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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, 2001
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
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HCA INC.
(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) 37203
(Zip Code)
ONE PARK PLAZA
NASHVILLE, TENNESSEE
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (615) 344-9551
FORMER NAME:
HCA - The Healthcare Company
Date of Change: July 1, 2001
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. [X]
As of February 28, 2002, there were outstanding 489,167,400 shares of the
Registrant's Voting Common Stock and 21,000,000 shares of the Registrant's
Nonvoting Common Stock. As of February 28, 2002 the aggregate market value of
the Common Stock held by non-affiliates was approximately $18.8 billion. For
purposes of the foregoing calculation only, the Registrant's directors,
executive officers, 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 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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INDEX
PAGE
REFERENCE
---------
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 27
Item 4. Submission of Matters to a Vote of Security Holders......... 39
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 40
Item 6. Selected Financial Data..................................... 41
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 43
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 60
Item 8. Financial Statements and Supplementary Data................. 60
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 60
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 61
Item 11. Executive Compensation...................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 61
Item 13. Certain Relationships and Related Transactions.............. 61
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 62
2
PART I
ITEM 1. BUSINESS
GENERAL
HCA Inc. is one of the leading health care services companies in the United
States. At December 31, 2001, the Company operated 184 hospitals, comprised of
172 general, acute care hospitals, six psychiatric hospitals, and six hospitals
included in joint ventures, which are accounted for using the equity method. In
addition, the Company operated 79 freestanding surgery centers, three of which
are accounted for using the equity method. The Company's facilities are located
in 23 states, England and Switzerland. The terms "Company" and "HCA" as used
herein refer to HCA Inc. and its affiliates unless otherwise stated or indicated
by context. The term "affiliates" means direct and indirect subsidiaries of HCA
Inc. 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 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, 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 through early 1997 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, HCA 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, HCA has reduced the number of hospitals it
operates by 46%, or 156 hospitals, and the number of surgery centers by 47%, or
70 centers. In addition, HCA sold substantially all of its home health
operations and various other non-core assets. The reduction of hospitals and
surgery centers includes 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 July 2001, HCA - The
Healthcare Company changed its name to HCA Inc.
The Company continues to be the subject of governmental investigations and
litigation relating to its business practices. In 2000, the Company agreed to
settle all criminal and certain civil claims against the Company 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 actions,
shareholder derivative and class action suits filed in Federal court,
3
shareholder derivative actions filed in state courts, patient/payer actions and
general liability claims. HCA 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 its ethics
and compliance program, applicable governmental regulations and guidelines and
industry standards. HCA also seeks to enhance financial performance by
increasing utilization of its facilities and improving operating efficiencies.
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 services
and emergency departments and selective acquisitions;
- improve operating efficiencies through enhanced cost management and
resource utilization, and the implementation of shared services
initiatives;
- recruit, 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 patients, the availability and rising
cost of labor, rising employee health benefit costs, and the increasing costs of
supplies, pharmaceuticals and new technologies. As a response to some of these
challenges, HCA is implementing a shared services initiative. This important
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 and has implemented various leadership and career development programs.
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, 2001, HCA operated 172 general, acute care hospitals with
39,504 licensed beds and an additional six hospitals with 2,063 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
At December 31, 2001, HCA operated six psychiatric hospitals with 608
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.
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
HCA's strategy to develop comprehensive health care networks 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 and the medical
and ancillary services 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, health maintenance organizations ("HMOs"),
preferred provider organizations ("PPOs") and private insurers, as well as
directly from patients. The approximate percentages of patient revenues of the
Company's facilities from such sources were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2001 2000 1999
----- ----- -----
Medicare.................................................... 28% 28% 29%
Medicaid.................................................... 6% 7% 7%
Managed care and other discounted........................... 42% 40% 37%
Other....................................................... 24% 25% 27%
--- --- ---
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 and medical benefits to qualifying
individuals who are unable to afford health care. Substantially all of HCA's
hospitals are certified as health care services providers for persons covered
under the Medicare and Medicaid programs. Amounts received under 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
Medicare
Under the Medicare program, HCA receives reimbursement under a prospective
payment system ("PPS") for inpatient and outpatient hospital services. Under
hospital 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. For cost reporting periods beginning after September 30,
2001, all hospitals, other than those defined as "new," will have inpatient
capital costs for acute care facilities reimbursed on a prospective payment
system based on DRG weights multiplied by a geographically adjusted Federal
rate, unless a hospital qualifies for a special exceptions payment.
DRG rates are updated and DRG weights are recalibrated each Federal fiscal
year. 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.
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 was market basket of 3.4% minus 1.1%
(or 2.3%), and for discharges from April 1, 2001 through September 30, 2001 was
market basket of 3.4% plus 1.1% (or 4.5%). This resulted in a DRG rate increase
of market basket of 3.4% for all of Federal fiscal year 2001. In Federal fiscal
year 2002, the DRG rate increase is market basket of 3.3% minus 0.55% (or
2.75%). BIPA provides for DRG rate updates in Federal fiscal year 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 2000 and 2001,
CMS has projected that payments for cost outlier cases will exceed the 5.1% set
aside. CMS has increased the outlier cost threshold for Federal fiscal years
2001 and 2002, which will reduce the number of cases that qualify for outlier
payments and the amount of payments for outlier cases that continue to qualify.
Effective for cost reporting periods beginning on or after January 1, 2002,
rehabilitation hospitals and rehabilitation units that are distinct parts of a
hospital were permitted to transition to PPS or to become subject immediately to
PPS. Previously, rehabilitation hospitals and units that met certain criteria
and had cost reporting periods beginning before January 1, 2002 were exempt from
PPS. Psychiatric, long-term care, specially designated children's hospitals and
certain designated cancer research hospitals, as well as psychiatric units that
are distinct parts of a hospital and meet the Centers for Medicare and Medicaid
Services ("CMS," formerly the Health Care Financing Administration) criteria for
exemption, are currently exempt from PPS and are reimbursed on a cost-based
system, subject to certain cost limits.
Outpatient
Traditionally, outpatient services provided at general, acute care
hospitals 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, CMS 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. CMS 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.
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 of
6
2.9% minus one percentage point, or 1.9%. Under BIPA, the update to the
outpatient PPS rates for calendar year 2001 was market basket, or 3.4%. The
update scheduled for 2002 as provided for under BIPA was to have been market
basket of 3.3% minus 1% (or 2.3%).
The Medicare program sets aside 2.5% of APC payments to pay for certain
approved medical devices, drugs, and biologicals on a pass-through basis. As
part of the update process, CMS has estimated that pass-through payments for
2002 would be considerably in excess of the 2.5% set aside if payments were to
be made at the current levels for pass-through medical devices. To correct for
this estimated overpayment in calendar year 2002, CMS recently issued final
regulations that will make significant changes to pass-through device payments
for services furnished on or after April 1, 2002, including a pro rata reduction
of 63.6%. These final regulations also corrected significant technical errors
that impacted all APCs and that delayed the implementation of updated APC rates
for calendar year 2002. The updated rates for calendar year 2002 are to be
implemented for services furnished on or after April 1, 2002. Calendar year 2001
APC rates will be used for services provided prior to April 1, 2002. While the
rules and implementation of outpatient PPS are complex, the Company does not
anticipate a material financial impact as a result of outpatient PPS, or the
delay in the implementation of the update to calendar year 2002 rates, nor the
pro rata payment reduction for 2002.
Rehabilitation
PPS for rehabilitation hospitals and rehabilitation units of hospitals was
implemented for Medicare cost reporting periods beginning on or after January 1,
2002. Hospitals and units with cost reporting periods beginning prior to October
1, 2002 can elect to be paid under PPS or a blend of PPS and the
facility-specific payment rates. Cost reporting periods beginning on or after
October 1, 2002 are to be paid under PPS. Under PPS, patients are classified
into case mix groups based upon impairment, age, comorbidities and functional
capability. Inpatient rehabilitation facilities are paid a predetermined amount
per discharge that reflects the patient's case mix group and is adjusted for
area wage levels, low-income patients, rural areas and high-cost outliers. As of
December 31, 2001, HCA had two rehabilitation hospitals and 54 hospital
rehabilitation units.
Other
Payments to PPS-exempt hospitals and units (e.g., inpatient psychiatric,
rehabilitation for cost reporting periods beginning prior to January 1, 2002,
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 2001 was a range
of 0% to 3.4%, depending on the hospital's or unit's costs in relation to its
rate-of-increase limit. The update to a hospital's target amount for its cost
reporting period beginning in fiscal year 2002 is a range of 0% to 3.3%,
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. 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 CMS 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, 2001, HCA had six psychiatric
hospitals and 49 hospital psychiatric units and one long-term care hospital.
Historically, Medicare reimbursed skilled nursing facilities 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 are paid a per diem
rate for virtually all covered services. This payment system was 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 skilled nursing
facilities payment rates, which impacted the BBA-97 provisions in a manner
favorable to HCA. As of December 31, 2001, HCA had 59 skilled nursing units.
7
Medicaid
Medicaid programs are funded jointly by the Federal government and the
states and are administered by states under approved plans. 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 periodically
consider altering the level of Medicaid funding (including upper payment limits)
in a manner that could adversely affect future levels of Medicaid reimbursement
received by HCA's hospitals. As permitted by law, certain states in which HCA
operates have adopted broad-based provider taxes to fund their Medicaid
programs.
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. CMS has extended filing due
dates for cost reports as a result of problems it has experienced with updating
the payment reports used to complete cost reports. Although CMS recently
announced a revised schedule of filing deadlines that range from May to December
2002, HCA cannot predict whether these dates will be further postponed. In the
meantime, HCA's hospitals continue to receive interim payments from CMS but
these payments are not yet subject to any adjustment based upon actual costs.
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 HCA under these reimbursement programs. These
audits often require several years to reach the final determination of amounts
due to HCA under these programs. Providers also have rights of appeal, and it is
common to contest issues raised in audits of prior years' reports.
The Company has reached an understanding with CMS to resolve all Medicare
cost report, home office cost statement and appeal issues between HCA and CMS.
The understanding provides that HCA would pay CMS $250 million with respect to
these matters. The understanding was reached as a means to resolve all
outstanding appeals and more than 2,600 HCA cost reports for cost report periods
from 1993 through periods ended on or before July 31, 2001, many of which CMS
has yet to audit. The understanding with CMS is subject to approval by the U.S.
Department of Justice ("DOJ"), which has not yet been obtained, and execution of
a definitive written agreement. See Note 19 -- Subsequent Event -- Understanding
Regarding Claims for Medicare Reimbursement in the notes to consolidated
financial statements.
The understanding with CMS does not include resolution of the outstanding
civil issues with the U.S. Department of Justice and relators with respect to
cost reports and physician relations. See Item 3 -- "Legal Proceedings."
Managed Care
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. HCA's admissions attributable to managed care
payers decreased from 42% for the year ended December 31, 2000 to 41% for the
year ended December 31, 2001. The percentage of HCA's revenues attributable to
managed care payers increased from 40% for the year ended December 31, 2000 to
42% for the year ended December 31, 2001. 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 eight percent from managed care payers during the previous
two years, there can be no assurance that HCA will continue to receive increases
in the future.
8
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 payment arrangements vary
from DRG-based payment systems, per diems, case rates and percentages of billed
charges.
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 and other health care professionals
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.
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,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Number of hospitals at end of period(a)........ 178 187 195 281 309
Number of licensed beds at end of period(b).... 40,112 41,009 42,484 53,693 60,643
Weighted average licensed beds(c).............. 40,645 41,659 46,291 59,104 61,096
Admissions(d).................................. 1,564,100 1,553,500 1,625,400 1,891,800 1,915,100
Equivalent admissions(e)....................... 2,311,700 2,300,800 2,425,100 2,875,600 2,901,400
Average length of stay (days)(f)............... 4.9 4.9 4.9 5.0 5.0
Average daily census(g)........................ 21,160 20,952 22,002 25,719 26,006
Occupancy rate(h).............................. 52% 50% 48% 44% 43%
---------------
(a) Excludes six facilities in 2001, nine facilities in 2000, 12 facilities in
1999, 24 facilities in 1998 and 27 facilities in 1997 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.
9
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. Increasingly, HCA is
facing competition by physician-owned specialty hospitals and outpatient surgery
centers that compete for market share in high margin services. Psychiatric
hospitals 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 and other health care professionals, 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 to 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 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. 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 remain ongoing challenges
and may require changes in HCA's operations in the future.
The hospital industry and many of 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
10
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 or expanded 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 continued compliance with the
various standards necessary for licensing and accreditation. HCA believes that
its health care facilities are properly licensed under applicable state laws.
Substantially all of HCA's general, acute care hospitals are certified for
participation in the Medicare and Medicaid programs 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 and Medicaid programs, 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 where HCA operates hospitals, the construction or expansion
of health care facilities, the acquisition of existing facilities, the transfer
or change of ownership and the addition of new beds or services may be subject
to review by and prior approval of state regulatory agencies under a CON
program. Such laws generally require the reviewing state agency to determine the
public need for additional or expanded health care facilities and services.
Failure to obtain necessary state approval can result in the inability to expand
facilities, complete an acquisition or change ownership.
State Rate Review
Some states where 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.
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.
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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 or both.
Anti-kickback Statute
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 care program. Courts have interpreted this statute broadly.
Violations of the Anti-kickback Statute may be punished by a criminal fine of up
to $25,000 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/or 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 arrangements or transactions that may indicate that the
arrangements or transactions violate the Anti-kickback Statute or other Federal
health care laws. The OIG has identified several incentive arrangements, which,
if accompanied by inappropriate intent, constitute 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. HCA has a
variety of financial relationships with physicians who refer patients to its
hospitals. HCA has contracts with physicians providing services under a variety
of financial arrangements such as employment contracts, leases and professional
service agreements. HCA also provides financial incentives, including minimum
revenue guarantees, to recruit physicians into the communities served by its
hospitals. While the Company endeavors to exercise best efforts to comply with
the applicable safe harbors, 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
12
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.
Stark Law
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 if these entities provide certain designated
health services that are reimbursable by Medicare, including inpatient and
outpatient hospital services. Sanctions for violating the Stark Law include
denial of payment, refunding amounts received for prohibited services, civil
monetary penalties of up to $15,000 per prohibited 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 for many of the customary financial arrangements
between physicians and providers, including employment contracts, leases and
recruitment agreements. There is also an exception for a physician's ownership
interest in an entire hospital, as opposed to an ownership interest in a
hospital department.
On January 4, 2001, CMS 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 phase
one regulations generally became effective January 4, 2002. However, CMS has
delayed until January 6, 2003 the effective date of a portion of the phase one
regulations related to whether percentage-based compensation is deemed to be
"set in advance" for purposes of exceptions to the Stark Law. The Company cannot
predict the final form that these regulations will take or the effect that the
final regulations will have on its operations.
Similar State Laws
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 can 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 facility licensure.
HIPAA and BBA-97
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 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.
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Other Fraud and Abuse Provisions
The Social Security Act also imposes criminal and civil penalties for
making false claims and statements 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. Criminal and civil penalties may be imposed for a number of other
prohibited activities, including failure to return known overpayments, certain
gainsharing arrangements, and offering remuneration to influence a Medicare or
Medicaid beneficiary's selection of a health care provider. Like the
Anti-kickback Statute, these provisions are very broad. Careful and accurate
coding of claims for reimbursement, including preparing cost reports, must be
performed to avoid liability.
Medicare regulations and fraud and abuse are areas included in the ongoing
government investigation and litigation pertaining to 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
HCA. See Item 3 -- "Legal Proceedings."
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. 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 and 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 HCA 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. However, Congress recently
enacted the Administrative Simplification Compliance Act, which extends the
compliance date until October 16, 2003 for entities that file a plan with HHS
that demonstrates how they intend to comply with the regulations by the extended
deadline.
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, physical 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 became effective April 2001, but compliance with these regulations
is not required until April 2003. Therefore, these privacy regulations
14
could be further amended prior to the compliance date. However, as currently
effective, 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, as effective, could impose significant
costs on HCA's facilities in order to comply with these standards.
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 privacy-related 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 department
for treatment and, if the patient is suffering from an emergency medical
condition, to either stabilize that condition or make an appropriate transfer of
the patient to a facility that can handle the condition. The obligation to
screen and stabilize emergency medical conditions exists regardless of a
patient's ability to pay for treatment. There are severe penalties under EMTALA
if a hospital fails to screen or appropriately stabilize or transfer a patient
or if the hospital delays appropriate treatment in order to first inquire about
the 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 department but
present for treatment to the hospital's campus generally or 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.
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. In addition, agreements between the corporation and the physician may
be considered void and unenforceable. These statutes vary from state to state,
are often vague and have seldom been interpreted by the courts or regulatory
agencies.
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 all aspects of its business and has developed a comprehensive ethics
and compliance program that is designed to meet or exceed applicable Federal
15
guidelines and industry standards. Because the law in this area is complex and
constantly evolving, ongoing or future governmental investigations or litigation
may 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 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.
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
Congress and in some state legislatures that would affect 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 HCA 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.
Compliance Program and Corporate Integrity Agreement
HCA 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,
HCA 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 January 2001, HCA entered into a Corporate Integrity Agreement ("CIA")
with the OIG which has an eight-year term. The CIA is structured to assure the
Federal government of HCA's overall Federal health care program compliance and
specifically covers DRG coding, outpatient laboratory billing, outpatient PPS
billing and physician relations. Under the CIA, HCA has an affirmative
obligation to report potential violations of applicable Federal heath care laws
and regulations and has, pursuant to this obligation, reported a number of
potential technical violations of the Stark and EMTALA laws. This obligation
could result in greater scrutiny by regulatory authorities. The CIA resulted in
a waiver of the government's discretionary right to exclude any of HCA'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. See Item 3 -- "Legal Proceedings." Breach of the CIA
could subject HCA to substantial monetary penalties and/or exclusion from
participation in the Medicare and Medicaid programs.
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
16
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 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Antitrust Laws
The Federal government and most states have enacted antitrust laws that
prohibit certain types of conduct deemed to be anti-competitive. These laws
prohibit price fixing, concerted refusal to deal, market monopolization, price
discrimination, tying arrangements and other practices that have or may have an
adverse effect on competition. Violations of Federal or state antitrust laws can
result in various sanctions, including criminal and civil penalties. HCA
believes it is in compliance with such Federal and state laws, but there can be
no assurance that a review of HCA's practices by courts or regulatory
authorities will not result in a determination that could adversely affect HCA's
operations.
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 condition.
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. HCA'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.
HCA also maintains professional and general liability insurance with unrelated
commercial carriers for losses in excess of amounts insured by its insurance
subsidiary. HCA and its insurance subsidiary maintain allowances for
professional liability risks that totaled $1.5 billion at December 31, 2001.
Management considers such allowances, which are based on actuarially determined
estimates, to be adequate for such liability risks.
EMPLOYEES AND MEDICAL STAFFS
At December 31, 2001, HCA had approximately 174,000 employees, including
approximately 51,000 part-time employees. HCA 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.
To address this challenge, HCA has implemented several initiatives to
17
improve recruiting, compensation programs and productivity. This shortage may
also require an increase in the utilization of more expensive temporary
personnel. References herein to "employees" refer to employees of affiliates of
HCA.
Licensed physicians who have been accepted to the medical staff of
individual hospitals staff HCA's 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 the hospital's medical staff and the
appropriate governing board of the hospital in accordance with established
credentialing criteria must approve acceptance to the staff. 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.
RISK FACTORS
If any of the events discussed in the following risks were to occur, HCA's
business, financial position, results of operations, cash flows or prospects
could be materially adversely affected. Additional risks and uncertainties not
presently known, or currently deemed immaterial by HCA may also constrain its
business and operations. In either case, the trading price of HCA's common stock
could decline and stockholders could lose all or part of their investment.
