generally from
10 to 40 years. Estimated useful lives of equipment vary generally from 4 to 10
years.
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method, generally over periods ranging from 30 to 40 years for
hospital acquisitions and periods ranging from 5 to 20 years for physician
practice, clinic and other
F-8
69
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Long-lived Assets (Continued)
acquisitions. Noncompete agreements and debt issuance costs are amortized based
upon the lives of the respective contracts or loans.
When events, circumstances and operating results indicate that the carrying
values of certain long-lived assets and the related identifiable intangible
assets might be impaired, HCA prepares projections of the undiscounted future
cash flows expected to result from the use of the assets and their eventual
disposition. If the projections indicate that the recorded amounts are not
expected to be recoverable, such amounts are reduced to estimated fair value.
Fair value is estimated based upon internal evaluations of each market that
include quantitative analyses of net revenue and cash flows, reviews of recent
sales of similar facilities and market responses based upon discussions with and
offers received from potential buyers. The market responses are usually
considered to provide the most reliable estimates of fair value.
Professional Liability Insurance Claims
A substantial portion of HCA's professional liability risks is insured
through a wholly-owned insurance subsidiary of HCA, which is funded annually.
Allowances for professional liability risks were $1.4 billion and $1.5 billion
at December 31, 2000 and 1999, respectively. Provisions for losses related to
professional liability risks are based upon actuarially determined estimates.
Loss and loss expense allowances represent the estimated ultimate net cost of
all reported and unreported losses incurred through the respective balance sheet
dates. The allowances for unpaid losses and loss expenses are estimated using
individual case-basis valuations and statistical analyses. Those estimates are
subject to the effects of trends in loss severity and frequency. The estimates
are continually reviewed and adjustments are recorded as experience develops or
new information becomes known. The changes to the estimated allowances are
included in current operating results. Although considerable variability is
inherent in such estimates, management believes that the allowances for losses
and loss expenses are adequate.
HCA's wholly owned insurance subsidiary has entered into certain
reinsurance contracts. The obligations covered by the reinsurance contracts
remain on the balance sheet as HCA remains liable to the extent that the
reinsurers do not meet their obligations under the reinsurance contracts. The
unamortized balance of the amounts receivable for the reinsurance contracts of
$230 million and $215 million at December 31, 2000, and 1999, respectively, are
included in other assets. A deferred reinsurance gain of $21 million is included
in other liabilities at December 31, 2000 and will be recognized over the
estimated recovery period using the interest method.
Investments of Insurance Subsidiary
At December 31, 2000 and 1999, all of the investments of HCA's wholly-owned
insurance subsidiary were classified as "available-for-sale" as defined in
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115").
Minority Interests in Consolidated Entities
The consolidated financial statements include all assets, liabilities,
revenues and expenses of less than 100% owned entities controlled by HCA.
Accordingly, management has recorded minority interests in the earnings and
equity of such entities.
HCA is a party to several partnership agreements which include provisions
for the redemption of minority interests using specified valuation techniques.
F-9
70
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Related Party Transactions
In December 2000, HCA completed the sale of 116 medical office buildings to
MedCap Properties, LLC. ("MedCap"). HCA received approximately $250 million and
a minority interest in MedCap in the transaction. MedCap is a private company
which was formed by HCA and other investors to acquire the buildings. HCA did
not recognize a gain or loss on the transaction. The Chief Manager of MedCap,
who is also a member of the MedCap board of governors, is a relative of a
Director and Executive Officer of the Company. HCA leases certain office space
from MedCap and guarantees a certain level of rental revenue to MedCap.
Stock Based Compensation
HCA applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its employee stock benefit plans. Accordingly, no compensation cost has been
recognized for HCA's employee stock benefit plans.
Disclosures about Segments of an Enterprise
During 1998, HCA adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers.
Derivatives
During June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities -- An Amendment of
FASB Statement 133". SFAS 138 addressed a limited number of SFAS 133
implementation issues. During June 1999, the FASB issued SFAS 137. SFAS 137
defers the effective date of SFAS 133 to years beginning after June 15, 2000.
SFAS 133 will require HCA to recognize all derivatives on the balance sheet at
fair value. Management has evaluated SFAS 133 and, due to the Company's minimal
use of derivatives, does not believe that the adoption of SFAS 133 will have a
material impact on its financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
NOTE 2 -- INVESTIGATIONS AND AGREEMENTS TO SETTLE CERTAIN GOVERNMENT CLAIMS
The Company continues to be the subject of governmental investigations into
and litigation relating to its business practices. Additionally, the Company is
a defendant in several qui tam actions brought by private parties on behalf of
the United States of America, some of which have been unsealed and served on the
Company. The Company is aware of additional qui tam actions that remain under
seal. There could also be other sealed qui tam cases of which it is unaware.
On December 14, 2000, the Company announced that it had entered into a Plea
Agreement with the Criminal Division of the Department of Justice and various
U.S. Attorney's Offices (the "Plea Agreement") and a Civil and Administrative
Settlement Agreement with the Civil Division of the Department of Justice (the
"Civil Agreement"). As discussed below, the agreements resolve all Federal
criminal issues outstanding against the Company and, subject to court approval,
certain issues involving Federal civil claims by or on
F-10
71
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTIGATIONS AND AGREEMENTS TO SETTLE CERTAIN GOVERNMENT CLAIMS
(CONTINUED)
behalf of the government against the Company relating to DRG coding, outpatient
laboratory billing and home health issues. The Company also entered into a
Corporate Integrity Agreement ("CIA") with the Office of Inspector General of
the Department of Health and Human Services.
Pursuant to the Plea Agreement, the Company and its affiliates received a
full release from criminal liability for conduct arising from or relating to
billing and reimbursement for services provided pursuant to Federal health care
benefit programs regarding: Medicare cost reports; violations of the
Anti-kickback Statute or the Physician Self-referral law, and any other conduct
involving relations with referral sources and those in a position to influence
referral sources; DRG billing; laboratory billing; the acquisition of home
health agencies; and the provision of services by home health agencies. In
addition, the government agreed not to prosecute the Company for other possible
criminal offenses which are or have been under investigation by the Department
of Justice arising from or relating to billing and reimbursement for services
provided pursuant to Federal health care benefit programs. The Plea Agreement
provided that the Company pay the government approximately $95 million, which
payment was made during the first quarter of 2001, and that two non-operating
subsidiaries enter certain criminal pleas, which pleas were entered in January
2001.
The Civil Agreement covers the following issues: DRG coding for calendar
years 1990-1997; outpatient laboratory billings for calendar years 1989-1997;
home health community education for Medicare cost report years 1994-1997; home
health billing for calendar years 1995-1998; and certain home health management
transactions for Medicare cost report years 1993-1998. The Civil Agreement
provides that in return for releases on these issues, the Company will pay the
government $745 million, with interest accruing from May 18, 2000 to the payment
date at a rate of 6.5%. The civil payment will be made upon receipt of court
approval of the Civil Agreement, which is expected to occur during the second
quarter of 2001. The major civil issues that are not covered by the Civil
Agreement include claims related to cost reports and physician relations issues.
Under the Civil Agreement, the Company's existing Letter of Credit
Agreement with the Department of Justice will be reduced from $1 billion to $250
million at the time of the settlement payment, which is expected to occur during
the second quarter of 2001. Any future civil settlement or court ordered
payments related to cost report or physician relations issues will reduce the
remaining amount of the letter of credit dollar for dollar. The amount of any
such future settlement or court ordered payments is not related to the remaining
amount of the letter of credit.
