<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11239
---------------------
HCA - THE HEALTHCARE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2497104
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE PARK PLAZA 37203
NASHVILLE, TENNESSEE (Zip Code)
(Address of principal executive offices)
</TABLE>
(615) 344-9551
(Registrant's telephone number, including area code)
FORMER NAME:
Columbia/HCA Healthcare Corporation
Date of Change: May 25, 2000
NOT APPLICABLE
(Former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock of the latest practical date.
<TABLE>
<CAPTION>
CLASS OF COMMON STOCK OUTSTANDING AT OCTOBER 31, 2000
--------------------- -------------------------------
<S> <C>
Voting common stock, $.01 par value 531,439,000 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
</TABLE>
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<PAGE> 2
HCA -- THE HEALTHCARE COMPANY
FORM 10-Q
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE OF
FORM 10-Q
---------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Income Statements -- for the quarters
and nine months ended September 30, 2000 and 1999......... 3
Condensed Consolidated Balance Sheets -- September 30, 2000
and December 31, 1999..................................... 4
Condensed Consolidated Statements of Cash Flows -- for the
nine months ended September 30, 2000 and 1999............. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 3. Quantitative and Qualitative Disclosure of Market Risk...... 30
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 2. Changes in Securities and Use of Proceeds................... 43
Item 6. Exhibits and Reports on Form 8-K............................ 43
</TABLE>
2
<PAGE> 3
HCA -- THE HEALTHCARE COMPANY
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 4,093 $ 3,899 $ 12,497 $ 12,715
Salaries and benefits................................. 1,650 1,569 4,956 5,083
Supplies.............................................. 646 618 1,971 1,994
Other operating expenses.............................. 756 747 2,288 2,487
Provision for doubtful accounts....................... 333 318 934 985
Depreciation and amortization......................... 257 262 778 836
Interest expense...................................... 147 122 402 351
Equity in earnings of affiliates...................... (28) (8) (93) (73)
Settlement with federal government.................... -- -- 745 --
Gains on sales of facilities.......................... (20) -- (38) (257)
Impairment of long-lived assets....................... 17 -- 17 160
Restructuring of operations and investigation related
costs............................................... 16 24 41 84
-------- -------- -------- --------
3,774 3,652 12,001 11,650
-------- -------- -------- --------
Income before minority interests and income taxes..... 319 247 496 1,065
Minority interests in earnings of consolidated
entities............................................ 26 13 81 41
-------- -------- -------- --------
Income before income taxes............................ 293 234 415 1,024
Provision for income taxes............................ 119 96 217 458
-------- -------- -------- --------
Net income.................................. $ 174 $ 138 $ 198 $ 566
======== ======== ======== ========
Per share data:
Basic earnings...................................... $ .31 $ .25 $ .36 $ .95
Diluted earnings.................................... $ .31 $ .24 $ .35 $ .95
Cash dividends...................................... $ .02 $ .02 $ .06 $ .06
Shares used in earnings per share calculations (in
thousands):
Basic............................................... 553,642 562,539 557,200 593,021
Diluted............................................. 566,470 567,789 568,216 598,594
</TABLE>
See accompanying notes.
3
<PAGE> 4
HCA -- THE HEALTHCARE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 180 $ 190
Accounts receivable, less allowances for doubtful accounts
of $1,584 and $1,567................................... 2,044 1,873
Inventories............................................... 383 383
Income taxes receivable................................... 158 178
Other..................................................... 1,184 973
------- -------
3,949 3,597
Property and equipment, at cost............................. 14,772 14,084
Accumulated depreciation.................................... (5,987) (5,594)
------- -------
8,785 8,490
Investments of insurance subsidiary......................... 1,486 1,457
Investments in and advances to affiliates................... 586 654
Intangible assets, net...................................... 2,312 2,319
Other....................................................... 389 368
------- -------
$17,507 $16,885
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 614 $ 657
Accrued salaries.......................................... 340 403
Government settlement accrual............................. 745 --
Other accrued expenses.................................... 1,169 1,112
Long-term debt due within one year........................ 1,434 1,160
------- -------
4,302 3,332
Long-term debt.............................................. 5,426 5,284
Professional liability risks, deferred taxes and other
liabilities............................................... 1,671 1,889
Minority interests in equity of consolidated entities....... 702 763
Stockholders' equity:
Common stock $.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; outstanding
531,841,600 voting shares and 21,000,000 nonvoting
shares -- 2000 and 543,272,900 voting shares and
21,000,000 nonvoting shares -- 1999.................... 6 6
Capital in excess of par value............................ 591 951
Other..................................................... 8 8
Accumulated other comprehensive income.................... 38 53
Retained earnings......................................... 4,763 4,599
------- -------
5,406 5,617
------- -------
$17,507 $16,885
======= =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
HCA -- THE HEALTHCARE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 198 $ 566
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts........................ 934 985
Depreciation and amortization.......................... 778 836
Income taxes........................................... (281) (117)
Settlement with federal government..................... 745 --
Gains on sales of facilities........................... (38) (257)
Impairment of long-lived assets........................ 17 160
Changes in operating assets and liabilities............ (1,307) (1,387)
Other.................................................. 68 20
------- -------
Net cash provided by operating activities............ 1,114 806
------- -------
Cash flows from investing activities:
Purchase of property and equipment..................... (860) (936)
Acquisition of hospitals and health care entities...... (338) --
Disposition of property and equipment.................. 295 660
Spin-off of facilities to stockholders................. -- 886
Change in investments.................................. (78) 557
Other.................................................. (2) 17
------- -------
Net cash provided by (used in) investing
activities.......................................... (983) 1,184
------- -------
Cash flows from financing activities:
Issuance of long-term debt............................. 2,736 1,024
Net change in revolving bank credit.................... (700) (441)
Repayment of long-term debt............................ (1,710) (826)
Payment of cash dividends.............................. (34) (35)
Repurchases of common stock, net....................... (400) (1,905)
Other.................................................. (33) 20
------- -------
Net cash used in financing activities................ (141) (2,163)
------- -------
Change in cash and cash equivalents......................... (10) (173)
Cash and cash equivalents at beginning of period............ 190 297
------- -------
Cash and cash equivalents at end of period.................. $ 180 $ 124
======= =======
Interest payments........................................... $ 342 $ 320
Income tax payments, net.................................... $ 498 $ 565
</TABLE>
See accompanying notes.
5
<PAGE> 6
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION
HCA -- The Healthcare Company, formerly known as Columbia/HCA Healthcare
Corporation, is a holding company whose affiliates own and operate hospitals and
related health care entities. The term "affiliates" includes direct and indirect
subsidiaries of HCA -- The Healthcare Company and partnerships and joint
ventures in which such subsidiaries are partners. At September 30, 2000, these
affiliates owned and operated 189 hospitals, 76 freestanding surgery centers and
provided extensive outpatient and ancillary services. Affiliates of HCA -- The
Healthcare Company are also partners in several 50/50 joint ventures that own
and operate nine hospitals and three freestanding surgery centers which are
accounted for using the equity method. The Company's facilities are located in
24 states, England and Switzerland. The terms "HCA" or the "Company" as used in
this Quarterly Report on Form 10-Q refer to HCA -- The Healthcare Company and
its affiliates unless otherwise stated or indicated by context.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
quarter and nine months ended September 30, 2000, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2 -- INVESTIGATIONS AND UNDERSTANDING TO SETTLE CERTAIN GOVERNMENT CIVIL
CLAIMS
The Company continues to be the subject of several Federal investigations
into its business practices, as well as governmental investigations by various
states. The Company is cooperating in these investigations and understands,
through written notice and other means, that it is a target in these
investigations. Given the breadth of the ongoing investigations, the Company
expects additional investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. The Company is a defendant in several qui
tam actions brought by private parties on behalf of the United States of
America, which have been unsealed and served on the Company. The actions allege,
in general, that the Company and certain subsidiaries and/or affiliated
partnerships violated the False Claims Act by submitting improper claims to the
government for reimbursement. The lawsuits generally seek damages of three times
the amount of all Medicare or Medicaid claims (involving false claims) presented
by the defendants to the Federal government, civil penalties of not less than
$5,000 nor more than $10,000 for each such Medicare or Medicaid claim,
attorneys' fees and costs. The government has intervened in six qui tam actions.
The Company is aware of additional qui tam actions that remain under seal and
believes that there are other sealed qui tam cases of which it is unaware.
The Company and its affiliates announced in May 2000 that an understanding
had been reached with attorneys of the Civil Division of the Department of
Justice ("DOJ") to recommend an agreement to settle, subject to certain
conditions, civil claims actions against the Company relating to Diagnosis
Related Group ("DRG") coding; outpatient laboratory billing; and home health
issues. Civil issues that remain to be resolved are cost reports and physician
relations issues.
The understanding with DOJ attorneys provides that the Company will
compensate the government $745 million (with interest at 6.5% beginning May 18,
2000) with respect to the issues covered by the understanding. This resulted in
the Company recording an after-tax charge of $498 million during the quarter
ended June 30, 2000. The settlement is subject to approval by additional
officials at the DOJ; execution of a corporate integrity agreement; execution of
definitive settlement documents for the three issues included in the
6
<PAGE> 7
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 2 -- INVESTIGATIONS AND UNDERSTANDING TO SETTLE CERTAIN GOVERNMENT CIVIL
CLAIMS (CONTINUED)
understanding; execution of agreements to resolve all criminal investigations
pending against the Company and court approval.
The date for completion of criminal settlements was automatically extended
from September 30, 2000 to December 31, 2000. In the event the criminal
settlement condition is not satisfied by December 31, 2000, the settlement
agreement shall expire unless the Company elects to waive the criminal
settlement condition. Notwithstanding the fixed expiration date, the parties
expect to complete the settlement even after the expiration date so long as the
criminal settlement condition is satisfied.
The understanding covers issues for the following years: DRG coding for
calendar years 1990-1997; outpatient laboratory billings for calendar years
1989-1997; home health community education for Medicare cost report years
1994-1997; home health billing for calendar years 1995-1998; and certain home
health management transactions for Medicare cost report years 1993-1998.
The Company's existing letter of credit agreement with the DOJ will be
reduced from $1 billion to $250 million at the time of the settlement payment.
In addition, the understanding provides that any future civil payments on cost
reports or physician relations will reduce the remaining amount of the letter of
credit dollar for dollar.
The Company and the Office of Inspector General of the Department of Health
and Human Services have reached an understanding on the principal terms of a
corporate integrity agreement. The corporate integrity agreement is intended to
assure the government of the Company's overall Medicare compliance including DRG
coding, outpatient laboratory billing and the two civil issues still to be
resolved -- physician relations and cost reports. Execution of the corporate
integrity agreement is expected to result in waiver of the government's
discretionary right to exclude any of the Company's operations from
participation in the Medicare program with respect to the issues settled.
The Company remains the subject of a formal order of investigation by the
Securities and Exchange Commission ("SEC"). The Company understands that the
investigation includes the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
Management is unable to predict the outcome or effect of the remaining
civil issues, the criminal investigation or other actions. The Company could be
subject to substantial costs resulting from an adverse outcome of one or more
such actions. Any such sanctions or losses could have a material adverse effect
on the Company's financial position and results of operations. (See Note
10 -- Contingencies and Part II, Item 1: Legal Proceedings.)
NOTE 3 -- RESTRUCTURING OF OPERATIONS
HCA has completed a restructuring of its operations to create a smaller and
more focused company. The restructuring included the divestitures of certain
hospitals, surgery centers and related facilities, the spin-offs of LifePoint
Hospitals, Inc. ("LifePoint") and Triad Hospitals, Inc. ("Triad") and the
divestitures of the Company's home health and certain other businesses.
Divestiture of Certain Hospitals and Surgery Centers
During the first nine months of 2000, HCA recognized a pretax gain of $38
million ($18 million after-tax) on the sales of three consolidating hospitals.
Proceeds from these sales were used to repay bank borrowings.
7
<PAGE> 8
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 3 -- RESTRUCTURING OF OPERATIONS (CONTINUED)
Divestiture of Certain Hospitals and Surgery Centers (continued)
During the first nine months of 1999, HCA recognized a pretax gain of $257
million ($151 million after-tax) on the sales of three consolidating hospitals
and certain related facilities. Proceeds from the sales were used to repay bank
borrowings.
During the third quarter of 2000, management identified and initiated plans
to sell during 2000 or 2001, one consolidating hospital and one
non-consolidating hospital. The carrying value for the hospitals was reduced to
fair value of approximately $19 million, based upon estimates of sales values,
for a total non-cash, pretax charge of approximately $17 million. The
consolidating hospital for which the impairment charge was recorded had revenues
of approximately $14 million and $12 million for the quarters ended September
30, 2000 and 1999, respectively, and approximately $39 million and $34 million
for the nine months ended September 30, 2000 and 1999, respectively. The
hospitals for which the impairment charge was recorded had net losses from
operations of approximately $1 million and $2 million for the quarters ended
September 30, 2000 and 1999, respectively, and approximately $3 million for each
of the nine months ended September 30, 2000 and 1999.
