Health Management Associates Inc. CEO BURKE W WHITMAN bought 50000 shares on 8-07-2008 at $5.55
Health Management Associates, Inc. and its subsidiaries (â€śwe,â€ť â€śourâ€ť or â€śusâ€ť) primarily operate general acute care hospitals in non-urban communities. As of December 31, 2007, we operated 59 hospitals with a total of 8,458 licensed beds in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Washington and West Virginia. Subsequent to December 31, 2007, we closed Gulf Coast Medical Center, a 189-bed general acute care hospital in Biloxi, Mississippi.
Services provided by our hospitals include general surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care and pediatric services. We also provide outpatient services such as one-day surgery, laboratory, x-ray, respiratory therapy, cardiology and physical therapy. Additionally, some of our hospitals provide specialty services in, among other areas, cardiology (e.g., open-heart surgery, etc.), neuro-surgery, oncology, radiation therapy, computer-assisted tomography (â€śCTâ€ť) scanning, magnetic resonance imaging (â€śMRIâ€ť), lithotripsy and full-service obstetrics. Our facilities benefit from centralized corporate resources, such as purchasing, information services, finance and accounting systems, legal services, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.
During the year ended December 31, 2007, we made certain changes and additions to our senior executive management team. Burke W. Whitman, who previously served as our President and Chief Operating Officer, was named President and Chief Executive Officer, succeeding Joseph V. Vumbacco, and appointed to our Board of Directors. Mr. Vumbacco continued to serve as our Vice Chairman and a member of our Board of Directors until his retirement on December 31, 2007. Additionally, Kelly E. Curry was named Executive Vice President and Chief Operating Officer effective July 1, 2007 and we hired a Treasurer effective July 9, 2007.
As more fully discussed at Note 3 to the Consolidated Financial Statements in Item 8 of Part II, we completed a recapitalization of our balance sheet in March 2007 (the â€śRecapitalizationâ€ť). Among other things, the Recapitalization included the payment of a special $10.00 per share cash dividend to our stockholders and significant modifications to our then existing debt structure. Moreover, in light of the special cash dividend, all future dividends were suspended indefinitely.
Effective March 1, 2006, our Board of Directors approved a change in our fiscal year end from September 30 to December 31. In connection with this change, we have included in Item 8 of Part II our audited Consolidated Financial Statements (i) as of and for the years ended December 31, 2007 and 2006 (the â€ś2007 Calendar Yearâ€ť and the â€ś2006 Calendar Year,â€ť respectively), (ii) for the three months ended December 31, 2005 (the â€ś2005 Three Month Periodâ€ť) and (iii) for the year ended September 30, 2005 (the â€ś2005 Fiscal Yearâ€ť).
Our Class A common stock is listed on the New York Stock Exchange under the symbol â€śHMA.â€ť We were incorporated in Delaware in 1979 but began operations through a subsidiary that was formed in 1977. We became a public company in 1991. We have been named to the list of Fortune Magazineâ€™s Most Admired Companies in America, appearing as the top hospital company in the â€śHealth Care: Medical Facilitiesâ€ť category for the last two years.
Acquisitions, Divestitures, Joint Ventures and Other Activity
Historically, we proactively identified acquisition targets and responded to requests for proposals from entities that were seeking to sell or lease hospital facilities. As a result of this strategy, we customarily entered into multiple agreements each year to acquire or lease hospital facilities. However, since mid-2006 we have elected to moderate our acquisition activity in order to focus our attention on (i) improving, developing and enhancing the operations of our existing health care facilities and (ii) identifying joint ventures and other arrangements that augment our position in the markets where we already have health care operations. Additionally, we continue to evaluate our portfolio of hospitals and, if an individual hospital no longer meets our short and long-term performance criteria, we consider strategic alternatives, including, in some cases, divestiture. Where appropriate, and consistent with our performance criteria and other objectives, we explore collaborative relationships, including joint ventures, with physicians and others. Generally, at any given time, we are actively involved in negotiations concerning possible acquisitions, divestitures and joint ventures. Recently completed transactions are set forth below.
Divestitures (completed and pending)
On July 31, 2007, we completed the sale of Lee Regional Medical Center, an 80-bed general acute care hospital in Pennington Gap, Virginia, Mountain View Regional Medical Center, a 133-bed general acute care hospital in Norton, Virginia, and certain health care entities affiliated with such hospitals. The selling price was $70.0 million, plus a working capital adjustment, and yielded a pre-tax gain of approximately $21.8 million.