The CIA is structured to assure the government of the Company's overall
Medicare compliance and specifically covers DRG coding, outpatient laboratory
billing, outpatient prospective payment system ("PPS") billing and physician
relations. The CIA resulted in a waiver of the government's discretionary right
to exclude any of the Company's operations from participation in the Medicare
Program for matters settled in the Civil Agreement.
The Company remains the subject of a formal order of investigation by the
Securities and Exchange Commission (the "SEC"). The Company understands that the
investigation includes the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
The Company continues to cooperate in the governmental investigations.
Given the scope of the ongoing investigations and litigation, the Company
expects other investigative and prosecutorial activity to occur in these and
other jurisdictions in the future.
While management remains unable to predict the outcome of any of the
ongoing investigations and litigation or the initiation of any additional
investigations or litigation, were the Company to be found in
F-11
72
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTIGATIONS AND AGREEMENTS TO SETTLE CERTAIN GOVERNMENT CLAIMS
(CONTINUED)
violation of Federal or state laws relating to Medicare, Medicaid or similar
programs or breach of the CIA, the Company could be subject to substantial
monetary fines, civil and criminal penalties and/or exclusion from participation
in the Medicare and Medicaid programs. Any such sanctions or losses could have a
material adverse effect on the Company's financial position, results of
operations and liquidity. (See Note 11 - Contingencies and Part I, Item 3: Legal
Proceedings.)
NOTE 3 -- RESTRUCTURING OF OPERATIONS
HCA has completed a restructuring of its operations to create a smaller and
more focused company. The restructuring included the divestitures of certain
hospitals, surgery centers and related facilities, the spin-offs of LifePoint
Hospitals, Inc. ("LifePoint") and Triad Hospitals, Inc. ("Triad") and the
divestitures of the Company's home health and certain other businesses, as
described in Note 5 -- Discontinued Operations.
Divestiture of Certain Hospitals and Surgery Centers
During 2000, HCA recognized a pretax gain of $34 million ($16 million
after-tax) on the sales of three consolidating hospitals. Proceeds from the
sales were used to repay bank borrowings.
During 2000, management identified and initiated plans to sell or replace
during 2001, 4 consolidating hospitals and certain other assets. The carrying
value for the hospitals and other assets expected to be sold was reduced to fair
value of $40 million, based upon estimates of sales values, for a total
non-cash, pretax charge of approximately $117 million. The consolidating
hospitals for which the impairment charge was recorded had revenues of $198
million, $190 million and $192 million for the years ended December 31, 2000,
1999, and 1998, respectively. These facilities incurred net income (loss) from
continuing operations before the pretax impairment charge and income taxes of $5
million, $6 million, and ($8) million for the years ended December 31, 2000,
1999, and 1998, respectively.
During 1999, HCA recognized a net pretax gain of $297 million ($164 million
after-tax) on the sale of three hospitals and certain related health care
facilities. Proceeds from the sales were used to repay bank borrowings.
During 1999, HCA identified and initiated, or revised, plans to divest or
close, 23 consolidating hospitals and 4 non-consolidating hospitals. The
carrying value for the hospitals and other assets expected to be sold was
reduced to fair value of $217 million, based upon estimates of sales values, for
a total non-cash, pretax charge of $220 million. The hospitals and other assets
for which the impairment charge was recorded had revenues (through the date of
sale or closure) of $189 million, $580 million and $795 million for the years
ended December 31, 2000, 1999 and 1998, respectively. These facilities incurred
losses from continuing operations before the pretax impairment charge and income
tax benefits (through the date of sale or closure) of $15 million, $57 million
and $86 million for the years ended December 31, 2000, 1999 and 1998,
respectively. During 1999 and 2000, HCA sold or closed 15 consolidating
hospitals and the 4 non-consolidating hospitals that had been identified for
divestiture. The facilities spun-off to Triad in 1999 included 4 of the
consolidating hospitals on which impairment charges had been recorded. HCA
completed the sale of one additional hospital in January of 2001. The proceeds
from the sales approximated the carrying values and were used to repay bank
borrowings.
During 1998, HCA recognized a net pretax gain of $744 million ($365 million
after-tax) on the sale of certain hospitals and surgery centers. The gain
includes the sale of 20 consolidating hospitals and one non-consolidating
hospital to a consortium of not-for-profit entities for gross proceeds of
approximately $1.2 billion, resulting in a pretax gain of $570 million ($335
million after-tax). The $744 million net gain also includes the sale of 34
ambulatory surgery centers for proceeds of approximately $550 million, resulting
in a pretax gain of
F-12
73
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- RESTRUCTURING OF OPERATIONS (CONTINUED)
Divestiture of Certain Hospitals and Surgery Centers (Continued)
$203 million ($50 million after-tax). The high effective tax rate of 73% on the
gain was due to significant amounts of non-deductible goodwill related to the
surgery centers sold. Also included in the $744 million net gain was a pretax
loss of $29 million ($20 million after-tax) on the sales of 6 consolidating
hospitals for gross proceeds of $108 million. Proceeds from these sales were
used to repay bank borrowings.
During September 1998, management approved a plan to divest a group of the
Company's medical office buildings. The carrying value for the medical office
buildings was reduced to fair value of $294 million, based on estimates of sales
values, resulting in a non-cash, pretax charge of $175 million. The revenues and
results of operations of the medical office buildings to be divested are not
significant to the Company's consolidated revenues and results of operations. In
December 2000, HCA completed the sale of the medical office buildings to MedCap
for $250 million and a minority interest in MedCap. The proceeds from the sale
were used to repay bank borrowings.
During 1998, management identified and initiated plans to sell or close, 23
consolidating hospitals and one non-consolidating hospital. The carrying value
for the hospitals and other assets expected to be sold was reduced to fair value
of $422 million based on estimates of sales values, resulting in a non-cash,
pretax charge of $367 million. For the years ended December 31, 2000, 1999 and
1998, respectively, the hospitals and other assets for which the impairment
charge was recorded had revenues (through the date of sale or closure) of $406
million, $566 million and $896 million and incurred losses from continuing
operations before the pretax impairment charge and income tax benefits (through
the date of sale or closure) of $21 million, $64 million and $77 million. During
1998, the sales of 8 consolidating hospitals of the 23 hospitals mentioned above
were completed for gross proceeds of $185 million. During 1999, the sales of 9
consolidating hospitals and one non-consolidating hospital that had been
identified for divestiture were completed for gross proceeds of $580 million.
The facilities spun-off to Triad in 1999 included 3 of the consolidating
hospitals on which the impairment charge had been recorded. During 1999, it was
determined that one consolidating hospital on which the 1998 impairment charge
was taken would not be sold. One hospital, of the 23 hospitals mentioned above,
was sold in 2000 for gross proceeds of $4 million. Proceeds from the completed
divestitures approximated the carrying values and were used to repay bank
borrowings.
Management's estimates of sales values are generally based upon internal
evaluations of each market that include quantitative analyses of net revenues
and cash flows, reviews of recent sales of similar facilities and market
responses based upon discussions with and offers received from potential buyers.
The market responses are usually considered to provide the most reliable
estimates of fair value.