During the first nine months of 1999, management identified and initiated,
or revised, plans to sell or close during 1999 and 2000, 15 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
approximately $195 million, based upon estimates of sales values, for a total
non-cash, pretax charge of approximately $160 million. The hospitals and other
assets for which the impairment charge was recorded had revenues (through the
date of sale or closure) of approximately $26 million and $101 million for the
quarters ended September 30, 2000 and 1999, respectively, and approximately $84
million and $421 million for the nine months ended September 30, 2000 and 1999,
respectively. These facilities incurred net losses from operations of
approximately one million and $20 million for the quarters ended September 30,
2000 and 1999, respectively and approximately $13 million and $40 million for
the nine months ended September 30, 2000 and 1999, respectively. During 1999 and
the first nine months of 2000, the Company completed the divestitures or
closures of nine of the consolidating hospitals and the four non-consolidating
hospitals on which impairment charges had been recorded. The facilities spun-off
to Triad included another three of the consolidating hospitals on which
impairment charges had been recorded. Proceeds from the completed divestitures
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 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 HCA'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.
8
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HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 3 -- RESTRUCTURING OF OPERATIONS (CONTINUED)
Divestiture of Certain Hospitals and Surgery Centers (continued)
The impairment charges affected the Company's asset categories, as follows
(in millions):
<TABLE>
<CAPTION>
NINE NINE
MONTHS MONTHS
2000 1999
------ ------
<S> <C> <C>
Property and equipment...................................... $11 $101
Intangible assets........................................... -- 50
Investments in and advances to affiliates................... 6 9
--- ----
$17 $160
=== ====
</TABLE>
The impairment charges affected the Company's operating segments, as
follows (in millions):
<TABLE>
<CAPTION>
NINE NINE
MONTHS MONTHS
2000 1999
------ ------
<S> <C> <C>
Eastern Group............................................... $ 6 $ 12
Western Group............................................... 11 17
Corporate and other......................................... -- 3
Spin-offs................................................... -- 34
National Group.............................................. -- 94
--- ----
$17 $160
=== ====
</TABLE>
Spin-Offs
On May 11, 1999, the Company completed the spin-offs of LifePoint and Triad
through a distribution of one share of LifePoint common stock and one share of
Triad common stock for every 19 shares of HCA's common stock outstanding on
April 30, 1999. Triad was comprised of 34 consolidating hospitals and LifePoint
was comprised of 23 consolidating hospitals.
NOTE 4 -- RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
HCA recorded the following pretax charges in connection with the
restructuring of operations and investigations as discussed in Note
2 -- Investigations and Understanding to Settle Certain Government Civil Claims
and Note 3 -- Restructuring of Operations (in millions):
<TABLE>
<CAPTION>
NINE
QUARTER MONTHS
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Professional fees related to investigations................. $16 $20 $36 $62
Severance costs............................................. -- -- -- 2
Other....................................................... -- 4 5 20
--- --- --- ---
$16 $24 $41 $84
=== === === ===
</TABLE>
The professional fees related to investigations represent incremental legal
and accounting expenses that are being recognized on the basis of when the costs
are incurred. The severance amounts in 1999 related primarily to a small group
of executives associated with operations or functions that were ceased or
divested. The liability balance for accrued severance and lease commitments was
approximately $9 million at September 30, 2000.
9
<PAGE> 10
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 5 -- BUSINESS COMBINATIONS
The following is a summary of acquisitions consummated during the nine
months ended September 30, 2000 (dollars in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
-------------
<S> <C>
Number of hospitals......................................... 7
Number of licensed beds..................................... 760
Purchase price information:
Hospitals:
Fair value of assets acquired.......................... $322
Liabilities assumed.................................... (89)
----
Net assets acquired.................................. 233
Other health care entities acquired......................... 105
----
Net cash paid........................................ $338
====
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $90 million. The pro forma effect of
these acquisitions on the Company's results of operations for the periods prior
to the respective acquisition dates was not significant.
NOTE 6 -- INCOME TAXES
HCA is currently contesting before the United States Tax Court (the "Tax
Court") and the United States Court of Federal Claims certain claimed
deficiencies and adjustments proposed by the IRS in conjunction with its
examination of the Company's 1994-1996 Federal income tax returns, Columbia
Healthcare Corporation's ("CHC") 1993 and 1994 Federal income tax returns,
HCA -- Hospital Corporation of America's ("Hospital Corporation of America")
1981 through 1988 and 1991 through 1993 Federal income tax returns and
Healthtrust, Inc. -- The Hospital Company's ("Healthtrust") 1990 through 1994
Federal income tax returns. The disputed items include the disallowance of
certain financing costs, system conversion costs and insurance premiums which
were deducted in calculating taxable income, and the allocation of costs to
fixed assets and goodwill in connection with hospitals acquired by the Company
in 1995 and 1996. The IRS is claiming an additional $196 million in income taxes
and interest through September 30, 2000.
Tax Court decisions received in 1996 and 1997, related to the IRS'
examination of Hospital Corporation of America's 1981 through 1988 Federal
income tax returns, may be appealed by the IRS or the Company to the United
States Court of Appeals, Sixth Circuit. The Company expects any decisions
regarding the appeal of these rulings will be made during 2001. Because no final
decisions have been made regarding appeals of the decisions, the Company is
presently unable to estimate the amount of any additional income tax and
interest which the IRS may claim.
During the first quarter of 2000, the IRS began an examination of the
Company's 1997 and 1998 Federal income tax returns. HCA is presently unable to
estimate the amount of any additional income tax and interest which the IRS may
claim upon completion of the examination.
Management believes that adequate provisions have been recorded to satisfy
final resolution of the disputed issues. Management believes that the Company,
CHC, Hospital Corporation of America and Healthtrust properly reported taxable
income and paid taxes in accordance with applicable laws and agreements
established with the IRS during previous examinations and that the final
resolution of these disputes will not have a material adverse effect on the
results of operations or financial position of HCA.
10
<PAGE> 11
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 7 -- 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 warrants, 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 for the quarters and nine months ended September 30, 2000 and
1999 (dollars in millions, except per share amounts and shares in thousands):
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income.................................... $ 174 $ 138 $ 198 $ 566
Weighted average common shares outstanding.... 553,642 562,539 557,200 593,021
Effect of dilutive securities:
Stock options............................... 10,973 4,285 7,939 3,446
Warrants and other.......................... 1,855 965 3,077 2,127
-------- -------- -------- --------
Shares used for diluted earnings per share.... 566,470 567,789 568,216 598,594
======== ======== ======== ========
Earnings per share:
Basic earnings per share.................... $ .31 $ .25 $ .36 $ .95
Diluted earnings per share.................. $ .31 $ .24 $ .35 $ .95
</TABLE>
NOTE 8 -- LONG-TERM DEBT
In March 2000, HCA entered into a $1.2 billion term loan agreement (the
"2000 Term Loan") with several banks. Proceeds from the 2000 Term Loan were used
in the first quarter of 2000 to retire the outstanding balance under the $1.0
billion interim term loan agreement entered into in March 1999 and to reduce
outstanding loans under the Company's revolving credit facility.
During the second quarter of 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. The English Term Loan matures in May 2001. See Note
14 -- Subsequent Event.
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
Company's revolving 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. See Note 9 -- Stock Repurchase Program.
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.
NOTE 9 -- STOCK REPURCHASE PROGRAM
In March 2000, HCA announced that its Board of Directors authorized the
repurchase of up to $1 billion of common stock. Certain financial organizations
purchased approximately 5.3 million shares of the Company's common stock for
approximately $119 million during the first quarter of 2000, approximately 11.3
million shares for approximately $322 million during the second quarter of 2000
and approximately 2.8 million shares for approximately $93 million during the
third quarter of 2000 utilizing forward purchase contracts. In accordance with
the terms of the contracts, these shares remain outstanding until settled by the
Company. As
11
<PAGE> 12
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 9 -- STOCK REPURCHASE PROGRAM (CONTINUED)
part of this stock repurchase program, HCA sold 5.7 million put options during
the third quarter of 2000, each of which entitles the holder to sell HCA's stock
to HCA at a specified price on a specified date. These put options expire on
various dates through February 27, 2001 and have exercise prices ranging from
$33.32 to $35.15 per share with an average exercise price of $34.46 per share.
The outstanding put options permit a net share settlement at the Company's
election and do not result in a put option liability on the balance sheet. HCA
expects to repurchase, from time to time, the remaining stock associated with
the March 2000 repurchase authorization through open market purchases, privately
negotiated transactions, forward purchase contracts or by utilizing the sale of
additional put options.
In November 1999, HCA announced that its Board of Directors authorized the
repurchase of up to $1 billion of its common stock. During the first quarter of
2000, HCA settled forward purchase contracts associated with its November 1999
authorization of approximately 8.5 million shares at a cost of $250 million;
during the second quarter of 2000, settled forward purchase contracts of
approximately 1.8 million shares at a cost of approximately $53 million and
during the third quarter of 2000, settled forward purchase contracts associated
with the same authorization of approximately 6.6 million shares at a cost of
approximately $200 million. In accordance with the terms of the forward purchase
contracts, approximately 17.5 million shares at a cost of approximately $495
million remain outstanding until the forward purchase contracts are settled by
the Company.
The significant terms of the forward purchase contracts utilized in the
repurchase transactions include: (1) in consideration for the purchases, the
Company is obligated to pay the counterparties an amount equal to their average
cost to acquire the stock plus a rate of return that varies by contract (from
LIBOR plus 100 basis points to LIBOR plus 150 basis points), (2) the contracts
generally have a stated term of one year, but the Company may settle the
contracts at any time, subject to certain notification requirements and (3) the
Company may settle the contracts, at its discretion, by one of three methods:
(a) physical settlement -- where the Company would pay cash in exchange for the
shares, (b) net share settlement -- where the Company would issue shares to the
counterparties or the counterparties would return shares to the Company in
amounts that provide value equal to the differential between the market value of
the shares on the settlement date less transaction costs and the counterparties'
cost to acquire the shares plus the specified rate of return or (c) net cash
settlement -- where the Company would pay cash to the counterparties or the
counterparties would pay cash to the Company in amounts that would provide value
equal to the differential between the market value of the shares on the
settlement date less transaction costs and the cost to acquire the shares plus
the specified rate of return.
During the first quarter of 1999, the Company entered into a Letter of
Credit Agreement with the United States Department of Justice related to the
Company's share repurchase programs. As part of the agreement, the Company
provided the government with letters of credit totaling $1 billion. The
understanding reached with the government in May 2000, as discussed in Note
2 -- Investigations and Understanding to Settle Certain Government Civil Claims,
provides that the letters of credit will be reduced from $1 billion to $250
million at the time of the settlement payment. In addition, the understanding
provides that any future civil payments on cost reports or physician relations
will reduce the remaining amount of the letters of credit dollar for dollar.
NOTE 10 -- CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see Note 2 --
Investigations and Understanding to Settle Certain Government Civil Claims and
Part II, Item 1: Legal Proceedings, for a description of the ongoing government
investigations and other legal proceedings) have been and are expected to be
instituted or asserted
12
<PAGE> 13
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 10 -- CONTINGENCIES (CONTINUED)
Significant Legal Proceedings (continued)
against the Company, including those relating to shareholder derivative and
class action complaints; purported class action lawsuits filed by patients and
payers alleging, in general, improper and fraudulent billing, coding, claims and
overcharging, as well as other violations of law; certain qui tam or
"whistleblower" actions alleging, in general, unlawful claims for reimbursement
or unlawful payments to physicians for the referral of patients and other
violations of law. While the amounts claimed may be substantial, the ultimate
liability cannot be determined or reasonably estimated at this time due to the
considerable uncertainties that exist. Therefore, it is possible that results of
operations, financial position and liquidity in a particular period could be
materially, adversely affected upon the resolution of certain of these
contingencies.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary course
of business, including claims for personal injuries or wrongful restriction of,
or interference with, physicians' staff privileges. In certain of these actions
the claimants may seek punitive damages against the Company, which 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 the Company's results of operations or financial position.
NOTE 11 -- COMPREHENSIVE INCOME
The components of comprehensive income, net of related taxes, for the
quarters and nine months ended September 30, 2000 and 1999 are as follows (in
millions):
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income.................................................. $174 $138 $198 $566
Unrealized gains on securities.............................. (3) (32) (11) (31)
Foreign currency translation adjustments.................... (2) 5 (4) (6)
---- ---- ---- ----
Comprehensive income........................................ $169 $111 $183 $529
==== ==== ==== ====
</TABLE>
The components of accumulated other comprehensive income, net of related
taxes are as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Net unrealized gains on securities.......................... $ 48 $59
Foreign currency translation adjustments.................... (10) (6)
---- ---
Accumulated other comprehensive income...................... $ 38 $53
==== ===
</TABLE>
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION
HCA operates in one line of business, which is operating hospitals and
related health care entities. During the quarters ended September 30, 2000 and
1999 approximately 27.6% and 27.9%, respectively, of the Company's revenues
related to patients participating in the Medicare program. The Company's
Medicare revenues approximated 28.7% and 29.3% of the Company's total revenues
during the nine months ended September 30, 2000 and 1999, respectively.