Effective September 1, 2006, we completed the sale of SandyPines, an 80-bed psychiatric hospital in Tequesta, Florida, University Behavioral Center, a 104-bed psychiatric hospital in Orlando, Florida, and certain real property in Lakeland, Florida that we operated as an inpatient psychiatric facility through December 31, 2000. The selling price was $38.0 million, which resulted in a pre-tax gain of approximately $20.7 million.
During October 2007, we determined that we would close Gulf Coast Medical Center (â€śGCMCâ€ť) on January 1, 2008. In large part, our decision was due to the inability of the hospital to rebound from the devastating effects of Hurricane Katrina. We are currently exploring various disposal alternatives for GCMCâ€™s tangible long-lived assets, which primarily consist of property, plant and equipment.
The aforementioned divestitures, together with Southwest Regional Medical Center (â€śSRMCâ€ť), are hereinafter collectively referred to as â€śDiscontinued Operations.â€ť We are currently evaluating various alternatives to divest SRMC, a 79-bed general acute care hospital in Little Rock, Arkansas; however, the timing of such divestiture has not yet been determined.
Joint Venture and Other Activity
On April 16, 2007, we paid $32.0 million to a minority shareholder in order to acquire the 20% equity interests that we did not already own in each of the 176-bed Dallas Regional Medical Center at Galloway (formerly Medical Center of Mesquite) and the 172-bed Womanâ€™s Center at Dallas Regional Medical Center (formerly Mesquite Community Hospital). Both such hospitals are located in Mesquite, Texas and are now wholly owned by us. During the last quarter of the 2007 Calendar Year, the Womanâ€™s Center at Dallas Regional Medical Center was converted from a general acute care hospital to a specialty womenâ€™s hospital.
On February 5, 2007, we opened our de novo 100-bed general acute care hospital, Physicians Regional Medical Centerâ€”Collier Boulevard in Naples, Florida.
During the 2007 Calendar Year, we established joint ventures in regard to the hospitals identified in the table below. As a result, the joint ventures now own and operate those hospitals. Local physicians own minority equity interests in each of the joint ventures and participate in the related hospitalâ€™s governance. We continue to own a majority of the equity interests in each of the joint ventures and maintain management control of each hospitalâ€™s day-to-day operations. During 2008, we plan to complete a joint venture syndication with respect to Midwest Regional Medical Center, our 255-bed general acute care hospital in Midwest City, Oklahoma.
Our market is non-urban areas with populations of 30,000 to 400,000 people located primarily in the southeastern and southwestern United States. Typically, the general acute care hospitals we acquire are, or we believe can become, the sole or preferred provider of health care services in their market areas. Our target markets generally have the following characteristics:
A history of being medically underserved. We believe that we can enhance and increase the level and quality of health care services in many underserved markets.
Favorable demographics, including a growing elderly population. We believe that this growing population uses a higher volume of hospital services.
The existence of patient outmigration trends to urban medical centers. We believe that, in many instances, we can recruit primary care and specialty physicians based on community needs and purchase new equipment that is necessary to reverse outmigration trends.
States in which a certificate of need is required to construct a hospital facility and add licensed beds to an existing hospital facility. We believe that states requiring certificates of need have appropriate barriers to construct a hospital, add licensed beds to an existing hospital or provide additional health care services and, in many instances, permit us to be the sole or preferred service provider in a particular geographic area.
Our business strategy is to deliver high quality health care services and improve patient and physician satisfaction, improve operations of our existing hospitals, utilize efficient management and acquire strategic hospitals in non-urban communities.