The asset impairment charges did not have a significant impact on the
Company's cash flows and are not expected to significantly impact cash flows for
future periods. The impaired facilities are classified as "held for use" because
economic and operational considerations justify operating the facilities and
marketing them as operating enterprises, therefore depreciation has not been
suspended. As a result of the write-downs, depreciation and amortization expense
related to these assets will decrease in future periods. In the aggregate, the
net effect of the change in depreciation and amortization expense is not
expected to have a material effect on operating results for future periods.
F-13
74
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- RESTRUCTURING OF OPERATIONS (CONTINUED)
Divestiture of Certain Hospitals and Surgery Centers (Continued)
The impairment charges affected the Company's asset categories, as follows
(dollars in millions):
2000 1999 1998
---- ---- ----
Property and equipment...................................... $ 73 $122 $401
Intangible assets........................................... 21 82 90
Investments in and advances to affiliates................... 23 16 51
---- ---- ----
$117 $220 $542
==== ==== ====
The impairment charges affected the Company's operating segments, as
follows (dollars in millions):
2000 1999 1998
---- ---- ----
Eastern Group............................................... $ 85 $ 14 $ 91
Western Group............................................... 11 7 43
Corporate and other......................................... 13 14 188
Spin-offs................................................... -- 34 81
National Group.............................................. 8 151 139
---- ---- ----
$117 $220 $542
==== ==== ====
Spin-Offs
On May 11, 1999, the Company completed the spin-offs of LifePoint and Triad
through a distribution of one share of LifePoint common stock and one share of
Triad common stock for every 19 shares of the Company's common stock outstanding
on April 30, 1999. Triad was comprised of 34 consolidating hospitals and
LifePoint was comprised of 23 consolidating hospitals. The Company's capital in
excess of par value was reduced by $687 million related to the spin-offs of
LifePoint and Triad.
For the years ended December 31, 1999 (through May 11, 1999), and 1998,
respectively, the LifePoint and Triad facilities had $666 million and $2.1
billion in revenues. Losses from continuing operations for the LifePoint and
Triad facilities were $26 million and $67 million for the years ended December
31, 1999 (through May 11, 1999), and 1998, respectively.
NOTE 4 -- RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
During 2000, 1999 and 1998, the Company recorded the following pretax
charges in connection with the restructuring of operations and investigation
related costs as discussed in Note 2 -- Investigations and Agreements to Settle
Certain Government Claims and Note 3 -- Restructuring of Operations (in
millions):
2000 1999 1998
---- ---- ----
Professional fees related to investigations................. $51 $ 77 $ 96
Severance costs............................................. -- 5 5
Other....................................................... 11 34 10
--- ---- ----
Total............................................. $62 $116 $111
=== ==== ====
The professional fees related to investigations represent incremental legal
and accounting expenses that are being recognized on the basis of when the costs
are incurred. The severance amounts in 1999 and 1998 related primarily to a
small group of executives associated with operations or functions that were
ceased or divested during these periods. In 1999, the Company accrued $6 million
for lease commitments related to the
F-14
75
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- RESTRUCTURING AND OPERATIONS AND INVESTIGATION
RELATED COSTS (CONTINUED)
closure of a leased hospital in the Company's Eastern Group. The liability
balance for accrued severance and lease commitments was $8 million at December
31, 2000.
NOTE 5 -- DISCONTINUED OPERATIONS
Discontinued operations included three of the four business units acquired
in the August 1997 merger with Value Health, Inc. ("Value Health") and the
Company's home health care businesses. During 1997, the Company implemented
plans to dispose of these businesses. During the second and third quarters of
1998, the Company completed sales of the three Value Health units for proceeds
totaling $662 million. The proceeds from the sales were used to repay bank
borrowings. The Company recorded a $73 million loss upon completion of these
sales in 1998, representing an adjustment to the estimated tax benefit related
to the after-tax loss on disposal of discontinued operations recorded in the
fourth quarter of 1997.
During the third and fourth quarters of 1998, the Company completed five
separate sales transactions that included substantially all of the Company's
home health care operations and received $90 million in proceeds. The proceeds
from the sales were used to repay bank borrowings.
Revenues of the discontinued businesses totaled $1.0 billion for the year
ended December 31, 1998.
NOTE 6 -- ACQUISITIONS
During 2000 and 1998, the Company acquired various hospitals and related
health care entities (or controlling interests in such entities), all of which
were recorded using the purchase method. The aggregate purchase price of these
transactions was allocated to the assets acquired and liabilities assumed based
upon their respective fair values. The consolidated financial statements include
the accounts and operations of acquired entities for periods subsequent to the
respective acquisition dates.
The following is a summary of hospitals and other health care entities
acquired during 2000 and 1998 (dollars in millions):
2000 1998
---- ----
Number of hospitals......................................... 7 6
Number of licensed beds..................................... 760 852
Purchase price information:
Hospitals:
Fair value of assets acquired........................ $325 $205
Liabilities assumed.................................. (95) (39)
---- ----
Net assets acquired............................... 230 166
Contributions from minority partners................. -- (54)
---- ----
230 112
Other health care entities acquired.................... 120 103
---- ----
Net cash paid..................................... $350 $215
==== ====
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $110 million in 2000 and $86 million in
1998.
The pro forma effect of these acquisitions on the Company's results of
operations for the periods prior to the respective acquisition dates was not
significant.
F-15
76
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES
The provision for income taxes on income from continuing operations
consists of the following (dollars in millions):
2000 1999 1998
----- ---- -----
Current:
Federal................................................... $ 442 $517 $ 637
State..................................................... 77 90 116
Foreign................................................... 14 3 --
Deferred:
Federal................................................... (231) (37) (169)
State..................................................... (43) (6) (35)
Foreign................................................... (5) 3 --
Change in valuation allowance............................. 43 -- --
----- ---- -----
$ 297 $570 $ 549
===== ==== =====
A reconciliation of the Federal statutory rate to the effective income tax
rate follows:
2000 1999 1998
---- ---- ----
Federal statutory rate.................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit..... 5.0 4.5 4.9
Non-deductible intangible assets.......................... 5.7 7.5 11.4
Valuation allowance....................................... 7.5 -- --
Settlement with Federal government........................ 6.5 -- --
Other items, net.......................................... (2.1) (0.5) (0.5)
---- ---- ----
Effective income tax rate................................. 57.6% 46.5% 50.8%
==== ==== ====
The tax benefits associated with nonqualified stock options increased the
current tax receivable by $40 million, $3 million, and $6 million in 2000, 1999,
and 1998, respectively. Such benefits were recorded as increases to additional
paid-in capital.
A summary of the items comprising the deferred tax assets and liabilities
at December 31 follows (dollars in millions):
2000 1999
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Depreciation and fixed asset basis differences...... $ -- $405 $ -- $ 342
Allowances for professional and general liability
and other risks................................... 249 -- 296 --
Doubtful accounts................................... 511 -- 359 --
Compensation........................................ 125 -- 160 --
Settlement with Federal government.................. 290 -- -- --
Other............................................... 205 368 140 285
------ ---- ---- -----------
1,380 773 955 627
Valuation allowance................................. (43) -- -- --
------ ---- ---- -----------
$1,337 $773 $955 $ 627
====== ==== ==== ===========
Deferred income taxes of $1.007 billion and $571 million at December 31,
2000 and 1999, respectively, are included in other current assets. Noncurrent
deferred income tax liabilities totaled $443 and $243 million at December 31,
2000 and 1999, respectively.
F-16
77
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
At December 31, 2000, state net operating loss carryforwards (expiring in
years 2001 through 2020) available to offset future taxable income approximated
$931 million. Utilization of net operating loss carryforwards in any one year
may be limited and, in certain cases, result in an adjustment to intangible
assets. Net deferred tax assets related to such carryforwards are not
significant.
