| TRIAD HOSPITALS INC Item 1A Risk Factors You should carefully consider the risks described in this Form 10-K before making an investment decision |
| These risks are not the only ones facing Triad |
| Additional risks and uncertainties not currently known to Triad or that it currently deems to be immaterial also may materially and adversely affect Triad’s business operations |
| Any of these risks could materially and adversely affect Triad’s business, financial condition or 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, our consolidated long-term debt equaled approximately dlra1dtta7 billion |
| As of December 31, 2005, we also were able to draw upon a revolving line of credit in an aggregate principal amount of up to dlra600dtta0 million, and there were no amounts outstanding |
| We had dlra19dtta6 million of letters of credit issued as of December 31, 2005 that reduced amounts available under the line of credit |
| We also have the ability to incur significant amounts of additional debt, subject to the conditions imposed by the terms of our credit facility and the indentures governing our outstanding debt securities |
| 18 ______________________________________________________________________ [61]Table of Contents [62]Index to Financial Statements Although we believe that our future operating cash flow, together with available financing arrangements, will be sufficient to fund our operating requirements, our leverage and debt service obligations could have important consequences, including the following: • The terms of our existing debt obligations contain, and the terms of any future debt obligations may contain, numerous financial and other restrictive covenants, which, 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 downturns in our businesses, in our industry, in the economy generally or if the government implements further limitations on reimbursement under Medicare and Medicaid |
| • We may have difficulty obtaining additional financing at favorable interest rates to meet our requirements for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes |
| • We may be required to dedicate a substantial portion of our cash flow to the payment of principal and interest of our indebtedness, which could reduce the amount of funds available for operations |
| • Any borrowings we may make at variable interest rates leave us vulnerable to increases in interest rates generally |
| A significant portion of our revenues is dependent on Medicare and Medicaid payments, and reductions in Medicare or Medicaid payments or the implementation of other measures to reduce reimbursements may reduce our revenues |
| A significant portion of our revenues is derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes |
| We derived approximately 32dtta9prca and 32dtta4prca of our revenues from the Medicare and Medicaid programs for the years ended December 31, 2005 and 2004, respectively |
| In recent years, legislative changes have resulted in limitations on, and, in some cases, reduced levels of payment and reimbursement for, a substantial portion of hospital procedures and costs |
| Other legislative changes have altered the method of amounts and payment for various services under the Medicare and Medicaid programs |
| In addition, the fiscal year 2006 budget contemplated, among other things, an approximate dlra10 billion reduction in Medicaid spending over five years |
| The DRA resulted in an dlra11 billion reduction in Medicare and Medicaid spending over five years |
| In addition, the fiscal year 2007 budget contemplates, among other things, an approximate dlra36 billion reduction in Medicare spending over five years |
| Moreover, as a result of budgetary constraints, a number of states have adopted or are considering legislation designed to reduce their Medicaid expenditures and to provide universal coverage and additional care, including enrolling Medicaid recipients in managed care programs and imposing additional taxes on hospitals to help finance or expand the states’ Medicaid systems |
| We believe that hospital operating margins have been, and may continue to be, under significant pressure because of deterioration in pricing flexibility and payer mix, and growth in operating expenses in excess of the increase in prospective payments under Medicare or Medicaid |
| Future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs may have a material adverse effect on our business, financial condition, results of operations or prospects |
| Our revenues and profitability may be constrained by future cost containment initiatives undertaken by purchasers of healthcare services |
| The competitive position of our hospitals is also affected by the increasing number of initiatives undertaken during the past several years by major purchasers of healthcare, including Federal and state governments, insurance companies, and employers, to revise payment methodologies and monitor healthcare expenditures in order to contain healthcare costs |
| As a result of these initiatives, managed care organizations offering prepaid and discounted medical services packages represent an increasing portion of our admissions, which may result in reduced hospital revenue growth |
| In addition, private payers increasingly are attempting to control healthcare costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as HMOs and PPOs |
| An increasing number of managed care organizations have experienced financial difficulties in recent years, in some cases resulting in bankruptcy or insolvency |
| Managed care organizations with whom we do business may encounter similar difficulties in paying claims in the future |
| We believe that reductions in the payments that we receive for our services, coupled with the increased percentage of patient admissions from organizations offering prepaid and discounted medical services and difficulty in collecting receivables from managed care organizations, could reduce our overall revenues and profitability |
| 19 ______________________________________________________________________ [63]Table of Contents [64]Index to Financial Statements We conduct business in a heavily regulated industry; changes in or violations of regulations may result in increased costs or sanctions that could reduce our revenue and profitability |