HCA Continues To Be The Subject Of Governmental Investigations And Litigation
That Could Result In Sanctions And Judgments.
HCA continues to be the subject of governmental investigations and
litigation relating to its business practices. On December 14, 2000, HCA entered
into a Plea Agreement with the Criminal Division of the Department of Justice
and various U.S. Attorneys' Offices (the "Plea Agreement") and a Civil and
Administrative Settlement Agreement with the Civil Division of the Department of
Justice (the "Civil Agreement"). The agreements resolve all Federal criminal
issues outstanding against HCA and certain issues involving Federal civil claims
by or on behalf of the government against HCA relating to DRG coding, outpatient
laboratory billing and home health issues. Pursuant to the Plea Agreement, HCA
paid the government $95 million during the first quarter of 2001. The Civil
Agreement was approved by the Federal District Court for the District of
Columbia in August 2001. Pursuant to the Civil Agreement, HCA agreed to pay the
government $745 million plus interest, which was paid in the third quarter of
2001. Civil issues that are not covered by the Civil Agreement that remain
outstanding include claims related to cost reports and physician relations
issues. HCA also entered into the CIA with the OIG, under which the Company has
an affirmative obligation to report potential violations of applicable laws and
regulations. This obligation could result in greater scrutiny by regulatory
authorities.
HCA remains the subject of a formal order of investigation by the
Securities and Exchange Commission. HCA understands that the investigation
includes the anti-fraud, insider trading, periodic reporting and internal
accounting control provisions of the Federal securities laws.
While management is unable to predict the outcome of any of the
investigations and litigation or the initiation of any additional investigations
or litigation, should HCA be found in violation of Federal or state laws
relating to Medicare, Medicaid or similar programs or in breach of the CIA, HCA
could be subject to substantial monetary fines, civil and criminal penalties
and/or exclusion from participation in the Medicare and Medicaid programs. Any
such fines or penalties could require HCA to make significant additional
payments, and any exclusion from participation in the Medicare and Medicaid
programs could reduce HCA's revenues.
18
If HCA Fails To Comply With Extensive Laws And Government Regulations, It
Could Suffer Penalties Or Be Required To Make Significant Changes To Its
Operations.
The health care industry is required to comply with extensive and complex
laws and regulations at the Federal, state and local government levels relating
to, among other things:
- billing for services;
- relationships with physicians and other referral sources;
- adequacy of medical care;
- quality of medical equipment and services;
- qualifications of medical and support personnel;
- confidentiality, maintenance and security issues associated with
health-related information and medical records;
- the screening, stabilization and transfer of patients who have emergency
medical conditions;
- licensure;
- hospital rate or budget review;
- operating policies and procedures; and
- addition of facilities and services.
Among these laws are the Anti-kickback Statute and the Stark Law. These
laws impact the relationships that HCA may have with physicians and other
referral sources. The OIG has enacted safe harbor regulations that outline
practices that are deemed protected from prosecution under the Anti-kickback
Statute. A number of HCA's current financial relationships with physicians and
other referral sources do not qualify for safe harbor protection under the
Anti-kickback Statute. Failure to meet a safe harbor does not mean that the
arrangement automatically violates the Anti-kickback Statute, but may subject
the arrangement to greater scrutiny. Further, HCA cannot guarantee that
practices that are outside of a safe harbor will not be found to violate the
Anti-kickback Statute.
In order to comply with the Stark Law, HCA's financial relationships with
physicians and their immediate family members must meet an exception. HCA
attempts to structure its relationships to meet an exception to the Stark Law,
but the regulations implementing the exceptions, some of which are still under
review, are detailed and complex, and HCA cannot guarantee that every
relationship complies fully with the Stark Law.
If HCA fails to comply with the Anti-kickback Statute, the Stark law or
other applicable laws and regulations, it could be subjected to liabilities,
including criminal penalties, civil penalties (including the loss of its
licenses to operate one or more facilities), and exclusion of one or more
facilities from participation in the Medicare, Medicaid and other Federal and
state health care programs. See "Business -- Regulation and Other Factors".
Because many of these laws and regulations are relatively new, HCA does not
always have the benefit of significant regulatory or judicial interpretation of
these laws and regulations. In the future, different interpretations or
enforcement of these laws and regulations could subject HCA's current or past
practices to allegations of impropriety or illegality or could require HCA to
make changes in its facilities, equipment, personnel, services, capital
expenditure programs and operating expenses. A determination that HCA has
violated these laws, or the public announcement that it is being investigated
for possible violations of these laws, could have a material adverse effect on
its business, financial condition, results of operations or prospects and HCA's
business reputation could suffer significantly. In addition, HCA is unable to
predict whether other legislation or regulations at the Federal or state level
will be adopted, what form such legislation or regulations may take or their
impact.
19
HCA Is Subject To Uncertainties Regarding Health Care Reform.
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would result
in major changes in the health care system, either nationally or at the state
level. Among the proposals that have been introduced are price controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a government health
insurance plan or plans that would cover all citizens and increase payments by
beneficiaries. HCA cannot predict whether any of the above proposals or any
other proposals will be adopted, and if adopted, no assurance can be given that
the implementation of such reforms will not have a material adverse effect on
its business, financial position or results of operations.
HCA's Hospitals Face Competition For Patients From Other Hospitals And Health
Care Providers.
The health care business is highly competitive and competition among
hospitals and other health care providers for patients has intensified in recent
years. Generally, other hospitals in the local communities served by most of
HCA's hospitals provide services similar to those offered by HCA's hospitals. In
addition, the number of freestanding specialty hospitals and 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. Some of the hospitals that compete with
HCA's hospitals are owned by governmental agencies or not-for-profit
corporations supported by endowments and charitable contributions and can
finance capital expenditures and operations on a tax-exempt basis. Increasingly,
HCA is facing competition by physician-owned specialty hospitals and outpatient
surgery centers that compete for market share in high margin services. Some of
HCA's competitors are more established, offer highly specialized facilities,
equipment and services which may not be available at HCA's hospitals, offer a
wider range of services or have more capital or other resources. If HCA's
competitors are better able to finance capital improvements, recruit physicians,
expand services or obtain favorable managed care contracts at their facilities,
HCA may experience a decline in patient volume. See "Business -- Competition."
HCA's Performance Depends On Its Ability To Recruit And Retain Quality
Physicians.
Physicians generally direct the majority of hospital admissions and
therefore the success of HCA's hospitals depends, in part, on the number and
quality of the physicians on the medical staffs of its hospitals, the admitting
practices of those physicians and maintaining good relations with those
physicians. Physicians are generally not employees of the hospitals at which
they practice and, in many of the markets that HCA serves, most physicians have
admitting privileges at other hospitals in addition to HCA's hospitals. Such
physicians may terminate their affiliation with HCA hospitals at any time. If
HCA is unable to provide adequate support personnel or technologically advanced
equipment and hospital facilities that meet the needs of those physicians, they
may be discouraged from referring patients to HCA facilities, admissions may
decrease and HCA's operating performance may decline.
HCA's Hospitals Face Competition For Staffing, Which May Increase Its Labor
Costs And Reduce Profitability.
HCA's operations are dependent on the effort, abilities and experience of
its management and medical support personnel, such as nurses, pharmacists and
lab technicians, as well as its physicians. HCA competes with other health care
providers in recruiting and retaining qualified management and support personnel
responsible for the day-to-day operations of each of its hospitals, including
nurses and other non-physician health care professionals. In some markets, the
availability of nurses and other medical support personnel has become a
significant operating issue to health care providers. This shortage may require
HCA to continue to enhance wages and benefits to recruit and retain nurses and
other medical support personnel or to hire more expensive temporary personnel.
HCA's salaries and benefits, as a percentage of revenues, increased to 40.5% in
2001 from 39.8% in 2000 in part due to cost pressures associated with the tight
labor market for health care professionals. HCA also depends on the available
labor pool of semi-skilled and unskilled employees in each of the markets in
which it operates. If HCA's labor costs continue to increase, it may not be able
to raise rates to
20
offset these increased costs. Because a significant percentage of HCA's revenues
consist of fixed, prospective payments, its ability to pass along increased
labor costs is constrained. HCA's failure to recruit and retain qualified
management, nurses and other medical support personnel, or to control its labor
costs could have a material adverse effect on HCA's results of operations.
Changes In Governmental Programs May Reduce HCA's Revenues.
A significant portion of HCA's revenues are derived from government health
care programs, principally Medicare and Medicaid, which are highly regulated and
subject to frequent and substantial changes. HCA derived approximately 34% of
its patient revenues from the Medicare and Medicaid programs in 2001.
Legislative changes, including those enacted as part of BBA-97, have resulted in
limitations on and, in some cases, reductions in levels of, payments to health
care providers for certain services under these government programs.
Many changes imposed by BBA-97 are being phased in over a period of years.
BBRA and BIPA are mitigating certain rate reductions resulting from BBA-97.
Nonetheless, BBA-97 significantly changed the method of payment under the
Medicare and Medicaid programs. This change resulted in significant reductions
in payments for HCA's inpatient, outpatient, and skilled nursing services. In
addition, a number of states have adopted or are considering legislation
designed to reduce their Medicaid expenditures and to provide universal coverage
and additional care, including enrolling Medicaid recipients in managed care
programs and imposing additional taxes on hospitals to help finance or expand
the states' Medicaid systems. Hospital operating margins have been, and may
continue to be, under significant pressure because of deterioration in pricing
flexibility and payer mix, and growth in operating expenses in excess of the
increase in PPS payments under the Medicare program. Future legislation or other
changes in the administration or interpretation of government health programs
could have a material adverse effect on the financial position and results of
operations of HCA.
Demands Of Non-government Payers May Reduce HCA's Revenues.
HCA's ability to negotiate favorable contracts with non-government payers
including, HMOs, PPOs and other managed care plans, significantly affects the
revenues and operating results of most of its hospitals. Patient revenues
derived from managed care payers accounted for approximately 42% of HCA's
patient revenues in 2001. Non-government payers, including managed care payers,
increasingly are demanding discounted fee structures. Reductions in price
increases or the 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 HCA.
Controls Designed To Reduce Inpatient Services May Reduce HCA's Revenues.
Controls imposed by third-party payers designed to reduce admissions and
lengths of stay, commonly referred to as "utilization review," have affected and
are expected to continue to affect HCA's facilities. Utilization review entails
the review of the admission and course of treatment of a patient by PROs.
Inpatient utilization, average lengths of stay and occupancy rates continue to
be negatively affected by payer-required pre-admission authorization and
utilization review and by payer pressure to maximize outpatient and alternative
health care delivery services for less acutely ill patients. Efforts to impose
more stringent cost controls are expected to continue. Although HCA is unable to
predict the effect these changes will have on its operations, significant limits
on the scope of services reimbursed and on reimbursement rates and fees could
have a material adverse effect on HCA's business, financial position and results
of operations.
HCA's Shared Services And Other Initiatives May Not Achieve Anticipated
Efficiencies.
HCA's strategy includes controlling the cost of providing services. HCA is
implementing a shared services initiative designed to increase revenue,
accelerate cash flows and reduce operating costs by consolidating hospitals'
back-office functions such as billing and collections and standardizing and
upgrading financial services. In addition, HCA is implementing supply
improvement and distribution programs that
21
include consolidating purchasing functions regionally, combining warehouses and
developing division-based procurement programs. HCA is also in the process of
implementing an enterprise resource planning ("ERP") system to replace its
financial and human resources information systems and reporting process. The ERP
system is designed to improve the integration among the Company's various
software systems and allow for more efficient collecting, sharing and analyzing
of data. The ERP system should provide more flexibility to format reports to fit
facilities' needs and allow employees to use their PCs to gather and analyze
information. HCA has expended significant sums to implement these initiatives
and expects to spend additional amounts over the next two years to fully develop
and implement these initiatives. There can be no assurance that HCA's
implementation will not be delayed, that HCA will not spend significantly more
than currently anticipated to implement these initiatives, that HCA's financial
business processes will not be interrupted during implementation or that HCA
will be able to realize the anticipated efficiencies from these initiatives.
State Efforts To Regulate The Construction Or Expansion Of Hospitals Could
Impair HCA's Ability To Operate And Expand Its Operations.
Some states require health care providers to obtain prior approval, known
as CON, for the purchase, construction or expansion of health care facilities,
to make certain capital expenditures or to make changes in services or bed
capacity. In giving approval, these states consider the need for additional or
expanded health care facilities or services. HCA currently operates hospitals in
a number of states with CON laws. The failure to obtain any required CON could
impair HCA's ability to operate or expand operations.
HCA's Facilities Are Heavily Concentrated In Florida And Texas, Which Makes
The Company Sensitive To Regulatory, Economic And Competitive Changes In Those
States.
Of 184 hospitals at December 31, 2001, 77 are located in Florida and Texas,
which makes HCA particularly sensitive to regulatory, economic, and competition
changes in those states. Any material change in the current regulatory, economic
or competitive conditions in these states could have a disproportionate affect
on the Company's overall business results.
HCA May Be Subject To Liabilities Because of Claims By The IRS.
HCA is currently contesting claims for income taxes and related interest
proposed by the IRS for prior years aggregating approximately $307 million
through December 31, 2001. The disputed items include the amount of gain or loss
recognized on the divestiture of certain non-core business units in 1998 and the
allocation of costs to fixed assets and goodwill in connection with hospitals
acquired by HCA in 1995 and 1996. During the first quarter of 2001, the IRS
began an examination of HCA's 1999 through 2000 Federal income tax returns. HCA
is presently unable to estimate the amount of any additional income tax and
interest that the IRS may claim upon completion of this examination or any other
examinations that may be initiated by the IRS.
HCA May Be Subject To Liabilities From Claims Brought Against Its Facilities.
HCA is subject to significant litigation relating to its business practices
including claims and legal actions by patients and others in the ordinary course
of business alleging malpractice, product liability or other legal theories. See
Item 3 -- "Legal Proceedings." Many of these actions involve large claims and
significant defense costs. HCA insures a substantial portion of its professional
and general liability risks through a wholly-owned subsidiary, in amounts
management believes are sufficient to cover claims arising out of the operation
of HCA's facilities. HCA's wholly-owned insurance subsidiary has entered into
certain reinsurance contracts, and the obligations covered by the reinsurance
contracts remain on the balance sheet as the subsidiary remains liable to the
extent that the reinsurers do not meet their obligations under the reinsurance
contracts. Some of the claims, however, could exceed the maximum insurance
coverage, may not be covered by insurance, or reinsurers could fail to meet
their obligations. If payments for claims exceed actuarially determined
estimates, are not covered by insurance or reinsurers fail to meet their
obligations, the results of operations and financial position of HCA could be
adversely affected.
22
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of HCA as of February 28, 2002, were as follows:
NAME AGE POSITION(S)
---- --- -----------
Jack O. Bovender, Jr. ............... 56 Chairman of the Board and Chief Executive
Officer
Richard M. Bracken................... 49 President and Chief Operating Officer
David G. Anderson.................... 54 Senior Vice President -- Finance and Treasurer
Victor L. Campbell................... 55 Senior Vice President
Rosalyn S. Elton..................... 40 Senior Vice President -- Operations Finance
James A. Fitzgerald, Jr. ............ 47 Senior Vice President -- Contracts and
Operations Support
V. Carl George....................... 57 Senior Vice President -- Development
Jay Grinney.......................... 50 President -- Eastern Group
Samuel N. Hazen...................... 41 President -- Western Group
Frank M. Houser, M.D. ............... 61 Senior Vice President -- Quality and Medical
Director
R. Milton Johnson.................... 45 Senior Vice President and Controller
Patricia T. Lindler.................. 54 Senior Vice President -- Government Programs
A. Bruce Moore, Jr. ................. 42 Senior Vice President -- Operations
Administration
Philip R. Patton..................... 49 Senior Vice President -- Human Resources
Gregory S. Roth...................... 45 President -- Ambulatory Surgery Group
William B. Rutherford................ 38 Chief Financial Officer -- Eastern Group
Richard J. Shallcross................ 43 Chief Financial Officer -- Western Group
Joseph N. Steakley................... 47 Senior Vice President -- Internal Audit &
Consulting Services
Beverly B. Wallace................... 51 Senior Vice President -- Revenue Cycle
Operations Management
Robert A. Waterman................... 48 Senior Vice President and General Counsel
Noel Brown Williams.................. 46 Senior Vice President and Chief Information
Officer
Alan R. Yuspeh....................... 52 Senior Vice President -- Ethics, Compliance and
Corporate Responsibility
Jack O. Bovender, Jr. was appointed Chairman of the Board and Chief
Executive Officer effective January 2002. Mr. Bovender served as President and
Chief Executive Officer from January 2001 until December 2001. Mr. Bovender
served as President and Chief Operating Officer of the Company from August 1997
to January 2001 and was appointed 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.
Richard M. Bracken was appointed President and Chief Operating Officer in
January 2002 after being appointed Chief Operating Officer in July 2001. Mr.
Bracken served as President -- Western Group of the Company from August 1997
until July 2001. From January 1995 to August 1997, Mr. Bracken served as
President of the Pacific Division of the Company. Prior to 1995 he served in
various hospital Chief Executive Officer and Administrator 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.
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.
23
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 was appointed President -- Western Group of the Company in
July 2001. Mr. Hazen served as Chief Financial Officer -- Western Group of the
Company from August 1995 to July 2001. 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
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 for Human
Resources of Quorum Health Group, Inc.
24
from 1996 to August 1998. Mr. Patton joined HCA -- Hospital Corporation of
America in 1979 and served as Senior Vice President of Human Resources from 1992
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.
Richard J. Shallcross was appointed Chief Financial Officer -- Western
Group of the Company in August 2001. Mr. Shallcross served as Chief Financial
Officer -- Continental Division of the Company from September 1997 to August
2001. From October 1996 to August 1997 Mr. Shallcross served as Chief Financial
Officer-Utah/Idaho Division of the Company. From November 1995 until September
1996 Mr. Shallcross served as Vice President of Finance and Managed Care for the
Colorado Division of the Company.
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 October 1989 until October 1997, Mr. Steakley was a partner with
Ernst & Young LLP.
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-America 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.
25
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, 2001:
LICENSED
STATE HOSPITALS BEDS
----- --------- --------
Alaska...................................................... 1 254
California.................................................. 7 1,977
Colorado.................................................... 6 2,063
Florida..................................................... 40 10,061
Georgia..................................................... 17 2,822
Idaho....................................................... 2 473
Indiana..................................................... 2 460
Kansas...................................................... 1 760
Kentucky.................................................... 2 396
Louisiana................................................... 13 2,137
Mississippi................................................. 1 130
Nevada...................................................... 2 880
New Hampshire............................................... 2 295
North Carolina.............................................. 1 60
Oklahoma.................................................... 5 1,186
South Carolina.............................................. 3 731
Tennessee................................................... 11 2,267
Texas....................................................... 37 9,172
Utah........................................................ 6 898
Virginia.................................................... 12 3,107
Washington.................................................. 1 119
West Virginia............................................... 4 1,003
INTERNATIONAL
Switzerland................................................. 2 220
United Kingdom.............................................. 6 704
--- ------
184 42,175
=== ======
In addition to the hospitals listed in the above table, HCA, directly or
indirectly operates 79 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 787,000 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. HCA'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 HCA's
financial position or results from operations.
26
ITEM 3. LEGAL PROCEEDINGS
The Company is facing significant legal challenges. The Company is the
subject of various government investigations and litigation, 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.
GOVERNMENT INVESTIGATIONS AND LITIGATION
HCA continues to be the subject of governmental investigations and
litigation relating to its business practices. Additionally, HCA is a defendant
in several qui tam actions brought by private parties on behalf of the United
States of America.
