The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this report. Data for the quarters ended
December 31, 2013and 2012, have been derived from our unaudited condensed consolidated financial statements. References herein to "we," "our" and "us" are to IASIS Healthcare LLCand its subsidiaries. References herein to "IAS" are to IASIS Healthcare Corporation, our parent company.
FORWARD LOOKING STATEMENTS
Some of the statements we make in this report are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Those risks and uncertainties include, among others, changes in governmental healthcare programs that could reduce our revenues; the uncertain impact of federal health reform; the possibility of
Health Choice Arizona, Inc.'s("Health Choice" or the "Plan") contract with the Arizona Health Care Cost Containment System ("AHCCCS") being discontinued and changes in the payment structure under that contract, as well as an inability to control costs at Health Choice; shifts in payor mix from commercial and managed care payors to Medicaidand managed Medicaid; our ability to retain and negotiate reasonable contracts with managed care plans; a growth in the level of uncompensated care at our hospitals; our ability to recruit and retain quality physicians and medical professionals; competition from other hospitals and healthcare providers impacting our patient volume; our failure to continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment; the federal health reform law's significant restrictions on hospitals that have physician owners; a failure of our information systems that would adversely affect our ability to properly manage our operations; failure to effectively and timely implement electronic health record systems; claims brought against our facilities for malpractice, product liability and other legal grounds; difficulties with the integration of acquisitions that may disrupt our ongoing operations; our dependence on key management personnel; potential responsibilities and costs under environmental laws; the possibility of a decline in the fair value of our reporting units that could result in a material non-cash charge to earnings; the risks and uncertainties related to our ability to generate sufficient cash to service our existing indebtedness; our substantial level of indebtedness; the possibility of an increase in interest rates, which would increase the cost of servicing our debt; and the risks associated with us being owned by equity sponsors who have the ability to control our financial decisions. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties, among others discussed in this report, are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the Securities and Exchange Commission(the "SEC"). Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. EXECUTIVE OVERVIEW We are a leading provider of high quality, affordable healthcare services primarily in high-growth urban and suburban markets. As of December 31, 2013, we owned or leased 16 acute care hospital facilities and one behavioral health hospital, with a total of 3,777 licensed beds, several outpatient service facilities, and more than 143 physician clinics. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. We operate in various regions, including: • Salt Lake City, Utah; • Phoenix, Arizona; • five cities in Texas, including Houstonand San Antonio; and • West Monroe, Louisiana.
We also own and operate Health Choice, a provider-owned, managed care organization and insurer that serves over 178,000 members in
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Significant Industry Trends
The following sections discuss recent trends that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.
The Impact of Health Reform
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law") changes how healthcare services are covered, delivered, and reimbursed. The law seeks to expand coverage of previously uninsured individuals, largely through expansion of
Medicaidcoverage and establishment of insurance exchanges ("Exchanges") where individuals may purchase coverage. The Health Reform Law also contains an "individual mandate" that imposes financial penalties on individuals who fail to carry insurance coverage and employers that do not provide health insurance coverage. In addition, the Health Reform Law reforms certain aspects of health insurance, reduces government reimbursement rates, expands existing efforts to tie Medicareand Medicaidpayments to performance and quality, places restrictions on physician-owned hospitals and contains provisions intended to strengthen fraud and abuse enforcement. The most significant provisions of the Health Reform Law that seek to decrease the number of uninsured individuals mostly became effective January 1, 2014. However, the employer mandate which requires companies with 50 or more employees to provide health insurance or pay fines, as well as insurer reporting requirements, has been delayed until January 1, 2015. In addition, the federal online Exchange has experienced significant technical issues that have negatively impacted the ability of individuals to enroll in Medicaidand to purchase health insurance. These technical issues could lead to the federal government delaying the individual mandate tax penalties past the current March 31, 2014deadline, further delays in uninsured individuals obtaining health insurance