After a long and anticipated wait, HCA (Healthcare Corporation of America) once again became a publicly traded company. On November 22, 2010, HCA Inc. reorganized by forming a new company structure known as HCA Holdings Inc. On November 23, 2010, HCA Holdings Inc. issued the 2021 notes. The notes represented the senior unsecured obligations of HCA Holdings Inc., and were not to be considered as guarantees by HCA or any of its subsidiaries (HCA, 2011).
Prior to the public offering launched in late 2010, HCA was a privately held healthcare company for the third time since its inception. At the time of the buyout in late 2006, the privatization of HCA was the largest LBO in U.S. history, with the value in excess of 33 billion dollars. HCA currently owns and operates over 268 hospitals and outpatient centers, including six hospitals in London, England. HCA currently employs over 195,000 people throughout the U.S. and U.K with assets over 26 billion dollars, and revenues exceeding 28 billion dollars annually (HCA, 2011).
As the largest publically and formally the largest privately healthcare company in America, HCA's ability to grow and prosper in the changing landscape of healthcare is due in part to its commitment to process improvement and quality accounting standards. The information contained in this work will provide an overview of their recent SEC, 10K filing.
History
The Hospital Corporation of America, (HCA), founded in 1968, began in Nashville Tennessee as one of the first small hospital chains in the U.S. After enjoying success in the Nashville market, the company and its investors began to purchase existing hospitals throughout the U.S. As HCA grew into a well branded healthcare organization, the senior management and investors saw an opportunity to purchase the nearly defunct Columbia hospital system in February 1994. As a result of this buyout, HCA\Columbia became the largest privatized hospital system in America.
As is expected with any for-profit company, cost management is a stated part of the HCA strategy and business plan. As a result of this philosophy, HCA has instituted several, shared resource departments within the company. Some examples of this modular/shared services program include supply chain management, patient registration, medical records and IT&S departments. Through this model, HCA has been able to leverage resources, improve technology and reduce the largest single operational cost; staffing.
The sheer size of HCA and the leverage it can employ provides a potential of revenue enhancement. Whether the leverage applied is to streamline supplies or to expand shared service capability, HCA has opened the possibility of providing third party management for other healthcare organizations. The experience and capital potential is yet another example of their ability to effectively consolidate and thereby increasing market share and presence.
HCA's rise to the top-spot in healthcare was not without significant challenges. During the early 1990's HCA was involved in a landmark Medicare fraud case involving the U.S. government. Due to the investigation and subsequent guilty finding by the government, HCA was heavily fined and placed on probation that ended in 2010. At the time of the charges, HCA's CEO was the current Florida Governor, Rick Scott. HCA had suffered significant damage to their reputation and goodwill as an ethical and caring healthcare provider. Although the resulting government sanctions and penalties imposed against HCA have been lifted, the company continues to emphasize ethical behavior from its staff by mandating annual classes on ethical behaviors and hiring third party auditing firms to verify quality accounting practices (HCA, 2011).
"On November 17, 2006, HCA Inc. was acquired by a private investor group comprised of affiliates of or funds sponsored by Bain Capital Partners, LLC ("Bain Capital"), Kohlberg Kravis Roberts & Co. ("KKR") and Merrill Lynch Global Private Equity ("MLGPE"), now BAML Capital Partners (each a "Sponsor"), Citigroup Inc. and Bank of America Corporation (the "Sponsor Assignees") and HCA founder Dr. Thomas F. Frist, Jr. (the "Frist Entities"), a group we collectively refer to as the "Investors," and by members of management and certain other investors" (HCA, 2010, p.3).
The New HCA
On November 22, 2010, HCA Inc. underwent a corporate restructuring by creating a new holding company; HCA Holding's Inc. As one part of the reorganization, HCA Holding's Inc.'s outstanding shares of stock were converted, on a 1:1 basis to the new common stock. Along with the conversion of the stock, all documentation reflecting the incorporation, by-laws, officers and board members were restated, along with their respective rights, privileges and interests in HCA Inc. There was also the list of guarantors during the reorganization. Although the registrant HCA Holdings Inc. was named in the Exchange Act documentation, there was language reflecting the denial of any debt liability in respect to their outstanding secured notes (HCA, 2011).
Although there is speculation behind the motives for going public, the official information given to the SEC can be summed up in the following statements. "We refer to the merger, the financing transactions related to the merger and other related transactions collectively as the "Recapitalization." The merger was accounted for as a recapitalization in our financial statements, with no adjustments to the historical basis of our assets and liabilities. As a result of the Recapitalization, our outstanding capital stock is owned by the Investors, certain members of management and key employees. On April 29, 2008, we registered our common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), thus subjecting us to the reporting requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended. Our common stock is not traded on a national securities exchange" (HCA, 2011, p.3).
