- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K Mark One: [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EX- CHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition Period from to . COMMISSION FILE NUMBER 1-11239 ---------------- COLUMBIA/HCA HEALTHCARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 75-2497104 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) ONE PARK PLAZA NASHVILLE, TENNESSEE 37203 (Address of Principal Executive (Zip Code) Offices) Registrant's Telephone Number, Including Area Code: (615) 327-9551 Securities Registered Pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, $.01 Par Value New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports re- quired to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Reg- istrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information state- ments incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 15, 1996, there were outstanding 433,354,931 shares of the Reg- istrant's Common Stock and 14,000,000 shares of the Registrant's Nonvoting Common Stock. As of March 15, 1996 the aggregate market value of the Common Stock held by non-affiliates was approximately $22,866,000,000. For purposes of the foregoing calculation only, the Registrant's directors, executive offi- cers, and The Columbia/HCA Healthcare Corporation Stock Bonus Plan have been deemed to be affiliates. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1995 Annual Report to Stockholders for the year ended December 31, 1995 are incorporated by reference into Parts I, II and IV. Portions of the Registrant's definitive Proxy Statement for its 1996 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. The Exhibit Index is on page 29. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
INDEX <TABLE> <CAPTION> PAGE REFERENCE --------- <C> <S> <C> <C> <C> PART I Item 1. Business.......................................... 1 Item 2. Properties........................................ 19 Item 3. Legal Proceedings................................. 20 Submission of Matters to a Vote of Security Item 4. Holders........................................... 22 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 22 Item 6. Selected Financial Data........................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 22 Item 8. Financial Statements and Supplementary Data....... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 22 PART III Directors and Executive Officers of the Item 10. Registrant........................................ 22 Item 11. Executive Compensation............................ 22 Security Ownership of Certain Beneficial Owners Item 12. and Management.................................... 23 Item 13. Certain Relationships and Related Transactions.... 23 PART IV Exhibits, Financial Statement Schedules and Item 14. Reports on Form 8-K............................... 23 </TABLE>
PART I ITEM 1. BUSINESS. GENERAL Columbia/HCA Healthcare Corporation is one of the largest health care serv- ices companies in the United States. At December 31, 1995, the Company oper- ated 313 general, acute care hospitals and 25 psychiatric hospitals in 32 states and two foreign countries. The Company is a partner in several 50/50 joint ventures that own and operate 19 hospitals and 3 outpatient surgery cen- ters, which are accounted for using the equity method. Such facilities are in- cluded in the hospitals operated totals, but are not consolidated for finan- cial statement purposes and for purposes of reporting certain operating sta- tistics. In addition, as part of its comprehensive health care networks, the Company operates facilities that provide a broad range of outpatient and an- cillary services. At December 31, 1995, the Company operated more than 130 outpatient surgery centers and 200 home health agencies. The term the "Compa- ny" as used herein refers to Columbia/HCA Healthcare Corporation and its di- rect and indirect subsidiaries and affiliated partnerships, unless otherwise stated or indicated by context. The Company's primary objective is to provide to the markets it serves a comprehensive array of quality health care services in the most cost effective manner possible. The Company's general, acute care hospitals usually provide a full range of services commonly available in hospitals to accommodate such medical specialties as internal medicine, general surgery, cardiology, oncolo- gy, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emer- gency services. Outpatient and ancillary health care services are provided by the Company's general, acute care hospitals as well as at freestanding facili- ties operated by the Company including outpatient surgery and diagnostic cen- ters, rehabilitation facilities, home health care agencies and other facili- ties. In addition, the Company operates psychiatric hospitals which generally provide a full range of mental health care services in inpatient, partial hos- pitalization and outpatient settings. On April 24, 1995, the Company acquired Healthtrust, Inc.--The Hospital Com- pany ("Healthtrust") pursuant to a merger transaction accounted for as a pool- ing of interests (the "Healthtrust Merger"). Healthtrust began operations through the acquisition of a group of hospitals and related assets (the "Healthtrust Formation") from Hospital Corporation of America (the predecessor to HCA) in September 1987. On May 5, 1994, Healthtrust acquired EPIC Holdings, Inc. ("EPIC") in a transaction accounted for as a purchase (the "EPIC Merg- er"). On September 16, 1994, the Company acquired Medical Care America, Inc. ("MCA") in a transaction accounted for as a purchase (the "MCA Merger"). On February 10, 1994, the Company acquired HCA-Hospital Corporation of America ("HCA") pursuant to a merger transaction accounted for as a pooling of inter- ests (the "HCA Merger"). Effective September 1, 1993, the Company acquired Ga- len Health Care, Inc. ("Galen") pursuant to a merger transaction accounted for as a pooling of interests (the "Galen Merger"). Galen began operations as an independent publicly held corporation upon the distribution of all of its com- mon stock (the "Spinoff") by its then 100% owner, Humana Inc. ("Humana"), on March 1, 1993. The Company, through various predecessor entities, began operations on July 1, 1988. The Company was incorporated in Nevada in January 1990 and reincorpo- rated in Delaware in September 1993. The Company's principal executive offices are located at One Park Plaza, Nashville, Tennessee 37203, and its telephone number at such address is (615) 327-9551. BUSINESS STRATEGY The Company's strategy is to become a significant, comprehensive provider of quality health care services in targeted markets. The Company pursues its strategy by acquiring the health care facilities necessary to develop a com- prehensive health care network with wide geographic presence throughout the market. Typically, the Company enters a market by acquiring one or more 1
mid- to large-size general, acute care hospitals (over 150 licensed beds), which have either desirable physical plants or ones which can be upgraded on an economically feasible basis. The Company then upgrades equipment and facil- ities and adds new services to increase the attractiveness of the hospital to local physicians and patient populations. The Company typically develops a network by acquiring additional health care facilities including additional general, acute care hospitals, psychiatric hospitals and outpatient facilities such as surgery centers, diagnostic centers, physical therapy centers and other treatment or wellness facilities including home health care agencies. By developing a comprehensive health care network in a local market, the Company achieves greater visibility and is better able to attract physicians and pa- tients by offering a full range of services in the entire market area. The Company is also able to reduce operating costs by sharing certain services among several facilities in the same market and is better positioned to work with health maintenance organizations ("HMOs"), preferred provider organiza- tions ("PPOs") and employers. Upon acquisition of a facility, the Company hires experienced executives to manage its operations and decentralizes operational decision making to the lo- cal level, while providing local physicians and managers the opportunity to purchase equity interests in the operations through a partnership or corporate structure. Management believes the Company's strategy of co-ownership of its facilities with physicians and management produces significant operational ad- vantages. Physicians who have an ownership interest in a facility take a more active role in recruiting other physicians and in improving efficiency by con- taining costs and making more rational capital expenditure decisions, and of- ten are more active supporters of operations and medical staff quality assur- ance activities, as they have a direct personal interest in the success and reputation of the facility. Moreover, because the Company's facilities are co- owned with and operated by prominent members of the local medical community, both community support for the facilities and the Company's ability to recruit physicians to the facilities are enhanced. In addition, by providing local managers of its facilities the opportunity to purchase equity interests in such facilities, the Company creates incentives on the part of its local man- agers to operate their facilities successfully with a long-term perspective. HEALTH CARE FACILITIES The Company currently owns, manages or operates hospitals, ambulatory sur- gery centers, diagnostic centers, cardiac rehabilitation centers, physical therapy centers, radiation oncology centers, comprehensive outpatient rehabil- itation centers and home health care agencies and programs. The Company currently operates 313 general, acute care hospitals with 62,936 licensed beds. Most of the Company's general, acute care hospitals provide medical and surgical services, including inpatient care, intensive and cardiac care, diagnostic services and emergency services. The general, acute care hos- pitals also provide outpatient services such as outpatient surgery, laborato- ry, radiology, respiratory therapy, cardiology and physical therapy. A local advisory board, which usually includes members of the hospital's medical staff, generally makes recommendations concerning the medical, professional and ethical practices at each hospital and monitors such practices. However, the hospital is ultimately responsible for ensuring that these practices con- form to established standards. When the Company acquires a hospital, it estab- lishes quality assurance programs to support and monitor quality of care stan- dards and to meet accreditation and regulatory requirements. Patient care evaluations and other quality of care assessment activities are monitored on a continuing basis. Like most hospitals, the Company's hospitals do not engage in extensive med- ical research and medical education programs. However, some of the Company's hospitals have an affiliation with medical schools, including the clinical ro- tation of medical students. 2
The Company currently operates 25 psychiatric hospitals with 2,866 licensed beds. The Company's psychiatric hospitals provide therapeutic programs tai- lored to child psychiatric, adolescent psychiatric, adult psychiatric, adoles- cent alcohol or drug abuse and adult alcohol or drug abuse patients. The hos- pitals use the treatment team concept whereby the admitting physician, team psychologist, social workers, nurses, therapists and counselors coordinate each phase of therapy. Services provided by this team include crisis interven- tion, individual psychotherapy, group and family therapy, social services, chemical dependency counseling, behavioral modification and physical medicine. Family aftercare plans are actively promoted from the time of admission, through hospitalization and after discharge. An aftercare plan measures each patient's post-program progress and utilizes one or more self-help groups. Program procedures are designed to ensure that quality standards are achieved and maintained. Certain of the Company's general, acute care hospitals also have a limited number of licensed psychiatric beds. Other outpatient or related health care services operated by the Company in- clude ambulatory surgery centers, diagnostic centers, outpatient physical therapy/rehabilitation centers, outpatient radiation therapy centers, cardiac rehabilitation centers, skilled nursing services and home health/infusion services. These outpatient and related services are an integral component of the Company's strategy to develop a comprehensive health care network in each of its target markets. The Company currently operates more than 130 outpatient surgery centers and 200 home health agencies (nearly all of which are hospi- tal-based). In addition to providing capital resources, the Company makes available a variety of management services to its health care facilities, most signifi- cantly: national supply and equipment purchasing and leasing contracts; finan- cial policies; accounting, financial and clinical systems; governmental reim- bursement assistance; construction planning and coordination; information sys- tems; legal; personnel management; and internal audit. SOURCES OF REVENUE Hospital revenues depend upon inpatient occupancy levels, the extent to which ancillary services and therapy programs are ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary significantly depending on the type of service (e.g., medical/surgical, intensive care or psychiatric) and the geo- graphic location of the hospital. The Company has experienced an increase in the percentage of patient revenues attributable to outpatient services. This increase is primarily the result of advances in technology (which allow more services to be provided on an outpatient basis), acquisitions of additional outpatient facilities and increased pressures from Medicare, Medicaid, HMOs, PPOs, employers and insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. The Company receives payment for patient services from the federal govern- ment primarily under the Medicare program, state governments under their re- spective Medicaid programs, HMOs, PPOs and other private insurers and directly from patients. The approximate percentages of patient revenues of the Company's facilities from such sources during the periods specified below were as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 -------- -------- -------- <S> <C> <C> <C> Medicare...................................... 36% 35% 34% Medicaid...................................... 6 6 6 Other sources................................. 58 59 60 -------- -------- -------- Total......................................... 100% 100% 100% ======== ======== ======== </TABLE> 3
