Community Health Systems, Inc.
10-K on 02/18/2021   Download
SEC Document
SEC Filing
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended December 31, 2020

 

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from             to 

Commission file number 001-15925

 

COMMUNITY HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

13-3893191

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

 

4000 Meridian Boulevard

37067

Franklin, Tennessee

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:

(615465-7000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $.01 par value

CYH

New York Stock Exchange

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes      No 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes      No 

 

Indicate by check mark whether the registrant (1) has filed all reports required 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

 

 

 

 

 

Large accelerated filer 

Accelerated filer

Smaller reporting company     

 

Non-accelerated filer     

Emerging growth company     

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes      No 

 

The aggregate market value of the voting stock held by non-affiliates of the Registrant was $336,683,731. Market value is determined by reference to the closing price on June 30, 2020 of the Registrant’s Common Stock as reported by the New York Stock Exchange. The Registrant does not (and did not at June 30, 2020) have any non-voting common stock outstanding. As of February 12, 2021, there were 129,615,003 shares of common stock, par value $.01 per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information required for Part III of this annual report is incorporated by reference to portions of the Registrant’s definitive proxy statement for its 2021 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year ended December 31, 2020.

 

 

 


 

TABLE OF CONTENTS

COMMUNITY HEALTH SYSTEMS, INC.

Year ended December 31, 2020

 

 

 

 

Page

 

PART I

 

 

 

 

 

 

Item 1.

Business

 

1

Item 1A.

Risk Factors

 

23

Item 1B.

Unresolved Staff Comments

 

42

Item 2.

Properties

 

42

Item 3.

Legal Proceedings

 

45

Item 4.

Mine Safety Disclosures

 

48

 

 

 

 

 

PART II

 

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

49

Item 6.

Selected Financial Data

 

50

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

51

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

 

79

Item 8.

Financial Statements and Supplementary Data

 

80

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

133

Item 9A.

Controls and Procedures

 

133

Item 9B.

Other Information

 

133

 

 

 

 

 

PART III

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

136

Item 11.

Executive Compensation

 

137

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

137

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

137

Item 14.

Principal Accountant Fees and Services

 

137

 

 

 

 

 

PART IV

 

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

138

Item 16.

Form 10-K Summary

 

148

 

 

 

 


 

Item 1. Business of Community Health Systems, Inc.

Overview of Our Company

We are one of the largest publicly-traded hospital companies in the United States and a leading operator of general acute care hospitals and outpatient facilities in communities across the country. We were originally founded in 1986 and were reincorporated in 1996 as a Delaware corporation. We provide healthcare services through the hospitals that we own and operate and affiliated businesses in generally larger non-urban markets and selected urban markets throughout the United States. As of December 31, 2020, we owned or leased 89 hospitals with an aggregate of 14,110 licensed beds, comprised of 87 general acute care hospitals and two stand-alone rehabilitation or psychiatric hospitals. These hospitals are geographically diversified across 16 states, with the majority of our hospitals located in regional networks or in close geographic proximity to one or more of our other hospitals. We generate revenues by providing a broad range of general and specialized hospital healthcare services and outpatient services to patients in the communities in which we are located. Services provided through our hospitals and affiliated businesses include general acute care, emergency room, general and specialty surgery, critical care, internal medicine, obstetrics, diagnostic, psychiatric and rehabilitation services. We also provide additional outpatient services at primary care practices, urgent care centers, free-standing emergency departments, ambulatory surgery centers, imaging and diagnostic centers, retail clinics and via direct-to-consumer virtual health visits. An integral part of providing these services is our network of affiliated physicians at our hospitals and affiliated businesses. As of December 31, 2020, we employed approximately 1,500 physicians and an additional 800 licensed healthcare practitioners. Through our management and operation of these businesses, we provide standardization and centralization of operations across key business areas; strategic assistance to expand and improve services and facilities; implementation of patient safety and quality of care improvement programs and assistance in the recruitment of additional physicians and licensed healthcare practitioners to the markets in which our hospitals are located. In a number of our markets, we have partnered with local physicians or not-for-profit providers, or both, in the ownership of our facilities.

Since 2017, we have implemented a portfolio rationalization and deleveraging strategy by divesting hospitals and non-hospital businesses that are attractive to strategic and other buyers. This portfolio rationalization and deleveraging strategy was completed at the end of 2020, inclusive of definitive agreements with respect to sales of five hospitals entered into in 2020 which have closed or are expected to close in 2021. We continue to receive interest from potential acquirers for certain of our hospitals, and may, from time to time, consider selling additional hospitals if we consider any such disposition to be in our best interests.

During 2020, we completed the divestiture of 13 hospitals, including three hospitals the divestitures of which closed effective January 1, 2020 (for these hospitals, we received the net proceeds at a preliminary closing on December 31, 2019). Including the net proceeds for the three hospitals that preliminarily closed on December 31, 2019, we received total net proceeds of approximately $845 million in connection with the disposition of these hospitals. Moreover, as of December 31, 2020, we had entered into definitive agreements to divest five additional hospitals. We completed the divestiture of four of those hospitals during 2021, and anticipate completing the divestiture of the fifth during 2021, the proceeds for which are not expected to be material.

During 2019, we completed the divestiture of 12 hospitals, including two which closed effective January 1, 2019 (for these hospitals, we received the net proceeds at a preliminary closing on December 31, 2018). Excluding the net proceeds for the two hospitals that preliminarily closed on December 31, 2018 and the three hospitals that preliminarily closed on December 31, 2019, we received total net proceeds of approximately $335 million in connection with the disposition of these hospitals. During 2018, we completed the divestiture of 11 hospitals. Including the net proceeds for the two additional hospitals that preliminarily closed on December 31, 2018 noted above, we received total net proceeds of approximately $405 million in connection with the disposition of these hospitals.