Deliver High Quality Health Care Services and Improve Patient and Physician Satisfaction
All of our hospitals (and substantially all of our laboratories and home health agencies) that have been surveyed are accredited by The Joint Commission, an independent not-for-profit organization that accredits and certifies more than 15,000 health care organizations and programs based on certain performance standards. We continually seek to improve the quality of the health care services we deliver and the satisfaction of our patients and physicians. During late 2007, we began a new physician and patient satisfaction survey process to determine their satisfaction with the level and quality of our services. For the first time, those survey results will be compared and benchmarked against results from other hospitals across the country. We believe that these new surveys will provide us with additional data to help improve our hospitalsâ€™ quality and satisfaction as they compare to our peers and competitors. Surveyed physicians and patients are asked to complete a confidential survey that seeks their perception of, among other things, each hospitalâ€™s health care services, including medical treatment, nursing care, attention to physician and patient concerns, communication, the admission process, cleanliness of the facility and the quality of dietary services. Each hospitalâ€™s management team will receive the detailed results of the surveys and comparative data regarding their ranking against benchmark statistics. Beginning in 2008, the second largest component of our hospital management teamsâ€™ incentive compensation will be based on quality indicators and satisfaction results from the abovementioned surveys.
As evidence of our commitment to quality, Lake Norman Regional Medical Center, a 105-bed general acute care hospital in Mooresville, North Carolina, achieved Magnet Status designation in February 2007 for excellence in nursing services by the American Nurses Credentialing Centerâ€™s Magnet Recognition Program. The Magnet Recognition Program recognizes health care organizations that demonstrate excellence in nursing practice and adherence to national standards for the organization and delivery of nursing services. We are pursuing Magnet Status designation in several of our other hospitals.
Listed below are some of the actions we undertook during the 2007 Calendar Year to further improve the quality of our health care services.
we implemented a medication error prevention program utilizing â€śSafeScanâ„˘,â€ť a handheld bedside medication administration system designed to help eliminate medication errors by using a clinician-designed bar code scanning device to verify medication orders at the point of care.
we implemented a concurrent medical record coding program entitled â€śDocumenting Our Excellence,â€ť which is intended to improve medical record documentation during a patient stay. This documentation and education program will allow us to more accurately reflect the acuity of our patients and ensure proper care plans, thereby resulting in better patient outcomes.
we hired a nationally recognized quality expert known for significantly improving the levels of quality in hospital systems. Additionally, several centralized key leadership positions were created to support our quality endeavors, including: a Corporate Chief Nursing Officer, Corporate Director Regulatory/Core Measures and a physician Chief Medical Officer.
Improve Operations of our Existing Hospitals
For our existing hospitals, we seek to increase our operating revenue by providing quality health care necessary to increase admissions and outpatient business. These hospitals are administered and directed on a local level by each hospitalâ€™s chief executive officer. A key element of our strategy is establishing and maintaining cooperative relationships with our physicians. We maintain a physician recruitment program designed to attract and retain qualified specialists and primary care physicians, in conjunction with our existing physicians and community needs, in order to broaden the services offered by our hospitals. To this end, we developed â€śPhysician Security Plus,â€ť a unique program designed to (i) create attractive practice opportunities for quality physicians in the communities that are served by our hospitals in order to build outstanding medical staffs; (ii) improve the satisfaction and retention of physicians in our markets; and (iii) create practice models that are sustainable in a competitive health care environment.
Our existing hospitals also increase admissions and outpatient business by implementing selective marketing programs. The marketing program for each hospital is directed by the hospitalâ€™s chief executive officer and is generally tailored to suit the particular geographic, demographic and economic characteristics of a hospitalâ€™s particular market area. Additionally, we pursue various clinical means to increase the utilization of the services provided by our hospitals, particularly emergency and outpatient services. These include:
â€śNurse First,â€ť an emergency room service program that provides for a well-qualified nurse to quickly assess the condition of a patient upon arrival in the emergency room;
â€śMedKeyâ„˘,â€ť a free plastic identification and patient information card that streamlines the registration process; and
â€śOne Call Scheduling,â€ť a dedicated phone system that physicians and other medical personnel can use to simultaneously schedule various diagnostic tests and services.
There are various opportunities to increase the number of patients who seek treatment at our hospitals. We believe that improving patient volume primarily rests in the refinement of physician relationships within the communities where our hospitals operate. In addition to local physician leadership council participation where we listen and respond to physician concerns, we continually evaluate innovative strategic business alternatives that address the ever-changing economic health care climate. In that regard, we have entered into, and will continue to enter into, joint venture arrangements with physicians for entire hospitals, ambulatory surgical centers, medical office buildings and other health care service businesses. Although joint ventures are not appropriate for each community where we have a hospital, we plan to evaluate physician and physician group partners in those markets where physicians have expressed an interest in establishing a financial partnership that it is economically viable and consistent with our goals and objectives. Often times, there already exists a high level of competition for health care services in these markets. With respect to our collaborative physician-based initiatives, we believe that our ultimate success will depend, in part, on our flexibility, creativity and responsiveness to all involved constituencies.