IRS Disputes
The Company is currently contesting before the United States Tax Court (the
"Tax Court") and the United States Court of Federal Claims certain claimed
deficiencies and adjustments proposed by the IRS in conjunction with its
examinations of the Company's 1994-1996 Federal income tax returns, Columbia
Healthcare Corporation's ("CHC") 1993 and 1994 Federal income tax returns,
HCA-Hospital Corporation of America, Inc.'s ("Hospital Corporation of America")
1981 through 1988 and 1991 through 1993 Federal income tax returns and
Healthtrust, Inc.-The Hospital Company's ("Healthtrust") 1990 through 1994
Federal income tax returns. The disputed items include the disallowance of
certain financing costs, system conversion costs and insurance premiums which
were deducted in calculating taxable income, and the allocation of costs to
fixed assets and goodwill in connection with hospitals acquired by the Company
in 1995 and 1996. The IRS is claiming an additional $202 million in income taxes
and interest through December 31, 2000.
During the first quarter of 2000, the Company and the IRS filed a
Stipulated Settlement with the Tax Court regarding the IRS' proposed
disallowance of certain acquisition-related costs, executive compensation and
systems conversion costs which were deducted in calculating taxable income and
the methods of accounting used by certain subsidiaries for calculating taxable
income related to vendor rebates and governmental receivables. The settlement
resulted in the payment of tax and interest of $156 million and had no impact on
the Company's results of operations.
Tax Court decisions received in 1996 and 1997, related to the IRS'
examination of Hospital Corporation of America's 1981 through 1988 Federal
income tax returns, may be appealed by the IRS or the Company to the United
States Court of Appeals, Sixth Circuit. The Company expects any decisions
regarding the appeal of these rulings will be made during 2001. Because no final
decisions have been made regarding appeals of the decisions, the Company is
presently unable to estimate the amount of any additional income tax and
interest which the IRS may claim.
During the first quarter of 2000, the IRS began an examination of the
Company's 1997 through 1998 Federal income tax returns. The Company is presently
unable to estimate the amount of any additional income tax and interest which
the IRS may claim upon completion of this examination.
Management believes that adequate provisions have been recorded to satisfy
final resolution of the disputed issues. Management believes that the Company,
CHC, Hospital Corporation of America and Healthtrust properly reported taxable
income and paid taxes in accordance with applicable laws and agreements
established with the IRS during previous examinations and that final resolution
of these disputes will not have a material adverse effect on the results of
operations or financial position of the Company.
NOTE 8 -- EARNINGS PER SHARE
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding, plus the
dilutive effect of outstanding stock options and other stock awards using the
treasury stock method and the assumed net-share settlement of structured
repurchases of common stock.
F-17
78
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations (dollars in millions, except per
share amounts and shares in thousands):
2000 1999 1998
-------- -------- --------
Income from continuing operations.................. $ 219 $ 657 $ 532
======== ======== ========
Weighted average common shares outstanding......... 555,553 585,216 643,719
Effect of dilutive securities:
Stock options................................. 9,390 3,865 2,310
Other......................................... 2,742 1,948 620
-------- -------- --------
Shares used for diluted earnings per share......... 567,685 591,029 646,649
======== ======== ========
Earnings per share:
Basic earnings per share from continuing
operations.................................... $ 0.39 $ 1.12 $ 0.82
======== ======== ========
Diluted earnings per share from continuing
operations.................................... $ 0.39 $ 1.11 $ 0.82
======== ======== ========
NOTE 9 -- INVESTMENTS OF INSURANCE SUBSIDIARY
A summary of the insurance subsidiary's investments at December 31 follows
(dollars in millions):
2000
--------------------------------------
UNREALIZED
AMOUNTS
AMORTIZED --------------- FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ ------
Debt securities:
United States Government....................... $ 4 $ -- $ -- $ 4
States and municipalities...................... 761 23 (1) 783
Mortgage-backed securities..................... 108 2 -- 110
Corporate and other............................ 157 1 -- 158
Money market funds............................. 160 -- -- 160
Redeemable preferred stocks.................... 33 1 (1) 33
------ ---- ---- ------
1,223 27 (2) 1,248
------ ---- ---- ------
Equity securities:
Perpetual preferred stocks..................... 24 -- (1) 23
Common stocks.................................. 341 88 (29) 400
------ ---- ---- ------
365 88 (30) 423
------ ---- ---- ------
$1,588 $115 $(32) $1,671
====== ==== ====
Amounts classified as current assets............. (300)
------
Investment carrying value........................ $1,371
======
F-18
79
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INVESTMENTS OF INSURANCE SUBSIDIARY (CONTINUED)
1999
--------------------------------------
UNREALIZED
AMOUNTS
AMORTIZED --------------- FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ ------
Debt securities:
United States Government....................... $ 4 $ -- $ -- $ 4
States and municipalities...................... 873 5 (15) 863
Mortgage-backed securities..................... 74 1 (1) 74
Corporate and other............................ 107 -- (3) 104
Money market funds............................. 59 -- -- 59
Redeemable preferred stocks.................... 47 -- -- 47
------ ---- ---- ------
1,164 6 (19) 1,151
------ ---- ---- ------
Equity securities:
Perpetual preferred stocks..................... 13 -- (1) 12
Common stocks.................................. 388 138 (32) 494
------ ---- ---- ------
401 138 (33) 506
------ ---- ---- ------
$1,565 $144 $(52) 1,657
====== ==== ====
Amounts classified as current assets............. (200)
------
Investment carrying value........................ $1,457
======
The fair value of investment securities is generally based on quoted market
prices.
Scheduled maturities of investments in debt securities at December 31, 2000
were as follows (dollars in millions):
AMORTIZED FAIR
COST VALUE
--------- ------
Due in one year or less..................................... $ 251 $ 251
Due after one year through five years....................... 240 245
Due after five years through ten years...................... 337 347
Due after ten years......................................... 287 295
------ ------
1,115 1,138
Mortgage-backed securities.................................. 108 110
------ ------
$1,223 $1,248
====== ======
The average expected maturity of the investments in debt securities listed
above approximated 3.9 years at December 31, 2000. Expected and scheduled
maturities may differ because the issuers of certain securities may have the
right to call, prepay or otherwise redeem such obligations.
The tax equivalent yield on investments (including common stocks) averaged
14% for 2000, 9% for 1999 and 10% for 1998. Tax equivalent yield is the rate
earned on invested assets, excluding unrealized gains and losses, adjusted for
the benefit of certain investment income not being subject to taxation.
F-19
80
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INVESTMENTS OF INSURANCE SUBSIDIARY (CONTINUED)
The cost of securities sold is based on the specific identification method.
