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Direct
Line: 212.859.8136
Fax: 212.859.4000
jeffrey.bagner@ffhsj.com
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February
19, 2009
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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 February 12, 2009, 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 that was filed with the Securities and Exchange Commission on
February 29, 2008.
The
responses set forth below are numbered to correspond to the numbering in the
Comment Letter.
Critical Accounting
Policies
Professional Liability
Insurance Claims, page 55
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1.
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We
acknowledge your response to our comments. Please revise your
proposed disclosure to include the
following:
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a.
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A
description of the method used to estimate accrued malpractice
liabilities, distinguishing if necessary between reported and unreported
claims. For example, consider
including:
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1.
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A
discussion of whether and how the company stratifies settled malpractice
claims into homogenous groups for purposes of estimating unsettled claims;
and
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2.
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A description of your accounting
for your excess of loss claims-made insurance
policy.
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b.
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The
company's accounting policy for costs associated with litigating and
settling accrued malpractice liabilities, including direct and incremental
costs and indirect costs.
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c.
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With
respect to your professional liability roll-forward on page 56 of your
Form 10-K, please disaggregate the expense column to show the provision
for insured events of the current year, and increases (decreases) in
provision for insured events of prior years. In addition please
disaggregate the claims and expenses paid column to show claims and claim
adjustment expenses attributable to insured events of the current year and
claims and claim adjustment expenses attributable to insured events of
prior years. Please also add a column quantifying the change in
the liability stemming from accretion of the
discount.
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d.
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Identify,
quantify and analyze the underlying causes for the increase (decrease) in
provision for insured events of prior
years.
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In response to the Staff’s comments
(a), (b), (c) and (d) above, the Company will revise its disclosure in the
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies – Professional Liability Insurance
Claims” section of its next Form 10-K for the period ended December 31, 2008 as
follows.
Professional
Liability Insurance Claims
As part of our business of owning and
operating hospitals, we are subject to legal actions alleging liability on our
part. We accrue for losses resulting from such liability claims, as
well as loss adjustment expenses that are out-of-pocket and directly related to
such liability claims. These direct out-of-pocket expenses include
fees of outside counsel and experts. We do not accrue for costs that
are part of our corporate overhead, such as the costs of our in-house legal and
risk management departments. The losses resulting from professional
liability claims primarily consist of estimates for known claims, as well as
estimates for incurred but not reported claims. The estimates are
based on specific claim facts, our historical claim reporting and payment
patterns, the nature and level of our hospital operations, and actuarially
determined projections. The actuarially determined projections are
based on our actual claim data, including historic reporting and payment
patterns which have been gathered over an approximate 20-year
period. As discussed below, since we purchase excess insurance on a
claims-made basis that transfers risk to third party insurers, the liability we
accrue does not include an amount for the losses covered by our excess
insurance. Since we believe that the amount and timing of our future
claims payments are reliably determinable, we discount the amount we accrue for
losses resulting from professional liability claims using the risk-free interest
rate corresponding to the timing of our expected payments. The net
present value of the projected payments was discounted using a weighted-average
risk-free rate of 2.6%, 4.1% and 4.6% in 2008, 2007 and 2006,
respectively. This liability is adjusted for new claims information
in the period such information becomes known to us. Professional
malpractice expense includes the losses resulting from professional liability
claims and loss adjustment expense, as well as paid excess insurance premiums,
and is presented within other operating expenses in the accompanying
consolidated statements of income.
Our processes for obtaining and analyzing claims and incident data are
standardized across all of our hospitals and have been consistent for many
years. We monitor the outcomes of the medical care services that we
provide and for each reported claim, we obtain various information concerning
the facts and circumstances related to that claim. In addition, we
routinely monitor current key statistics and volume indicators in our assessment
of utilizing historical trends. The average lag period between claim
occurrence and payment of a final settlement is between 4 and 5 years, although
the facts and circumstances of individual claims could result in the timing of
such payments being different from this average. Since claims are
paid promptly after settlement with the claimant is reached, settled claims
represent less than 1.0% of the total liability at the end of any
period.
For purposes of estimating our
individual claim accruals, we utilize specific claim information, including the
nature of the claim, the expected claim amount, the year in which the claim
occurred and the laws of the jurisdiction in which the claim
occurred. Once the case accruals for known claims are determined,
information is stratified by loss layers and retentions, accident years,
reported years, geography, and claims relating to the acquired Triad hospitals
versus claims relating to our other hospitals. Several actuarial
methods are used against this data to produce estimates of ultimate paid losses
and reserves for incurred but not reported claims. Each of these
methods uses our company-specific historical claims data and other
information. This company-specific data includes information
regarding our business, including historical paid losses and loss adjustment
expenses, historical and current case loss reserves, actual and projected
hospital statistical data, a variety of hospital census information, employed
physician information, professional liability retentions for each policy year,
geographic information and other data.
