<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
<TABLE>
<C> <S>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM __________TO __________
COMMISSION FILE NUMBER 1-11239
---------------------
COLUMBIA/HCA HEALTHCARE CORPORATION
(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)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, 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 APRIL 30, 2000
--------------------- -----------------------------
<S> <C>
Voting common stock, $.01 par value 536,639,900 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
</TABLE>
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<PAGE> 2
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
MARCH 31, 2000
<TABLE>
<CAPTION>
PAGE OF
FORM 10-Q
---------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -- for
the quarters ended March 31, 2000 and 1999........ 3
Condensed Consolidated Balance Sheets -- March 31,
2000 and December 31, 1999........................ 4
Condensed Consolidated Statements of Cash
Flows -- for the quarters ended March 31, 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....................... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................... 26
Item 6. Exhibits and Reports on Form 8-K.................... 37
</TABLE>
2
<PAGE> 3
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Revenues.................................................... $ 4,271 $ 4,655
Salaries and benefits....................................... 1,661 1,848
Supplies.................................................... 670 722
Other operating expenses.................................... 764 904
Provision for doubtful accounts............................. 302 338
Depreciation and amortization............................... 256 296
Interest expense............................................ 119 111
Equity in earnings of affiliates............................ (32) (35)
Gains on sales of facilities................................ -- (249)
Impairment of long-lived assets............................. -- 106
Restructuring of operations and investigation related
costs..................................................... 13 30
-------- --------
3,753 4,071
-------- --------
Income before minority interests and income taxes........... 518 584
Minority interests in earnings of consolidated entities..... 26 14
-------- --------
Income before income taxes.................................. 492 570
Provision for income taxes.................................. 196 248
-------- --------
Net income........................................ $ 296 $ 322
======== ========
Per share data:
Basic earnings............................................ $ .53 $ .50
Diluted earnings.......................................... $ .52 $ .50
Cash dividends............................................ $ .02 $ .02
Shares used in earnings per share calculations (in
thousands):
Basic..................................................... 563,239 639,403
Diluted................................................... 573,054 645,011
</TABLE>
See accompanying notes.
3
<PAGE> 4
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 133 $ 190
Accounts receivable, less allowances for doubtful accounts
of $1,537 and $1,567................................... 1,976 1,873
Inventories............................................... 377 383
Income taxes receivable................................... -- 178
Other..................................................... 923 973
------- -------
3,409 3,597
Property and equipment, at cost............................. 14,273 14,084
Accumulated depreciation.................................... (5,724) (5,594)
------- -------
8,549 8,490
Investments of insurance subsidiary......................... 1,461 1,457
Investments in and advances to affiliates................... 662 654
Intangible assets, net...................................... 2,257 2,319
Other....................................................... 392 368
------- -------
$16,730 $16,885
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 632 $ 657
Accrued salaries.......................................... 390 403
Other accrued expenses.................................... 1,054 1,112
Long-term debt due within one year........................ 719 1,160
------- -------
2,795 3,332
Long-term debt.............................................. 5,771 5,284
Professional liability risks, deferred taxes and other
liabilities............................................... 1,715 1,889
Minority interests in equity of consolidated entities....... 759 763
Stockholders' equity:
Common stock $.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; outstanding
536,370,200 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............................ 732 951
Other..................................................... 8 8
Accumulated other comprehensive income.................... 61 53
Retained earnings......................................... 4,883 4,599
------- -------
5,690 5,617
------- -------
$16,730 $16,885
======= =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
----- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 296 $ 322
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts........................ 302 338
Depreciation and amortization.......................... 256 296
Income taxes........................................... 163 331
Gains on sales of facilities........................... -- (249)
Impairment of long-lived assets........................ -- 106
Changes in operating assets and liabilities............ (601) (844)
Other.................................................. 13 12
----- -------
Net cash provided by operating activities............ 429 312
----- -------
Cash flows from investing activities:
Purchase of property and equipment..................... (272) (301)
Acquisition of hospitals and health care entities...... (18) --
Disposition of property and equipment.................. 38 506
Change in investments.................................. (22) 541
Other.................................................. (26) 64
----- -------
Net cash provided by (used in) investing
activities.......................................... (300) 810
----- -------
Cash flows from financing activities:
Issuance of long-term debt............................. 1,200 1,004
Net change in revolving bank credit.................... (550) (1,241)
Repayment of long-term debt............................ (607) (187)
Payment of cash dividends.............................. (11) (13)
Repurchases of common stock, net....................... (242) (408)
Other.................................................. 24 12
----- -------
Net cash used in financing activities................ (186) (833)
----- -------
Change in cash and cash equivalents......................... (57) 289
Cash and cash equivalents at beginning of period............ 190 297
----- -------
Cash and cash equivalents at end of period.................. $ 133 $ 586
===== =======
Interest payments........................................... $ 80 $ 83
Income tax payments (refunds), net.......................... $ 32 $ (82)
</TABLE>
See accompanying notes.
5
<PAGE> 6
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION
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 Columbia/HCA
Healthcare Corporation and partnerships and joint ventures in which such
subsidiaries are partners. At March 31, 2000, these affiliates owned and
operated 192 hospitals, 80 freestanding surgery centers and provided extensive
outpatient and ancillary services. Affiliates of Columbia/HCA Healthcare
Corporation are also partners in several 50/50 joint ventures that own and
operate 13 hospitals and 3 freestanding surgery centers which are accounted for
using the equity method. The Company's facilities are located in 24 states,
England and Switzerland. The terms "Columbia/HCA" or the "Company" as used in
this Quarterly Report on Form 10-Q refer to Columbia/HCA Healthcare Corporation
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 and such adjustments are of
a normal recurring nature. Operating results for the quarter ended March 31,
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
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 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 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 is the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
Management remains unable to predict the outcome or effect of the ongoing
investigations or qui tam and other actions. If the Company is found to have
violated 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. Similarly, the amounts claimed in the qui tam and other actions are
substantial, and 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 9 -- Contingencies and Part II, Item 1:
Legal Proceedings.)
6
<PAGE> 7
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 3 -- RESTRUCTURING OF OPERATIONS
The Company has substantially completed a restructuring of its operations
in an effort 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 quarter of 1999, the Company recognized a pretax gain of
$249 million ($151 million after-tax) on the sale of two consolidating hospitals
and certain related health care facilities. Proceeds from the sales were used to
repay bank borrowings.