Sales of securities for the years ended December 31 are summarized below
(dollars in millions):
2000 1999 1998
---- ---- ----
Debt securities:
Cash proceeds............................................. $395 $514 $341
Gross realized gains...................................... 4 2 3
Gross realized losses..................................... 7 5 1
Equity securities:
Cash proceeds............................................. $425 $200 $308
Gross realized gains...................................... 160 109 77
Gross realized losses..................................... 34 51 30
NOTE 10 -- LONG-TERM DEBT
A summary of long-term debt at December 31 (including related interest
rates at December 31, 2000) follows (dollars in millions):
2000 1999
------ ------
Senior collateralized debt (rates generally fixed, averaging
9.1%) payable in periodic installments through 2034....... $ 187 $ 211
Senior debt (rates fixed, averaging 8.0%) payable in
periodic installments through 2095........................ 4,591 4,009
Senior debt (floating rates, averaging 8.1%) due 2002....... 500 --
Bank term loans (floating rates, averaging 8.3%)............ 1,150 1,400
Bank credit agreement (floating rates, averaging 7.5%)...... 200 700
Subordinated debt (rates generally fixed, averaging 6.9%)
payable in periodic installments through 2015............. 124 124
------ ------
Total debt, average life of ten years (rates averaging
8.1%)..................................................... 6,752 6,444
Less amounts due within one year............................ 1,121 1,160
------ ------
$5,631 $5,284
====== ======
Credit Facility
HCA's revolving credit facility (the "Credit Facility") is a $2.0 billion,
five-year revolving credit agreement expiring February 2002. As of December 31,
2000, HCA had $200 million outstanding under the Credit Facility.
As of February 2001, interest is payable generally at either LIBOR plus
0.45% to 1.50% (depending on HCA's credit ratings), the prime lending rate or a
competitive bid rate. The Credit Facility contains customary covenants which
include (i) a limitation on debt levels, (ii) a limitation on sales of assets,
mergers and changes of ownership and (iii) maintenance of minimum interest
coverage ratios. HCA is currently in compliance with all such covenants.
Significant Financing Activities
2000
In March 2000, HCA entered into a $1.2 billion term loan agreement (the
"2000 Term Loan") with several banks. Proceeds from the 2000 Term Loan were used
in the first quarter of 2000 to retire the
F-20
81
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
Significant Financing Activities (Continued)
outstanding balance under the $1.0 billion interim term loan agreement entered
into in March 1999 (the "1999 Term Loan") and to reduce outstanding loans under
the Credit Facility. At December 31, 2000, the balance outstanding under the
2000 Term Loan was $500 million. The 2000 Term Loan was repaid in January 2001.
In May 2000, an English subsidiary of the Company entered into a $168
million Term Facility Agreement ("English Term Loan") with a bank. The English
Term Loan was used to purchase the ownership interest of the Company's 50/50
joint venture partner in England and to refinance existing indebtedness.
In August 2000, HCA issued $750 million of 8.75% notes due September 1,
2010. Proceeds from the notes were used to reduce outstanding loans under the
Credit Facility by $350 million, reduce the outstanding balance under the 2000
Term Loan by $200 million and to settle $200 million of forward purchase
contracts.
In September 2000, HCA issued $500 million of floating rate notes due
September 19, 2002. Proceeds from the notes were used to reduce the outstanding
balance under the 2000 Term Loan.
In November 2000, HCA issued approximately $217 million of 8.75% notes due
November 1, 2010. Proceeds from the notes were used to repay the outstanding
balance under the English Term Loan and for general corporate purposes.
In January 2001, HCA issued $500 million of 7.875% notes due 2011. Proceeds
from the notes were used to retire the outstanding balance under the 2000 Term
Loan.
1999
In March 1999, HCA entered into the 1999 Term Loan with several banks.
Proceeds from the $1.0 billion 1999 Term Loan were used during the second
quarter to fund the $1.0 billion share repurchase program approved in February
1999. HCA repaid $500 million of the 1999 Term Loan in September 1999.
In February 1999, Standard & Poor's ("S&P") downgraded the Company's senior
debt rating from BBB to BB+.
1998
During June 1998, HCA's 364-day credit facility was converted into a
one-year term loan maturing in June 1999. The one year term loan, which had a
balance of $741 million at December 31, 1998, was paid off in its entirety in
February 1999.
In July 1998, the Company entered into a $1.0 billion term loan agreement
(the "1998 Term Loan") with several banks which matures in February 2002.
Proceeds from the 1998 Term Loan were used to reduce other borrowings. The
balance outstanding under the 1998 Term Loan at December 31, 2000 was $650
million.
In February 1998, the Company's senior debt rating was downgraded from Baa2
to Ba2 and from BBB+ to BBB- by Moody's Investors Service ("Moody's") and Fitch
IBCA, respectively.
General Information
Maturities of long-term debt in years 2002 through 2005 (excluding
borrowings under the Credit Facility) are $1.015 billion, $341 million, $313
million and $478 million, respectively.
F-21
82
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
General Information (Continued)
The estimated fair value of the Company's long-term debt was $6.6 billion
and $6.1 billion at December 31, 2000 and 1999, respectively, compared to
carrying amounts aggregating $6.8 billion and $6.4 billion, respectively. The
estimates of fair value are based upon the quoted market prices for the same or
similar issues of long-term debt with the same maturities.
NOTE 11 -- CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see Note
2 -- Investigations and Agreements to Settle Certain Government Claims and Part
I, Item 3: Legal Proceedings, for descriptions of the ongoing government
investigations and other legal proceedings) have been and are expected to be
instituted or asserted against the Company, including those relating to
shareholder derivative and class action complaints; purported class action
lawsuits filed by patients and payers alleging, in general, improper and
fraudulent billing, coding, claims and overcharging, as well as other violations
of law; certain qui tam or "whistleblower" actions alleging, in general,
unlawful claims for reimbursement or unlawful payments to physicians for the
referral of patients and other violations of law. While the amounts claimed may
be substantial, the ultimate liability cannot be determined or reasonably
estimated at this time due to the considerable uncertainties that exist.
Therefore, it is possible that results of operations, financial position and
liquidity in a particular period could be materially, adversely affected upon
the resolution of certain of these contingencies.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary course
of business, including claims for personal injuries or wrongful restriction of,
or interference with, physicians' staff privileges. In certain of these actions
the claimants may seek punitive damages against the Company, which are usually
not covered by insurance. It is management's opinion that the ultimate
resolution of these pending claims and legal proceedings will not have a
material adverse effect on the Company's results of operations or financial
position.
NOTE 12 -- CAPITAL STOCK AND STOCK REPURCHASES
Capital Stock
The terms and conditions associated with each class of HCA's common stock
are substantially identical except for voting rights. All nonvoting common
stockholders may convert their shares on a one-for-one basis into voting common
stock, subject to certain limitations.
Stock Repurchase Program
In March 2000, HCA announced that its Board of Directors authorized the
repurchase of up to $1 billion of its common stock. Certain financial
organizations purchased approximately 19.4 million shares of the Company's
common stock for $535 million during 2000, utilizing forward purchase contracts.
During 2000, HCA settled forward purchase contracts representing approximately
11.7 million shares at a cost of $300 million. In accordance with the terms of
the contracts, approximately 7.7 million shares at a cost of $235 million remain
outstanding until settled by the Company. As part of this stock repurchase
program, HCA sold 3.8 million put options which remain outstanding at December
31, 2000, each of which entitles the holder to sell HCA's stock to HCA at a
specified price on a specified date. These put options expire on various dates
through March 27, 2001 and have exercise prices ranging from $34.17 to $37.00
per share, with an average exercise price of $35.66 per share. HCA expects to
repurchase the remaining stock associated with the March
F-22
83
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- CAPITAL STOCK AND STOCK REPURCHASES (CONTINUED)
Stock Repurchase Program (Continued)
2000 repurchase authorization through open market purchases, privately
negotiated transactions, forward purchase contracts or by utilizing the sale of
additional put options.
