A discussion and analysis of financial condition and results of operations of Holdings has not been provided as management believes that this information would not enhance the quality of the information provided nor enhance an assessment of the financial condition and results of operations of LifePoint's business as a whole. LifePoint has limited independent operations and net assets other than through its ownership of Holdings and indirect ownership of Holdings' subsidiaries. For more information regarding Holdings, please see the related financial statements and accompanying notes appearing elsewhere herein.
Columbia/HCA is a defendant in a number of other suits, which allege, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the suits have been conditionally certified as class actions.
It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigations will be commenced. If Columbia/HCA is found to have violated federal or state laws relating to Medicare, Medicaid or similar programs, Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts in question in the qui tam and other actions are substantial, and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such actions. In addition, a number of derivative actions have been brought by purported stockholders of Columbia/HCA against certain current and former officers and directors of Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable steps to ensure that Columbia/HCA did not engage in illegal practices.
Reductions in Medicare and Medicaid reimbursement, the increasing percentage of the patient volume being related to patients participating in managed care plans and continuing trends toward more services being performed on an outpatient basis are expected to present ongoing challenges. The challenges presented by these trends are magnified by the Company's inability to control these trends and the associated risks. To maintain and improve its operating margins in future periods, the Company must, among other things, increase patient volumes while controlling the costs of providing services. If the Company is not able to achieve these improvements and the trend toward declining reimbursements and payments continues, results of operations and cash flow will deteriorate.
Management believes that the proper response to these challenges includes the delivery of a broad range of quality health care services to patients by assuring that physicians with appropriate specializations practice in the hospitals, that the appropriate equipment and range of specialized services are available within the hospitals, and that the hospitals are positioned as community assets.
Revenues increased 3.4% to $515.2 million for the year ended December 31, 1999 compared to $498.4 million for the year ended December 31, 1998 primarily as a result of increases in the volume of patients treated at the Company's facilities. Inpatient admissions increased 3.2% and equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) increased 4.2% for the year ended December 31, 1999 compared to the year ended December 31, 1998. Revenues per equivalent admission decreased 0.8% for the year ended December 31, 1999 compared to the prior year. The decline in revenues per equivalent admission resulted from several factors, including decreases in Medicare reimbursement rates mandated by the Balanced Budget Act which became effective October 1, 1997 (such rates lowered revenues by approximately $10.1 million for the year ended December 31, 1999 compared to periods prior to the effective date of the Balanced Budget Act), and continued increases in the number of managed care payers (managed care as a percentage of total admissions increased to 20.2% for the year ended December 31, 1999 compared to 18.6% for the year ended December 31, 1998). In addition, favorable cost report adjustments of $0.7 million were recorded during the year ended December 31, 1999 compared to $1.2 million recorded during the year ended December 31, 1998.
Other operating expenses decreased as a percentage of revenues to 22.7% for the year ended December 31, 1999 from 23.5% for the year ended December 31, 1998. Other operating expenses consist primarily of contract services, physician recruitment, professional fees, repairs and maintenance, rents and leases, utilities, insurance, marketing and non-income taxes. The decrease was primarily due to decreases in professional fees and contract services.
Depreciation and amortization expense increased to $31.4 million for the year ended December 31, 1999 from $28.3 million for the year ended December 31, 1998 primarily due to increased capital expenditures related to computer information system conversions. The majority of the Company's facilities began depreciating the systems in the fourth quarter of 1998.
Management fees allocated by Columbia/HCA were $3.2 million for the year ended December 31, 1999 and $8.9 million for the year ended December 31, 1998. These amounts represented allocations, using revenues as the allocation basis, of the corporate, general and administrative expenses of Columbia/HCA; however, Columbia/HCA stopped allocating management fees to the Company after the Distribution. The elimination of management fee allocations by Columbia/HCA was offset by increases in salaries, supplies and other operating costs related to the establishment and operation of the Company's corporate office during 1999.
During the fourth quarter of 1998, the Company decided to sell three hospital facilities that were identified as not compatible with the Company's operating plans based upon management's review of all facilities and giving consideration to current and expected market conditions and the current and expected capital needs in each market. At December 31, 1998, the carrying value before the impairment charge of the long-lived assets related to these hospital facilities was approximately $47.0 million. The carrying value was reduced to fair value, based on estimates of selling values at that time, for a total non-cash charge of $24.8 million. During the fourth quarter of 1999, the Company recorded an additional non-cash charge of $25.4 million (comprised of $22.4 million in further impairment charges for these facilities and $3.0 million in anticipated selling/closing costs). The remaining carrying value of the long-lived assets related to these hospital facilities was written down based on revised selling values. Severance costs, if any, will be expensed when incurred at a later date. One of these three hospital facilities held for sale was sold subsequent to December 31, 1999. See Note 16 of the Notes to the Consolidated Financial Statements included elsewhere in this report. For the years ended December 31, 1999, 1998 and 1997, respectively, these facilities to be divested had net revenues of approximately $42.6 million, $48.0 million and $50.6 million and incurred income (loss) from continuing operations before income taxes (benefit) and the asset impairment charges of approximately $(3.8) million, $(2.9) million and $0.7 million.