In December 2000, HCA 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"). The
agreements resolve all Federal criminal issues outstanding against HCA and
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 civil issues that are not covered by the Civil Agreement
and remain outstanding include claims related to cost reports and physician
relations issues. The Civil Agreement was approved by the Federal District Court
of the District of Columbia in August 2001. HCA paid the government $95 million,
as provided by the Plea Agreement, during the first quarter of 2001 and paid
$745 million (plus $60 million of accrued interest), as provided by the Civil
Agreement, during the third quarter of 2001. HCA also entered into a Corporate
Integrity Agreement ("CIA") with the Office of Inspector General of the
Department of Health and Human Services.
Under the Civil Agreement, HCA's existing Letter of Credit Agreement with
the Department of Justice was reduced from $1 billion to $250 million at the
time of the settlement payment. 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.
HCA remains the subject of a formal order of investigation by the
Securities and Exchange Commission. HCA understands that the investigation
includes the anti-fraud, insider trading, periodic reporting and internal
accounting control provisions of the Federal securities laws.
HCA continues to cooperate in government investigations. Given the scope of
the investigations and current litigation, HCA anticipates continued
investigative activity to occur in these and other jurisdictions in the future.
While management remains unable to predict the outcome of any of the
investigations and litigation or the initiation of any additional investigations
or litigation, were HCA to be found in violation of Federal or state laws
relating to Medicare, Medicaid or similar programs or breach of the CIA, HCA
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 expenses could have a material adverse effect on HCA's
financial position, results of operations and liquidity. See Note
2 -- Investigations and Settlement of Certain Government Claims, Note
12 -- Contingencies and Note 19 -- Subsequent Event -- Understanding Regarding
Claims for Medicare Reimbursement 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.
The actions allege, in general, that the Company and certain affiliates violated
the False Claims Act, 31 U.S.C. 3729, et seq., for improper claims submitted to
the government for reimbursement. The lawsuits generally seek damages of three
times the amount of Medicare or Medicaid claims (involving false claims)
presented by the defendants to the Federal government, civil
27
penalties of not less than $5,500 or more than $11,000 for each such Medicare or
Medicaid claim, attorneys' fees and costs. In many instances there are
additional common law claims.
In February 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. 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.
In January 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 were
required to file motions to dismiss by February 14, 2001. The court ordered
that, by March 15, 2001, the government was required to 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 (where it had not already declined
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 the later of March 15, 2001 or within 15 days
after the government's notice declining intervention.
A. QUI TAM ACTIONS IN WHICH THE UNITED STATES HAS INTERVENED
The United States intervened in eight of the consolidated cases, which fall
generally in three categories: (1) cost reports allegedly constituting false
claims; (2) alleged improper financial arrangements with physicians to induce
referrals; and (3) alleged false claims pertaining to certain management fees
paid to Curative Health Services.
1. Cost Report Cases
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 1993, 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 report 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 an amended complaint on the Company. The
Company filed an answer and counterclaim in response to the complaint. The
counterclaim seeks payment which includes, but is not limited to, the amounts
owed to the Company, with interest, for all outstanding cost reports not settled
by the government dating back to cost report years ended in 1994 and thereafter.
The government has filed a motion to dismiss the counterclaim. In addition, the
relator has served a complaint to preserve the non-intervened claims. Discovery
regarding all claims began in August 2001, and is ongoing. However, on January
28, 2002, the Company filed a motion for protective order regarding depositions
of its current and former employees. The filing of the motion has had the effect
of staying such depositions pending a ruling. The government has filed a motion
to consolidate the case with United States ex rel. Schilling v. Columbia/HCA,
which the Company has opposed.
In December 1998, the U.S. District for the Middle District of Florida
unsealed United States ex rel. Schilling v. Columbia/HCA, Civil Action No.
96M-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 an amended
complaint on the Company. Certain claims alleging home health issues have been
dismissed as being covered by the Civil Agreement. The Company filed an answer
and counterclaim in response to the complaint. The counterclaim seeks payment
which includes, but is not limited to, the amounts owed to the Company, with
interest, for all outstanding cost reports not settled by the government dating
back to cost report years ended in 1994 and thereafter. The government has
28
filed a motion to dismiss the counterclaim. In addition, the relator has served
a complaint to preserve the non-intervened claims. Discovery regarding all
claims began in August 2001, and is currently ongoing.
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. The Company filed an answer to the complaint on May
14, 2001. Relator has served a complaint to preserve its non-intervened counts,
and the Company filed an answer on June 15, 2001. Discovery is currently
ongoing.
2. Physician Referral Cases
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
Company filed an answer to the complaint on May 14, 2001, and an amended answer
on July 27, 2001. This matter has been consolidated with United States ex rel.
King v. Columbia/HCA Healthcare Corp., et al. and United States ex rel. Mroz v.
Columbia/HCA Healthcare Corp., et al. for purposes of discovery and pretrial
matters, and discovery is currently ongoing.
In 1996, the case 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 charges. The government's complaint alleges that the
Company's financial relationships with certain physicians violated the False
Claims Act, Anti-kickback Statute, and Stark Law. The government's complaint
also asserts common law claims based on the same allegations. The Company filed
an answer to the government's complaint on May 14, 2001, and an amended answer
on July 27, 2001. Relator has withdrawn the non-intervened counts. This matter
has been consolidated with United States ex rel. Thompson v. Columbia/HCA
Healthcare Corp., et al. and United States ex rel. Mroz v. Columbia/HCA
Healthcare Corp., et al. for purposes of discovery and pretrial matters, and
discovery is currently ongoing.
On September 2, 1997, the case 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 an HCA hospital engaged in improper arrangements with physicians to
induce referrals in violation of the Anti-kickback Statute. The government
intervened in this case, and on March 15, 2001 served its complaint on the
Company. The government's complaint alleges that the Company's financial
relationships with certain physicians violated the False Claims Act,
Anti-kickback Statute, and Stark Law. The government's complaint also asserts
common law claims based on the same allegations. The Company filed an answer to
the government's complaint on May 14, 2001, and an amended answer on July 27,
2001. This matter has been consolidated with United States ex rel. Thompson v.
Columbia/HCA Healthcare Corp., et al. and United States ex rel. King v.
Columbia/HCA Healthcare Corp., et al. for purposes of discovery and pretrial
matters, and discovery is currently ongoing.
29
3. Curative Health Services Cases
In June of 1998, the case United States of America ex rel. Joseph "Mickey"
Parslow v. Columbia/HCA Healthcare Corporation and Curative Health Services,
Incorporated, No 98-1260-CIV-T-23F was filed, in the Middle District of Florida,
Tampa Division. This complaint was unsealed by the court on April 9, 1999. The
government has intervened in this lawsuit and served the complaint on the
Company. This qui tam action alleges that the Company submitted false claims
relating to contracts with Curative Health Services, Incorporated ("Curative")
for the management of certain wound care centers. The complaint further alleges
that management fees paid to Curative that were excessive and not reasonable and
that the claims for reimbursement for these management fees violated the
Anti-kickback Statute. The Company filed an answer to the complaint on May 14,
2001. Discovery is ongoing.
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 has allegations
similar to those in the Parslow case. The government has intervened in the case,
in part, in order to seek dismissal of any outpatient laboratory claims covered
by the Civil Agreement and has dismissed those allegations. On March 15, 2001,
the government intervened in certain claims relating to the request for
reimbursement for non-allowable costs and served its complaint on the Company.
The relator has moved to dismiss the remaining claims. The Company filed an
answer to the complaint on May 14, 2001, and an amended answer on July 27, 2001.
Discovery is ongoing.
B. QUI TAM ACTIONS IN WHICH THE UNITED STATES HAS NOT INTERVENED
In 1997, the case 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. The
government has not intervened in this case. Relator served the complaint and the
Company filed a motion to dismiss, which is currently pending before the court.
In 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. In general, the complaint alleges that the defendants submitted false
claims regarding the three day DRG payment window 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
charges 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. In 1997, relator also filed a
second suit, 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 United States
has not intervened in either action. Relator served both complaints in March
2001. On June 5, 2001, the Company filed a motion to extend the time for
responding to the duplicative complaints until such time as relator elects which
complaint she intends to pursue. The court has stayed discovery pending a ruling
on the motion to extend.
In 1998, the case 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. The United States has not intervened in
this case. The relators served the complaint, and the Company filed a motion to
dismiss, which is currently pending. Discovery is stayed pending a ruling on the
motion to dismiss.
30
In 1999, the case 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 United States did not intervene in this case. The relator served
the complaint, which the court dismissed on July 6, 2001. The relator filed a
notice of appeal in August 2001.
In 1997, the case 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 such as including improper inflation of cost
basis, costs relating to unnecessary care to patients, and falsification of
records. The United States has not intervened in this case. The Company has been
served with the complaint, which it answered. Discovery is stayed pending a
ruling on another defendant's motion to dismiss.
In 1999, the case 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 that allegedly resulted in improper cost allocation to the hospital's
acute care services and thus improperly increased reimbursement. The government
has not intervened in this case. The Company was served with the complaint and
filed an answer. Discovery is stayed pending a ruling on another defendant's
motion to dismiss.
On July 31, 1998, the U.S. District Court for the Western District of
Texas, unsealed United States of America 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 is a qui tam action alleging various violations of the Federal
False Claims Act concerning statements made to the Joint Commission in order to
be eligible for Medicare payments, thereby allegedly rendering 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. Some of the claims were
dismissed as released under the Settlement Agreement. The Company filed a motion
to dismiss the remaining allegations in the complaint. Discovery has been stayed
pending a ruling on the motion to dismiss.
The matter of United States of America, 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. Relator filed a motion for partial summary
judgment. The court ordered relator's motion for partial summary judgment
stricken. The relator did not file an amended motion for summary judgment. The
government has not intervened in this case. Discovery is currently ongoing.
In 1998, the case 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. The United States declined intervention in
this case. The Company was served with the relator's complaint. The Company
filed a motion to dismiss, which is currently pending. Discovery has been stayed
pending a ruling on the motion.
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
31
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, 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., 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 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. In September 1999, the District Court entered an order granting the
defendants' motion to dismiss McCall with prejudice. The plaintiffs in the
McCall lawsuit filed an appeal from that order. On February 13, 2001, the United
States Court of Appeals for the Sixth Circuit entered an order reversing, in
part, the district court's dismissal order and remanding the case to the trial
court. On April 23, 2001, the Sixth Circuit denied defendants' motion for
rehearing, or certification to the Delaware Supreme Court. On July 25, 2001, the
trial court issued a Second Case Management Order. A trial date has not been
set.
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. That appeal is currently pending before the Sixth Circuit, and oral
argument has been set for April 23, 2002.
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
32
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. In addition, a
purported derivative action entitled Williams v. Averhoff, (Civil Action No.
15055-NC) was filed on August 5, 1997, in the Court of Chancery of the State of
Delaware in and for New Castle County, but has not been served on any
defendants. 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. On March 30, 1999, the Barron case was dismissed without prejudice.
In the Kovalchick and Williams lawsuits, 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 and Williams
lawsuits. On January 31, 2002, the plaintiffs in Kovalchick and Williams advised
the court that they intended to lift the stay of proceedings in this matter and
proceed with discovery. The Company has filed motions opposing plaintiffs'
request to lift the stays.
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; (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 filed an appeal from that order. On February 13, 2001, the United States
Court of Appeals for the Sixth Circuit entered an order reversing, in part, the
district court's dismissal order and remanding the case to the trial court, and,
on April 23, 2001, the Sixth Circuit denied defendants' motion for rehearing,
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
33
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 (see cases below) 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 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 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. At a status conference on April 27,
2001, the court ordered a joint audit of the medical and billing records for
certain beneficiaries of one or more of the plaintiff health and welfare funds.
A follow-up status conference was held on October 31, 2001 and a case management
order was entered on February 8, 2002.
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
34
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 Racketeer Influenced
and Corrupt Organizations 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 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.)
35
The matter of The United Paperworkers 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
(below) 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. There has been no activity since April 1999.
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
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 but the motion to
transfer was denied on April 8, 1999. A Motion, Notice and Order of Dismissal
for lack of prosecution was entered by the court on June 1, 2000. Plaintiff
filed a Showing of Good Cause on June 28, 2000. A hearing was held on July 18,
2000, after which the court entered an Order that Action Remain Pending. There
has been no activity in the case since July 2000.
Smallwood, Peggy Sue and her husband, John R. Smallwood (formerly described
as 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
36
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. On May 24, 2001,
the Supreme Court ruled that the hospital's admissions contract did not supply a
definite price term as required by Tennessee contract law. However, the court
further held that under quasi-contract principles, the hospital is entitled to
recover the reasonable value of medical goods and services provided to patients.
Defendants filed a motion for entry of judgment, and a hearing took place on
October 26, 2001. The court denied defendant's motion for entry of judgment and
granted with limitations, plaintiff's motion for leave to amend their complaint.
The parties agreed that plaintiffs will proceed under their real names and not a
pseudonym. The court subsequently issued orders appointing two special masters
to advise the court on the legal standards for determining the reasonable value
of medical goods and services. The case is currently set for trial on September
30, 2002.
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
diagnoses, 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 that 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
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
37
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. Action in this case is stayed by agreement of the parties pending the
audit and status conference in the Columbia/HCA Billing Practices litigation.
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 was 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
sought compensatory and punitive damages in an unstated amount plus costs and
attorneys' fees. The Company filed a response denying the allegations. Plaintiff
subsequently voluntarily withdrew its anti-trust claims and class-action
allegations. On December 11, 2001, this case was dismissed with prejudice
against the plaintiffs by agreement of the parties.
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 Settlement
of Certain Government Claims and Note 12 -- 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 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
38
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. The appeal has been fully briefed. Oral
argument before the Sixth Circuit Court of Appeals took place on September 21,
2001. On February 7, 2002, the Sixth Circuit Court of Appeals affirmed the
District Court's decision.
The matter of Rocky Mountain Medical Center, Inc. v. Northern Utah
Healthcare Corporation, d/b/a St. Mark's Hospital, Case No. 000906627, was filed
in the 3rd Judicial District Court of Salt Lake County, Utah on August 22, 2000
with a request for injunctive relief and damages under Utah antitrust law.
Specific counts in the complaint include illegal boycott, unreasonable restraint
of trade, attempt to monopolize and interference with prospective economic
relations. At issue are St. Mark's Hospital's contracts with certain managed
care organizations. The court denied plaintiff's request for a preliminary
injunction. Cross-motions for summary judgment were filed by both parties and
both motions were denied in December 2001. In March 2002, plaintiffs filed a
Motion for Leave to Amend seeking permission to join three related corporate
entities of St. Mark's Hospital. This motion will be opposed by the defendant.
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 is engaged in
discussions with these insurers, 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 is a party to certain proceedings in the United States Tax
Courts, the United States Court of Federal Claims and the United States Court of
Appeals, Sixth Circuit. 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 2001.
39
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.
HIGH LOW
------ ------
2001
First Quarter............................................. $44.16 $33.93
Second Quarter............................................ 45.22 35.60
Third Quarter............................................. 47.28 41.20
Fourth Quarter............................................ 46.90 36.44
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
At the close of business on February 28, 2002, there were approximately
15,700 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 $0.02 per share. While
it is the present intention of HCA's board of directors to continue paying a
quarterly dividend of $0.02 per share, the declaration and payment of future
dividends by HCA will depend upon many factors, including HCA's earnings,
financial position, business needs, capital and surplus and regulatory
considerations.
40
ITEM 6. SELECTED FINANCIAL DATA
HCA INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS:
Revenues................................................... $ 17,953 $ 16,670 $ 16,657 $ 18,681 $ 18,819
Salaries and benefits...................................... 7,279 6,639 6,694 7,766 7,631
Supplies................................................... 2,860 2,640 2,645 2,901 2,722
Other operating expenses................................... 3,238 3,208 3,306 3,865 4,331
Provision for doubtful accounts............................ 1,376 1,255 1,269 1,442 1,420
Depreciation and amortization.............................. 1,048 1,033 1,094 1,247 1,238
Interest expense........................................... 536 559 471 561 493
Insurance subsidiary gains on sales of investments......... (63) (123) (55) (49) (68)
Equity in earnings of affiliates........................... (158) (126) (90) (112) (68)
Settlement with Federal government......................... 262 840 -- -- --
Gains on sales of facilities............................... (131) (34) (297) (744) --
Impairment of long-lived assets............................ 17 117 220 542 442
Restructuring of operations and investigation related
costs.................................................... 65 62 116 111 140
---------- ---------- ---------- ---------- ----------
16,329 16,070 15,373 17,530 18,281
---------- ---------- ---------- ---------- ----------
Income from continuing operations before minority interests
and income taxes......................................... 1,624 600 1,284 1,151 538
Minority interests in earnings of consolidated entities.... 119 84 57 70 150
---------- ---------- ---------- ---------- ----------
Income from continuing operations before income taxes...... 1,505 516 1,227 1,081 388
Provision for income taxes................................. 602 297 570 549 206
---------- ---------- ---------- ---------- ----------
Income from continuing operations before extraordinary
charge................................................... 903 219 657 532 182
Discontinued operations, net of income taxes:
Loss (income) from operations of discontinued
businesses............................................. -- -- -- 80 (12)
Loss on disposals of discontinued businesses............. -- -- -- 73 443
Cumulative effect of accounting change, net of income
taxes.................................................... -- -- -- -- 56
Extraordinary charge on extinguishment of debt, net of
income taxes............................................. 17 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 886 $ 219 $ 657 $ 379 $ (305)
========== ========== ========== ========== ==========
Basic earnings (loss) per share:
Income from continuing operations before extraordinary
charge................................................. $ 1.72 $ 0.39 $ 1.12 $ 0.82 $ 0.28
Discontinued operations:
Income (loss) from operations of discontinued
businesses........................................... -- -- -- (0.12) 0.02
Loss on disposals of discontinued businesses........... -- -- -- (0.11) (0.67)
Cumulative effect of accounting change................... -- -- -- -- (0.09)
Extraordinary charge on extinguishment of debt........... (0.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 1.69 $ 0.39 $ 1.12 $ 0.59 $ (0.46)
========== ========== ========== ========== ==========
Shares used in computing basic earnings (loss) per share
(in thousands)........................................... 524,112 555,553 585,216 643,719 657,931
Diluted earnings (loss) per share:
Income from continuing operations before extraordinary
charge................................................. $ 1.68 $ 0.39 $ 1.11 $ 0.82 $ 0.27
Discontinued operations:
Income (loss) from operations of discontinued
businesses........................................... -- -- -- (0.12) 0.02
Loss on disposals of discontinued businesses........... -- -- -- (0.11) (0.67)
Cumulative effect of accounting change................... -- -- -- -- (0.08)
Extraordinary charge on extinguishment of debt........... (.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 1.65 $ 0.39 $ 1.11 $ 0.59 $ (0.46)
========== ========== ========== ========== ==========
Shares used in computing diluted earnings (loss) per share
(in thousands)........................................... 538,177 567,685 591,029 646,649 663,090
Cash dividends per common share............................ $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.07
Redemption of preferred stock purchase rights.............. $ -- $ -- $ -- $ -- $ 0.01
41
HCA INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31 -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
FINANCIAL POSITION:
Assets................................................... $ 17,730 $ 17,568 $ 16,885 $ 19,429 $ 22,002
Working capital.......................................... 957 312 480 446 1,818
Net assets of discontinued operations.................... -- -- -- -- 841
Long-term debt, including amounts due within one year.... 7,360 6,752 6,444 6,753 9,408
Minority interests in equity of consolidated entities.... 563 572 763 765 836
Company-obligated mandatorily redeemable securities of
affiliate holding solely Company securities............ 400 -- -- -- --
Forward purchase contracts and put options............... -- 769 -- -- --
Stockholders' equity..................................... 4,762 4,405 5,617 7,581 7,250
CASH FLOW DATA:
Cash provided by operating activities.................... $ 1,413 $ 1,547 $ 1,223 $ 1,916 $ 1,483
Cash provided by (used in) investing activities.......... (1,300) (1,087) 925 970 (2,746)
Cash provided by (used in) financing activities.......... (342) (336) (2,255) (2,699) 1,260
OPERATING DATA:
Number of hospitals at end of period(a).................. 178 187 195 281 309
Number of licensed beds at end of period(b).............. 40,112 41,009 42,484 53,693 60,643
Weighted average licensed beds(c)........................ 40,645 41,659 46,291 59,104 61,096
Admissions(d)............................................ 1,564,100 1,553,500 1,625,400 1,891,800 1,915,100
Equivalent admissions(e)................................. 2,311,700 2,300,800 2,425,100 2,875,600 2,901,400
Average length of stay (days)(f)......................... 4.9 4.9 4.9 5.0 5.0
Average daily census(g).................................. 21,160 20,952 22,002 25,719 26,006
Occupancy(h)............................................. 52% 50% 48% 44% 43%
---------------
(a) Excludes six facilities in 2001, nine facilities in 2000, 12 facilities in
1999, 24 facilities in 1998 and 27 facilities in 1997 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.