During the first quarter of 1999, management identified and initiated, or
revised, plans to sell or close during 1999 and 2000, 13 consolidating
hospitals. The carrying value for the hospitals and other assets expected to be
sold was reduced to fair value of approximately $210 million, based upon
estimates of sales values, for a total non-cash, pretax charge of approximately
$106 million. For the quarters ended March 31, 2000 and 1999, respectively, the
hospitals and other assets for which the impairment charge was recorded had
revenues (through the date of sale or closure) of approximately $29 million and
$136 million and incurred net losses before the pretax charge and income tax
benefits of approximately $8 million and $10 million. During 1999 and the first
quarter of 2000, the Company completed the divestitures of 7 of the
consolidating hospitals on which impairment charges had been recorded (an
additional one of these hospitals was closed in April of 2000). The facilities
spun-off to Triad included another 3 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 the
Company's cash flows and are not expected to significantly impact cash flows for
future periods. The impaired facilities are classified as "held for use" because
economic and operational considerations justify operating the facilities and
marketing them as operating enterprises, therefore depreciation has not been
suspended.
The impairment charges affected the Company's asset categories, as follows
(in millions):
<TABLE>
<CAPTION>
1999
----
<S> <C>
Property and equipment...................................... $ 72
Intangible assets........................................... 34
----
$106
====
</TABLE>
The impairment charges affected the Company's operating segments, as
follows (in millions):
<TABLE>
<CAPTION>
1999
----
<S> <C>
Spin-offs................................................... $ 34
National Group.............................................. 72
----
$106
====
</TABLE>
7
<PAGE> 8
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 3 -- RESTRUCTURING OF OPERATIONS (CONTINUED)
Spin-Offs
On May 11, 1999, the Company completed the spin-offs of LifePoint and Triad
through a distribution of one share of LifePoint common stock and one share of
Triad common stock for every 19 shares of the Company's common stock outstanding
on April 30, 1999. Triad was comprised of 34 consolidating hospitals and
LifePoint was comprised of 23 consolidating hospitals. The Company's capital in
excess of par value was reduced by approximately $687 million related to the
spin-offs of LifePoint and Triad.
For the quarter ended March 31, 1999, the LifePoint and Triad facilities
had $502 million in revenues and incurred a net loss of $26 million for the
quarter ended March 31, 1999.
NOTE 4 -- RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
The Company recorded the following pretax charges in connection with the
restructuring of operations and investigations as discussed in Note
2 -- Investigations and Note 3 -- Restructuring of Operations (in millions):
<TABLE>
<CAPTION>
QUARTER
------------
2000 1999
---- ----
<S> <C> <C>
Professional fees related to investigations................. $ 8 $19
Severance costs............................................. -- 2
Other....................................................... 5 9
--- ---
$13 $30
=== ===
</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 $12 million at March 31, 2000.
NOTE 5 -- INCOME TAXES
The Company is currently contesting before the United States Tax Court (the
"Tax Court") and the United States Court of Federal Claims certain claimed
deficiencies and adjustments proposed by the IRS in conjunction with its
examination of the Company's 1994 Federal income tax return, Columbia Healthcare
Corporation's ("CHC") 1993 and 1994 Federal income tax returns, HCA-Hospital
Corporation of America, Inc.'s ("HCA") 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. During the second
quarter of 2000, the Company filed a petition with the Tax Court contesting
certain claimed deficiencies and adjustments proposed by the IRS in connection
with its examination of the Company's 1995 through 1996 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 $186 million in income taxes and interest
through March 31, 2000.
During the first quarter of 2000, the Company and the IRS filed a
Stipulated Settlement with the Tax Court regarding the IRS' proposed
disallowance of certain acquisition-related costs, executive compensation and
systems conversion costs which were deducted in calculating taxable income and
the methods of accounting used by certain subsidiaries for calculating taxable
income related to vendor rebates and
8
<PAGE> 9
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 5 -- INCOME TAXES (CONTINUED)
governmental receivables. As a result of the settlement, the Company paid
additional tax and interest of approximately $156 million during the first
quarter of 2000. The settlement had no impact on the Company's results of
operations.
Tax Court decisions received in 1996 and 1997, related to the IRS'
examination of HCA'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 2000. 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. The Company 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, HCA and Healthtrust properly reported taxable income and paid taxes in
accordance with applicable laws and agreements established with the IRS during
previous examinations and the final resolution of these disputes will not have a
material adverse effect on the results of operations or financial position of
the Company.
NOTE 6 -- 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 ended March 31, 2000 and 1999 (dollars in
millions, except per share amounts):
<TABLE>
<CAPTION>
QUARTER
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net income.................................................. $ 296 $ 322
Weighted average common shares outstanding.................. 563,239 639,403
Effect of dilutive securities:
Stock options............................................. 5,338 1,326
Warrants and other........................................ 4,477 4,282
-------- --------
Shares used for diluted earnings per share.................. 573,054 645,011
======== ========
Earnings per share:
Basic earnings per share.................................. $ .53 $ .50
Diluted earnings per share................................ $ .52 $ .50
</TABLE>
NOTE 7 -- LONG-TERM DEBT
In March 2000, the Company 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.
9
<PAGE> 10
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 8 -- STOCK REPURCHASE PROGRAM
In March 2000, the Company announced that its Board of Directors authorized
the repurchase of up to $1 billion of additional common stock. During the first
quarter of 2000, certain financial organizations repurchased approximately 5.3
million shares of the Company's common stock for approximately $119 million
under forward purchase contracts, and in accordance with the terms of the
contracts, these shares remain outstanding until settled by the Company. The
Company expects to repurchase the remaining stock associated with the March 2000
repurchase authorization through open market purchases, privately negotiated
transactions or forward purchase contracts.
In November 1999, the Company announced that its Board of Directors had
authorized the repurchase of up to $1 billion of its common stock. During the
first quarter of 2000, the Company settled forward purchase contracts associated
with its November 1999 authorization of approximately 8.5 million shares at a
cost of $250 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. The remaining November 1999 forward
purchase contracts totaling approximately 25.9 million shares at a cost of
approximately $750 million are expected to be settled during 2000.
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 125 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 or (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, in connection with the Company's share
repurchase programs, the Company entered into a Letter of Credit Agreement with
the United States Department of Justice. As part of the agreement, the Company
provided the government with letters of credit totaling $1 billion. The Company
and the government acknowledge that the amount of the letters of credit is not
based upon the amount or expected amount of any potential settlement of the
ongoing government investigation, and the agreement does not constitute an
admission of liability by the Company.