HCA's operations are structured into two geographically organized groups:
the Eastern Group is comprised of 97 consolidating hospitals located in the
Eastern United States and the Western Group is
13
<PAGE> 14
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
comprised of 78 consolidating hospitals located in the Western United States.
These two groups represent HCA's core operations and are typically located in
urban areas that are characterized by highly integrated facility networks. An
additional group, the National Group, includes six consolidating hospitals which
HCA intends to sell or close and the operations of certain other hospitals which
have been sold. HCA also operates eight consolidating hospitals in England and
Switzerland. HCA completed the spin-offs of LifePoint and Triad (the
"Spin-offs") during the second quarter of 1999. At the time of the spin-offs,
LifePoint included 23 consolidating hospitals and Triad included 34
consolidating hospitals. See Note 3 -- Restructuring of Operations.
HCA's Chief Operating Officer 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 and income taxes. The Company 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 of
HCA's revenues, EBITDA, depreciation and amortization, and assets, restated for
the restructuring of operations transactions (the spin-offs and transfers of
certain facilities to the National Group), are summarized in the following table
(dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS
QUARTER ENDED QUARTER ENDED QUARTER ENDED ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30, MARCH 31, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- --------------- ----------------- ---------------------------
2000 1999 2000 1999 2000 1999 2000 1999 1999 1998 1997
------ ------ ------ ------ ------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Eastern Group............ $1,978 $1,903 $2,045 $1,923 $2,157 $2,006 $ 6,180 $ 5,832 $ 7,794 $ 7,419 $ 7,314
Western Group............ 1,888 1,723 1,864 1,766 1,883 1,769 5,635 5,258 7,016 6,493 6,229
Corporate and other(a)... 177 77 110 77 89 76 376 230 302 283 232
National Group........... 50 196 114 231 142 302 306 729 879 2,399 2,947
Spin-offs................ -- -- -- 164 -- 502 -- 666 666 2,087 2,097
------ ------ ------ ------ ------ ------ ------- ------- ------- ------- -------
$4,093 $3,899 $4,133 $4,161 $4,271 $4,655 $12,497 $12,715 $16,657 $18,681 $18,819
====== ====== ====== ====== ====== ====== ======= ======= ======= ======= =======
EBITDA:
Eastern Group............ $ 384 $ 392 $ 453 $ 433 $ 540 $ 503 $ 1,377 $ 1,328 $ 1,727 $ 1,571 $ 1,444
Western Group............ 320 281 355 299 368 311 1,043 891 1,172 984 1,003
Corporate and other(a)... 46 5 6 (46) (2) (13) 50 (54) (68) 8 (149)
National Group........... (14) (23) (15) -- -- 14 (29) (9) (26) 99 283
Spin-offs................ -- -- -- 20 -- 63 -- 83 83 206 270
------ ------ ------ ------ ------ ------ ------- ------- ------- ------- -------
$ 736 $ 655 $ 799 $ 706 $ 906 $ 878 $ 2,441 $ 2,239 $ 2,888 $ 2,868 $ 2,851
====== ====== ====== ====== ====== ====== ======= ======= ======= ======= =======
Depreciation and
amortization:
Eastern Group............ $ 111 $ 113 $ 117 $ 113 $ 114 $ 112 $ 342 $ 338 $ 457 $ 448 $ 436
Western Group............ 103 108 111 111 110 107 324 326 435 404 400
Corporate and other(a)... 40 28 24 24 24 25 88 77 98 89 87
National Group........... 3 13 13 18 8 17 24 48 57 168 185
Spin-offs................ -- -- -- 12 -- 35 -- 47 47 138 130
------ ------ ------ ------ ------ ------ ------- ------- ------- ------- -------
$ 257 $ 262 $ 265 $ 278 $ 256 $ 296 $ 778 $ 836 $ 1,094 $ 1,247 $ 1,238
====== ====== ====== ====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
14
<PAGE> 15
HCA -- THE HEALTHCARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
2000 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C> <C>
Assets:
Eastern Group.............................................. $ 6,571 $ 6,722 $ 6,723 $ 6,660
Western Group.............................................. 6,442 6,591 6,811 6,448
Corporate and other(a)..................................... 4,278 3,143 2,884 4,445
National Group............................................. 216 429 1,285 2,640
Spin-offs.................................................. -- -- 1,726 1,809
------- ------- ------- -------
$17,507 $16,885 $19,429 $22,002
======= ======= ======= =======
</TABLE>
---------------
(a) Includes the Company's eight consolidating hospitals located in England and
Switzerland.
NOTE 13 -- RECENT PRONOUNCEMENTS
During June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS 137 defers the effective date of SFAS 133 to
years beginning after June 15, 2000. SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Due to the
Company's minimal use of derivatives, management does not believe that the
adoption of SFAS 133 will have a material impact on its financial statements.
NOTE 14 -- SUBSEQUENT EVENT
In October 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.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains disclosures which contain
"forward-looking statements." Forward-looking statements include all statements
that do not relate solely to historical or current facts, and may be identified
by the use of words like "may," "believe," "will," "expect," "project,"
"estimate," "anticipate," "plan," "initiative," "should," "intends" or
"continue." These forward-looking statements are based on the current plans and
expectations of the Company and are subject to a number of known and unknown
uncertainties and risks, many of which are beyond the Company's control, that
could significantly affect current plans and expectations and the Company's
future financial condition and results. These factors include, but are not
limited to, (i) the outcome of the known and unknown governmental investigations
and litigation involving the Company's business practices, (ii) the ability to
negotiate and execute definitive settlement agreements relating to DRG coding,
outpatient laboratory billing, home health issues and other matters, (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 program that may limit reimbursements to health
care providers and insurers, (vi) changes in Federal, state or local regulation
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, (ix) liabilities and
other claims asserted against the Company, (x) fluctuations in the market value
of the Company's common stock, (xi) ability to complete the share repurchase
program and to settle related forward purchase contracts, (xii) changes in
accounting practices, (xiii) changes in general economic conditions, (xiv)
future divestitures which may result in additional charges, (xv) the ability to
enter, renegotiate and renew managed care provider arrangements on acceptable
terms, (xvi) the availability and terms of capital to fund the expansion of the
Company's business, (xvii) changes in business strategy or development plans,
(xviii) slowness of reimbursement, (xix) the ability to implement the Company's
shared services and e-health initiatives, (xx) the outcome of pending and any
future tax audits and litigation associated with the Company's tax positions,
(xxi) the outcome of the Company's continuing efforts to monitor, maintain and
comply with appropriate laws, regulations, policies and procedures and the
Company's anticipated corporate integrity agreement with the government, (xxii)
the ability to increase patient volumes and control the costs of providing
services, (xxiii) future divestitures which may result in additional charges,
and (xxiv) other risk factors. As a consequence, current plans, anticipated
actions and future financial condition and results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
You are cautioned not to unduly rely on such forward-looking statements when
evaluating the information presented in this report, including in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
INVESTIGATIONS AND UNDERSTANDING TO SETTLE CERTAIN GOVERNMENT CIVIL CLAIMS
The Company is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. The Company is cooperating in these investigations and
understands, through written notice and other means, that it is a target in
these investigations. Given the breadth of the ongoing investigations, the
Company expects additional investigative and prosecutorial activity to occur in
these and other jurisdictions in the future.
The Company and its affiliates announced in May 2000 that an understanding
had been reached with attorneys of the DOJ to recommend an agreement to settle,
subject to certain conditions, civil claims actions against the Company relating
to DRG coding, outpatient laboratory billing, and home health issues. Civil
issues that remain to be resolved are cost reports and physician relations
issues.
The understanding with DOJ attorneys provides that the Company will
compensate the government $745 million (with interest at 6.5% beginning May 18,
2000) with respect to the issues covered by the understanding. This resulted in
the Company recording an after-tax charge of $498 during the quarter ended June
30, 2000. The settlement is subject to approval by additional officials at the
DOJ; execution of a
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
INVESTIGATIONS AND UNDERSTANDING TO SETTLE CERTAIN GOVERNMENT CIVIL CLAIMS
(CONTINUED)
corporate integrity agreement; execution of definitive settlement documents for
the three issues included in the understanding; execution of agreements to
resolve all pending criminal investigations; and court approval.
The date for completion of criminal settlements has been automatically
extended from September 30, 2000 to December 31, 2000. In the event the criminal
settlement condition is not satisfied by December 31, 2000, the settlement
agreement shall expire unless the Company elects to waive the criminal
condition. Notwithstanding the fixed date of expiration, the parties expect to
complete the settlement even after the expiration date so long as the criminal
settlement condition is satisfied.
The understanding covers issues for the following years: DRG coding for
calendar years 1990-1997; outpatient laboratory billing for calendar years
1989-1997; home health community education for Medicare cost report years
1994-1997; home health billing for calendar years 1995-1998; and certain home
health management transactions for Medicare cost report years 1993-1998.
The Company's existing letter of credit agreement with the DOJ will be
reduced from $1 billion to $250 million at the time of the settlement payment.
In addition, the understanding provides that any future civil payments on cost
reports or physician relations will reduce the remaining amount of the letter of
credit dollar for dollar.
The Company and the Office of Inspector General of the Department of Health
and Human Services have reached an understanding on the principal terms of a
corporate integrity agreement. The corporate integrity agreement is intended to
assure the government of the Company's overall Medicare compliance and covers
DRG coding, outpatient laboratory billing and the two civil issues still to be
resolved -- physician relations and cost reports. Execution of the corporate
integrity agreement is expected to result in waiver of the government's
discretionary right to exclude any of the Company's operations from
participation in the Medicare program with respect to the issues settled.
The Company remains the subject of a formal order of investigation by the
SEC. The Company understands that the SEC investigation includes the anti-fraud,
insider trading, periodic reporting and internal accounting control provisions
of the Federal securities laws.
The Company cannot predict the outcome or quantify effects that the
remaining civil issues, the criminal investigation or other actions will have on
operations in future periods. The Company could be subject to substantial costs
resulting from an adverse outcome of one or more such actions. Any such
sanctions or losses could have a material adverse effect on the Company's
financial position and results of operations. (See Note 10 -- Contingencies in
the Notes to Condensed Consolidated Financial Statements.)
BUSINESS STRATEGY
HCA's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost effective
manner and consistent with the Company's ethics and compliance program and
governmental regulations. HCA also seeks to enhance financial performance by
increasing utilization and improving operating efficiencies of the Company's
facilities. To achieve these objectives, HCA pursues the following strategies:
- Reinforce HCA's "patients first" philosophy and the Company's commitment
to ethics and compliance: HCA is committed to a values-based corporate
culture that prioritizes the care and improvement of human life above all
else. The values highlighted by the Company's corporate culture --
compassion, honesty, integrity, fairness, loyalty, respect and kindness
-- are the cornerstone of HCA. To reinforce the Company's dedication to
these values and to ensure integrity in all that HCA does, the Company
has developed and implemented a comprehensive ethics and compliance
program that articulates a
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
BUSINESS STRATEGY (CONTINUED)
high set of values and behavioral standards. HCA believes that this
program has reinforced the Company's dedication to excellent patient
care.
- Focus on strong assets in select, core communities: HCA focuses on
communities where the Company is or can be the number one or number two
health care provider. To achieve this goal, management initiated a
comprehensive restructuring process that has transformed HCA into a
smaller, more focused company. This restructuring allows HCA to focus its
efforts on core communities, which are typically located in urban areas
characterized by highly integrated health care facility networks. This
restructuring included the divestiture of home health operations and the
Value Health business units, the spin-offs of LifePoint and Triad to
HCA's stockholders, and the sales of various other hospitals and surgery
centers outside of HCA's strategic locations. HCA intends to continue to
optimize core assets through selected divestitures, acquisitions and
capital expenditures.
- Develop comprehensive local health care networks with a broad range of
health care services: HCA seeks to operate each of the Company's
facilities as part of a network with other health care facilities that
HCA's affiliates own or operate within a common region. Being a
comprehensive provider of quality health care services in selected
communities should enable the Company to attract and serve patients and
physicians.
- Grow through increased patient volume, expansion of specialty and
outpatient services and selective acquisitions: HCA intends to identify
opportunities in areas where demand for comprehensive health services is
not adequately met. Expansion of specialty services should strengthen the
Company's health care delivery networks and attract new patients. To
support this expansion, HCA plans to actively recruit additional
specialists. Recognizing that within the health care industry, the shift
from inpatient to outpatient care is likely to continue, HCA intends to
enhance the access to and the capabilities of the Company's outpatient
services by devoting additional capital resources to outpatient
facilities.
- Improve operating efficiencies through enhanced cost management, shared
services and resource utilization: HCA has initiated several measures to
improve the financial performance of the Company's facilities. To address
labor costs, HCA implemented in many communities a flexible staffing
model. To curtail supply cost, HCA formed a new group purchasing
organization that allows the Company to achieve better pricing in
negotiating purchasing and supply contracts. In addition, as HCA grows in
select core markets, the Company should continue to benefit from
economies of scale, including supply chain efficiencies and volume
discount cost savings. Also, the Company expects to be able to reduce
operating costs and to be better positioned to work with health
maintenance organizations, preferred provider organizations and
employers, by sharing certain services among several facilities in the
same market.