(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.
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HCA INC.
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 Inc. which should be read in
conjunction with the following discussion and analysis. The terms "HCA" or the
"Company" as used herein refer to HCA Inc. and its affiliates unless otherwise
stated or indicated by context. The term "affiliates" means direct and indirect
subsidiaries of HCA Inc. and partnerships and joint ventures in which such
subsidiaries are partners.
FORWARD-LOOKING STATEMENTS
This "Annual Report on Form 10-K" includes certain disclosures which
contain "forward-looking statements." Forward-looking statements include all
statements that do not relate solely to historical or current facts, and can be
identified by the use of words like "may," "believe," "will," "expect,"
"project," "estimate," "anticipate," "plan," "initiative" or "continue." These
forward-looking statements are based on the current plans and expectations of
HCA and are subject to a number of known and unknown uncertainties and risks,
many of which are beyond HCA's control, that could significantly affect current
plans and expectations and HCA's future financial position and results of
operations. These factors include, but are not limited to, (i) the outcome of
the known and unknown litigation and the governmental investigations and
litigation involving HCA's business practices including the ability to
negotiate, execute and timely consummate definitive settlement agreements in the
government's remaining civil cases and to obtain court approval thereof, (ii)
the ability to consummate the understanding with the Centers for Medicare and
Medicaid Services ("CMS," formerly known as the Health Care Financing
Administration), (iii) the highly competitive nature of the health care
business, (iv) the efforts of insurers, health care providers and others to
contain health care costs, (v) possible changes in the Medicare and Medicaid
programs that may limit reimbursements to health care providers and insurers,
(vi) changes in Federal, state or local regulations affecting the health care
industry, (vii) the possible enactment of Federal or state health care reform,
(viii) the ability to attract and retain qualified management and personnel,
including affiliated physicians, nurses and medical support personnel, (ix)
liabilities and other claims asserted against HCA, (x) fluctuations in the
market value of HCA's common stock, (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, terms and cost of capital, (xvi) changes in business
strategy or development plans, (xvii) slowness of reimbursement, (xviii) the
ability to implement HCA's shared services and other initiatives and realize
decreases in administrative, supply and infrastructure costs, (xix) the outcome
of pending and any future tax audits, appeals, and litigation associated with
HCA's tax positions, (xx) the outcome of HCA's continuing efforts to monitor,
maintain and comply with appropriate laws, regulations, policies and procedures
and HCA's corporate integrity agreement with the government, (xxi) increased
reviews of HCA's cost reports, (xxii) the ability to maintain and increase
patient volumes and control the costs of providing services, and (xxiii) other
risk factors described in this Annual Report on Form 10-K. As a consequence,
current plans, anticipated actions and future financial position and results may
differ from those expressed in any forward-looking statements made by or on
behalf of HCA. You are cautioned not to unduly rely on such forward-looking
statements when evaluating the information presented in this report.
INVESTIGATIONS AND SETTLEMENT OF CERTAIN GOVERNMENT CLAIMS
HCA continues to be the subject of governmental investigations and
litigation relating to its business practices. Additionally, HCA is a defendant
in several qui tam actions brought by private parties on behalf of the United
States of America.
43
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
INVESTIGATIONS AND SETTLEMENT OF CERTAIN GOVERNMENT CLAIMS (CONTINUED)
In December 2000, HCA 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"). The
agreements resolve all Federal criminal issues outstanding against HCA and
certain issues involving Federal civil claims by or on behalf of the government
against HCA relating to DRG coding, outpatient laboratory billing and home
health issues. The civil issues that are not covered by the Civil Agreement and
remain outstanding include claims related to cost reports and physician
relations issues. The Civil Agreement was approved by the Federal District Court
of the District of Columbia in August 2001. HCA paid the government $95 million,
as provided by the Plea Agreement, during the first quarter of 2001 and paid
$745 million (plus $60 million of accrued interest), as provided by the Civil
Agreement, during the third quarter of 2001. HCA also entered into a Corporate
Integrity Agreement ("CIA") with the Office of Inspector General of the
Department of Health and Human Services.
Under the Civil Agreement, HCA's existing Letter of Credit Agreement with
the Department of Justice was reduced from $1 billion to $250 million at the
time of the settlement payment. 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.
HCA remains the subject of a formal order of investigation by the
Securities and Exchange Commission ("SEC"). HCA understands that the
investigation includes the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
HCA continues to cooperate in the governmental investigations. Given the
scope of the investigations and current litigation, HCA anticipates continued
investigative activity may occur in these and other jurisdictions in the future.
While management is unable to predict the outcome of any of the
investigations and litigation or the initiation of any additional investigations
or litigation, were HCA to be found in violation of Federal or state laws
relating to Medicare, Medicaid or similar programs or breach of the CIA, HCA
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 expenses could have a material adverse effect on HCA's
financial position, results of operations and liquidity. See Note
2 -- Investigations and Settlement of Certain Government Claims, Note
12 -- Contingencies and Note 19 -- Subsequent Event -- Understanding Regarding
Claims for Medicare Reimbursement 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 HCA's ethics and compliance program, governmental
regulations and guidelines and industry standards. HCA also seeks to enhance
financial performance by increasing utilization of its facilities and improving
operating efficiencies. To achieve these objectives, HCA pursues the following
strategies:
- Emphasize a "patients first" philosophy and a commitment to ethics and
compliance: The foundation of HCA is putting patients first and
providing quality health care services in the communities HCA serves. HCA
continuously updates and implements quality assurance procedures to
monitor level of care and patient safety issues. HCA identifies best
practices in its many health care facilities and shares those practices
throughout its network of hospitals and health care facilities to help
achieve better
44
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
BUSINESS STRATEGY (CONTINUED)
outcomes for patients. 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 HCA's corporate culture -- compassion,
honesty, integrity, fairness, loyalty, respect and kindness -- are the
cornerstone of HCA. To reinforce HCA's dedication to these values and to
ensure integrity in all that it does, HCA 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
reinforces the dedication to providing excellent patient care.
- Focus on strong assets in select, core communities: HCA focuses on
communities where it is, or can be, the number one or number two health
care provider and which are typically located in urban areas
characterized by highly integrated health care facility networks. HCA
intends to continue to optimize core assets through capital expenditures
and selected acquisitions and divestitures.
- Develop comprehensive local health care networks with a broad range of
health care services: HCA seeks to operate each of its facilities as
part of a network with other health care facilities that HCA's affiliates
own or operate within a common region that should enable these local
health care networks to effectively contract with managed care and other
payers and attract and serve patients and physicians.
- Grow through increased patient volume, expansion of specialty services
and emergency departments and selective acquisitions: HCA plans capital
spending to increase bed capacity, provide new or expanded services, and
provide renovated and expanded emergency departments, operating rooms,
women's services, imaging, oncology, open-heart areas and intensive and
critical care units.
- Improve operating efficiencies through enhanced cost management and
resource utilization, and the implementation of shared services
initiatives: HCA has initiated several measures designed to improve the
financial performance of its facilities. To address labor costs, HCA
implemented a best practices initiative that provides HCA's hospitals
with strategies to improve recruiting, compensation programs and
productivity; implemented training programs for middle managers at the
hospital level; and created an internal contract labor agency that
provides for improved quality at a reduced cost. To curtail supply costs,
HCA formed a group purchasing organization that allows the achievement of
better pricing in negotiating purchasing and supply contracts. In
addition, as HCA grows in select core markets, the benefits should
continue to be realized from economies of scale, including supply chain
efficiencies and volume discount cost savings. HCA 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 it 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 HCA's local
focus: HCA's strategy to streamline and decentralize management
structure affords management of HCA'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: HCA
maintains and replaces equipment, renovates and constructs replacement
facilities and adds new services to increase the attractiveness of its
hospitals and other facilities to patients and physicians. In addition,
HCA evaluates acquisitions that complement its strategies and assesses
opportunities to enhance stockholder value, including repayment of
indebtedness and stock repurchases.
45
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of HCA's consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent liabilities and the
reported amounts of revenues and expenses. HCA's management base their estimates
on historical experience and various other assumptions that they believe are
reasonable under the circumstances. Management evaluates its estimates on an
ongoing basis and makes changes to the estimates as experience develops or new
information becomes known. Actual results may differ from these estimates under
different assumptions or conditions.
Management believes that the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Revenues
HCA derived 76% of its 2001 patient revenues (75% in 2000 and 73% in 1999)
from Medicare, Medicaid and managed care patients. Revenues are recorded during
the period the health care services are provided, based upon the estimated
amounts due from Medicare, Medicaid and the managed care payers. Estimates of
contractual allowances under managed care health plans are based upon the
payment terms specified in the related contractual agreements. Laws and
regulations governing the Medicare and Medicaid programs are complex and subject
to interpretation. The estimated reimbursement amounts are made on a
payer-specific basis and are recorded based on the best information available
regarding management's interpretation of the applicable laws, regulations and
contract terms. Management continually reviews the contractual estimation
process to consider and incorporate updates to the laws and regulations and the
frequent changes in managed care contractual terms that result from contract
renegotiations and renewals. Management has invested significant resources to
refine and improve the information system data used to make these estimates and
to develop a standardized calculation process and train employees.
Due to the complexities involved in these estimations of revenue earned,
the health care services authorized and provided and related reimbursement are
often subject to interpretations that could result in payments that are
different from our estimates.
Provision for Doubtful Accounts
The collection of outstanding receivables from Medicare, managed care
payers and patients is HCA's primary source of cash and is critical to the
Company's operating performance. The primary collection risks relate to
uninsured patient accounts and patient accounts for which primary insurance has
paid, but patient responsibility amounts (deductibles and co-payments) remain
outstanding. 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. Management relies on annual detailed
reviews of historical collections and write-offs at facilities that represent a
majority of HCA's revenues and accounts receivable. Adverse changes in business
office operations, payer mix, economic conditions or trends in Federal and state
governmental health care coverage could affect HCA's collection of accounts
receivable, cash flows and results of operations.
Professional Liability Insurance Claims
HCA, along with virtually all health care providers, operate in an
environment with medical malpractice and professional liability risks.
Allowances for professional liability risks were $1.5 billion at December 31,
2001. A substantial portion of HCA's professional liability risks is insured
through a wholly-owned insurance subsidiary. HCA's health care facilities are
insured by the wholly-owned insurance subsidiary for losses up to $25 million
per occurrence, a portion of which is reinsured with unrelated commercial
carriers. Professional
46
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
Professional Liability Insurance Claims (Continued)
and general liability risks above $1.8 million retention per occurrence for
2000, $6.8 million retention per occurrence for 2001 and $10 million retention
per occurrence for 2002 have been reinsured. 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. 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. Due to the considerable variability that is inherent in such estimates,
there can be no assurance that the ultimate liability will not exceed
management's estimates.
Accrual of Government Claims Settlements and Related Litigation Contingencies
HCA continues to be the subject of governmental investigations and
litigation relating to its business practices. The governmental investigations
were initiated more than five years ago and include activities for certain
entities for periods prior to their acquisition by the Company and activities
for certain entities that have been divested.
During December 2000, HCA and the government entered into agreements that
resolved all Federal criminal issues outstanding against HCA and 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 civil issues that are not covered by the agreements and remain
outstanding include United States Department of Justice ("DOJ") claims related
to cost reports and physician relations issues. Pursuant to the agreements, HCA
paid the government $840 million (plus $60 million of accrued interest) during
2001.
During March 2002, HCA and CMS reached an understanding pursuant to which
the Company has agreed to pay CMS $250 million for settlement of all CMS
Medicare reimbursement and payment issues regarding all HCA cost report, home
office cost statement and appeal issues between HCA and CMS related to cost
report periods from 1993 through periods ended on or before July 31, 2001. HCA
recorded an accrual for the $250 million settlement payment in the December 31,
2001 consolidated financial statements. The understanding with CMS is subject to
approval by the U.S. Department of Justice, which has not yet been obtained, and
execution of a definitive written agreement. See Note 19 -- Subsequent
Event -- Understanding Regarding Claims for Medicare Reimbursement in the notes
to consolidated financial statements.
The understanding with CMS does not include resolution of the outstanding
civil issues with the U.S. Department of Justice and relators with respect to
cost reports and physician relations. See Item 3 -- "Legal Proceedings."
At December 31, 2001, no liability has been accrued related to the
remaining cost report and physician relations issues. The criteria that
management must evaluate in determining when the recording of loss contingency
shall be accrued are: (1) that it is probable that a liability has been incurred
and (2) that the loss can be reasonably estimated. Management has determined
that due to the considerable uncertainties that exist regarding the cost report
and physician relations issues, the ultimate liability cannot be determined or
reasonably estimated at this time. Management recognizes that this determination
must be continually reassessed as negotiations develop and new information
becomes available. The amounts claimed are substantial and, upon resolution of
these contingencies, it is possible that results of operations, financial
position and liquidity could be materially, adversely affected.
47
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS
Revenue/Volume Trends
HCA's revenues depend upon inpatient occupancy levels, the ancillary
services and therapy programs ordered by physicians and provided to patients,
the volume of outpatient procedures and the charge and negotiated payment rates
for such services.
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. HCA's facilities have experienced revenue growth due
to increases in same facility volume growth, changes in patient mix and
favorable pricing trends. HCA has experienced increases in revenue per
equivalent admission over the prior period of 7.2%, 5.5% and 5.7%, in 2001,
2000, and 1999, respectively. There can be no assurances that HCA will continue
to receive these levels of increases in the future. These increases were the
result of renegotiating and renewing certain managed care contracts on more
favorable terms, shifts of managed care admissions from HMO business to PPO
business and improved reimbursement from the government.
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 the
Balanced Budget Act of 1997 ("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
five-year period that began in April 2001. BBA-97 contained a requirement that
CMS adopt a prospective payment system ("PPS") for outpatient hospital services,
which was implemented during August 2000. The implementation of outpatient PPS
has not had a measurable effect on HCA's financial results.
Admissions related to Medicare, Medicaid and managed care plans and other
discounted arrangements for the years ended December 31, 2001, 2000 and 1999 are
set forth below.
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
---- ---- ----
Medicare................................................ 38% 37% 38%
Medicaid................................................ 11% 11% 11%
Managed care and other discounted....................... 41% 42% 41%
Other................................................... 10% 10% 10%
--- --- ---
100% 100% 100%
=== === ===
The approximate percentages of inpatient revenues of the Company's
facilities related to Medicare, Medicaid and managed care plans and other
discounted arrangements for the years ended December 31, 2001, 2000 and 1999 are
set forth below.
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
---- ---- ----
Medicare................................................ 39% 40% 42%
Medicaid................................................ 7% 8% 8%
Managed care and other discounted....................... 39% 38% 33%
Other................................................... 15% 14% 17%
--- --- ---
100% 100% 100%
=== === ===
48
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue/Volume Trends (Continued)
Payment pressure by payers for patients to utilize outpatient or
alternative delivery services is 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.
49
HCA INC.
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 net income for the years ended
December 31, 2001, 2000 and 1999 (dollars in millions, except per share
amounts):
2001 2000 1999
--------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
Revenues................................................. $17,953 100.0 $16,670 100.0 $16,657 100.0
Salaries and benefits.................................... 7,279 40.5 6,639 39.8 6,694 40.2
Supplies................................................. 2,860 15.9 2,640 15.8 2,645 15.9
Other operating expenses................................. 3,238 18.1 3,208 19.3 3,306 19.8
Provision for doubtful accounts.......................... 1,376 7.7 1,255 7.5 1,269 7.6
Depreciation and amortization............................ 1,048 5.8 1,033 6.2 1,094 6.6
Interest expense......................................... 536 3.0 559 3.4 471 2.8
Insurance subsidiary gains on sales of investments....... (63) (0.4) (123) (0.7) (55) (0.3)
Equity in earnings of affiliates......................... (158) (0.9) (126) (0.8) (90) (0.5)
Settlement with Federal government....................... 262 1.5 840 5.0 -- --
Gains on sales of facilities............................. (131) (0.7) (34) (0.2) (297) (1.8)
Impairment of long-lived assets.......................... 17 0.1 117 0.7 220 1.3
Restructuring of operations and investigation related
costs.................................................. 65 0.4 62 0.4 116 0.7
------- ----- ------- ----- ------- -----
16,329 91.0 16,070 96.4 15,373 92.3
------- ----- ------- ----- ------- -----
Income before minority interests and income taxes........ 1,624 9.0 600 3.6 1,284 7.7
Minority interests in earnings of consolidated
entities............................................... 119 0.6 84 0.5 57 0.3
------- ----- ------- ----- ------- -----
Income before income taxes............................... 1,505 8.4 516 3.1 1,227 7.4
Provision for income taxes............................... 602 3.4 297 1.8 570 3.5
------- ----- ------- ----- ------- -----
Income before extraordinary charge....................... 903 5.0 219 1.3 657 3.9
Extraordinary charge on extinguishment of debt, net of
income taxes........................................... 17 0.1 -- -- -- --
------- ----- ------- ----- ------- -----
Net income............................................... $ 886 4.9 $ 219 1.3 $ 657 3.9
======= ===== ======= ===== ======= =====
Basic earnings per share................................. $ 1.69 $ 0.39 $ 1.12
Diluted earnings per share............................... $ 1.65 $ 0.39 $ 1.11
% changes from prior year:
Revenues............................................... 7.7% 0.1% (10.8)%
Income before income taxes............................. 191.7 (58.0) 13.5
Income before extraordinary charge..................... 312.5 (66.7) 23.6
Net income............................................. 304.9 (66.7) 23.6
Basic earnings per share............................... 333.3 (65.2) 36.6
Diluted earnings per share............................. 323.1 (64.9) 35.4
Admissions(a).......................................... 0.7 (4.4) (14.1)
Equivalent admissions(b)............................... 0.5 (5.1) (15.7)
Revenue per equivalent admission....................... 7.2 5.5 5.7
Same facility % changes from prior year(c):
Revenues............................................... 10.2 6.2 5.3
Admissions(a).......................................... 2.7 2.8 2.7
Equivalent admissions(b)............................... 2.6 2.6 2.5
Revenue per equivalent admission....................... 7.4 3.6 2.7
---------------
(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 that were either acquired or divested during the current
and prior year.
