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Direct
Line: 212.859.8136
Fax: 212.859.4000
jeffrey.bagner@ffhsj.com
June
20, 2008
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Mr. Jim
B. Rosenberg
Senior
Assistant Chief Accountant
United
States Securities and Exchange Commission
Division
of Corporation Finance
100 F
Street, N.E., Mail Stop 6010
Washington,
DC 20549
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Re:
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Community
Health Systems, Inc.
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Dear Mr.
Rosenberg:
This
letter sets forth the response of Community Health Systems, Inc. (the “Company”) to the
comment letter, dated June 6, 2008, of the staff of the Division of Corporation
Finance (the “Staff”) relating to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2007
(the “2007 Form
10-K”) that was filed with the Securities and Exchange Commission (the
“Commission”)
on February 29, 2008.
The
responses set forth below are numbered to correspond to the numbering in the
Staff’s comment letter. Page references in the responses below are to
the 2007 Form 10-K.
Critical Accounting
Policies
Third Party Reimbursement,
page 53
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1.
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You
state that contractual allowance adjustments related to financial
settlements or appeals increased operating revenue by an insignificant
amount. Please revise your disclosure to clarify whether the
changes have been insignificant to net income for the periods
presented. In addition, please disclose whether there are
changes in estimates other than from final settlements or appeals and, if
so, disclose their nature, timing and amount recorded in your statements
of income.
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The net
adjustments related to final settlements or appeals increased net income by
approximately $4.2 million in 2007, $3.3 million in 2006 and $0.1 million in
2005. Based on the Company’s size and historical earnings, the
Company considers the effect of these adjustments to contractual allowances on
net income to be insignificant for the periods presented.
A $96.3
million adjustment in 2007 was disclosed in footnote 1 to the Company’s
financial statements on page 67 of the 2007 Form 10-K where it was stated that
the change in estimate for contractual allowances was related to estimated
amounts of self-pay accounts receivable that will ultimately qualify as charity
care, or that will ultimately qualify for Medicaid, indigent care or other
specific governmental reimbursement.
In future
filings the Company will revise its disclosure related to third-party
reimbursement in its management’s discussion and analysis and in the footnotes
to the Company’s financial statements to clarify that, in addition to
adjustments from final settlements or appeals, the adjustments also included
those items identified in footnote 1 to the Company’s financial
statements. The nature of those items will be disclosed in a manner
that conforms to the disclosures currently made in footnote 1 to the Company’s
financial statements. Additionally, the Company will further revise
its disclosure related to third-party reimbursement to also indicate whether or
not the Company considers such adjustments to contractual allowances to be
significant to net income.
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2.
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Please
quantify and disclose the reasonably likely effect that a change in your
assumptions related to your contractual allowance as of December 31, 2007
could have on financial position and
operations.
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In future
filings the Company will add a sensitivity disclosure (e.g., a hypothetical 1%
change in expected reimbursement) similar to the following proposed language
(based upon the facts in effect as of December 31, 2007):
Contractual
allowances represent the difference between our standard billing rates and the
expected amount of reimbursement from third parties. Payor
classification, services performed and the relevance of historical paid claims
data are the key assumptions in determining the expected
reimbursement. Assuming the aforementioned assumptions changed the
Company’s estimate of expected reimbursement by 1% of gross accounts receivable,
net accounts receivable would change approximately $34 million and result in an
impact on net income of approximately $21 million as of and for the year ended
December 31, 2007. This represents only one example of reasonably
possible sensitivity scenarios.
Critical Accounting
Policies
Allowance for Doubtful
Accounts, page 53
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3.
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In
regards to the 2007 increases to contractual reserves and allowance for
doubtful accounts of $96.3 million and $70.1 million, respectively, please
disclose the key cash collection indicators that experienced
deterioration, and the changes in the assumptions that led to the change
in estimate. In addition, please disclose the changes in the
inputs and assumptions that were driven by the additional data provided by
the Triad acquisition. Please revise your disclosure to
reconcile the $96.3 million discussed herein to the changes in estimates
discussed under “Third Party Reimbursement.” Further, disclose
how much of the $96.3 million relates to revenue you recorded in
2006.