- Recruit and develop strong relationships with physicians: HCA plans to
actively recruit physicians to enhance patient care and fulfill the needs
of the communities the Company serves. HCA believes that recruiting and
retaining motivated physicians is essential to being a premier provider
of health care services.
- Streamline and decentralize management consistent with our local
focus: HCA's strategy to streamline and decentralize the Company's
management structure affords management of the Company's facilities
greater flexibility to make decisions that are specific to the respective
local communities. This, in turn, leads to a smoother, less hierarchical
operating structure and creates a more nimble, responsive organization.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
BUSINESS STRATEGY (CONTINUED)
- Effectively allocate capital in order to maximize return: Management
carefully evaluates investment opportunities and invests in projects that
add to the primary objective of providing comprehensive, high-quality
health care services in the most cost-effective manner. HCA maintains and
replaces equipment, renovates and constructs replacement facilities and
adds new services to increase the attractiveness of the Company's
hospitals and other facilities to patients and physicians. In addition,
HCA evaluates acquisitions that complement the Company's strategies and
assesses opportunities to enhance stockholder value, including repayment
of indebtedness and stock repurchases.
RESULTS OF OPERATIONS
Revenue/Volume Trends
HCA's revenues are affected by pressure on payment rates by government,
managed care providers and others. Under the Balanced Budget Act of 1997
("BBA-97"), the Company's reimbursement from the Medicare and Medicaid programs
was reduced by significant changes that were phased in through October 1, 1998,
and will continue to be reduced as certain changes continue to be phased in
during 2000 and 2001. BBA-97 contains a requirement that the Health Care
Financing Administration adopt a prospective payment system ("PPS") for
outpatient hospital services which was implemented during August 2000. The
outpatient PPS has not, at this point, had a measurable effect on the Company's
financial results. The Company and the health care industry continue to
experience a shift in business from Medicare and indemnity insurance to managed
care. HCA generally receives lower payments per patient under managed care plans
thereby reducing revenues, earnings and cash flows. Payer pressure to utilize
outpatient and alternative health care delivery services also presents a
challenge to the Company and the health care industry in general. Admissions
related to Medicare, Medicaid and managed care plans and other discounted
arrangements for the quarters and nine months ended September 30, 2000 and 1999
are set forth below.
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Medicare.................................................... 35.3% 35.7% 36.9% 37.7%
Medicaid.................................................... 11.1 11.2 10.9 10.9
Managed care and other discounted........................... 42.8 42.8 42.4 40.8
Other....................................................... 10.8 10.3 9.8 10.6
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Payment pressure by payers for patients to utilize outpatient or
alternative delivery services and increasing percentages of patient volume being
related to patients participating in managed care plans are expected to present
ongoing challenges. The challenges presented by these trends are enhanced by
HCA's inability to control these trends and the associated risks. To maintain
and improve its operating margins in future periods, HCA must increase patient
volumes while controlling the cost of providing services.
Management believes that the proper response to these challenges includes
the delivery of a broad range of quality health care services to physicians and
patients, with operating decisions being made by the local management teams and
local physicians, and a focus on reducing operating costs through implementation
of its shared services initiative.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Results Summary
The following are comparative summaries of results from operations for the
quarters and nine months ended September 30, 2000 and 1999 (dollars in millions,
except per share amounts):
<TABLE>
<CAPTION>
QUARTER
------------------------------------
2000 1999
---------------- ----------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
<S> <C> <C> <C> <C>
Revenues.................................................... $ 4,093 100.0 $ 3,899 100.0
Salaries and benefits....................................... 1,650 40.3 1,569 40.2
Supplies.................................................... 646 15.8 618 15.9
Other operating expenses.................................... 756 18.5 747 19.1
Provision for doubtful accounts............................. 333 8.1 318 8.2
Depreciation and amortization............................... 257 6.3 262 6.8
Interest expense............................................ 147 3.6 122 3.1
Equity in earnings of affiliates............................ (28) (0.7) (8) (0.2)
Gains on sales of facilities................................ (20) (0.5) -- --
Impairment of long-lived assets............................. 17 0.4 -- --
Restructuring of operations and investigation related
costs..................................................... 16 0.4 24 0.6
------- ----- ------- -----
3,774 92.2 3,652 93.7
------- ----- ------- -----
Income before minority interests and income taxes........... 319 7.8 247 6.3
Minority interests in earnings of consolidated entities..... 26 0.6 13 0.3
------- ----- ------- -----
Income before income taxes.................................. 293 7.2 234 6.0
Provision for income taxes.................................. 119 2.9 96 2.5
------- ----- ------- -----
Net income.................................................. $ 174 4.3 $ 138 3.5
======= ===== ======= =====
Basic earnings per share.................................... $ .31 $ .25
Diluted earnings per share.................................. $ .31 $ .24
% changes from prior year:
Revenues.................................................. 5.0% (14.8)%
Income before income taxes................................ 25.1 (40.4)
Net income................................................ 26.3 (15.2)
Basic earnings per share.................................. 24.0 --
Diluted earnings per share................................ 29.2 (4.0)
Admissions(a)............................................. 2.9 (19.4)
Equivalent admissions(b).................................. 1.9 (20.9)
Revenue per equivalent admission.......................... 3.0 7.6
Same facility % changes from prior year(c):
Revenues.................................................. 6.9 5.8
Admissions(a)............................................. 4.3 2.0
Equivalent admissions(b).................................. 3.4 1.9
Revenue per equivalent admission.......................... 3.4 3.8
</TABLE>
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Results Summary (continued)
<TABLE>
<CAPTION>
NINE MONTHS
------------------------------------
2000 1999
---------------- ----------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
<S> <C> <C> <C> <C>
Revenues.................................................... $12,497 100.0 $12,715 100.0
Salaries and benefits....................................... 4,956 39.7 5,083 40.0
Supplies.................................................... 1,971 15.8 1,994 15.7
Other operating expenses.................................... 2,288 18.2 2,487 19.5
Provision for doubtful accounts............................. 934 7.5 985 7.8
Depreciation and amortization............................... 778 6.2 836 6.4
Interest expense............................................ 402 3.2 351 2.8
Equity in earnings of affiliates............................ (93) (0.7) (73) (0.6)
Settlement with federal government.......................... 745 6.0 -- --
Gains on sales of facilities................................ (38) (0.3) (257) (2.0)
Impairment of long-lived assets............................. 17 0.1 160 1.3
Restructuring of operations and investigation related
costs..................................................... 41 0.3 84 0.7
------- ----- ------- -----
12,001 96.0 11,650 91.6
------- ----- ------- -----
Income before minority interests and income taxes........... 496 4.0 1,065 8.4
Minority interests in earnings of consolidated entities..... 81 0.7 41 0.3
------- ----- ------- -----
Income before income taxes.................................. 415 3.3 1,024 8.1
Provision for income taxes.................................. 217 1.7 458 3.6
------- ----- ------- -----
Net income.................................................. $ 198 1.6 $ 566 4.5
======= ===== ======= =====
Basic earnings per share.................................... $ .36 $ .95
Diluted earnings per share.................................. $ .35 $ .95
% changes from prior year:
Revenues.................................................. (1.7)% (10.8)%
Income before income taxes................................ (59.4) (3.9)
Net income................................................ (65.0) (2.0)
Basic earnings per share.................................. (62.1) 10.5
Diluted earnings per share................................ (63.2) 10.5
Admissions(a)............................................. (5.9) (13.8)
Equivalent admissions(b).................................. (6.6) (15.4)
Revenue per equivalent admission.......................... 5.3 5.3
Same facility % changes from prior year(c):
Revenues.................................................. 6.2 4.3
Admissions(a)............................................. 3.2 2.2
Equivalent admissions(b).................................. 3.0 2.1
Revenue per equivalent admission.......................... 3.1 2.2
</TABLE>
---------------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general measure
of combined inpatient and outpatient volume.
(c) Same facility information excludes the operations of hospitals and their
related facilities which were either acquired or divested during the current
and prior period.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended September 30, 2000 and 1999
Income before income taxes increased 25.1% from income of $234 million in
1999 to $293 million in 2000 and pretax margins increased to 7.2% in 2000 from
6.0% in 1999. The increase in pretax income was primarily attributable to an
increase in revenue per equivalent admission and improvement in certain
operating expenses as a percentage of revenue.
Revenues increased 5.0% to $4.1 billion in 2000 compared to $3.9 billion in
1999. Inpatient admissions increased 2.9% from 1999 and equivalent admissions
(adjusted to reflect combined inpatient and outpatient volume) increased 1.9%.
On a same facility basis, revenues increased 6.9%, admissions increased 4.3% and
equivalent admissions increased 3.4% from 1999. Revenue per equivalent admission
increased 3.0% from 1999 and on a same facility basis increased 3.4%. The
increase in revenue per equivalent admission was primarily the result of
renegotiating and renewing certain managed care contracts on more favorable
terms to the Company.
Salaries and benefits, as a percentage of revenues, increased slightly to
40.3% in 2000 from 40.2% in 1999 due to an increase in the wage rate per man
hour of approximately 6% for the 2000 quarter compared to 1999.
Supply costs decreased slightly as a percentage of revenues to 15.8% in
2000 from 15.9% in 1999; however, the Company continues to experience cost
pressures in this area due to increasing costs of new technology and
pharmaceuticals.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) as a percentage of revenues, decreased to 18.5%
in the third quarter of 2000 from 19.1% in 1999 due to small decreases in
several of these areas as a percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, decreased to
8.1% in 2000 from 8.2% 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), delays in payments and the denial of claims by managed care payers
and increases in the volume of health care services provided to uninsured
patients in certain of the Company's facilities.
Equity in earnings of affiliates increased as a percentage of revenues to
0.7% in 2000 from 0.2% in 1999 due to improved operations during 2000 at certain
of HCA's joint ventures accounted for using the equity method of accounting and
an impairment charge related to one of our equity investment entities in the
third quarter of 1999 (resulting in an $11 million expense).
Depreciation and amortization decreased as a percentage of revenues to 6.3%
in 2000 from 6.8% in 1999, primarily due to depreciation levels remaining
relatively flat while revenues increased.
Interest expense increased to $147 million in 2000 compared to $122 million
in 1999 primarily as a result of an increase in the general level of interest
rates during 2000 compared to 1999 and the additional interest expense of
approximately $12 million recognized during the third quarter of 2000 related to
the proposed settlement with the federal government. The average rates for the
Company's bank borrowings increased from 6.65% during the quarter ended
September 30, 1999 to 8.09% during the quarter ended September 30, 2000.
During 2000 and 1999, respectively, the Company incurred $16 million and
$24 million of restructuring of operations and investigation related costs. The
$16 million of costs incurred during the 2000 quarter were professional fees
(legal and accounting) related to the governmental investigations. In 1999,
restructuring of operations and investigation related costs included $20 million
of professional fees (legal and accounting)
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended September 30, 2000 and 1999 (continued)
related to the governmental investigations and $4 million of other costs. See
Note 4 -- Restructuring of Operations and Investigation Related Costs in the
Notes to Condensed Consolidated Financial Statements.
During the third quarter of 2000, the Company recognized a pretax gain of
$20 million ($9 million after-tax) on the sales of two hospitals. Proceeds from
the sales were used to repay bank borrowings. See Note 3 -- Restructuring of
Operations in the Notes to Condensed Consolidated Financial Statements.
During the third quarter of 2000, the Company identified and initiated
plans to sell during 2000 and 2001, one consolidating and one non-consolidating
hospital. The carrying value for the hospitals was reduced to fair value based
upon estimates of sales values, for a total non-cash, pretax charge of
approximately $17 million. See Note 3 -- Restructuring of Operations in the
Notes to Condensed Consolidated Financial Statements.
Minority interests increased slightly as a percentage of revenues to 0.6%
in 2000 from 0.3% in 1999 due to improved operations at certain joint ventures.
The effective income tax rate was 40.6% in 2000 and 41.2% in 1999 due to
nondeductible intangible assets related to gains on sales of facilities and
impairments of long-lived assets. If the effect of the nondeductible intangible
assets and the related amortization were excluded, the effective income tax rate
would have been approximately 39% for both 2000 and 1999.
Nine Months Ended September 30, 2000 and 1999
Income before income taxes decreased 59.4% to $415 million in 2000 from
$1.0 billion in 1999 and pretax margins decreased to 3.3% in 2000 from 8.1% in
1999. The decrease in pretax income was primarily attributable to the accrual of
$745 million for an estimated settlement with the federal government in the
second quarter of 2000. Excluding the settlement charge, income before income
taxes increased 13.3% to $1.2 billion in 2000.
Revenues decreased 1.7% to $12.5 billion in 2000 compared to $12.7 billion
in 1999. Inpatient admissions decreased 5.9% from 1999 and equivalent admissions
(adjusted to reflect combined inpatient and outpatient volume) decreased 6.6%.
Revenues, admissions and equivalent admissions declined primarily as a result of
the Company's restructuring of operations. During 1999, the Company completed
the spin-offs of LifePoint and Triad and the sales of 24 hospital facilities. On
a same facility basis, revenues increased 6.2%, admissions increased 3.2% and
equivalent admissions increased 3.0% from 1999. Revenue per equivalent admission
increased 5.3% from 1999 to 2000 and on a same facility basis increased 3.1%.