Loss from continuing operations before income taxes was $10.1 million for the year ended December 31, 1999 compared to a loss of $27.5 million for the year ended December 31, 1998 primarily due to increases in revenue and decreases in certain expenses as described above. The three facilities held for sale contributed significantly to the decline in results of operations. These facilities incurred losses from continuing operations before income tax benefit of approximately $3.8 million and $2.9 million for the years ended December 31, 1999 and 1998, respectively.
Provision for doubtful accounts, as a percentage of revenues, increased to 8.4% in 1998 from 7.1% in 1997 due to internal factors such as computer information system conversions (including patient accounting systems) at various facilities and external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and payer remittance slowdowns. The information system conversions hampered the business office billing functions and collection efforts in those facilities as some resources were directed to installing and converting systems and building new data files, rather than devoting full effort to billing and collecting receivables. The information systems conversion was substantially completed in 1998. The Company experienced an increased occurrence of charge audits from certain payers due to the negative publicity surrounding the government investigations which resulted in delays in the collection of receivables. The delays in collection resulted in an increase in receivables reserved under the Company's bad debt allowance policy.
Prior to the Distribution, the Company relied upon Columbia/HCA for liquidity and sources of capital to supplement any needs not met by operations. As an independent, publicly-traded company, the Company must now rely upon the bank credit facilities and other traditional funding sources to supplement needs not met by operations. At December 31, 1999, the Company had working capital of $42.2 million compared to $26.9 million at December 31, 1998. The increase in working capital was primarily due to a $12.5 million increase in cash resulting from net cash collections since the Distribution. In addition, accounts receivable increased approximately $10.3 million primarily as a result of Columbia/HCA's agreement to indemnify the Company with respect to Medicare, Medicaid, and cost-based Blue Cross receivables and payables relating to cost reporting periods ending on or prior to the Distribution. The increase in working capital was partially offset by increases in accounts payable.
Cash used in investing activities was $67.0 million for the year ended December 31, 1999 compared to $29.3 million for the year ended December 31, 1998. The increase was primarily due to capital expenditures of $64.8 million in 1999 (of which $29.1 million related to the construction of a replacement hospital located in Florida that was completed in December 1999) compared to $29.3 million in 1998. At December 31, 1999, there were construction projects committed by the Company which had an estimated cost of approximately $15.9 million. These projects are scheduled for completion by the end of 2000. Management believes that its capital expenditure program is adequate to expand, improve and equip the Company's existing health care facilities. The Company expects to make total capital expenditures in 2000 of approximately $47.0 million, excluding acquisitions.
The $85 million term loan facility was drawn in full at the time of the Distribution. The final payment under this term loan is due November 11, 2005.
The Company's obligations under the Bank Facilities are guaranteed by its subsidiaries. These guarantees are secured by a pledge of substantially all of the subsidiaries' assets. The Credit Agreement requires that the Company comply with various financial ratios and tests and contains covenants, including but not limited to restrictions on new indebtedness, the ability to merge or consolidate, asset sales, capital expenditures and dividends.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which was required to be adopted in years beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, deferring the effective date of SFAS No. 133 for one year. Management does not anticipate that the adoption of the new statement will have a material effect on the financial condition or results of operations of the Company.
- a substantial portion of LifePoint's cash flow from operations may have to be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available for operations;
- certain of the borrowings may be at variable rates of interest, which would make LifePoint vulnerable to increases in interest rates; and
Any substantial increase in LifePoint's debt levels or the inability to borrow funds at favorable interest rates or to comply with the financial or other restrictive covenants could have a material adverse effect on the business, financial condition, results of operations or prospects of LifePoint.
Since physicians generally direct the majority of hospital admissions, the success of LifePoint, in part, is dependent upon the number and quality of physicians on its hospitals' medical staffs, the admissions practices of such physicians and the maintenance of good relations with such physicians. Hospital physicians are generally not employees. Only a limited number of physicians practice in the non-urban communities in which LifePoint's hospitals are located. Consequently, the loss of physicians in these communities, the inability of LifePoint to recruit and to retain physicians in these communities or the inability of LifePoint to maintain good relations with the physicians on its hospitals' medical staffs could have a material adverse effect on its business, financial condition, results of operations or prospects. The operations of LifePoint's hospitals could also be materially adversely affected by the shortage of nurses and certain other health care professionals in these communities.