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The
primary cash collection key indicator that experienced deterioration during the
4th
quarter of 2007 was “cash receipts as a percent of net revenue less bad
debts.” This percentage decreased to the lowest percentage
experienced by the Company for any quarter since the quarter ended September 30,
2006. Further analysis indicated the primary causes of this
deterioration was a continuing increase in the volume of indigent non-resident
aliens, an increase in the number of patients qualifying for charity care and a
greater than expected impact of the removal of participants from TennCare
(Tennessee’s state provided Medicaid program) which increased the number of
uninsured patients receiving care with limited financial means at our eight
Tennessee hospitals. As disclosed in footnote 1 to the Company’s
financial statements on page 67 of the 2007 Form 10-K, the Company has revised
its estimate of contractual allowances for estimated amounts of self-pay
accounts receivable that will ultimately qualify as charity care, or that will
ultimately qualify for Medicaid, indigent care or other specific governmental
reimbursement. During the fourth quarter of 2007, due to the
deteriorating cash collections at Legacy CHS hospitals and the desire to
standardize processes with those of the former Triad hospitals, the Company
undertook a detailed programming effort to develop data around the deteriorating
classes of accounts receivable needed to update its historical cash collections
percentages as well as to enable it to estimate how much of certain self pay
categories ultimately convert to Medicaid, charity and indigent
programs. Triad’s processes for establishing contractual allowances
and allowances for bad debts related to accounts classified as Medicaid –
pending, charity – pending and indigent non-resident alien included inputs and
assumptions based on the historical percentage of these accounts which
ultimately qualified for specific government programs or for write-off as
charity care.
The
Company used these new inputs and assumptions regarding Medicaid – pending,
charity – pending and indigent non-resident alien in conjunction with the new
data developed in the fourth quarter as described above to evaluate the
realizability of the accounts receivable of the Legacy CHS
hospitals. The Company determined that the accounts receivable of the
Legacy CHS hospitals should be reduced by an additional $96 million to reduce
them to estimated net realizable value at December 31, 2007. Of the
$96 million in additional contractual allowances recorded in 2007, approximately
$4.4 million related to revenue recorded in 2006.
Furthermore,
in updating the historical collection statistics of all its hospitals, the
Company also took into account a detailed study of the historical collection
information for the hospitals acquired from Triad. The updated
collection statistics of the hospitals acquired from Triad also showed
subsequent deterioration in estimated cash collection percentages similar to
that experienced on the Legacy CHS hospitals. Therefore, the Company
also standardized the processes for calculating the allowance for doubtful
accounts of the hospitals acquired from Triad to that of its other hospitals
which, along with the allowance percentages determined from new collection data,
resulted in the need for an additional $70.1 million of bad debt
allowance.
To the
extent that future filings reflect the change in estimate, the Company will
revise its disclosure of its allowance for doubtful accounts in its management’s
discussion and analysis to include a disclosure that conforms to the following
language contained in the aforementioned footnote to the Company’s financial
statements; “…revised its estimate of contractual allowances for
estimated amounts of self-pay accounts receivable that will ultimately qualify
as charity care, or that will ultimately qualify for Medicaid, indigent care or
other specific governmental reimbursement. Previous estimates of
uncollectible amounts for such receivables were included in the Company’s bad
debt reserves for each period.” The Company will revise its
disclosure in future filings to clarify that, based on the Company’s size and
historical earnings, the contractual allowance adjustments in 2007 that related
to the prior periods were not significant to net operating revenues or net
income.
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4.
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Please
quantify and disclose the reasonably likely effect that a change in your
assumptions related to your allowance for doubtful accounts as of December
31, 2007 could have on financial position and
operations.
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In future
filings, the Company will add a sensitivity disclosure similar to the following
language (based upon the facts in effect as of December 31, 2007):
Significant
changes in the amount of self-pay accounts receivable, amount of co-pays,
business office operations, economic conditions, trends in federal and state
governmental healthcare programs and eligible recipients or other third party
payors could affect our estimates of accounts receivable
collectibility. Assuming the aforementioned factors resulted in a
hypothetical 1% change in the allowance for doubtful accounts as a percentage of
self-pay receivables, net accounts receivable would change approximately $17
million and result in an impact on net income of approximately $10 million as of
and for the year ended December 31, 2007. This represents only one
example of reasonably possible sensitivity scenarios.
Critical Accounting Policies
and Estimates, page 26
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5.
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It
appears that you are discounting both settled and unsettled professional
liability loss reserves. Please tell us your basis in GAAP for discounting
your unsettled loss reserves for professional liability
claims.
