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Direct
Line: 212.859.8136
Fax: 212.859.4000
bagneje@ffhsj.com
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May
18, 2007
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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 May 4, 2007, 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, 2006 (the “2006 Form 10-K”) that was
filed with the Securities and Exchange Commission (the “Commission”) on February
20, 2007.
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 2006 Form 10-K.
Management’s
Discussion and Analysis
Critical
Accounting Policies
Third
Party Reimbursement, page 45
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1.
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Please
provide us with the information that follows, in a disclosure type
format,
regarding the $65 million pre-tax charge that you recorded to your
allowance for doubtful accounts during the period ended September
30,
2006.
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s
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As
you identify the charge as a change in estimate, expand your discussion
of
the new information, as discussed in paragraph 2 d. of SFAS No.
154, which
led you to revise your methodology for calculating your allowance
for
doubtful accounts with respect to both your self-pay balances and
other
payors. It is unclear why you feel the increase in self-pay
volume that you experienced in the third quarter is a trend you
feel will
persist. Additionally, please specify how this trend impacts
your methodology with respect to other payor
classes.
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The
Company regularly reviews the adequacy of its allowance for doubtful accounts
by, among other things, monitoring its historical cash receipts as a percentage
of trailing twelve months net revenues less provision for bad debts, and
analyzing current period net revenues and admissions by payor. During
the third quarter of 2006, the Company’s same-store self-pay admissions were
8.1% of total same store admissions. This represented the highest
same-store self-pay admissions as a percentage of total same-store admissions
experienced by the Company since at least December 31, 2002. Also,
self-pay revenues as a percentage of total revenues were 12.1% for the three
months ended September 30, 2006 as compared to 11.7% for the three months
ended
September 30, 2005. In addition, during the third quarter of 2006,
the Company noted a significant decline in cash receipts as a percentage
of
trailing twelve month net revenues less provision for bad debts, from that
experienced during the calendar years 2002 through 2005. The Company
believes these occurrences were the result of current economic trends, including
an increase in the number of individuals without medical insurance, reduced
enrollment under Medicaid programs such as TennCare (which resulted in an
increase in uninsured patients) and the trend by private insurers and employers
of increasing insured patients’ portion of their healthcare expenditures,
primarily in the form of higher deductibles and co-payments. The
third quarter 2006 increase in self-pay volume and decrease in collection
percentages caused the Company to reconsider the manner in which it estimates
its allowance for doubtful accounts since a greater percentage of its total
accounts receivable balance was now exposed to increased collection
risk. No similar change in trends or risk was identified in
connection with third party insured accounts such as Medicare, Medicaid,
managed
care and other third party payors. Therefore, the Company conducted a
detail review and analysis of the adequacy of its allowance for doubtful
accounts. As a result, the Company increased its provision for bad
debts by $65 million in order to maintain an adequate allowance for doubtful
accounts as of September 30, 2006.
In
conjunction with recording this increase to the allowance and as a result
of the
aforementioned review and analysis of its allowance for doubtful accounts,
the
Company changed its methodology for estimating its allowance for doubtful
accounts effective September 30, 2006. Under this revised
methodology, the Company began reserving as an allowance for doubtful accounts
a
percentage of all self-pay accounts without regard to aging category, based
on
collection history, adjusted for expected recoveries and, if present,
anticipated changes in trends. For all other payor categories, the
Company began reserving 100% of all accounts aging over 365 days from the
date
of discharge.
In
response to the Staff’s question about the trend of increasing self-pay volume,
the Company notes that although uninsured and underinsured patients continue
to
be an industry-wide issue in certain markets, the Company does not necessarily
anticipate a significant amount of continuing increase in self-pay volume
or
deterioration in the collectibility of its self-pay business. In
particular, the participants disenrolled from the TennCare program, many
of whom
have become self-pay patients, have been disenrolled for one year; therefore
their impact will now be present in comparable
periods. However, whether trends in self-pay volume and
collections continue to deteriorate or improve, the Company believes its
revised
methodology provides a better approach to estimating its allowance for doubtful
accounts as it is more responsive to changes in payor mix and historical
collection patterns in the event such changes occur. The revised
methodology and the adequacy of resulting estimates will continue to be reviewed
by monitoring historical cash collections as a percentage of trailing twelve
month net revenues less provision for bad debts, as well as by analyzing
current
period net revenue and admission by payor classification, aged accounts
receivable by payor, days revenue outstanding, and the impact of recent
acquisitions and dispositions.
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s
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Please
clarify the difference between your previous methodology for other
payor
classes of reserving for “all accounts receivable greater than 150 days”
and your current methodology of reserving for accounts aging “over 365
days from the date of discharge”. Based on your current
disclosure it appears that you now only reserve for accounts aging
over
365 days from the date of discharge for other payor
classes. Tell us how you determined your new methodology is
appropriate in relation to the new information you analyzed in
the third
quarter of 2006.