In their respective markets, our hospitals directly employ physicians who lead our clinics and provide health care services outside of the hospital setting. Our hospitals have also assumed active roles managing local physician relationships in their markets. As a result of our employed physician initiatives, we are beginning to see favorable changes in physician referral patterns. We believe that a significant opportunity exists to further improve our hospital operations through more efficient management of our employed physicians. During the 2007 Calendar Year, we sought to better align the interests of our employed physicians with those of our hospitals by beginning to convert such physicians to production-based employment arrangements. A lower base salary was provided with supplemental compensation available based on physician practice cash collections. During 2008, we expect to implement additional production-based arrangements and we expect to see incremental contributions from the physicians we employed during the last twelve months.
Utilize Efficient Management
We consider our management structure to be decentralized. Our hospitals are run by experienced chief executive officers, chief financial officers and chief nursing officers who have both the authority and responsibility for day-to-day hospital operations. Incentive compensation programs have been implemented to reward our managers for achieving and exceeding pre-established goals. We employ a relatively small corporate staff to provide services such as systems design and development, training, human resource management, reimbursement, accounting support, legal services, purchasing, risk management and construction management. We maintain centralized financial control through fiscal and accounting policies established at the corporate level for use at all of our subsidiary hospitals. Financial information is consolidated at the corporate level using our proprietary Pulse System Â® and is monitored daily by our management team. We also participate in a group purchasing organization with other proprietary hospital systems. We believe that this participation allows us to procure medical equipment and supplies at advantageous pricing by leveraging the buying power of the organizationâ€™s members.
During January 2008, our decentralized management structure was realigned to improve decision-making and resource management. Our operational reporting structure expanded from six divisions to eight divisions, thereby reinforcing our decentralized structure. At the same time, this new reporting structure affords us better oversight as a result of fewer hospitals per division. Each division now has a divisional chief executive officer and chief financial officer, with an improved alignment of individual hospital and divisional objectives. As discussed above, we recently recruited and promoted new leadership for centralized support functions such as clinical affairs, managed care, physician recruitment, physician relations, nursing and quality.
Acquire Additional Hospitals
We believe that the hospitals we acquire are, or can become, the provider of choice for health care services in their respective market areas. When we make an initial evaluation of a potential acquisition, we require that a hospitalâ€™s market service area have a demonstrated need for the hospital, along with an established physician base that we believe can benefit from our ability to attract additional qualified physicians to the area based on community needs. In addition to acquisitions, we also consider constructing new hospitals and partnering with not-for-profit entities in areas and markets that otherwise meet our acquisition criteria.
We believe that many of the hospitals we acquire are underperforming at the time of acquisition. Upon acquiring a hospital, we conduct a thorough review and, where appropriate, retain current administrative leadership. We also take several other steps, including, among other things, employing a well-qualified chief executive officer, chief financial officer and chief nursing officer, implementing our proprietary management information system (the Pulse System Â® ) and other technological enhancements, recruiting physicians, establishing additional quality assessment and efficiency measures, introducing volume purchasing under company-wide agreements, and spending the necessary capital to renovate facilities and upgrade equipment. Our Pulse System Â® and the other technological enhancements that we implement provide each hospitalâ€™s management team with the financial and operational information necessary to operate the hospital efficiently and effectively. Based on the information gathered, we can also assist physicians with case management.
Additionally, we believe that we operate each hospital we acquire in an efficient manner to expand and improve the services it offers. We strive to provide at least 90% of the acute care needs of each community our hospitals serve and reduce the outmigration of patients to hospitals in larger urban areas. Generally, we have been successful in achieving a significant improvement in the operating performance of our newly acquired facilities within 12 to 24 months of acquisition. Once a facility has matured, we generally achieve incremental growth through the investment of capital, recruitment of physicians based on community needs, expansion and enhancement of health care services and favorable demographic trends.