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We follow
the guidance permitted in chapter 8 of the AICPA Audit and Accounting Guide:
Health Care Organizations which discusses the discounting of accrued
malpractice claims. Footnote 7 to the illustrative financial
statements in Appendix A of the guide (which illustrates the application of the
reporting practices discussed in the guide) provides disclosures for a hospital
that discounts its medical malpractice claims. In addition, we noted
that it is the policy of other hospital company registrants to discount their
reserves for professional liability claims.
The
Company’s reserve for professional liability claims is established based upon
actuarial calculations. The actuarial calculations utilize the
Company’s history of reported and settled claims and related industry hospital
and physician malpractice claim data to establish a series of loss development
factors and other estimation models. The loss development factors and
models, along with considerations of self insured limits and other excess
insurance arrangements, are applied to the Company portfolio of reported claims
and related case loss reserves to produce estimates of the amount and timing of
future claim payments. Those projected cash flows are then discounted
using a risk free interest rate, based on the daily treasury yield curve at the
time of measurement, corresponding to the timing of such cash
flows. The Company believes that its company specific information
enables it to estimate the amount and timing of its future professional
liability claim payments and that its policy of discounting such liabilities is
appropriate.
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6.
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Please
revise your disclosure to clarify whether there have been any significant
changes in your estimate of these accruals. If such changes have been
material, please quantify these
amounts.
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The
Company’s disclosures in prior periods have been silent to significant changes
in its reserve for professional liability claims due to the absence of any
significant changes in those periods. In future filings, the Company
will add language to affirmatively indicate whether or not any significant
changes in its estimate of the reserve for professional liability claims have
occurred.
Financial
Statements
Note 4. Goodwill and Other
Intangible Assets, page 80
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7.
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It
appears that you categorize your operating segments as reporting units
when performing your annual goodwill evaluation. Please provide
us an analysis that demonstrates why you believe, for your hospital
operations segment, that the economic characteristics are similar for the
components that comprise that
segment.
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The
Company believes that each hospital represents a component of the hospital
operations segment and meets the definition of a reporting unit because each
hospital constitutes a business for which discrete financial information is
available. For purposes of applying FASB Statement No. 142 (SFAS
142), the Company aggregates each of its hospitals (i.e., reporting units) into
a single reporting unit. The Company analyzed the components of our
hospital operations segment against each of the criteria in paragraph 30 of SFAS
142, which references paragraph 17 of FASB Statement No. 131 (SFAS
131). Further noted in EITF Topic D-101, “Clarification of Reporting
Unit Guidance in Paragraph 30 of FASB Statement No. 142” (EITF D-101), the FASB
did not intend that every factor must be met in order for two or more components
to be considered economically similar. Additionally, the Board
concluded that the evaluation of whether “components that comprise an operating
segment have similar economic characteristics is a matter of judgment that
depends on specific facts and circumstances; that assessment should be more
qualitative than quantitative.”
The
Company considered all of the factors of paragraph 17 of SFAS 131 as
follows:
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SFAS
131, paragraph 17 a - Nature of products and services. Each of
the Company’s hospitals operates as a general acute care hospital and
provides substantially the same range of general acute care hospital
services. This includes an emergency department, which
generates an average of 50-60% of inpatient admissions at the majority of
our hospitals. The Company has instituted standardized
emergency room procedures in each of the Company’s hospitals (other than
the hospitals acquired in the Triad acquisition). The Company
is in the process of instituting the standardized emergency room
procedures at each of the hospitals acquired in the Triad
acquisition.
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SFAS
131 paragraph 17 b - Nature of the production process. The
Company has implemented standardized operational programs, including
participation in a group purchasing organization, self-insured malpractice
and health insurance programs (in which most hospitals participate and
share in a risk pool), physician recruiting programs, physician
credentialing programs, and other standardized strategic initiatives such
as staffing initiatives and the emergency room initiative discussed
above.
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SFAS
131 paragraph 17 c - Type or class of customer for their products and
services. All of the Company’s hospitals share the same primary
payor categories including Medicare, Medicaid, managed care payors, and
self-insured patients, although the mix in primary payors may fluctuate
between hospitals. The mix in primary payors at a given
hospital may also fluctuate from year to year.
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SFAS
131 paragraph 17 d - The methods used to distribute their products or
provide their services. As described above, the services
provided at each hospital are similar. We implement
standardized protocols for the delivery of services at all of our
hospitals to take advantage of best practices that make the hospitals more
profitable, and ensure high quality patient care.
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SFAS
131 paragraph 17 e - Nature of the regulatory environment. All
hospitals are subject to Medicare quality of care and billing regulations,
and such federal rules regarding providing emergency care regardless of
ability to pay.
