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Direct
Line: 212.859.8136
Fax: 212.859.4000
jeffrey.bagner@ffhsj.com
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August
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 (the “Comment Letter”),
dated August 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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Please
refer to your response to our prior comments two and four. Your
responses discuss a hypothetical 1% change in expected reimbursement and
allowance for doubtful accounts. We do not believe that
hypothetical changes in balance amounts address our comments and we
re-issue comments two and four. Please note that the comments’
focus is on quantification and disclosure of the impact that reasonable
likely changes in your assumptions would have on your financial position
and operations. For example your response to comment two states
that payor classification is a key assumption. Quantification
and disclosure of the impact of reasonably likely changes to that
assumption would achieve the objective of our
comments.
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In
response to your comments, the Company will modify its sensitivity disclosures,
as indicated below, in its next Form 10-Q for the period ended September 30,
2008, or other filing, if earlier. The italicized print indicates the
changes from the Company’s disclosure in its Form 10-K that will be incorporated
into the disclosure in response to your comment:
Prior
comment #2:
We
account for the differences between the estimated program reimbursement rates
and the standard billing rates as contractual allowance adjustments, which we
deduct from gross revenues to arrive at net operating revenues. The process of estimating
contractual allowances requires us to estimate the amount expected to be
received based on payor contract provisions. The key assumption in
this process is the estimated contractual reimbursement percentage, which is
based on payor classification and historical paid claims
data. Due to the complexities involved in these estimates,
actual payments we receive could be different from the amounts we estimate and
record. If the
actual contractual reimbursement percentage under government programs and
managed care contracts differed by 1% from our estimated reimbursement
percentage, net income for the six months ended June 30, 2008 would have changed
by approximately $23.9 million, and net accounts receivable would have changed
by $38.8 million. This represents only one example of reasonably
possible sensitivity scenarios.
Prior
comment #4:
The process of estimating the
allowance for doubtful accounts requires us to estimate the collectibility of
self-pay accounts receivable, which is primarily based on our collection
history, adjusted for expected recoveries and, if present, anticipated changes
in collection trends. Significant changes in payor mix,
business office operations, economic conditions, trends in federal and state
governmental healthcare coverage or other third party payors could affect our
estimates of accounts receivable collectibility. If the actual collections percentage
differed by 1% from our estimated collection percentage, as a result of a change
in expected recoveries, net income for the six months ended June 30,
2008 would have changed by $10.5 million, and net accounts receivable would have
changed by $17.1 million. This represents only one example of
reasonable possible sensitivity scenarios.
Allowance for Doubtful
Accounts, page 53
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2.
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Please
refer to your response to our prior comment number
three. Please address the following
comments:
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1.
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Revise
your disclosure to include a more robust discussion of the facts and
circumstances attributable to the charges as discussed in your response so
that your rationale for increasing the contractual reserves and allowance
for doubtful accounts is transparent to
investors,
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In
response to your comment, the Company will incorporate, as indicated below, its
response to prior comment number 3 in its next Form 10-Q for the period ending
September 30, 2008, or other filing, if earlier. The italicized print
indicates the changes from the Company’s disclosure in its Form 10-K that will
be incorporated into the disclosure in response to your comment:
During
the quarter ended December 31, 2007, in conjunction with our ongoing process of
monitoring the net realizable value of accounts receivable, as well as
integrating the methodologies, data and assumptions used by the former Triad
management, we performed various analyses including updating a review of
historical cash collections. As a result of these analyses, we noted
deterioration in certain key cash collection indicators. The primary key cash collection
indicator that experienced deterioration during the fourth quarter of 2007 was
“cash receipts as a percentage of net revenue less bad debts.” This
percentage decreased to the lowest percentage experienced by us since
the quarter ended September 30, 2006. Further analysis indicated the
primary causes of this deterioration were 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 with limited financial means
receiving care at our eight Tennessee hospitals. During the fourth
quarter of 2007, due to the deteriorating cash collections and the desire to
standardize processes with those of the former Triad hospitals, we 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 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.
We 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 accounts
receivable and to revise our 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, resulting
in an increase to our contractual reserves of $96.3 million. Previous
estimates of uncollectible amounts for such receivables were included in our bad
debt reserves for each period.
Furthermore,
in updating the historical collection statistics of all our hospitals, we 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
cash collections similar to those experienced by the other hospitals that we
own. Therefore, we also standardized the processes for calculating
the allowance for doubtful accounts of the hospitals acquired from Triad to that
of our other hospitals which, along with the allowance percentages determined
from the new collection data, resulted in the recording of an additional $70.1
million of allowance for bad debts.
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2.
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Tell
us why an increase in the volume of indigent non-resident aliens and
removal of participants from TennCare resulted in an increase to
contractual reserves as opposed to an increase to bad debt
expense;
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The
Company receives reimbursement under governmental programs for indigent
non-resident aliens. The difference between that reimbursement and
the standard billing rates is accounted for as a contractual adjustment at the
time revenue is recognized. The resulting receivable from the
governmental agency is considered by the Company to be collectible and
therefore, does not result in the recognition of bad debt expense.
The
disenrollment of participants in Tenncare by the state of Tennessee resulted in
an increased number of patients who were near or below poverty levels without
medical insurance. Many of these patients have been proven to qualify
for charity care which significantly increased the amount of charity care being
recorded. The policy of the Company, as required by the Audit and
Accounting Guide for Health Care Organizations, is to write-off charity care as
an adjustment to revenue. The resulting adjustment to revenue for a
patient qualifying for charity care is greater than the contractual allowance
adjustment for reimbursement under the Tenncare program. Accordingly,
the shift of former TennCare patients from an insured payor to charity reduces
net operating revenue but does not increase bad debt expense.