In many of the geographic areas in which we operate, there are other hospitals that provide services comparable to those offered by our hospitals. Generally, competition is limited to a single or small number of hospital competitors in each hospitalâ€™s market service area. In fact, with respect to the delivery of general acute care inpatient services, we believe that most of our hospitals face less competition in their immediate market service areas than they would likely face in larger, more urban, communities. However, the health care environment is becoming more competitive in every market as physicians and ancillary service providers introduce outpatient services. Regardless of the level of competition, we strive to distinguish ourselves based on the quality and scope of the medical services we provide.
Certain of our competitors may have greater resources than we do, may be better equipped than we are and could offer a broader range of services than we do. For example, some hospitals that compete with us are owned by governmental agencies and are supported by tax revenue, and others are owned by not-for-profit entities and may be supported, to a large extent, by endowments and charitable contributions. Such support is not available to our hospitals. Additionally, outpatient treatment and diagnostic facilities, outpatient surgical centers and freestanding ambulatory surgical centers (including many in which physicians and physician groups have an ownership interest) and a growing number of health care clinics located in large retail stores also introduce competitors to the health care marketplace. Such health care facilities have increased in number and accessibility in recent years.
A majority of our hospitals are located in states that have certificate of need laws. These laws limit competition by placing restrictions on the construction of new hospital or health care facilities, the addition of new licensed beds or the addition of significant new services. We believe that such states have appropriate barriers to entry and, in many instances, permit us to be the sole or preferred service provider in a particular geographic area.
The competitive position of our hospitals is also increasingly affected by our ability to negotiate service contracts with purchasers of group health care services. Such purchasers include employers, preferred provider organizations (â€śPPOsâ€ť) and health maintenance organizations (â€śHMOsâ€ť). PPOs and HMOs attempt to direct and control the use of hospital services by managing care and either receive discounts from a hospitalâ€™s established charges or pay based on a fixed per diem or a capitated basis, where hospitals receive fixed periodic payments based on the number of members of the organization regardless of the actual services provided. To date, PPOs and HMOs have not adversely affected the competitive position of our hospitals. In addition, employers and traditional health insurers are increasingly interested in reducing costs through negotiations with hospitals for managed care programs and discounts from established charges. In return, hospitals secure commitments for a larger number of potential patients. We believe that we have been proactive in establishing or joining such programs to maintain, and even increase, the hospital services we provide. We do not believe that such programs will have a significant adverse impact on our business or operations.
We are in an industry that has a competitive labor market. As such, we face competition for attracting and retaining health care professionals. In recent years, there has been a nationwide shortage of qualified nurses and other medical support personnel. In order to address this shortage, we have increased wages, improved hospital working conditions and fostered relationships with local nursing schools.
Another important factor contributing to a hospitalâ€™s competitive advantage is the number and quality of physicians on its staff. Physicians make admitting and other decisions regarding the appropriate course of patient treatment which, in turn, affect hospital revenue. Admitting physicians may also be on the medical staffs of hospitals that we do not operate. By offering quality services and facilities, convenient locations and state-of-the-art medical equipment, we attempt to attract our physiciansâ€™ patients. Our hospitals try to increase the number, quality and specialties of physicians in their communities based on community needs. During the 2007 Calendar Year, we recruited 372 physicians. Often, in consideration for a physician relocating to a community where one of our hospitals is located and agreeing to engage in private practice, our subsidiary hospital advances money to the physician to provide financial assistance pursuant to a recruiting agreement for the physician to establish a practice. The amounts advanced are dependent on the individual financial results of each physicianâ€™s practice during a certain period, referred to as the measurement period, which generally does not exceed one year. The amounts advanced under these recruiting agreements are considered to be loans and are generally forgiven on a pro rata basis over a period of 12 to 24 months, contingent on the physician continuing to practice in the community served by our hospital.
We face competition for hospital acquisitions from both proprietary and not-for-profit multi-hospital groups. Some of these competitors may have greater financial and other resources than we do. Historically, we have been able to acquire hospitals at prices we believe to be reasonable. However, increased competition for acquisitions of non-urban general acute care hospitals could have an adverse impact on our ability to acquire additional hospitals on favorable terms.
Sources of Revenue
We record gross patient service charges on a patient-by-patient basis in the period in which services are rendered. Patient accounts are billed after the patient is discharged. When a patientâ€™s account is billed, our accounting system calculates the reimbursement that we expect to receive based on the type of payor and the contractual terms of such payor. We record the difference between gross patient service charges and expected reimbursement as contractual adjustments.