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EITF
D-101 provides some additional qualitative and quantitative factors to be
considered in determining whether each of the components in the hospital
operations segment exhibit similar long-term financial performance and share
similar economic characteristics. Of those, the following are
applicable to our business:
The
manner in which an entity operates its business and the nature of those
operations.
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Management uses income from
continuing operations, EBITDA and EBITDA margin, and other operating
statistics as key measures of operating results. The EBITDA
margin percentages for the majority of the Company’s hospitals generally
fall within a 10 percentage point range. This range is within
management’s expectations, given the nature of the hospital
business. Margins fluctuate from year to year for various
reasons beyond the control of management. For example, payor
mix, the severity of illnesses of patients, viral outbreaks, and the
insurance carried by patients can affect margins. Recently
acquired hospitals, or hospitals with intermittent operational and market
issues (e.g., a loss of a key doctor/specialist or a reduction in, or low,
state reimbursement) tend to be at the low end or below the EBITDA margin
range discussed above until such issues are successfully
addressed. Those hospitals that are above that range tend to
benefit from favorable managed care contracts, favorable or increased
state reimbursement or relationships with more active key
doctors/specialists or identified best practices. Those best
operating practices are shared with and implemented at lower performing
hospitals. Any of these factors can be subject to change from
year to year and may result in inconsistent margins between
years. While not all of our hospitals have similar margins in
any given year, the Company’s management processes are designed to
identify and implement changes to improve the margins at all hospitals
through application of shared best practices among all hospitals so that
there is a consistent long-term trend in margins for all of our
hospitals. As evaluated above under SFAS 131 paragraphs 17 a
and 17b, the nature of those operations are very
similar.
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Although
payment rates differ greatly by payor group (e.g., Medicare, Medicaid,
private insurance, managed care, and self-pay) the payment rates within
each payor group are similar in each of the Company’s
markets.
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Whether
goodwill is recoverable from the separate operations of each component business
or from two or more component businesses working in concert (which might be the
case if the components are economically interdependent).
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The
expectation of management is for the combined operations of all hospitals
to work in concert to recover the carrying value of goodwill allocated to
the hospital reporting unit. Our business strategy of
standardization and centralization is central to the recovery of
goodwill. At all of our hospitals we implement standardized
processes to increase revenues, improve profitability, and improve quality
through our corporate ownership, management and operation of these
businesses. The business model provides standardization and
centralization of operations across key business areas, strategic
direction to expand and improve services and facilities at our hospitals,
implementation of quality of care improvement programs, and assistance in
the recruitment of additional physicians to the markets in which our
hospitals are located.
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The
extent to which the component businesses share assets and other
resources.
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The
Company has centralized many administrative functions including legal,
cost report preparation and processing, information technology development
and management, and facilities management which oversee construction,
renovation and major capital improvements. These shared
operational and administrative functions provide benefits to each hospital
that could not otherwise be obtained as cost effectively by the individual
hospitals, creating an economic interdependence shared among each of our
hospitals through a common support
system.
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The
Company has advised us that it acknowledges that:
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s
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the
Company is responsible for the adequacy and accuracy of the disclosure in
the 2007 Form 10-K;
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s
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Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the 2007
Form 10-K; and
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s
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the
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Please
see attached as Exhibit A the
Company’s acknowledgment as to the foregoing.
Should
you have any questions or comments with respect to this filing, please call me
at (212) 859-8136.
| Sincerely, | |||
| /s/ Jeffrey Bagner | |||
| Jeffrey Bagner | |||
cc:
Tabatha Akins (Securities and Exchange Commission)
Joel
Parker (Securities and Exchange Commission)
Rachel A.
Seifert (Community Health Systems, Inc.)
Exhibit
A
June 20,
2008
[Community
Health Systems, Inc. Letterhead]
In
response to the comment letter, dated June 6, 2008, of the staff of the Division
of Corporation Finance, the Company hereby acknowledges that:
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·
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the
Company is responsible for adequacy and accuracy of the disclosure in the
2007 Form 10-K;
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·
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Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the 2007
Form 10-K; and
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·
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the
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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/s/ Wayne T. Smith
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Wayne
T. Smith
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Chairman
of the Board, President
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and
Chief Executive Officer
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/s/ W. Larry Cash
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W.
Larry Cash
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Executive
Vice President,
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Chief
Financial Officer and Director
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/s/ T. Mark Buford
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T.
Mark Buford
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Vice
President and Corporate
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Controller
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