NOTE 9 -- CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see Note
2 -- Investigations 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 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
10
<PAGE> 11
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 9 -- CONTINGENCIES (CONTINUED)
Significant Legal Proceedings (continued)
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 10 -- COMPREHENSIVE INCOME
The components of comprehensive income, net of related taxes, for the
quarters ended March 31, 2000 and 1999 are as follows (in millions):
<TABLE>
<CAPTION>
QUARTER
------------
2000 1999
---- ----
<S> <C> <C>
Net income.................................................. $296 $322
Unrealized gains (losses) on securities..................... 8 (9)
Foreign currency translation adjustments.................... -- (7)
---- ----
Comprehensive income........................................ $304 $306
==== ====
</TABLE>
The components of accumulated other comprehensive income, net of related
taxes, at March 31, 2000 and December 31, 1999 are as follows (in millions):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net unrealized gains on securities.......................... $67 $59
Foreign currency translation adjustments.................... (6) (6)
--- ---
Accumulated other comprehensive income...................... $61 $53
=== ===
</TABLE>
NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one line of business, which is operating hospitals
and related health care entities. During the quarters ended March 31, 2000 and
1999 approximately 30% and 31%, respectively, of the Company's revenues related
to patients participating in the Medicare program.
The Company's operations are structured into two geographically organized
groups: the Eastern Group is comprised of 102 consolidating hospitals located in
the Eastern United States and the Western Group is comprised of 81 consolidating
hospitals located in the Western United States. These two groups represent the
Company'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 7 consolidating hospitals which the Company intends to
sell or close and which are located in the United States, but not in the
Company's core markets. The Company also operates 2 consolidating hospitals in
Switzerland.
11
<PAGE> 12
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
The Company completed the spin-offs of LifePoint and Triad (the
"Spin-offs") during the second quarter of 1999. LifePoint included 23
consolidating hospitals and Triad included 34 consolidating hospitals. See Note
3 -- Restructuring of Operations.
The chief operating decision maker reviews geographic distributions of the
Company's revenues, EBITDA, depreciation and amortization, and assets. EBITDA is
defined as income before depreciation and amortization, interest expense, gains
on sales of facilities, impairment of long-lived assets, restructuring of
operations and investigation related costs, minority interests and income taxes.
The Company's Chief Operating Officer, who is the Company's chief operating
decision maker, 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 the Company's revenues, EBITDA,
depreciation and amortization, and assets, restated for the 1999 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>
QUARTER
----------------
2000 1999
------ ------
<S> <C> <C>
Revenues:
Eastern Group............................................. $2,229 $2,077
Western Group............................................. 1,894 1,779
Corporate and other(a).................................... 88 75
National Group............................................ 60 222
Spin-offs................................................. -- 502
------ ------
$4,271 $4,655
====== ======
EBITDA:
Eastern Group............................................. $ 548 $ 512
Western Group............................................. 367 311
Corporate and other(a).................................... (2) (14)
National Group............................................ (7) 6
Spin-offs................................................. -- 63
------ ------
$ 906 $ 878
====== ======
Depreciation and amortization:
Eastern Group............................................. $ 118 $ 116
Western Group............................................. 110 108
Corporate and other(a).................................... 24 25
National Group............................................ 4 12
Spin-offs................................................. -- 35
------ ------
$ 256 $ 296
====== ======
</TABLE>
12
<PAGE> 13
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Assets:
Eastern Group............................................. $ 7,125 $ 6,915
Western Group............................................. 6,627 6,586
Corporate and other(a).................................... 2,722 3,144
National Group............................................ 256 240
------- -------
$16,730 $16,885
======= =======
</TABLE>
- ---------------
(a) Includes the Company's 2 consolidating hospitals located in Switzerland.
13
<PAGE> 14
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" 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 highly competitive nature
of the health care business, (iii) the efforts of insurers, health care
providers and others to contain health care costs, (iv) possible changes in the
Medicare program that may further limit reimbursements to health care providers
and insurers, (v) changes in Federal, state or local regulation affecting the
health care industry, (vi) the possible enactment of Federal or state health
care reform, (vii) the ability to attract and retain qualified management and
personnel, including physicians, (viii) liabilities and other claims asserted
against the Company, (ix) fluctuations in the market value of the Company's
common stock, (x) ability to complete the share repurchase program, (xi) changes
in accounting practices, (xii) changes in general economic conditions, (xiii)
future divestitures which may result in additional charges, (xiv) the ability to
enter into managed care provider arrangements on acceptable terms, (xv) the
availability and terms of capital to fund the expansion of the Company's
business, (xvi) changes in business strategy or development plans, (xvii)
slowness of reimbursement, (xviii) the ability to implement its shared services
strategy, and (xix) 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
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 is the subject of a
formal order of investigation by the Securities and Exchange Commission ("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 ongoing
investigations and the initiation of additional investigations, if any, will
have on the Company's financial condition or results of operations in future
periods. 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 9-Contingencies in the Notes to Condensed Consolidated
Financial Statements.)
BUSINESS STRATEGY
The Company's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. The Company's general, acute care hospitals usually provide a
full range of services commonly available in hospitals to accommodate such
medical specialties as internal medicine, general surgery, cardiology, oncology,
neurosurgery, orthopedics and
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
BUSINESS STRATEGY (CONTINUED)
obstetrics, as well as diagnostic and emergency services. Outpatient and
ancillary health care services are provided by the Company's general, acute care
hospitals, and through the Company's freestanding outpatient surgery and
diagnostic centers and rehabilitation facilities. The Company's psychiatric
hospitals provide a full range of mental health care services through inpatient,
partial hospitalization and outpatient settings. The Company also operates
preferred provider organizations in 47 states and the District of Columbia.
The Company maintains and replaces equipment, renovates and constructs
replacement facilities and adds new services to increase the attractiveness of
its hospitals and other facilities to patients and local physicians. The Company
believes that its ability to attract and serve patients and physicians is
enhanced by developing a comprehensive health care network with a broad range of
health care services located throughout a market area. The Company also believes
it is able to reduce operating costs by sharing certain services among several
facilities in the same area and is better positioned to work with health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs")
and employers.
In May 1999, the Company established LifePoint Hospitals, Inc.
("LifePoint") and Triad Hospitals, Inc. ("Triad"), as independent,
publicly-traded companies through tax-free spin-offs of these companies to the
Company's stockholders.