Sources of Revenue
Unlike most industries, hospitals are challenged by not only the volume of customers/patients seen, but also the regulations and provider contracts that determine the profitability of each transaction. Hospitals rely on the revenues created by inpatient occupancy levels, medical and ancillary charges during their stay, as well as physician ordered testing. The charges and reimbursement rates can be dependent not only the contract with a given provider, but also the geographic area of the country can result in different reimbursement rates. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control. It is the culmination of federal (Medicare), state (Medicaid) and private insurers that make their main sources of income. As the new healthcare reform law takes effect, all of these revenue streams will be affected by reduced reimbursement rates.
Years Ended December 31,
2010
2009
2008
Medicare
34%
34%
35%
Managed Medicare
10
10
9
Medicaid
9
9
8
Managed Medicaid
8
7
7
Managed care and other insurers
32
34
35
Uninsured
7
6
6
Total 100% 100% 100%
Risk Factors
The following risk factors would certainly have negative effects on the financial position, cash flows and operations. HCA is a highly leveraged company, and therefore future capital funding and the ability to react to market conditions may be effected. The interest rates for some of the leveraged funds are variable and by design, pose a potential for increases and added risk.
Both operational and cash flow strengths are the pillars that is leveraged to help incur secured rather than unsecured debt. Due to global fluctuations of U.S. currency and HCA's participation in currency exchange, there is risk from the global market level as well. If conditions deteriorate, HCA could lose its ability to fund the debt and be forced to reduce or delay the rate of growth in the marketplace. It is possible the global economic conditions along with the recent healthcare reform could create a liquidity problem resulting in a disposal of assets to service the debt.
The current debt agreements are written with restrictions to capital outlay and asset-based credit, thereby limiting flexibility to engage markets as needed. In the event these restrictions are violated, daily deposits will be transferred into a secured account that will administer funds to the pre-paid (asset-based) loans (HCA, 2011).
HCA utilizes and is accountable for financial ratios representing senior secured credit facilities. External influences within the global marketplace may detract from their ability to meet the expected ratios. Under the current debt agreements, HCA has grants the lenders of the senior secured loans to claim an immediate payoff of the debt in entirety. If there are not funds to cover the amount due, the creditors are also given the right to claim the collateral used to secure the loans. If the lenders accelerate the repayment terms of the loans, HCA cannot assure the assets to repay both lien notes and senior secured creditors.
As discussed earlier; the primary income for our facilities, HCA relies upon Federal, State and private contracts for reimbursement. The growth of the uninsured population and their subsequent inability to pay for services has direct and significant effects on stability and profitability. These accounts are viewed as doubtful with respect to the likelihood of complete repayment.
The changes in healthcare reform and the inability to fully predict the effects on revenue, as well as the secondary results encountered by the reduction of fees with private payers, can reduce revenues. Failure to comply with the new regulations could also result in heavy fines and penalties. The recent electronic healthcare record push has also placed additional time and human resource restraints. Finally; the restrictions that state governments can impose on the expansion of healthcare facilities within a given market can adversely affect HCA's ability to capitalize on emerging markets (HCA, 2011).
HCA, like all other healthcare providers are subject to frequent liability claims, as well as complex state and federal regulations. Although HCA maintains umbrella policies against lawsuits, there are often punitive damages that the policy will not cover.
Accounting Policies and Revenue Estimates
The total net income is used exclusively to repay the outstanding senior secured debt. The interest rate swap agreements are also specifically utilized to manage the variable interest debt. At the end of 2010, HCA had utilized $7.1 billion dollars to hedge against the variable loans of the senior secured creditors.
The preparation of the financial statements requires that management make assumption with regards to the reported assets and liabilities. Although the estimates do utilize historical data, they are mainly used to reflect a true market value of a given period of time. Factors such as the professional liability costs and coverage afforded to the physicians and staff, as well as unreported losses can be difficult to accurately determine, but are accounted for as general overhead.
Despite the downturn in the U.S. economy, HCA has managed to post a net profit of $1.05 billion dollars in 2009 and $1.2 billion dollars in 2010. Although these numbers would reflect a healthy profit for most companies, at the end of the calendar year 2010, HCA remained highly leveraged with a long-term debt of almost $29 billion dollars.