50
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 2001 and 2000
Income before income taxes increased 192% primarily due to the settlement
with the Federal government related to civil and criminal issues that resulted
in a pretax charge of $840 million in 2000. Also in 2000, HCA incurred a pretax
charge of $117 million for the impairment of long-lived assets. During 2001, HCA
incurred a pretax charge of $262 million for the settlement with the Federal
government and $17 million for the impairment of long-lived assets. See Note
2 -- Investigations and Settlement of Certain Government Claims, Note
4 -- Impairments of Long-Lived Assets and Note 19 -- Subsequent
Event -- Understanding Regarding Claims for Medicare Reimbursement in the notes
to consolidated financial statements.
Revenues increased 7.7%, though the number of hospitals was reduced from
187 hospitals at December 31, 2000 to 178 hospitals at the end of 2001. On a
same facility basis, revenues increased 10.2% and admissions increased 2.7%. The
increases in reported and same facility revenues were the result of admissions
growth of 0.7% on a reported basis and 2.7% on a same facility basis, combined
with revenue per equivalent admission increases of 7.2% on a reported basis and
7.4% on a same facility basis. Successes achieved during 2001 in renegotiating
and renewing certain managed care contracts on more favorable terms, shifts from
Medicare managed care to traditional Medicare and shifts by managed care
patients from HMO to PPO products led to these improvements in revenue per
equivalent admission.
Salaries and benefits, as a percentage of revenues, increased to 40.5% in
2001 from 39.8% in 2000. Salaries per equivalent admission increased 9.2% from
2000 to 2001 due to cost pressures associated with the tight labor market for
health care professionals and increasing employee health benefits costs.
Employee benefits as a percentage of salaries and benefits increased from 14.9%
in 2000 to 16.2% in 2001.
Supply costs increased, as a percentage of revenues, to 15.9% in 2001 from
15.8% in 2000. The 7.8% rate of increase in the cost of supplies per equivalent
admission (including pharmaceutical, orthopedic and cardiac supplies) exceeded
the 7.2% increase in revenue per equivalent admission.
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 18.1%
in 2001 from 19.3% in 2000 primarily due to the combined effect of revenue
growth and leveraging the fixed nature of the majority of these expenses.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.7% in 2001 from 7.5% in 2000. The effect of rate increases on a small
component of the Company's overall business, primarily self pay and the
uninsured, has resulted in an increase in bad debts, as measured as a percent of
net revenue, because the revenues associated with those patients are generally
recorded at gross charges.
Depreciation and amortization decreased, as a percentage of revenues, to
5.8% in 2001 from 6.2% in 2000. Depreciation and amortization levels remained
relatively unchanged while revenues increased over the prior year.
Interest expense decreased to $536 million in 2001 from $559 million in
2000 primarily due to a decrease in the general level of interest rates during
2001 compared to 2000. The average interest rates for the Company's borrowings
decreased from 8.1% at December 31, 2000 to 6.5% at December 31, 2001.
Insurance subsidiary gains on sales of investments consist of realized
gains on the sales of investment securities by HCA's wholly-owned insurance
subsidiary. These gains decreased from $123 million in 2000 to $63 million in
2001. During 2000, certain funds were reallocated among investment managers,
resulting in the recognition of previously unrealized gains.
51
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 2001 and 2000 (Continued)
Equity in earnings of affiliates, as a percentage of revenues, increased to
0.9% in 2001 from 0.8% in 2000 due to improved operations at hospital joint
ventures accounted for using the equity method.
During 2001, HCA recognized a pretax gain of $131 million ($76 million
after-tax) on the sales of three consolidating hospitals, HCA's interest in two
non-consolidating hospitals and a provider of specialty managed care benefit
programs. 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 2001, HCA reduced the carrying value for its interest in a
non-hospital, equity method joint venture to fair value, based upon estimates of
sales value, for a non-cash, pretax charge of $17 million ($10 million
after-tax). During 2000, HCA identified and initiated plans to sell or replace
four 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 ($80 million after-tax). See Note 4 -- Impairments of Long-Lived Assets
in the notes to consolidated financial statements.
During 2001 and 2000, respectively, HCA incurred $65 million and $62
million of restructuring of operations and investigation related costs. In 2001,
these costs included $54 million of professional fees (legal and accounting)
related to the governmental investigations and $11 million of other 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. See Note 5 -- Restructuring of Operations and Investigation Related Costs
in the notes to consolidated financial statements.
Minority interests in earnings of consolidated entities increased, as a
percentage of revenues, to 0.6% in 2001 from 0.5% in 2000 due to improved
operations at certain consolidating joint ventures.
The effective income tax rate was 57.6% in 2000 and 39.9% in 2001. The
higher effective income tax rate in 2000 was due to the recording of a valuation
allowance and certain nondeductible intangible assets related to gains on sales
of facilities and impairment of long-lived assets. If the effect of the
valuation allowance, the nondeductible intangible assets and the related
amortization were excluded, the effective income tax rate would have been 39%
for both periods.
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 Settlement of 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 reported 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.
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
52
HCA INC.
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)
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 and rising
employee benefit costs 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 all played roles in the improvement 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 19.3%
in 2000 from 19.8% in 1999 due primarily to the Company's restructuring of
operations. The other operating expenses, as a percentage of revenues, for the
facilities included in the spin-offs of Triad Hospitals, Inc. ("Triad") and
LifePoint Hospitals, Inc. ("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 (includes facilities which were in use, but
intended to be sold) were 27.8% for 1999.
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 and increases in the volume of health care
services provided to uninsured patients in certain of HCA's facilities.
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 interest rates during
2000 compared to 1999 and $30 million of additional interest expense 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.
Insurance subsidiary gains on sales of investments consist of realized
gains on the sales of investment securities by HCA's wholly-owned insurance
subsidiary. These gains increased from $55 million in 1999 to $123 million in
2000. During 2000, certain funds were reallocated among investment managers,
resulting in the recognition of previously unrealized gains.
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).
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 sales
of three hospitals and certain related health care facilities. Proceeds from the
sales were used to repay bank borrowings.
During 2000, the Company identified and initiated plans to sell or replace
four 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 ($80 million after-tax). See Note 4 -- Impairments of Long-Lived Assets
in the notes to consolidated financial statements.
53
HCA INC.
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)
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 ($194 million after-tax). See Note 4 -- Impairments of
Long-Lived Assets in the notes to consolidated financial statements.
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).
Minority interests in earnings of consolidated entities increased, as a
percentage of revenues, to 0.5% in 2000 from 0.3% in 1999 due to improved
operations at certain consolidating 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 the
recording of 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 periods.
Liquidity and Capital Resources
Cash provided by operating activities totaled $1.4 billion in 2001,
compared to $1.5 billion in 2000 and $1.2 billion in 1999. The decrease in cash
provided by operating activities during 2001 compared to 2000 was primarily due
to the payment of $840 million to the Federal government pursuant to the Plea
and Civil Agreements and changes in income tax payments. The increase in cash
provided by operating activities during 2000 compared to 1999 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.
Working capital totaled $957 million at December 31, 2001 and $312 million
at December 31, 2000. At December 31, 2001 and 2000, respectively, current
liabilities included $250 million and $840 million accruals for settlements with
the Federal government.
Cash used in investing activities was $1.3 billion and $1.1 billion in 2001
and 2000, respectively, compared to cash provided by investing activities of
$0.9 billion in 1999. Excluding acquisitions, capital expenditures were $1.4
billion in 2001, $1.2 billion in 2000 and $1.3 billion in 1999. HCA expended
$239 million and $350 million for acquisitions and investments in and advances
to affiliates (generally interests in joint ventures that are accounted for
using the equity method) during 2001 and 2000, respectively. The cash flows
provided by operating activities were used to fund capital expenditures in 2001
and 2000. Planned capital expenditures in 2002 and 2003 are expected to
approximate $1.6 billion and $1.8 billion, respectively. At December 31, 2001,
there were projects under construction, which had an estimated additional cost
to complete and equip over the next five years of $2.4 billion. HCA expects to
finance capital expenditures with internally generated and borrowed funds. In
addition to cash flows from operations, available sources of capital include
amounts available under HCA's revolving credit facility (the "Credit Facility")
($695 million and
54
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
$860 million as of December 31, 2001 and February 28, 2002, 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 $1.8 billion in
1999.
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 $61 million and
$270 million at February 28, 2002 and December 31, 2001, respectively. During
January 2002, one put option expired. During 2001, two put options expired, HCA
sold its partnership interest in another joint venture for $113 million, and one
of HCA's joint venture partners exercised its put option whereby HCA purchased
the partner's interest in the joint venture for $20 million. During 2000, two of
HCA's joint venture partners exercised their put options and HCA purchased the
partners' interests in the joint ventures for $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. HCA cannot predict if, or when, other joint
venture partners will exercise such options.
During 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 HCA's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.7 billion at December 31,
2001 and 2000. HCA's wholly-owned insurance subsidiary has entered into certain
reinsurance contracts, and the obligations covered by the reinsurance contracts
remain on the balance sheet as the subsidiary remains liable to the extent that
the reinsurers do not meet their obligations under the reinsurance contracts. To
minimize its exposure to losses from reinsurer insolvencies, HCA evaluates the
financial condition of its reinsurers and monitors concentrations of credit risk
arising from similar activities or economic characteristics of the reinsurers.
The amounts receivable related to the reinsurance contracts of $313 million and
$230 million at December 31, 2001 and 2000, respectively, are included in other
assets.
55
HCA INC.
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 $342 million in 2001, $336
million in 2000 and $2.3 billion in 1999. The cash flows provided by operating
activities and investing activities were primarily used to repurchase HCA's
common stock in 1999.
In October 2001, HCA announced an authorization to repurchase up to $250
million of its common stock. During the fourth quarter of 2001, HCA repurchased
6.4 million shares through open market purchases for $250 million, completing
the repurchase authorization.
During 2001, HCA entered into an agreement with a financial institution
that resulted in the financial institution investing $400 million (at December
31, 2001) to capitalize an entity that would acquire HCA common stock. This
consolidated affiliate acquired 16.8 million of HCA shares in connection with
HCA's settlement of certain forward purchase contracts. The financial
institution's investment in the consolidated affiliate is scheduled for
repayment on April 30, 2003 and is reflected in HCA's balance sheet as "Company-
obligated mandatorily redeemable securities of affiliate holding solely Company
securities." The quarterly return on their investment, based upon a LIBOR plus
125 basis points return rate during 2001, is recorded as minority interest
expense.
In March 2000, HCA announced an authorization to repurchase up to $1
billion of the Company's common stock. Certain financial organizations purchased
approximately 31.3 million shares of HCA's common stock for $977 million,
utilizing forward purchase contracts. During 2001, HCA settled forward purchase
contracts representing 19.6 million shares at a cost of $677 million. During
2000, HCA settled forward purchase contracts representing approximately 11.7
million shares at a cost of $300 million. In addition, during 2001, HCA
purchased 1.1 million shares through open market purchases at a cost of $40
million, and received $17 million in premiums from the sale of put options.
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, and 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 from common equity to temporary equity at December
31, 2000.
In November 1999, HCA announced an authorization to repurchase 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. During
2001, HCA settled the remaining forward purchase contracts associated with its
November 1999 authorization representing 15.7 million shares at a cost of $461
million.
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 share repurchase programs, HCA entered into a Letter
of Credit Agreement with the United States Department of Justice in 1999. As
part of the agreement, HCA 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 Settlement of Certain
Government Claims in the notes to consolidated financial statements, provides
that the letters of credit were reduced from $1 billion to $250 million upon
payment of the civil settlement.
56
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
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 HCA. 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 HCA's results of operations, financial position and
liquidity.
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 a $1.2 billion
bank term loan agreement (the "2000 Term Loan").
In April 2001, HCA entered into a $2.5 billion credit agreement (the "2001
Credit Agreement") with a group of banks consisting of a $1.75 billion revolving
credit facility (the "Credit Facility") and a $750 million term loan (the "2001
Term Loan"). The 2001 Credit Agreement has a final maturity in April 2006. The
Credit Facility refinanced and replaced HCA's previously existing $2.0 billion
credit facility ("Prior Credit Facility"). Interest under the 2001 Credit
Agreement is payable at a spread to LIBOR, a spread to the prime lending rate or
a competitive bid rate. The spread is dependent on HCA's credit ratings. The
2001 Credit Agreement contains customary covenants which include (i) limitations
on debt levels, (ii) limitations 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.
In May 2001, HCA issued $500 million of 7.125% notes due June 1, 2006.
Proceeds from the notes were used for general corporate purposes.
In March 2000, HCA entered into the 2000 Term Loan. Proceeds from the 2000
Term Loan were used in the first quarter of 2000 to retire the outstanding
balance under a $1.0 billion term loan and to reduce outstanding loans under the
Prior Credit Facility.
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.
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
Prior 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. At December 31, 2001,
$1.0 billion of debt securities have been issued related to this shelf.
In April 2001, Moody's Investors Service upgraded HCA's senior debt rating
to Bal from Ba2 and maintained a positive outlook on the Company. In September
2001, Fitch IBCA changed its rating outlook on HCA from stable to positive. In
February 2002, Standard & Poor's upgraded HCA's senior debt rating from BB+ to
BBB-.
57
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Maturities of contractual obligations and other commercial commitments are
presented in the table below (dollars in millions):
PAYMENTS DUE BY PERIOD
-----------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL CURRENT 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----------------------- ------ ------- --------- --------- -------------
Long-term debt, excluding the Credit
Facility................................ $6,605 $807 $1,687 $1,038 $3,073
Loans outstanding under the Credit
Facility................................ 755 -- -- 755 --
Company-obligated mandatorily redeemable
securities of affiliate holding solely
Company obligations..................... 400 -- 400 -- --
Operating leases.......................... 1,007 179 313 203 312
COMMITMENT EXPIRATION BY PERIOD
-----------------------------------------------
OTHER COMMERCIAL COMMITMENTS TOTAL CURRENT 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
---------------------------- ----- ------- --------- --------- -------------
Government letter of credit................ $250 $ -- $-- $250 $--
Other letters of credit.................... 59 12 2 41 4
Surety bonds............................... 141 140 1 -- --
Guarantees................................. 4 -- -- -- 4
Management believes that cash flows from operations, amounts available
under the Credit Facility and HCA's anticipated access to public and private
debt markets are sufficient to meet expected liquidity needs during the next
twelve months.
MARKET RISK
HCA is exposed to market risk related to changes in market values of
securities. The investments in debt and equity securities of HCA's wholly-owned
insurance subsidiary were $1.1 billion and $574 million, respectively, at
December 31, 2001. These investments are carried at fair value with changes in
unrealized gains and losses being recorded as adjustments to other comprehensive
income. 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.
HCA is also exposed to market risk related to changes in interest rates,
and HCA periodically enters into interest rate swap agreements to manage its
exposure to these fluctuations. HCA's interest rate swap agreements involve the
exchange of fixed and variable rate interest payments between two parties, based
on common notional principal amounts and maturity dates. The notional amounts
and interest payments in these agreements match the cash flows of the related
liabilities. The notional amounts of the swap agreements represent balances used
to calculate the exchange of cash flows and are not assets or liabilities of
HCA. Any market risk or opportunity associated with these swap agreements is
offset by the opposite market impact on the related debt. HCA's credit risk
related to these agreements is considered low because the swap agreements are
with creditworthy financial institutions. The interest payments under these
agreements are settled on a net basis. These derivatives and the related hedged
debt amounts have been recognized in the financial statements at their
respective fair values.
With respect to HCA's interest-bearing liabilities, approximately $2.3
billion of long-term debt at December 31, 2001 is subject to variable rates of
interest, while the remaining balance in long-term debt of $5.1 billion at
December 31, 2001 is subject to fixed rates of interest. Both the general level
of U.S. interest
58
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
MARKET RISK (CONTINUED)
rates and, for the 2001 Credit Agreement, the Company's credit rating affect
HCA's variable interest rate. HCA's variable rate debt is comprised of the
Company's Credit Facility on which interest is payable generally at LIBOR plus
0.7% to 1.5% (depending on HCA's credit ratings), a bank term loan on which
interest is payable generally at LIBOR plus 1% to 2%, and floating rate notes on
which interest is payable at LIBOR plus 1.5% to 1.9%. Due to decreases in LIBOR,
the average rate for the Company's Credit Facility decreased from 7.2% for the
year ended December 31, 2000 to 4.3% for the year ended December 31, 2001, and
the average rate for the Company's term loans decreased from 7.9% for the year
ended December 31, 2000 to 5.2% for the year ended December 31, 2001. The
estimated fair value of HCA's total long-term debt was $7.5 billion at December
31, 2001. The estimates of fair value are based upon the quoted market prices
for the same or similar issues of long-term debt with the same maturities. Based
on a hypothetical 1% increase in interest rates, the potential annualized
reduction to future pretax earnings would be approximately $23 million. The
impact of such a change in interest rates on the fair 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 to be maintained at fixed rates.
HCA is exposed to market risk related to changes in interest rates and the
market price of HCA stock with respect to an agreement with a financial
institution that resulted in the financial institution investing $400 million
(at December 31, 2001) to capitalize an entity that acquired 16.8 million HCA
shares. The agreement stipulates that the return on their investment be based on
a floating interest rate, which at December 31, 2001 was LIBOR plus 125 basis
points. The rate was lowered in February 2002 to LIBOR plus 87.5 basis points
due, in part, to Standard & Poor's upgrade of HCA's senior debt rating from BB+
to BBB-. The agreement also stipulates that if the market price of HCA stock
closes below $18 per share on the New York Stock Exchange, the financial
institution may elect to accelerate repayment of their investment which may
result in the sale of all or part of the 16.8 million HCA shares. The 16.8
million HCA shares were registered under a shelf registration that was declared
effective during February 2002.
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 2001, 28% in 2000 and 29% in 1999 of HCA's total patient 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 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 claims for income taxes and related interest proposed by
the IRS for prior years aggregating approximately $307 million as of December
31, 2001. 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
59
HCA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
IRS DISPUTES (CONTINUED)
Note 7 -- Income Taxes in the notes to consolidated financial statements for a
description of the pending IRS disputes.
In October 2001, the Company and the IRS filed Stipulated Settlements with
the Tax Court regarding the IRS' proposed disallowance of certain financing
costs, systems conversion costs and insurance premiums which were deducted in
calculating taxable income and the allocation of costs among fixed assets and
goodwill in connection with certain hospitals acquired by the Company in 1995
and 1996. The settlement resulted in the Company's payment of additional tax and
interest of $16 million and had no impact on the Company's results of
operations.
During the third quarter of 2001, the Company filed an appeal with the
United States Court of Appeals, Sixth Circuit with respect to two Tax Court
decisions received in 1996 related to the IRS examination of HCA - Hospital
Corporation of America's ("Hospital Corporation of America") 1987 through 1988
Federal income tax returns. HCA is contesting the Tax Court decisions related to
the method that Hospital Corporation of America used to calculate its tax
reserve for doubtful accounts and the timing of deferred income recognition in
connection with its sales of certain subsidiaries to Healthtrust Inc. -- The
Hospital Company in 1987. Neither the Company nor the IRS filed appeals with
respect to any other 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. Accordingly, these decisions have become final and
Hospital Corporation of America's 1981 through 1986 taxable years are now
closed.
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.
60
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 HCA to be filed in
connection with its 2002 Annual Meeting of Stockholders, except for the
information regarding executive officers of HCA, 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 HCA to be filed in
connection with its 2002 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 HCA to be filed in connection
with its 2002 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 HCA to be filed in connection with its 2002 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
61
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 consolidated 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).
3.3 -- Certificate of Ownership and Merger (filed as Exhibit 4.1 to
the Company's Current Report on Form 8-K dated July 1, 2001,
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).
62
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 16, 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).