The Company has substantially completed a restructuring of its operations,
in an effort to create a smaller and more focused company. The divestiture of
the Company's home health operations and the Value Health business units, the
spin-offs of LifePoint and Triad and the sales of various other hospitals and
surgery centers, not located in the Company's strategic locations, allow the
Company's management to focus their efforts on the Company's core markets, which
are typically located in urban areas that are characterized by highly integrated
health care facility networks.
The Company and the health care industry are facing many challenges,
including the growing number of uninsured, reimbursement pressures from
government and non-government payers and the increasing costs of supplies,
pharmaceuticals and new technologies. As a response to these challenges, the
Company is implementing a shared services initiative. This initiative is a
company-wide program designed to reduce operating costs and provide additional
resources for patient care by consolidating hospitals' back-office functions
such as billing and collections and standardizing and upgrading financial
services. In addition, the Company is implementing company-wide supply
improvement and distribution programs that will include consolidating purchasing
and accounts payable functions regionally, combining warehouses and developing
division-based procurement programs.
RESULTS OF OPERATIONS
Revenue/Volume Trends
The Company's revenues continue to be affected by an increasing proportion
of revenue being derived from fixed payment, higher discount sources, including
government payers, managed care providers and others. The Company expects
patient volumes from Medicare and Medicaid to continue to increase due to the
general aging of the population and expansion of state Medicaid programs.
However, 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. The
outpatient PPS is currently anticipated to be implemented on July 1, 2000. As of
this date, the Company is not able to predict the effect, if any, that the
outpatient PPS will have on its financial results. The Company continues to
experience a shift in its payer mix as patients move from traditional indemnity
insurance and Medicare coverage to medical coverage that is provided under
managed care plans.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue/Volume Trends (continued)
The Company generally receives lower payments per patient under managed care
plans than under traditional indemnity insurance plans or traditional Medicare.
With an increasing proportion of services being reimbursed based upon fixed
payment amounts (where the payment is based upon the diagnosis, regardless of
the cost incurred or level of service provided), revenues, earnings and cash
flows are being reduced. Revenues from capitation arrangements (prepaid health
service agreements) are less than 1% of consolidated revenues. Admissions
related to Medicare, Medicaid and managed care plans and other discounted
arrangements for the quarters ended March 31, 2000 and 1999 are set forth below.
<TABLE>
<CAPTION>
QUARTERS
ENDED MARCH 31,
----------------
2000 1999
------ ------
<S> <C> <C>
Medicare.................................................... 38.4% 39.9%
Medicaid.................................................... 10.8 11.2
Managed care and other discounted........................... 41.6 38.8
Other....................................................... 9.2 10.1
----- -----
100.0% 100.0%
===== =====
</TABLE>
Reductions in the rate of increase in Medicare and Medicaid reimbursement
and increasing percentages of patient volume being related to patients
participating in managed care plans are expected to present ongoing challenges
to the Company. The challenges presented by these trends are enhanced by the
fact that the Company does not have the ability to control these trends and the
associated risks. To maintain and improve its operating margins in future
periods, the Company must increase patient volumes while controlling the cost of
providing services. If the Company is not able to achieve reductions in the cost
of providing services through operational efficiencies, and the trend of
declining reimbursements and payments continue, results of operations and cash
flows will deteriorate.
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 along with the implementation of its shared services
initiative.
16
<PAGE> 17
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 ended March 31, 2000 and 1999 (dollars in millions, except per share
amounts):
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues.................................................... $4,271 100.0 $4,655 100.0
Salaries and benefits....................................... 1,661 38.9 1,848 39.7
Supplies.................................................... 670 15.7 722 15.5
Other operating expenses.................................... 764 17.8 904 19.3
Provision for doubtful accounts............................. 302 7.1 338 7.3
Depreciation and amortization............................... 256 6.0 296 6.4
Interest expense............................................ 119 2.8 111 2.4
Equity in earnings of affiliates............................ (32) (0.7) (35) (0.7)
Gains on sales of facilities................................ -- -- (249) (5.3)
Impairment of long-lived assets............................. -- -- 106 2.3
Restructuring of operations and investigation related
costs..................................................... 13 0.3 30 0.6
------ ----- ------ -----
3,753 87.9 4,071 87.5
------ ----- ------ -----
Income before minority interests and income taxes........... 518 12.1 584 12.5
Minority interests in earnings of consolidated entities..... 26 0.6 14 0.3
------ ----- ------ -----
Income before income taxes.................................. 492 11.5 570 12.2
Provision for income taxes.................................. 196 4.6 248 5.3
------ ----- ------ -----
Net income.................................................. $ 296 6.9 $ 322 6.9
====== ===== ====== =====
Basic earnings per share.................................... $ .53 $ .50
Diluted earnings per share.................................. $ .52 $ .50
% changes from prior year:
Revenue................................................... (8.2)% (5.0)%
Income before income taxes................................ (13.7) 49.5
Net income................................................ (8.0) 46.7
Basic earnings per share.................................. 6.0 47.1
Diluted earnings per share................................ 4.0 47.1
Admissions(a)............................................. (14.5) (6.0)
Equivalent admissions(b).................................. (15.3) (7.1)
Revenues per equivalent admission......................... 8.3 2.2
Same facility % changes from prior year(c):
Revenues.................................................. 6.4 2.7
Admissions(a)............................................. 2.2 3.5
Equivalent admissions(b).................................. 2.5 3.6
Revenues per equivalent admission......................... 3.8 (0.8)
</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.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended March 31, 2000 and 1999
Income before income taxes decreased 13.7% to $492 million in 2000 from
$570 million in 1999 and pretax margins decreased to 11.5% in 2000 from 12.2% in
1999. The decrease in pretax income was primarily attributable to gains on sales
of facilities (an excess of $143 million in net gains over the $106 million in
impairment charges) recorded in the first quarter of 1999. Excluding gains on
sales of facilities and impairments of long-lived assets, income before income
taxes increased 15.1% to $492 million in 2000 from $427 million in 1999.
Revenues decreased 8.2% to $4.3 billion in 2000 compared to $4.7 billion in
1999. Inpatient admissions decreased 14.5% from 1999 and equivalent admissions
(adjusted to reflect combined inpatient and outpatient volume) decreased 15.3%.
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 6.4%, admissions increased 2.2% and
equivalent admissions increased 2.5% from 1999. Revenue per equivalent
admissions increased 8.3% from 1999 to 2000 and on a same facility basis
increased 3.8%. The increase in revenue per equivalent admission on a same
facility basis was primarily the result of successes achieved during 1999 in
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.