| The healthcare industry is subject to extensive Federal, state and local law and regulations relating to: • licensure and certificate of need requirements; • conduct of operations; • ownership of facilities; • addition of facilities and services; • financial relationships with physicians and other referral sources; • confidentiality, maintenance and security issues associated with medical records; • billing for services; and • prices for services |
| These laws and regulations are extremely complex and subject to interpretation |
| In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations |
| In certain public statements, governmental authorities have taken positions on issues for which little official interpretation was previously available |
| Some of these positions appear to be inconsistent with common practices within the industry but have not previously been challenged |
| We have a variety of financial relationships with physicians who refer patients to our hospitals |
| We have contracts with physicians providing services under a variety of financial arrangements such as employment contracts, leases and professional service agreements |
| We also provide financial incentives, including loans and minimum revenue guarantees, to recruit physicians into the communities served by our hospitals |
| Several of the freestanding surgery centers affiliated with us have physician investors |
| In several of our locations, physicians have acquired ownership interests in hospitals and other healthcare providers in which we own a majority interest |
| Some of our arrangements with our physicians do not expressly meet the requirements for safe harbor protection |
| A determination that we have violated any of these laws could subject us to liability including: • criminal penalties; • civil sanctions, including civil monetary penalties; and • exclusion from participation in government programs such as Medicare and Medicaid or other Federal healthcare programs |
| Consequently, a determination that we have violated these laws, or even a public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial condition, results of operations or prospects and our business reputation could suffer significantly |
| We have experienced deterioration in the collectibility of uninsured accounts receivable and we may continue to experience such deterioration in the future |
| We record our accounts receivable at the estimated net realizable amount, and maintain allowances for doubtful accounts for estimated losses resulting from payers’ inability to make payments on accounts |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Doubtful Accounts” for a discussion of our allowance for doubtful accounts methodology |
| We have experienced growth in our uninsured receivables |
| Uninsured receivables are comprised of 20 ______________________________________________________________________ [65]Table of Contents [66]Index to Financial Statements fully uninsured receivables, for which each patient is responsible for the entire bill, and receivables for deductibles and co-insurance, which are amounts due from insured patients after insurance pays |
| We believe that the growth in uninsured receivables for deductibles and co-insurance resulted from changes in employer health plans that have increased the amount of out-of-pocket expenditures required to be paid by employees |
| We also experienced an increase in managed care revenues, as a percentage of total revenues, in the fourth quarter of 2005, which increased the amount of deductibles and co-insurance |
| We have also experienced growth and deterioration in fully uninsured receivables, which we believe resulted from weak economic conditions and rising healthcare costs |
| We may have greater amounts of uninsured receivables in the future and if the collectibility of those uninsured receivables deteriorates, increases in our allowance for doubtful accounts may be required, which could materially adversely impact our operating results and financial condition |
| Our self-pay discount program could reduce our profitability |
| We implemented a self-pay discount program in the fourth quarter of 2004 offering discounts to uninsured patients based on personal financial criteria and means testing |
| In the second quarter of 2005, we implemented an additional component to this program offering a discount to all uninsured patients based on the lowest managed care discount at each hospital |
| These programs reduced revenues by approximately dlra9dtta7 million in 2004 and dlra147dtta6 million in 2005, which we believe resulted in a similar reduction to the provision for doubtful accounts in both periods |
| We believe that these programs did not have a significant impact on our earnings per share or cash flow |
| Although we do not yet have sufficient experience with these programs to conclusively determine the ongoing impact on our results of operations, we believe that the amount of self-pay discounts will be approximately dlra160 million to dlra180 million per year in the future |
| If our provision for doubtful accounts does not decrease in an amount similar to the reduction in our revenue from the self-pay discount program, our profitability and cash flow could decline |
| Our future success depends on our ability to maintain good relationships with the physicians at our hospitals |
| Because physicians generally direct the majority of hospital admissions, our success has been, in part, dependent upon the number and quality of physicians on our hospitals’ medical staffs, the admissions practices of the physicians at our hospitals and our ability to maintain good relations with physicians |
| Physicians are generally not employees of the hospitals at which they practice and, in many of the markets that we serve, most physicians have admitting privileges at other hospitals in addition to our hospitals |
| If we are unable to successfully maintain good relationships with physicians, our hospitals’ admissions may decrease and our operating performance may decline |
| Our revenues and earnings are heavily concentrated in Texas, Indiana, Alabama and Arkansas, which makes our revenues and earnings particularly sensitive to economic and other changes in these states |
