| TENET HEALTHCARE CORP ITEM 1A RISK FACTORS Our business is subject to a number of risks and uncertainties—many of which are beyond our control—that may cause our actual operating results or financial performance to be materially different from our expectations |
| If one or more of the events discussed in the following risks were to occur, actual outcomes could differ materially from those expressed in or implied by any forward-looking statements we make in this report or our other filings with the SEC, and our business, financial position, results of operations or liquidity could be materially adversely affected |
| Additional risks and uncertainties not presently known, or that we currently deem immaterial, may also negatively affect our business and operations |
| In either case, the trading price of our common stock could decline and shareholders could lose all or part of their investment |
| If managed care payers reduce the payments we receive as reimbursement for the health care services we provide, or if we have difficulty collecting from managed care payers, our revenues could be adversely affected |
| We currently have thousands of managed care contracts with various health maintenance organizations and preferred provider organizations |
| The amount of our net patient revenue from our continuing general hospitals under managed care contracts for the year ended December 31, 2005 was dlra4dtta7 billion, which represented approximately 49prca of our total net operating revenues |
| Approximately 38prca of our managed care net patient revenues during the year ended December 31, 2005 were derived from our top five managed care payers |
| At December 31, 2005, approximately 58prca of our net accounts receivable related to continuing operations were due from managed care payers |
| Managed care payers are increasingly demanding discounted fee structures or the assumption by health care providers of all or a portion of the financial risk |
| We expect managed care payers to continue to aggressively manage reimbursement levels and enforce more stringent cost controls |
| In addition, an increasing number of managed care providers have experienced financial difficulties in recent years, in some cases resulting in bankruptcy or insolvency |
| Managed care providers with which we do business have encountered and may continue to encounter similar difficulties in paying claims in the future |
| In recent years, payment pressure from managed care payers, along with increased levels of co-pay payments, deductibles and coinsurance amounts to be paid by insured patients, has affected our provision for doubtful accounts, and we continue to experience ongoing managed care payment delays and disputes |
| 16 _________________________________________________________________ It would harm our business if we were unable to enter into managed care provider arrangements on acceptable terms |
| Any material reductions in the payments that we receive for our services, coupled with the difficulty in collecting receivables from managed care payers, could reduce our overall revenues and have an adverse effect on our results of operations |
| Changes in the Medicare and Medicaid programs or other government health care programs could have an adverse effect on our business |
| Estimated payments under the Medicare program constituted approximately 27dtta5prca of net patient revenues at our continuing general hospitals for the year ended December 31, 2005, and various state Medicaid programs, excluding state-funded managed care programs, constituted approximately 8dtta3prca of net patient revenues at the same hospitals for the same period |
| The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease government program payments in the future, as well as affect the cost of providing services to patients and the timing of payments to facilities |
| We are unable to predict the effect of future government health care funding policy changes on our operations |
| If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, if we are required to pay substantial amounts in settlement pertaining to government programs, or if we, or one or more of our subsidiaries &apos hospitals, are excluded from participation in the Medicare or Medicaid program or any other government health care program, there could be a material adverse effect on our business, financial position, results of operations or cash flows |
| The ultimate resolution of claims, lawsuits and investigations could adversely affect our financial position |
| During the past several years, we have been subject to a significant number of claims and lawsuits |
| Also during the past several years, we became the subject of federal and state agencies &apos civil and criminal investigations and enforcement efforts, and received subpoenas and other requests from those agencies for information relating to a variety of subjects |
| While we cannot predict the likelihood of future claims or inquiries, we expect that new matters may be initiated against us from time to time |
| The results of claims, lawsuits and investigations also cannot be predicted, and it is possible that the ultimate resolution of these matters, individually or in the aggregate, may have a material adverse effect on our business (both in the near and long term), financial position, results of operations or cash flows |
| Although we defend ourselves vigorously against claims and lawsuits and cooperate with investigations, these matters: • Could require us to pay substantial damages or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under our insurance policies where coverage applies and is available; • Cause us to incur substantial expenses; • Require significant time and attention from our management; and • Could cause us to close or sell hospitals or otherwise modify the way we conduct business |
| We recognize that, where appropriate, our interests may be best served by resolving certain matters without litigation |
| To that end, we have been and continue to be engaged in discussions with federal law enforcement agencies regarding the possibility of reaching a non-litigated resolution of certain outstanding issues with the federal government |
| We are not able to predict whether such a resolution will in fact occur on any terms, project a timeline for resolution or quantify the economic impact of any non-litigated resolution |
| However, if we do reach a non-litigated resolution, it is possible that the settlement could be significant and may require us to incur additional debt or other financing |