Throughout this Form 10-K, we refer to Community Health Systems, Inc., or the Parent Company, and its consolidated subsidiaries in a simplified manner and on a collective basis, using words like “we,” “our,” “us” and the “Company.” This drafting style is suggested by the Securities and Exchange Commission, or SEC, and is not meant to indicate that the publicly-traded Parent Company or any particular subsidiary of the Parent Company owns or operates any asset, business or property. The hospitals, operations and businesses described in this filing are owned and operated, and management services provided, by distinct and indirect subsidiaries of Community Health Systems, Inc.

Available Information

Our website address is www.chs.net and the investor relations section of our website is located at www.chs.net/investor-relations. Notwithstanding the foregoing, the information contained on our website as noted above or elsewhere in this Form 10-K is not incorporated by reference into this Form 10-K.  We make available free of charge, through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as well as amendments to those reports, as soon as reasonably practical after they are filed with, or furnished to, the SEC. The SEC maintains an Internet site

1


 

that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov.

We also make available free of charge, through the investor relations section of our website, our By-laws, our Governance Guidelines, our Code of Conduct and the charters of our Audit and Compliance Committee, Compensation Committee and Governance and Nominating Committee.

We have included the Chief Executive Officer and the Chief Financial Officer certifications regarding the public disclosure required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-K.

Our Business Strategy

The key elements of our business strategy are to:

Become a market leader and increase market share in the communities we serve

We operate across diverse markets that range from sole community providers to large regional networks. We are able to leverage our significant scale and standardized systems to provide cost-effective services and best practices for our affiliate operations. Each of our markets develops and executes a strategic plan with short- and long-term goals, based on their unique opportunities and the needs of their respective communities. As an organization, we also have implemented a number of strategic initiatives designed to improve market position, expand services to our patients, and capture a greater share of healthcare spending in our markets. These include:

 

Strengthening regional networks and local market operations;

 

Expanding patient access points, health services and infrastructure;

 

Recruiting and/or employing additional primary care physicians and specialists; and

 

Developing a more consumer-centric experience and facilitating connections between episodes of care.

Strengthening Regional Networks and Local Market Operations. We believe opportunities exist in select markets to create healthcare networks consisting of multiple hospitals and corresponding outpatient services.

Regional networks are able to expand the breadth of services provided for our patients, develop centers of excellence for key services, deliver care in an organized and efficient way across the network, improve alignment with physicians and other providers, and make services more attractive to managed care and other payers. Currently, 56 of our hospitals operate in 14 unique regional networks.

We also operate healthcare systems that are built around a single acute-care hospital. In these markets, we are focused on supporting the hospital with physician practices, outpatient services, clinical collaborations and partnerships that offer our patients health services across the continuum of care. These hospitals and their related outpatient services may operate in competitive markets or as sole community providers.

Expanding Patient Access Points, Health Services and Infrastructure. When expanding services—in both the acute and non-acute care settings—our approach is data-driven and strategic to ensure our investments are responsive to community and patient needs and produce sound financial results. While we continue to provide health services across a broad spectrum, we have focused our attention and resources on service lines we believe have the greatest potential for growth, including primary care, emergency medicine, orthopedics, neuroscience, cardiovascular care, surgical services and behavioral health. As the shift to delivering health services in outpatient settings accelerates, we continue to expand our care offerings beyond hospital walls to include more outpatient access through primary care practices, urgent care centers, free-standing emergency departments, ambulatory surgery centers, imaging and diagnostic centers, retail clinics and direct-to-consumer virtual health visits.

We believe expanding our patient access footprint can attract new patients and increase patient retention, as well as our ability to connect patients from one episode of care to the next appropriate care setting. We also believe our investments will enhance our long-term growth and generate increased revenue, earnings, and operating margins by providing a solid return on investment.

Recruiting and/or Employing Additional Primary Care Physicians and Specialists. The physician-patient relationship is the foundation on which all healthcare services are built. Understanding this, we continuously assess our communities to identify service gaps and practice opportunities in order to recruit an optimal mix of primary care physicians and specialists. We analyze demographic data and referral trends and employ recruiters at the corporate level to support local hospital administrators in their physician recruitment efforts. In some markets, we employ physicians, often acquiring their practices at the onset of the arrangement. However, most physicians in our communities and on our medical staffs remain in private practice and are not our employees.

2


 

We work hard to develop positive, collaborative relationships with physicians. We currently participate in 15 Medicare Shared Savings Program Accountable Care Organizations which include approximately 5,000 employed and independent physicians in our communities. We look forward to realizing the benefits of these Accountable Care Organizations, including opportunities to strengthen quality, deepen clinical collaboration and demonstrate performance under a reimbursement system moving toward more value-based incentives and payments.

Developing a More Consumer-Centric Experience and Facilitating Connections between Episodes of Care. Consumers continue to take a more active role in healthcare decision-making, especially as they assume increasing responsibility for the cost of their healthcare. The rise in consumerism is highlighting customer expectations that have not always been prioritized in the healthcare setting. We are working on ways to create more enduring relationships with our patients by providing services that help people navigate their healthcare journeys and enable more seamless connections across episodes of care in our healthcare systems, hospitals, and physician practices. Some of these initiatives include:

 

A centralized and proprietary transfer center offering services to connect emergency department and hospitalized patients requiring transfer to facilities that can best meet their needs;

 

Centralized patient scheduling call centers and online scheduling to ease appointment scheduling;

 

Patient navigation and next appointment scheduling from existing points of care;

 

Availability of virtual health for certain services provided in the hospital and for direct-to-consumer, on-demand virtual visits with physicians;

 

Digital marketing and consumer engagement campaigns; and

 

Other technology enabled initiatives that support connected healthcare experiences, such as patient portals, text message appointment reminders, gaps-in-care campaigns and post-discharge surveys.