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3.
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Reconcile your statements
within your response that the noted items increased the number of
uninsured patients with limited financial means to your disclosure on page
54 of your Form 10-K. Such disclosure shows a consistent
percentage of gross self-pay receivables of 34.2%, 34% and 34.7% in 2007,
2006 and 2005, respectively.
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Several
factors that developed during 2007 contributed to the proportional percentage of
self-pay accounts receivable to total accounts receivable as disclosed on page
54 of the Company’s Form 10-K. As described below, each of these
factors on its own may have increased or decreased the proportional percentage
of self-pay accounts receivable. However, on a combined basis, the
impact of each factor was offset by the impact of the other
factors.
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As
noted in our response above, to the extent that the increase in uninsured
patients with limited financial means met our charity guidelines, an
adjustment was made to remove the revenue and related accounts
receivable. Accordingly, there would be no increase in gross
self-pay accounts receivable from these patients. For those
patients that may have been disenrolled from Tenncare and who
did not qualify for charity care, any unpaid balances would have resulted
in an increase to gross self-pay receivables, as prior to their
disenrollment their receivables would have been classified as insured
receivables.
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·
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As
disclosed on page 53 of the Company’s Form 10-K, the Company’s testing of
historical collection data indicated a deterioration in cash
collections. Absent other factors this deterioration results in
an accumulation of self-pay accounts and thus would have resulted in a
corresponding increase in gross self-pay accounts
receivable.
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·
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As
noted in the Company’s disclosure of revenues from different payor sources
on page 41 of the Company’s Form 10-K, revenues from insured patients grew
proportionally more than revenues from self-pay patients resulting in the
decrease of self-pay revenue to total revenue from 11.8% in 2006 to 10.0%
in 2007. Absent other factors, this would have resulted in a
similar and corresponding decrease in gross self pay accounts receivable
to total accounts receivable.
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As noted
above, the net impact of these factors on the percentage of self-pay accounts
receivable to total accounts receivable was that self-pay accounts receivable
remained consistent at approximately 34%.
Professional Insurance
Liability Claims, page 55
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3.
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Please
refer to your response to our prior comment number five. It
remains unclear how you determined that discounting your unsettled loss
reserves for professional liability claims was
appropriate. Please tell us how your company specific
information has enabled you to determine that the aggregate amount of the
liability and the amount and timing of cash payments for the liability are
fixed or reliably determinable. Please see paragraph 132 of SOP
96-1.
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As noted
in the Company’s previous response, its reserve for professional liability
claims is established based upon actuarial calculations utilizing the Company’s
history of reported and settled claims, together with related hospital industry
and physician malpractice claims data. The actuarially determined
development factors used to project the timing of payments are based on the
Company’s historical payment patterns, which encompasses an actual payment
history of approximately 20 years. These development factors indicate
that the payment patterns have remained stable from period to period providing a
reasonable basis on which to project the timing of such payments. The
Company’s history of claim payments indicates that it’s loss ultimates (claim
estimates adjusted each year for actual payments) for 2006 and prior accident
years have fluctuated within a range of less than 6% each of the last four
years, indicating the Company’s ability to reliably determine such
liability. Additionally, over the last four years, actual annual
claim payments have fluctuated from estimated payments for each of those periods
by less than 8%, indicating the Company’s ability to estimate the timing of such
payments. As previously indicated, the Company believes Chapter 8 of
the AICPA’s Audit and Accounting Guide for Health Care Organizations provides
for the discounting of accrued medical malpractice claims. Also, the
Company believes its history of only minor adjustments to its estimated loss
ultimates and stable payment patterns, by analogy, are consistent with the
guidance in paragraph 132 of SOP 96-1 which indicates the requirement that the
amount and timing of payments be “reliably determinable” in order to be
discounted. Furthermore, the Company believes that SEC Staff
Accounting Bulletin Topic 5N provides analogous guidance that supports
discounting medical malpractice claims liabilities. The SEC’s
interpretive response to Question 1 of the SAB indicates:
“The
Staff is aware of efforts by the accounting profession to assess the
circumstances under which discounting may be appropriate in financial
statements. Pending authoritative guidance resulting from those
efforts however, the staff will raise no objection if the registrant follows a
policy for GAAP reporting purposes of:
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·
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Discounting
liabilities for unpaid claims and claim adjustment expenses at the same
rates that it uses for reporting to state regulatory authorities with
respect to the same liabilities, or
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Discounting
liabilities with respect to settled claims under the following
circumstances:
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§
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The
payment pattern and ultimate cost are fixed and determinable on an
individual claim basis, and
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§
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The
discount rate used is reasonable on the facts and circumstances applicable
to the registrant at the time the claims are
settled.”
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The
Company believes its estimates of the amount and timing of professional
liability payouts are reliably determinable. The Company also
believes its current practice of discounting medical malpractice claims to be
consistent with the AICPA’s Audit and Accounting Guide for Health Care
Organizations, consistent in principle with analogous FASB and SEC literature
and consistent with industry practice,
Other
Matters
Subsequent
to filing, on June 20, 2008, the Company’s responses to your prior comment
letter, the Company revised its presentation of intercompany amounts in its
supplemental financial information presented in accordance with Rule 3-10 of
Regulation S-X (including for prior periods) in Note 17 to its Form 10-Q for the
period ended June 30, 2008. The Company does not believe that these
revisions are material.
Should
you have any questions or comments with respect to this filing, please call me
at (212) 859-8136.
| Sincerely, | |||
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/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.)