LifePoint is also dependent upon the continued services and management experience of Scott L. Mercy, James M. Fleetwood, Jr. and other of its executive officers. If Messrs. Mercy or Fleetwood or any of such other executive officers were to resign their positions or otherwise be unable to serve, the operating results of LifePoint could be adversely affected. In addition, the success of LifePoint depends on its ability to attract and retain managers at its hospitals and related facilities, on the ability of its officers and key employees to manage growth successfully and on its ability to attract and retain skilled employees.
In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration or already enacted are price controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, Medicare and Medicaid managed care programs and requirements that all businesses offer health insurance coverage to their employees. While LifePoint anticipates that the rate of increase in payments to hospitals will be reduced as a result of future federal and state legislation, it is uncertain at this time what legislation on health care reform may ultimately be enacted or whether other changes in the administration or interpretation of governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the business, financial condition, results of operations or prospects of LifePoint.
One element of LifePoint's business strategy is expansion through the acquisition of acute care hospitals in growing non-urban markets. The competition to acquire non-urban hospitals is significant. There can be no assurance that suitable acquisitions can be accomplished on terms favorable to LifePoint, or that financing, if necessary, can be obtained for such acquisitions. The consummation of acquisitions may result in the incurrence or assumption by LifePoint of additional indebtedness. In addition, in order to ensure the tax-free treatment of the Distribution, LifePoint is limited in the amount of stock it may issue as consideration for acquisitions.
LifePoint provides financial incentives to recruit physicians into the communities served by its hospitals, including loans and minimum revenue guarantees. One LifePoint hospital has physician investors. LifePoint also enters into employment agreements, independent contractor agreements, leases and other agreements with physicians. Although the Company believes that these agreements comply with applicable law, there can be no assurance that regulatory authorities who enforce the Anti-Kickback Statute will not determine that such arrangements of any of the hospitals owned and operated by LifePoint violate the Anti-Kickback Statute or other federal laws. Such a determination could subject LifePoint to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and/or exclusion from participation in Medicare, Medicaid or other federal health care programs, any of which could have a material adverse effect on the business, financial condition, results of operations or prospects of LifePoint.
Some states require prior approval for the purchase, construction and expansion of health care facilities, based upon a state's determination of need for additional or expanded health care facilities or services. Such determinations, embodied in certificates of need issued by governmental agencies with jurisdiction over health care facilities, may be required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and certain other matters. Five states in which LifePoint currently owns hospitals, Alabama, Florida, Georgia, Kentucky and Tennessee, have enacted CON legislation. There can be no assurance that LifePoint will be able to obtain CONs required for expansion activities in the future or that the failure to obtain any required CON will not have a material adverse effect on the business, financial condition, results of operations or prospects of LifePoint.
Professional Liability Risks Could Adversely Affect Results of Operations and Cash Flow
On March 30, 1999, Columbia/HCA received a ruling from the IRS concerning the United States federal income tax consequences of the Distribution. The tax ruling provides that, because the Distribution qualifies under Section 355 of the Internal Revenue Code of 1986, the Distribution generally will be tax-free to Columbia/HCA and to Columbia/HCA's stockholders, except for any cash received instead of fractional shares. The tax ruling is based upon the accuracy of representations made by Columbia/HCA as to numerous factual matters and as to the intention to take, or to refrain from taking, certain future actions. The inaccuracy of any of those factual representations or the failure to take the intended actions, or the taking of actions which were represented would not be taken, could cause the IRS to revoke all or part of the tax ruling retroactively.
If the Distribution were not to qualify for tax-free treatment under Section 355 of the Code, then, in general, additional corporate tax (which would be substantial) would be payable by the consolidated group of which Columbia/HCA is the common parent. Under the consolidated return rules, each member of the consolidated group, including LifePoint, would be jointly and severally liable for such tax liability. If the Distribution did not qualify for tax-free treatment under Section 355 of the Code, the resulting tax liability would have a material adverse effect on the business, financial position, results of operations or prospects of Columbia/HCA and, possibly, also of LifePoint.
The claims of creditors of the subsidiaries of Holdings, including trade creditors, will generally have priority as to the assets of such subsidiaries over the claims of creditors of Holdings, including the holders of the Notes. As of December 31, 1999, on a pro forma basis after giving effect to the elimination of the facilities to be divested, the aggregate amount of indebtedness and other obligations of Holdings' subsidiaries, including trade payables and lease obligations, was approximately $285.0 million, including the guarantees of the Notes.