4.5(c) -- Second Supplemental Indenture, dated as of July 1, 2001
between the Company and Bank One Trust Company, N.A., as
Trustee (filed as Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, and
incorporated herein by reference).
4.5(d) -- Third Supplemental Indenture, dated as of December 5, 2001
between the Company and The Bank of New York, as Trustee
(which agreement is filed herewith).
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).
63
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).
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).
4.10 -- $2.5 Billion Credit Agreement, dated April 30, 2001, among
the Company, The Several Banks and Other Financial
Institutions, JP Morgan, a Division of Chase Securities,
Inc., as Sole Advisor, Lead Arranger and Bookrunner and The
Chase Manhatten Bank, as Administrative Agent (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, and incorporated
herein by reference).
4.11 -- Loan Agreement among the Company, Lenders party to the
agreement and Toronto Dominion (Texas), Inc., as
Administrative Agent, dated as of June 28, 2001 and amended
and restated as of July 31, 2001 (filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-3 (File No.
333-67040), and incorporated herein by reference).
4.12 -- Registration Rights Agreement, dated as of June 28, 2001,
between the Company and Canadian Investments LLC, a Delaware
limited liability Company (filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-3 (File No.
333-67040), 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 Form 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).*
64
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 -- 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).*
10.13 -- 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).*
10.14 -- 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).*
10.15(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).*
10.15(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).*
10.16 -- 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).*
10.17 -- 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).*
10.18 -- 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).
10.19 -- 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).*
10.20 -- 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).*
10.21 -- 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).
65
10.22 -- 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).*
10.23 -- 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).*
10.24 -- 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).*
10.25 -- 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).
10.26 -- 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).
10.27 -- 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).
10.28 -- 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
(filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
10.29 -- HCA -- The Healthcare Company 2001 Performance Equity Incentive Plan (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, and incorporated
herein by reference).*
10.30 -- Retirement Agreement between the Company and Thomas F. Frist, Jr., M.D. dated as of January 1, 2002
(which agreement is filed herewith).*
10.31 -- HCA Supplemental Executive Retirement Plan dated as of July 1, 2001 (which plan is filed
herewith).*
10.32 -- HCA Restoration Plan dated as of January 1, 2001 (which plan is filed herewith).*
10.33 -- HCA Directors' Compensation/Fees Policy as revised May 24, 2001 (which policy 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 October 25, 2001, the Company filed a report on Form 8-K which announced
its operating results for the third quarter ended September 30, 2001.
66
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 INC.
By: /s/ JACK O. BOVENDER, JR.
-------------------------------------
Jack O. Bovender, Jr.
Chief Executive Officer
Dated: March 29, 2002
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/ JACK O. BOVENDER, JR. Chairman of the Board and March 29, 2002
----------------------------------------------------- Chief Executive Officer
Jack O. Bovender, Jr. (Principal Executive Officer)
/s/ R. MILTON JOHNSON Senior Vice President and March 29, 2002
----------------------------------------------------- Controller (Principal
R. Milton Johnson Accounting Officer)
/s/ MAGDALENA H. AVERHOFF, M.D. Director March 29, 2002
-----------------------------------------------------
Magdalena H. Averhoff, M.D.
/s/ J. MICHAEL COOK Director March 29, 2002
-----------------------------------------------------
J. Michael Cook
/s/ MARTIN FELDSTEIN Director March 29, 2002
-----------------------------------------------------
Martin Feldstein
/s/ THOMAS F. FRIST, JR., M.D. Director March 29, 2002
-----------------------------------------------------
Thomas F. Frist, Jr., M.D.
/s/ FREDERICK W. GLUCK Director March 29, 2002
-----------------------------------------------------
Frederick W. Gluck
/s/ GLENDA A. HATCHETT Director March 29, 2002
-----------------------------------------------------
Glenda A. Hatchett
/s/ T. MICHAEL LONG Director March 29, 2002
-----------------------------------------------------
T. Michael Long
/s/ JOHN H. MCARTHUR Director March 29, 2002
-----------------------------------------------------
John H. McArthur
/s/ THOMAS S. MURPHY Director March 29, 2002
-----------------------------------------------------
Thomas S. Murphy
67
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KENT C. NELSON Director March 29, 2002
-----------------------------------------------------
Kent C. Nelson
/s/ CARL E. REICHARDT Director March 29, 2002
-----------------------------------------------------
Carl E. Reichardt
/s/ FRANK S. ROYAL, M.D. Director March 29, 2002
-----------------------------------------------------
Frank S. Royal, M.D.
/s/ HAROLD T. SHAPIRO Director March 29, 2002
-----------------------------------------------------
Harold T. Shapiro
68
HCA INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Income Statements for the years ended
December 31, 2001, 2000 and 1999....................... F-3
Consolidated Balance Sheets, December 31, 2001 and 2000... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... F-6
Notes to Consolidated Financial Statements................ F-7
Quarterly Consolidated Financial Information
(Unaudited)............................................ F-33
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
HCA Inc.
We have audited the accompanying consolidated balance sheets of HCA Inc. as
of December 31, 2001 and 2000 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. 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 Inc. at
December 31, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2001
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Nashville, Tennessee
February 5, 2002, except for Note 19,
as to which the date is March 28, 2002
F-2
HCA INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999
------- ------- -------
Revenues.................................................... $17,953 $16,670 $16,657
Salaries and benefits....................................... 7,279 6,639 6,694
Supplies.................................................... 2,860 2,640 2,645
Other operating expenses.................................... 3,238 3,208 3,306
Provision for doubtful accounts............................. 1,376 1,255 1,269
Depreciation and amortization............................... 1,048 1,033 1,094
Interest expense............................................ 536 559 471
Insurance subsidiary gains on sales of investments.......... (63) (123) (55)
Equity in earnings of affiliates............................ (158) (126) (90)
Settlement with Federal government.......................... 262 840 --
Gains on sales of facilities................................ (131) (34) (297)
Impairment of long-lived assets............................. 17 117 220
Restructuring of operations and investigation related
costs..................................................... 65 62 116
------- ------- -------
16,329 16,070 15,373
------- ------- -------
Income before minority interests and income taxes........... 1,624 600 1,284
Minority interests in earnings of consolidated entities..... 119 84 57
------- ------- -------
Income before income taxes.................................. 1,505 516 1,227
Provision for income taxes.................................. 602 297 570
------- ------- -------
Income before extraordinary charge.......................... 903 219 657
Extraordinary charge on extinguishment of debt, net of
income tax benefit of $11................................. 17 -- --
------- ------- -------
Net income........................................ $ 886 $ 219 $ 657
======= ======= =======
Basic earnings per share:
Income before extraordinary charge........................ $ 1.72 $ 0.39 $ 1.12
Extraordinary charge...................................... (0.03) -- --
------- ------- -------
Net income........................................ $ 1.69 $ 0.39 $ 1.12
======= ======= =======
Diluted earnings per share:
Income before extraordinary charge........................ $ 1.68 $ 0.39 $ 1.11
Extraordinary charge...................................... (0.03) -- --
------- ------- -------
Net income........................................ $ 1.65 $ 0.39 $ 1.11
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
HCA INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2001 2000
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 85 $ 314
Accounts receivable, less allowance for doubtful accounts
of $1,812 and $1,583................................... 2,420 2,211
Inventories............................................... 423 396
Income taxes receivable................................... 93 197
Other..................................................... 1,120 1,335
------- -------
4,141 4,453
Property and equipment, at cost:
Land...................................................... 966 793
Buildings................................................. 6,076 6,021
Equipment................................................. 7,530 7,045
Construction in progress.................................. 650 431
------- -------
15,222 14,290
Accumulated depreciation.................................. (6,303) (5,810)
------- -------
8,919 8,480
Investments of insurance subsidiary......................... 1,453 1,371
Investments in and advances to affiliates................... 680 779
Intangible assets, net of accumulated amortization of $973
and $785.................................................. 2,051 2,155
Other....................................................... 486 330
------- -------
$17,730 $17,568
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 755 $ 693
Accrued salaries.......................................... 386 352
Other accrued expenses.................................... 986 1,135
Government settlement accrual............................. 250 840
Long-term debt due within one year........................ 807 1,121
------- -------
3,184 4,141
Long-term debt.............................................. 6,553 5,631
Professional liability risks, deferred taxes and other
liabilities............................................... 2,268 2,050
Minority interests in equity of consolidated entities....... 563 572
Company-obligated mandatorily redeemable securities of
affiliate holding solely Company securities............... 400 --
Forward purchase contracts and put options.................. -- 769
Stockholders' equity:
Common stock $0.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; 488,297,200
outstanding voting shares and 21,000,000 nonvoting
shares -- 2001 and 521,991,700 voting shares and
21,000,000 nonvoting shares -- 2000.................... 5 5
Other..................................................... 7 9
Accumulated other comprehensive income.................... 18 52
Retained earnings......................................... 4,732 4,339
------- -------
4,762 4,405
------- -------
$17,730 $17,568
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
HCA INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(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, 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
Comprehensive income:
Net income.............................. 886 886
Net unrealized losses on investment
securities............................ (34) (34)
---- ------- -------
Total comprehensive income......... (34) 886 852
Cash dividends............................ (42) (42)
Stock repurchases......................... (42,934) (738) (738)
Stock options exercised, net.............. 7,629 239 239
Employee benefit plan issuances........... 1,549 52 52
Other..................................... 61 (2) (4) (6)
------- --- ------- ---- ---- ------- -------
Balances, December 31, 2001................. 509,297 $ 5 $ -- $ 7 $ 18 $ 4,732 $ 4,762
======= === ======= ==== ==== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
HCA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN MILLIONS)
2001 2000 1999
------ ------- -------
Cash flows from operating activities:
Net income............................................... $ 886 $ 219 $ 657
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts..................... 1,376 1,255 1,269
Depreciation and amortization....................... 1,048 1,033 1,094
Income taxes........................................ 412 (219) (66)
Settlement with Federal government.................. (580) 840 --
Gains on sales of facilities........................ (131) (34) (297)
Impairment of long-lived assets..................... 17 117 220
Increase (decrease) in cash from operating assets
and liabilities:
Accounts receivable.............................. (1,603) (1,678) (1,463)
Inventories and other assets..................... (39) 90 (119)
Accounts payable and accrued expenses............ 45 (147) (110)
Other............................................... (18) 71 38
------ ------- -------
Net cash provided by operating activities........ 1,413 1,547 1,223
------ ------- -------
Cash flows from investing activities:
Purchase of property and equipment....................... (1,370) (1,155) (1,287)
Acquisition of hospitals and health care entities........ (239) (350) --
Spin-off of facilities to stockholders................... -- -- 886
Disposal of hospitals and health care entities........... 519 327 805
Change in investments.................................... (167) 106 565
Other.................................................... (43) (15) (44)
------ ------- -------
Net cash provided by (used in) investing
activities..................................... (1,300) (1,087) 925
------ ------- -------
Cash flows from financing activities:
Issuance of long-term debt............................... 1,750 2,980 1,037
Net change in revolving credit facility.................. 555 (500) 200
Repayment of long-term debt.............................. (1,697) (2,058) (1,572)
Repurchases of common stock.............................. (1,506) (874) (1,931)
Issuances of common stock................................ 213 197 47
Issuance of mandatorily redeemable securities of
affiliate............................................. 400 -- --
Payment of cash dividends................................ (42) (44) (44)
Other.................................................... (15) (37) 8
------ ------- -------
Net cash used in financing activities............ (342) (336) (2,255)
------ ------- -------
Change in cash and cash equivalents...................... (229) 124 (107)
Cash and cash equivalents at beginning of period......... 314 190 297
------ ------- -------
Cash and cash equivalents at end of period............... $ 85 $ 314 $ 190
====== ======= =======
Interest payments........................................ $ 558 $ 489 $ 475
Income tax payments, net of refunds...................... $ 179 $ 516 $ 634
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Reporting Entity
HCA Inc., 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 Inc. and partnerships and joint ventures in which
such subsidiaries are partners. At December 31, 2001, these affiliates owned and
operated 178 hospitals, 76 freestanding surgery centers and provided extensive
outpatient and ancillary services. Affiliates of HCA are also partners in joint
ventures that own and operate six hospitals and three freestanding surgery
centers, which are accounted for using the equity method. The Company's
facilities are located in 23 states, England and Switzerland. The terms "HCA" or
the "Company" as used in this annual report on Form 10-K refer to HCA Inc. 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 that 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
Revenues consist primarily of net patient service revenues that are
recorded based upon established billing rates less allowances for contractual
adjustments. Revenues are recorded during the period the health care services
are provided, based upon the estimated amounts due from the patients and
third-party payers, including Federal and state agencies (under the Medicare,
Medicaid and Tricare programs), managed care health plans, commercial insurance
companies and employers. Estimates of contractual allowances under managed care
health plans are based upon the payment terms specified in the related
contractual agreement. Managed care agreements' contractual payment terms are
generally based upon predetermined rates per diagnosis, per diem rates or
discounted fee-for-service rates.
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 $105
million, $168 million and $94 million in 2001, 2000 and 1999, respectively. In
association with the ongoing Federal investigations into certain of HCA's
business practices, the applicable governmental agencies had substantially
ceased the processing of final settlements of HCA's cost reports. Since the cost
reports were not being settled, HCA has not been receiving the updated
information, which prior to 1998, was the basis used by HCA 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 conducted have been more intensive than in years prior to the inception of
the ongoing Federal investigations. HCA, as well as all hospitals nationwide,
F-7
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Revenues (Continued)
has been unable to file Medicare cost reports for periods ending on or after
August 1, 2000 due to delays being experienced by Medicare fiscal intermediaries
in furnishing payment reports to hospitals. The Centers for Medicare and
Medicaid Services expects Medicare fiscal intermediaries to be able to issue the
payment reports to hospitals that will enable hospitals to file these delayed
cost reports between May 2002 and December 2002. Management believes that
adequate 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 both years ended
December 31, 2001 and 2000, approximately 28% 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. HCA 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 historical
collections and write-offs experience, adjusted for changes in trends and
conditions, are used to evaluate the allowance amount for the current period.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
F-8
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
Depreciation expense, computed using the straight-line method, was $961
million in 2001, $931 million in 2000 and $976 million in 1999. 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 (goodwill) and have been 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 acquisitions. Noncompete agreements and
debt issuance costs are amortized based upon the lives of the respective
contracts or loans.
When events, circumstances or 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 $1.5 billion and $1.4 billion
at December 31, 2001 and 2000, 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; however, there can be no assurance that the
ultimate liability will not exceed management's estimates.
HCA's health care facilities are insured by the wholly-owned insurance
subsidiary for losses up to $25 million per occurrence, a portion of which is
reinsured with unrelated commercial carriers. Professional and general liability
risks above $1.8 million retention per occurrence for 2000, $6.8 million
retention per occurrence for 2001 and $10 million retention per occurrence for
2002 have been reinsured. The obligations covered by the reinsurance contracts
remain on the balance sheet as the subsidiary remains liable to the extent that
the reinsurers do not meet their obligations under the reinsurance contracts.
The amounts receivable for the reinsurance contracts of $313 million and $230
million at December 31, 2001, and 2000, respectively, are included in other
assets. In addition, deferred gains from retroactive reinsurance of $15 million
and $21 million are included in other liabilities at December 31, 2001 and 2000,
respectively, and will be recognized over the estimated recovery period using
the interest method.
F-9
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Investments of Insurance Subsidiary
At December 31, 2001 and 2000, 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".
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 that include provisions
for the redemption of minority interests using specified valuation techniques.
Related Party Transactions
MedCap Properties, LCC ("MedCap")
In December 2000, HCA transferred 116 medical office buildings ("MOBs") to
MedCap. HCA received approximately $250 million and a minority interest
(approximately 48%) in MedCap in the transaction. MedCap is a private company
that 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
former executive officer of the Company.
HCA leases certain office space from MedCap and during 2001, paid MedCap
$17.1 million in rents for such leased office space. HCA reserves certain rights
of control and approval with respect to the leasing, operation and maintenance
of the MOBs transferred to MedCap. In return for these rights, HCA has provided
MedCap with a contingent guaranty of a specified level of net operating income,
defined as rental income less operating expenses. This agreement relates to the
majority of the MOBs transferred to MedCap and no payments were required under
the agreement during 2001. HCA has also provided special credit enhancement
under separate operations and support agreements related to certain MOBs that
are newly constructed or have relatively low occupancy rates. HCA incurred costs
of $3.2 million under these agreements during 2001, and HCA expects that the
costs to be incurred in future periods will not have a material impact on its
results of operations. The term for the operations and support agreements is for
five years and is extendable indefinitely at HCA's option.
MedCap has the option to require HCA to purchase the affiliated MOBs with
respect to an HCA hospital that is closed or replaced. The purchase price for
affiliated MOBs under the option agreement is the greater of their aggregate
current fair value or their aggregate book value at MedCap's formation date.
During 2001, HCA repurchased two MOBs from MedCap that were affiliated with
hospital facilities that HCA planned to sell. The aggregate purchase price of
$4.5 million exceeded HCA's allocation of its investment book value for the two
MOBs by $1.9 million. MedCap also has rights of first offer on any future MOBs
developed by HCA or its affiliates and on the disposition by HCA and its
affiliates of any existing MOB associated with HCA hospitals, in geographic
markets covered by MedCap.
LifePoint Hospitals, Inc. ("LifePoint") and Triad Hospitals, Inc. ("Triad")
In May 1999, HCA completed the spin-offs of LifePoint and Triad (the
"Spin-offs") through the distribution of shares of LifePoint common stock and
Triad common stock to the HCA stockholders. In connection with the Spin-offs,
HCA entered into agreements to provide financial, clinical, patient accounting,
network information and risk management services to LifePoint and Triad. The
agreements have terms expiring in May 2006. For the years ended December 31,
2001 and 2000, HCA received $11.6 million and $11.0 million, respectively, from
LifePoint and $35.6 million and $26.2 million, respectively, from Triad
F-10
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
LifePoint Hospitals, Inc. ("LifePoint") and Triad Hospitals, Inc. ("Triad")
(Continued)
pursuant to these agreements. The fees provided for in the agreements are
intended to be market competitive based on HCA's costs incurred in providing the
services. During 2000, HCA sold a hospital facility to LifePoint for a sales
price of $51 million and realized a pretax gain of $18 million. During 2001, HCA
sold a hospital facility to LifePoint for a sales price of $19 million and
realized a pretax gain of $3 million. The Company believes the sales of the
hospital facilities to LifePoint were on terms no less favorable to the Company
than those which would have been obtained from an unaffiliated party.
Medibuy, Inc ("Medibuy")
In 1999, HCA formed a strategic internet initiative, known as
empactHealth.com, aimed at improving efficiencies in the procurement of goods
and supplies by its hospitals. In January 2001, empactHealth merged with
Medibuy, an unrelated competitor of empactHealth. As a result of the merger, HCA
owns approximately 17% and its directors and certain members of its management
own approximately 2% of Medibuy. The Company has implemented a plan to eliminate
the HCA management and directors ownership in Medibuy at fair value during 2002.
An officer of HCA also serves as HCA's designee on Medibuy's board of directors.
HCA has entered into agreements with Medibuy pursuant to which Medibuy provides
access to its e-commerce system. The agreements have five-year terms and provide
for an annual software license fee of $10,000 per facility for 2002, subject to
a minimum fee of $2.0 million for 2002, and $5,000 per facility annually
thereafter, subject to a minimum fee of $1.0 million for 2003, until such time
as HCA transitions to an alternative provider. The agreements also require HCA
to pay a transaction fee for any transactions effected through the Medibuy
marketplace. During 2001, HCA reduced the carrying value for its investment in
Medibuy to fair value, based upon estimates of sales values, for a non-cash
pretax charge of $17 million ($10 million after tax). In January 2002, HCA
agreed to invest up to $3 million in Medibuy during 2002, $1 million of which
was funded in March 2002. The Company believes its transactions with Medibuy are
on terms no less favorable to the Company than those which would be obtained
from an unaffiliated party.