Not only does HCA operate within the U.S. but they also have facilities in London, England. As part of their presence overseas, HCA has even greater exposure to market risks associated with foreign currencies. In order to mitigate some of the foreign currency related debt, HCA began a currency swap agreements.
Results of Operations
HCA experienced recent growth and profitability, with revenues increasing from $30.052 billion in 2009 to $30.683 billion in 2010. The increased revenue was the result of combined revenue per patient profit as well an increase in the volume of inpatients registered. Aside from these increases, HCA also brought in more adjusted cash income of 4.7%. The primary use for the cash generated is to pay operating expenses, capital expenditures and servicing the senior secured debt. There are also considerations and adjustments in cash outlay for acquisition of new facilities and distributions to be paid to the stockholders.
Report of Independent Registered Public Accounting Firm
To satisfy the government imposed sanctions as well as investor assurance of quality accounting practices, HCA Holdings Inc.'s internal controls over their financial reporting was based on an integrated framework. The internal controls and accounting practices are under the direct purview of HCA's senior leadership and they alone are responsible for expressing the company position as it relates to the financial reporting controls.
In 2010 an external audit was performed by the firm of Ernst & Young LLP. They conducted their audit utilizing the standards of the Public Company Accounting Oversight Board. The main purpose of this audit was to reflect upon the standards of internal controls being utilized by HCA in all financial aspects of their operations. The internal controls over the financial reporting are designed to provide the best quality assurance and accounting practices regarding the reporting of financial statements. Specifically; controls include policy and procedures, operational transactions and records of all accounts. As with any internally controlled auditing process, the limitations of this method can include the over-reaching of forward looking statements, as well as misstated or misunderstood relevance of data.
As reported by the auditing team of Ernst & Young: "In our opinion, HCA Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria" (HCA, 2011, p.78). The following balance sheet reflects the previous two calendar years, and was prepared by the auditing team in accordance with the Public Company Accounting Oversight Board.
INC. CONSOLIDATED BALANCE SHEETS 2010 AND2009
(Dollars in millions)
ASSETS 2010 2009
Current assets:
Cash and cash equivalents
$ 411
$ 312
Accounts receivable, less allowance for doubtful accounts of $3,939 and $4,860
3,832
3,692
Inventories
897
802
Deferred income taxes
931
1,192
Other
848
579
6,919
6,577
Property and equipment, at cost:
Land
1,215
1,202
Buildings
9,438
9,108
Equipment
14,310
13,575
Construction in progress
678
784
25,641
24,669
Accumulated depreciation
(14,289)
(13,242)
Investments of insurance subsidiary
642
1,166
Investments in and advances to affiliates
869
853
Goodwill
2,693
2,577
Deferred loan costs
374
418
Other
1,003
1,113
23,852
24,131
LIABILITIES AND STOCKHOLDERS'DEFICIT
Current liabilities:
Accounts payable
1,537
1,460
Accrued salaries
895
849
Other accrued expenses
1,245
1,158
Long-term debt due within one year
592
846
4,269
4,313
Long-term debt
27,633
24,824
Professional liability risks
995
1,057
Income taxes and other liabilities
1,608
1,768
Equity securities with contingent redemption rights
141
147
Stockholders'deficit:
Common stock $0.01 par; authorized 125,000,000 shares - 2010 and 2009; outstanding 94,885,500 shares - 2010 and 94,637,400 shares - 2009
1
1
Capital in excess of par value
389
226
Accumulated other comprehensive loss
(428)
(450)
Retained deficit
(11,888)
(8,763)
Stockholders'deficit attributable to HCA Holdings, Inc.
(11,926)
(8,986)
Non-controlling interests
1,132
1,008
(10,794)
(7,978)
Summary Overview
Although HCA Holding's Inc. has become increasingly leveraged, they have effectively utilized their funding. Since the company's inception they have continued to grow and profit despite their shortcomings and loss of goodwill. Whether or not the risk of excessive leverage is to be realized or not, the company has positioned itself by sheer market size to aggressively seek those patients who did not have healthcare, but will be eligible under the new healthcare reform. The strategy seems to indicate HCA's willingness to become more leveraged in preparation for the expected increase of patient volumes that will potentially be created by the healthcare reform law.
The perception of U.S. healthcare throughout the world may be known as the most expensive, however; it is also known as the best. The implementation of the Healthcare Reform Law in the U.S., over the next few years has many healthcare providers uncertain if they will be flexible enough to accommodate the new regulations. In this new healthcare environment, HCA's global experiences, may very well provide the edge needed to excel in the new marketplace.