While the Company achieved some successes in managed care pricing, attaining
revenue increases continues to present a challenge due to decreases in Medicare
rates of reimbursement mandated by BBA-97 which became effective October 1, 1997
(lowered first quarter 2000 revenues by approximately $10 million) and a
continuing shift in revenues away from traditional Medicare and indemnity payers
to managed care (managed care as a percent of total admissions increased to
41.6% in 2000 compared to 38.8% in 1999).
Salaries and benefits, as a percentage of revenues, decreased to 38.9% in
2000 from 39.7% 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. The salaries and benefits as a percentage of
revenues for the facilities included in the spin-offs of Triad and LifePoint
were 42.6% for the first quarter of 1999, and the salaries and benefits as a
percentage of revenues for the facilities included in the Company's National
Group was 47.5% for the first quarter of 1999. During 1999, 15 hospitals were
divested from the Company's National Group. Salaries and benefits for the
Company's core facilities as a percentage of revenues was 38.9% in 1999 compared
to 38.7% in 2000. Man hours per equivalent admission for the Company's core
facilities remained relatively flat compared to last year.
Supply costs increased as a percentage of revenues to 15.7% in 2000 from
15.5% in 1999 due to an increase in the cost of supplies per equivalent
admission on a same facility basis of 3.7% related to the increasing costs of
new technology and pharmaceuticals.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) as a percentage of revenues, decreased to 17.8%
in the first quarter of 2000 from 19.3% 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. The other operating
expenses as a percentage of revenues for the facilities included in the
spin-offs of Triad and LifePoint were 22.3% for the first quarter of 1999, and
the other operating expenses as a percentage of revenues for the facilities
included in the Company's National Group were 26.3% for the first quarter of
1999 and 30.3% for 2000. Other operating expenses for the Company's core
facilities as a percentage of revenues were 18.6% in 1999 compared to 17.7% in
2000.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended March 31, 2000 and 1999 (continued)
Provision for doubtful accounts, as a percentage of revenues, decreased to
7.1% in 2000 from 7.3% 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 flat as a percentage of revenues
at 0.7% in 2000 and 1999.
Depreciation and amortization decreased as a percentage of revenues to 6.0%
in 2000 from 6.4% in 1999, primarily due to the restructuring of operations
discussed above. 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, while the depreciation and amortization as a percentage of revenues for
the Company's core facilities was 6.2% in 1999 and was 6.0% in 2000.
Interest expense increased to $119 million in 2000 compared to $111 million
in 1999 primarily as a result of an increase in interest rates during 2000
compared to 1999. The average rates for the Company's bank borrowings increased
from 6.1% during the quarter ended March 31, 1999 to 7.3% during the quarter
ended March 31, 2000.
During 2000 and 1999, respectively, the Company incurred $13 million and
$30 million of restructuring of operations and investigation related costs. In
2000, these costs included $8 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 $19 million of professional fees (legal and accounting) related to the
governmental investigations, $2 million of severance costs and $9 million of
other costs. See Note 4 -- Restructuring of Operations and Investigation Related
Costs in the Notes to Condensed Consolidated Financial Statements.
During 1999, the Company recognized a pretax gain of $249 million ($151
million after-tax) on the sale of two hospitals and certain related health care
facilities. Proceeds from the sales were used to repay bank borrowings.
During 1999, the Company also identified and initiated, or revised, plans
to divest or close during 1999 and 2000, 13 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 $106 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.
The effective income tax rate was 43.6% in 1999 due to non-deductible
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.
As previously discussed, the Company has substantially completed a
restructuring of its operations. See Note 3 -- Restructuring of Operations in
the Notes to Condensed Consolidated Financial Statements. Assuming the
restructuring was completed as of the beginning of the period, the Company's
remaining core facilities had combined net income which increased 19.4% to $310
million in 2000 from $260 million in 1999. Excluding gains on sales of
facilities, impairment of long-lived assets and restructuring of operations and
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended March 31, 2000 and 1999 (continued)
investigation related costs, combined net income for the Company's remaining
core facilities increased 14.4% to $320 million in 2000 from $279 million in
1999.
Liquidity
Cash provided by operating activities improved to $429 million during the
first quarter of 2000 compared to $312 million in 1999.
Cash used in investing activities was $300 million in 2000, compared to
cash provided of $810 million during the first quarter of 1999. The decrease was
due to proceeds from the disposition of hospitals and other health care
facilities of $506 million in the first quarter of 1999 compared with $38
million in 2000. During 1999 cash flows from changes in investments were $541
million (including repayment by a nonconsolidated joint venture of Company
advances of approximately $330 million) compared with cash used of $22 million
in 2000.
Cash flows used in financing activities totaled $186 million in the first
quarter of 2000 compared to $833 million in 1999. The financing cash flows were
primarily used to pay down debt in 1999 (approximately $424 million) and
repurchase the Company's common stock (approximately $242 million and $408
million during the first quarter of 2000 and 1999, respectively).
Working capital totaled $614 million as of March 31, 2000 compared to $265
million at December 31, 1999. At December 31, 1999 current liabilities included
$500 million outstanding under the Company's senior interim term loan (the "1999
Term Loan"). In March 2000, the Company repaid the $500 million using proceeds
from a new $1.2 billion senior term loan (the "2000 Term Loan"). Management
believes that cash flows from operations, amounts available under the Company's
revolving credit facility (the "Credit Facility") and the Company's access to
debt markets are sufficient to meet expected liquidity needs during the
remainder of 2000.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.7 billion at both March 31,
2000 and at December 31, 1999.
The Company 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 the Company within specific periods at fixed prices or prices based on
certain formulas. The combined put price under all such agreements was
approximately $500 million at March 31, 2000. During the first quarter of 2000,
the partner in the Winter Park Healthcare Group, Ltd. joint venture exercised
its put option whereby the Company purchased a portion of the partner's interest
in the joint venture for approximately $18 million. The Company 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 certain 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 influence the exercise
of the put agreements by certain existing joint venture partners.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
In March 2000, the Company announced that its Board of Directors authorized
the repurchase of up to $1 billion of additional common stock. During the first
quarter of 2000, certain financial organizations repurchased approximately 5.3
million shares of the Company's common stock for approximately $119 million
under forward purchase contracts, and in accordance with the terms of the
contracts, these shares remain outstanding until settled by the Company. The
Company expects to repurchase the remaining stock associated with the March 2000
repurchase authorization through open market purchases, privately negotiated
transactions or forward purchase contracts.
