Triad owns and operates the health care service business which comprised the Pacific Group of Columbia/HCA until the distribution by Columbia/HCA to its shareholders of all of the shares of outstanding common stock of Triad. The distribution, which occurred on May 11, 1999, marked the beginning of Triad's operations as an independent, publicly-traded company. As such, the historical financial statements of Triad may not be indicative of Triad's future performance, nor do they necessarily reflect what the financial position and results of operations of Triad would have been if it had operated as a separate, stand-alone entity during the entire periods presented.
On January 1, 1999, Triad transferred two acute care hospitals and three ambulatory surgery centers located in the Kansas City, Missouri area to an unaffiliated third party pursuant to a long-term lease which provides for payment to Triad of rental amounts approximating $16.0 million per year. For the years ended December 31, 1999 and 1998, these leased facilities contributed revenues, exclusive of the $16.7 million lease payments, of $(4.0) million and $216.6 million and income (loss) before impairment charges and income tax benefit of $(12.0) million and $5.3 million, respectively. These leased hospitals, along with the facilities divested, accounted for a majority of the decrease in revenue and volume for Triad.
Triad's revenues also continue to be affected by the trend toward certain services being performed more frequently on an outpatient basis. Growth in outpatient services is expected to continue in the health care industry as procedures performed on an inpatient basis are converted to outpatient procedures through continuing advances in pharmaceutical and medical technologies. The redirection of certain procedures to an outpatient basis is also influenced by pressures from payers to perform certain procedures as outpatient care rather than inpatient care. Net outpatient revenues grew to 49.4% for the year ended December 31, 1999 from 49.1% for the comparable period in 1998.
Following are comparative summaries of results from continuing operations for the years ended December 31, 1999, 1998 and 1997. Dollars are in millions, except per share amounts and ratios.
Interest expense, which is net of $2.5 million of interest income in 1999, increased to $42.7 million in the year ended December 31, 1999 from $2.7 million in the year ended December 31, 1998 due to the assumption of debt from Columbia/HCA in the distribution.
The loss from continuing operations before income tax benefit increased to $124.9 million in the year ended December 31, 1998 from $26.2 million in the year ended December 31, 1997. The increase in pretax loss was due to several factors. Among these were impairment charges of $55.1 million in 1998 compared to $13.7 million in 1997 due to management's reassessment of facilities that would not be part of Triad's core markets. Also, the increase pretax loss was attributable to increased losses of $6.0 million on the facilities that management had determined did not meet Triad's strategic plan. Another factor that contributed to the increase was the inability to adjust expenses in line with decreases in volumes. The level of management's attention being devoted to governmental investigations, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout Triad contributed to Triad's inability to implement changes to reduce operating expenses in response to the volume and revenue growth rate declines.
Revenues decreased by 1.3% to $1,588.7 million in the year ended December 31, 1998 compared to $1,609.3 million in the year ended December 31, 1997. Inpatient admissions decreased 1.9% during 1998 and adjusted admissions, adjusted to reflect combined inpatient and outpatient volume increased 0.6%.
(3) To adjust to the estimated, incremental general and administrative costs of an annual amount of $22.4 million for the periods prior to the distribution in 1999 and the years ended December 31, 1998 and 1997, in addition to $5.6 million in the periods prior to the distribution in 1999 and $7.6 and $11.7 million in the years ended December 31, 1998 and 1997 in costs already included in the consolidated statement of operations, that would have been incurred if Triad had managed comparable general and administrative functions and to eliminate the management fee allocated from Columbia/HCA.
(6) To adjust provision for income taxes for the estimated impact of the pro forma adjustments.
On a core (pro forma) basis, provision for doubtful accounts, as a percentage of net revenue, decreased to 8.6% in the year ended December 31, 1999 from 9.3% in the year ended December 31, 1998 due to increased focus by management on the core facilities that will remain with Triad after the completed and planned divestitures.
On a core (pro forma) basis, depreciation and amortization remained constant at $79.7 million in the years ended December 31, 1999 and 1998, respectively.
On a core (pro forma) basis, other operating expenses, as a percentage of net revenue, decreased to 23.0% from 23.4% for the year ended December 31, 1998 and 1997, respectively. This was primarily due to lower marketing costs being incurred from the cancellation of a national branding campaign.
Prior to the distribution Triad relied upon Columbia/HCA for liquidity and sources of capital to supplement any needs not met by operations. As an independent publicly-traded company, Triad now has direct access to the capital markets and the ability to enter into its own borrowing arrangements. At December 31, 1999, Triad had working capital of $187.6 million.
In connection with the distribution, all intercompany accounts payable by Triad to Columbia/HCA were eliminated, and Holdings ultimately assumed $673.8 million of debt obligations from Columbia/HCA. The debt consisted originally of a $75.0 million asset sale bridge loan bearing interest at LIBOR plus 3.25% per annum due
On October 31, 1999, Triad sold its stock interest in a psychiatric hospital in Kansas City, Missouri for $4.3 million. A gain on the sale of $0.6 million was recognized during the year ended December 31, 1999. For the year ended December 31, 1999 and 1998, this facility had net revenues of $8.0 million and $10.2 million, respectively and pre-tax income before gain on sale of assets and impairment charges of $0.0 million and $0.4 million, respectively.
On February 11, 2000, Triad closed its acute care hospital in Roseberg, Oregon. An impairment charge of $6.8 million on this facility was recognized during the year ended December 31, 1999. As of December 31, 1999, the carrying value of this facility after impairment charge was $7.4 million. For the years ended December 31, 1999 and 1998, this facility had net revenues of $21.8 million and $21.5 million, respectively, and pre-tax losses before impairment charges and income tax of $5.6 million and $6.6 million, respectively. Triad continues to pursue a lawsuit against another hospital in the market, seeking damages for various causes of action, including breach of fiduciary duties, interference with business advantage, and breach of contract and it expects ultimately to sell the facility for real estate value.
According to published reports, on July 2, 1999, a federal jury in Tampa, Florida found two Columbia/HCA employees guilty of conspiracy and making false statements on Medicare and Champus costs reports for years 1992 and 1993 and a Medicaid cost report for 1993. Both were found not guilty of obstructing a federal auditor. One other employee was acquitted of all counts for which he had been charged and the jury was unable to reach a verdict with respect to another employee. This employee agreed to a settlement of charges in September 1999. Published reports further indicate that the two convicted employees have appealed their convictions and that these appeals remain pending.
Management believes that hospital industry operating margins have been, and may continue to be, under significant pressure because of deterioration in inpatient volumes, changes in payer mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. Management expects that the average rate of increase in Medicare prospective payments will continue to decline slightly in 2000 not withstanding the enactment of the Refinement Act. In addition, as a result of increasing regulatory and competitive pressures, Triad's ability to maintain operating margins through price increases to non-Medicare patients is limited.
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 the services provided by and reimbursement to health care providers in Triad'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 the Balanced Budget Act as previously discussed. While Triad is unable to predict whether any proposals for health care reform will be adopted, there can be no assurance that proposals adverse to the business of Triad will not be adopted.