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Prior
to
September 30, 2006, the Company did not provide reserves by payor category
but
estimated bad debts as a consolidated provision for total accounts
receivable. This estimate of its allowance for doubtful accounts was
calculated by reserving all accounts aging over 150 days from date of discharge,
without regard to payor class. The Company collects substantially all
third-party insured receivables, including those from managed care and
governmental agencies. Therefore, by reserving all amounts greater than 150
days
from discharge without regard to payor class, the Company had included in
the
reserve some accounts that were collectible. This had the effect of
compensating for those self-pay accounts less than 150 days from discharge
that
may not have been collectible. Based upon our reviews of
adequacy of the allowance for doubtful accounts, for periods prior to September
30, 2006 this methodology had provided us with a reasonable estimate of the
total allowance for doubtful accounts.
The
deteriorating trends in self-pay volume and cash receipt percentages noted
during the third quarter of 2006 were related to the self-pay account category
and not to the third party insured payor category. As a result of
these changing trends the Company changed its methodology to estimate its
allowance for doubtful accounts by reserving a percentage of all self-pay
accounts receivable without regard to aging category, based on collection
history, adjusted for expected recoveries and, if present, anticipated changes
in trends. For all other payor categories, the Company began
reserving 100% of all accounts aging over 365 days from the date of
discharge. For various reasons, such as administrative or
billing errors, an immaterial amount of third party insured receivables aged
beyond one year from the date of discharge are not collected. The
Company has determined any of these accounts remaining outstanding over 365
days
from discharge should therefore also be reserved as uncollectible. As
of December 31, 2006 the balance of all third party insured receivables over
365
days from discharge were only $1.0 million, representing an immaterial component
of our allowance for doubtful accounts. The Company believes this revised
methodology is a better approach to estimating its allowance for doubtful
accounts as it is more responsive to changes in trends and will better enable
the Company to determine whether there has been another change in its ability
to
collect its accounts receivable.
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s
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Please
disclose the percentage reserved for self-pay in each
period.
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The
total
allowance for doubtful accounts, as reported in the consolidated financial
statements, as a percentage of self-pay receivables was approximately 64%
at
December 31, 2006 and 54% at December 31, 2005. Of the total reserve balance
of
$465.6 million at December 31, 2006, only $1.0 million related to third party
insured receivables, which represents an immaterial component of our allowance
for doubtful accounts.
Attached
as Exhibit B is a form of enhanced disclosures the Company proposes to provide
in its second quarter Form 10-Q, marked for changes from the disclosures
currently provided in its 2006 Form 10-K.
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 2006 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 2006
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 or Shawn Creedon at (212) 859-8742.
| Sincerely, | |||
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/s/
Jeffrey Bagner
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| Jeffrey Bagner | |||
cc:
Amy
C. Bruckner (Securities
and Exchange Commission)
Rachel
A. Seifert
(Community Health Systems, Inc.)
Exhibit
A
May
18,
2007
[Community
Health Systems, Inc. Letterhead]
In
response to the comment letter, dated May 4, 2007, 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
2006 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 2006
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
Wayne
T.
Smith
Chairman
of the Board, President
and
Chief
Executive Officer
/s/
W.
Larry Cash
W.
Larry
Cash
Executive
Vice President,
Chief
Financial Officer and Director
/s/
T.
Mark Buford
T.
Mark
Buford
Vice
President and Corporate
Controller
Exhibit
B
Management’s
Discussion and Analysis
Critical
Accounting Policies
Allowance
for Doubtful Accounts, page 45
Allowance
for Doubtful Accounts
During
the third quarter of 2006, our same-store self-pay admissions were 8.1% of
total
same store admissions. This represented the highest same-store
self-pay admissions as a percentage of total same-store admissions experienced
by the Company since at least December 31, 2002. Also during this
same period we experienced lower cash collections as a percentage of trailing
twelve month net revenues less provision for bad debts. The Company
believes these occurrences were the result of current economic trends, including
an increase in the number of individuals without medical insurance, reduced
enrollment under Medicaid programs such as TennCare (which resulted in an
increase in uninsured patients) and the trend by private insurers and employers
of increasing insured patients’ portion of their healthcare expenditures,
primarily in the form of higher deductibles and co-payments. The
third quarter 2006 increase in self-pay volume and decrease in collection
percentages caused the Company to reconsider the manner in which it estimates
its allowance for doubtful accounts since a greater percentage of its total
accounts receivable balance was now exposed to increased collection
risk. No similar change in trends or risk was identified in
connection with third party insured accounts such as Medicare, Medicaid,
managed
care and other third party payors. We believed these trends reflected
an increased collection risk from self-pay accounts, and as a result, we
performed a review and analysis of the adequacy of our allowance for doubtful
accounts. Therefore, the Company conducted a detail review and
analysis of the adequacy of its allowance for doubtful
accounts. Based on this analysis, we recorded a change in estimate to
increase our allowance for doubtful accounts by $65 million on our September
30,
2006 balance sheet and a corresponding $65 million pre-tax increase to
our provision for bad debts, resulting in a $40 million after-tax reduction
in
income from continuing operations.