Medicare is a federal program that provides certain hospital and medical in- surance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a federal-state program administered by the states which provides hospital benefits to qualifying individuals who are unable to afford care. Substantially all of the Company's hospitals are certified as providers of Medicare and Medicaid services. Amounts received un- der the Medicare and Medicaid programs are generally significantly less than the hospital's customary charges for the services provided. To attract additional volume, most of the Company's hospitals offer dis- counts from established charges to certain large group purchasers of health care services, including Blue Cross, other private insurance companies, em- ployers, HMOs, PPOs and other managed care plans. Blue Cross is a private health care program that funds hospital benefits through independent plans that vary in each state. These discount programs limit the Company's ability to increase charges in response to increasing costs. See "Competition." Pa- tients are generally not responsible for any difference between customary hos- pital charges and amounts reimbursed for such services under Medicare, Medic- aid, some Blue Cross plans, HMOs or PPOs, but are responsible to the extent of any exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been in- creasing each year. Collection of amounts due from individuals is typically more difficult than from governmental or business payors. Medicare Under the Medicare program the Company receives reimbursement under a pro- spective payment system ("PPS") for the routine and ancillary operating costs of most Medicare inpatient hospital services. Psychiatric, long-term care, re- habilitation, pediatric and certain designated cancer research hospitals, as well as psychiatric or rehabilitation units that are distinct parts of a hos- pital, are currently exempt from PPS and are reimbursed on a cost based sys- tem, subject to certain cost caps. It is uncertain what impact, if any, the federal efforts to reform the health care system or balance the federal budget will have on the current method of Medicare reimbursement. Under PPS, fixed payment amounts per inpatient discharge were established based on the patient's assigned diagnosis related group ("DRG"). DRG's clas- sify patients' treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. DRG rates have been established for each individual hospital participating in the Medicare program and are based upon a statistically normal distribution of severity. Patients falling well outside the normal distribution are afforded additional payments and defined as "outliers." Under PPS, hospitals may retain payments in excess of costs but must absorb costs in excess of such payments; therefore, hospitals are encouraged to operate more efficiently. DRG rates are updated and recalibrated periodically and have been affected by several recent federal enactments. The index used by the Health Care Fi- nancing Administration ("HCFA") to adjust the DRG rates gives consideration to the inflation experienced by hospitals in purchasing goods and services ("mar- ket basket"). However, for several years the percentage increases to the DRG rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. The market basket is adjusted each federal fiscal year ("FY") which begins on October 1. The market basket for FY 1993 was 4.1%, FY 1994 was 4.3%, FY 1995 was 3.6% and for FY 1996 is 3.5%. The Omnibus Budget Reconciliation Act of 1993 ("OBRA-93") extended the re- duction enacted by the Omnibus Budget Reconciliation Act of 1990 ("OBRA-90") in the Medicare DRG payments to healthcare providers through 1997. A substan- tial number of the Company's hospitals are classified as urban hospitals for reimbursement purposes. The net updates of DRG rates for large urban and other urban hospitals are established as follows: FY 1994 and FY 1995 market basket 4
minus 2.5%; FY 1996 market basket minus 2%; and FY 1997 market basket minus 0.5%. Management cannot predict how future adjustments by Congress and HCFA will affect the profitability of the Company's health care facilities. The provisions of OBRA-90 required the Secretary (the "Secretary") of the Department of Health and Human Services ("HHS") to develop a proposal for a PPS for all hospital-based outpatient services and inpatient psychiatric care. The Secretary's report, which was due on September 1, 1991, was submitted to Congress on March 17, 1995. The Secretary's report recommends a phase-in of PPS for outpatient services with prospective payment rates being established initially for surgical and radiological services and other diagnostic proce- dures that account for almost half of hospital outpatient Medicare charges. Other groups of outpatient services would be brought under PPS as appropriate methodologies are developed. The report also addressed changes to beneficiary coinsurance and the computation of coinsurance under the current blended pay- ment method. Implementation of the Secretary's proposals would require Con- gress to enact legislation. The Company is unable to assess whether such leg- islation, if any, will be enacted in connection with changes to Medicare reim- bursement of hospital outpatient services. Until such time as the Secretary has implemented a PPS for all hospital-based outpatient services, OBRA-90 di- rects that payments for the reasonable cost of outpatient hospital services (other than for capital related costs) be reimbursed at 94.2% of such reason- able costs for cost reporting periods falling within FY 1991 through FY 1995. OBRA-93 extended this reduction through FY 1998. Subsequent to September 30, 1991 and through FY 1992, capital related pay- ments for inpatient hospital services were made at the rate of 90% of reason- able capital costs. The PPS capital costs reimbursement applies an estimated national average of FY 1989 Medicare capital costs per patient discharge up- dated to FY 1992 by the estimated increase in Medicare capital costs per dis- charge (the "Federal Rate"). Capital PPS is applicable to cost reports begin- ning on or after October 1, 1991. Under capital PPS reimbursement a 10 year transition period has been established. A hospital is paid under one of the following two different payment methodologies during this transition period: (i) hospitals with a hospital-specific rate (the rate established for a hospi- tal based on the cost report ending on or before December 31, 1990) below the Federal Rate would be paid on a fully prospective payment methodology and (ii) hospitals with a hospital-specific rate above the Federal Rate would be paid based on a hold-harmless payment methodology or 100% of the Federal Rate whichever results in a higher payment. A hospital is paid under one methodol- ogy throughout the entire transition. After the transition period, all hospi- tals would be paid the Federal Rate. The impact of PPS capital reimbursement in the first two years has not been material to Medicare capital reimbursement. The hospital-specific rates for FY 1994 decreased 2.16%. The established Federal Rate for FY 1994 was reduced by 9.33% to $378 per patient discharge and for FY 1995 was reduced by 0.4% to $377 per patient discharge. The hospital-specific rate for FY 1996 increased 18.6%. The Federal Rate for FY 1996 increased 21.2% to $457 per patient dis- charge. These increases were primarily the result of the expiration of a bud- get neutrality provision of OBRA-90 that limited payments to 90% of payments estimated to have been made on a reasonable cost basis during the fiscal year. Legislation passed by Congress and vetoed by the President would have resulted in a reduction of capital payment rates for FY 1996. Medicaid Most state Medicaid payments are made under a prospective payment system or under programs which negotiate payment levels with individual hospitals. Med- icaid reimbursement is generally substantially less than a hospital's cost of services. Medicaid is currently funded approximately 50% by the states and ap- proximately 50% by the federal government. The federal government and many states are currently considering significant reductions in the level of Medic- aid funding while at the same time expanding Medicaid benefits, which could adversely affect future levels of Medicaid reimbursement received by the Company's hospitals. 5
On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (the "Medicaid Amendments"), which limit the amount of voluntary contributions and provider-specific taxes that can be used by states to fund Medicaid and require the use of broad-based taxes for such funding. As a result of enactment of the Medicaid Amendments, certain states in which the Company operates have adopted broad-based provider taxes to fund their Medicaid programs. To date, the impact upon the Company of these new taxes has not been materially adverse. However, the Company is un- able to predict whether any additional broad-based provider taxes will be adopted by the states in which it operates and, accordingly, is unable to as- sess the effect thereof on its results of operations or financial position. Annual Cost Reports The Company's annual cost reports which are required under the Medicare and Medicaid programs are subject to audit which may result in adjustments to the amounts ultimately determined to be due the Company under these reimbursement programs. These audits often require several years to reach the final determi- nation of amounts earned under the programs. Providers also have rights of ap- peal, and the Company is currently contesting certain issues raised in audits of prior years' reports. Management believes that adequate provision has been made in its financial statements for any material retroactive adjustments that might result from all of such audits and that final resolution of all of these issues will not have a material adverse effect upon the Company's results of operations or financial position. Since the inception of the Medicare prospec- tive payment system in 1983, the amount of reimbursement to the Company's gen- eral, acute care hospitals potentially affected by audit adjustments has sub- stantially diminished. Commercial Insurance The Company's hospitals provide services to individuals covered by private health care insurance. Private insurance carriers either reimburse their pol- icy holders or make direct payments to the Company's hospitals based upon the particular hospital's established charges and the particular coverage provided in the insurance policy. Blue Cross is a health care financing program that provides its subscribers with hospital benefits through independent organiza- tions that vary from state to state. The Company's hospitals are paid directly by local Blue Cross organizations on the basis agreed to by each hospital and Blue Cross by a written contract. Recently, several commercial insurers have undertaken efforts to limit the costs of hospital services by adopting prospective payment or DRG based sys- tems. To the extent such efforts are successful, and to the extent that the insurers' systems fail to reimburse hospitals for the costs of providing serv- ices to their beneficiaries, such efforts may have a negative impact on the operating results of the Company's hospitals. HOSPITAL UTILIZATION The Company believes that the two most important factors relating to the overall utilization of a hospital are the quality and market position of the hospital and the number and quality of physicians providing patient care within the facility. Generally, the Company believes that the ability of a hospital to be a market leader is determined by its breadth of services, level of technology, emphasis on quality of care and convenience for patients and physicians. Other factors which impact utilization include the growth in local population, local economic conditions and market penetration of managed care programs. The following table sets forth certain operating statistics for hospitals owned and operated by the Company for each of the most recent five years. Medical/surgical hospital operations are subject to certain seasonal fluctua- tions, including decreases in patient utilization during holiday pe- 6