and an increase in the number of individuals who choose to pay the tax mandates rather than to purchase health insurance. Furthermore, states may choose, without losing existing federal Medicaidfunding, not to implement the Medicaidexpansion provisions of the Health Reform Law and in those states the penalty for not carrying insurance will be waived for low-income residents. A number of state governors and legislatures, including Texasand Louisiana, have chosen not to participate in the expanded Medicaidprogram at this time; however, these states could choose to implement the expansion at a later date. While some states have currently chosen not to participate, some states such as Arizonahave approved the expansion of its Medicaidprogram effective January 1, 2014, which is anticipated to increase its Medicaidenrollment by approximately 370,000 people over the coming years. Additionally, other states, such as Arkansas, have chosen to participate or are considering participating through "private option" programs that would provide funds to low-income individuals to purchase private insurance. These "private option" programs are subject to federal approval. Because of the many variables involved, including the law's complexity, the lack of implementing regulations or interpretive guidance, gradual and partially delayed implementation, possible amendment, repeal or further implementation delays, uncertainty regarding the success of Exchanges in enrolling uninsured individuals, possible reductions in funding by the U.S. Congress("Congress") and future reductions in Medicareand Medicaidreimbursement, the impact of the Health Reform Law, including how individuals and businesses will respond to the new choices and obligations under the law, is not yet fully known. We believe, however, that trends toward pay-for-performance reimbursement models focused on quality and cost control, which are encouraged by the Health Reform Law, are taking hold among private health insurers and will continue to do so.
Budget Control Act and Sequestration
The Budget Control Act of 2011 (the "BCA") increased the nation's borrowing authority and takes steps to reduce federal spending and the deficit. The deficit reduction portion of the BCA imposes caps, which began in federal fiscal year 2012, that reduce discretionary spending by more than
$900 billionover ten years. The BCA also requires automatic spending reductions of $1.2 trillionfor federal fiscal years 2013 through 2021, minus any deficit reductions enacted by Congressand debt service costs. These automatic spending reductions are commonly referred to as "sequestration." The spending reductions are split evenly between defense and non-defense discretionary spending, although certain programs (including Medicaidand Children's Health Insurance Programs ("CHIP")), are exempt from these automatic spending reductions, and Medicareexpenditures cannot be reduced by more than two percent. Sequestration began on March 1, 2013, with CMS imposing a two percent reduction on Medicareclaims beginning April 1, 2013. We are unable to predict what other deficit reduction initiatives may be proposed by the President or the Congressor whether the President and the Congresswill restructure or suspend sequestration. It is possible that changes in the law to end or restructure sequestration will result in greater spending reductions than currently required by the BCA. 27
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The trend in the healthcare industry continues towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting and financial incentives tied to the quality and efficiency of care provided by facilities. The Health Reform Law expands the use of value-based purchasing initiatives in federal healthcare programs. We expect programs of this type to become more common in the healthcare industry. In addition, managed care organizations are implementing programs that condition payment on performance against specified measures. The quality measurement criteria used by managed care and commercial payors may be similar to or even more stringent than
Medicarerequirements. As we expect these trends towards value-based purchasing of healthcare services by Medicareand other payors to continue, we believe that our position as a high-quality, low cost provider in certain of our markets will prove beneficial as we continue to move towards a quality and value-based reimbursement system. Because of these trends, if we are unable to meet or exceed quality of care standards in our facilities, our operating results could be significantly impacted in the future.
State Medicaid Budgets
Over recent years, the states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Many states have experienced or project near term shortfalls in their budgets, and economic conditions may increase these budget pressures. Health and human services programs, including
Medicaidand similar programs, represent a significant portion of state budgets. The states in which we operate have responded to these budget concerns, by decreasing funding for Medicaidand other healthcare programs or by making structural changes that have resulted in a reduction in hospital reimbursement. In addition, many states are seeking waivers from the Centers for Medicare and Medicaid Services("CMS") in order to implement or expand managed Medicaidprograms.