| For the year ended December 31, 2005, our • Texas facilities generated approximately 16dtta2prca of revenues and 10dtta8prca of income from continuing operations before income tax provision; • Indiana facilities generated approximately 16dtta2prca of revenues and 52dtta7prca of income from continuing operations before income tax provision; • Alabama facilities generated approximately 12dtta0prca of revenues and 17dtta0prca of income from continuing operations before income tax provision; and • Arkansas facilities generated approximately 9dtta3prca of revenues and 4dtta9prca of income from continuing operations before income tax provision |
| Accordingly, any change in the current demographic, economic, competitive or regulatory conditions in Texas, Indiana, Alabama or Arkansas could have a material adverse effect on our business, financial condition, results of operations or prospects |
| 21 ______________________________________________________________________ [67]Table of Contents [68]Index to Financial Statements We depend heavily on our senior and local management personnel, and the loss of the services of one or more of our key senior management personnel or key local management personnel could weaken our management team and our ability to deliver healthcare services efficiently |
| We are dependent upon the services and management experience of James D Shelton, Chairman and Chief Executive Officer, and other of our executive officers |
| Shelton or any of our other executive officers were to resign their positions or otherwise be unable to serve, our management could be weakened and our operating results could be adversely affected |
| In addition, our success depends on our ability to attract and retain local managers at our hospitals and related facilities, the ability of our officers and key employees to manage growth successfully and our ability to attract and retain skilled employees |
| If we are unable to attract and retain local management, our operating performance could decline |
| Our success depends on our ability to attract and retain qualified healthcare professionals, and a shortage of qualified healthcare professionals in certain markets could weaken our ability to deliver healthcare services efficiently |
| In addition to the physicians and management personnel whom we employ, our operations are dependent on the efforts, ability and experience of our other healthcare professionals, such as nurses, pharmacists and lab technicians |
| Nurses, pharmacists, lab technicians and other healthcare professionals are generally our employees |
| Our future success will be influenced by our ability to attract and retain these skilled employees |
| A shortage of healthcare professionals in certain markets, the loss of some or all of our key employees, or the inability to attract and retain sufficient numbers of qualified healthcare professionals could cause our operating performance to decline |
| Our business and results of operations could suffer if access to our existing information systems is interrupted or if our planned conversion to new information systems is not successfully implemented |
| Our business depends significantly on effective information systems to process clinical and financial information |
| Under a contract expiring in May 2008, HCA provides financial, clinical, patient accounting and network information services to us |
| If our access to these systems is interrupted, our operations could suffer |
| Moreover, we may be unable to integrate new information systems into our existing systems on a timely and cost-effective basis when required by changing industry and regulatory standards and evolving technologies |
| In January and February 2006, we entered into agreements to replace our current information technology systems and services with new, outsourced clinical, revenue cycle and enterprise resource planning systems |
| The conversion from our current information systems is expected to cost approximately dlra330 million and take approximately four years to complete |
| Our business and results of operations could be materially adversely affected if the conversion is not successfully completed, if we encounter unanticipated delays or increased costs during the conversion process, or if the new information systems do not meet our expectations |
| In any such event, we may be required to incur an impairment charge that could have a material adverse effect on our financial results and prospects |
| We face competition from other hospitals and healthcare providers, which may result in a decline in our revenues, profitability and market share |
| The healthcare business is highly competitive and competition among hospitals and other healthcare providers for patients has intensified in recent years |
| In some cases, competing hospitals are more established than our hospitals |
| Certain of these competing facilities, particularly in urban markets, offer services, including extensive medical research and medical education programs, which are not offered by our facilities |
| Some of the hospitals that compete with us are owned or operated by tax-supported governmental bodies or by private not-for-profit entities supported by endowments and charitable contributions, which can finance capital expenditures on a tax-exempt basis and are exempt from sales, property and income taxes |
| In some of these markets, we also face competition from other providers such as outpatient surgery, orthopedic, oncology and diagnostic centers |
| Although some of our hospitals operate in geographic areas where we are currently the sole provider of general acute care hospital services, these hospitals also face competition from other hospitals, including larger tertiary care centers |
| Despite the fact that these competing hospitals may be as far as 30 to 50 miles away, patients in these markets increasingly may migrate to these competing facilities as a result of local physician referrals, managed care plan incentives or personal choice |
| 22 ______________________________________________________________________ [69]Table of Contents [70]Index to Financial Statements Our healthcare consulting business competes in a fragmented industry for the small percentage of hospitals managed by hospital management companies |