Increase productivity and operating efficiencies to enhance profitability

Our hospital management teams are supported by experienced corporate leaders who have significant industry knowledge and a proven track record of success. Local hospitals benefit from centralized clinical, operational, financial and regulatory expertise that encompasses nearly every aspect of our business. Additionally, we are able to leverage deep and meaningful data sources to facilitate informed decision-making and drive operational improvements across the enterprise in areas such as drug and supply procurement, workforce optimization and staffing and emergency department and operating room performance.

Standard policies and procedures in areas ranging from physician practice management to patient accounting to construction and facilities management help to facilitate best practices, reduce variation and improve operating results. The following areas highlight some of our standardized and centralized platforms.

Billing and Collections. We have adopted standard policies and procedures with respect to billing and collections. We have automated various components of the collection cycle, including statements and collection letters, to help facilitate timely and accurate progression of our accounts through the collection cycle. We have consolidated local billing and collection functions into five centralized business offices and have completed the transition of our hospital billing departments to this new infrastructure. We are now realizing the benefits of lower patient claim denials, higher underpayment recoveries and reduced operating expenses.

Physician Support. We support newly recruited physicians to facilitate a smooth and effective transition into our communities. Newly recruited physicians participate in orientation that covers matters related to starting up a new practice or joining an established practice. For employed physicians, we utilize software solutions that monitor and help optimize their practice performance against industry standard benchmarks and best practices. We also have implemented programs to improve physician workflow, reduce physician turnover, optimize staffing at physician clinics and standardize onboarding processes.

Procurement and Materials Management. We have standardized and centralized supply chain operations to improve procurement of the medical supplies, equipment and pharmaceuticals used in our hospitals. We have an ownership interest in and participation agreement with HealthTrust Purchasing Group, L.P., or HealthTrust, a group purchasing organization, or GPO, which benefits members through scaled pricing. HealthTrust contracts with certain vendors who supply a substantial portion of our medical supplies, equipment and pharmaceuticals.

Case and Resource Management. The primary goal of our case management program is to deliver safe, high-quality care in an efficient and cost effective manner. The program focuses on:

 

Appropriate management of length of stay consistent with national standards and benchmarks;

 

Reducing unnecessary utilization;

3


 

 

Developing and implementing operational best practices;

 

Discharge planning; and

 

Compliance with applicable regulatory standards.

Our case management program integrates the functions of utilization review, discharge planning, assessment of medical necessity and resource management. Patients are assessed upon presentation to the hospital and throughout their course of care with ongoing reviews. Industry-standard criteria are utilized in patient assessments and discharge plans are adjusted according to patient needs. Cases are monitored to prevent delays in service or unnecessary utilization of resources. When a patient is ready for discharge, a case manager works with the patient’s attending physician to evaluate and coordinate the patient’s needs for continued care in the post-acute setting. Hospitals have the support of a physician advisor to act as a liaison to the medical staff and assist with all the activities of the program.

Other Initiatives. Numerous other initiatives have been standardized or centralized and leverage data to reduce costs and increase productivity. For example, we have improved staff scheduling and efficiency by implementing standardized time keeping systems, and we have implemented initiatives to reduce unnecessary overtime and guide temporary staffing decisions that align with patient admissions and acuity. We have created a centralized team and implemented standard processes for payroll processing and management of accounts payable. Likewise, we have leveraged data and expertise to optimize our performance in clinical and operating areas such as emergency room, pharmacy, laboratory, imaging and skilled nursing services and health information management. Each time we implement a new process initiative, we work to identify and communicate best practices and we monitor progress and performance improvement throughout the organization.

Continuously improve patient safety and quality of care

We maintain quality assurance programs to monitor, support and advance quality of care standards and to meet Medicare and Medicaid accreditation and regulatory requirements. We maintain an emphasis on patient safety and clinical outcomes and we are continuously focused on ways to improve patient, physician and employee satisfaction. We believe that a focus on continuous improvement yields the best results for patients, reduces risk and liability, and creates value for the people and communities we serve.

We have developed and implemented programs to support and monitor patient safety and quality of care that include:

 

Standardized data and benchmarks to monitor clinical outcomes, hospital performance and quality improvement efforts;

 

Recommended policies and procedures based on medical and scientific evidence;

 

Training with evidence-based tools for improving patient safety and quality of care and patient, physician and employee satisfaction;

 

Leveraging technology and information sharing around evidence-based clinical best practices;

 

Training programs for hospital management and clinical staff regarding regulatory and reporting requirements; and

 

Implementation of specific leadership methods and error-prevention tools to create safer care environments for patients and staff.

We have operated a Patient Safety Organization, or PSO, since 2011. Our PSO is listed by the U.S. Department of Health and Human Services Agency, or HHS, for Healthcare Research and Quality. We believe our PSO has assisted, and will continue to assist us, in improving patient safety at our hospitals. The PSO has been recertified through 2024.

Industry Overview

According to the Centers for Medicare & Medicaid Services, or CMS, national healthcare expenditures grew 4.6% in 2019 to $3.8 trillion and are projected to have grown 5.2% in 2020 to nearly $4.0 trillion. The CMS projections, published in March of 2020, indicate that total U.S. healthcare spending is expected to grow by 5.1% in 2021 and 5.7% in 2022, and at an average annual rate of 5.4% for 2019 through 2028. CMS anticipates that total U.S. healthcare annual expenditures will reach nearly $6.2 trillion by 2028, accounting for approximately 19.7% of the total U.S. gross domestic product. Healthcare spending is expected to be largely influenced by changes in economic conditions and demographics, as well as by increasing prices for medical goods and services. The CMS projections are constructed using a current-law framework. They are typically published once per year and are not updated to reflect interim changes. For example, the projections do not take into account the COVID-19 pandemic and its impact or the possibility of further modifications to, or repeal of, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively, the Affordable Care Act.