Texaslegislature and the Texas Health and Human Services Commission("THHSC") recommended expanding Medicaidmanaged care enrollment in the state, and in December 2011, CMS approved a five-year Medicaidwaiver that: (1) allows Texasto expand its Medicaidmanaged care program while preserving hospital funding; (2) provides incentive payments for improvements in healthcare delivery; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. Certain of our acute care hospitals currently receive supplemental Medicaidreimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texashospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Revenue recognized under these Texasprivate supplemental Medicaidreimbursement programs for the quarter ended December 31, 2013, was $18.0 million, compared to $15.1 millionin the prior year quarter. Under the Medicaidwaiver, which will change the funding structure of Texas'current supplemental Medicaidreimbursement programs, funds will be distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities' care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination will be controlled primarily by government-owned public hospitals that serve the surrounding geographic areas. Along with delays in funding for the state's Medicaidsupplemental reimbursement programs, the expansion of the managed Medicaidprogram has also resulted in delays in processing and payment of related patient accounts receivable by many of the managed care payors. As of December 31, 2013, we had $63.9 millionin receivables due to our Texas hospitals in connection with the supplemental reimbursement programs, including amounts due under the Texas Medicaid Disproportionate Share Hospitalprogram ("Texas Medicaid DSH"). The THHSC has released proposed rules to change the Texas Medicaid DSH methodology for the state's fiscal year 2014 and 2015. While changes to the Texas Medicaid DSH methodology have been proposed, details regarding its computation for the state's upcoming fiscal year have not yet been finalized. Because deliberations regarding the Texas Medicaid DSH program are ongoing, we are unable to estimate the financial impact, if any, that proposed program changes may have on our results of operations. Texashas appropriated $160.0 millionfor fiscal year 2014 and $140.0 millionfor fiscal year 2015 to stabilize and improve the Texas Medicaid DSH program, including providing rate adjustments to recognize improvements in quality of patient care, the most appropriate use of care, and patient outcomes. These appropriations provide that the funding is contingent on "measurable progress" by THHSC toward a long-term plan. Funds appropriated for in 2015 may not be spent before the plan is finalized.
During the quarter ended
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June 17, 2013, the governor of Arizonasigned into law the expansion of its Medicaidprogram under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that was previously eliminated. The expansion of the state's Medicaidprogram under the Health Reform Law could potentially result in the addition of approximately 370,000 people to its Medicaidrolls. The law became effective January 1, 2014.
Physician Alignment and Clinical Integration
In an effort to meet community needs and address coverage issues, we have made significant investments in order to align with physicians through various recruitment and employment strategies, as well as alternative means of alignment such as our formation of provider networks in certain markets. We believe that physician alignment promotes clinical integration, enhances quality of care and makes us more efficient and competitive in a healthcare environment trending toward value-based purchasing and pay-for-performance. As we continue to focus on our physician alignment and integration strategies, we face significant competition for skilled physicians in certain of our markets as more hospital providers adopt a physician staffing model approach, coupled with a general shortage of physicians across most specialties. This increased competition has resulted in efforts by managed care organizations to align with certain provider networks in the markets in which we operate. In response, we have formed our own provider networks in certain markets that include both employed and non-affiliated physicians, providing the infrastructure through which we are able to contract more efficiently with commercial payors, position ourselves for value based reimbursement and promote clinical integration. While we expect that employing physicians should provide relief on cost pressures associated with on-call coverage and other professional fees, we anticipate incurring additional labor and other start-up related costs as we continue the integration of employed physicians and their related support staff. We also face risk from competition for outpatient business. We expect to mitigate this risk through continued focus on our physician employment strategy, the development of new access points of care, our commitment to capital investment in our hospitals, including updated technology and equipment, and our commitment to our quality of care initiatives that some competitors, including individual physicians or physician groups, may not be equipped to implement.
Like others in the hospital industry, we continue to experience high levels of uncompensated care, including discounts to the uninsured, bad debts and charity care. These elevated levels are driven by the number of uninsured and under-insured patients seeking care at our hospitals. Given the high rate of unemployment and its impact on the economy, particularly in the markets we serve, we believe our hospitals may continue to experience these elevated levels of uncompensated care until the U.S. economy experiences an economic recovery that includes significant sustained job growth and a meaningful decline in unemployment. During the quarter ended
December 31, 2013, our self-pay admissions represented 8.3% of our total admissions, compared to 7.9% in the prior year quarter. The increase in self-pay admissions as a percentage of total admissions is primarily the result of a decline in total admissions during the quarter ended December 31, 2013as compared to the prior year quarter. The cost of our uncompensated care is currently being impacted by the higher acuity levels at which these patients are presenting for treatment, which is primarily resulting from economic pressures and their related decisions to defer care. During the quarter ended December 31, 2013, our uncompensated care, which includes bad debts, charity care and uninsured discounts, as a percentage of acute care revenue was 24.6%, compared to 24.3% in the prior year quarter. This has resulted in pressures on pricing and operating margins created from providing the same level of healthcare service, but for less reimbursement.