In November 1999, HCA announced that its Board of Directors authorized the
repurchase of up to $1 billion of its common stock. During 2000, HCA settled
forward purchase contracts representing approximately 18.7 million shares at a
cost of $539 million. In accordance with the terms of the forward purchase
contracts, the shares purchased remain outstanding until the forward purchase
contracts are settled by the Company. Approximately 15.7 million shares at a
cost of $460 million remain outstanding (at December 31, 2000) until the forward
purchase contracts are settled by HCA.
In February 1999, HCA's Board of Directors authorized the repurchase of up
to $1 billion of HCA's common stock, which the Company completed through open
market purchases and accelerated purchase contracts. During 1999, through open
market purchases, HCA repurchased 13.7 million shares of its common stock for
$300 million. Also during 1999, HCA, through accelerated purchase agreements,
repurchased 28.1 million shares of its common stock for $700 million.
In July 1998, HCA announced a stock repurchase program under which $1
billion of HCA's common stock was repurchased. The majority of these shares were
purchased by certain financial organizations utilizing forward purchase
contracts. During 1999, HCA settled forward purchase contracts representing 39.5
million shares at a cost of $888 million. HCA, through open market purchases,
repurchased 4.1 million shares for $98 million during the fourth quarter of 1998
and 0.6 million shares for $14 million during 1999.
The significant terms of the forward purchase contracts utilized in the
repurchase transactions include: (1) in consideration for the purchases, HCA is
obligated to pay the counterparties an amount equal to their cost to acquire the
stock plus a rate of return that varies by contract (from LIBOR plus 100 basis
points to LIBOR plus 150 basis points), (2) the contracts generally have a
stated term of one year, but HCA may settle the contracts at any time, subject
to certain notification requirements and (3) HCA may settle the contracts, at
its discretion, by one of three methods: (a) physical settlement -- where HCA
would pay cash in exchange for the shares or (b) net share settlement -- where
HCA would issue shares to the counterparties or the counterparties would return
shares to HCA in amounts that provide value equal to the differential between
the market value of the shares on the settlement date less the transaction costs
and the counterparties' cost to acquire the shares plus the specified rate of
return or (c) net cash settlement -- where HCA would pay cash to the
counterparties or the counterparties would pay cash to HCA in amounts that would
provide value equal to the differential between the market value of the shares
on the settlement date less transaction costs and the cost to acquire the shares
plus the specified rate of return.
At the November 2000 meeting of the Emerging Issues Task Force ("EITF"),
the SEC provided guidance that in situations where public companies have
outstanding equity derivative contracts that are not compliant with the EITF
guidance in Issue 00-19, "Accounting for Derivative Financial Instruments
Indexed to, the Potentially Settled in, a Company's Own Stock" ("Issue 00-19"),
they are required to reclassify the maximum amount of the potential cash
obligation (the forward price in a forward stock purchase contract or the strike
price for a written put option) to temporary equity. Pursuant to this guidance,
HCA reclassified $769 million ($752 million related to outstanding forward
purchase contracts under the March 2000 and November 1999 repurchase
authorizations and $17 million related to written put options) from common
equity to temporary equity at December 31, 2000 (prior year amounts were not
restated). This reclassification was made at December 31, 2000, though the
transition provisions in Issue 00-19 do not require overall compliance until
June 30, 2001. The Company believes that the equity derivative contracts that
may remain unsettled at June 30, 2001, if any, will be in compliance with the
requirements of Issue 00-19 and does not
F-23
84
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- CAPITAL STOCK AND STOCK REPURCHASES (CONTINUED)
Stock Repurchase Program (Continued)
expect the adoption of Issue 00-19 to have a material impact on our consolidated
financial statements or results of operations.
During 2000 and 1999, the settled share repurchase transactions reduced
capital in excess of par value by approximately $0.9 billion and $1.9 billion,
respectively.
In connection with the Company's share repurchase programs, the Company
entered into a Letter of Credit Agreement with the United States Department of
Justice. As part of the agreement, the Company provided the government with
letters of credit totaling $1 billion. The Civil Agreement with the government
as discussed in Note 2 -- Investigations and Agreements to Settle Certain
Government Claims, provides that the letters of credit will be reduced from $1
billion to $250 million at the time of the civil settlement payment, which is
anticipated in the first six months of 2001.
NOTE 13 -- STOCK BENEFIT PLANS
In May 2000, the stockholders of HCA approved the Columbia/HCA Healthcare
Corporation 2000 Equity Incentive Plan (the "2000 Plan"). This plan replaces the
Amended and Restated Columbia/HCA Healthcare Corporation 1992 Stock and
Incentive Plan (the "1992 Plan"). The 2000 Plan is the primary plan under which
options to purchase common stock and restricted stock may be granted to
officers, employees and directors. The number of options or shares authorized
under the 2000 Plan is 50,500,000 (which includes 500,000 shares authorized
under the 1992 Plan). In addition, options previously granted under the 1992
Plan that are cancelled become available for subsequent grants. Options are
exercisable in whole or in part beginning one to five years after the grant and
ending ten years after the grant.
Options to purchase common stock have been granted to officers, employees
and directors under various predecessor plans. Generally, options have been
granted with exercise prices no less than the market price on the date of grant.
Exercise provisions vary, but most options are exercisable in whole or in part
beginning two to four years after the grant date and ending four to fifteen
years after the grant date.
On May 11, 1999, HCA completed the spin-offs of LifePoint and Triad.
Accordingly, adjustments were made to the HCA stock options outstanding.
Nonvested HCA stock options held by individuals who became employees of
LifePoint or Triad were cancelled and those employees were granted options by
LifePoint or Triad. The number of HCA options was increased, HCA exercise prices
were decreased and/or new options were granted by LifePoint and Triad to
preserve the intrinsic value that existed just prior to the spin-offs for the
holders of nonvested options by those HCA employees who remained HCA employees
and for all holders of vested HCA stock options.