In November 1999, the Company announced that its Board of Directors had
authorized the repurchase of up to $1 billion of its common stock. During the
first quarter of 2000, the Company settled forward purchase contracts associated
with its November 1999 authorization of approximately 8.5 million shares at a
cost of $250 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. The remaining November 1999 forward
purchase contracts totaling approximately 25.9 million shares at a cost of
approximately $750 million are expected to be settled during 2000.
During the first quarter of 1999, in connection with the Company's share
repurchase programs, the Company entered into a Letter of Credit Agreement with
the United States Department of Justice. As part of the agreement, the Company
provided the government with letters of credit totaling $1 billion. The Company
and the government acknowledge that the amount of the letters of credit
agreement is not based upon the amount, or expected amount, of any potential
settlement of the ongoing government investigation, and the agreement does not
constitute an admission of liability by the Company.
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 $272 million during the
first quarter of 2000 compared to $301 million for the same period in 1999.
Planned capital expenditures in 2000 are expected to approximate $1.3 billion.
Management believes that its capital expenditure program is adequate to expand,
improve and equip its existing health care facilities.
Acquisition of hospitals and health care entities and investments in and
advances to affiliates (generally 50% interests in joint ventures that are
accounted for using the equity method) totaled $18 million during the first
quarter of 2000 compared with none during the first quarter of 1999.
The Company expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt markets, amounts available under the Company's Credit Facility
(approximately $961 million as of April 30, 2000) and equity. At March 31, 2000,
there were projects under construction which had an estimated additional cost to
complete and equip over the next two years of approximately $821 million.
In March 2000, the Company 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.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Capital Resources (continued)
The Credit Facility, the 2000 Term Loan and the $1.0 billion term loan
which the Company 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. The Company is currently in
compliance with all such covenants.
Market Risk
The Company is exposed to market risk related to changes in interest rates
and market values of securities. The Company currently does not use derivative
instruments to offset the market risk exposure of the investments in debt or
equity securities of the Company'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 $1.1 billion
and $542 million, respectively, at March 31, 2000. These investments are carried
at fair value with changes in unrealized gains and losses being recorded as
adjustments to stockholders' equity. The fair value of investments is generally
based on quoted market prices. Changes in interest rates and market values of
securities are not expected to be material in relation to the financial position
and operating results of the Company.
With respect to the Company's interest-bearing liabilities, approximately
$2.15 billion of long-term debt at March 31, 2000 is subject to variable rates
of interest, while the remaining balance in long-term debt of $4.34 billion at
March 31, 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 5.8% for the quarter ended March 31, 1999 to 6.8% for the quarter ended
March 31, 2000, and the average rate for the Company's term loans increased from
6.3% for the quarter ended March 31, 1999 to 7.4% for the quarter ended March
31, 2000. The estimated fair value of the Company's total long-term debt was
$6.16 billion at March 31, 2000. The estimates of fair value are based upon the
quoted market prices for the same or similar issues of long-term debt with the
same maturities. Based on a hypothetical 1% increase in interest rates, the
potential annualized losses in future pretax earnings would be approximately
$21.5 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures that would
significantly affect health care systems in the Company's markets. The cost of
certain proposals would be funded in significant part by reduction in payments
by government programs, including Medicare and Medicaid, to health care
providers (similar to the reductions incurred as part of BBA-97 as previously
discussed). While the Company is unable to predict which, if any, proposals for
health care reform will be adopted, there can be no assurance that proposals
adverse to the business of the Company will not be adopted.
PENDING IRS DISPUTES
The Company is contesting income taxes and related interest proposed by the
IRS for prior years aggregating approximately $186 million as of March 31, 2000.
Management believes that final resolution of these disputes will not have a
material adverse effect on the results of operations or liquidity of the
Company. (See Note 5 -- Income Taxes in the Notes to Condensed Consolidated
Financial Statements for a description of the pending IRS disputes).
During the first quarter of 2000, the Company and the IRS filed a
Stipulated Settlement with the Tax Court regarding the IRS' proposed
disallowance of certain acquisition-related costs, executive compensation and
systems conversion costs which were deducted in calculating taxable income and
the methods of accounting used by certain subsidiaries for calculating taxable
income related to vendor rebates and governmental receivables. As a result of
the settlement, the Company paid additional tax and interest of approximately
$156 million during the first quarter of 2000. The settlement had no impact on
the Company's results of operations.
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<PAGE> 24
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................................................... 204
September 30.............................................. 202
December 31............................................... 195
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 80 95
June 30................................................... 81
September 30.............................................. 81
December 31............................................... 80
Licensed hospital beds at(a):
March 31.................................................. 42,006 51,797
June 30................................................... 43,969
September 30.............................................. 43,461
December 31............................................... 42,484
Weighted average licensed beds(b):
Quarter:
First................................................... 42,184 52,451
Second.................................................. 46,490
Third................................................... 43,511
Fourth.................................................. 42,850
Year...................................................... 46,291
Average daily census(c):
Quarter:
First................................................... 22,697 26,546
Second.................................................. 21,467
Third................................................... 19,704
Fourth.................................................. 20,385
Year...................................................... 22,002
Admissions(d):
Quarter:
First................................................... 408,100 477,400
Second.................................................. 395,800
Third................................................... 370,500
Fourth.................................................. 381,700
Year...................................................... 1,625,400
Equivalent Admissions(e):
Quarter:
First................................................... 595,900 703,300
Second.................................................. 596,900
Third................................................... 557,900
Fourth.................................................. 567,000
Year...................................................... 2,425,100
Average length of stay (days)(f):
Quarter:
First................................................... 5.1 5.0
Second.................................................. 4.9
Third................................................... 4.9
Fourth.................................................. 4.9
Year...................................................... 4.9
</TABLE>
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<PAGE> 25
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................................................... 16
September 30.............................................. 12
December 31............................................... 12
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 3 5
June 30................................................... 4
September 30.............................................. 3
December 31............................................... 3
Licensed hospital beds at:
March 31.................................................. 3,251 6,015
June 30................................................... 3,868
September 30.............................................. 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.
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<PAGE> 26
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 is cooperating 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 Columbia/HCA), announced that they will pay
$61 million to settle allegations that both
26
<PAGE> 27
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 Columbia/HCA 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 Columbia/HCA or its subsidiaries.