We anticipate that if we experience further growth in uninsured volume and revenue over the near-term, including increased acuity levels and continued increases in co-payments and deductibles for insured patients, our uncompensated care may increase and our results of operations could be adversely affected.
January 1, 2014, we expect uninsured volumes to begin decreasing due to the impact of the Health Reform Law, which includes the implementation of Exchanges and the expansion of Medicaidprograms in certain of the states in which we operate. However, states may opt not to implement the expansion. A number of state governors and legislatures, including in Texasand Louisiana, have chosen not to participate in the expanded Medicaidprogram at this time; however, these states could choose to implement the expansion at a later date. 29
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The percentages of our insured and uninsured net hospital receivables are summarized as follows: December 31, September 30, 2013 2013 Insured receivables 78.9 % 77.2 % Uninsured receivables 21.1 % 22.8 % Total 100.0 % 100.0 % The percentages of hospital receivables in summarized aging categories are as follows: December 31, September 30, 2013 2013 0 to 90 days 57.9 % 61.0 % 91 to 180 days 20.2 % 20.7 % Over 180 days 21.9 % 18.3 % Total 100.0 % 100.0 %
Adoption of Electronic Health Records ("EHR")
The American Recovery and Reinvestment Act of 2009 ("ARRA") included approximately
$26.0 billionin funding for various healthcare information technology ("IT") initiatives, including Medicareand Medicaidincentives for eligible hospitals and professionals to adopt and meaningfully use certified EHR technology ("EHR Incentive Programs"). In addition, eligible providers that fail to demonstrate meaningful use of certified EHR technology will be subject to reduced payments from Medicare, beginning in federal fiscal year 2015 for eligible hospitals and calendar year 2015 for eligible professionals. Implementation of the EHR Incentive Programs has been divided into three stages with increasing requirements for participation. Stage 1 requires providers to meet meaningful use objectives specified by CMS, which include electronically capturing health information in structured format, tracking key clinical conditions for coordination of care purposes, implementing clinical decision support tools to facilitate disease and medication management, using EHRs to engage patients and families, and reporting clinical quality measures and public health information. Our hospitals, as well as a number of our physician clinics, substantially met the Stage 1 requirements in our fiscal year 2012. Stage 2 introduces several new meaningful use measures, as well as imposes stricter requirements on certain existing Stage 1 measures. Providers must achieve meaningful use under the Stage 1 criteria before advancing to Stage 2 and are required to meet the criteria for the applicable stage based on their first year of attesting to meaningful use. Our hospitals and physician clinics whose first payment year was 2011 and 2012 are required to meet Stage 2 criteria beginning in 2014. Though we expect to continue to incur certain non-productive and other operating costs, as well as additional investments in hardware and software, we believe our historical investments in advanced clinical and other information systems, as well as quality of care programs, provides a solid platform to build upon for timely compliance with the healthcare IT initiatives and requirements of ARRA. Revenue and Volume Trends Total net revenue for the quarter ended December 31, 2013, increased 4.0% to $614.6 million, compared to $590.9 millionin the prior year quarter. Total net revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium revenue. Acute care revenue contributed $10.8 millionto the increase in total net revenue for the quarter ended December 31, 2013, compared to the prior year quarter, while premium revenue at Health Choice increased $12.9 millionfor the same period.