riods and increases in the cold weather months. Psychiatric hospital opera- tions are also subject to certain seasonal fluctuations, including decreases in patient occupancy during the summer months and holiday periods. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1995(E) 1994 1993 1992 1991 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Number of hospitals (a). 319 311 274 281 301 Weighted average licensed beds (b)...... 61,617 57,517 53,247 51,955 54,072 Admissions (c).......... 1,774,800 1,565,500 1,451,000 1,448,000 1,486,200 Average length of stay (days)................. 5.3 5.6 5.8 6.0 6.3 Average daily census.... 25,917 23,841 22,973 23,569 25,816 Occupancy rate (d)...... 42% 41% 43% 45% 48% </TABLE> - -------- (a) End of period. (b) Weighted average licensed beds is defined as the number of licensed beds after giving effect to the length of time the beds have been licensed dur- ing the period. (c) Admissions represent the number of patients admitted for inpatient treat- ment. (d) Occupancy rates are calculated by dividing average daily census by weighted average licensed beds. (e) This does not include 19 facilities that are not consolidated for finan- cial reporting purposes. Beginning in 1983, hospitals began experiencing significant shifts from in- patient to outpatient care as well as decreases in average lengths of inpa- tient stay, primarily as a result of hospital payment changes by Medicare, in- surance carriers and self-insured employers. These changes generally encour- aged the utilization of outpatient, rather than inpatient, services whenever possible, and shortened lengths of stay for inpatient care. Another factor af- fecting hospital utilization levels is improved treatment protocols as a re- sult of medical technology and pharmacological advances. COMPETITION Generally, other hospitals in the local markets served by most of the Company's hospitals provide services that are offered by the Company's hospi- tals. Additionally, in the past several years, the number of free-standing outpatient surgery and diagnostic centers in the geographic areas in which the Company operates has increased significantly. As a result, most of the Company's hospitals operate in an increasingly competitive environment. The rates charged by the Company's hospitals are intended to be competitive with those charged by other local hospitals for similar services. In some cases, competing hospitals are more established than the Company's hospitals. Also, some competing hospitals are owned by tax-supported government agencies and many others by tax-exempt corporations which may be supported by endowments and charitable contributions and which are exempt from sales, property and in- come taxes. Such exemptions and support are not available to the Company's hospitals. In addition, in certain localities served by the Company there are large teaching hospitals which provide highly specialized facilities, equip- ment and services which may not be available at most of the Company's hospi- tals. Psychiatric hospitals frequently attract patients from areas outside their immediate locale and, therefore, the Company's psychiatric hospitals compete with both local and regional hospitals, including the psychiatric units of general, acute care hospitals. The Company believes that its hospitals compete within local markets on the basis of many factors, including the quality of care, ability to attract and retain quality physicians, location, breadth of services, technology offered and prices charged. The competition among hospitals and other health care providers has intensified in recent years as hospital occupancy rates have de- clined. The Company's strategies are designed, and management believes that its hospitals are positioned, to be competitive under these changing circum- stances. 7
One of the most significant factors in the competitive position of a hospi- tal is the number and quality of physicians affiliated with the hospital. Al- though physicians may at any time terminate their affiliation with a hospital operated by the Company, the Company seeks to retain physicians of varied spe- cialties on its hospitals' medical staffs and to attract other qualified phy- sicians. The Company believes that physicians refer patients to a hospital primarily on the basis of the quality of services it renders to patients and physicians, the quality of other physicians on the medical staff, the location of the hospital and the quality of the hospital's facilities, equipment and employees. Accordingly, the Company strives to maintain high ethical and pro- fessional standards and quality facilities, equipment, employees and services for physicians and their patients. Another major factor in the competitive position of a hospital is its man- agement's ability to negotiate service contracts with purchasers of group health care services. HMOs and PPOs attempt to direct and control the use of hospital services through managed care programs and to obtain discounts from hospitals' established charges. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts from established charges. Generally, hospitals compete for service contracts with group health care service purchasers on the basis of price, market reputation, geographic location, quality and range of services, quality of the medical staff and con- venience. The importance of obtaining contracts with managed care organiza- tions varies from market to market depending on the market strength of such organizations. State certificate of need ("CON") laws, which place limitations on a hospi- tal's ability to expand hospital services and add new equipment, may also have the effect of restricting competition. The application process for approval of covered services, facilities, changes in operations and capital expenditures is, therefore, highly competitive. In those states which have no CON laws or which set relatively high levels of expenditures before they become reviewable by state authorities, competition in the form of new services, facilities and capital spending is more prevalent. The Company has not experienced, and does not expect to experience, any material adverse effects from state CON require- ments or from the imposition, elimination or relaxation of such requirements. See "Regulation and Other Factors." The Company, and the health care industry as a whole, face the challenge of continuing to provide quality patient care while dealing with rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and government payors. As both private and government payors reduce the scope of what may be reimbursed and reduce reimbursement levels for what is covered, federal and state efforts to reform the United States health care system may further impact reimbursement rates. Changes in medical tech- nology, existing and future legislation, regulations and interpretations and competitive contracting for provider services by private and government payors may require changes in the Company's facilities, equipment, personnel, rates and/or services in the future. The hospital industry and the Company's hospitals continue to have signifi- cant unused capacity, and, thus, there is substantial competition for pa- tients. Inpatient utilization, average lengths of stay and average occupancy rates continue to be negatively affected by payor-required pre- admission au- thorization, utilization review and by payor pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Increased competition, admissions constraints and payor pressures are expected to continue. To meet these challenges, the Company has expanded many of its hospitals' facilities to include outpatient centers, offers discounts to pri- vate payor groups, enters into capitation contracts in some service areas, up- grades facilities and equipment and offers new programs and services. 8
REGULATION AND OTHER FACTORS Licensure, Certification and Accreditation Health care facility construction and operation is subject to federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Facili- ties are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for li- censing and accreditation. All of the Company's health care facilities are properly licensed under appropriate state laws. Substantially all of the Company's general, acute care hospitals are certified under the Medicare pro- gram or are accredited by the Joint Commission on Accreditation of Health Care Organizations ("Joint Commission"), the effect of which is to permit the fa- cilities to participate in the Medicare and Medicaid programs. Certain of the Company's psychiatric hospitals do not participate in these programs. Should any facility lose its Joint Commission accreditation, or otherwise lose its certification under the Medicare program, the facility would be unable to re- ceive reimbursement from the Medicare and Medicaid programs. Management be- lieves that the Company's facilities are in substantial compliance with cur- rent applicable federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, it may be necessary for the Company to effect changes in its facilities, equipment, personnel and services. Certificates of Need The construction of new facilities, the acquisition of existing facilities, and the addition of new beds or services may be subject to review by state regulatory agencies under a CON program. The Company operates hospitals in some states that require approval under a CON program. Such laws generally re- quire appropriate state agency determination of public need and approval prior to the addition of beds or services or certain other capital expenditures. Failure to obtain necessary state approval can result in the inability to ex- pand facilities, complete an acquisition or change ownership. Further, viola- tion may result in the imposition of civil or, in some cases, criminal sanc- tions, the denial of Medicare or Medicaid reimbursement or the revocation of a facility's license. State Rate Review Some states in which the Company owns hospitals have adopted legislation mandating rate or budget review for hospitals or have adopted taxes on hospi- tal revenues, assessments or licensure fees to fund indigent health care within the state. In Florida, a budget review process and limitations on net revenue increases per admission have been in effect with respect to the Company's hospitals since January 1, 1986. The increase in hospital net revenues per admission is limited to an annually-determined percentage increase in costs that Florida hospitals pay for goods and services plus a statutory 2%, plus additional amounts which recognize the effect of patient days related to Medicare, Medic- aid and uncompensated charity care. This law limits the ability of Florida hospitals to increase rates to maintain operating margins. The Company owned 55 hospitals aggregating 13,378 beds in Florida as of December 31, 1995. In the aggregate, state rate or budget review and indigent tax provisions have not materially adversely affected the Company's results of operations. The Company is unable to predict whether any additional state rate or budget review or indigent tax provisions will be adopted and, accordingly, is unable to assess the effect thereof on its results of operations or financial condi- tion. 9
Utilization Review Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards, are medically necessary and that claims for reimburse- ment are properly filed. These provisions include a requirement that a sam- pling of admissions of Medicare and Medicaid patients must be reviewed by peer review organizations ("PROs"), which review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of DRG classifications and the appropriateness of cases of ex- traordinary length of stay or cost. PROs may deny payment for services provid- ed, may assess fines and also have the authority to recommend to HHS that a provider which is in substantial noncompliance with the standards of the PRO be excluded from participating in the Medicare program. Utilization review is also a requirement of most non- governmental managed care organizations. Medicare Regulations and Fraud and Abuse Participation in the Medicare program is heavily regulated by federal stat- ute and regulation. If a hospital provider fails substantially to comply with the numerous conditions of participation in the Medicare program or performs certain prohibited acts (e.g., (i) making false claims to Medicare for serv- ices not rendered or misrepresenting actual services rendered in order to ob- tain higher reimbursement; (ii) paying remuneration for Medicare referrals (so called "fraud and abuse" which is prohibited by the "anti-kickback" provisions of the Social Security Act); (iii) failing to stabilize all individuals who come to its emergency room who have an "emergency medical condition," whether or not any such individual is eligible for Medicare; (iv) transferring any stabilized patient to another health care facility before such other facility has agreed to the transfer of such patient, while such other facility does not have sufficient room and staff to treat the patient, without the patient's emergency department medical records, or without appropriate life support equipment; and (v) transferring any unstabilized patient except those trans- ferred at the patient's request or with physician certification that the medi- cal risks from the transfer are less harmful than continued treatment at the transferring facility), such hospital's participation in the Medicare program may be terminated or civil or criminal penalties may be imposed upon such hos- pital under certain provisions of the Social Security Act. Moreover, HHS and the courts have interpreted the "fraud and abuse" anti- kickback provisions of the Social Security Act (presently codified in Section 1128B(b) of the Social Security Act, hereinafter the "Antifraud Amendments") broadly to include the intentional offer, payment, solicitation or receipt of anything of value if one purpose of the payment is to induce the referral of Medicare business. Health care providers generally are concerned that many relatively innocuous, or even beneficial, commercial arrangements with their physicians may technically violate this strict interpretation of the Antifraud Amendments. In 1976 Congress established the Office of Inspector General ("OIG") at HHS to identify and eliminate fraud, abuse and waste in HHS programs and to pro- mote efficiency and economy in HHS departmental operations. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to health care providers on ways to engage in legitimate business practices and avoid scrutiny under the fraud and abuse statute, the OIG has from time to time issued "fraud alerts" identifying features of transactions, which, if present, may indicate that the transaction violates the fraud and abuse law. In May 1992, the OIG issued a special fraud alert regarding hospital incentives to physicians. The alert identified the following incentive arrangements as potential violations of the statute: (a) payment of any sort of incentive by the hospital each time a physician refers a patient to the hospital, (b) the use of free or significantly discounted of- fice space or equipment (in facilities usually located close to the hospital), (c) provision of free or significantly discounted billing, nursing or other staff services, (d) free training for a physician's office staff in areas such as management techniques, 10