At the end of each month, we estimate expected reimbursement for unbilled accounts. Estimated reimbursement amounts are calculated on a payor-specific basis and are recorded based on the best information available to us at the time regarding applicable laws, rules, regulations and contract terms. We continually review our contractual adjustment estimation process to consider and incorporate updates to laws, rules and regulations, as well as changes to managed care contract terms that result from negotiations and renewals.
We receive payment for services rendered to patients from:
the federal government under the Medicare program;
each of the states where our hospitals are located under the various state Medicaid programs;
commercial insurance; and
private insurers and patients.
Co-payments and deductibles are a portion of the patientâ€™s bill for medical services that many private and governmental payors require the patient to pay. Co-payment and deductible amounts vary among payors and are based on the provisions of the health plan in which the patient participates. We do not track and segregate the portion of co-payments and deductibles that we collect at the time of service; however, we are currently collecting more than 55% of such amounts. During the 2007 Calendar Year, we increased our efforts to collect patient co-payments and deductibles at the time services are rendered by our hospitals and clinics. Co-payments and deductibles are subject to the same collection practices as other patient accounts receivable.
Our policy is to verify insurance coverage prior to rendering service in order to facilitate timely identification of the payor and the benefits covered. However, adherence to this policy is not permitted under federal law when the necessity of service and patient condition (e.g., emergency room services, active labor and other similar situations, etc.) are present, as those conditions preclude the verification of coverage. We do not quantify the percent of encounters where coverage is not verified prior to services being rendered.
Approximately 95% of our billing is processed electronically via our proprietary Pulse System Â® . Charges for services rendered are automatically interfaced into our billing system, which edits bills for inconsistencies and improperly billed charges. Inconsistencies are reviewed by billing personnel who resolve such matters before a bill is sent. Once a preliminary bill clears the edit process, our systems automatically generate a final bill. Approximately 95% of these bills are sent electronically to third party payors. For the 5% of the bills that are not generated through the above described process, paper copies of the bills are printed and mailed to third party payors and/or individuals.
The table below sets forth the approximate percent of hospital revenue, defined as revenue from all sources after deducting contractual allowances and discounts from established billing rates, that we derive from various payors.
Hospital revenue depends upon inpatient occupancy levels, the extent to which ancillary services and therapy programs are ordered by physicians and provided to patients, and the volume of outpatient procedures. Reimbursement rates for routine inpatient services vary significantly depending on the type of service (e.g., acute care, intensive care, etc.) and the geographic location of the hospital. The percent of operating revenue attributable to outpatient services has generally increased in recent years, primarily as a result of advances in medical technology that allow more services to be provided on an outpatient basis, as well as increased pressure from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to increased outpatient levels mirrors the general trend occurring in the health care industry.
Medicare and Medicaid
Medicare is a federal health insurance program, administered by the U.S. Department of Health and Human Services that provides hospital and other medical benefits to individuals age 65 and over, certain disabled persons and certain other individuals with qualifying conditions. Medicaid is a joint federal-state health care benefit program, operating pursuant to a state plan developed and administered by each participating state, subject to broadly defined federal requirements, that provides health care benefits to uninsured individuals who are otherwise unable to afford such services. Our hospitals derive a substantial portion of their net revenue from the Medicare and Medicaid programs. Both the Medicare and Medicaid programs are heavily regulated and subject to frequent changes that typically affect the payments to participating hospitals.
Inpatient Payments. The Medicare program provides payment for inpatient hospital services under a prospective payment system, or PPS. Under the inpatient PPS, hospitals are paid a prospectively determined fixed amount for each hospital discharge. The fixed payment amount per inpatient discharge is established based on each patientâ€™s diagnosis related group, or DRG. Each patient admitted for care is assigned to a DRG based on his or her primary admitting diagnosis. Every DRG is assigned a payment rate based on the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. The DRG payment rates are based on national average costs from an historic base period and do not consider the actual costs incurred by a hospital to provide care. Although based on national average costs, the DRG standardized amounts and capital payment rates are adjusted by the wage index and geographic adjustment factor for the geographic region in which a particular hospital is located, or reclassified to, and are weighted based on a statistically normal distribution of severity. DRG rates are usually adjusted by an update factor each federal fiscal year, which begins on October 1 st . The update factor used as the basis to adjust the DRG rates (the â€śmarket basketâ€ť) takes into consideration annual inflation in the purchasing of goods and services experienced by hospitals and other entities. Because other entities are included in the market basket determination, for several years the market basket has been lower than the percent increase in costs experienced by hospitals. For federal fiscal years 2007, 2006 and 2005, the update factors were 3.4%, 3.7% and 3.3%, respectively. For federal fiscal year 2008, the update factor is 3.3%.