Acute Care Revenue
Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals' net patient revenue consists of fixed payment, discounted sources, including
Medicare, Medicaidand managed care organizations. Reimbursement for Medicareand Medicaidservices are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals' established charges and payment rates under Medicare, Medicaidand various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Acute care revenue is reported net of the provision for doubtful accounts. Other revenue includes medical office building rental income and other miscellaneous revenue. Admissions decreased 4.1% for the quarter ended December 31, 2013, compared to the prior year quarter. This decline is reflective of an industry-wide decline in inpatient utilization, coupled with a continued shift towards outpatient services. Adjusted admissions decreased 0.1% for the quarter ended December 31, 2013, compared to the prior year quarter. Our volume for the quarter ended December 31, 2013, was positively impacted by an 8.6% increase in outpatient surgeries, which was offset by a 3.1% decline in inpatient surgeries and a 5.2% decline in emergency room visits, all compared to the prior year quarter. 30
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The following table provides the sources of our hospitals' gross patient revenue by payor: Quarter Ended December 31, 2013 2012 Medicare 28.0 % 27.9 % Managed Medicare 13.2 13.2 Medicaid and managed Medicaid 22.1 22.1 Managed care 29.7 29.8 Self-pay 7.0 7.0 Total 100 % 100 %
The following table provides the sources of our hospitals' net patient revenue by payor before the provision for bad debts:
Quarter Ended December 31, 2013 2012 Medicare 19.8 % 19.8 % Managed Medicare 9.9 10.1 Medicaid and managed Medicaid 11.7 12.1 Managed care 39.2 38.1 Self-pay 19.4 19.9 Total 100 % 100 % Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 2.9% for the quarter ended
December 31, 2013, compared to the prior year quarter. Our pricing metrics for the quarter ended December 31, 2013, have been negatively affected by both an increase in uncompensated care, driven by the impact of high unemployment and other industry pressures, and the impact of Medicaresequestration. See "Item 1 - Business - Sources of Acute Care Revenue" and "Item 1 - Business - Government Regulation and Other Factors" included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the SECon December 20, 2013, for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicareplan, managed Medicareplans, Medicaidplans, managed Medicaidplans and managed care plans. In those sections, we also discussed the unique reimbursement features of the traditional Medicareplan, including the annual Medicareregulatory updates published by CMS that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also addressed in such Annual Report on Form 10-K.
Health Choice contracts with state
Medicaidprograms in Arizonaand Utahto provide specified health services to qualified Medicaidenrollees through contracted providers. Most of its premium revenue is derived through a contract with AHCCCS, the state agency that administers Arizona's Medicaidprogram. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaidpatients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription Drug ("MAPD") Special Needs Plan ("SNP"). This contract allows Health Choice to offer Medicareand Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicareand Medicaid). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures. Premium revenue generated by Health Choice represented 24.7% of our consolidated net revenue for the quarter ended December 31, 2013, compared to 23.5% in the prior year quarter. 31
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2013. Our critical accounting policies are further described under the caption "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2013. SELECTED OPERATING DATA
The following table sets forth certain unaudited operating data from continuing operations for each of the periods presented.
December 31, 20132012 Acute Care Number of acute care hospital facilities at end of period 16
Licensed beds at end of period (1) 3, 777
Average length of stay (days) (2) 5.1
Occupancy rates (average beds in service) 48.7 % 49.6 % Admissions (3) 26,380 27,520 Adjusted admissions (4) 47,804 47,839 Patient days (5) 135,623 138,042 Adjusted patient days (4) 245,765 239,964 Net patient revenue per adjusted admission (6)
$ 9,539 $ 9,274Health Choice Medicaid covered lives 173,857 170,446 Dual-eligible lives (7) 5,069 4,065 Medical loss ratio (8) 84.4 % 82.8 %
(2) Represents the average number of days that a patient stayed in our hospitals.
(3) Represents the total number of patients admitted to our hospitals for stays
in excess of 23 hours. Management and investors use this number as a general
measure of inpatient volume.
(4) Adjusted admissions and adjusted patient days are general measures of
combined inpatient and outpatient volume. We compute adjusted
admissions/patient days by multiplying admissions/patient days by gross
patient revenue and then dividing that number by gross inpatient revenue.
(5) Represents the number of days our beds were occupied by inpatients over the
(6) Includes the impact of the provision for bad debts as a component of revenue.