| Competitors include large, national firms such as the national accounting firms, specialized healthcare firms, and numerous independent practitioners |
| Furthermore, some hospitals choose to obtain management services from the many large, tertiary care facilities that create referral networks with smaller surrounding hospitals |
| As a result, hospitals have various alternatives to the management services currently offered by us |
| The intense competition we face from other healthcare providers and other firms may result in a decline in our revenues, profitability and market share |
| We may have difficulty implementing our business strategy of growth through acquisitions and joint ventures and we may have difficulty effectively integrating future acquisitions and joint ventures into our ongoing operations |
| We also may have difficulty acquiring hospitals from not-for-profit entities due to increased regulatory scrutiny |
| One element of our business strategy is expansion through the acquisition of acute care hospitals or the formation of joint ventures in selected markets |
| The competition to acquire hospitals and form joint ventures in the markets that we target are significant, and we may not be able to consummate suitable transactions on terms favorable to us if other healthcare companies, including those with greater financial resources than ours, are competing for the same target businesses |
| In order to consummate future acquisitions or joint ventures, we may be required to incur or assume additional indebtedness |
| We may not be able to obtain financing, if necessary, for any acquisitions or joint ventures that we might make or we may be required to borrow at higher rates and on less favorable terms |
| Additionally, we may not be able to effectively integrate the facilities that we acquire with our ongoing operations |
| Acquired businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations |
| Although we have policies to conform the practices of acquired facilities to our standards, and generally will seek indemnification from prospective sellers covering these matters, we may become liable for past activities of acquired businesses |
| Many states have enacted or are considering enacting laws affecting sales, leases or other transactions in which control of not-for-profit hospitals is acquired by for-profit entities |
| These laws, in general, include provisions relating to state attorney general approval, advance notification and community involvement |
| In addition, state attorneys general in states without specific legislation governing these transactions may exercise authority based upon charitable trust and other existing law |
| The increased legal and regulatory review of these transactions involving the change of control of not-for-profit entities may increase the costs required, or limit our ability, to acquire not-for-profit hospitals and may affect our ability to exercise existing purchase options for hospitals under hospital lease arrangements |
| We may be subject to liabilities because of litigation and investigations that could have a material adverse effect on our operations |
| We are defendants in various lawsuits and the subject of governmental investigations |
| As a company in the healthcare industry, we are subject to the increased use of the qui tam, or whistleblower, provisions of the Federal False Claims Act |
| These provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the Federal government, such as when an entity knowingly submits a false claim for reimbursement to the Federal government |
| An entity found liable under the False Claims Act may be required to pay up to three times the actual damages sustained by the government, plus certain civil penalties |
| A number of states have adopted their own false claims provisions and whistleblower provisions |
| If we incur material liabilities as a result of litigation, including qui tam actions, or governmental investigation, these matters could have a material adverse effect on our business, financial condition, results of operations or prospects |
| See NOTE 16 - CONTINGENCIES to the consolidated financial statements for a discussion of litigation and governmental investigations relating to our business |
| At this time we cannot predict the final effect or outcome of the ongoing litigation or investigations |
| If violations of Federal or state laws relating to Medicare, Medicaid or other government programs are found, then we 23 ______________________________________________________________________ [71]Table of Contents [72]Index to Financial Statements may be required to pay substantial fines and civil and criminal damages and also may be excluded from participation in the Medicare and Medicaid programs and other government programs |
| Similarly, the amount of damages sought in the qui tam actions or in the future may be substantial |
| We could be subject to substantial costs resulting from defending, or from an adverse outcome in, any current or future investigations, administrative proceedings or litigation |
| Amounts paid to settle any of these matters may be material |
| Agreements entered into as a part of any settlement could also materially adversely affect us |
| Any current or future investigations or actions could have a material adverse effect on our results of operations or financial position |
| From time to time, we may be the subject of additional investigations or a party to additional litigation, including qui tam actions, alleging violations of law |
| We may not know about those investigations or about qui tam actions filed against us unless and to the extent such matters are unsealed |
| If any of those matters were successfully asserted against us, there could be a material adverse effect on our business, financial position, results of operations or prospects |
| If we fail to comply with our corporate integrity agreement, we could be required to pay significant monetary penalties |
| On November 1, 2001, we entered into a five-year corporate integrity agreement with the OIG and agreed to maintain our compliance program in accordance with the corporate integrity agreement |
| This obligation could result in greater scrutiny by regulatory authorities |
| Violations of the corporate integrity agreement could subject our hospitals to substantial monetary penalties |