Hospital services, the market within the healthcare industry in which we primarily operate, is the largest single category of healthcare expenditures. In 2020, hospital care expenditures are projected to have grown 5.1%, amounting to approximately $1.3

4


 

trillion. CMS estimates that the hospital services category will amount to over $1.4 trillion in 2021 and projects growth in this category at an average of 5.9% annually from 2021 through 2028.

U.S. Hospital Industry. The U.S. hospital industry is broadly defined to include acute care, rehabilitation and psychiatric facilities that are either public (government owned and operated), not-for-profit private (religious or secular), or for-profit institutions (investor owned). According to the American Hospital Association, there are approximately 5,100 community hospitals in the U.S., which are not-for-profit owned, investor owned, or state or local government owned. Of these hospitals, approximately 35% are located in non-urban communities. We believe that a majority of these hospitals are owned by not-for-profit or governmental entities. These facilities offer a broad range of healthcare services, including internal medicine, general surgery, cardiology, oncology, orthopedics, OB/GYN and emergency services. In addition, hospitals offer other ancillary services, including psychiatric, diagnostic, rehabilitation, home care and outpatient surgery services.

Factors Affecting Performance. Among the many factors that can influence a hospital’s financial and operating performance are:

 

facility size and location;

 

facility ownership structure (e.g., tax-exempt or investor owned);

 

a facility’s ability to participate in GPOs, such as HealthTrust; and

 

facility payor mix.

Patients needing the most complex care are more often served by the larger and/or more specialized urban hospitals. We believe opportunities exist in selected urban markets to create networks between urban hospitals and non-urban hospitals in order to expand the breadth of services offered in the non-urban hospitals while improving physician alignment in those markets and making them more attractive to managed care organizations.

COVID-19 Pandemic

As a provider of healthcare services, we have been significantly affected by the public health and economic effects of the COVID-19 pandemic. We have been working with federal, state and local health authorities to respond to COVID-19 cases in the communities we serve and have been taking or supporting measures to try to limit the spread of the virus and to mitigate the burden on the healthcare system, including, at times, rescheduling or cancelling elective procedures at our hospitals and other healthcare facilities.  For additional information regarding the ongoing impact of the COVID-19 pandemic on the Company, see the discussion below under “COVID-19 Pandemic” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K.

Hospital Industry Trends

Demographic Trends. According to the U.S. Census Bureau, in 2020, there were nearly 51 million Americans aged 65 or older in the U.S. comprising approximately 15.6% of the total U.S. population. By the year 2030, the number of Americans aged 65 or older is expected to climb to 73 million, or 20.6% of the total population. Due to the anticipated increasing life expectancy of Americans, the number of people aged 85 and older is also expected to increase from 6 million in 2016 to 9 million by the year 2030. This anticipated increase in life expectancy will increase demand for healthcare services and, as importantly, the demand for innovative, more sophisticated means of delivering those services. Hospitals, as the largest category of care in the healthcare market, will be among those impacted most directly by this increase in demand. Based on data compiled for us, the populations of the service areas where our hospitals are located grew 4.9% from 2015 to 2020 and are expected to grow by 3.2% from 2020 to 2025. The number of people aged 65 or older in these service areas grew by 17.2% from 2015 to 2020 and is expected to grow by 15.9% from 2020 to 2025. People aged 65 or older comprised 18.7% of the total population in our service areas in 2020, and they may comprise an estimated 20.9% of the total population in our service areas by 2025.

Consolidation. In addition to our own acquisitions and dispositions in recent years, consolidation activity in the hospital industry, primarily through mergers and acquisitions involving both for-profit and not-for-profit hospital systems, is continuing. Reasons for this activity include:

 

ample supply of available capital;

 

valuation levels;

 

financial performance issues, including challenges associated with changes in reimbursement and collectability of self-pay revenue;

 

the desire to enhance the local availability of healthcare in the community;

 

the need and ability to recruit primary care physicians and specialists;

5


 

 

the need to achieve general economies of scale and to gain access to standardized and centralized functions, including favorable supply agreements and access to malpractice coverage;

 

changes to healthcare payment models that emphasize cost-effective delivery of service and quality of outcomes for the entire episode of care; and

 

regulatory changes.

The payor industry is also consolidating and acquiring health services providers in an effort to offer more expansive, competitive programs.

Trends in Payment for Healthcare Services. As discussed in more detail in the Government Regulation section of this Form 10-K, the impact of healthcare reform legislation, combined with the growing financial and economic pressures on the healthcare industry, has resulted in challenges to traditional reimbursement models. For example, the Affordable Care Act has encouraged the adoption of new payment models that emphasize cost-effective delivery of care and quality of outcomes. Although the number of patients with health insurance coverage has expanded since 2010, the year the Affordable Care Act was enacted, patients may face higher deductibles and increased co-payment requirements, which may result in greater write-offs of uncollectible amounts from those patients.

Shift to Outpatient Services. Because of the growing availability of stand-alone outpatient healthcare facilities, the increase in the services that can be provided at these locations, and payor policies requiring or promoting treatment in outpatient settings, many individuals are seeking a broader range of services at outpatient facilities. This trend has contributed to an increase in outpatient services while inhibiting the growth of inpatient admissions. Recent changes to Medicare policy affecting the reimbursement methodology for certain items and services provided by off-campus provider-based hospital departments have generally resulted in reduced payment rates for these hospital outpatient settings. In December 2020, CMS finalized a rule that will begin phasing out over three years the Inpatient Only List, which is a list of procedures eligible to be reimbursed by Medicare only if performed in an inpatient setting. As a result, these procedures will also be eligible to be reimbursed by Medicare if performed in outpatient settings, which may further increase the demand for outpatient services and decrease the demand for inpatient services.