| We do not expect to enter into any settlement unless funding for it can be arranged without jeopardizing our 17 _________________________________________________________________ liquidity |
| If a non-litigated resolution does not occur, we will continue to defend ourselves vigorously against claims and lawsuits |
| Any resolution of significant claims against us, whether as a result of litigation or settlement, could have a material adverse impact on our business, financial position or results of operations |
| Our business continues to be adversely affected by a high volume of uninsured patients |
| Like others in the health care industry, we continue to provide services to a high volume of uninsured patients |
| In fact, our level of uninsured patients has been higher in the last two years than in previous periods |
| Although the discounting components of our Compact with Uninsured Patients have reduced our provision for doubtful accounts recorded in our Consolidated Financial Statements, they are not expected to mitigate the net economic effects of treating uninsured patients |
| We continue to experience a high level of uncollectible accounts and, unless a business mix shift toward a higher level of insured patients occurs, we anticipate this trend to continue |
| We operate in a highly competitive industry, and competition is one reason for our recent declines in patient volumes |
| A number of factors affect patient volumes and, thereby, our results of operations at our hospitals and related health care facilities, including the influence of local health care competitors |
| Generally, other hospitals in the local communities we serve provide services similar to those offered by our hospitals |
| Some of the hospitals that compete with our hospitals are owned by government agencies or not-for-profit corporations |
| Tax-exempt competitors may have certain financial advantages not available to our facilities, such as endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property and income taxes |
| In some states, including California, not-for-profit hospitals are permitted by law to directly employ physicians while for-profit hospitals are prohibited from doing so |
| We also face increasing competition from physician-owned specialty hospitals and freestanding surgery, diagnostic and imaging centers for market share in high margin services and for quality physicians and personnel |
| If competing health care providers are better able to attract patients, recruit and retain physicians, expand services or obtain favorable managed care contracts at their facilities, we may continue to experience a decline in inpatient and outpatient volume levels |
| Our business and financial position could be harmed if we are not able to attract and retain employees, physicians and other health care professionals, and our costs continue to be adversely affected by the shortage of nurses |
| Our operations depend on the efforts, abilities and experience of our employees and the physicians on the medical staffs of our hospitals, most of whom have no long-term contractual relationship with us |
| It is essential to our ongoing business that we attract and retain skilled employees and an appropriate number of quality physicians and other health care professionals in all specialties on our medical staffs |
| In some of our markets, physician recruitment and retention are affected by a shortage of physicians in certain sought-after specialties and the difficulties that physicians are experiencing in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance |
| In addition, we believe physician attrition is one of the reasons for our recent volume declines |
| If we are unable to build stronger relationships with the physicians who admit patients both to our hospitals and to our competitors &apos hospitals, we expect these volume declines to continue |
| In general, the loss of some or all of our key employees or the inability to attract or retain sufficient numbers of qualified physicians and other health care professionals could have a material adverse effect on our business, financial position, results of operations or cash flows |
| Labor costs remain a significant cost pressure facing us, as well as the health care industry in general |
| The national nursing shortage continues and remains more serious in key specialties and in certain geographic areas than others, including several areas in which we operate hospitals |
| This has increased labor costs for nursing personnel |
| In addition, state-mandated nurse-staffing ratios in 18 _________________________________________________________________ California affect not only our labor costs, but if we are unable to hire the necessary number of nurses to meet the required ratios, they may also cause us to limit patient admissions with a corresponding adverse effect on net operating revenues |
| We cannot predict the degree to which we will be affected by the future availability or cost of nursing personnel, but we expect to continue to experience significant salary, wage and benefit pressures created by the nursing shortage throughout the country and escalation in state-mandated nurse-staffing ratios in California |
| In response to these trends, we have enhanced salaries, wages and benefits to recruit and retain nurses |
| In addition, we have been and may continue to be required to increase our use of temporary personnel, which is typically more expensive than hiring full-time or part-time employees |
| Our licensed hospital beds are heavily concentrated in Florida, California and Texas, which makes us sensitive to economic, regulatory, environmental and other developments in those states |
| As of December 31, 2005, the largest concentrations of licensed beds in our general hospitals were in Florida (25dtta1prca), California (21dtta5prca) and Texas (16dtta3prca) |
| Such concentrations increase the risk that, should any adverse economic, regulatory, environmental or other development occur within these states, our business, financial position, results of operations or cash flows could be materially adversely affected |
| Specifically, a natural disaster or other catastrophic event could affect us more significantly than other companies with less geographic concentration |
| In the recent past, hurricanes have had a disruptive effect on the operations of our hospitals in Florida and Texas, as well as in Louisiana and Mississippi, and the patient populations in those states |