HealthStream, Inc. ("HealthStream")
In October 2001, HCA entered into an amended agreement with HealthStream to
purchase internet-based education and training services. The agreement has a
four-year term and provides for minimum fees of $2.5 million per year, with
total minimum fees of $12 million over the four-year term. During 2001, the
Company paid HealthStream $1.5 million, which represented approximately 11% of
HealthStream's net revenues. The Chief Executive Officer, President and Chairman
of the Board of Directors of HealthStream is a relative of a Director and former
executive officer of HCA. The Company believes its transactions with
HealthStream are on terms no less favorable to the Company than those which
would be obtained from an unaffiliated party.
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 stock options granted under the plans because the exercise
prices for options granted were equal to the quoted market prices on the option
grant dates and all option grants were to employees or directors.
Derivatives
Effective January 1, 2001, HCA adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended ("SFAS 133"). SFAS 133
F-11
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Derivatives -- (Continued)
requires that all derivatives, whether designated in hedging relationships or
not, be recognized on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and the hedged item are recognized in earnings. If the derivative is
designated as a cash flow hedge, changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. In accordance with the
provisions of SFAS 133, HCA designated its outstanding interest rate swap
agreements as fair value hedges. HCA determined that the current agreements are
highly effective in offsetting the fair value changes in a portion of HCA's debt
portfolio. These derivatives and the related hedged debt amounts have been
recognized in the financial statements at their respective fair values.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
Under SFAS 141, all business combinations initiated after June 30, 2001 are
accounted for using the purchase method of accounting. Under the provisions of
SFAS 142, goodwill will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives. HCA will adopt SFAS 142 effective January 1, 2002 and the
Company does not expect any material amounts of goodwill to be determined to be
impaired; however, the adoption of SFAS 142 will have a material effect on
future results of operations, as goodwill will not be amortized and the
effective tax rate is expected to decrease. The following table shows HCA's net
income for the years ended
F-12
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Recent Pronouncements -- (Continued)
December 31, 2001, 2000 and 1999 on a pro forma basis as if the cessation of
goodwill amortization had occurred as of January 1, 1999 (dollars in millions,
except per share amounts):
2001 2000 1999
------ ----- -----
Income before extraordinary charge, as reported............. $ 903 $ 219 $ 657
Goodwill amortization, net of applicable income tax
benefits.................................................. 69 73 83
------ ----- -----
Pro forma income before extraordinary charge................ 972 292 740
Extraordinary charge........................................ 17 -- --
------ ----- -----
Pro forma net income................................... $ 955 $ 292 $ 740
====== ===== =====
Basic earnings per share:
Income before extraordinary charge, as reported............. $ 1.72 $0.39 $1.12
Goodwill amortization, net of applicable income tax
benefits.................................................. 0.13 0.13 0.15
------ ----- -----
Pro forma income before extraordinary charge................ 1.85 0.52 1.27
Extraordinary charge........................................ (0.03) -- --
------ ----- -----
Pro forma net income................................... $ 1.82 $0.52 $1.27
====== ===== =====
Diluted earnings per share:
Income before extraordinary charge, as reported............. $ 1.68 $0.39 $1.11
Goodwill amortization, net of applicable income tax
benefits.................................................. 0.13 0.13 0.15
------ ----- -----
Pro forma income before extraordinary charge................ 1.81 0.52 1.26
Extraordinary charge........................................ (0.03) -- --
------ ----- -----
Pro forma net income................................... $ 1.78 $0.52 $1.26
====== ===== =====
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" ("SFAS 143"). In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS 143 will not have a
material impact on its results of operations and financial position upon
adoption. HCA plans to adopt SFAS 143 effective January 1, 2003.
SFAS 144 establishes a single accounting model for the impairment of
long-lived assets, including discontinued operations. SFAS 144 supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting Principle Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
provisions of SFAS 144 are effective for fiscal years beginning after December
15, 2001 and, in general, are to be applied prospectively. HCA does not expect
that the adoption will have a material impact on its results of operations and
financial position.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
F-13
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTIGATIONS AND SETTLEMENT OF CERTAIN GOVERNMENT CLAIMS
HCA continues to be the subject of governmental investigations and
litigation relating to its business practices. Additionally, HCA is a defendant
in several qui tam actions brought by private parties on behalf of the United
States of America.
In December 2000, HCA 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"). The
agreements resolve all Federal criminal issues outstanding against HCA and
certain issues involving Federal civil claims by or on behalf of the government
against HCA relating to DRG coding, outpatient laboratory billing and home
health issues. The civil issues that are not covered by the Civil Agreement and
remain outstanding include claims related to cost reports and physician relation
issues. The Civil Agreement was approved by the Federal District Court of the
District of Columbia in August 2001. HCA paid the government $95 million, as
provided by the Plea Agreement, during the first quarter of 2001 and paid $745
million (plus $60 million of accrued interest), as provided by the Civil
Agreement, during the third quarter of 2001. HCA also entered into a Corporate
Integrity Agreement ("CIA") with the Office of Inspector General of the
Department of Health and Human Services.
Under the Civil Agreement, HCA's existing Letter of Credit Agreement with
the Department of Justice was reduced from $1 billion to $250 million at the
time of the settlement payment. 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.
HCA remains the subject of a formal order of investigation by the
Securities and Exchange Commission (the "SEC"). HCA understands that the
investigation includes the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
HCA continues to cooperate in the governmental investigations. Given the
scope of the investigations and current litigation, HCA anticipates continued
investigative activity to occur in these and other jurisdictions in the future.
While management remains unable to predict the outcome of any of the
investigations and litigation or the initiation of any additional investigations
or litigation, were HCA to be found in violation of Federal or state laws
relating to Medicare, Medicaid or similar programs or breach of the CIA, HCA
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 expenses could have a material adverse effect on HCA's
financial position, results of operations and liquidity. See Note
12 -- Contingencies, Note 19 -- Subsequent Event -- Understanding Regarding
Claims for Medicare Reimbursement and Part I, Item 3: Legal Proceedings.
NOTE 3 -- FACILITY SALES
During 2001, HCA recognized pretax gains of $52 million ($28 million
after-tax) on the sales of three consolidating hospitals and HCA's interests in
two non-consolidating hospitals. HCA also recognized a pretax gain of $79
million ($48 million after-tax) on the sale of a provider of specialty managed
care benefit programs. During 2000, HCA recognized a pretax gain of $34 million
($16 million after-tax) on the sales of three consolidating hospitals. During
1999, HCA recognized a net pretax gain of $297 million ($164 million after-tax)
on the sales of three hospitals and certain related health care facilities.
Proceeds from the sales were used to repay bank borrowings.
F-14
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- IMPAIRMENTS OF LONG-LIVED ASSETS
During 2001, HCA reduced the carrying value for its investment in a
non-hospital, equity method joint venture to fair value, based upon estimates of
sales value, for a non-cash, pretax charge of $17 million ($10 million
after-tax). This joint ventures' impact on HCA's operations was not significant.
During 2000, HCA management identified and initiated plans to sell or
replace four 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 $117 million ($80 million after-tax). The
consolidating hospitals for which the impairment charge was recorded had
revenues (through the date of sale) of $162 million, $198 million and $190
million for the years ended December 31, 2001, 2000, and 1999, respectively.
These facilities reported net income (through the date of sale) before the
pretax impairment charge and income taxes of $10 million, $5 million and $6
million for the years ended December 31, 2001, 2000, and 1999, respectively.
During 2001, HCA sold one of these consolidating hospitals, and the proceeds
approximated the carrying value.
During 1999, HCA management 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 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 ($194 million after-tax). The
hospitals and other assets for which the impairment charge was recorded had
revenues (through the date of sale or closure) of $100 million, $189 million and
$580 million for the years ended December 31, 2001, 2000 and 1999, 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 $8 million, $15 million and $57 million for the years ended December 31,
2001, 2000 and 1999, respectively. During 1999 and 2000, HCA sold or closed 15
consolidating hospitals and the four non-consolidating hospitals that had been
identified for divestiture. During 2000, it was determined that one
consolidating hospital that had been identified to be sold would not be sold.
The facilities spun-off to Triad in 1999 included four of the consolidating
hospitals on which impairment charges had been recorded. HCA completed the sales
of the three remaining hospitals during 2001. The proceeds from the sales
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 expense related to these
assets will decrease in future periods. In the aggregate, the net effect of the
change in depreciation expense is not expected to have a material effect on
operating results for future periods.
The impairment charges affected HCA's asset categories, as follows (dollars
in millions):
2001 2000 1999
---- ---- ----
Property and equipment...................................... $-- $ 73 $122
Intangible assets........................................... -- 21 82
Investments in and advances to affiliates................... 17 23 16
--- ---- ----
$17 $117 $220
=== ==== ====
F-15
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- IMPAIRMENTS OF LONG-LIVED ASSETS (CONTINUED)
The impairment charges affected HCA's operating segments, as follows
(dollars in millions):
2001 2000 1999
---- ---- ----
Eastern Group............................................... $-- $ 85 $ 6
Western Group............................................... -- 11 7
Corporate and other......................................... 17 13 14
Spin-offs................................................... -- -- 34
National Group.............................................. -- 8 159
--- ---- ----
$17 $117 $220
=== ==== ====
NOTE 5 -- RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
During 2001, 2000 and 1999, HCA recorded the following pretax charges in
connection with the restructuring of operations and investigation related costs,
as discussed in Note 2 -- Investigations and Settlement of Certain Government
Claims (in millions).
2001 2000 1999
---- ---- ----
Professional fees related to investigations................. $54 $51 $ 77
Severance costs............................................. -- -- 5
Other....................................................... 11 11 34
--- --- ----
$65 $62 $116
=== === ====
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 amount in 1999 related primarily to a small group of
executives associated with operations or functions that were ceased or divested.
In 1999, HCA accrued $6 million for lease commitments related to the closure of
a leased hospital in HCA's Eastern Group. The liability balance for accrued
severance and lease commitments was $4 million at December 31, 2001.
NOTE 6 -- ACQUISITIONS
During 2001 and 2000, HCA 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 2001 and 2000 (dollars in millions):
2001 2000
---- ----
Number of hospitals......................................... 2 7
Number of licensed beds..................................... 543 760
Purchase price information:
Hospitals:
Fair value of assets acquired........................ $ 99 $325
Liabilities assumed.................................. (9) (95)
---- ----
Net assets acquired............................... 90 230
Other health care entities acquired.................... 149 120
---- ----
Net cash paid..................................... $239 $350
==== ====
F-16
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- ACQUISITIONS (CONTINUED)
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $127 million in 2001 and $110 million in
2000.
The pro forma effect of these acquisitions on HCA's results of operations
for the periods prior to the respective acquisition dates was not significant.
NOTE 7 -- INCOME TAXES
The provision for income taxes consists of the following (dollars in
millions):
2001 2000 1999
---- ---- ----
Current:
Federal................................................... $299 $442 $517
State..................................................... 51 77 90
Foreign................................................... 7 14 3
Deferred:
Federal................................................... 221 (231) (37)
State..................................................... 54 (43) (6)
Foreign................................................... 13 (5) 3
Change in valuation allowance............................. (43) 43 --
---- ---- ----
$602 $297 $570
==== ==== ====
A reconciliation of the Federal statutory rate to the effective income tax
rate follows:
2001 2000 1999
---- ---- ----
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit....... 4.1 5.0 4.5
Non-deductible intangible assets............................ 1.6 5.7 7.5
Valuation allowance......................................... (2.6) 7.5 --
Settlement with Federal government.......................... -- 6.5 --
Other items, net............................................ 1.8 (2.1) (0.5)
---- ---- ----
Effective income tax rate................................... 39.9% 57.6% 46.5%
==== ==== ====
The tax benefits associated with nonqualified stock options increased the
current tax receivable by $60 million, $40 million, and $3 million in 2001,
2000, and 1999, respectively. Such benefits were recorded as increases to
additional paid-in capital.
F-17
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
A summary of the items comprising the deferred tax assets and liabilities
at December 31 follows (dollars in millions):
2001 2000
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Depreciation and fixed asset basis differences..... $ -- $514 $ -- $405
Allowances for professional and general liability
and other risks.................................. 231 -- 249 --
Doubtful accounts.................................. 592 -- 511 --
Compensation....................................... 126 -- 125 --
Settlement with Federal government................. 92 -- 290 --
Other.............................................. 196 380 205 368
------ ---- ------ ----
1,237 894 1,380 773
Valuation allowance................................ -- -- (43) --
------ ---- ------ ----
$1,237 $894 $1,337 $773
====== ==== ====== ====
Deferred income taxes of $781 million and $1.007 billion at December 31,
2001 and 2000, respectively, are included in other current assets. Noncurrent
deferred income tax liabilities totaled $438 million and $443 million at
December 31, 2001 and 2000, respectively.
At December 31, 2001, state net operating loss carryforwards (expiring in
years 2002 through 2020) available to offset future taxable income approximated
$1.049 billion. 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
HCA is currently contesting before the Appeals Division of the Internal
Revenue Service (the "IRS"), 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 HCA's
1994-1998 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 amount of gain or loss recognized on the divestiture of certain
non-core business units in 1998 and the allocation of costs among fixed assets
and goodwill in connection with certain hospitals acquired by HCA in 1995 and
1996. The IRS is claiming an additional $307 million in income taxes and
interest through December 31, 2001.
In October 2001, the Company and the IRS filed Stipulated Settlements with
the Tax Court regarding the IRS' proposed disallowance of certain financing
costs, systems conversion costs and insurance premiums which were deducted in
calculating taxable income and the allocation of costs among fixed assets and
goodwill in connection with certain hospitals acquired by the Company in 1995
and 1996. The settlement resulted in the Company's payment of additional tax and
interest of $16 million and had no impact on the Company's results of
operations.
During the third quarter of 2001, the Company filed an appeal with the
United States Court of Appeals, Sixth Circuit with respect to two Tax Court
decisions received in 1996 related to the IRS examination of Hospital
Corporation of America's 1987 through 1988 Federal income tax returns. HCA is
contesting the Tax Court decisions related to the method that Hospital
Corporation of America used to calculate its tax reserve
F-18
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
IRS Disputes (Continued)
for doubtful accounts and the timing of deferred income recognition in
connection with its sales of certain subsidiaries to Healthtrust in 1987.
Neither the Company nor the IRS filed appeals with respect to any other 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.
Accordingly, these decisions have become final and Hospital Corporation of
America's 1981 through 1986 taxable years are now closed.
During the first quarter of 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 HCA's
payment of tax and interest of $156 million and had no impact on HCA's results
of operations.
During the first quarter of 2001, the IRS began an examination of HCA's
1999 through 2000 Federal income tax returns. HCA is presently unable to
estimate the amount of any additional income tax and interest that 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 HCA, 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.
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.
The following table sets forth the computation of basic and diluted
earnings per share (dollars in millions, except per share amounts and shares in
thousands):
2001 2000 1999
-------- -------- --------
Income before extraordinary charge................. $ 903 $ 219 $ 657
======== ======== ========
Weighted average common shares outstanding......... 524,112 555,553 585,216
Effect of dilutive securities:
Stock options................................. 12,446 9,390 3,865
Other......................................... 1,619 2,742 1,948
-------- -------- --------
Shares used for diluted earnings per share......... 538,177 567,685 591,029
======== ======== ========
Earnings per share:
Basic earnings per share......................... $ 1.72 $ 0.39 $ 1.12
======== ======== ========
Diluted earnings per share....................... $ 1.68 $ 0.39 $ 1.11
======== ======== ========
F-19
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INVESTMENTS OF INSURANCE SUBSIDIARY
A summary of the insurance subsidiary's investments at December 31 follows
(dollars in millions):
2001
----------------------------------------
UNREALIZED
AMOUNTS
AMORTIZED ----------------- FAIR
COST GAINS LOSSES VALUE
--------- ------- ------ ------
Debt securities:
United States Government..................... $ 4 $ -- $ -- $ 4
States and municipalities.................... 804 26 (2) 828
Mortgage-backed securities................... 103 3 -- 106
Corporate and other.......................... 101 2 (1) 102
Money market funds........................... 84 -- -- 84
Redeemable preferred stocks.................. 5 -- -- 5
------ ---- ---- ------
1,101 31 (3) 1,129
------ ---- ---- ------
Equity securities:
Perpetual preferred stocks................... 11 -- (1) 10
Common stocks................................ 560 81 (77) 564
------ ---- ---- ------
571 81 (78) 574
------ ---- ---- ------
$1,672 $112 $(81) 1,703
====== ==== ====
Amounts classified as current assets........... (250)
------
Investment carrying value...................... $1,453
======
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
======
The fair value of investment securities is generally based on quoted market
prices.
F-20
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INVESTMENTS OF INSURANCE SUBSIDIARY (CONTINUED)
Scheduled maturities of investments in debt securities at December 31, 2001
were as follows (dollars in millions):
AMORTIZED FAIR
COST VALUE
--------- ------
Due in one year or less................................... $ 116 $ 116
Due after one year through five years..................... 266 277
Due after five years through ten years.................... 311 318
Due after ten years....................................... 305 312
------ ------
998 1,023
Mortgage-backed securities................................ 103 106
------ ------
$1,101 $1,129
====== ======
The average expected maturity of the investments in debt securities listed
above approximated 4.3 years at December 31, 2001. 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
9% for 2001, 14% for 2000 and 9% for 1999. 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.
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):
2001 2000 1999
---- ---- ----
Debt securities:
Cash proceeds............................................. $155 $395 $514
Gross realized gains...................................... 5 4 2
Gross realized losses..................................... 2 7 5
Equity securities:
Cash proceeds............................................. $412 $425 $200
Gross realized gains...................................... 95 160 109
Gross realized losses..................................... 35 34 51
NOTE 10 -- DERIVATIVES
HCA has entered into interest rate swap agreements to manage its exposure
to fluctuations in interest rates. These swap agreements involve the exchange of
fixed and variable rate interest payments between two parties based on common
notional principal amounts and maturity dates. Pay-floating swaps effectively
convert fixed rate obligations to LIBOR indexed variable rate instruments. The
notional amounts and interest payments in these agreements match the cash flows
of the related liabilities. The notional amounts of the swap agreements
represent amounts used to calculate the exchange of cash flows and are not
assets or liabilities of HCA. Any market risk or opportunity associated with
these swap agreements is offset by the opposite market impact on the related
debt. HCA's credit risk related to these agreements is considered low because
the swap agreements are with creditworthy financial institutions. The interest
payments under these agreements are settled on a net basis.
F-21
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- DERIVATIVES (CONTINUED)
The following table sets forth HCA's derivative financial instruments at
December 31, 2001 (dollars in millions):
NOTIONAL TERMINATION FAIR
AMOUNT DATE VALUE
-------- -------------- -----
Pay-floating interest rate swap........................... $150 March 2004 $3
Pay-floating interest rate swap........................... $125 September 2003 $3
The fair value of the interest rate swaps at December 31, 2001 represents
the estimated amounts HCA would have received upon termination of these
agreements.