The increase in revenue per equivalent admission on a same facility basis was
primarily the result of renegotiating and renewing certain managed care
contracts on more favorable terms to the Company. The increase in revenue per
equivalent admission on a consolidated basis was the result of the combination
of the same facility improvement and the benefit from the restructuring of
operations transactions.
Salaries and benefits, as a percentage of revenues, decreased to 39.7% in
2000 from 40.0% in 1999 due to the restructuring of operations discussed above
and in Note 3 -- Restructuring of Operations in the Notes to Condensed
Consolidated Financial Statements. Salaries and benefits as a percentage of
revenues for the facilities included in the spin-offs of Triad and LifePoint
were 42.4% for 1999, and salaries and benefits as a percentage of revenues for
the facilities included in the Company's National Group were 46.6% for 1999.
Supply costs increased as a percentage of revenues to 15.8% in 2000 from
15.7% in 1999 due to an increase in the cost of supplies per equivalent
admission of 5.9% related to the increasing costs of new technology and
pharmaceuticals.
23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 2000 and 1999 (continued)
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 18.2%
in 2000 from 19.5% in 1999 due primarily to the restructuring of operations
discussed above and in Note 3 -- Restructuring of Operations in the Notes to
Condensed Consolidated Financial Statements. The other operating expenses as a
percentage of revenues for the facilities included in the spin-offs of Triad and
LifePoint were 22.4% for 1999, and the other operating expenses as a percentage
of revenues for the facilities included in the Company's National Group were
27.5% for 1999. Another factor in the improvement in other operating expenses
related to certain insurance subsidiary funds being reallocated among investment
managers, resulting in the recognition of previously unrealized gains that
decreased other operating expenses by approximately $27 million during the
second quarter of 2000.
Provision for doubtful accounts, as a percentage of revenues, decreased to
7.5% in 2000 from 7.8% 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), delays in payments and the denial of claims by managed care payers
and increases in the volume of health care services provided to uninsured
patients in certain of the Company's facilities.
Equity in earnings of affiliates remained basically flat as a percentage of
revenues at 0.7% in 2000 as compared to 0.6% in 1999.
Depreciation and amortization decreased as a percentage of revenues to 6.2%
in 2000 from 6.4% in 1999, primarily due to the restructuring of operations
discussed above and the same facility depreciation rates remaining flat while
same facility revenues increased. Depreciation and amortization as a percentage
of revenues for the facilities included in the spin-offs of Triad and LifePoint
was 7.0% in 1999.
Interest expense increased to $402 million in 2000 compared to $351 million
in 1999, primarily as a result of an increase in the general level of interest
rates during 2000 compared to 1999 and the interest expense, beginning May 2000,
of approximately $18 million related to the settlement with the federal
government. The average rates for the Company's bank borrowings increased from
6.37% during the nine months ended September 30, 1999 to 7.76% during the nine
months ended September 30, 2000.
During 2000 and 1999, respectively, the Company incurred $41 million and
$84 million of restructuring of operations and investigation related costs. In
2000, these costs included $36 million of professional fees (legal and
accounting) related to the governmental investigations and $5 million of other
costs. In 1999, restructuring of operations and investigation related costs
included $62 million of professional fees (legal and accounting) related to the
governmental investigations, $2 million of severance and $20 million of other
costs. See Note 4 -- Restructuring of Operations and Investigation Related Costs
in the Notes to Condensed Consolidated Financial Statements.
During 2000, the Company recognized a pretax gain of $38 million ($18
million after-tax) on the sales of three hospitals. During 1999, the Company
recognized a pretax gain of $257 million ($151 million after-tax) on the sale of
three hospitals and certain related health care facilities. Proceeds from the
sales were used to repay bank borrowings. See Note 3 -- Restructuring of
Operations in the Notes to Condensed Consolidated Financial Statements.
During 2000, the Company identified and initiated plans to sell during 2000
or 2001, one consolidating and one non-consolidating hospital. The carrying
value for the hospitals was reduced to fair value based upon estimates of sales
values, for a total non-cash, pretax charge of approximately $17 million. See
Note 3 -- Restructuring of Operations in the Notes to Condensed Consolidated
Financial Statements.
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 2000 and 1999 (continued)
During 1999, the Company also identified and initiated, or revised, plans
to divest or close during 1999 and 2000, 15 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 based upon estimates of
sales values, for a total non-cash, pretax charge of approximately $160 million.
See Note 3 -- Restructuring of Operations in the Notes to Condensed Consolidated
Financial Statements.
Minority interests increased as a percentage of revenues to 0.7% in 2000
from 0.3% in 1999 due to improved operations at certain joint ventures.
The effective income tax rate was 52.3% in 2000 and 44.7% in 1999 due to 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 valuation allowance, the nondeductible intangible assets
and the related amortization were excluded, the effective income tax rate would
have been approximately 39% for both 2000 and 1999.
Liquidity
Cash provided by operating activities improved to $1.114 billion during the
first nine months of 2000 compared to $806 million in 1999. The improvement was
primarily due to an increase in net income, excluding gains on sales of
facilities, impairment of long-lived assets and the settlement with federal
government to $715 million in 2000 from $608 million in 1999. The Company made
tax payments of $498 million during the first nine months of 2000 compared to
$565 million in 1999.
Cash used in investing activities was $983 million in 2000, compared to
cash provided of $1.184 billion during 1999. The decrease was due primarily to:
proceeds from the disposition of hospitals and other health care facilities of
$660 million in 1999 compared with $295 million in 2000; cash flows from changes
in investments were $557 million in 1999 (including repayment by a
nonconsolidating joint venture of Company advances of approximately $330
million) compared with cash used of $78 million in 2000; and the $886 million in
proceeds in 1999 related to the spin-offs. In 2000, the Company used $338
million to acquire hospitals and health care entities, and there were no
acquisitions in 1999.
Cash flows used in financing activities totaled $141 million in the first
nine months of 2000 compared to $2.163 billion in 1999. The primary financing
cash flow activities were the net repurchases of the Company's common stock
(approximately $400 million and $1.9 billion during 2000 and 1999, respectively)
and the receipt of net proceeds from debt issuances of $326 million in 2000
compared to net debt payments of $243 million in 1999.
At September 30, 2000, HCA had a working capital deficit of $353 million
compared to working capital of $265 million at December 31, 1999. The decrease
is due to the accrual of $745 million related to the understanding to settle
certain government civil claims. See Note 2 -- Investigations and Understanding
to Settle Certain Government Civil Claims in the Notes to Condensed Consolidated
Financial Statements. At September 30, 2000, management believes that cash flows
from operations, amounts available under the Company's revolving credit facility
(the "Credit Facility") and HCA's expected access to debt markets are sufficient
to meet expected liquidity needs during the next twelve months.
Investments of HCA's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.7 billion at both September
30, 2000 and December 31, 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 approximately $400 million at
25
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
September 30, 2000. During 2000, two of the Company's joint venture partners
exercised their put options whereby HCA purchased the partner's interest in the
joint venture for approximately $95 million. HCA cannot predict if, or when,
other joint venture partners will exercise such options.
During the first quarter of 1998, the Internal Revenue Service (the "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
may propose to revoke the tax-exempt or public charity status of not-for profit
entities which participate in such joint ventures or to treat joint venture
income as unrelated business taxable income. The Company 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. The tax ruling or any adverse
determination by the IRS 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/or influence the exercise of the put
agreements by certain existing joint venture partners.
In March 2000, the Company announced that its Board of Directors authorized
the repurchase of up to $1 billion of additional common stock. Certain financial
organizations purchased approximately 5.3 million shares of HCA's common stock
for approximately $119 million during the first quarter of 2000; approximately
11.3 million shares for approximately $322 million during the second quarter of
2000 and approximately 2.8 million shares for approximately $93 million during
the third quarter of 2000, utilizing forward purchase contracts. In accordance
with the terms of the contracts, these shares remain outstanding until settled
by HCA. As part of this stock repurchase program, HCA sold 5.7 million put
options during the third quarter of 2000, each of which entitles the holder to
sell stock to HCA at a specified price on a specified date. These put options
expire on various dates through February 27, 2001 and have exercise prices
ranging from $33.32 to $35.15 per share with an average exercise price of $34.46
per share. The outstanding put options permit a net share settlement at the
Company's election and do not result in a put option liability on the balance
sheet. HCA expects to repurchase, from time to time, the remaining stock
associated with the March 2000 repurchase authorization through open market
purchases, privately negotiated transactions, forward purchase contracts or by
utilizing the sale of additional put options.
In November 1999, HCA announced that its Board of Directors authorized the
repurchase of up to $1 billion of its common stock. During the first quarter of
2000, HCA settled forward purchase contracts associated with its November 1999
authorization for approximately 8.5 million shares at a cost of $250 million;
during the second quarter of 2000, settled forward purchase contracts for
approximately 1.8 million shares at a cost of approximately $53 million and
during the third quarter of 2000, settled forward purchase contracts associated
with the same authorization for approximately 6.6 million shares at a cost of
approximately $200 million. In accordance with the terms of the forward purchase
contracts, the shares purchased remain outstanding until the forward purchase
contracts are settled by the Company. In accordance with the terms of the
forward purchase contracts, approximately 17.5 million shares at a cost of
approximately $495 million remain outstanding until the forward purchase
contracts are settled by the Company.
During the first quarter of 1999, as part of the agreement related to the
Company's share repurchase programs, the Company entered into a Letter of Credit
Agreement with the United States Department of Justice. The Company provided the
government with letters of credit totaling $1 billion. The understanding reached
with the government in May 2000 provides that the letters of credit will be
reduced from $1 billion to $250 million at the time of the settlement payment.
In addition, the understanding is that any future civil payments on cost reports
or physician relations will reduce the remaining amount of the letters of credit
dollar for dollar.
26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
The resolution of the government investigations and the various lawsuits
and legal proceedings that have been asserted could result in substantial
liabilities to the Company. The ultimate liabilities cannot be reasonably
estimated, as to the timing or amounts, at this time; however, it is possible
that the resolution of certain of the contingencies could have a material
adverse effect on the Company's results of operations, financial position and
liquidity.
Capital Resources
Excluding acquisitions, capital expenditures were $860 million during the
first nine months of 2000 compared to $936 million for the same period in 1999.
Planned capital expenditures in 2000 are expected to approximate $1.2 billion.
Management believes that its capital expenditure program is adequate to expand,
improve and equip its existing health care facilities.
Acquisitions of hospitals and health care entities totaled $338 million
during 2000 compared with none during the first nine months of 1999.
HCA expects to finance all capital expenditures with internally generated
and borrowed funds. Available sources of capital include amounts available under
the Company's Credit Facility (approximately $1.087 billion as of October 31,
2000) and anticipated availability in public and private debt markets. At
September 30, 2000, there were construction projects that have been approved by
management which have an estimated additional cost to complete and equip over
the next three years of approximately $1.7 billion.
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 the 1999 Term Loan and to reduce outstanding loans under the
Credit Facility. At September 30, 2000, $500 million remains outstanding under
the 2000 Term Loan.
During the second quarter of 2000, an English subsidiary of the Company
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 the Company's
50/50 joint venture partner in England and to refinance existing indebtedness.
The English Term Loan matures in May 2001.
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
Company's revolving 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 the Company'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 October 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.
The Credit Facility, the 2000 Term Loan and the $1.0 billion term loan
which HCA entered into in July 1998 (the "1998 Term Loan") contain customary
covenants which include (i) limitations on additional debt, (ii) limitations on
sales of assets, mergers and changes of ownership, and (iii) maintenance of
certain interest coverage ratios. HCA is currently in compliance with all such
covenants.
27
<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Market Risk
The Company is exposed to market risk related to changes in interest rates
and market values of securities. HCA currently does not use derivative
instruments to offset the market risk exposure of the investments in debt or
equity securities of HCA's wholly-owned insurance subsidiary or to alter the
interest rate characteristics of the Company's debt instruments.
The Company's investments in debt and equity securities were $1.2 billion
and $518 million, respectively, at September 30, 2000. These investments are
carried at fair value with changes in unrealized gains and losses being recorded
as adjustments to stockholders' equity. The fair value of investments is
generally based on quoted market prices. Changes in interest rates and market
values of securities are not expected to be material in relation to the
financial position and operating results of the Company.