In its most recent modification to the DRG system, the Centers for Medicare & Medicaid Services, or CMS, adopted a final rule on August 22, 2007 that established Medicare Severity DRGs, or MS-DRGs, that became effective on October 1, 2007. The move to MS-DRGs is an effort by CMS to refine the DRG weighting system to more fully capture differences in severity of illness among patients. It replaced 538 DRGs with 745 MS-DRGs. MS-DRGs have a two year phase in period during federal fiscal years 2008 and 2009. CMS believes that MS-DRGs will reduce incentives for hospitals that attempt to treat only the healthiest and most profitable patients by better taking into account severity of illness in Medicare payment rates. MS-DRGs are also expected to encourage hospitals to improve their coding and documentation of patient diagnoses. In order to ensure that improvements in coding and documentation do not lead to an increase in aggregate payments without corresponding growth in actual patient severity, CMS proposed a negative documentation and coding adjustment for federal fiscal year 2008. On September 29, 2007, the TMA, Abstinence Education, and QI Programs Extension Act of 2007 was signed into law, thereby reducing the documentation and coding adjustment for MS-DRGs by 0.6%. CMS expects that the documentation and coding adjustment will not reduce the overall amount of payments to hospitals nationwide.
Outpatient Payments. The majority of hospital outpatient services and certain Medicare Part B services that are furnished to hospital inpatients with no Part A coverage are also paid by Medicare on a PPS basis. However, certain outpatient services, including physical therapy, occupational therapy, speech therapy, durable medical equipment, clinical diagnostic laboratory services and services at freestanding surgical centers and diagnostic facilities, are paid based on fee schedules established by Medicare.
Medicareâ€™s outpatient PPS groups services that are clinically related and use similar resources into ambulatory payment classifications, or APCs. Depending on the service rendered during an encounter, a patient may be assigned to a single or multiple groups. Medicare pays a set price or rate for each group, regardless of the actual costs incurred in providing care. Medicare sets the payment rate for each APC based on historical median cost data, subject to geographic modification. The APC payment rates are updated each federal fiscal year, again based on the market basket. For federal fiscal years 2007, 2006 and 2005, the payment rate update factors were 3.4%, 3.7% and 3.3%, respectively. For federal fiscal year 2008, the update factor is 3.3%.
Outlier Payments. In addition to DRG and capital payments, our hospitals may qualify for and receive â€śoutlierâ€ť payments from Medicare for certain inpatient hospital services. Typically, Medicare sets aside 5.1% of Medicare inpatient payments for inpatient stays that are outliers. Outlier payments are made for those inpatient discharges where the total cost of care (as determined by using the gross charges adjusted by the hospitalâ€™s cost-to-charge ratio) exceeds the total DRG payment plus a fixed threshold amount. In determining the cost-to-charge ratio, Medicare uses the latest of either a hospitalâ€™s most recently submitted or most recently settled cost report. The threshold amounts used in the outlier computation for federal fiscal years 2007, 2006 and 2005 were $24,485, $23,600 and $25,800, respectively. The amount for federal fiscal year 2008 is $22,460. Excluding our Discontinued Operations, approximately 1.6%, 2.1%, 2.2% and 2.4% of our Medicare inpatient payments were for outlier payments during the 2007 Calendar Year, the 2006 Calendar Year, the 2005 Three Month Period and the 2005 Fiscal Year, respectively.
Medicare fiscal intermediaries have been given specific criteria for identifying hospitals that may have received inappropriate outlier payments. The intermediaries are authorized to recover overpayments, including interest, if the actual cost of the DRG stay (which was reflected in the settled cost report) was less than claimed, or if there were indications of abuse. In order to avoid overpayment or underpayment of outlier cases, hospitals may request changes to their cost-to-charge ratio in much the same way that an individual taxpayer can adjust the amount of income tax withholdings.