Self-pay
revenues represented
approximately ·%
and ·%
of our net operating revenue for the three months ended June 30, 2007 and
2006,
respectively, and ·%
and ·%
for the six months ended June 30, 2007 and 2006,
respectively. Although uninsured and underinsured patients continue
to be an industry-wide issue in certain markets, we do not anticipate a
significant amount of continuing deterioration in our self-pay business
primarily because the participants disenrolled in the TennCare program have
now
been disenrolled for more than one year.
Substantially
all of our accounts
receivable are related to providing healthcare services to our hospitals’
patients. Collection of these accounts receivable is our primary
source of cash and is critical to our operating performance. Our
primary collection risks relate to uninsured patients and outstanding patient
balances for which the primary insurance payor has paid some but not all
of the
outstanding balance, with the remaining outstanding balance (generally
deductibles and co-payments) owed by the patient. At the point of
service, for patients required to make a co-payment, we generally collect
less
than 10% of the related revenue. For all procedures scheduled in
advance, our policy is to verify insurance coverage prior to the date of
the
procedure. Insurance coverage is not verified in advance of
procedures for walk-in and emergency room patients.
Effective
September 30, 2006, we began
estimating the allowance for doubtful accounts by reserving a percentage
of all
self-pay accounts receivable without regard to aging category, based on
collection history, adjusted for expected recoveries and, if present,
anticipated changes in trends. Since we have historically collected
substantially all third party insured accounts receivable, which includes
receivables from governmental agencies, within one year of the date of
discharge, For all other payor categories the
Company we began reserving 100% of only those third
party insured all accounts aging over 365 days from
the date of discharge. The percentage used to reserve for all
self-pay accounts is based now on our specific collection history
for self-pay accounts. We believe that we collect
substantially all of our third-party insured receivables which include
receivables from governmental agencies. Previously, we
estimated the allowance for doubtful accounts by reserving all accounts aging
over 150 days from the date of discharge, without regard to payor
class. We believe the revised methodology provides a better approach
to reflect changes in payor mix and historical collection patterns and to
respond to changes in trends and will be more responsive to changes in those
factors that impact the collectibility of our accounts
receivable. Collections are impacted by the economic ability of
patients to pay and the effectiveness of our collection
efforts. Significant changes in payor mix, business office
operations, economic conditions or trends in federal and state governmental
healthcare coverage could affect our collection of accounts
receivable. We also review our overall reserve adequacy by monitoring
historical cash collections as a percentage of trailing net revenue less
provision for bad debts, as well as by analyzing current period net revenue
and
admissions by payor classification, aged accounts receivable by payor, days
revenue outstanding, and the impact of recent acquisitions and
dispositions.
Our
policy is to write-off gross
accounts receivable if the balance is under $10.00 or when such amounts are
placed with outside collection agencies. We believe this policy
accurately reflects the ongoing collection efforts within the Company and
is
consistent with industry practices. We had approximately $·
million and $834 million at June 30, 2007 and December 31, 2006, respectively,
being pursued by various outside collection agencies. We expect to
collect less than 4%, net of estimated collection fees, of the amounts being
pursued by outside collection agencies. As these amounts have been
written-off, they are not included in our gross accounts receivable or our
allowance for doubtful accounts. However, we take into consideration
estimated collections of these amounts written-off in evaluating the
reasonableness of our allowance for doubtful accounts.
Days
revenue outstanding was ·
days at June 30, 2007 and 62 days at December 31, 2006. The change in
our methodology of estimating our allowance for doubtful accounts reduced
our
days revenue outstanding by approximately 5 days. This decrease was
[explanation of difference, if any]. After giving effect to the
change in our methodology of estimating our allowance for doubtful accounts,
our
target range for days revenue outstanding is 57 – 62 days.
Total
gross accounts receivables
(prior to allowance for contractual adjustments and doubtful accounts) were
$·
as of June 30, 2007, and $2,273,194 as of December 31,
2006. The approximate percentage of total gross accounts
receivable (prior to allowance for contractual adjustments and doubtful
accounts) summarized by aging categories is as follows:
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As
of
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As
of
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June
30,
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December
31,
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2007
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2006
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0
–
60 days
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63.3%
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60
– 150 days
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17.1%
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150
– 360 days
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6.5%
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Over
360 days
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12.7%
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Total
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100.0%
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The
approximate percentage of total
gross accounts receivable (prior to allowances for contractual adjustments
and
doubtful accounts) summarized by payor is as follows:
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As
of
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As
of
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June
30,
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December
31,
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2007
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2006
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Insured
receivables
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Self-pay
receivables
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Total
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The
total allowance for doubtful
accounts, as reported in the condensed consolidated financial statements,
as a
percentage of self-pay receivables, net of other contractual allowance
discounts, was approximately ·%
at June 30, 2007 and 64%at December 31, 2006. The portion of the total
allowance for doubtful accounts related to third party insured receivables
is
immaterial.