CPT coding and laboratory techniques, (e) guarantees which provide that, if the physician's income fails to reach a predetermined level, the hospital will supplement the remainder up to a certain amount, (f) low-interest or interest- free loans, or loans which may be forgiven if a physician refers patients (or some number of patients) to the hospital, (g) payment of the costs of a physi- cian's travel and expenses for conferences, (h) coverage on the hospital's group health insurance plans at an inappropriately low cost to the physician and (i) payment for services (which may include consultations at the hospital) which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of services rendered. In this fraud alert the OIG encouraged persons having information about hospitals who offer the above types of incentives to physicians to report such information to the OIG. In addition, on July 29, 1991, the OIG issued final regulations outlining certain "safe harbor" practices, which, although potentially capable of induc- ing prohibited referrals of business under Medicare or state health programs, would not be subject to enforcement action under the Social Security Act. The practices covered by the regulations include certain physician joint venture transactions, rental of space and equipment, personal services and management contracts, sales of physician practices, referral services, warranties, dis- counts, payments to employees, group purchasing organizations and waivers of beneficiary deductibles and co-payments. Additional proposed safe harbors are expected to be published in the near future by the OIG, including a safe har- bor regulation for physician recruitment. Certain of the Company's current ar- rangements with physicians, including joint ventures, do not qualify for the current safe harbor exemptions and, as a result, such arrangements risk scru- tiny by the OIG and may be subject to enforcement action. The failure of these arrangements to satisfy all of the conditions of the applicable safe harbor criteria does not mean that the arrangements are illegal. Nevertheless, cer- tain of the Company's current financial arrangements with physicians, includ- ing joint ventures, and the Company's future development of joint ventures and other financial arrangements with physicians, could be adversely affected by the failure of such arrangements to comply with the safe harbor regulations, or the future adoption of other legislation or regulation in these areas. Effective January 1, 1991, Section 1877 of the Social Security Act (commonly known as "Stark I") prohibited referrals of Medicare and Medicaid patients to clinical laboratories with which a referring physician has a financial rela- tionship. OBRA-93 included certain amendments to Section 1877 (such amendments commonly known as "Stark II") which substantially broadened the scope of pro- hibited physician self-referrals to include referrals by physicians to enti- ties with which the physician has a financial relationship and which provide certain "designated health services" which are reimbursable by Medicare or Medicaid. "Designated health services" include not only the clinical labora- tory services which were the only such services covered by Stark I, but also, among other things, physical and occupational therapy services, radiology services, durable medical equipment, home health, and inpatient and outpatient hospital services. Sanctions for violating Stark I or II include civil money penalties up to $15,000 per prohibited service provided, assessments equal to 200% of the dollar value of each such service provided and exclusion from the Medicare and Medicaid programs. Stark II contains certain exceptions to the self-referral prohibition, including an exception if the physician has an own- ership interest in the entire hospital. Stark II became effective January 1, 1995 and contemplates the promulgation of regulations implementing the new provisions. The Company cannot predict the final form that such regulations will take or the effect that Stark II or the regulations to be promulgated thereunder will have on the Company. The Social Security Act also imposes criminal and civil penalties for making false claims to Medicare and Medicaid for services not rendered or for misrep- resenting actual services rendered in order to obtain higher reimbursement. Like the Antifraud Amendments, this statute is very broad. Careful and accu- rate coding of claims for reimbursement must be performed to avoid liability under the false claims statutes. 11
The OIG has requested information regarding the Company's procedures for preparing Medicare cost reports. The Company is cooperating with the OIG and has provided various information in order to explain the Company's practices. Management believes that any claims in this regard, if asserted, would not have a material adverse effect on the Company's financial position or results of operations. Certain of the Company's current financial arrangements with physicians, in- cluding joint ventures, and the Company's future development of joint ventures and other financial arrangements with physicians, could be adversely affected by the failure of such arrangements to comply with the Antifraud Amendments, Section 1877, current state laws or other legislation or regulation in these areas adopted in the future. The Company is unable to predict the effect of such regulations or whether other legislation or regulations at the federal or state level in any of these areas will be adopted, what form such legislation or regulations may take or their impact on the Company. The Company is contin- uing to enter into new financial arrangements with physicians and other prov- iders in a manner structured to comply in all material respects with these laws. There can be no assurance, however, that (i) governmental officials charged with the responsibility for enforcing these laws will not assert that the Company is in violation thereof or (ii) such statutes will ultimately be interpreted by the courts in a manner consistent with the Company's interpre- tation. The federal Medicaid regulations also prohibit fraudulent and abusive prac- tices and authorize the exclusion from such program of providers in violation of such regulations. State Legislation Some of the states in which the Company operates have laws that prohibit corporations and other entities from employing physicians and practicing medi- cine for a profit or that prohibit certain direct and indirect payments or fee-splitting arrangements between health care providers that are designed to induce or encourage the referral of patients to, or the recommendation of, particular providers for medical products and services. In addition, some states restrict certain business relationships between physicians and pharma- cies. Possible sanctions for violation of these restrictions include loss of licensure and civil and criminal penalties. These statutes vary from state to state, are often vague and have seldom been interpreted by the courts or regu- latory agencies. Although the Company exercises care in an effort to structure its arrangements with health care providers to comply with the relevant state statutes, and although management believes that the Company is in compliance with these laws, there can be no assurance that (i) governmental officials charged with responsibility for enforcing these laws will not assert that the Company or certain transactions in which it is involved are in violation of such laws and (ii) such state laws will ultimately be interpreted by the courts in a manner consistent with the practices of the Company. Health Care Reform Health care, as one of the largest industries in the United States, contin- ues to attract much legislative interest and public attention. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration are cost controls on hospitals, insur- ance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurance cov- erage to their employees and the creation of a single government health insur- ance plan that would cover all citizens. The costs of certain proposals would be funded in significant part by reductions in payments by governmental pro- grams, including Medicare and Medicaid, to health care providers such as hos- pitals. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health 12
care programs will not have a material adverse effect on the Company's busi- ness, financial condition or results of operations. ENVIRONMENTAL MATTERS The Company is subject to various federal, state and local statutes and or- dinances regulating the discharge of materials into the environment. Manage- ment does not believe that the Company will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect its capital expenditures, earnings or competitive posi- tion. INSURANCE As is typical in the health care industry, the Company is subject to claims and legal actions by patients in the ordinary course of business. Through a wholly-owned insurance subsidiary, the Company insures a substantial portion of its general and professional liability risks. The Company's health care fa- cilities are insured by the insurance subsidiary for losses of up to $25 mil- lion per occurrence. The Company also maintains general and professional lia- bility insurance with unrelated commercial carriers for losses in excess of amounts insured by its insurance subsidiary. The Company and its insurance subsidiary maintain allowances for loss for professional and general liability risks which totalled $1.2 billion at Decem- ber 31, 1995. Management considers such allowances, which are based on actua- rially determined estimates, to be adequate for such liability risks. Any losses incurred in excess of the established allowances for loss will be re- flected as a charge to earnings of the Company. Any losses incurred in excess of amounts funded and maintained with commercial excess liability insurance carriers will be funded from the Company's working capital. While the Company's cash flow has been adequate to provide for alleged and unforeseen liability claims in the past, there can be no assurance that such amounts will continue to be adequate. If payments for general and professional liabilities exceed anticipated losses, the results of operations and financial condition of the Company could be adversely affected. EMPLOYEES AND MEDICAL STAFFS At December 31, 1995, the Company had approximately 240,000 employees, in- cluding approximately 77,000 part-time employees. Employees at 14 hospitals are represented by various labor unions. The Company considers its employee relations to be satisfactory. While the Company's hospitals experience union organizational activity from time to time, the Company does not expect such efforts to materially affect its future operations. The Company's hospitals, like most hospitals, have experienced labor costs rising faster than the gen- eral inflation rate. In recent years, the Company generally has not experi- enced material difficulty in recruiting and retaining employees, including nurses and professional staff members, primarily as a result of staff reten- tion programs and general economic conditions. There can be no assurance as to future availability and cost of qualified medical personnel. The Company's hospitals are staffed by licensed physicians who have been ad- mitted to the medical staff of individual hospitals. With limited exceptions, physicians generally are not employees of the Company's hospitals. However, some physicians provide services in the Company's hospitals under contracts, which generally describe a term of service, provide and establish the duties and obligations of such physicians, require the maintenance of certain perfor- mance criteria and fix compensation for such services. Any licensed physician may apply to be admitted to the medical staff of any of the Company's hospi- tals, but admission to the staff must be approved by the hospital's medical staff and the appropriate governing board of the hospital in accordance with established credentialling criteria. Members of the medical staffs of the Company's hospitals often also serve on the medical staffs of other hospitals, and may terminate their affiliation with a hospital at any time. 13