The Company is also 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 Note 9 -- Contingencies in the Notes to
Condensed Consolidated Financial Statements.)
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.
The government has not yet served an Amended Complaint on the Columbia/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
27
<PAGE> 28
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 to
physicians by the Diabetes Treatment Centers of America, who served as Medical
Directors at a hospital affiliated with the Company, were unlawful payments for
the referrals of their patients. Relator filed a motion for partial summary
judgment. The court ordered relator's motion for partial summary judgment
stricken. The relator did not file an amended motion for summary judgment 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
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<PAGE> 29
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
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 all of 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
29
<PAGE> 30
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. Plaintiffs filed their Motion for Class
Certification in February 1998, and defendants filed responsive briefs. No
ruling has been made on class certification.
On October 10, 1997, the court entered an order consolidating the
above-mentioned derivative law claims into a single-captioned case, McCall, H.
Carl, as Comptroller of the State of New York and as Trustee of the New York
State Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare
Corporation v. Richard L. Scott, et al., No. 3-97-0838. All of the other
derivative lawsuits were administratively closed by the court. The consolidated
McCall lawsuit was brought against the Company, Thomas Frist, Jr., Richard L.
Scott, David T. Vandewater, R. Clayton McWhorter, Magdalena Averhoff, M.D.,
Frank S. Royal, M.D., T. Michael Long, William T. Young and Donald S.
MacNaughton. The lawsuit alleges, among other things, derivative claims against
the individual defendants that they intentionally or negligently breached their
fiduciary duties to the Company by authorizing, permitting or failing to prevent
the Company from engaging in various schemes to improperly increase 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. The plaintiffs filed their reply brief
in May 2000.
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;
30
<PAGE> 31
(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. Plaintiffs in both Barron and Kovalchick have granted
the defendants an indefinite extension of time to respond to the Complaints. On
August 14, 1997, a similar purported derivative action entitled State Board of
Administration of Florida, the public pension fund of the State of Florida in
behalf of itself and in behalf of all other stockholders of Columbia/HCA
Healthcare Corporation derivatively in behalf of Columbia/HCA Healthcare
Corporation vs. Magdalena Averhoff, et al., (No. 97-2729), was filed in the
Circuit Court in Davidson County, Tennessee on behalf of the Company by certain
purported shareholders of the Company against certain of the Company's current
and former directors and officers. These lawsuits seek damages and costs as well
as orders (i) enjoining the Company from paying benefits to individual
defendants; (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
31
<PAGE> 32
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 has not been ruled on by
the court. Effective November 2, 1999, a sixth case, The United Paperworkers
International Union, et al. v. Columbia/HCA Healthcare Corporation, et al., was
transferred by the MDL Panel for consolidated pretrial proceedings. On December
30, 1999, plaintiffs filed a motion seeking leave to file a first amended
coordinated complaint, which has not been ruled on by the court. The parties are
currently engaged in discovery pending a ruling by the court on plaintiffs'
motion.
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
Influenced and Corrupt Organization Act ("RICO") based on allegations that the
defendant employed one or more schemes or artifices to defraud the plaintiff and
purported class members through fraudulent billing for services not performed,
fraudulent overcharging in excess of correct rates and fraudulent concealment
and misrepresentation. In October 1997, the Company filed a motion to transfer
venue and to dismiss the lawsuit on jurisdiction and venue grounds because the
RICO claims are deficient. The motion to transfer was denied on January 23,
1998. The motion to dismiss was also denied. In February 1998, defendant filed a
petition with the MDL Panel to consolidate this case with Boyson for pretrial
proceedings in the Middle District of Tennessee. During the pendency of the
motion to consolidate, plaintiff amended its Complaint to add allegations under
the Employee Retirement Income Security Act of 1974 ("ERISA") as well as state
law claims. The amended complaint seeks damages, attorneys' fees and costs, as
well as disgorgement and injunctive relief. The MDL Panel granted defendant's
motion to consolidate in June 1998, and this action was transferred to the
Middle District of Tennessee. The amended complaint in Operating Engineers was
withdrawn and superseded by the Coordinated Class Action Complaint filed in the
MDL proceeding on September 21, 1998. (See In re: Columbia/HCA Healthcare
Corporation Billing Practices Litigation, 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
32
<PAGE> 33
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.)
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 has been 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. (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,
Harold 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
33
<PAGE> 34
reasonable costs of its goods and services, that the overcharges constitute a
breach of contract and an unfair or deceptive trade practice as well as a breach
of the duty of good faith and fair dealing. This suit seeks damages, costs and
attorneys' fees. In addition, the suit seeks a declaratory judgment recognizing
plaintiffs' rights to be free from predatory billing and collection practices
and an Order (i) requiring defendants to notify plaintiff class members of entry
of declaratory judgment and (ii) enjoining defendants from further efforts to
collect charges from the plaintiffs. In 1997, this case was certified as a class
action consisting of all past, present and future patients at Summit 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 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.
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 which has not been ruled on. 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.
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
34
<PAGE> 35
seriousness of patients' illnesses. The lawsuit also alleges that the Company
systematically entered into illegal kickback schemes with doctors for patient
referrals. The Company filed its answer in November 1997 denying the claims.
Discovery has commenced.
The matter of 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 Johnson, Bruce A., et al. v. Plantation General Hospital,
Limited Partnership was filed on March 9, 1992 in the Circuit Court for the
Seventeenth Judicial Circuit, State of Florida, Broward County, Case No.
92-06823 Division 2. In general, the suit alleged that the hospital charged
excessive amounts for pharmaceuticals, medical supplies and laboratory tests.