With respect to the Company's interest-bearing liabilities, approximately
$2.02 billion of long-term debt at September 30, 2000 is subject to variable
rates of interest, while the remaining balance in long-term debt of $4.84
billion at September 30, 2000 is subject to fixed rates of interest. The
Company's variable interest rate is affected by both the general level of U.S.
interest rates and the Company's credit rating. The Company's variable rate debt
is comprised of the Company's Credit Facility of which interest is payable
generally at LIBOR plus 0.45% to 1.5% (depending on the Company's credit
ratings), and bank term loans of which interest is payable generally at LIBOR
plus 0.75% to 2.5%. Due to increases in LIBOR, the average rate for the
Company's Credit Facility increased from 6.19% for the quarter ended September
30, 1999 to 7.51% for the quarter ended September 30, 2000, and the average rate
for the Company's term loans increased from 6.78% for the quarter ended
September 30, 1999 to 8.19% for the quarter ended September 30, 2000. The
estimated fair value of the Company's total long-term debt was $6.6 billion at
September 30, 2000. The estimates of fair value are based upon the quoted market
prices for the same or similar issues of long-term debt with the same
maturities. Based on a hypothetical 1% increase in interest rates, the potential
annualized losses in future pretax earnings would be approximately $20.4
million. The impact of such a change in interest rates on the carrying value of
long-term debt would not be significant. The estimated changes to interest
expense and the fair value of long-term debt are determined considering the
impact of hypothetical interest rates on the Company's borrowing cost and
long-term debt balances. To mitigate the impact of fluctuations in interest
rates, the Company generally targets a portion of its debt portfolio at a fixed
rate, either by borrowing on a fixed or floating rate basis or entering into
interest rate swap transactions. The Company has not, during 2000 or 1999,
participated in any interest rate swap agreements.
Foreign operations and the related market risks associated with foreign
currency are currently insignificant to the Company's results of operations and
financial position.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Company experienced no material adverse effect on its results of
operations, financial condition or ability to provide for its patients' safety
and health as a result of the Year 2000 date conversion in its or third party
computer systems and programs.
PENDING IRS DISPUTES
The Company is contesting income taxes and related interest proposed by the
IRS for prior years aggregating approximately $196 million as of September 30,
2000. Management believes that final resolution of these disputes will not have
a material adverse effect on the results of operations or liquidity of the
Company. (See Note 6 -- Income Taxes in the Notes to Condensed Consolidated
Financial Statements for a description of the pending IRS disputes).
28
<PAGE> 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
OPERATING DATA
<TABLE>
<CAPTION>
2000 1999
------- ---------
<S> <C> <C>
CONSOLIDATING
Number of hospitals in operation at:
March 31.................................................. 192 273
June 30................................................... 195 204
September 30.............................................. 189 202
December 31............................................... 195
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 80 95
June 30................................................... 80 81
September 30.............................................. 76 81
December 31............................................... 80
Licensed hospital beds at(a):
March 31.................................................. 42,006 51,797
June 30................................................... 42,240 43,969
September 30.............................................. 41,298 43,461
December 31............................................... 42,484
Weighted average licensed beds(b):
Quarter:
First................................................... 42,184 52,451
Second.................................................. 41,923 46,490
Third................................................... 41,409 43,511
Fourth.................................................. 42,850
Year...................................................... 46,291
Average daily census(c):
Quarter:
First................................................... 22,697 26,546
Second.................................................. 20,526 21,467
Third................................................... 20,028 19,704
Fourth.................................................. 20,385
Year...................................................... 22,002
Admissions(d):
Quarter:
First................................................... 408,100 477,400
Second.................................................. 380,600 395,800
Third................................................... 381,200 370,500
Fourth.................................................. 381,700
Year...................................................... 1,625,400
Equivalent admissions(e):
Quarter:
First................................................... 595,900 703,300
Second.................................................. 570,600 596,900
Third................................................... 568,500 557,900
Fourth.................................................. 567,000
Year...................................................... 2,425,100
Average length of stay (days)(f):
Quarter:
First................................................... 5.1 5.0
Second.................................................. 4.9 4.9
Third................................................... 4.8 4.9
Fourth.................................................. 4.9
Year...................................................... 4.9
</TABLE>
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<PAGE> 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
OPERATING DATA (CONTINUED)
<TABLE>
<CAPTION>
2000 1999
------- ---------
<S> <C> <C>
NON-CONSOLIDATING(G)
Number of hospitals in operation at:
March 31.................................................. 13 24
June 30................................................... 9 16
September 30.............................................. 9 12
December 31............................................... 12
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 3 5
June 30................................................... 3 4
September 30.............................................. 3 3
December 31............................................... 3
Licensed hospital beds at:
March 31.................................................. 3,251 6,015
June 30................................................... 2,697 3,868
September 30.............................................. 2,697 3,153
December 31............................................... 3,179
</TABLE>
---------------
(a) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(b) Weighted average licensed beds represents the average number of licensed
beds, weighted based on periods owned.
(c) Represents the average number of patients in the Company's hospital beds
each day.
(d) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company'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 the
Company's hospitals.
(g) The non-consolidating facilities include facilities operated through 50/50
joint ventures which are not controlled by the Company and are accounted for
using the equity method of accounting.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
The information called for by this item is provided under the caption
"Market Risk" under Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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<PAGE> 31
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
The Company is facing significant legal challenges. The Company is the
subject of various Federal and state investigations, qui tam actions,
shareholder derivative and class action suits filed in Federal court,
shareholder derivative actions filed in state courts, patient/payer actions and
general liability claims.
FEDERAL AND STATE INVESTIGATIONS
In March 1997, various facilities of the Company's El Paso, Texas
operations were searched by Federal authorities pursuant to search warrants, and
the government removed various records and documents. In February 1998, also in
El Paso, an additional warrant was executed and a single computer was seized.
In July 1997, various Company affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District Court
in several states. During July, September and November 1997, the Company was
also served with subpoenas requesting records and documents related to
laboratory billing and DRG coding in various states and home health operations
in various jurisdictions, including, but not limited to, Florida. In January
1998, the Company received a subpoena which requested records and documents
relating to physician relationships. In June 1999, Columbia Home Care Group
received a subpoena seeking records related to home health operations. In March
2000, the Company received a subpoena that requested records relating to wound
care centers.
Also, in July 1997, the United States District Court for the Middle
District of Florida, in Fort Myers, issued an indictment against three employees
of a subsidiary of the Company. The indictment related to the alleged false
characterization of interest payments on certain debt resulting in Medicare and
Tricare (formerly CHAMPUS) overpayments since 1986 to Fawcett Memorial Hospital,
a Port Charlotte, Florida hospital that was acquired by the Company in 1992. The
Company has been served with subpoenas for various records and documents. A
fourth employee of a subsidiary of the Company was indicted in July 1998 by a
superseding indictment. The trial on this matter commenced on May 3, 1999. On
July 2, 1999, the jury returned a mixed verdict, finding two such employees
guilty and acquitting one. The jury was unable to reach a verdict as to the
fourth employee. The government and the fourth employee executed an agreement to
defer prosecution for 18 months after which charges will be dismissed. The two
convicted employees were sentenced in December 1999 and both have appealed to
the 11th Circuit.
Several hospitals and other facilities affiliated with the Company in
various states have also received individual Federal and/or state government
inquiries, both informal and formal, requesting information related to
reimbursement from government programs.
In general, the Company believes that the United States Department of
Justice and other Federal and state governmental authorities are investigating
certain acts, practices or omissions alleged to have been engaged in by the
Company with respect to Medicare, Medicaid and Tricare patients regarding (a)
allegedly improper DRG coding (commonly referred to as "upcoding") relating to
bills submitted for medical services, (b) allegedly improper outpatient
laboratory billing (e.g., unbundling of services and medically unnecessary
tests), (c) inclusion of allegedly improper items in cost reports submitted as a
basis for reimbursement under Medicare, Medicaid and similar government
programs, (d) arrangements with physicians and other parties that allegedly
violate certain Federal and state laws governing fraud and abuse, anti-kickback
and "Stark" laws and (e) allegedly improper acquisitions of home health care
agencies and allegedly excessive billing for home health care services.
The Company and its affiliates announced in May 2000 that an understanding
had been reached with attorneys of the DOJ to recommend an agreement to settle,
subject to certain conditions, civil claims actions against the Company relating
to DRG coding, outpatient laboratory billing, and home health issues. Civil
issues that remain to be resolved are cost reports and physician relations
issues.
The understanding with DOJ attorneys provides that the Company will
compensate the government $745 million (with interest at 6.5% beginning May 18,
2000) with respect to the issues covered by the
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<PAGE> 32
understanding. This resulted in the Company recording an after-tax charge of
$498 million during the quarter ended June 30, 2000. The settlement is subject
to approval by additional officials at the DOJ, other federal agencies as well
as state officials; execution of a corporate integrity agreement; execution of
definitive settlement documents for the three issues included in the
understanding; execution of agreements to resolve all criminal investigations
pending against the Company and court approval.
The date for completion of criminal settlements has been automatically
extended from September 30, 2000 to December 31, 2000. In the event the criminal
settlement condition is not satisfied by December 31, 2000, the settlement
agreement shall expire unless the Company elects to waive the criminal
condition. Notwithstanding the fixed date of expiration, the parties expect to
complete the settlement even after the expiration date so long as the criminal
settlement condition is satisfied.
The understanding provides releases for the following years: DRG coding for
calendar years 1990-1997; outpatient laboratory billings for calendar years
1989-1997; home health community education for Medicare cost report years
1994-1997; home health billing for calendar years 1995-1998; and certain home
health management transactions for Medicare cost report years 1993-1998.
The Company's existing letter of credit agreement with the DOJ will be
reduced from $1 billion to $250 million at the time of the settlement payment.
In addition, the understanding provides that any future civil payments on cost
reports or physician relations will reduce the remaining amount of the letter of
credit dollar for dollar.
The Company also reached an understanding with the Office of Inspector
General of the Department of Health and Human Services on the principal terms of
a corporate integrity agreement. The corporate integrity agreement is intended
to assure the government of the Company's overall Medicare compliance including
DRG coding, outpatient laboratory billing and the two civil issues still to be
resolved -- physician relations and cost reports. Execution of the corporate
integrity agreement is expected to result in waiver of the government's
discretionary right to exclude any of the Company's operations from
participation in the Medicare program with respect to the issues settled.
The Company continues to cooperate in these investigations and understands,
through written notice and other means, that it is a target in these
investigations. Given the scope of the ongoing investigations, the Company
expects additional subpoenas and other investigative and prosecutorial activity
to occur in these and other jurisdictions in the future.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with the Company), announced that they will pay
$61 million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges (conspiracy, mail
fraud and violating the Medicare anti-kickback statute) filed by the U.S.
Attorneys in the Middle and Southern District of Florida and the Northern
District of Georgia. While the Company was not specifically named in these
guilty pleas, the guilty pleas refer to the involvement of a "Company A" or a
"company not named as a defendant." The Company believes these references refer
to the Company or its subsidiaries.
The Company remains the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation relates to the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
While we remain unable to predict the outcome of any of the ongoing
investigations or the initiation of any additional investigations, were the
Company to be found in violation of Federal or state laws relating to Medicare,
Medicaid or similar programs, the Company could be subject to substantial
monetary fines, civil and criminal penalties and exclusion from participation in
the Medicare and Medicaid programs. Any such sanctions could have a material
adverse effect on the Company's financial position and results of operations.
(See Note 2 -- Investigations and Understanding to Settle Certain Government
Civil Claims and Note 10 -- Contingencies in the Notes to Condensed Consolidated
Financial Statements.)
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<PAGE> 33
LAWSUITS
Qui Tam Actions
Several qui tam actions have been brought by private parties ("relators")
on behalf of the United States of America and have been unsealed and served on
the Company. With the exception of six cases discussed below, the government has
declined to intervene in the qui tam actions unsealed to date. To the best of
the Company's knowledge, the actions allege, in general, that the Company and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act, 31 U.S.C. sec.3729 et seq., for improper claims submitted to the government
for reimbursement. The lawsuits generally seek damages of three times the amount
of all Medicare or Medicaid claims (involving false claims) presented by the
defendants to the Federal government, civil penalties of not less than $5,000
nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees
and costs. The Company is aware of additional qui tam actions that remain under
seal and believes that there are other sealed qui tam cases of which it is
unaware.
On February 12, 1999, the United States filed a Motion before the Judicial
Panel on Multidistrict Litigation ("MDL Panel") seeking to transfer and
consolidate, pursuant to 28 U.S.C. sec. 1407, all 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 denied the Motion on procedural grounds. On August 12,
1999, the United States Government filed an Application to Conduct 28 U.S.C.
sec. 1407 Consolidated Proceedings under seal with the MDL Panel. The underlying
motion to consolidate the proceedings relates to the qui tam cases against the
Company, both sealed and unsealed.
On October 5, 1998, the matter of United States of America ex rel. James F.
Alderson v. Columbia/HCA Healthcare Corp., Healthtrust -- The Hospital Company
and Quorum Health Group, et al., Case No. 97-2035-CIV-T-23E, in the Middle
District of Florida, Tampa Division, was unsealed. The government intervened in
this action on October 1, 1998. The Complaint was originally filed in Montana in
1993 but was later transferred to Florida. The Complaint alleges that defendants
made false statements in annual Medicare cost reports over a period of ten
years. The Complaint further alleges that defendants engaged in a scheme of
filing improper reimbursement claims while keeping a "secret" set of books which
were known as "reserve cost reports" and concealing these books from Medicare
auditors. The government filed and served an Amended Complaint against Quorum
Health Group. In October 2000, Quorum announced that it had reached an
understanding to settle the matter. The government has not yet served an Amended
Complaint on the HCA defendants.
