CYH

Business Context and Reporting Period

Company: Community Health Systems, Inc. (CHS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: CHS is the largest publicly traded operator of hospitals in the U.S. by facility count and net operating revenues. As of December 31, 2009, the company owned or leased 122 hospitals with 18,140 licensed beds across 29 states. The company's strategy focuses on increasing revenue, improving profitability and quality, and growing through selective acquisitions, primarily in non-urban markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net operating revenues increased 10.9% year-over-year. On a same-store basis, revenues grew 5.9%, driven by higher acuity levels, outpatient growth, and favorable payor mix, partially offset by a less severe flu season compared to 2008.
• Volume Trends: Total inpatient admissions increased 3.6% and adjusted admissions increased 5.6%. However, same-store inpatient admissions decreased 1.5% due to the strong flu season in 2008 and the closure of certain less profitable services.
• Expense Management: Operating expenses remained consistent at 86.5% of revenues. The provision for bad debts increased to 12.1% of revenues (from 11.2% in 2008) due to higher self-pay volumes and economic conditions affecting patient ability to pay.
• Acquisitions: In 2009, CHS acquired three hospitals (Wilkes-Barre General Hospital, Siloam Springs Memorial Hospital, and Medical Center of South Arkansas) and purchased the remaining equity in Massillon Community Health System. The company also entered into a financing agreement with Rockwood Clinic.
• Dispositions: The company sold its interest in Presbyterian Hospital of Denton for $103.0 million, which was classified as a discontinued operation.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management anticipates continued growth in substantially all markets by reducing the need for patients to travel outside their communities. The company expects to fund future capital expenditures (estimated at $650-$750 million for 2010) through cash flows from operations and available borrowing capacity.
• Healthcare Reform: The company faces significant uncertainty regarding pending healthcare reform legislation. While a reduction in uninsured patients may lower bad debt expenses, proposals could result in lower reimbursement rates or a migration of patients from private payors to lower-paying government programs.
• Legal Proceedings:
  • False Claims Act (New Mexico): The U.S. Department of Justice intervened in a qui tam lawsuit alleging improper claims for federal funds by three New Mexico hospitals. The government seeks treble damages plus penalties. CHS is vigorously defending the action.
  • Kyphoplasty Investigation: The U.S. Attorney's Office for the Western District of New York is investigating billing practices for kyphoplasty procedures at two CHS hospitals.
  • OIG Subpoena: The Office of Inspector General issued a subpoena regarding the Laredo, Texas hospital concerning case management and billing practices.
• Debt Covenants: The company is significantly leveraged with approximately $8.9 billion in total debt. Its Credit Facility and Senior Notes contain restrictive covenants limiting additional indebtedness, dividends, and asset sales. Management believes it will remain in compliance with these covenants.
• Capital Commitments: The company has committed to spending approximately $310 million on three replacement hospitals and $468.5 million on other capital improvements and physician recruiting over the next five to seven years.

Key Facts for Investor Verification

• Debt Service Capacity: Verify the company's ability to service its $8.9 billion debt load, particularly given the high interest expense ($649 million in 2009) and the impact of potential interest rate fluctuations on variable-rate debt.
• Bad Debt Trends: Monitor the provision for bad debts, which rose to 12.1% of revenues in 2009, as a leading indicator of economic stress on the self-pay patient population.
• Regulatory Exposure: Assess the potential financial impact of the ongoing False Claims Act litigation in New Mexico and the kyphoplasty billing investigation, which could result in significant penalties and reputational damage.
• Healthcare Reform Impact: Evaluate the sensitivity of the company's margins to potential changes in Medicare and Medicaid reimbursement rates resulting from federal healthcare reform legislation.
• Capital Expenditure Obligations: Confirm the company's ability to meet its contractual obligations to build replacement hospitals in Valparaiso, Indiana; Siloam Springs, Arkansas; and Barstow, California, totaling approximately $310 million.