PENDING HCA TAX LITIGATION; SPINOFF TAX RULING As a result of examinations by the Internal Revenue Service (the "IRS") of HCA's federal income tax returns, HCA received statutory notices of deficiency for the years 1981 through 1988. HCA has filed petitions in the U.S. Tax Court opposing these claimed deficiencies. Additionally, the IRS completed its exam- ination for the years 1989 and 1990 and has issued proposed adjustments, which HCA has protested. In the aggregate, the IRS is claiming additional taxes and interest of approximately $600 million. Management of the Company is of the opinion that HCA has properly reported its income and paid its taxes in accor- dance with applicable laws and in accordance with agreements established with the IRS during previous examinations. In management's opinion, the final out- come from the IRS's examinations of prior years' income taxes will not have a material adverse effect on the results of operations, financial position or liquidity of the Company. If all or the majority of the positions of the IRS are upheld, however, the financial position, results of operations and liquid- ity of the Company could be materially adversely affected. Management believes that any cash payments necessary as a result of such final outcome would be funded with cash from operations and, if necessary, with amounts available un- der the Company's revolving credit or other borrowing facilities. Certain actions or events both in and beyond the control of the Company could render the Spinoff or certain related transactions taxable. In connec- tion with the Spinoff, Humana received rulings from the IRS to the effect, among other things, that the Spinoff was tax-free under Section 355 of the In- ternal Revenue Code of 1986, as amended (the "Code"). Prior to the Galen Merg- er, Galen received a supplemental tax ruling that the Galen Merger would not alter such tax rulings. Although generally binding on the IRS, each of the tax rulings and the supplemental tax ruling is subject to the accuracy of certain factual representations and assumptions contained in the ruling requests made by Humana and Galen. While the Company is not aware of any facts or circum- stances which would cause such representations and assumptions to be inaccu- rate, there can be no assurances in this regard. Each of Galen and Humana would be liable for the full amount of any tax if the Spinoff were held tax- able, although as between Galen and Humana, Galen would be liable for approxi- mately 61% of that tax under a Tax Sharing and Indemnification Agreement en- tered into in connection with the Spinoff (unless the Spinoff became taxable by reason of actions or events deemed to be in the control of Galen, in which event Galen would be responsible for 100% of such tax). ERISA MATTERS In connection with the Healthtrust Formation in 1987, Healthtrust's Employee Stock Ownership Plan (the "ESOP") purchased approximately 50.9 million shares of Healthtrust common stock for $810 million. The purchase price was based on the determination of the committee administering the ESOP (the "ESOP Commit- tee") as to the fair market value of such shares at that time. Based on such determination, and subject to limitations contained in the Code, Healthtrust has claimed income tax deductions for contributions to the ESOP for the years to which such contributions relate. Contributions to the ESOP were used by the ESOP to pay interest and principal on the loans owed to Healthtrust. These payments were in turn used by Healthtrust to pay interest and principal on the ESOP term loans under a Healthtrust bank credit agreement and certain other indebtedness related to the ESOP. As a result, Healthtrust was effectively able to obtain a deduction for principal, as well as interest payments, on ESOP related borrowings. If the ESOP Committee's determination of fair market value was incorrect, Healthtrust's contribution to the ESOP may not be fully deductible, which could have a material adverse effect on the Company. It was intended that qualified holders of the ESOP term loans and the other indebtedness incurred in connection with the ESOP be entitled to exclude from taxable income 50% of the interest received on such indebtedness. In addition, the loans to the ESOP and the purchase of 14
Healthtrust common stock by the ESOP were intended to qualify for exemption from the "prohibited transaction" rules under the Code and the Employee Re- tirement Income Security Act of 1974, as amended ("ERISA"), which rules gener- ally prohibit sale and loan transactions between an employer and a qualified retirement plan. The 50% interest exclusion and the prohibited transaction ex- emption were available only if the plan was designed to invest primarily in "employer securities". It is likely that if Healthtrust and HCA were deemed to have been members of the same "controlled group of corporations" for purposes of the relevant section in the Code or ERISA, the stock of HCA, and not Healthtrust's common stock, would have been "employer securities" for these purposes. Healthtrust and HCA concluded that they were not in the same "con- trolled group of corporations" (as defined in Section 409(l) of the Code). If, notwithstanding such conclusion, HCA's common stock were deemed to have been "employer securities" for such purposes, there could be severe adverse conse- quences to Healthtrust, including violation of the prohibited transaction rules discussed above (which could subject Healthtrust or other disqualified persons with respect to the ESOP to an excise tax and could require that cer- tain corrective action be taken) and retroactive increases in the rate of in- terest payable on certain of Healthtrust's previously outstanding ESOP related indebtedness as a result of the loss of the 50% interest exclusion. In addi- tion, the 50% interest exclusion and the prohibited transaction exemption were available only if the price paid by the ESOP reflected the fair market value of the employer securities as determined in good faith by the plan fiducia- ries. Accordingly, if the ESOP Committee's determination of fair market value was incorrect, the 50% interest exclusion might not have been fully available and Healthtrust or other disqualified persons may have committed prohibited transactions, either of which events could have a material adverse effect on the Company. The purchase of EPIC common stock by the EPIC Employee Stock Ownership Plan (the "EPIC ESOP") in connection with EPIC's acquisition (the "EPIC Formation") of its facilities from American Medical International, Inc. ("AMI") in 1988 was structured in a manner similar to the purchase of Healthtrust common stock by the ESOP in connection with the Healthtrust Formation and was intended to (i) qualify for exemption from the "prohibited transaction" rules of the Code and ERISA, (ii) permit EPIC to deduct for federal income tax purposes its con- tributions to the EPIC ESOP used to pay principal and interest on loans made by EPIC to the EPIC ESOP and (iii) permit qualified holders of indebtedness incurred in connection with the EPIC ESOP to benefit from the 50% interest ex- clusion provision referred to above. Exemption from the prohibited transaction rules and the availability of the ESOP related benefits described above de- pends on (i) the amount the EPIC ESOP paid for EPIC common stock not having exceeded the fair market value of that EPIC common stock, (ii) the EPIC common stock being "employer securities" and (iii) compliance with the other relevant provisions of the Code and ERISA. If (i) the EPIC ESOP paid an amount in ex- cess of fair market value for the EPIC common stock, (ii) the EPIC common stock were to fail to qualify as "employer securities" or (iii) the EPIC ESOP were to fail to comply with the other relevant provisions of the Code or ERISA, such events could have a material adverse effect on the Company. 15
EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of March 28, 1996, were as follows: <TABLE> <CAPTION> NAME AGE POSITION(S) ---- --- ----------- <S> <C> <C> R. Clayton McWhorter.... 62 Chairman of the Board Thomas F. Frist, Jr., M.D.................... 57 Vice Chairman of the Board Richard L. Scott........ 43 President and Chief Executive Officer David T. Vandewater..... 45 Chief Operating Officer Stephen T. Braun........ 40 Senior Vice President and General Counsel Victor L. Campbell...... 49 Senior Vice President Richard E. Chapman...... 47 Senior Vice President--Information Systems David C. Colby.......... 42 Senior Vice President and Treasurer Kenneth C. Donahey...... 45 Senior Vice President and Controller W. Leon Drennan......... 40 Senior Vice President--Internal Audit Samuel A. Greco......... 44 Senior Vice President--Operations Finance Neil D. Hemphill........ 42 Senior Vice President--Human Resources/Administration Jamie E. Hopping........ 42 President--Western Group Daniel J. Moen.......... 44 President--Columbia Sponsored Network Group Joseph D. Moore......... 49 Senior Vice President--Development Lindy B. Richardson..... 49 Senior Vice President--Marketing/Public Affairs Richard A. Schweinhart.. 46 Senior Vice President--Columbia Sponsored Networks James D. Shelton........ 42 President--Central Group Donald E. Steen......... 49 President--International Group David R. White.......... 48 President--Mid-America Group </TABLE> R. Clayton McWhorter has served as Chairman of the Board of the Company since April 1995. Mr. McWhorter was Chairman and Chief Executive Officer of Healthtrust from 1987 to April 1995 and was President of Healthtrust from 1991 to April 1995. Mr. McWhorter served as President and Chief Operating Officer of Hospital Corporation of America (HCA's predecessor) from 1985 to 1987, and as a Director of Hospital Corporation of America from 1983 to 1987. Thomas F. Frist, Jr., M.D. has served as Vice Chairman of the Board of the Company since April 1995. From February 1994 to April 1995, he was Chairman of the Board of the Company. Dr. Frist was Chairman of the Board, President and Chief Executive Officer of HCA-Hospital Corporation of America ("HCA") from 1988 to February 1994. Dr. Frist, a founder of the predecessor of HCA, was previously Chairman and Chief Executive Officer of such predecessor from Au- gust 1985 until September 1987. Richard L. Scott has served as President, Chief Executive Officer and a di- rector of the Company since September 1993. Mr. Scott was Chairman, Chief Ex- ecutive Officer and a director of the Company or its predecessors from July 1988 to September 1993. Mr. Scott is also a director of Banc One Corporation. David T. Vandewater has served as Chief Operating Officer of the Company since September 1993. Mr. Vandewater was President of the Company from Febru- ary 1991 to September 1993 and served as its Executive Vice President from May 1990 until February 1991. From July 1988 until February 1990, Mr. Vandewater was an Executive Vice President and Chief Operating Officer of Republic Health Corporation (presently called OrNda Healthcorp). Stephen T. Braun has served as Senior Vice President and General Counsel of the Company since September 1993. Mr. Braun served as Vice President and Gen- eral Counsel of the Company 16
from October 1991 until September 1993. From July 1987 to October 1991, Mr. Braun practiced law with the law firm of Doherty, Rumble & Butler, Profes- sional Association, Saint Paul, Minnesota. Victor L. Campbell has served as Senior Vice President of the Company since February 1994. For more than five years prior to that time, Mr. Campbell served as HCA's Vice President for Investor, Corporate, and Government Rela- tions. Mr. Campbell is currently a director of the Federation of American Health Systems and the American Hospital Association. Richard E. Chapman has served as Senior Vice President--Information Systems of the Company since February 1995. Mr. Chapman served as Vice President--In- formation Systems for Columbia from September 1993 until February 1995. Mr. Chapman also served as Vice President--Information Systems for both Galen and Humana from 1988 until September 1993. David C. Colby has served as Senior Vice President and Treasurer of the Com- pany since February 1994. Mr. Colby served as Chief Financial Officer of the Company or its predecessors from July 1988 until April 1995. Mr. Colby was elected Treasurer of the Company in November 1991. Kenneth C. Donahey has served as Senior Vice President and Controller of the Company since April 1995. Prior to that time, Mr. Donahey served as Senior Vice President and Controller of Healthtrust from April 1993 to April 1995. Mr. Donahey also served as Vice President and Controller of Healthtrust from 1987 to 1993. W. Leon Drennan has served as Senior Vice President--Internal Audit of the Company since February 1995. From February 1994 to January 1995, Mr. Drennan served as Vice President of the Company. Mr. Drennan served as Vice Presi- dent--Internal Audit for HCA from 1987 until 1994. Samuel A. Greco has served as Senior Vice President--Operations Finance of the Company since July 1992. Mr. Greco served as Senior Vice President of Fi- nance--South Florida Division of the Company from November 1990 to July 1992. Mr. Greco was Chief Financial Officer of University Hospital, Tamarac, Flori- da, which is owned and operated by the Company, from January 1990 to November 1990. Neil D. Hemphill has served as Senior Vice President--Human Resources of the Company since February 1994. Mr. Hemphill served as Vice President--Human Re- sources of the Company from June 1992 to February 1994. Mr. Hemphill was a Di- rector of Human Resources of Republic Health Corporation (presently called OrNda Healthcorp) from January 1985 to June 1992. Jamie E. Hopping has served as President--Western Group of the Company since January 1996. From January 1993, Ms. Hopping was Chief Operating Officer of the Company's South Florida Division and in February 1994 was named President of the South Florida Division. From 1990 to 1993, Ms. Hopping was Chief Execu- tive Officer of Deering Hospital in South Florida. Daniel J. Moen has served as President--Columbia Sponsored Network Group since March 1996, and served as President of the Company's Florida Group from February 1994 until March 1996. Mr. Moen was President of the Company's South Florida Division from October 1991 until February 1994. From 1989 until Sep- tember 1991, he served as Vice President, South Florida Market for Humana Inc. Joesph D. Moore has served as Senior Vice President--Development of the Com- pany since February 1994. Mr. Moore was Senior Vice President--Finance and De- velopment of HCA from January 1993 to February 1994. Mr. Moore was Senior Vice President--Development of HCA from April 1992 until January 1993 and Vice President--Development of HCA from 1980 until April 1992. 17
