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[FRIED, FRANK , HARRIS, SHRIVER & JACOBSON LLP LETTERHEAD]
May 31, 2006
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
RE: COMMUNITY HEALTH SYSTEMS, INC.
Dear Mr. Rosenberg:
This letter sets forth the response of Community Health Systems, Inc. (the
"Company") to the comment letter, dated May 18, 2006, 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, 2005 (the "2005
Form 10-K") that was filed with the Securities and Exchange Commission (the
"Commission") on February 18, 2006.
The responses set forth below are numbered to correspond to the numbering
in the Staff's comment letter. Pages references in the responses below are
to the 2005 Form 10-K.
Management's Discussion and Analysis
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Critical Accounting Policies
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Third Party Reimbursement, page 45
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1. Please quantify and provide, in disclosure type format, for each
period presented, disclosure related to the amount of changes in
estimates of prior period contractual adjustments that you
recorded during the current period. For example for 2005, this
amount would represent the amount of the difference between
estimates of contractual adjustments for services provided in
2004 and the amount of the new estimate or settlement amount that
was recorded during 2005.
To elaborate on the information presented in "Management's
Discussion and Analysis - Critical Accounting Policies- Third
Party Reimbursement" in the 2005 Form 10-K, the Company accounts
for adjustments to cost report final settlements as contractual
allowance adjustments and records them as such cost report final
settlements are determined. The actual cost report settlement
amounts recorded in each of the three years presented, which
represent changes in prior period estimates resulting from these
cost report final settlements, increased net operating revenue of
the Company by $93,000 and $2,075,000 for the years ended
December 31, 2005 and 2004, respectively, and decreased net
operating revenues of the Company by $2,309,000 for the year
ended December 31, 2003. The Company considers these adjustments
made for cost report final settlements related to prior periods
to be insignificant for all years presented in the 2005 Form 10-K
and so indicated this fact in the footnotes to the Company's
financial statements that are included under Item 8 to the 2005
Form 10-K (see Footnote 1 - Third-Party Reimbursement paragraph).
The Company's measurement of accuracy with regard to the
estimated contractual allowances calculated by the Company's
automated contractual allowance system resides in the monitoring
of the prior period cost report contractual allowance adjustments
as described above. Since these prior period amounts are
insignificant, the Company believes its automated contractual
allowance system provides a high degree of accuracy for estimated
contractual allowances. Furthermore, the Company has advised us
that nothing has come to the attention of its management that
would indicate a significant out of period adjustment to
contractual allowances has occurred.
In future filings with the Commission, the Company has advised us
that it will conform the disclosure in its management's
discussion and analysis to the disclosure of its third-party
reimbursement as contained in the aforementioned footnote to the
Company's financial statements by including a statement
concerning its conclusion on the significance of these
adjustments.
Allowance for Doubtful Accounts, page 46
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2. Please clarify, in disclosure type format, if true, that your
calculation for the reserve for doubtful accounts is determined
by reserving the net accounts receivable (rather than gross
accounts receivable) for all governmental and non-governmental
balances over 150 days from discharge. If this is not the case,
please clarify, in disclosure type format, why your methodology
is appropriate.
The Company's process for recording net operating revenues is to
record each transaction at its standard billing rate (gross
charge) and then reduce the standard billing rate by the amount
of any applicable contractual allowance. This contractual
allowance represents the difference between the standard billing
rates and the estimated reimbursement rates and is generally
automatically calculated and recorded through the Company's
automated contractual allowance system. Since only the amount of
gross charges are included on bills sent to the parties
responsible for payment, the Company's accounts receivable
information system only ages patients' accounts at the gross
amount of the remaining account balance. At such point in time
that any portion of a gross charge remains unpaid after 150 days
from the date of discharge, the Company generally determines the
net remaining unpaid patients' accounts receivable by calculating
the respective amount of the contractual allowance associated
with those accounts. The Company's allowance for doubtful
accounts is then established in an amount equivalent to these net
remaining unpaid accounts receivable balances. Therefore, the
amount established as an allowance for doubtful accounts would
correspond with the related amount reflected in net operating
revenues that, at this point in time, had not yet been collected.
The Company has advised us that it will clarify in future filings
that its allowance for doubtful accounts is calculated net of
previously recognized contractual allowances by modifying the
description of its methodology which is described in the MD&A
section of the 2005 Form 10-K under "Critical Accounting Policies
- Allowance for Doubtful Accounts," and in the footnotes to the
Company's financial statements. The revised description will read
to the following effect:
"Our estimate for the allowance for doubtful accounts is
generally calculated by reserving, as uncollectible, the net
unpaid balance of all accounts over 150 days from discharge
date without regard to payor class."
3. Please provide us, in disclosure type format, an aging of your
accounts receivable that agrees to the accounts receivable
balance on your balance sheet (i.e., net accounts receivable) for
the periods presented. In the same regard, please provide us, in
disclosure type format, the percentage of accounts receivable
summarized by aging categories using net accounts receivable
rather than total gross accounts receivable (prior to allowances
for contractual adjustments and doubtful accounts).