Selected Operating Data

The following table sets forth operating statistics for each of the years presented for our hospitals. Statistics for 2020 include a full year of operations for 88 hospitals and partial periods for 13 hospitals that were divested, one hospital that was closed and one hospital that was opened during the year reflecting the operations of these hospitals prior to divestiture or closure or after commencing operations, as applicable. Statistics for 2019 include a full year of operations for 101 hospitals and partial periods for 12 hospitals divested and one hospital that was acquired during the year reflecting the operations of these hospitals prior to divestiture or after acquisition, as applicable. Statistics for 2018 include a full year of operations for 113 hospitals and partial periods for 11 hospitals

6


 

divested during the year and three hospitals that ceased operations during the year reflecting the operations of these hospitals prior to divestiture or closure.

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Consolidated Data

 

 

 

 

 

 

 

 

 

 

 

 

Number of hospitals (at end of period)

 

 

89

 

 

 

102

 

 

 

113

 

Licensed beds (at end of period)(1)

 

 

14,110

 

 

 

16,240

 

 

 

18,227

 

Beds in service (at end of period)(2)

 

 

12,421

 

 

 

14,442

 

 

 

16,297

 

Admissions(3)

 

 

470,325

 

 

 

557,959

 

 

 

627,321

 

Adjusted admissions(4)

 

 

973,571

 

 

 

1,208,513

 

 

 

1,351,857

 

Patient days(5)

 

 

2,190,939

 

 

 

2,474,569

 

 

 

2,815,401

 

Average length of stay (days)(6)

 

 

4.7

 

 

 

4.4

 

 

 

4.5

 

Occupancy rate (beds in service)(7)

 

 

44.6

%

 

 

45.1

%

 

 

43.5

%

Net operating revenues

 

$

11,789

 

 

$

13,210

 

 

$

14,155

 

Net inpatient revenues as a % of net operating revenues

 

 

49.1

%

 

 

47.0

%

 

 

47.7

%

Net outpatient revenues as a % of net operating revenues

 

 

50.9

%

 

 

53.0

%

 

 

52.3

%

Net income (loss) attributable to Community Health Systems Inc.

   stockholders

 

$

511

 

 

$

(675

)

 

$

(788

)

Net income (loss) attributable to Community Health Systems Inc.

   stockholders as a % of net operating revenues

 

 

4.3

%

 

 

(5.1

)%

 

 

(5.6

)%

Adjusted EBITDA(8)

 

$

1,809

 

 

$

1,628

 

 

$

1,642

 

Adjusted EBITDA as a % of net operating revenues(8)

 

 

15.3

%

 

 

12.3

%

 

 

11.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity Data

 

 

 

 

 

 

 

 

 

 

 

 

Net cash flows provided by operating activities

 

$

2,178

 

 

$

385

 

 

$

274

 

Net cash flows provided by operating activities as a % of net operating

   revenues

 

 

18.5

%

 

 

2.9

%

 

 

1.9

%

Net cash flows provided by (used in) investing activities

 

$

177

 

 

$

(2

)

 

$

(245

)

Net cash flows used in financing activities

 

$

(895

)

 

$

(363

)

 

$

(396

)

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

(Decrease) Increase

 

 

 

(Dollars in millions)

 

Same-Store Data(9)

 

 

 

 

 

 

 

 

 

 

 

 

Admissions(3)

 

 

443,106

 

 

 

481,658

 

 

 

(8.0

)%

Adjusted admissions(4)

 

 

919,325

 

 

 

1,050,558

 

 

 

(12.5

)%

Patient days(5)

 

 

2,064,349

 

 

 

2,127,231

 

 

 

 

 

Average length of stay (days)(6)

 

 

4.7

 

 

 

4.4

 

 

 

 

 

Occupancy rate (beds in service)(7)

 

 

45.6

%

 

 

46.5

%

 

 

 

 

Net operating revenues

 

$

11,207

 

 

$

11,603

 

 

 

(3.4

)%

Income from operations

 

$

1,285

 

 

$

1,038

 

 

 

23.8

%

Income from operations as a % of net operating revenues

 

 

11.5

%

 

 

8.9

%

 

 

 

 

Depreciation and amortization

 

$

520

 

 

$

526

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

$

(10

)

 

$

(15

)

 

 

 

 

 

(1)

Licensed beds are the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use.

(2)

Beds in service are the number of beds that are readily available for patient use.

(3)

Admissions represent the number of patients admitted for inpatient treatment.

(4)

Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues.

(5)

Patient days represent the total number of days of care provided to inpatients.

7


 

(6)

Average length of stay (days) represents the average number of days inpatients stay in our hospitals.

(7)

We calculated occupancy rate percentages by dividing the average daily number of inpatients by the weighted-average number of beds in service.