(7) Represents members eligible for
Choice's contract with CMS to provide coverage as a MAPD SNP.
(8) Represents medical claims expense as a percentage of premium revenue,
including claims paid to our hospitals. 32
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The following table sets forth, for the periods presented, our results of consolidated operations expressed in dollar terms and as a percentage of net revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.
Quarter Ended Quarter Ended December 31, 2013 December 31, 2012 ($ in thousands): Amount Percentage Amount Percentage Net revenue Acute care revenue before provision for bad debts
$ 565,333 $ 537,132Less: Provision for bad debts (102,502 ) (85,054 ) Acute care revenue 462,831 75.3 % 452,078 76.5 % Premium revenue 151,719 24.7 % 138,854 23.5 % Net revenue 614,550 100.0 % 590,932 100.0 % Costs and expenses Salaries and benefits 226,243 36.8 % 220,871 37.4 % Supplies 81,975 13.3 % 79,997 13.5 % Medical claims 125,820 20.5 % 113,343 19.2 % Rentals and leases 19,138 3.1 % 12,796 2.2 % Other operating expenses 104,908 17.1 % 102,354 17.3 % Medicareand Medicaid EHR incentives (3,430 ) (0.6 %) (1,364 ) (0.2 %) Interest expense, net 33,160 5.4 % 33,828 5.7 % Depreciation and amortization 26,398 4.3 % 24,220 4.1 % Management fees 1,250 0.2 % 1,250 0.2 % Total costs and expenses 615,462 100.1 % 587,295 99.4 % Earnings (loss) from continuing operations before gain on disposal of assets and income taxes (912 ) (0.1 %) 3,637 0.6 % Gain on disposal of assets, net 1,244 0.2 % 93 0.0 % Earnings from continuing operations before income taxes 332 0.1 % 3,730 0.6 % Income tax expense 950 0.2 % 1,589 0.2 % Net earnings (loss) from continuing operations (618 ) (0.1 %) 2,141 0.4 % Earnings from discontinued operations, net of income taxes 9,608 1.6 % 1,927 0.3 % Net earnings 8,990 1.5 % 4,068 0.7 % Net earnings attributable to non-controlling interests (3,788 ) (0.6 %) (1,599 ) (0.3 %) Net earnings attributable to IASIS Healthcare LLC $ 5,2020.9 % $ 2,4690.4 % 33
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The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollar terms and as a percentage of acute care revenue. Such information has been derived from our unaudited condensed consolidated statements of operations. Quarter Ended Quarter Ended December 31, 2013 December 31, 2012 ($ in thousands): Amount Percentage Amount Percentage Acute care revenue Acute care revenue before provision for bad debts
$ 565,333 $ 537,132Less: Provision for bad debts (102,502 ) (85,054 ) Acute care revenue 462,831 99.5 % 452,078 99.7 % Revenue between segments (1) 2,208 0.5 % 1,567 0.3 % Total acute care revenue 465,039 100.0 % 453,645 100.0 % Costs and expenses Salaries and benefits 219,202 47.1 % 215,105 47.4 % Supplies 81,916 17.6 % 79,943 17.6 % Rentals and leases 18,775 4.0 % 12,403 2.7 % Other operating expenses 97,322 20.9 % 96,597 21.3 % Medicareand Medicaid EHR incentives (3,430 ) (0.7 %) (1,364 ) (0.3 %) Interest expense, net 33,160 7.1 % 33,828 7.5 % Depreciation and amortization 25,341 5.5 % 23,185 5.1 % Management fees 1,250 0.3 % 1,250 0.3 % Total costs and expenses 473,536 101.8 % 460,947 101.6 % Loss from continuing operations before gain on disposal of assets and income taxes (8,497 ) (1.8 %) (7,302 ) (1.6 %) Gain on disposal of assets, net 1,244 0.2 % 93 0.0 % Loss from continuing operations before income taxes $ (7,253 )(1.6 %) $ (7,209 )(1.6 %)
(1) Revenue between segments is eliminated in our consolidated results.