Lindy B. Richardson has served as Senior Vice President--Marketing/Public Affairs of the Company since February 1994. Ms. Richardson served as Vice President--Marketing/Public Affairs of the Company from September 1993 to Feb- ruary 1994. Ms. Richardson served as Director of Marketing/Public Affairs for both Galen and Humana from 1988 to September 1993. Richard A. Schweinhart has served as Senior Vice President--Columbia Spon- sored Networks of the Company since March 1996. From April 1995 until March 1996, Mr. Schweinhart served as Senior Vice President--Nonhospital Operations, and from September 1993 until April 1995 as Senior Vice President--Finance of the Company. Mr. Schweinhart served as Senior Vice President--Finance for both Galen and Humana from November 1991 to September 1993. Mr. Schweinhart also served as Vice President--Finance of Humana from 1988 until November 1991. James D. Shelton has served as President--Central Group of the Company since June 1994. From May 1993 to June 1994, Mr. Shelton was employed by National Medical Enterprises, Inc. ("NME") (presently called Tenet Healthcare Corpora- tion) as Executive Vice President of the Central Division. Mr. Shelton served as Senior Vice President of Operations for NME from August 1986 until May 1993. Donald E. Steen has served as President--International Group of the Company since November 1995. From September 1994 until November 1995, Mr. Steen served as President--Western Group of the Company. Mr. Steen was formerly President and Chief Executive Officer of Medical Care America from September 1992 until September 1994 and President, Chief Executive Officer of Medical Care Interna- tional from September 1981 to September 1992. David R. White joined the Company in March 1994 and has served as Presi- dent--National Group of the Company since June 1995. Before this period, he served as Executive Vice President and Chief Operating Officer with Community Health Systems, Inc. for eight years. 18
ITEM 2. PROPERTIES. The following table lists, by state, the number of hospitals owned, managed or operated by the Company as of December 31, 1995: <TABLE> <CAPTION> LICENSED STATE HOSPITALS BEDS ----- --------- -------- <S> <C> <C> Alabama................................................ 8 1,218 Alaska................................................. 1 238 Arizona................................................ 5 777 Arkansas............................................... 3 554 California............................................. 13 1,755 Colorado............................................... 10 2,324 Delaware............................................... 1 74 Florida................................................ 55 13,378 Georgia................................................ 19 3,207 Idaho.................................................. 2 436 Illinois............................................... 9 2,964 Indiana................................................ 2 466 Kansas................................................. 3 1,260 Kentucky............................................... 14 2,946 Louisiana.............................................. 22 3,413 Mississippi............................................ 2 264 Missouri............................................... 3 786 Nevada................................................. 1 688 New Hampshire.......................................... 3 295 New Mexico............................................. 2 381 North Carolina......................................... 7 980 Ohio................................................... 3 1,168 Oklahoma............................................... 7 1,131 Oregon................................................. 2 198 South Carolina......................................... 5 903 Tennessee.............................................. 28 4,372 Texas.................................................. 69 13,318 Utah................................................... 10 1,277 Virginia............................................... 15 3,155 Washington............................................. 1 110 West Virginia.......................................... 6 909 Wyoming................................................ 1 70 <CAPTION> INTERNATIONAL ------------- <S> <C> <C> Switzerland............................................ 1 185 United Kingdom......................................... 5 602 --- ------ 338 65,802 === ====== </TABLE> In addition to the hospitals listed in the above table, the Company operates more than 135 outpatient surgery centers. The Company also operates medical office buildings in conjunction with its hospitals. These office buildings are primarily occupied by physicians who practice at the Company's hospitals. 19
The Company owns and maintains its headquarters in approximately 400,000 square feet of space in four office buildings in Nashville, Tennessee. The Company's headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for the Company's present needs. ITEM 3. LEGAL PROCEEDINGS. The Company is currently, and from time to time, subject to claims and suits arising in the ordinary course of business, including claims for personal in- juries or for wrongful restriction of, or interference with, physicians' staff privileges. In certain of these actions the claimants have asked for punitive damages against the Company, which are usually not covered by insurance. In the opinion of management, the ultimate resolution of any of these pending claims and legal proceedings will not have a material adverse effect on the Company's results of operations or financial position. A class action styled Mary Forsyth et al. v. Humana Inc. et al., Case #CV-S- 89-249-PMP (L.R.L.), was filed on March 29, 1989, in the United States Dis- trict Court for the District of Nevada (the "Forsyth" case). On August 12, 1991, a Second Amended Complaint was filed in the Forsyth case which signifi- cantly increased the amount of damages claimed by the plaintiffs in previously filed complaints. The claimed damages increased from $10 million to $84,520,143 in connection with a count which alleges a violation of the Em- ployee Retirement Income Security Act (the "ERISA Count"); from $10 million to $181,034,570 (before trebling) in connection with an alleged violation of the Sherman Anti-Trust Act (the "Anti-Trust Count"); and from $10 million to $181,034,570 (before trebling) for an alleged violation of the Racketeer In- fluenced and Corrupt Organization Act (the "RICO Count"). In late March 1992, as part of the discovery process, the plaintiffs provided information in re- gard to their calculation of damages which indicates they are seeking recovery of $49,440,000 of damages plus approximately $15,396,000 of interest in the ERISA Count and $103,562,165 of damages (before trebling) plus approximately $31,800,000 of interest in the RICO Count. Specific amounts were not readily apparent for the Anti-Trust Count but it appears the plaintiffs believe their claimed damages in the Anti-Trust Count would be similar to those in the RICO Count. The ERISA Count, which is being asserted by the Co-Payer Class, claims that Humana Inc. ("Humana") violated a fiduciary duty in connection with (i) the calculation of co-insurance payments required under policies issued by Humana's insurance subsidiary ("Humana Insurance") for insureds who were treated at Sunrise Hospital in Las Vegas (now owned by the Company), and (ii) payments to the hospital by Humana Insurance. The Anti-Trust Count, which is being asserted by the Premium Payer Class, alleges that Sunrise Hospital has monopolized or has attempted to monopolize the for-profit, acute care hospital services market in Clark County, Nevada, and that Humana Insurance engaged in predatory pricing in connection with the sale of insurance policies to members of such class. The plaintiffs have also indicated damages with respect to the Co-Payer Class. The RICO Count, which is being asserted by both the Premium Payer and Co-Payer Classes, alleges fraud in connection with (i) the sale of insurance policies to members of the Premium Payer Class and (ii) the calcula- tion of the co-insurance payments. On June 22, 1992, defendants filed a Motion for Summary Judgment on all three counts of the Complaint. On July 21, 1993, Summary Judgment was entered in favor of defendants on all counts, although the Court allowed the Co-Payer Class to file a Third Amended Complaint. On Au- gust 24, 1993, the plaintiffs filed a Third Amended Complaint against Humana Insurance, seeking to recover at least $2,000,000, plus interest, which repre- sents the difference between their co-insurance payments and what the payments would have been if calculated based on the discounted payments made by Humana Insurance to Sunrise Hospital. The plaintiffs filed a Motion for Summary Judg- ment on the Third Amended Complaint on November 10, 1993. The Court granted the plaintiff's Motion for Summary Judgment on June 3, 1994. The plaintiffs have 20
appealed the grant of defendants Motion for Summary Judgment on the RICO Count and the Anti-Trust Count. The matter was argued before the Ninth Circuit Court of Appeals on December 4, 1995. There has been no ruling as of the date here- of. Pursuant to an Assumption of Liabilities and Indemnification Agreement en- tered into in connection with the Spinoff, Humana assumed approximately 39% and Galen assumed approximately 61% of all liabilities, costs and expenses arising out of certain identified legal proceedings and claims, including the Forsyth case. A class action, In re Medical Care America, Inc. Securities Litigation, is pending in the United States District Court for the Northern District of Tex- as, Dallas Division (Civil Action No. 3-92-CV-1996-R). A class has been certi- fied by the Court consisting of all persons who owned securities of Medical Care America, Inc. ("MCA") at the close of trading on September 24, 1992 and who acquired those securities either in purchases in the open market following the September 9, 1992 merger of Medical Care International, Inc. ("MCI") and Critical Care America, Inc. ("CCA") forming MCA or through exchange of their securities in said companies pursuant to the merger, and who allegedly sus- tained damages as a result of such purchases, subject to certain exclusions (the "Class Members"). The named defendants include MCA, MCI, CCA as well as certain officers and/or directors of MCA, MCI or CCA. The plaintiffs seek to recover damages sustained by Class Members as a result of alleged violations by the defendants of Section 11 of the Securities Act of 1933, as amended, and Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. In addition, the complaint asserts claims under the state law of Texas which have not been certified for class treatment at the present time, without prejudice to any party's rights regarding certifica- tion of such claims in the future. The complaint alleges a course of conduct in which the defendants knowingly or recklessly failed to state material in- formation and released false and misleading information to the investing pub- lic, regarding the earnings, profitability and business prospects of MCA and of MCI and CCA prior to their merger. The plaintiffs allege that, as a result of this false and misleading information, the market price of MCA securities was artificially inflated throughout the class period. The plaintiffs further allege that, upon the dissemination on September 25, 1992 of the true facts concerning MCA's earnings, profitability and business prospects, the market price of MCA common stock dropped precipitously, resulting in a significant market loss of over $1 billion, and causing damages to plaintiffs and the other Class Members. The litigation has been tentatively settled for $60 mil- lion. The settlement is subject to the approval of the Court as well as a ma- jority of the Class Members. A lawsuit captioned United States of America ex rel. James Thompson v. Columbia/HCA Healthcare Corporation et al., was filed on March 10, 1995 in the United States District Court for the Southern District of Texas, Corpus Christi Division (Civil Action No. C-95-110). The lawsuit is a qui tam action brought by a private party (or "relator") on behalf of the United States of America. The relator claims that the defendants (the Company and certain sub- sidiaries and affiliated partnerships) engaged in a widespread strategy to pay physicians money for referrals and engaged in other conduct to induce refer- rals, such as: (i) offering physicians equity interests in hospitals; (ii) of- fering loans to physicians; (iii) paying money under the guise of "consulta- tion fees" to physicians to guarantee their capital investment; (iv) paying consultation fees, rent or other monies to physicians; (v) providing free or reduced rate rents for office space; (vi) providing free or reduced-rate vaca- tions and trips; (viii) providing income guarantees; and (ix) granting physi- cians exclusive rights to perform procedures in particular fields of practice. The lawsuit is premised on alleged violations of the False Claims Act, 31 U.S.C. (S)3729 et seq. The complaint seeks damages of three times the amount of all Medicare claims (involving false claims) presented by the defendants to the federal government, a civil penalty of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. Although expressly permitted to do so, the United States has thus far declined to intervene in the case and assume prosecution of the claims asserted by the relator. The defendants filed a Motion to Dismiss the Second Amended Complaint on November 29, 1995. Discovery has been stayed pending a ruling 21