NOTE 11 -- LONG-TERM DEBT
A summary of long-term debt at December 31, including related interest
rates at December 31, 2001, follows (dollars in millions):
2001 2000
------ ------
Senior collateralized debt (rates generally fixed, averaging
8.4%) payable in periodic installments through 2034....... $ 153 $ 187
Senior debt (rates fixed, averaging 7.9%) payable in
periodic installments through 2095........................ 4,927 4,591
Senior debt (floating rates, averaging 3.5%) due 2004....... 775 500
Bank term loans (floating rates, averaging 3.2%)............ 750 1,150
Bank revolving credit facility (floating rates, averaging
2.8%)..................................................... 755 200
Subordinated debt........................................... -- 124
------ ------
Total debt, average life of ten years (rates averaging
6.5%)..................................................... 7,360 6,752
Less amounts due within one year............................ 807 1,121
------ ------
$6,553 $5,631
====== ======
Bank Revolving Credit Facility
HCA's revolving credit facility (the "Credit Facility") is a $1.75 billion
agreement expiring April 2006. As of December 31, 2001, HCA had $755 million
outstanding under the Credit Facility.
As of February 2002, interest is payable generally at either LIBOR plus
0.7% to 1.5% (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
2001
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 a $1.2 billion
bank term loan agreement (the "2000 Term Loan").
In April 2001, HCA entered into a $2.5 billion credit agreement (the "2001
Credit Agreement") with several banks. The 2001 Credit Agreement consists of a
$750 million term loan maturing in 2006 (the "2001 Term Loan") and the Credit
Facility. Proceeds from the 2001 Term Loan were used to refinance prior bank
loans.
F-22
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- LONG-TERM DEBT (CONTINUED)
Significant Financing Activities (Continued)
In May 2001, HCA issued $500 million of 7.125% notes due 2006. Proceeds
from the notes were used for general corporate purposes.
In April 2001, Moody's Investors Service upgraded HCA's senior debt rating
from Ba2 to Ba1 and maintained a positive ratings outlook. In September 2001,
Fitch IBCA changed its rating outlook on HCA from stable to positive. In
February 2002, Standard & Poor's upgraded HCA's senior debt rating from BB+ to
BBB-.
During 2001, HCA made open market purchases of its debt that resulted in an
extraordinary charge of $17 million, net of income taxes of $11 million.
2000
In March 2000, HCA entered into the 2000 Term Loan with several banks.
Proceeds from the 2000 Term Loan were used in the first quarter of 2000 to
retire the outstanding balance under the $1.0 billion interim term loan
agreement entered into in March 1999 and to reduce outstanding loans under a
prior bank revolving credit facility (the "Prior Credit Facility").
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
Prior 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 December 2000, HCA filed a "shelf" registration statement and prospectus
with the SEC relating to $1.5 billion in debt securities. At December 31, 2001,
$1.0 billion of debt securities have been issued related to this shelf.
General Information
Maturities of long-term debt in years 2003 through 2006 (excluding
borrowings under the Credit Facility) are $447 million, $500 million, $740
million and $714 million, respectively.
The estimated fair value of the Company's long-term debt was $7.5 billion
and $6.6 billion at December 31, 2001 and 2000, respectively, compared to
carrying amounts aggregating $7.4 billion and $6.8 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.
F-23
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- LONG-TERM DEBT (CONTINUED)
Fair Value Information
At December 31, 2001 and 2000, the fair values of cash and cash
equivalents, receivables and accounts payable approximated carrying values
because of the short-term nature of these instruments. The estimated fair values
of other financial instruments subject to fair value disclosures, determined
based on quoted market prices and the related carrying amounts are as follows
(dollars in millions):
2001 2000
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
Investments.................................... $1,453 $1,453 $1,371 $1,371
Interest rate swaps............................ 6 6 -- --
Long-term debt................................. 7,360 7,521 6,752 6,591
NOTE 12 -- CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see Note
2 -- Investigations and Settlement of 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 HCA, 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
HCA 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 HCA, which may not be 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
HCA's results of operations or financial position.
NOTE 13 -- 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 Programs
In October 2001, HCA announced an authorization to repurchase up to $250
million of its common stock. During the fourth quarter of 2001, HCA made open
market purchases of 6.4 million shares for $250 million, completing the
repurchase authorization.
F-24
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- CAPITAL STOCK AND STOCK REPURCHASES (CONTINUED)
Stock Repurchase Programs (Continued)
During 2001, HCA entered into an agreement with a financial institution
that resulted in the financial institution investing $400 million (at December
31, 2001) to capitalize an entity that would acquire HCA common stock. This
consolidated affiliate acquired 16.8 million shares of HCA common stock in
connection with HCA's settlement of certain forward purchase contracts. The
financial institution's investment in the consolidated affiliate is scheduled
for repayment on April 30, 2003 and is reflected in HCA's balance sheet as
"Company-obligated mandatorily redeemable securities of affiliate holding solely
Company securities." The quarterly return on their investment, based upon a
LIBOR plus 125 basis points return rate during 2001, is recorded as minority
interest expense.
In March 2000, HCA announced that its Board of Directors authorized the
repurchase of up to $1 billion of common stock. Through September 30, 2001,
certain financial organizations had purchased 31.3 million shares of HCA's
common stock for $977 million utilizing forward purchase contracts. During 2000,
HCA settled forward purchase contracts associated with the March 2000
authorization representing 11.7 million shares at a cost of $300 million. During
2001, HCA settled the remaining forward purchase contracts representing 19.6
million shares at a cost of $677 million, purchased 1.1 million shares through
open market purchases at a cost of $40 million and received $17 million in
premiums from the sale of 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 associated with its November 1999 authorization
representing 18.7 million shares at a cost of $539 million. During 2001, HCA
settled the remaining forward purchase contracts associated with its November
1999 authorization, representing 15.7 million shares at a cost of $461 million.
In 1999, HCA expended $1.9 billion to complete the repurchase of 81.9
million of its shares through open market purchases and the settlement of
accelerated and forward purchase contracts.
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, and Potentially Settled in, a Company's Own Stock", 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 from common equity to temporary equity at December 31,
2000.
During 2001 and 2000, the settled share repurchase transactions reduced
stockholders' equity by $738 million and $874 million, respectively.
In connection with its share repurchase programs, HCA entered into a Letter
of Credit Agreement with the United States Department of Justice in 1999. As
part of the agreement, HCA provided the government with letters of credit
totaling $1 billion. As provided under the Civil Agreement with the government,
as discussed in Note 2 -- Investigations and Settlement of Certain Government
Claims, the letters of credit were reduced from $1 billion to $250 million upon
payment of the civil settlement.
F-25
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- 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.
Information regarding these option plans for 2001, 2000 and 1999 is
summarized below (share amounts in thousands):
STOCK OPTION PRICE PER WEIGHTED AVERAGE
OPTIONS SHARE EXERCISE PRICE
------- --------------------- ----------------
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
Granted................................ 8,384 27.56 to 46.36 36.34
Exercised.............................. (7,631) 0.14 to 37.92 23.29
Cancelled.............................. (1,755) 17.12 to 40.23 25.18
------
Balances, December 31, 2001.............. 50,231 0.14 to 46.36 25.70
======
2001 2000 1999
------- ------- -------
Weighted average fair value for options granted during
the year............................................ $ 15.93 $ 9.33 $ 8.01
Options exercisable................................... 24,757 21,829 18,304
Options available for grant........................... 44,024 51,378 8,478
F-26
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- STOCK BENEFIT PLANS (CONTINUED)
The following table summarizes information regarding the options
outstanding at December 31, 2001 (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 12/31/01 LIFE PRICE 12/31/01 PRICE
--------------- ----------- ---------------- -------- ----------- --------
$ 7.35........................ 2 Less than 1 year $ 7.35 2 $ 7.35
18.07........................ 4 Less than 1 year 18.07 4 18.07
35.30........................ 5 Less than 1 year 35.30 5 35.30
10.63 to 13.24............... 418 1 year 11.54 418 11.54
23.85........................ 5 1 year 23.85 5 23.85
11.47 to 17.11............... 158 1 year 13.25 158 13.25
0.38........................ 249 2 years 0.38 249 0.38
21.16 to 25.21............... 1,081 2 years 24.19 1,081 24.19
25.21 to 30.90............... 1,769 3 years 26.14 1,769 26.14
29.22 to 36.05............... 3,879 4 years 34.30 3,879 34.30
41.13........................ 3 5 years 41.13 2 41.13
26.74 to 37.92............... 11,565 6 years 30.31 8,611 30.19
21.16 to 30.93............... 3,223 6 years 24.77 1,249 24.68
32.27........................ 114 6 years 32.27 84 32.27
17.12 to 24.49............... 13,106 7 years 17.22 5,720 17.29
20.00 to 29.94............... 6,009 8 years 20.79 912 20.60
31.63 to 39.25............... 24 9 years 34.48 2 39.25
27.56 to 39.20............... 7,533 9 years 35.75 32 37.64
43.00 to 46.36............... 507 10 years 45.57 -- --
38.54........................ 2 10 years 38.54 -- --
0.14........................ 83 12 years 0.14 83 0.14
0.14........................ 357 14 years 0.14 357 0.14
0.38........................ 86 15 years 0.38 86 0.38
0.38........................ 49 17 years 0.38 49 0.38
------ ------
50,231 24,757
====== ======
HCA's amended and restated Employee Stock Purchase Plan ("ESPP") provides
an opportunity to purchase shares of its common stock at a discount (through
payroll deductions over six month periods) to substantially all employees. HCA
stockholders on May 24, 2001 approved increasing the number of shares that may
be issued pursuant to the ESPP by 10,000,000 shares. At December 31, 2001,
11,627,800 shares of common stock were reserved for HCA's employee stock
purchase plan.
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 HCA's employee stock option and stock purchase plans had
been determined based upon their fair
F-27
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- STOCK BENEFIT PLANS (CONTINUED)
values at the grant dates. These pro forma amounts are as follows (dollars in
millions, except per share amounts):
2001 2000 1999
----- ----- -----
Net income:
As reported............................................... $ 886 $ 219 $ 657
Pro forma................................................. 837 164 609
Basic earnings per share:
As reported............................................... $1.69 $0.39 $1.12
Pro forma................................................. 1.60 0.30 1.04
Diluted earnings per share:
As reported............................................... $1.65 $0.39 $1.11
Pro forma................................................. 1.56 0.29 1.03
For SFAS 123 purposes, the weighted average fair values of HCA's stock
options granted in 2001, 2000 and 1999 were $15.93, $9.33 and $8.01 per share,
respectively. The fair values were estimated using the Black-Scholes option
valuation model with the following weighted average assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate..................................... 4.62% 4.90% 6.53%
Expected volatility......................................... 38% 39% 38%
Expected life, in years..................................... 6 6 6
Expected dividend yield..................................... .20% .25% .35%
The pro forma compensation cost related to the shares of common stock
issued under the ESPP was $6 million, $14 million and $9 million for the years
2001, 2000 and 1999, 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,
HCA has made grants of restricted shares or units of HCA'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, 2001, 1,822,600 shares were subject to restrictions, which
lapse between 2002 and 2004. During 2001, 2000 and 1999 grants and purchases of
969,500, 1,490,700 and 1,137,100 shares, respectively were made at a
weighted-average grant or purchase date fair value of $36.80, $21.05 and $17.88
per share, respectively.
NOTE 15 -- 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 $128 million for 2001, $121 million for
2000 and $151 million for 1999. Amounts approximately equal to retirement plan
expense are funded annually.
HCA maintains various contributory benefit plans that are available to
employees who meet certain minimum requirements. Certain of the plans require
that HCA match certain percentages of participants'
F-28
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
contributions up to certain maximum levels (generally 50% of the first 3% of
compensation deferred by participants in 2001 and 25% of the first 3% of
compensation deferred by participants in 2000 and 1999). The cost of these plans
totaled $41 million for 2001 and $17 million for 2000 and 1999. HCA's
contributions are funded periodically during each year.
NOTE 16 -- 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, 2001, 2000 and
1999, approximately 28%, 28% and 29%, 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 includes 94 consolidating hospitals located in the Eastern United
States and the Western Group includes 76 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, included hospitals
that are located in the United States, but are not located in the Company's core
markets. All of the hospitals that were included in the National Group had been
sold as of December 31, 2001. HCA also operates 8 consolidating hospitals in
England and Switzerland.
HCA's senior management reviews geographic distributions of HCA's revenues,
EBITDA, depreciation and amortization and assets. EBITDA is defined as income
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,
income taxes and extraordinary charge. 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 HCA's revenues,
F-29
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
equity in earnings of affiliates, EBITDA, depreciation and amortization and
assets are summarized in the following table (dollars in millions):
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Eastern Group....................................... $ 8,823 $ 8,066 $ 7,625
Western Group....................................... 8,381 7,550 7,012
Corporate and other(a).............................. 550 511 303
National Group...................................... 199 543 1,051
Spin-offs........................................... -- -- 666
------- ------- -------
$17,953 $16,670 $16,657
======= ======= =======
Equity in earnings of affiliates:
Eastern Group....................................... $ (16) $ (16) $ (27)
Western Group....................................... (153) (101) (50)
Corporate and other(a).............................. 11 (17) (27)
National Group...................................... -- 8 14
Spin-offs........................................... -- -- --
------- ------- -------
$ (158) $ (126) $ (90)
======= ======= =======
EBITDA:
Eastern Group....................................... $ 1,938 $ 1,796 $ 1,708
Western Group....................................... 1,705 1,403 1,173
Corporate and other(a).............................. (206) (36) (67)
National Group...................................... (16) 14 (9)
Spin-offs........................................... -- -- 83
------- ------- -------
$ 3,421 $ 3,177 $ 2,888
======= ======= =======
Depreciation and amortization:
Eastern Group....................................... $ 453 $ 444 $ 448
Western Group....................................... 439 431 435
Corporate and other(a).............................. 140 125 95
National Group...................................... 16 33 69
Spin-offs........................................... -- -- 47
------- ------- -------
$ 1,048 $ 1,033 $ 1,094
======= ======= =======
AS OF DECEMBER 31,
------------------
2001 2000
------- -------
Assets:
Eastern Group............................................. $ 6,675 $ 6,464
Western Group............................................. 6,755 6,482
Corporate and other(a).................................... 4,199 4,294
National Group............................................ 101 328
Spin-offs................................................. -- --
------- -------
$17,730 $17,568
======= =======
---------------
(a) Includes HCA's 8 consolidating hospitals located in England and Switzerland.
F-30
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- 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, 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
Unrealized gains on available-for-sale
securities, net of $4 of taxes.............. 6 -- 6
Gains reclassified into earnings from other
comprehensive income, net of $23 of taxes... (40) -- (40)
---- --- ----
Balance at December 31, 2001..................... $ 19 $(1) $ 18
==== === ====
NOTE 18 -- ACCRUED EXPENSES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other accrued expenses at December 31 follows (in millions):
2001 2000
---- ------
Employee benefit plans...................................... $160 $ 166
Workers compensation........................................ 39 94
Taxes other than income..................................... 151 163
Professional liability risks................................ 318 356
Interest.................................................... 84 114
Other....................................................... 234 242
---- ------
$986 $1,135
==== ======
A summary of activity in HCA'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, 1999............. $1,645 $1,269 $(1,347) $1,567
Year-ended December 31, 2000............. 1,567 1,255 (1,239) 1,583
Year-ended December 31, 2001............. 1,583 1,376 (1,147) 1,812
F-31
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- SUBSEQUENT EVENT -- UNDERSTANDING REGARDING CLAIMS FOR
MEDICARE REIMBURSEMENT
On March 28, 2002, HCA announced that it had reached an understanding with
the Centers for Medicare and Medicaid Services ("CMS") to resolve all Medicare
cost report, home office cost statement and appeal issues between HCA and CMS.
The understanding provides that HCA would pay CMS $250 million with respect to
these matters. The understanding was reached as a means to resolve all
outstanding appeals and more than 2,600 HCA cost reports for cost report periods
from 1993 through periods ended on or before July 31, 2001, many of which CMS
has yet to audit. The understanding with CMS is subject to approval by the U.S.
Department of Justice, which has not yet been obtained, and execution of a
definitive written agreement.
The understanding with CMS does not include resolution of the outstanding
civil issues with the U.S. Department of Justice and relators with respect to
cost reports and physician relations. See Note 2 -- Investigations and
Settlement of Certain Government Claims.
The understanding with CMS resulted in HCA recording a pretax charge of
$260 million ($165 million after tax), or $0.32 per basic and $0.30 per diluted
share, consisting of the accrual of $250 million for the settlement payment and
the write-off of $10 million of net Medicare cost report receivables. This
charge has been recorded in the consolidated income statement for the year ended
December 31, 2001.
F-32
HCA INC.
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2001
---------------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
Revenues............................................... $4,501 $4,476 $4,438 $4,538
Income before extraordinary charge..................... $ 326(a) $ 263 $ 256(b) $ 58(c)
Net income............................................. $ 326(a) $ 263 $ 256(b) $ 41(d)
Basic earnings per share:
Income before extraordinary charge................... $ 0.60 $ 0.49 $ 0.50 $ 0.11
Net income........................................... $ 0.60 $ 0.49 $ 0.50 $ 0.08
Diluted earnings per share:
Income before extraordinary charge................... $ 0.59 $ 0.48 $ 0.48 $ 0.11
Net income........................................... $ 0.59 $ 0.48 $ 0.48 $ 0.08
Cash dividends......................................... $ 0.02 $ 0.02 $ 0.02 $ 0.02
Market prices(h):
High................................................. $44.16 $45.22 $47.28 $46.90
Low.................................................. 33.93 35.60 41.20 36.44
2000
---------------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
Revenues............................................... $4,271 $4,133 $4,093 $4,173
Net income (loss)...................................... $ 296 $ (272)(e) $ 174(f) $ 21(g)
Basic earnings (loss) per share........................ $ 0.53 $(0.49) $ 0.31 $ 0.04
Diluted earnings (loss) per share...................... $ 0.52 $(0.49) $ 0.31 $ 0.04
Cash dividends......................................... $ 0.02 $ 0.02 $ 0.02 $ 0.02
Market prices(h):
High................................................. $32.44 $32.44 $39.06 $45.25
Low.................................................. 18.75 23.69 29.75 37.25
---------------
(a) First quarter results include $4 million ($0.01 per basic and diluted share)
of gains on sales of facilities (See NOTE 3 of the notes to consolidated
financial statements).
(b) Third quarter results include $68 million ($0.13 per basic and diluted
share) of gains on sales of facilities and $10 million ($0.02 per basic and
diluted share) of charges related to the impairment of long-lived assets
(See NOTES 3 and 4 of the notes to consolidated financial statements).
(c) Fourth quarter results include $4 million ($0.01 per basic and diluted
share) of gains on sales of facilities and $165 million ($0.32 per basic
share and $0.31 per diluted share) related to the settlement with the
Federal government. (See NOTES 3 and 19 of the notes to consolidated
financial statements).
(d) Fourth quarter results include $4 million ($0.01 per basic and diluted
share) of gains on sales of facilities, and $165 million ($0.32 per basic
share and $0.31 per diluted share) related to the settlement with the
Federal government and $17 million ($0.03 per basic and diluted share) of an
extraordinary charge related to the extinguishment of debt. (See NOTES 3, 11
and 19 of the notes to consolidated financial statements).
(e) Second quarter results include $498 million ($0.90 per basic and diluted
share) charge related to the settlement with the Federal government and $9
million ($0.02 per basic and diluted share) of gains on sales of facilities
(see NOTES 2 and 3 of the notes to consolidated financial statements).
(f) Third quarter results include $9 million ($0.02 per basic and diluted share)
of gains on sales of facilities and $12 million ($0.02 per basic and diluted
share) of charges related to the impairment of long-lived assets (see NOTES
3 and 4 of the notes to consolidated financial statements).
(g) Fourth quarter results include $68 million ($0.12 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 ($0.17 per basic and diluted
share) related to the settlement with the Federal government (see NOTES 2, 3
and 4 of the notes to consolidated financial statements).
(h) Represents high and low sales prices of the Company's common stock which is
traded on the New York Stock Exchange (ticker symbol HCA).
F-33