Why did HCA's net income fall so sharply in 2000?

The main driver was an $840 million pretax charge for the settlement with the Federal government, which covers a $745 million civil payment and a $95 million criminal plea payment. Excluding this charge and related effects, the underlying business showed improved margins through better managed care pricing and lower salary and supply costs as a percentage of revenue, though 1999 also benefited from large asset sale gains that did not recur at the same scale.

Is HCA's core hospital business growing?

On a same-facility basis, yes. Admissions rose 2.8% and revenues rose 6.2%, while consolidated revenue was flat because HCA cut its hospital count from 195 to 187 through divestitures. The company is positioning itself around core urban markets where it aims to be the number one or two provider.

What legal risks remain after the December 2000 settlements?

The criminal investigation is largely resolved, but the civil cost-report and physician-relations issues are not covered by the civil agreement. Dozens of qui tam (whistleblower) suits remain, many now in the consolidated federal proceeding, along with shareholder derivative and class actions and patient/payer billing class actions. The SEC also maintains a formal investigation. Management says an adverse outcome could have a material impact on liquidity, financial position and results, but cannot estimate the amounts.

How is HCA's balance sheet and capital structure positioned?

Long-term debt was $6.75 billion, with about $1.9 billion at variable rates, and the company is in compliance with its credit covenants. Equity fell to $4.4 billion after heavy share repurchases in 1999 and 2000, and $769 million of forward purchase contracts and put options were reclassified to temporary equity. The company has a $2 billion revolver with $888 million available at year-end, and a $1 billion letter of credit to the Department of Justice that will fall to $250 million at the civil payment.

What are the biggest exposures for Medicare and payer mix?

Medicare accounted for 28% of 2000 revenues, down from 30% in 1998, while managed care rose to 40% of revenues from 32%. Managed care pays less per patient, which pressures margins, though it has generally brought price increases of five to six percent. Future Medicare and Medicaid changes, including the Federal and state Medicaid funding reductions under consideration, remain a risk. The company also faces ongoing cost-report audits that could lead to adjustments.

HCA 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 2001. Cited figures are marked; the original filing is the authoritative source.

HCA - The Healthcare Company's 2000 annual report shows a company in transition after a multi-year restructuring and a major government investigation.

Revenues were essentially flat at $16.67 billion^a (up 0.1%) as the company shrank to 187 hospitals from 195, but same-facility revenues grew 6.2% on a 2.8% rise in admissions, driven by renegotiated managed care contracts that lifted revenue per equivalent admission 5.5%. Operating efficiency improved, with salaries and supplies falling as a share of revenue. Earnings were heavily depressed by one-time items.

Pretax income fell 58% to $516 million^b (3.1% margin, versus 7.4% in 1999), largely due to an $840 million pretax charge for the settlement with the Federal government, which includes a $745 million civil payment and a $95 million criminal payment. Net income dropped to $219 million, or $0.39 per diluted share, from $657 million ($1.11). The effective tax rate was 57.6%, though management estimates roughly 39% excluding the settlement, valuation allowance and non-deductible intangibles.

For investors, the key issues are the resolution of the legal overhang and the balance sheet. The December 2000 plea and civil agreements, along with a Corporate Integrity Agreement running eight years, resolve most criminal exposure, but significant civil cost-report and physician-relations matters, numerous qui tam suits, and shareholder class actions remain unresolved and are not quantifiable. Total debt was $6.75 billion, stockholders' equity fell to $4.4 billion^c after $1.9 billion of buybacks in 1999 and $769 million of forward purchase contracts reclassified to temporary equity, and the company's cash flow from operations rose to $1.55 billion.

02—Key points

Key Highlights

Revenue flat at $16.67B (+0.1%), but same-facility revenue up 6.2% with revenue per equivalent admission up 5.5%, reflecting better managed care contract terms
Pretax income fell 58% to $516M due to an $840M Federal government settlement charge; pretax margin dropped to 3.1% from 7.4%
Net income of $219M ($0.39 diluted EPS) versus $657M ($1.11) in 1999, with a 57.6% effective tax rate (about 39% excluding one-time items)
Civil settlement of $745M plus $95M criminal payment resolves most federal criminal exposure; a Corporate Integrity Agreement runs eight years and carries exclusion risk if breached
Operating cash flow rose to $1.55B from $1.22B, while capital expenditures were about $1.2B and 2001 capex is planned at roughly $1.3B
Total long-term debt of $6.75B (average rate 8.1%); stockholders' equity declined to $4.4B from $5.6B after buybacks and a $769M reclassification of forward purchase contracts to temporary equity
Significant unresolved litigation remains, including over 40 qui tam actions, shareholder derivative and class actions, and patient/payer billing class actions, with management unable to estimate outcomes

03—Questions

Frequently Asked Questions

Why did HCA's net income fall so sharply in 2000?
The main driver was an $840 million pretax charge for the settlement with the Federal government, which covers a $745 million civil payment and a $95 million criminal plea payment. Excluding this charge and related effects, the underlying business showed improved margins through better managed care pricing and lower salary and supply costs as a percentage of revenue, though 1999 also benefited from large asset sale gains that did not recur at the same scale.
Is HCA's core hospital business growing?
On a same-facility basis, yes. Admissions rose 2.8% and revenues rose 6.2%, while consolidated revenue was flat because HCA cut its hospital count from 195 to 187 through divestitures. The company is positioning itself around core urban markets where it aims to be the number one or two provider.
What legal risks remain after the December 2000 settlements?
The criminal investigation is largely resolved, but the civil cost-report and physician-relations issues are not covered by the civil agreement. Dozens of qui tam (whistleblower) suits remain, many now in the consolidated federal proceeding, along with shareholder derivative and class actions and patient/payer billing class actions. The SEC also maintains a formal investigation. Management says an adverse outcome could have a material impact on liquidity, financial position and results, but cannot estimate the amounts.
How is HCA's balance sheet and capital structure positioned?
Long-term debt was $6.75 billion, with about $1.9 billion at variable rates, and the company is in compliance with its credit covenants. Equity fell to $4.4 billion after heavy share repurchases in 1999 and 2000, and $769 million of forward purchase contracts and put options were reclassified to temporary equity. The company has a $2 billion revolver with $888 million available at year-end, and a $1 billion letter of credit to the Department of Justice that will fall to $250 million at the civil payment.
What are the biggest exposures for Medicare and payer mix?
Medicare accounted for 28% of 2000 revenues, down from 30% in 1998, while managed care rose to 40% of revenues from 32%. Managed care pays less per patient, which pressures margins, though it has generally brought price increases of five to six percent. Future Medicare and Medicaid changes, including the Federal and state Medicaid funding reductions under consideration, remain a risk. The company also faces ongoing cost-report audits that could lead to adjustments.

04—Continue

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