The matter of United States of America ex rel. Sara Ortega v. Columbia/HCA
Healthcare Corp., et al., No. EP95-CA-259H, was unsealed on July 31, 1998 in the
Western District of Texas, El Paso Division. The Complaint alleges that
defendants submitted false statements to the Joint Commission on Accreditation
of Healthcare Organizations (JCAHO) in order to be eligible for Medicare
payments, thereby rendering false defendants' claims for Medicare reimbursement.
An Amended Complaint, which has not been served on the Company, also alleges
that defendants engaged in fraudulent accounting practices, paid kickbacks for
patient referrals, upcoded claims for reimbursement from Federal health care
programs and shifted costs to its Medicare cost reports. Defendants have moved
to dismiss the Complaint, and that motion is pending. Defendants have also moved
to stay discovery while the motion to dismiss is pending. The government
announced that it intervened on all counts of the Amended Complaint except for
the count alleging false statements to JCAHO.
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 by the
Diabetes Treatment Centers of America to physicians 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
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<PAGE> 34
judgment stricken. The relator did not file an amended motion for summary
judgment and the court's deadline for filing such a motion has passed. This
action is currently stayed.
In December 1998, the matter of United States of America ex rel. John W.
Schilling v. Columbia/HCA Healthcare Corporation, et al., Civil Action No.
96-1264-CIV-T-23B, in the Middle District of Florida, was unsealed. The
government has intervened in this action. The Complaint alleges that defendants
made false statements in annual Medicare cost reports. The Complaint further
alleges, as in Alderson (above), that the Company kept "reserve cost reports."
The government has not yet served the Complaint on Defendants, and the case is
currently stayed.
In June 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, in the Middle District of Florida, Tampa
Division, was filed. This complaint was unsealed by the court on April 9, 1999.
The government has intervened in this lawsuit but has not yet served the
complaint on the Company. This qui tam action alleges that the Company submitted
false claims relating to contracts with Curative for the management of certain
wound care centers. The complaint further alleges that management fees paid to
Curative were excessive and not reasonable and that the claims for reimbursement
for these management fees violated the anti-kickback statutes.
A lawsuit captioned United States of America ex rel. James Thompson v.
Columbia/HCA Healthcare Corporation, et al. was filed on March 10, 1995 in the
United States District Court for the Southern District of Texas, Corpus Christi
Division (Civil Action No. C-95-110). In general, the relator claims that the
defendants (the Company and certain subsidiaries and affiliated partnerships)
engaged in a widespread strategy to pay physicians money for referrals and
engaged in other conduct to induce referrals, such as: (i) offering physicians
equity interests in hospitals; (ii) offering loans to physicians; (iii) paying
money under the guise of "consultation fees" to physicians to guarantee their
capital investment; (iv) paying consultation fees, rent or other monies to
physicians; (v) providing office space for free or reduced rent; (vi) providing
free or reduced rate vacations and trips; (vii) providing free or reduced rate
opportunities for additional medical training; (viii) providing income
guarantees; and (ix) granting physicians exclusive rights to perform procedures
in particular fields of practice. 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. Although some discovery has
occurred, there is currently a stay of discovery.
The matter of United States ex rel. McLendon v. Columbia/HCA, et al., Civ.
No. 1 97 CV 0890, was filed under seal on April 4, 1997 in the U.S. District
Court for the Northern District of Georgia, Atlanta Division. On July 19, 1999,
the court unsealed this action. The Complaint alleges that the Company acted to
illegally obtain Medicare reimbursement for costs incurred in purchasing home
health agencies. The Complaint also alleges that the Company illegally billed
Medicare for certain sales and marketing activities and for certain home care
visits. The government has intervened in this action but has not served the
Complaint.
In August 1999, the Company was made aware that the case of United States
ex rel. Tonya M. Atchison v. Col/HCA Healthcare, Inc., El Paso Healthcare
System, Ltd., Columbia West Radiology Group, P.A., West Texas Radiology Group,
Rio Grande Physicians' Services Inc., El Paso Nurses Unlimited Inc., El Paso
Healthcare Systems Limited, and El Paso Healthcare Systems United Partnership,
No. EP 97-CA234, was unsealed in the U.S. District Court for the Western
District of Texas and the Company was served on or about September 16, 1999. In
general, the complaint alleges that the defendants submitted false claims
regarding the 72-hour rule, cost reports and central business office billings,
wrote-off bad debt on international patients, inflated financial information on
the sale of a hospital, improperly billed pharmacy 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
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<PAGE> 35
treatment and wound care centers. The government has not intervened in this
action. The parties have agreed to extend the time within which to respond to
the complaint.
On November 10, 1999, the Company was served with the case of United States
ex rel. Ronald L. Campbell and Daniel C. Rice v. Montgomery County Hospital
District, Montgomery County Health Care Foundation, and Conroe Hospital Corp.,
Case No. H-97-3502, in the Southern District of Texas. The complaint alleges
that the Company conspired with Montgomery County Hospital District ("MCHD") to
conceal the fact that MCHD knowingly overstated capital losses, resulting in the
avoidance of "recapture liability" on the cost reports. The court has stayed
this case. The government has not intervened in this case.
In February 2000, the matter of United States of America, ex rel. Michael
R. Marine v. Columbia Aventura Medical Center, Columbia Cedars Medical Center,
Columbia Hospital, Columbia/HCA Healthcare Corporation, Columbia JFK Medical
Center, Columbia Kendall Regional Medical Center, Columbia Miami Heart
Institute, Columbia Northwest Medical Center, Columbia University Hospital and
Medical Center, and Columbia Westside Regional Medical Center Case No. 97-4368
(S.D. Fla.) was unsealed. The government intervened on or about February 15,
2000. The complaint alleges that the Company submitted false claims pertaining
to the costs incurred by its nine south Florida hospitals for home health
services furnished to homebound patients. The Company has not been served with
the Complaint.
In approximately March 2000, the matter of United States of America ex
rel., Bruce S. Skinner, M.D. v. North Trident Regional Hospital, Inc.,
Columbia/HCA Healthcare Corp. of South Carolina, Inc., Columbia Physician
Services, Inc., and Columbia/HCA Healthcare Corporation, Case No. 2-00-0076-23
(U.S. District Court, District of South Carolina, Charleston Division) was
unsealed. The complaint alleges that the defendants committed fraud and engaged
in the upcoding of billing for physician/employees' professional services. The
government has declined to intervene in this case.
The Company intends to pursue the defense of the qui tam actions
vigorously.
Shareholder Derivative and Class Action Complaints Filed in the U.S. District
Courts
Since April 1997, numerous securities class action and derivative lawsuits
have been filed in the United States District Court for the Middle District of
Tennessee against the Company and a number of its current and former directors,
officers and/or employees.
On October 10, 1997, the court entered an order consolidating the
above-mentioned securities class action claims into a single-captioned case,
Morse, Sidney, et al. v. R. Clayton McWhorter, et al., Case No. 3-97-0370. All
of the other individual securities class action lawsuits were administratively
closed by the court. The consolidated Morse lawsuit is a purported class action
seeking the certification of a class of persons or entities who acquired the
Company's common stock from April 9, 1994 to September 9, 1997. The consolidated
lawsuit was brought against the Company, Richard Scott, David Vandewater, Thomas
Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt, Magdalena Averhoff, M.D.,
T. Michael Long and Donald S. MacNaughton. The lawsuit alleges, among other
things, that the defendants committed violations of the Federal securities laws
by materially inflating the Company's revenues and earnings through a number of
practices, including upcoding, maintaining reserve cost reports, disseminating
false and misleading statements, cost shifting, illegal reimbursements, improper
billing, unbundling and violating various Medicare laws. The lawsuit seeks
damages, costs and expenses.
On October 10, 1997, the court entered an order consolidating the
above-mentioned derivative law claims into a single-captioned case, McCall, H.
Carl, as Comptroller of the State of New York and as Trustee of the New York
State Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare
Corporation v. Richard L. Scott, et al., No. 3-97-0838. All of the other
derivative lawsuits were administratively closed by the court. The consolidated
McCall lawsuit was brought against the Company, Thomas Frist, Jr., Richard L.
Scott, David T. Vandewater, R. Clayton McWhorter, Magdalena Averhoff, M.D.,
Frank S. Royal, M.D., T. Michael Long, William T. Young and Donald S.
MacNaughton. The lawsuit alleges, among other things, derivative claims against
the individual defendants that they intentionally or negligently breached their
fiduciary duties to the Company by authorizing, permitting or failing to prevent
the Company from engaging
35
<PAGE> 36
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. These motions were referred to the Magistrate Judge for consideration.
In June 1998, the Magistrate Judge recommended that the court grant the motions
to dismiss in both cases. Plaintiffs in both cases filed objections to the
Magistrate's recommendations with the District Court, and defendants filed
responsive pleadings. In September 1999, the District Court entered an Order
granting the defendants' motion to dismiss McCall, H. Carl, as Comptroller of
the State of New York and as Trustee of the New York State Retirement Fund,
derivatively on behalf of Columbia/HCA Healthcare Corporation v. Richard L.
Scott, et al., No. 3-97-0838 with prejudice. The plaintiffs in the McCall
lawsuit have filed an appeal from that order. Defendants filed their brief in
opposition to the appeal in March 2000. All parties have filed their briefs with
the Sixth Circuit Court of Appeals.
On July 28, 2000, the District Court entered an Order granting the
defendants' motions to dismiss in Morse. The District Court's order dismissed
Morse with prejudice. On or about August 10, 2000, plaintiffs filed a Motion to
Alter or Amend Judgment and for Leave to File an Amended Complaint and requested
oral argument on their motion. The plaintiffs' motion to alter or amend was
denied in October 2000. On October 18, 2000, plaintiffs filed their Notice of
Appeal.
Shareholder Derivative Actions Filed in State Courts
Several derivative actions have been filed in state court by certain
purported stockholders of the Company against certain of the Company's current
and former officers and directors alleging breach of fiduciary duty, and failure
to take reasonable steps to ensure that the Company did not engage in illegal
practices thereby exposing the Company to significant damages.
Two purported derivative actions entitled Barron, Evelyn, et al. v.
Magdelena Averhoff, et al., (Civil Action No. 15822NC), filed on July 22, 1997,
and Kovalchick, John E. v. Magdelena Averhoff, et al., (Civil Action No.
15829NC), filed on July 29, 1997, have been filed in the Court of Chancery of
the State of Delaware in and for New Castle County. The actions were brought on
behalf of the Company by certain purported shareholders of the Company against
certain of the Company's current and former officers and directors. The suits
seek damages, attorneys' fees and costs. In the Barron lawsuit, plaintiffs also
seek an Order (i) requiring individual defendants to return to the Company all
salaries or remunerations paid them by the Company, together with proceeds of
the sale of the Company's stock made in breach of their fiduciary duties; (ii)
prohibiting the Company from paying any individual defendant any benefits
pursuant to the terms of employment, consulting or partnership agreements; and
(iii) terminating all improper business relationships between the Company and
any individual defendant. In the Kovalchick lawsuit, plaintiffs also seek an
Order (i) requiring individual defendants to return to the Company all salaries
or remunerations paid to them by the Company and all proceeds from the sale of
the Company's stock made in breach of their fiduciary duties; (ii) requiring
that an impartial Compliance Committee be appointed to meet regularly; and (iii)
requiring that the Company be prohibited from paying any director/defendant any
benefits pursuant to terms of employment, consulting or partnership agreements.
The parties have stipulated to a temporary stay of the Kovalchick lawsuit.
Plaintiffs in both Barron and Kovalchick have granted the defendants an
indefinite extension of time to respond to the Complaints. On August 14, 1997, a
similar purported derivative action entitled State Board of Administration of
Florida, the public pension fund of the State of Florida in behalf of itself and
in behalf of all other stockholders of Columbia/HCA Healthcare Corporation
derivatively in behalf of Columbia/HCA Healthcare Corporation vs. Magdalena
Averhoff, et al., (No. 97-2729), was filed in the
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<PAGE> 37
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 have filed an appeal from that order. Defendants filed their brief in
opposition to the appeal in March 2000. Plaintiffs filed their reply brief in
May 2000.
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/or former officers and/or directors alleging, in general,
improper and fraudulent billing, overcharging, coding and physician referrals,
as well as other violations of law. Certain of the lawsuits have been
conditionally certified as class actions.
The matter of In re: Columbia/HCA Healthcare Corporation Billing Practices
Litigation, Master File No. MDL 1227, was commenced by Order of the MDL Panel
entered on June 11, 1998 granting the Company's petition to consolidate the
Boyson and Operating Engineers cases for pretrial purposes in the Middle
District of Tennessee pursuant to 28 U.S.C. 1407. Three other cases (see cases
below) that have been consolidated with Boyson and Operating Engineers in the
MDL proceeding are (i) Board of Trustees of the Carpenters & Millwrights of
Houston & Vicinity Welfare Trust Fund, (ii) Board of Trustees of the Texas
Ironworkers' Health Benefit Plan, and (iii) Tennessee Laborers Health and
Welfare Fund. On September 21, 1998, the plaintiffs in five consolidated cases
filed a Coordinated Class Action Complaint, which the Company answered on
October 13, 1998. The plaintiffs seek certification of two proposed classes
including all private individuals and all employee welfare benefit plans that
have paid for health-related goods or services provided by the Company. The
plaintiffs allege, among other things, that the Company has engaged in a pattern
and practice of inflating charges, concealing the true nature of patients'
illnesses, providing unnecessary medical care, and billing for services never
rendered. The plaintiffs seek damages, attorneys' fees and costs, as well as
disgorgement and injunctive relief. A scheduling order was entered that provided
for class certification motions to be filed by February 22, 1999 and for
discovery to be completed by June 30, 1999. In February 1999, plaintiffs filed a
motion to extend the time periods in the scheduling order, which was granted by
the court on August 24, 1999. However, the court has not entered a new
scheduling order. Effective November 2, 1999, a
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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 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.