F-24
85
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- STOCK BENEFIT PLANS (CONTINUED)
Information regarding these option plans for 2000, 1999 and 1998 is
summarized below (share amounts in thousands):
STOCK OPTION PRICE PER WEIGHTED AVERAGE
OPTIONS SHARE EXERCISE PRICE
------- --------------------- ----------------
Balances, December 31, 1997.............. 45,015 $ 0.14 to $59.64 $28.70
Granted................................ 7,092 21.16 to 32.27 25.27
Exercised.............................. (1,629) 0.38 to 30.90 17.68
Cancelled.............................. (9,819) 0.14 to 59.64 31.26
------
Balances, December 31, 1998.............. 40,659 0.14 to 41.13 27.92
Granted................................ 18,847 17.12 to 25.75 17.29
Adjustment due to spin-offs............ 406 0.38 to 41.13 27.19
Exercised.............................. (726) 0.14 to 26.62 14.17
Cancelled.............................. (7,279) 0.14 to 37.92 29.27
------
Balances, December 31, 1999.............. 51,907 0.14 to 41.13 24.05
Granted................................ 7,609 18.25 to 39.25 20.81
Exercised.............................. (6,650) 0.38 to 37.92 22.59
Cancelled.............................. (1,633) 0.14 to 37.92 28.71
------
Balances, December 31, 2000.............. 51,233 0.14 to 41.13 23.58
======
2000 1999 1998
------- ------- -------
Weighted average fair value for options granted during
the year............................................ $ 9.33 $ 8.01 $ 8.81
Options exercisable................................... 21,829 18,304 10,757
Options available for grant........................... 51,378 8,478 19,323
F-25
86
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- STOCK BENEFIT PLANS (CONTINUED)
The following table summarizes information regarding the options
outstanding at December 31, 2000 (share amounts in thousands):
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/00 LIFE PRICE 12/31/00 PRICE
- --------------- ----------- ---------------- -------- ----------- --------
$11.99........................ 17 Less than 1 year $11.99 17 $11.99
33.52........................ 5 Less than 1 year 33.52 5 33.52
18.07........................ 4 1 years 18.07 4 18.07
35.30........................ 8 1 years 35.30 8 35.30
7.35 to 10.99............... 125 2 years 10.71 125 10.71
11.26 to 13.24............... 622 2 years 11.77 622 11.77
23.85........................ 5 2 years 23.85 5 23.85
11.47 to 17.11............... 224 2 years 13.91 224 13.91
0.38........................ 330 3 years 0.38 330 0.38
21.16 to 27.50............... 1,461 3 years 24.16 1,461 24.16
25.21 to 30.90............... 2,357 4 years 26.17 2,355 26.16
29.22 to 36.58............... 4,821 5 years 34.48 3,793 34.27
41.13........................ 3 6 years 41.13 2 41.13
26.74 to 37.92............... 12,759 7 years 30.70 6,626 30.60
21.16 to 30.93............... 4,115 7 years 24.90 846 24.98
32.27........................ 147 7 years 32.27 88 32.27
17.12 to 24.49............... 16,322 8 years 17.22 4,698 17.32
20.00 to 29.94............... 7,286 9 years 20.74 27 20.06
31.63 to 39.25............... 29 10 years 33.99 -- --
0.14........................ 101 13 years 0.14 101 0.14
0.14........................ 357 15 years 0.14 357 0.14
0.38........................ 86 16 years 0.38 86 0.38
0.38........................ 49 18 years 0.38 49 0.38
------ ------
51,233 21,829
====== ======
HCA has an Employee Stock Purchase Plan ("ESPP") which provides an
opportunity to purchase shares of its common stock at a discount (through
payroll deductions over six month intervals) to substantially all employees. At
December 31, 2000, 2,697,500 shares of common stock were reserved for the
Company's employee stock purchase plan.
F-26
87
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- STOCK BENEFIT PLANS (CONTINUED)
HCA applies the provisions of APB 25 in accounting for its stock options
and stock purchase plans, and accordingly, compensation cost is not recognized
in the consolidated income statements. As required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), HCA has determined the pro forma net income and earnings per share as if
compensation cost for the Company's employee stock option and stock purchase
plans had been determined based upon their fair value at the grant date. These
pro forma amounts are as follows (dollars in millions, except per share
amounts):
2000 1999 1998
----- ----- ----
Net income:
As reported............................................... $ 219 $ 657 $379
Pro forma................................................. 164 609 346
Basic earnings per share:
As reported............................................... $0.39 $1.12 $.59
Pro forma................................................. 0.30 1.04 .54
Diluted earnings per share:
As reported............................................... $0.39 $1.11 $.59
Pro forma................................................. 0.29 1.03 .54
For SFAS 123 purposes, the weighted average fair values of HCA's stock
options granted in 2000, 1999 and 1998 were $9.33, $8.01 and $8.81 per share,
respectively. The fair values were estimated using the Black-Scholes option
valuation model with the following weighted average assumptions:
2000 1999 1998
---- ---- ----
Risk-free interest rate..................................... 4.90% 6.53% 4.75%
Expected volatility......................................... .39 .38 .24
Expected life, in years..................................... 6 6 6
Expected dividend yield..................................... .25% .35% .30%
The pro forma compensation cost related to the shares of common stock
issued under the ESPP was $14 million, $9 million and $13 million for the years
2000, 1999 and 1998, respectively. These pro forma costs were estimated based on
the difference between the price paid and the fair market value of the stock on
the last day of each subscription period.
Under the 1992 Plan, the 2000 Plan and the Management Stock Purchase Plan,
the Company has made grants of restricted shares or units of the Company's
common stock to provide incentive compensation to key employees. Under the
performance equity plan, grants are made annually and are earned based on the
achievement of specified performance goals. These shares have a two-year vesting
period with half the shares vesting at the end of the first year and the
remainder vesting at the end of the second year. The Management Stock Purchase
Plan allows key employees to defer an elected percentage (not to exceed 25%) of
their base salaries through the purchase of restricted stock at a 25% discount
from the average market price. Purchases of restricted shares are made twice a
year and the shares vest after three years.
At December 31, 2000, 2,095,200 shares were subject to restrictions, which
lapse between 2001 and 2003. During 2000, 1999 and 1998 grants and purchases of
1,490,700, 1,137,100 and 109,000 shares, respectively were made at a
weighted-average grant or purchase date fair value of $21.05, $17.88 and $28.89
per share, respectively.
F-27
88
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- EMPLOYEE BENEFIT PLANS
HCA maintains noncontributory, defined contribution retirement plans
covering substantially all employees. Benefits are determined as a percentage of
a participant's salary and are vested over specified periods of employee
service. Retirement plan expense was $121 million for 2000, $151 million for
1999 and $170 million for 1998. Amounts approximately equal to retirement plan
expense are funded annually.
HCA maintains various contributory benefit plans which are available to
employees who meet certain minimum requirements. Certain of the plans require
that HCA match an amount ranging from 25% to 100% of a participant's
contribution up to certain maximum levels. The cost of these plans totaled $17
million for 2000 and 1999 and $21 million for 1998. HCA's contributions are
funded periodically during each year.
NOTE 15 -- SEGMENT AND GEOGRAPHIC INFORMATION
HCA operates in one line of business which is operating hospitals and
related health care entities. During the years ended December 31, 2000, 1999 and
1998, approximately 28%, 29% and 30%, respectively, of HCA's revenues related to
patients participating in the Medicare program.
HCA's operations are structured in two geographically organized groups: the
Eastern Group comprised of 95 consolidating hospitals located in the Eastern
United States and the Western Group comprised of 78 consolidating hospitals
located in the Western United States. These two groups represent HCA's core
operations and are typically located in urban areas that are characterized by
highly integrated facility networks. An additional group, the National Group,
includes 6 consolidating hospitals which are located in the United States, but
are not located in the Company's core markets and are currently held for sale.
The Company also operates 8 consolidating hospitals in England and Switzerland.
HCA completed the spin-offs of LifePoint and Triad (the "Spin-offs") during
the second quarter of 1999. At April 30, 1999, LifePoint included 23
consolidating hospitals located in non-urban areas and Triad included 34
consolidating hospitals, located in small cities, generally in the Southern,
Western and Southwestern United States. See Note 3 -- Restructuring of
Operations.