on the motion. The Company believes that the allegations in the complaint are without merit and intends to pursue the defense of this action vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1995. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item is set forth in the Company's 1995 An- nual Report to Stockholders under the heading "Stock Information and Divi- dends," which information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is set forth in the Company's 1995 An- nual Report to Stockholders under the heading "Selected Financial Data," which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is set forth in the Company's 1995 An- nual Report to Stockholders under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is set forth on pages 16 through 39 in the Company's 1995 Annual Report to Stockholders, which information is incor- porated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is set forth under the heading "Elec- tion of Directors" in the definitive proxy materials of the Company to be filed in connection with its 1996 Annual Meeting of Stockholders, except for the information regarding executive officers of the Company, which is con- tained in Item 1 of Part I of this Annual Report on Form 10-K. The information required by this Item contained in such definitive proxy materials is incorpo- rated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is set forth under the heading "Execu- tive Compensation" in the definitive proxy materials of the Company to be filed in connection with its 1996 Annual Meeting of Stockholders, which infor- mation is incorporated herein by reference. 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is set forth under the heading "Prin- cipal Stockholders" in the definitive proxy materials of the Company to be filed in connection with its 1996 Annual Meeting of Stockholders, which infor- mation is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is set forth under the heading "Cer- tain Transactions" in the definitive proxy materials of the Company to be filed in connection with its 1996 Annual Meeting of Stockholders, which infor- mation is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of the report: 1. Financial Statements The consolidated financial statements to be included in Part II, Item 8, are incorporated by reference to the Company's 1995 An- nual Report to Stockholders (See Exhibit 13). 2. List of Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 1995, 1994 and 1993 is included in Page S-1 of this Annual Report on Form 10-K. All other schedules are omitted because the required information is not present or not present in material amounts. 3. List of Exhibits 3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3(a) to the Company's Current Report on Form 8-K dated February 11, 1994, and incorporated herein by reference). 3.2(a) By-laws of the Company (filed as Exhibit 2.2 to the Company's Registration Statement on Form 8-A dated August 31, 1993, and incorporated herein by reference). 3.2(b) Amendment to By-laws of the Company (filed as Exhibit 3(b).1 to the Company's Current Report on Form 8-K dated February 11, 1994, and incorporated herein by reference). 4.1 Specimen Certificate for shares of Common Stock, par value $.01 per share, of the Company (filed as Exhibit 4.1 to the Company's Form SE to Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference). 4.2 Columbia Hospital Corporation 9% Subordinated Mandatory Convert- ible Note Due June 30, 1999 (filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference). 4.3 Registration Rights Agreement between the Company and The 1818 Fund, L.P. dated March 18, 1991 (filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference). 4.4 Securities Purchase Agreement by and between the Company and The 1818 Fund, L.P. dated as of March 18, 1991 (filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference). 23
4.5 Warrant to purchase shares of Common Stock, par value $.01 per share, of the Company (filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference). 4.6 Registration Rights Agreement dated as of March 16, 1989, by and among HCA- Hospital Corporation of America and the persons listed on the signature pages thereto (filed as Exhibit (g)(24) to Amendment No. 3 to the Schedule 13E-3 filed by HCA-Hospital Corporation of America, Hospital Corporation of America and The HCA Profit Sharing Plan on March 22, 1989, and incorporated herein by reference). 4.7 Assignment and Assumption Agreement dated as of February 10, 1994, between HCA-Hospital Corporation of America and the Com- pany relating to the Registration Rights Agreement, as amended (filed as Exhibit 4.7 to the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 1993, and incorporated herein by reference). 4.8 Amended and Restated Rights Agreement dated February 10, 1994 between the Company and Mid-America Bank of Louisville and Trust Company (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and in- corporated herein by reference). 4.9(a) $1 Billion Credit Agreement dated as of February 10, 1994 (the "364 Day Agreement"), among the Company, the Several Banks and Other Financial Institutions, and Chemical Bank as Agent and as CAF Loan Agent (filed as Exhibit 4.9 to the Company's Annual Re- port on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference). 4.9(b) Agreement and Amendment to the 364 Day Agreement dated as of September 26, 1994 (filed as Exhibit 4.9 to the Company's Regis- tration Statement on Form S-4 (File No. 33-56803), and incorpo- rated herein by reference). 4.9(c) Agreement and Amendment to the 364 Day Agreement dated as of February 28, 1996 (which Agreement and Amendment is filed here- with). 4.10(a) $2 Billion Credit Agreement dated as of February 10, 1994 (the "Credit Facility"), among the Company, the Several Banks and Other Financial Institutions, and Chemical Bank as Agent and as CAF Loan Agent (filed as Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference). 4.10(b) Agreement and Amendment to the Credit Facility dated as of Sep- tember 26, 1994 (filed as Exhibit 4.10 to the Company's Regis- tration Statement on Form S-4 (File No. 33-56803), and incorpo- rated herein by reference). 4.10(c) Agreement and Amendment to the Credit Facility dated as of Feb- ruary 28, 1996 (which Agreement and Amendment is filed here- with). 4.11 Indenture dated as of December 15, 1993 between the Company and The First National Bank of Chicago, as Trustee (filed as Exhibit 4.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by refer- ence). 10.1 Agreement and Plan of Merger among the Company, COL Acquisition Corporation and Healthtrust, Inc.--The Hospital Company dated as of October 4, 1994 (filed as Exhibit 2 to the Company's Regis- tration Statement on Form S-4 (File No. 33-56803), and incorpo- rated herein by reference). 10.2 Agreement and Plan of Merger among the Company, CHOS Acquisition Corporation and HCA-Hospital Corporation of America dated as of October 2, 1993 (filed as Exhibit 2 to the Company's Registra- tion Statement on Form S-4 (File No. 33-50735), and incorporated herein by reference). 24
10.3 Agreement and Plan of Merger between Galen Health Care, Inc. and the Company dated as of June 10, 1993 (filed as Exhibit 2 to the Company's Registration Statement on Form S-4 (File No. 33- 49773), and incorporated herein by reference). 10.4 Agreement and Plan of Merger among Hospital Corporation of Amer- ica, HCA- Hospital Corporation of America and TF Acquisition, Inc. dated November 21, 1988 plus a list identifying the con- tents of all omitted exhibits to the Agreement and Plan of Merger plus an agreement of Hospital Corporation of America to furnish supplementally to the Securities and Exchange Commission upon request a copy of all omitted exhibits (filed as Exhibit 2 to Hospital Corporation of America's Current Report on Form 8-K dated November 21, 1988, and incorporated herein by reference). 10.5 Amendment No. 1 to Agreement and Plan of Merger dated as of Feb- ruary 7, 1989, among Hospital Corporation of America, HCA-Hospi- tal Corporation of America and TF Acquisition, Inc. (filed as Exhibit 2(b) to Hospital Corporation of America's Annual Report on Form 10-K for the year ended December 31, 1988, and incorpo- rated herein by reference). 10.6 Columbia Hospital Corporation Stock Option Plan (filed as Ex- hibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference).* 10.7 Columbia Hospital Corporation 1992 Stock and Incentive Plan (filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Reg. No. 33-48886), and incorporated herein by ref- erence).* 10.8 Columbia Hospital Corporation Outside Directors Nonqualified Stock Option Plan (filed as Exhibit 28.1 to the Company's Regis- tration Statement on Form S-8 (File No. 33-55272), and incorpo- rated herein by reference).* 10.9 HCA-Hospital Corporation of America 1989 Nonqualified Stock Op- tion Plan, as amended through December 16, 1991 (filed as Ex- hibit 10(g) to HCA-Hospital Corporation of America's Registra- tion Statement on Form S-1 (File No. 33-44906), and incorporated herein by reference).* 10.10 Form of Stock Option Agreement under the HCA-Hospital Corpora- tion of America 1989 Nonqualified Stock Option Plan (filed as Exhibit 10(j) to HCA-Hospital Corporation of America's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).* 10.11 HCA-Hospital Corporation of America Nonqualified Initial Option Plan (filed as Exhibit 4.6 to the Company's Registration State- ment on Form S-3 (File No. 33-52379), and incorporated herein by reference).* 10.12 Termination Agreement between the Company and Carl F. Pollard dated December 16, 1993 (filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).* 10.13 Form of Indemnity Agreement with certain officers and directors (filed as Exhibit 10(kk) to Galen Health Care, Inc.'s Registra- tion Statement on Form 10, as amended, and incorporated herein by reference). 10.14 Form of Severance Pay Agreement between Galen Health Care, Inc. and certain executives (filed as Exhibit 10(jj) to Galen Health Care, Inc.'s Registration Statement on Form 10, as amended, and incorporated herein by reference).* 10.15 Form of Severance Agreement between HCA-Hospital Corporation of America and certain executives dated as of November 1, 1993 (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorpo- rated herein by reference).* 25
10.16 Assumption Agreement among the Company, CHOS Acquisition Corpo- ration and HCA-Hospital Corporation of America dated as of Feb- ruary 10, 1994, relating to the Severance Agreements (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).* 10.17 Form of Severance Pay Agreement between the Company and certain executives dated as of June 10, 1993 (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).* 10.18 Form of Galen Health Care, Inc. 1993 Adjustment Plan (filed as Exhibit 4.15 to the Company's Registration Statement on Form S-8 (File No. 33-50147), and incorporated herein by reference).* 10.19 Columbia/HCA Healthcare Corporation Annual Incentive Plan (filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).* 10.20 Columbia/HCA Healthcare Corporation Directors' Retirement Policy (filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorpo- rated herein by reference).* 10.21 HCA-Hospital Corporation of America 1992 Stock Compensation Plan (filed as Exhibit 10(t) to HCA-Hospital Corporation of America's Registration Statement on Form S-1 (File No. 33-44906), and in- corporated herein by reference).* 10.22 Columbia/HCA Healthcare Corporation 1995 Management Stock Pur- chase Plan (which plan is filed herewith).* 10.23 Employment Agreement, dated November 15, 1993 by and between Medical Care America, Inc. and Donald E. Steen (which agreement is filed herewith).* 10.24 Employment Agreement, dated April 24, 1995 by and between the Company and R. Clayton McWhorter (which agreement is filed here- with).* 11 Statement re Computation of Earnings Per Common and Common Equivalent Share. 12 Statement re Computation of Ratio of Earnings to Fixed Charges. 13 Portions of the 1995 Annual Report to Stockholders of the Compa- 21 ny. List of Subsidiaries. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Sr. Judith Ann Karam, CSA. 27 Financial Data Schedule. - -------- * Management compensatory plan or arrangement. (b) Reports on Form 8-K. <TABLE> <CAPTION> DATE OF CURRENT REPORT ITEM(S) REPORTED --------------- ---------------- <C> <S> November 24, 1995 Form of 7.19% Debenture due 2015 and 7.50% Debenture due 2095 issued by the Company December 8, 1995 Form of 7.05% Debenture due 2027 issued by the Company </TABLE> 26