Based on
these analyses we determine our estimate of the professional liability
claims. The determination of management’s estimate, including the
preparation of the reserve analysis that supports such estimate, involves
subjective judgment of the management. Changes in reserving data or
the trends and factors that influence reserving data may signal fundamental
shifts in our future claim development patterns or may simply reflect
single-period anomalies. Even if a change reflects a fundamental
shift, the full extent of the change may not become evident until years
later. Moreover, since our methods and models use different types of
data and we select our liability from the results of all of these methods, we
typically cannot quantify the precise impact of such factors on our estimates of
the liability. Due to our standardized and consistent processes for
handling claims and the long history and depth of our company-specific data, our
methodologies have produced reliably determinable estimates of ultimate paid
losses.
Although we have not historically
maintained and presented our claims data in this manner, we are providing the
following table to present the amounts of our accrual for professional liability
claims and approximate amounts of our activity for each of the respective years
listed (excludes premiums for excess insurance coverage) (in
thousands):
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Year
ended December 31,
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||||||||||||
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2008
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2007
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2006
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Accrual
for professional liability claims, January 1
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$ | 300,184 | $ | 104,161 | $ | 88,371 | ||||||
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Liability
acquired through acquisition:
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Gross
liability acquired
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- | 197,453 | - | |||||||||
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Discount
of liability acquired
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- | (26,309 | ) | - | ||||||||
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Discounted
liability acquired
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- | 171,144 | - | |||||||||
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Expense
(income) related to:
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Current
accident year
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110,010 | 73,039 | 50,775 | |||||||||
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Prior
accident years
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(15,826 | ) | 7,158 | 3,146 | ||||||||
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Expense
(income) from discounting
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11,449 | (1,040 | ) | (3,667 | ) | |||||||
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Total
incurred loss and loss expense
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105,683 | 79,157 | 50,254 | |||||||||
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Paid
claims and expenses related to:
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Current
accident year
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(688 | ) | (701 | ) | (574 | ) | ||||||
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Prior
accident years
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(54,600 | ) | (53,577 | ) | (33,890 | ) | ||||||
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Total
paid claims and expenses
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(55,288 | ) | (54,278 | ) | (34,464 | ) | ||||||
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Accrual
for professional liability claims, December 31
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$ | 350,579 | $ | 300,184 | $ | 104,161 | ||||||
The increase in current accident year
claims expense in each respective year from 2006 to 2008 reflects our partial
year ownership in 2007 of hospitals acquired from Triad and our full year of
ownership in 2008 of those former Triad hospitals. Income/expense
related to prior accident years reflects changes in estimates resulting from the
filing of claims for prior year incidents, claim settlements, updates from
litigation, and our ongoing investigation of open
claims. Expense/income from discounting reflects the changes in the
weighted-average risk-free interest rate used and timing of estimated payments
for discounting in each respective year.
We are primarily self insured for these
claims; however, we obtain excess insurance that transfers the risk of loss to a
third party insurer for claims in excess of our self-insured
retentions. Our excess insurance is underwritten on a claims-made
basis. For claims reported prior to June 1, 2002, substantially all
of our professional and general liability risks were subject to a $0.5 million
per occurrence self-insured retention and for claims
reported from June 1, 2002 through June 1, 2003, these self-insured retentions
were $2.0 million per occurrence. Substantially all claims reported
after June 1, 2003 and before June 1, 2005 are self-insured up to $4 million per
claim. Substantially all claims reported on or after June 1, 2005 are
self-insured up to $5 million per claim. Management on occasion has
selectively increased the insured risk at certain hospitals based upon insurance
pricing and other factors and may continue that practice in the
future. Excess insurance for all hospitals has been purchased through
commercial insurance companies and generally covers us for liabilities in excess
of the self-insured retentions and up to $100 million per occurrence for claims
reported on or after June 1, 2003 and up to $150 million per occurrence for
claims occurred and reported after January 1, 2008.
Effective January 1, 2008, the former
Triad Hospitals are insured on a claims-made basis as described above and
through commercial insurance companies as described above for substantially all
claims occurring on or after January 1, 2002 and reported on or after January 1,
2008. Substantially all losses for the former Triad hospitals in
periods prior to May 1999 were insured through a wholly-owned insurance
subsidiary of HCA, Inc., or HCA, Triad’s owner prior to that time, and excess
loss policies maintained by HCA. HCA has agreed to indemnify the former Triad
hospitals in respect of claims covered by such insurance policies arising prior
to May 1999. After May 1999 through December 31, 2006, the former
Triad hospitals obtained insurance coverage on a claims incurred basis from
HCA’s wholly-owned insurance subsidiary with excess coverage obtained from other
carriers that is subject to certain deductibles. Effective for claims incurred
after December 31, 2006, Triad began insuring its claims from $1 million to $5
million through its wholly-owned captive insurance company, replacing the
coverage provided by HCA. Substantially all claims occurring during 2007 were
self-insured up to $10 million per claim.
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e.
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Please
confirm that you will disclose the information provided in your response
to comments 1 and 4 in your December 17, 2008 letter in your next Form
10-K filing.
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The
Company confirms that its responses to comments 1 and 4 in its December 17, 2008
response letter have been addressed in the response above.
Should
you have any questions or comments with respect to this filing, please call me
at (212) 859-8136.
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Sincerely,
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/s/
Jeffrey Bagner
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Jeffrey
Bagner
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cc: Tabatha
Akins (Securities and Exchange Commission)
Joel Parker (Securities and Exchange
Commission)
Rachel A.
Seifert (Community Health Systems, Inc.)