| Our California operations could be adversely affected by a major earthquake in that state |
| Moreover, we anticipate spending approximately dlra385 million by 2012 to meet Californiaapstas seismic regulations for hospitals |
| Our business and financial results could be harmed by violations of existing regulations or compliance with new or changed regulations |
| Our business is subject to extensive federal, state and local regulation relating to, among other things, licensure, conduct of operations, ownership of facilities, physician relationships, addition of facilities and services, and reimbursement rates for services |
| The laws, rules and regulations governing the health care industry are extremely complex, and the industry often has little or no regulatory or judicial interpretation for guidance |
| If a determination is made that we were in material violation of such laws, rules or regulations, we could be subject to penalties or liabilities or required to make significant changes to our operations |
| In addition, health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention |
| We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations |
| Further changes in the regulatory framework affecting health care providers could harm our business, financial position, results of operations or cash flows |
| The cost and future availability of insurance, as well as insurance policy limits, may have an adverse effect on our operations |
| We continue to experience unfavorable pricing and availability trends in the professional and general liability insurance markets and increases in the size of claim settlements and awards in this area |
| If these trends continue, they could have an adverse effect on our business and financial results |
| All reinsurance and any excess professional and general liability insurance we purchase are subject to policy aggregate limitations |
| Any limits paid, in whole or in part, could deplete or reduce the excess limits available to pay any other material claims applicable to the relevant policy period |
| If such policy aggregate limitations should be partially or fully exhausted in the future, or actual payments of claims materially exceed projected estimates of claims, our financial position, results of operations or cash flows could be materially adversely affected |
| 19 _________________________________________________________________ All five of our hospitals and several imaging centers in the New Orleans area and our hospital in Mississippi suffered considerable damage from Hurricane Katrina in late August 2005 |
| We have property, business interruption and related insurance coverage to mitigate the financial impact of these types of catastrophic events |
| Our policies, which are on an occurrence basis and cover the period April 1, 2005 through March 31, 2006, are subject to deductible provisions, exclusions and limits |
| One such limit relates to flood losses as defined in the insurance policies |
| If significant portions of the losses at our facilities are determined to be caused by flood, flood damage limits under our insurance policies for any future damages to any of our hospitals during the remainder of the policy period may be partially or fully exhausted |
| If existing flood policy limits should be partially or fully exhausted as a result of Hurricane Katrina and ensuing events, and we were to sustain a subsequent flood loss, and if we cannot or do not obtain additional coverage, our financial position, results of operations or cash flows could be materially adversely affected |
| Trends affecting our actual or anticipated results may lead to charges that would adversely affect our results of operations |
| As a result of the various factors that affect our industry generally and our business specifically, we may from time to time be required to record charges in our results of operations |
| For example, as a result of our recent financial trends and the current outlook for our future operating performance, we recorded goodwill and long-lived asset impairment charges of approximately dlra160 million in the year ended December 31, 2005 and approximately dlra1dtta1 billion during the fourth quarter of 2004 |
| Based on future financial trends and the possible impact of negative trends on our future outlook, further impairments of long-lived assets and goodwill may occur, and we will incur additional restructuring charges |
| Future restructuring of our regions that changes our goodwill reporting units could also result in further impairments of our goodwill |
| Any such charges could adversely affect our results of operations |
| Our substantial leverage could have a significant effect on our operations |
| We are a highly leveraged company |
| As of December 31, 2005, we had approximately dlra4dtta8 billion of total long-term debt, as well as approximately dlra194 million in letters of credit outstanding under our letter of credit facility |
| In addition, from time to time, we expect to engage in various capital markets, bank credit and other financing activities depending on our needs and financing alternatives available at that time |
| Our leverage and debt service obligations could have important consequences to an investor, including the following: • Our letter of credit facility and the indentures governing our senior notes contain, and any future debt obligations may contain, covenants that, among other things, restrict our ability to pay dividends, incur additional debt and sell assets |
| If we do not comply with these obligations, it may cause an event of default, which, if not cured or waived, could require us to repay the indebtedness immediately |
| • We may be more vulnerable in the event of a deterioration in our business, in the health care industry, in the economy generally or if federal or state governments set further limitations on reimbursement under the Medicare or Medicaid programs |
| • We may have difficulty obtaining additional financing at economically acceptable interest rates and other terms to meet our requirements for working capital, capital expenditures, the payment of judgments or settlements, or general corporate purposes |
| • We may be required to dedicate a substantial portion of our cash flow to the payment of principal and interest on our indebtedness, which could reduce the amount of funds available for our operations |