Total acute care revenue - Total acute care revenue for the quarter ended
December 31, 2013, was $465.0 million, an increase of $11.4 millionor 2.5% compared to $ 453.6 millionin the prior year quarter. The increase in total acute care revenue is comprised primarily of a decrease in adjusted admissions of 0.1% and an increase in net patient revenue per adjusted admission of 2.9%. The provision for bad debts for the quarter ended December 31, 2013, was $102.5 million, increase of $17.4 millionor 20.5%, compared to $85.1 millionin the prior year quarter. The increase in the provision for bad debts is primarily the result of increased acuity levels of uninsured patients seeking care at our hospitals. Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue of $2.0 millionand $1.6 millionfor the quarters ended December 31, 2013and 2012, respectively. 34
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Salaries and benefits - Salaries and benefits expense for the quarter ended
December 31, 2013, was $219.2 million, or 47.1% of total acute care revenue, compared to $215.1 million, or 47.4% of total acute care revenue in the prior year quarter. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 47.0% for the quarter ended December 31, 2013, compared to 47.2% in the prior year quarter. The improvement in our salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation, is the result of the implementation of labor cost reduction initiatives, including a reduction in contract labor utilization. Rentals and leases - Rentals and leases expense for the quarter ended December 31, 2013, was $18.8 million, compared to $12.4 millionin the prior year quarter. The increase in rentals and leases expense is primarily due to $5.0 millionof additional rent expense recorded in the quarter ended December 31, 2013, as a result of the sale-leaseback of certain hospital real estate, which closed in the fourth quarter of fiscal year 2013. Other operating expenses - Other operating expenses for the quarter ended December 31, 2013, were $97.3 million, or 20.9% of total acute care revenue, compared to $96.6 million, or 21.3% of total acute care revenue in the prior year quarter. Other operating expenses as a percentage of total acute care revenue decreased primarily due to a decline in professional fees associated with our Medicaidsupplemental reimbursement programs in Texas.
The following table and discussion sets forth, for the periods presented, the results of our Health Choice operations expressed in dollar terms and as a percentage of premium revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.
Quarter Ended Quarter Ended December 31, 2013 December 31, 2012 ($ in thousands): Amount Percentage Amount Percentage Premium revenue Premium revenue
$ 151,719100.0 % $ 138,854100.0 % Costs and expenses Salaries and benefits 7,041 4.7 % 5,766 4.2 % Supplies 59 0.0 % 54 0.0 % Medical claims (1) 128,028 84.4 % 114,910 82.8 % Other operating expenses 7,586 5.0 % 5,757 4.1 % Rentals and leases 363 0.2 % 393 0.3 % Depreciation and amortization 1,057 0.7 % 1,035 0.7 % Total costs and expenses 144,134 95.0 % 127,915 92.1 % Earnings before income taxes $ 7,5855.0 % $ 10,9397.9 %
(1) Medical claims paid to our hospitals of
each of the quarters ended
eliminated in our consolidated results.
Premium revenue - Premium revenue from Health Choice was
$151.7 millionfor the quarter ended December 31, 2013, an increase of $12.9 millionor 9.3% compared to $138.9 millionin the prior year quarter. The increase in premium revenue is impacted by a 2.3% increase in member months, driven by growth in all of our product lines, particularly our Medicareproduct line which increased 23.0%, all compared to the prior year quarter. Additionally, premium revenue for the quarter ended December 31, 2013, compared to the prior year quarter, increased as a result of additional reimbursement related to primary care physician Medicaidparity payments, which also includes a pass-through component impacting our medical expenses. Medical claims - Prior to eliminations, medical claims expense was $128.0 millionfor the quarter ended December 31, 2013, compared to $114.9 millionin the prior year quarter. Medical claims expense as a percentage of premium revenue was 84.4% for the quarter ended December 31, 2013, compared to 82.8% in the prior year quarter. Medical claims as a percentage of premium revenue increased 1.6% as a result of additional medical expenses associated with the pass-through component of the primary care physician Medicaidparity payments received in the current quarter. Additionally, medical expenses have been impacted by increases in pharmacy costs resulting from an uptick in specialty drug utilization. 35
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