(8)

EBITDA is a non-GAAP financial measure which consists of net income (loss) attributable to Community Health Systems, Inc. before interest, income taxes, and depreciation and amortization. Adjusted EBITDA, also a non-GAAP financial measure, is EBITDA adjusted to add back net income attributable to noncontrolling interests and to exclude (gain) loss from early extinguishment of debt, impairment and (gain) loss on sale of businesses, (income) expense related to government and other legal settlements and related costs, expense incurred in the fourth quarter of 2020 related to the settlement of certain professional liability claims for which the third-party insurers’ obligation to insure the Company against the underlying loss is being litigated, expense related to employee termination benefits and other restructuring charges, expense from settlement and fair value adjustments on the CVR agreement liability related to the Health Management Associates, Inc., or HMA, legal proceedings and related legal expenses, the impact of changes in estimate to increase the professional liability claims accrual recorded during the second quarter of 2019 (which estimate was further revised in the third quarter of 2019 based on updated actuarial analysis) with respect to claims incurred in 2016 and prior years, and expense related to the valuation allowance recorded in the second quarter of 2019 to reserve the outstanding balance of a promissory note received from the buyer in connection with the sale of two of the Company’s hospitals in 2017, as well as income from a reduction of the valuation allowance on the outstanding balance of a promissory note from the buyer of another hospital. During the three months ended December 31, 2020, the Company incurred expenses in the amount of approximately $50 million related to the settlement of a professional liability claim for which the Company’s third-party insurers’ obligation to provide coverage to the Company in connection with the underlying loss is being litigated. In the ordinary course of business, the Company’s expense with respect to professional liability claims is limited to amounts not covered by third-party insurance policies, which typically provide coverage for professional liability claims. The subject of the litigation for the recovery of the full amount of the $50 million settlement is whether the claim is covered under the subject policies. The Company believes it is owed reimbursement of the full amount of the settlement by its insurers with respect to this matter. The Company has included this adjustment in the calculation of Adjusted EBITDA because the Company believes that this expense, absent the dispute as to whether it relates to a covered loss as defined in our insurance policies, would have been mitigated by insurance recoveries and is therefore outside of the ordinary course of the Company’s operations and not reflective of the Company’s underlying results of operations in light of the intended purpose of Adjusted EBITDA in assessing the Company’s operational performance and comparing the Company’s performance between periods. The Company has from time to time sold noncontrolling interests in certain of its subsidiaries or acquired subsidiaries with existing noncontrolling interest ownership positions. The Company believes that it is useful to present Adjusted EBITDA because it adds back the portion of EBITDA attributable to these third-party interests. The Company reports Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by management to assess the operating performance of the Company’s hospital operations and to make decisions on the allocation of resources. Adjusted EBITDA is also used to evaluate the performance of the Company’s executive management team and is one of the primary metrics used in connection with determining short-term cash incentive compensation and the achievement of vesting criteria with respect to performance-based equity awards. In addition, management utilizes Adjusted EBITDA in assessing the Company’s consolidated results of operations and operational performance and in comparing the Company’s results of operations between periods. The Company believes it is useful to provide investors and other users of the Company’s financial statements this performance measure to align with how management assesses the Company’s results of operations. Adjusted EBITDA also is comparable to a similar metric called Consolidated EBITDA, as defined in the Company’s  asset-based loan facility, or ABL Facility, which is a key component in the determination of our compliance with certain covenants under the ABL Facility (including our ability to service debt and incur capital expenditures), and is used to determine the interest rate and commitment fee payable under the ABL Facility (although Adjusted EBITDA does not include all of the adjustments described in the ABL Facility). Adjusted EBITDA includes the Adjusted EBITDA attributable to hospitals that were divested during the course of such year, but in each case solely to the extent relating to the period prior to the consummation of the applicable divestiture. For further discussion of Consolidated EBITDA and how that measure is utilized in the calculation of covenants in the ABL Facility, see the Capital Resources section of Part II, Item 7 of this Form 10-K.

Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP. It should not be considered in isolation or as a substitute for net income, operating income, or any other performance measure calculated in accordance with U.S. GAAP. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating financial performance. The Company believes such adjustments are appropriate as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Additionally, this calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

8


 

The following table reflects the reconciliation of Adjusted EBITDA, as defined, to net income (loss) attributable to Community Health Systems, Inc. stockholders as derived directly from our Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018 (in millions):

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Net income (loss) attributable to Community Health Systems, Inc.

   stockholders

 

$

511

 

 

$

(675

)

 

$

(788

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

(Benefit from) provision for income taxes

 

 

(185

)

 

 

160

 

 

 

(11

)

Depreciation and amortization

 

 

558

 

 

 

608

 

 

 

700

 

Net income attributable to noncontrolling interests

 

 

96

 

 

 

85

 

 

 

84

 

Interest expense, net

 

 

1,031

 

 

 

1,041

 

 

 

976

 

(Gain) loss from early extinguishment of debt

 

 

(317

)

 

 

54

 

 

 

(31

)

Impairment and (gain) loss on sale of businesses, net

 

 

48

 

 

 

138

 

 

 

668

 

(Income) expense from government and other legal settlements and

   related costs

 

 

-

 

 

 

93

 

 

 

11

 

Expense from the settlement of professional liability claims

    for which the third-party insurers' obligation to insure the

    Company for the underlying loss is being litigated

 

 

50

 

 

 

-

 

 

 

-

 

Expense from settlement and fair value adjustments and legal expenses

   related to cases covered by the CVR

 

 

2

 

 

 

11

 

 

 

13

 

Expense related to employee termination benefits and other

   restructuring charges

 

 

15

 

 

 

2

 

 

 

20

 

Change in valuation allowances recorded for promissory notes

 

 

-

 

 

 

21

 

 

 

-

 

Change in estimate for professional liability claims accrual

 

 

-

 

 

 

90

 

 

 

-

 

Adjusted EBITDA

 

$

1,809

 

 

$

1,628

 

 

$

1,642

 

 

(9)

Same-store data excludes the results of a hospital acquired in 2019, a hospital opened in 2020 and the hospitals divested or closed in the periods presented. For all hospitals owned throughout both periods, the same-store operating results and statistical data reflects the indicated periods.

Sources of Revenue

The following table presents the approximate percentages of net operating revenues by payor source for the periods indicated. The data for the periods presented are not strictly comparable due to the effect that hospital acquisitions and divestitures have had on these statistics.