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Ex- change Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 1996 COLUMBIA/HCA HEALTHCARE CORPORATION /s/ Richard L. Scott By: _________________________________ RICHARD L. SCOTT PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this re- port has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ R. Clayton McWhorter Chairman of the March 29, 1996 - ------------------------------------- Board R. CLAYTON MCWHORTER /s/ Thomas F. Frist, Jr., M.D. Vice Chairman of the March 29, 1996 - ------------------------------------- Board THOMAS F. FRIST, JR., M.D. /s/ Richard L. Scott President, Chief March 29, 1996 - ------------------------------------- Executive Officer RICHARD L. SCOTT and Director /s/ David C. Colby Senior Vice March 29, 1996 - ------------------------------------- President and DAVID C. COLBY Treasurer (Principal Financial Officer) /s/ Kenneth C. Donahey Senior Vice March 29, 1996 - ------------------------------------- President and KENNETH C. DONAHEY Controller (Principal Accounting Officer) /s/ Magdalena Averhoff, M.D. Director March 29, 1996 - ------------------------------------- MAGDALENA AVERHOFF, M.D. 27
SIGNATURE TITLE DATE /s/ Charles J. Kane Director March 29, 1996 - ------------------------------------- CHARLES J. KANE /s/ John W. Landrum Director March 29, 1996 - ------------------------------------- JOHN W. LANDRUM /s/ T. Michael Long Director March 29, 1996 - ------------------------------------- T. MICHAEL LONG /s/ Donald S. MacNaughton Director March 29, 1996 - ------------------------------------- DONALD S. MACNAUGHTON Director - ------------------------------------- RODMAN W. MOORHEAD III /s/ Carl E. Reichardt Director March 29, 1996 - ------------------------------------- CARL E. REICHARDT /s/ Frank S. Royal, M.D. Director March 29, 1996 - ------------------------------------- FRANK S. ROYAL, M.D. Director - ------------------------------------- Director ROBERT D. WALTER - ------------------------------------- WILLIAM T. YOUNG 28
INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ------- ----------- 1. Financial Statements The consolidated financial statements to be included in Part II, Item 8, are incorporated by reference to the Company's 1995 An- nual Report to Stockholders (See Exhibit 13). 2. List of Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 1995, 1994 and 1993 is included in Page S-1 of this Annual Report on Form 10-K. All other schedules are omitted because the required information is not present or not present in material amounts. 3. List of Exhibits 3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3(a) to the Company's Current Report on Form 8-K dated February 11, 1994, and incorporated herein by reference). 3.2(a) By-laws of the Company (filed as Exhibit 2.2 to the Company's Registration Statement on Form 8-A dated August 31, 1993, and incorporated herein by reference). 3.2(b) Amendment to By-laws of the Company (filed as Exhibit 3(b).1 to the Company's Current Report on Form 8-K dated February 11, 1994, and incorporated herein by reference). 4.1 Specimen Certificate for shares of Common Stock, par value $.01 per share, of the Company (filed as Exhibit 4.1 to the Company's Form SE to Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference). 4.2 Columbia Hospital Corporation 9% Subordinated Mandatory Convert- ible Note Due June 30, 1999 (filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference). 4.3 Registration Rights Agreement between the Company and The 1818 Fund, L.P. dated March 18, 1991 (filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference). 4.4 Securities Purchase Agreement by and between the Company and The 1818 Fund, L.P. dated as of March 18, 1991 (filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference). 4.5 Warrant to purchase shares of Common Stock, par value $.01 per share, of the Company (filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference). 4.6 Registration Rights Agreement dated as of March 16, 1989, by and among HCA- Hospital Corporation of America and the persons listed on the signature pages thereto (filed as Exhibit (g)(24) to Amendment No. 3 to the Schedule 13E-3 filed by HCA-Hospital Corporation of America, Hospital Corporation of America and The HCA Profit Sharing Plan on March 22, 1989, and incorporated herein by reference). 29
EXHIBIT NO. DESCRIPTION - ------- ----------- 4.7 Assignment and Assumption Agreement dated as of February 10, 1994, between HCA-Hospital Corporation of America and the Com- pany relating to the Registration Rights Agreement, as amended (filed as Exhibit 4.7 to the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 1993, and incorporated herein by reference). 4.8 Amended and Restated Rights Agreement dated February 10, 1994 between the Company and Mid-America Bank of Louisville and Trust Company (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and in- corporated herein by reference). 4.9(a) $1 Billion Credit Agreement dated as of February 10, 1994 (the "364 Day Agreement"), among the Company, the Several Banks and Other Financial Institutions, and Chemical Bank as Agent and as CAF Loan Agent (filed as Exhibit 4.9 to the Company's Annual Re- port on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference). 4.9(b) Agreement and Amendment to the 364 Day Agreement dated as of September 26, 1994 (filed as Exhibit 4.9 to the Company's Regis- tration Statement on Form S-4 (File No. 33-56803), and incorpo- rated herein by reference). 4.9(c) Agreement and Amendment to the 364 Day Agreement dated as of February 28, 1996 (which Agreement and Amendment is filed here- with). 4.10(a) $2 Billion Credit Agreement dated as of February 10, 1994 (the "Credit Facility"), among the Company, the Several Banks and Other Financial Institutions, and Chemical Bank as Agent and as CAF Loan Agent (filed as Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference). 4.10(b) Agreement and Amendment to the Credit Facility dated as of Sep- tember 26, 1994 (filed as Exhibit 4.10 to the Company's Regis- tration Statement on Form S-4 (File No. 33-56803), and incorpo- rated herein by reference). 4.10(c) Agreement and Amendment to the Credit Facility dated as of Feb- ruary 28, 1996 (which Agreement and Amendment is filed here- with). 4.11 Indenture dated as of December 15, 1993 between the Company and The First National Bank of Chicago, as Trustee (filed as Exhibit 4.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by refer- ence). 10.1 Agreement and Plan of Merger among the Company, COL Acquisition Corporation and Healthtrust, Inc.--The Hospital Company dated as of October 4, 1994 (filed as Exhibit 2 to the Company's Regis- tration Statement on Form S-4 (File No. 33-56803), and incorpo- rated herein by reference). 10.2 Agreement and Plan of Merger among the Company, CHOS Acquisition Corporation and HCA-Hospital Corporation of America dated as of October 2, 1993 (filed as Exhibit 2 to the Company's Registra- tion Statement on Form S-4 (File No. 33-50735), and incorporated herein by reference). 10.3 Agreement and Plan of Merger between Galen Health Care, Inc. and the Company dated as of June 10, 1993 (filed as Exhibit 2 to the Company's Registration Statement on Form S-4 (File No. 33- 49773), and incorporated herein by reference). 30
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.4 Agreement and Plan of Merger among Hospital Corporation of Amer- ica, HCA- Hospital Corporation of America and TF Acquisition, Inc. dated November 21, 1988 plus a list identifying the con- tents of all omitted exhibits to the Agreement and Plan of Merger plus an agreement of Hospital Corporation of America to furnish supplementally to the Securities and Exchange Commission upon request a copy of all omitted exhibits (filed as Exhibit 2 to Hospital Corporation of America's Current Report on Form 8-K dated November 21, 1988, and incorporated herein by reference). 10.5 Amendment No. 1 to Agreement and Plan of Merger dated as of Feb- ruary 7, 1989, among Hospital Corporation of America, HCA-Hospi- tal Corporation of America and TF Acquisition, Inc. (filed as Exhibit 2(b) to Hospital Corporation of America's Annual Report on Form 10-K for the year ended December 31, 1988, and incorpo- rated herein by reference). 10.6 Columbia Hospital Corporation Stock Option Plan (filed as Ex- hibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference).* 10.7 Columbia Hospital Corporation 1992 Stock and Incentive Plan (filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Reg. No. 33-48886), and incorporated herein by ref- erence).* 10.8 Columbia Hospital Corporation Outside Directors Nonqualified Stock Option Plan (filed as Exhibit 28.1 to the Company's Regis- tration Statement on Form S-8 (File No. 33-55272), and incorpo- rated herein by reference).* 10.9 HCA-Hospital Corporation of America 1989 Nonqualified Stock Op- tion Plan, as amended through December 16, 1991 (filed as Ex- hibit 10(g) to HCA-Hospital Corporation of America's Registra- tion Statement on Form S-1 (File No. 33-44906), and incorporated herein by reference).* 10.10 Form of Stock Option Agreement under the HCA-Hospital Corpora- tion of America 1989 Nonqualified Stock Option Plan (filed as Exhibit 10(j) to HCA-Hospital Corporation of America's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).* 10.11 HCA-Hospital Corporation of America Nonqualified Initial Option Plan (filed as Exhibit 4.6 to the Company's Registration State- ment on Form S-3 (File No. 33-52379), and incorporated herein by reference).* 10.12 Termination Agreement between the Company and Carl F. Pollard dated December 16, 1993 (filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).* 10.13 Form of Indemnity Agreement with certain officers and directors (filed as Exhibit 10(kk) to Galen Health Care, Inc.'s Registra- tion Statement on Form 10, as amended, and incorporated herein by reference). 10.14 Form of Severance Pay Agreement between Galen Health Care, Inc. and certain executives (filed as Exhibit 10(jj) to Galen Health Care, Inc.'s Registration Statement on Form 10, as amended, and incorporated herein by reference).* 10.15 Form of Severance Agreement between HCA-Hospital Corporation of America and certain executives dated as of November 1, 1993 (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorpo- rated herein by reference).* 31
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.16 Assumption Agreement among the Company, CHOS Acquisition Corpo- ration and HCA-Hospital Corporation of America dated as of Feb- ruary 10, 1994, relating to the Severance Agreements (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).* 10.17 Form of Severance Pay Agreement between the Company and certain executives dated as of June 10, 1993 (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).* 10.18 Form of Galen Health Care, Inc. 1993 Adjustment Plan (filed as Exhibit 4.15 to the Company's Registration Statement on Form S-8 (File No. 33-50147), and incorporated herein by reference).* 10.19 Columbia/HCA Healthcare Corporation Annual Incentive Plan (filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).* 10.20 Columbia/HCA Healthcare Corporation Directors' Retirement Policy (filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorpo- rated herein by reference).* 10.21 HCA-Hospital Corporation of America 1992 Stock Compensation Plan (filed as Exhibit 10(t) to HCA-Hospital Corporation of America's Registration Statement on Form S-1 (File No. 33-44906), and in- corporated herein by reference).* 10.22 Columbia/HCA Healthcare Corporation 1995 Management Stock Pur- chase Plan (which plan is filed herewith).* 10.23 Employment Agreement, dated November 15, 1993 by and between Medical Care America, Inc. and Donald E. Steen (which agreement is filed herewith).* 10.24 Employment Agreement, dated April 24, 1995 by and between the Company and R. Clayton McWhorter (which agreement is filed here- with).* 11 Statement re Computation of Earnings Per Common and Common Equivalent Share. 12 Statement re Computation of Ratio of Earnings to Fixed Charges. 13 Portions of the 1995 Annual Report to Stockholders of the Compa- 21 ny. List of Subsidiaries. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Sr. Judith Ann Karam, CSA. 27 Financial Data Schedule. - -------- * Management compensatory plan or arrangement. 32
COLUMBIA/HCA HEALTHCARE CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (DOLLARS IN MILLIONS) <TABLE> <CAPTION> ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND DEDUCTIONS AT END OF PERIOD EXPENSES OR PAYMENTS OF PERIOD ---------- ---------- ----------- --------- <S> <C> <C> <C> <C> Allowances for doubtful accounts: Year ended December 31, 1993..... $583 $699 $(645) $637 Year ended December 31, 1994..... 637 853 (706) 784 Year ended December 31, 1995..... 784 998 (881) 901 </TABLE> S-1