The matter of Boyson, Cordula, on behalf of herself and all others
similarly situated v. Columbia/HCA Healthcare Corporation was filed on September
8, 1997 in the United States District Court for the Middle District of
Tennessee, Nashville Division (Civil Action No. 3-97-0936). The original
complaint, which sought certification of a national class comprised of all
persons or entities who have paid for medical services provided by the Company,
alleges, among other things, that the Company has engaged in a pattern and
practice of (i) inflating diagnosis and medical treatments of its patients to
receive larger payments from the purported class members; (ii) providing
unnecessary medical care; and (iii) billing for services never rendered. This
lawsuit seeks injunctive relief requiring the Company to perform an accounting
to identify and disgorge medical bill overcharges. It also seeks damages,
attorneys' fees, interest and costs. In an Order entered on June 11, 1998 by the
MDL Panel, other lawsuits against the Company were consolidated with the Boyson
case in the Middle District of Tennessee. The amended complaint in Boyson was
withdrawn and superseded by the Coordinated Class Action Complaint filed in the
MDL proceeding on September 21, 1998. (See In re: Columbia/HCA Healthcare
Corporation Billing Practices Litigation, above.)
The matter of Operating Engineers Local No. 312 Health & Welfare Fund, on
behalf of itself and as representative of a class of those similarly situated v.
Columbia/HCA Healthcare Corporation was filed on August 6, 1997 in the United
States District Court for the Eastern District of Texas, Civil Action No.
597CV203. The original complaint alleged violations of the Racketeering
Influence 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, above.)
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, above.)
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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, above.)
The matter of The United Paper Workers International Union, et al. v.
Columbia/HCA Healthcare Corporation, et al., was filed on September 3, 1998 in
the Circuit Court for Washington County, Tennessee, Civil Action No. 19350. The
lawsuit contains billing fraud allegations similar to those in the Ferguson case
and seeks certification of a national class comprised of all self-insured
employers who paid or were obligated to pay any portion of a bill for, among
other things, pharmaceuticals, medical supplies or medical services. The suit
seeks declaratory relief, damages, interest, attorneys' fees and other
litigation costs. In addition, the suit seeks an Order (i) requiring defendants
to provide an accounting to plaintiffs and class members who overpaid or were
obligated to overpay, (ii) requiring defendants to disgorge all monies illegally
collected from plaintiffs and the class, and (iii) rescinding all contracts of
defendants with plaintiffs and all class members. Following the service of this
complaint on the Company on August 20, 1999, the Company subsequently removed
this lawsuit to the United States District Court for the Eastern District of
Tennessee and it was conditionally transferred by the MDL Panel to the Middle
District of Tennessee for consolidated pretrial proceedings with In re:
Columbia/HCA Healthcare Corporation Billing Practices Litigation and was later
formally joined in plaintiffs' amended complaint (See In re: Columbia/HCA
Healthcare Corporation Billing Practices Litigation, above.)
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.
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 charges for hospital services and supplies for medical services (a
hysterectomy in the plaintiff's case) exceeded the reasonable costs of its goods
and services, that the overcharges constitute a breach of contract and an unfair
or deceptive trade practice as well as a breach of the duty of good faith and
fair dealing. This suit seeks damages, costs and attorneys' fees. In addition,
the suit seeks a declaratory judgment recognizing plaintiffs' rights to be free
from predatory billing and collection practices and an Order (i) requiring
defendants to notify plaintiff
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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 Medical Center. 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 the Supreme Court 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
argument in this case.
Ferguson, Charles, on behalf of himself and all other similarly situated v.
Columbia/HCA Healthcare Corporation, et al. was filed on September 16, 1997 in
the Circuit Court for Washington County, Tennessee, Civil Action No. 18679. This
lawsuit seeks certification of a national class comprised of all individuals and
entities who paid or were responsible for payment of any portion of a bill for
medical care or treatment provided by the Company and alleges, among other
things, that the Company engaged in billing fraud by excessively billing
patients for services rendered, billing patients for services not rendered or
not medically necessary, uniformly using improper codes to report patient
diagnosis, and improperly and illegally recruiting doctors to refer patients to
the Company's hospitals. The proposed class is broad enough to encompass all
private payers, including individuals, insurers and health and welfare plans.
The suit seeks damages, interest, attorneys' fees, costs and expenses. In
addition, the suit seeks an Order (i) requiring defendants to provide an
accounting of plaintiffs and class members who overpaid or were obligated to
overpay; and (ii) requiring defendants to disgorge all monies illegally
collected from plaintiffs and the class. Plaintiff filed a Motion for Class
Certification in September 1997. No ruling has been made on the motion. In
December 1997, the Company filed a Motion for Summary Judgment which was denied.
In January 1998, plaintiff filed a Motion for Leave to File a Second Amended
Class Action Complaint to Add an Additional Class Representative which was
granted but the court dismissed the claims asserted by the additional plaintiff.
In June 1998, plaintiff filed a Motion for Leave of Court to File a Third
Amended Class Action Complaint, and in October 1998 plaintiff filed a Motion for
Leave of Court to File a Fourth Amended Class Action Complaint. Both proposed
Amended Complaints seek to add new named plaintiffs to represent the proposed
class. Both seek to add additional allegations of billing fraud, including
improper billing for laboratory tests, inducing doctors to perform unnecessary
medical procedures, improperly admitting patients from emergency rooms and
maximizing patients' lengths of stay as inpatients in order to increase charges,
and improperly inducing doctors to refer patients to the Company's home health
care units or psychiatric hospitals. Both seek an additional order that the
Company's contracts with plaintiffs and all class members are rescinded and that
the Company must repay all monies received from plaintiffs and the class
members. The court has not ruled on either Motion for Leave to Amend. Discovery
is underway in the case. The Company in September 1998 filed another Motion for
Summary Judgment contesting the standing of the named plaintiffs to bring the
alleged claims. That motion has not been ruled on by the court. Amended motions
for summary judgment were filed in January 2000. Those motions have not yet been
ruled on by the court.
The matter of Hoop, Kemp, et al. v. Columbia/HCA Health Corporation, et al.
was filed on August 18, 1997 in the District Court of Johnson County, Texas,
Civil Action No. 249-171-97. This suit seeks certification of a Texas class
comprised of persons who paid for any portion of an improper or fraudulent bill
for medical services rendered by any Texas facility owned or operated by the
Company. The suit seeks damages, attorneys' fees, costs and expenses, as well as
restitution to plaintiffs and the class in the amount by which defendants have
been unjustly enriched and equitable and injunctive relief. The lawsuit
principally alleges that the Company perpetrated a fraudulent scheme that
consisted of systematic and routine overbilling through false and inaccurate
bills, including padding, billing for services never provided, and exaggerating
the seriousness of patients' illnesses. The lawsuit also alleges that the
Company systematically entered into illegal
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kickback schemes with doctors for patient referrals. The Company filed its
answer in November 1997 denying the claims. Discovery has commenced.
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 which is also pending,
but the motion to transfer was denied on April 8, 1999. Discovery has commenced.
The matter of Ultimate Home Healthcare, Inc., on behalf of itself and all
other entities similarly situated in the states of Tennessee, Texas, Florida and
Georgia v. Columbia/HCA Healthcare Corporation, Columbia Homecare Group, Olsten
Corporation, and Olsten Health Management a/k/a Hospital Contract Management
Services was filed in the United States District Court for the Middle District
of Tennessee on June 14, 2000, as Civil Case No. 3-00-0560. The case is filed as
a purported class action on behalf of home health care companies and agencies
that conducted business in Tennessee, Texas, Florida and Georgia during the
years 1994 through 1996. On July 21, 2000 an amended complaint was filed. The
amended complaint alleges violations of civil RICO, antitrust and consumer
protection laws, and other business torts arising out of transactions and
operations in which the Company's affiliates purchased home health care
agencies, or assets of agencies, from Olsten Corporation affiliates. The
complaint seeks compensatory and punitive damages in an unstated amount plus
costs and attorneys' fees. The suit is in its early stages and no response by
the Company has been filed.
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
Understanding to Settle Certain Government Civil Claims and Note
10 -- Contingencies in the Notes to Condensed 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
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allegedly experienced by the Plan because of breaches of fiduciary duty, an
order transferring management of the plan to a competent, neutral third-party,
and an award of pre-judgment interest, reasonable attorneys' fees and costs. A
bench trial was held from June 8 through July 1, 1999. Additional oral arguments
were held on March 23, 2000. On May 24, 2000, the court issued a Memorandum
opinion and an Order dismissing the plaintiffs' action with prejudice and
entered a judgment in favor of defendants. The court ruled that the defendants
did not breach their fiduciary duty to the Stock Bonus Plan. On June 12, 2000,
plaintiffs filed a notice of appeal.
On December 4, 1997, a lawsuit captioned Florida Software Systems, Inc., a
Florida corporation v. Columbia/HCA Healthcare Corporation, a Delaware
corporation was filed in the United States District Court for the Middle
District of Florida (Civil Action No. 97-2866-C.V.-T-17b). The lawsuit alleges
that the defendant breached an agreement under which Florida Software Systems,
Inc. was allegedly granted the exclusive right to provide medical claims
management for certain claims made by the Company for payment to any third party
payers in connection with the rendering of medical care or services. The lawsuit
alleges claims for fraud, breach of implied contract and breach of contract. The
lawsuit seeks damages, attorneys' fees and costs in excess of $2 billion, as
well as injunctive relief. The court denied the plaintiff's motion for a
preliminary injunction. On October 15, 1998, the Company filed a counterclaim
and third-party complaint against Florida Software Systems, Inc., Receivable
Dynamics Inc., Nevada Communications Corporation, Norman R. Dobiesz, Maureen
Donovan Dobiesz, Stuart M. Lopata, and Samuel A. Greco (a former senior officer
at the Company). The counterclaim alleges racketeering, conspiracy, breach of
fiduciary duty, and breach of contract. Defendants in the counterclaim and
third-party complaint have filed answers to the counterclaim and third-party
complaint. Discovery has been conducted and several dispositive motions are
pending with the court. A related pending lawsuit, Nevada Communications
Corporation, a Delaware Corporation v. Columbia/HCA Healthcare Corporation, a
Delaware Corporation, which was filed in the 12th Judicial Circuit Court for
Manatee County, Florida (Civil Action No. CA 98-3039) involves similar issues
and alleges breach of a telecommunications contract. The Company has filed a
counterclaim containing allegations similar to the counterclaim in the Florida
Software lawsuit. A trial on the Nevada Communications matter is set for April
2001.
Two law firms representing groups of health insurers have approached the
Company and alleged that the Company's affiliates may have overcharged or
otherwise improperly billed the health insurers for various types of medical
care during the time frame from 1994 through 1997. The Company has engaged in
discussions with these law firms, but no litigation has been filed. The Company
is unable to determine if litigation will be filed, and if filed, what damages
would be asserted.
The Company intends to pursue the defense of these actions and prosecution
of its counterclaims and third party claims vigorously.
The Company from time to time is a party to certain proceedings in the
United States Tax Court and the United States Court of Federal Claims. For a
description of those proceedings, see Note 6 -- Income Taxes in the Notes to
Condensed 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.
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ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS.
Part I, Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity includes a reference to HCA's
share repurchase programs. As part of these programs, during the quarter ended
September 30, 2000, HCA sold 5.7 million put options, each of which entitles the
holder to sell stock to the Company at a specified price on a specified date.
These put options expire on various dates through February 27, 2001 and have
exercise prices ranging from $33.32 to $35.15 per share with an average exercise
price of $34.46 a share.
All of these transactions were exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended. Each transaction was privately
negotiated, and each purchaser of options was an accredited investor and
qualified institutional buyer. No public offering or public solicitation was
made by HCA in the placement of these securities.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit 3.1 -- 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).
Exhibit 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).
Exhibit 12 -- Statement re Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 27 -- Financial Data Schedule.*
*Included only in filings under the Electronic Data, Gathering, Analysis
and Retrieval system.
(b) Reports on Form 8-K filed during the quarter ended September 30, 2000:
On August 24, 2000, the Company filed a report on Form 8-K which announced
the issuance of $750 million of 8.75% Notes due 2010.
On September 21, 2000, the Company filed a report on Form 8-K which
announced the issuance of $500 million of Floating Rate Senior Notes due
September 19, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCA -- THE HEALTHCARE COMPANY
/s/ R. MILTON JOHNSON
--------------------------------------
R. Milton Johnson
Senior Vice President and Controller
Date: November 8, 2000
44