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Medicare

 

 

23.9

%

 

 

25.2

%

 

 

26.3

%

Medicaid

 

 

13.4

 

 

 

13.2

 

 

 

13.3

 

Managed Care and other third-party payors

 

 

62.9

 

 

 

60.6

 

 

 

59.0

 

Self-pay

 

 

(0.2

)

 

 

1.0

 

 

 

1.4

 

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

As shown above, we receive a substantial portion of our revenues from the Medicare and Medicaid programs. Included in Managed Care and other third-party payors is operating revenues from insurance companies with which we have insurance provider contracts, Medicare managed care, insurance companies for which we do not have insurance provider contracts, workers’ compensation carriers and non-patient service revenue, such as rental income and cafeteria sales. In the future, we generally expect the portion of revenues received from the Medicare and Medicaid programs to increase over the long-term due to the general aging of the population and the impact of the Affordable Care Act. The Affordable Care Act has increased the number of insured patients in states that have expanded Medicaid, which in turn, has reduced the percentage of revenues from self-pay patients. However, it is unclear whether the trend of increased coverage will continue, due in part to the impact of the COVID-19 pandemic and the elimination of the financial penalty associated with the individual mandate, effective January 1, 2019. Further, the Affordable Care Act imposes significant reductions in amounts the government pays Medicare managed care plans. Moreover, the trend toward increased enrollment in Medicare and Medicaid managed care may adversely affect our operating revenue. An executive order issued in October 2019 seeks to accelerate

9


 

this shift away from traditional fee-for-service Medicare to Medicare managed care. We may also be impacted by regulatory requirements imposed on insurers, such as minimum medical-loss ratios and specific benefit requirements. Furthermore, in the normal course of business, managed care programs, insurance companies and employers actively negotiate the amounts paid to hospitals. Our relationships with payors may be impacted by price transparency initiatives and out-of-network billing restrictions. There can be no assurance that we will retain our existing reimbursement arrangements or that these third-party payors will not attempt to further reduce the rates they pay for our services.

Net operating revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-based reimbursement and other payment methods. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive for the treatment of patients covered by Medicare, Medicaid and non-governmental payors are generally less than our standard billing rates. We account for the differences between the estimated program reimbursement rates and our standard billing rates as contractual allowance adjustments, which we deduct from gross revenues to arrive at net operating revenues. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual allowance adjustments and report them in the periods that such adjustments become known. Contractual allowance adjustments related to final settlements and previous program reimbursement estimates impacted net operating revenues and net income (loss) by an insignificant amount in each of the years ended December 31, 2020, 2019 and 2018.

The payment rates under the Medicare program for hospital inpatient and outpatient acute care services are based on a prospective payment system, depending upon the diagnosis of a patient’s condition. These rates are indexed for inflation annually, although increases have historically been less than actual inflation.

Payment rates under the Medicaid program vary by state. In addition to the base payment rates for specific claims for services rendered to Medicaid enrollees, several states utilize supplemental reimbursement programs to make separate payments that are not specifically tied to an individual’s care, some of which offset a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from CMS and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. The programs are generally authorized for a specified period of time and require CMS’s approval to be extended. We are unable to predict whether or on what terms CMS will extend the supplemental programs in the states in which we operate. Under these supplemental programs, we recognize revenue and related expenses in the period in which amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in net operating revenues and included as Medicaid revenue in the table above, and fees, taxes or other program related costs are reflected in other operating expenses.

As of December 31, 2020, Indiana, Florida and Texas represented our only areas of significant geographic concentration. Net operating revenues generated by our hospitals in Indiana, as a percentage of consolidated net operating revenues, were 15.0% in 2020, 13.7% in 2019 and 12.5% in 2018. Net operating revenues generated by our hospitals in Florida, as a percentage of consolidated net operating revenues, were 13.0% in 2020 and 14.3% in 2019 and 2018. Net operating revenues generated by our hospitals in Texas, as a percentage of consolidated net operating revenues, were 12.2% in both 2020 and 2019 and 11.7% in 2018.

Hospital revenues depend upon inpatient occupancy levels, the volume of outpatient procedures and the charges or negotiated payment rates for hospital services provided. Charges and payment rates for routine inpatient services vary significantly depending on the type of service performed and the geographic location of the hospital. In recent years, we have experienced a significant increase in revenue received from outpatient services. We attribute this increase to:

 

advances in technology, which have permitted us to provide more services on an outpatient basis and  

 

pressure from Medicare and Medicaid programs, insurance companies and managed care plans to reduce the length and number of inpatient hospital stays and to reduce costs by providing services on an outpatient rather than on an inpatient basis.

Healthcare facility operations are also subject to certain seasonal fluctuations, including decreases in patient utilization during holiday periods and increases in colder weather months. However, the COVID-19 pandemic has had, and may continue to have, an impact on patient behaviors and patient volumes that has resulted in, and may continue to result in, temporary changes in typical seasonal fluctuations of our business.

10


 

Government Regulation

Overview. The healthcare industry is required to comply with extensive government regulation at the federal, state and local levels. If we fail to comply with applicable laws and regulations, we may be subject to criminal penalties and civil sanctions, our hospitals could lose their licenses and we could lose our ability to participate in Medicare, Medicaid and other government programs. Hospitals must meet requirements to be certified as hospitals and qualified to participate in government programs, including those relating to the adequacy of medical care, equipment, personnel, operating policies and procedures; billing and coding for services; properly handling overpayments; classifications of levels of care provided; preparing and filing cost reports; relationships with referral sources and referral recipients; maintenance of adequate records; hospital use; rate-setting; compliance with building codes; environmental protection; privacy and security; interoperability and refraining from information blocking; debt collection; and communications with patients and consumers.

