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Direct
Line: 212.859.8136
Fax: 212.859.4000
jeffrey.bagner@ffhsj.com
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October
2, 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
verbal comments (the “Comments”) that the
Company received on September 19, 2008 from, and the subsequent phone conference
the Company had on October 1, 2008 with, 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 on
February 29, 2008.
The
responses set forth below are numbered to correspond to the numbering in the
Staff’s Comments.
Comment #1: Please
refer to your response to our prior comment No. 1. The proposed
discussion states that the sensitivity analysis “represents only one example of
reasonably possible sensitivity scenarios.” Please revise your
sensitivity analysis to include a discussion of all outcomes that are reasonable
likely to occur and would have a material effect on the financial condition or
the operating performance of the Company. Refer to Financial Report
Release 501.14.
The
examples set forth in our prior responses represent the only scenarios that the
Company believes to be both reasonably likely to occur and that would have a
material effect on financial condition or operating
performance. Therefore, the proposed language has been revised to
remove the statement that the sensitivity analysis “represents only one example
of reasonably possible sensitivity scenarios” as indicated below for both the
contractual allowances and allowance for doubtful accounts (which statement
appeared at the end of each of our previous responses to prior comments No. 2
and No. 4).
The
following represents the Company’s revised proposed disclosures to be included
in its next Form 10-K for the period ending on September 30, 2008:
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.
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
available, 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.
Comment #2. Please
refer to your response to our prior comment No. 3. Please provide
proposed revision to your current disclosure to include the information
discussed in your response. Please include the specific drivers of
the reserve amounts such as historical loss patterns and actuarial projections
along with the impact that reasonably likely changes in your assumption would
have on your financial position and operations. Lastly, please
quantify for us the dollar amounts of the difference between the loss ultimates
and actual payment and the difference between the actual annual claim payments
and the estimated payments for each of the periods presented in your financial
statements.
In
response to your comments, the Company will revise its disclosure in its next
Form 10-Q for the period ending September 30, 2008 as follows. The
italicized print indicates the changes from the Company’s disclosure in the 2007
Form 10-K that will be incorporated in response to your comment:
We accrue
for estimated losses resulting from professional liability
claims. The accrual
is primarily based on specific case based reserves as well as an estimate
for incurred but not reported claims, which are based on case specific
facts, historical loss patterns and actuarially determined
projections. Utilizing the Company’s historical loss patterns and a
risk free interest rate of 4.1% in 2007 and 4.6% in 2006, the accrual is
discounted to its net present value. To the extent that subsequent
claims information becomes known and varies from management’s estimates, the
accrual is adjusted currently. The Company does not believe that
changes to its historical loss patterns or to its discounting assumptions would
be both reasonably likely to occur and material to its financial condition or
operating performance.
Supplementally,
in response to the Staff’s comments, the Company is providing the following
information:
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Change
in Ultimate Losses - Period over Period
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||||||||
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Selected
Ultimate Losses and
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||||||||
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Allocated
Loss
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||||||||
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Adjustment
Expenses
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Dollar
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%
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||||||
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Periods
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Year
1
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Year
2 (a)
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Change
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Change
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2003
versus 2004
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$ 93,111,614
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$ 98,261,826
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$ 5,150,212
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5.5%
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||||
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2004
versus 2005
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123,261,826
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120,713,220
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(2,548,606
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) |
-2.1%
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|||
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2005
versus 2006
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145,213,220
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152,843,847
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7,630,627
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5.3%
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2006
versus 2007 (b)
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181,343,847
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181,071,826
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(272,021
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) |
-0.2%
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(a)
excludes ultimate losses for the current year period as such ultimates
would not be in the prior year amount for comparative
purposes.
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(b)
excludes hospitals acquired during 2007.
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The
difference in actual versus estimated claim payments for each of the last three
years is as follows:
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Projected
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Actual
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%
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|||||
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Payments
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Payments
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Difference
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Difference
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2007
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$ 26,145,793
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$ 26,357,722
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$ 211,929
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0.8%
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2006
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21,130,853
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22,791,191
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1,660,338
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7.9%
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2005
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14,977,616
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14,468,682
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(508,934)
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-3.4%
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Should
you have any questions or comments with respect to this filing, please call me
at (212) 859-8136.
Sincerely,
Jeffrey
Bagner
cc: Tabatha
Akins (Securities and Exchange Commission)
Joel Parker (Securities and Exchange
Commission)
Rachel A.
Seifert (Community Health Systems, Inc.)