| Complying with the corporate integrity agreement may impose expensive and burdensome requirements on certain operations, which could have a material adverse impact on us |
| We may be subject to liabilities because of claims arising from our hospital management activities |
| We may be subject to liabilities from the activities or omissions of the employees of hospitals we manage or our employees in connection with the management of such hospitals |
| Recently, we and other hospital management companies have been subject to complaints alleging that these companies violated laws on behalf of hospitals they managed |
| In some cases, plaintiffs brought actions against the management company instead of, or in addition to, their individually managed hospital clients for these violations |
| Our hospital management contracts generally require the hospitals we manage to indemnify us against certain claims and maintain specified amounts of insurance |
| However, our managed hospitals or other third parties may not indemnify us against losses we incur arising out of the activities or omissions of the employees of the hospitals we manage |
| If we are held liable for amounts exceeding the limits of insurance coverage or for claims outside the scope of that coverage or any indemnity, or if any indemnity agreement is determined to be unenforceable, then any such liability could adversely affect our business, results of operations and financial condition |
| We may be subject to general liabilities or liabilities because of claims brought against our hospitals, we could experience rising malpractice insurance premiums, and our insurance carriers could become insolvent |
| In recent years, plaintiffs have brought actions against hospitals and other healthcare providers, alleging malpractice, product liability or other legal theories |
| Many of these actions involved large claims and significant defense costs |
| We maintain professional malpractice liability and general liability insurance coverage, subject to certain deductibles, to cover claims arising out of the operations of our hospitals |
| Some of the claims, however, could exceed the scope of the coverage in effect or coverage of particular claims could be denied |
| While our professional and other liability insurance have been adequate in the past to provide for liability claims, such insurance may not be available for us to maintain adequate levels of insurance |
| Moreover, healthcare providers in the industry have experienced significant increases in the premiums for malpractice insurance in the past, and such costs may rise in the future |
| Malpractice insurance coverage may not continue to be available at a cost allowing us to maintain adequate levels of insurance with acceptable deductible amounts |
| In addition, because of the significant increase in medical malpractice insurance premiums in certain states, we may encounter difficulty recruiting and retaining physicians or continuing to provide certain services at our hospitals |
| In addition, one or more of our insurance carriers may become insolvent and unable to fulfill its obligation to defend, pay or reimburse us when that obligation becomes due |
| 24 ______________________________________________________________________ [73]Table of Contents [74]Index to Financial Statements In addition, we self-insure portions of our workers’ compensation, health insurance, and general and professional liability insurance coverage and maintain excess loss policies |
| The liabilities estimated for these self-insured portions are based on actuarially determined estimates which are based on a number of factors including amount and timing of historical payments, severity of individual cases, anticipated volume of services provided and discount rates for future cash flows |
| The amounts of any ultimate actual payments for workers’ compensation and general and professional liability risks may not become known for several years after incurrence |
| Moreover, any factors changing the underlying data used in determining these estimates would result in revisions to the liabilities which could result in a decrease in income |
| We could incur substantial liability if our spin-off from HCA was found to be taxable |
| On March 30, 1999, HCA received a private letter ruling from the IRS concerning the United States Federal income tax consequences of the spin-off of LifePoint Hospitals, Inc |
| and us by HCA and the restructuring transactions that preceded the spin-off |
| The private letter ruling provided that the spin-off generally was tax-free to HCA and HCA’s stockholders, except for any cash received instead of fractional shares |
| The IRS has issued additional private letter rulings that supplement its March 30, 1999 ruling, including supplemental rulings stating that the Quorum merger and certain other transactions occurring subsequent to the spin-off do not adversely affect the private letter rulings previously issued by the IRS The March 30, 1999 ruling and the supplemental rulings are based upon the accuracy of representations as to numerous factual matters and as to certain intentions of HCA, LifePoint and us |
| The inaccuracy of any of those representations could cause the IRS to revoke all or part of any of the rulings retroactively |
| If the spin-off were to fail to qualify for tax-free treatment, then, in general, additional corporate tax, which would be substantial, would be payable by the consolidated group of which HCA is the common parent |
| Each member of HCA’s consolidated group at the time of the spin-off, including us, would be jointly and severally liable for this tax liability |
| In addition, we entered into a tax sharing and indemnification agreement with HCA and LifePoint, which prohibits us from taking actions that could jeopardize the tax treatment of either the spin-off or the restructuring transactions that preceded the spin-off, and requires us to indemnify HCA and LifePoint for any taxes or other losses that result from our actions, which amounts could be substantial |
| If we are required to make any indemnity payments or otherwise are liable for additional taxes relating to the spin-off, our results of operations could be materially adversely affected |