Hospitals are subject to periodic inspection by federal, state and local authorities to determine their compliance with applicable regulations and requirements necessary for licensing and certification. All of our hospitals are licensed under appropriate state laws and are qualified to participate in Medicare and Medicaid programs. In addition, most of our hospitals are accredited by The Joint Commission. This accreditation indicates that a hospital satisfies the applicable health and administrative standards to participate in Medicare and Medicaid programs.

Government regulations may change. If that happens, we may have to make changes to our facilities, equipment, personnel and services so that our hospitals remain certified as hospitals and qualified to participate in these programs. We believe that our hospitals are in substantial compliance with current federal, state and local regulations and standards. We cannot be certain that governmental officials responsible for enforcing these laws or whistleblowers will not assert that we are in violation of them or that such statutes or regulations will be interpreted by the courts in a manner consistent with our interpretation.

Healthcare Reform. Over the last decade, the U.S. Congress and certain state legislatures have introduced and passed a large number of proposals and legislation designed to make major changes in the healthcare system, including changes intended to increase access to health insurance. The most prominent of these efforts, the Affordable Care Act, affects how healthcare services are covered, delivered, and reimbursed. The Affordable Care Act has increased health insurance coverage through a combination of public program expansion and private sector health insurance reforms and mandated that substantially all U.S. citizens maintain health insurance coverage. However, the future of the Affordable Care Act is uncertain. The law has been subject to legislative and regulatory changes and court challenges, and certain members of Congress have stated their intent to repeal or make additional significant changes to, the Affordable Care Act, its implementation or its interpretation. Effective January 1, 2019, the financial penalty enforcing the individual mandate was eliminated. In December 2018, as a result of this change, a federal judge in Texas found the individual mandate unconstitutional and determined the rest of the Affordable Care Act was therefore invalid. In December 2019, the Fifth Circuit Court of Appeals upheld this decision with respect to the individual mandate, but remanded for further consideration of how this affects the rest of the law. On November 10, 2020, the Supreme Court heard oral arguments regarding this case, and the law remains in place pending the appeals process. The elimination of the individual mandate penalty and other changes may impact the number of individuals that elect to obtain public or private health insurance or the scope of such coverage, if purchased. Moreover, final rules issued in 2018 expand the availability of association health plans and allow the sale of short-term, limited-duration health plans, neither of which are required to cover all of the essential health benefits mandated by the Affordable Care Act.

We believe that the Affordable Care Act has had a positive impact on net operating revenues and income as the result of the expansion of private sector and Medicaid coverage that has occurred. However, other provisions of the Affordable Care Act, such as requirements related to employee health insurance coverage, have increased our operating costs. In addition, the Affordable Care Act has made changes to Medicare and Medicaid reimbursement that could adversely impact the reimbursement we receive under these programs. These changes include a productivity offset to the Medicare market basket update and reductions to the Medicare and Medicaid disproportionate share hospital, or DSH, payments. However, reductions to DSH payments have been delayed through 2023 by the Consolidated Appropriations Act, 2021, or the CAA.

Substantial uncertainty remains regarding the ongoing net effect of the Affordable Care Act due to the possibility of repeal or significant additional changes to the law, clarifications and modifications resulting from executive orders, the rule-making process, the ultimate outcome of court challenges and the development of agency guidance, whether and how many states ultimately decide to expand Medicaid coverage and on what terms, the number of individuals who elect to purchase health insurance coverage and budgetary issues at federal and state levels. However, President Biden has indicated through executive orders that his administration intends to protect and strengthen the Affordable Care Act and Medicaid programs. The impact on the healthcare industry and timing of any potential additional reforms or further changes to the Affordable Care Act is unknown. For example, members of Congress have proposed measures that would expand government-sponsored coverage, including single-payor proposals, which could also significantly affect healthcare providers. Other initiatives and proposals, including those aimed at price transparency and out-of-network charges, may impact prices and the relationships between hospitals and insurers. It is difficult to predict the nature and success of future financial or delivery system reforms.

11


 

 

Fraud and Abuse Laws. Participation in the Medicare and Medicaid programs is heavily regulated by federal statute and regulation. If a hospital fails to comply substantially with the requirements for participating in the programs, the hospital’s participation may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare program if it engages in any of the following acts:

 

making claims to Medicare for services not provided or misrepresenting actual services provided in order to obtain higher payments;

 

paying money to induce the referral of patients where services are reimbursable under a federal health program; or

 

paying money to limit or reduce the services provided to Medicare beneficiaries.

Any person or entity that knowingly and willfully defrauds or attempts to defraud a healthcare benefit program, including private healthcare plans, may be subject to fines, imprisonment or both. Additionally, any person or entity that knowingly and willfully falsifies or conceals a material fact or makes any material false or fraudulent statements in connection with the delivery or payment of healthcare services by a healthcare benefit plan is subject to a fine, imprisonment or both.

A section of the Social Security Act, known as the “Anti-Kickback Statute” prohibits some business practices and relationships under Medicare, Medicaid and other federal healthcare programs. These practices include the payment, receipt, offer, or solicitation of remuneration of any kind in exchange for items or services that are reimbursed under most federal or state healthcare programs.

The Office of Inspector General of the Department of Health and Human Services, or OIG, is responsible for identifying and investigating fraud and abuse activities in federal healthcare programs. As part of its duties, the OIG provides guidance to healthcare providers by identifying types of activities that could violate the Anti-Kickback Statute. The OIG also publishes regulations outlining activities and business relationships that would be deemed not to violate the Anti-Kickback Statute. These regulations are known as “safe harbor” regulations. The failure of a particular activity to comply with the safe harbor regulations does not necessarily mean that the activity violates the Anti-Kickback Statute; however, such failure may lead to increased scrutiny by government enforcement authorities.