The suit sought certification of a class. Count I sought a price reduction on
all outstanding bills in the amount of the allegedly excessive portion of the
charges. Counts II and III sought damages for patients who have paid bills
containing allegedly excessive amounts for the alleged unreasonable portion of
the charges. Plaintiff's Complaint also claimed the right to recover attorneys'
fees and costs. In September 1995, the trial court certified a class and the
Fourth District Court of Appeals affirmed. In October 1996, the hospital filed a
Motion for Summary Judgment on Counts II and III on the basis of the voluntary
payment defense. The court granted the motion in November 1997. In April 1998,
following the hospital's statement that it would deem the six to eleven year old
outstanding debt of class members to be fully satisfied, the court granted
defendant's motion for summary judgment on Count I on the ground of mootness. No
monetary judgment was recovered. In September 1998, the court entered an order
denying plaintiff's motion for attorneys' fees and granting their motion for
costs. Both parties appealed the September 1998 orders. In November 1999, the
Court of Appeals affirmed the lower court's order denying attorneys' fees but
did not address the issue of costs, stating the issue was premature. An order
was entered in the trial court establishing that plaintiffs were entitled to
costs, but no dollar amount was fixed. We filed a motion asking that the trial
court reconsider its award of costs to plaintiffs. The trial court vacated its
September 1998 order regarding the award of costs, and another hearing was held
in March 2000 on this issue. On March 10, 2000, the trial court entered an order
denying the plaintiffs' motion for costs. The plaintiffs have not filed an
appeal regarding this order, and the filing deadline has passed. Accordingly,
there are no remaining issues in this litigation and the case will be closed.
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 Note
9 -- 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
35
<PAGE> 36
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 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 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.
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 5 -- 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.
36
<PAGE> 37
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit 10 -- Columbia/HCA Healthcare Corporation 2000 Performance Equity
Incentive Plan (which plan is filed herewith).*
Exhibit 12 -- Statement re Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 27 -- Financial Data Schedule.* (For SEC use only).
*Included only in filings under the Electronic Data, Gathering, Analysis
and Retrieval system.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2000:
On February 16, 2000, the Company filed a report on Form 8-K which included
its operating results for the year and fourth quarter ended December 31, 1999.
37
<PAGE> 38
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.
COLUMBIA/HCA HEALTHCARE
CORPORATION
/s/ R. MILTON JOHNSON
--------------------------------------
R. Milton Johnson
Senior Vice President and Controller
Date: May 11, 2000
38
<PAGE> 1
EXHIBIT 10
COLUMBIA/HCA HEALTHCARE CORPORATION
PERFORMANCE EQUITY INCENTIVE PLAN
Purpose and Administration of the Plan
The Performance Equity Incentive Plan ("Plan") has been established to encourage
outstanding performance of employees who are in a position to make substantial
contributions to the success of the Company. This plan is governed by the
Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan, or if
approved by the Company's stockholders, The Columbia/HCA Healthcare Corporation
2000 Equity Incentive Plan and is administered by the Compensation Committee.
Participation
Eligibility to participate in the Plan shall be extended generally to all full
time regular/corporate payroll Director and above with at least three months
employment in the fiscal year ("Participants") subject to approval by the CEO of
Columbia/HCA Healthcare Corporation. For a Participant added during the Fiscal
Year, the consideration shall be determined pursuant to the Plan and prorated.
Proration may also apply to employees who transfer to a position eligible for a
different incentive target.
Incentive Calculation and Payment
Plan payments for Participants are based on a combination of financial/non
financial measurements (see chart below). As soon as practical, after the Fiscal
Year, when the financial results of the Company are known, the appropriate
senior officer will review and recommend plan payments. The Committee may make
adjustments to performance targets deemed necessary to avoid unwarranted
penalties or windfalls. Such adjustments will recognize uncontrollable outside
factors and will be kept to a minimum. Payments shall be made as soon as
practicable, after the annual audit report has been issued, but in no event
later than three months after the Fiscal Year. Payments will be in the form of
restricted stock that will vest at 50% per year over the following two years.
This Plan is not a "qualified" plan for tax purposes, and any payments are
subject to tax withholding requirements.
Plan Measurements
<TABLE>
<CAPTION>
FINANCIAL NON FINANCIAL
---------------------------------------------- --------------------------------
SWB as % of
Net, Cash Flow, Satisfaction
EBITDA AR/Bad Debt ------------
(Actual to Department Or Supply Corp-Client Individual
Budget)* Budget*** Expense as % Ops-Patient Specific Goals***
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Covered Officer 100%
- --------------------------------------------------------------------------------------------------------------
Corporate 25% 25% ** 50%
- --------------------------------------------------------------------------------------------------------------
Operations AND SVPS 50% 20% 15% 15%
==============================================================================================================
</TABLE>
*NOTE: EBITDA will have an upside potential of up to 150% for exceeding budget
by 10% (both operations and Corporate).
**Each Corporate participant will have at least one Individual Specific Goal
related to Client Satisfaction.
***Some Corporate departments may be measured on some other financial measure as
approved by the SVP Human Resources and the Company COO.
1
<PAGE> 2
Termination of Participant
In the event a payment is due pursuant to the Plan and a Participant's
employment with the Company is terminated prior to the payment by reason of
retirement, total and permanent disability or death, such Participant (or estate
in the event of death) shall receive a pro rata payment as soon as practical
after the Fiscal Year, but in no event later than the three months after the
Fiscal Year. The Committee or it's designee shall have authority to accelerate
vesting on all unvested shares. A Participant who is otherwise voluntarily or
involuntarily separated prior to the payment of any Incentive Compensation shall
cease to be a Participant and shall not have earned any right to receive any
payments pursuant to the Plan.
2
<PAGE> 1
EXHIBIT 12
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
EARNINGS:
Income before minority interests and income taxes........... $518 $584
Fixed charges, excluding capitalized interest............... 144 142
---- ----
$662 $726
==== ====
FIXED CHARGES:
Interest charged to expense................................. $119 $111
Interest portion of rental expense and amortization of
deferred loan costs....................................... 25 31
---- ----
Fixed charges, excluding capitalized interest............... 144 142
Capitalized interest........................................ 5 6
---- ----
$149 $148
==== ====
Ratio of earnings to fixed charges.......................... 4.43 4.91
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF INCOME AND BALANCE SHEETS OF COLUMBIA/HCA HEALTHCARE CORPORATION
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 133
<SECURITIES> 0
<RECEIVABLES> 3,513
<ALLOWANCES> 1,537
<INVENTORY> 377
<CURRENT-ASSETS> 3,409
<PP&E> 14,273
<DEPRECIATION> 5,724
<TOTAL-ASSETS> 16,730
<CURRENT-LIABILITIES> 2,795
<BONDS> 5,771
0
0
<COMMON> 6
<OTHER-SE> 5,684
<TOTAL-LIABILITY-AND-EQUITY> 16,730
<SALES> 0
<TOTAL-REVENUES> 4,271
<CGS> 0
<TOTAL-COSTS> 2,331
<OTHER-EXPENSES> 764
<LOSS-PROVISION> 302
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 492
<INCOME-TAX> 196
<INCOME-CONTINUING> 296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 296
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.52
</TABLE>