HCA's Chief Executive Officer reviews geographic distributions of HCA's
revenues, EBITDA, depreciation and amortization and assets. EBITDA is defined as
income from continuing operations before depreciation and amortization, interest
expense, settlement with Federal government, gains on sales of facilities,
impairment of long-lived assets, restructuring of operations and investigation
related costs, minority interests and income taxes. HCA uses EBITDA as an
analytical indicator for purposes of allocating resources to geographic areas
and assessing their performance. EBITDA is commonly used as an analytical
indicator within the health care industry, and also serves as a measure of
leverage capacity and debt service ability. EBITDA should not be considered as a
measure of financial performance under generally accepted accounting principles,
and the items excluded from EBITDA are significant components in understanding
and assessing financial performance. Because EBITDA is not a measurement
determined in accordance with generally accepted accounting principles and is
thus susceptible to varying calculations, EBITDA as presented may not be
comparable to other similarly titled measures of other companies. The geographic
distributions, restated for the restructuring of operations transactions (the
transfers of certain facilities to the National Group), of
F-28
89
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
HCA's revenues, EBITDA, depreciation and amortization and assets are summarized
in the following table (dollars in millions):
2000 1999 1998
------- ------- -------
Revenues:
Eastern Group....................................... $ 8,193 $ 7,749 $ 7,369
Western Group....................................... 7,550 7,012 6,491
Corporate and other(a).............................. 511 303 291
National Group...................................... 416 927 2,443
Spin-offs........................................... -- 666 2,087
------- ------- -------
$16,670 $16,657 $18,681
======= ======= =======
EBITDA:
Eastern Group....................................... $ 1,803 $ 1,717 $ 1,566
Western Group....................................... 1,403 1,173 984
Corporate and other(a).............................. (36) (67) 8
National Group...................................... 7 (18) 104
Spin-offs........................................... -- 83 206
------- ------- -------
$ 3,177 $ 2,888 $ 2,868
======= ======= =======
Depreciation and amortization:
Eastern Group....................................... $ 450 $ 454 $ 443
Western Group....................................... 431 435 405
Corporate and other(a).............................. 125 95 92
National Group...................................... 27 63 169
Spin-offs........................................... -- 47 138
------- ------- -------
$ 1,033 $ 1,094 $ 1,247
======= ======= =======
Assets:
Eastern Group....................................... $ 6,558 $ 6,692 $ 6,689
Western Group....................................... 6,484 6,591 6,811
Corporate and other(a).............................. 4,290 3,143 2,884
National Group...................................... 236 459 1,319
Spin-offs........................................... -- -- 1,726
------- ------- -------
$17,568 $16,885 $19,429
======= ======= =======
- ---------------
(a) Includes the Company's 8 consolidating hospitals located in England and
Switzerland.
F-29
90
HCA - THE HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income are as follows
(dollars in millions):
UNREALIZED
GAINS ON CURRENCY
AVAILABLE-FOR-SALE TRANSLATION
SECURITIES ADJUSTMENTS TOTAL
------------------ ----------- -----
Balance at December 31, 1997............................. $ 90 $ 2 $ 92
Unrealized gains on available-for-sale securities, net
of $17 of taxes..................................... 28 -- 28
Gains reclassified into earnings from other
comprehensive income, net of $23 of taxes........... (41) -- (41)
Currency translation adjustment, net of taxes.......... -- 1 1
---- --- ----
Balance at December 31, 1998............................. 77 3 80
Unrealized gains on available-for-sale securities, net
of $9 of taxes...................................... 17 -- 17
Gains reclassified into earnings from other
comprehensive income, net of $20 of taxes........... (35) -- (35)
Currency translation adjustment, net of $4 of tax
benefit............................................. -- (9) (9)
---- --- ----
Balance at December 31, 1999............................. 59 (6) 53
Unrealized gains on available-for-sale securities, net
of $41 of taxes..................................... 73 -- 73
Gains reclassified into earnings from other
comprehensive income, net of $44 of taxes........... (79) -- (79)
Currency translation adjustment, net of $5 of taxes.... -- 5 5
---- --- ----
Balance at December 31, 2000............................. $ 53 $(1) $ 52
==== === ====
NOTE 17 -- ACCRUED EXPENSES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other accrued expenses at December 31 follows (in millions):
2000 1999
------ ----
Employee benefit plans...................................... $ 166 $176
Workers compensation........................................ 94 55
Taxes other than income..................................... 163 164
Professional liability risks................................ 356 210
Interest.................................................... 114 64
Other....................................................... 242 228
------ ----
$1,135 $897
====== ====
A summary of activity in the Company's allowance for doubtful accounts
follows (in millions):
PROVISION ACCOUNTS
BALANCE AT FOR WRITTEN OFF, BALANCE
BEGINNING DOUBTFUL NET OF AT END
OF YEAR ACCOUNTS RECOVERIES OF YEAR
---------- --------- ------------ -------
Allowance for doubtful accounts:
Year-ended December 31, 1998............ $1,661 $1,442 $(1,458) $ 1,645
Year-ended December 31, 1999............ 1,645 1,269 (1,347) 1,567
Year-ended December 31, 2000............ 1,567 1,255 (1,239) 1,583
F-30
91
HCA - THE HEALTHCARE COMPANY
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000
-----------------------------------------
FIRST SECOND THIRD FOURTH
------ -------- ------ ------
Revenues............................................ $4,271 $ 4,133 $4,093 $4,173
Net income (loss)................................... $ 296 $ (272)(a) $ 174(b) $ 21(c)
Basic earnings (loss) per share..................... $ .53 $ (.49) $ .31 $ .04
Diluted earnings (loss) per share................... $ .52 $ (.49) $ .31 $ .04
Cash dividends...................................... $ .02 $ .02 $ .02 $ .02
Market prices(g):
High.............................................. $32.44 $ 32.44 $39.06 $45.25
Low............................................... 18.75 23.69 29.75 37.25
1999
---------------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
Revenues............................................... $4,655 $4,161 $3,899 $3,942
Net income............................................. $ 322(d) $ 106(e) $ 138 $ 91(f)
Basic earnings per share............................... $ .50 $ .18 $ .25 $ .16
Diluted earnings per share............................. $ .50 $ .18 $ .24 $ .16
Cash dividends......................................... $ .02 $ .02 $ .02 $ .02
Market prices(g):
High................................................. $23.67 $27.47 $25.63 $29.44
Low.................................................. 16.38 17.44 20.19 20.25
- ---------------
(a) Second quarter results include $498 million ($.90 per basic and diluted
share) charge related to the settlement with the Federal government and $9
million ($.02 per basic and diluted share) of gains on sales of facilities
(see NOTES 2 and 3 of the Notes to Consolidated Financial Statements).
(b) Third quarter results include $9 million ($.02 per basic and diluted share)
of gains on sales of facilities and $12 million ($.02 per basic and diluted
share) of charges related to the impairment of long-lived assets (see NOTE 3
of the Notes to Consolidated Financial Statements).
(c) Fourth quarter results include $68 million ($.12 per basic and diluted
share) of charges related to the impairment of long-lived assets, $2 million
of losses on sales of assets, and $95 million ($.17 per basic and diluted
share) related to the settlement with the Federal government (see NOTES 2
and 3 of the Notes to Consolidated Financial Statements).
(d) First quarter results include $151 million ($.24 per basic and diluted
share) of gains on sales of facilities and $80 million ($.13 per basic and
diluted share) of charges related to the impairment of long-lived assets
(see NOTE 3 of the Notes to Consolidated Financial Statements).
(e) Second quarter results include $51 million ($.09 per basic and diluted
share) of charges related to the impairment of long-lived assets (see NOTE 3
of the Notes to Consolidated Financial Statements).
(f) Fourth quarter results include $13 million ($.02 per basic and diluted
share) of gains on sales of facilities and $63 million ($.11 per basic and
diluted share) of charges related to the impairment of long-lived assets
(see NOTE 3 of the Notes to Consolidated Financial Statements).
(g) Represents high and low sales prices of the Company's common stock which is
traded on the New York Stock Exchange (ticker symbol HCA). The historical
sales prices for periods prior to May 11, 1999 have been restated to reflect
the effect of the spin-offs of LifePoint and Triad.
F-31