As indicated in our response to Comment #2 above, the Company's
accounts receivable system, which maintains the account level
detail, only ages patient accounts receivable at the gross amount
of the remaining patients' account balance and does not age the
amounts of the respective contractual allowances. This is the
reason the Company has provided the information in its current
format in the 2005 Form 10-K. Based upon the Company's aging
method, the Company does not believe the preparation of the net
accounts receivable, which would require substantial time and
effort on the part of the Company, will provide meaningful
disclosure at this time to investors in the Company.
As additional background, the Company's maintenance and
disclosure of accounts receivable aging information on a gross
versus net basis was discussed extensively with the Staff during
its review of the Company's Annual Report on Form 10-K for the
year ended December 31, 2003, which was concluded in April 2004.
As a result of those discussions, the Company provided all
disclosures suggested by the Staff at that time. Such disclosures
have continued to be included in the management's discussion and
analysis section in the Company's subsequent periodic filings
under the Securities Exchange Act of 1934, as amended.
4. Clarify, in disclosure type format, what the allowance for other
discounts represents.
Generally, all self-pay revenue is billed and attempted to be
collected at the standard billing rates for the services
provided. However, in certain instances the Company may become
aware of specific facts and circumstances that may lead it to
believe that the related revenue is not fully realizable. In
these instances the Company would reduce the amount of revenue
recognized by providing an allowance for other discounts as a
reduction to the standard billing rates in arriving at net
operating revenues. Specifically, this allowance for other
discounts relates to services provided to undocumented aliens in
certain of our markets, services provided in response to natural
disasters such as Hurricane KATRINA and an estimate of other
services provided in specific markets that the Company
anticipates will ultimately qualify for charity care. The total
of these allowances that reduced accounts receivable, as referred
to on page 46 of the 2005 Form 10-K, was $11.2 million and $5.1
million at December 31, 2005 and 2004, respectively, and
represented only 1.7% of the Company's gross self pay receivables
at December 31, 2005 and 0.9% of the Company's gross self pay
receivables at December 31, 2004. The Company believes such
amounts are immaterial and therefore do not presently warrant any
expanded disclosures.
Report of Independent Registered Public Accounting Firm, page 51
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5. Since the report filed does not contain a typed signature of
Deloitte & Touche LLP please confirm that they provide a manually
signed report that is the same as the one included in your filing
and that you have retained it for your records.
The Company has advised us that the conformed signature was
inadvertently omitted from the 2005 Form 10-K that was filed with
the Commission on February 18, 2006, and that Deloitte & Touche
LLP did provide to the Company a manually signed report that is
the same as the one included in the 2005 Form 10-K. In addition,
the Company has advised us that it has retained the manually
signed report for its records and that the facsimile signature of
Deloitte & Touche LLP was included in the printed copies of the
Form 10-K provided to the Company's shareholders as an insert to
its annual report.
Item 9A Controls and Procedures
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6. Please confirm, if true, your disclosure controls and procedures
are effective as "adequately designed" is not appropriate. Refer
to Release No. 33-8238: Management's Reports on Internal control
over Financial Reporting and Certification of Disclosure in
Exchange Act Periodic Reports: Conclusions Regarding
Effectiveness of Disclosure Controls and Procedures.
The Company has advised us that its disclosure controls and
procedures were "effective." The disclosure under the first
paragraph of Item 9A of the 2005 Form 10-K was intended to have
read as follow:
"Our Chief Executive Officer and Chief Financial Officer,
with the participation of other members of management, have
evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a - 15(e) and 15d - 15(e)
under the Securities Exchange Act of 1934, as amended, as of
December 31, 2005. Based on such evaluations, our Chief
Executive Officer and Chief Financial Officer concluded
that, as of such date, our disclosure controls and
procedures were effective (at the reasonable assurance
level) to ensure that the information required to be
included in this report has been recorded, processed,
summarized and reported within the time period specified in
the Commission's rules and forms and to ensure that the
information required to be included in the report was
accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosure. There
have been no changes in our internal control over financial
reporting during our fourth quarter ended December 31, 2005,
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting."
The Company has advised us that future filings with the
Commission will reflect this change.
The Company has advised us that it acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the 2005 Form 10-K;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action
with respect to the 2005 Form 10-K; and
o 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.
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 or Shawn Creedon at (212) 859-8742.
Sincerely,
/s/ Jeffrey Bagner
-------------------------
Jeffrey Bagner
cc: Sasha Parikh (Securities and Exchange Commission)
Mary Mast (Securities and Exchange Commission)
Rachel A. Seifert (Community Health Systems, Inc.)
Exhibit A
[Community Health Systems, Inc. Letterhead]
May 31, 2006
In response to comment number 6 of the comment letter, dated May 18, 2006,
of the staff of the Division of Corporation Finance, the Company hereby
acknowledges that:
o the Company is responsible for adequacy and accuracy of the
disclosure in the 2005 Form 10-K;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action
with respect to the 2005 Form 10-K; and
o 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.
/s/ Wayne T. Smith
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Wayne T. Smith
Chairman of the Board, President
and Chief Executive Officer
/s/ W. Larry Cash
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W. Larry Cash
Executive Vice President,
Chief Financial Officer and Director
/s/ T. Mark Buford
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T. Mark Buford
Vice President and Corporate
Controller