Disproportionate Share Payments. An additional payment is made for hospitals that serve a significantly disproportionate share of low income Medicare and Medicaid patients. The additional payment is based on the hospitalâ€™s DRG payments and paid according to formulas that take into consideration the hospitalâ€™s percent of low income patients, status, geographic designation and number of beds.
Rural Health Clinic Payments . A rural health clinic is an outpatient facility primarily engaged in furnishing physician and other health services in accordance with federal guidelines. In order to qualify, a clinic must be located in a medically under-served area that is non-urbanized, as defined by the U.S. Census Bureau. Payments to rural health clinics for covered services is made via an all-inclusive per visit rate. As of December 31, 2007, we operated five rural health clinics in Missouri.
Ambulatory Surgical Center Payments. Ambulatory surgical centers are distinct facilities that provide surgical services to patients not requiring hospitalization. Such centers may be licensed by the state in which they operate, depending on individual state requirements. Medicare pays for services provided in ambulatory surgical centers that voluntarily sought and received certification and are approved by CMS. Effective January 1, 2008, CMS instituted a new system for reimbursing ambulatory surgical centers, as was mandated by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the 2003 Act. The new reimbursement system is based on the outpatient PPS system, taking into account the lower relative costs of procedures performed in an ambulatory surgical center as compared to a hospital outpatient department. We participate in the operation of five ambulatory surgical centers.
Reimbursement for Bad Debts. Medicare reimburses hospitals and other health care providers for certain allowable costs that are attributable to uncollectible Medicare beneficiary deductible and coinsurance amounts. Hospitals generally receive an interim pass-through payment for bad debts in an amount determined by the Medicare fiscal intermediary, based on the prior periodâ€™s bad debt amounts as reported on the hospitalâ€™s cost report. In order to be an allowable bad debt, the underlying accounts receivable must be related to a covered service and derived from a deductible and/or coinsurance amount. In addition, the following conditions must be met: (i) the hospital must be able to establish that reasonable collection efforts were undertaken prior to classification as a bad debt; (ii) the debt was actually uncollectible when classified as worthless; and (iii) sound business judgment established that there was no likelihood of recovery of the debt at any time in the future. In determining reasonable cost subject to reimbursement, the amount of bad debts otherwise treatable as allowable are reduced 30% by Medicare. Amounts received by a hospital as reimbursement for bad debts are subject to audit and recoupment by the fiscal intermediary. Bad debt reimbursement has been a focus of fiscal intermediary audit/recoupment efforts in the past.
Legislative Changes. Legislative changes to the Medicare program have historically limited growth rates for reimbursement and, in some cases, reduced levels of reimbursement for the health care services we provide. For example, the Balanced Budget Act of 1997 included significant reductions in spending levels for the Medicare and Medicaid programs. The Balanced Budget Refinement Act of 1999 mitigated some of the adverse effects of the Balanced Budget Act of 1997 through a â€ścorridor reimbursement approach,â€ť whereby a percent of losses under the Medicare outpatient PPS were reimbursed through 2003. The 2003 Act provided an extension, until January 1, 2006, of certain provisions of the Balanced Budget Refinement Act of 1999 for small rural and sole community hospitals. Some of our general acute care hospitals qualified for relief under this provision.
William J. Schoen , age 72, has served as our Chairman of the Board since April 1986. He became President and Chief Operating Officer in December 1983, Co-Chief Executive Officer in December 1985 and Chief Executive Officer in April 1986. He served as President until April 1997 and Chief Executive Officer until January 2001. From 1982 to 1987, Mr. Schoen was Chairman of Commerce National Bank, Naples, Florida and from 1973 to 1981 he was President, Chief Operating Officer and Chief Executive Officer of The F&M Schaefer Corporation, a consumer products company. From 1971 to 1973, Mr. Schoen was President of the Pierce Glass subsidiary of Indian Head, Inc. Mr. Schoen also serves on the Board of Trustees of the University of Southern California and numerous non-profit organizations.
Burke W. Whitman , age 52, became our President and Chief Executive Officer effective June 1, 2007. Also effective June 1, 2007, the board of directors appointed Mr. Whitman as a director. Mr. Whitman was our President and Chief Operating Officer from January 2006 to May 2007. Prior to joining us and since February 1999, Mr. Whitman served as Executive Vice President and Chief Financial Officer of Triad Hospitals, Inc. Before such time, Mr. Whitman served as President and Chief Financial Officer of Deerfield Healthcare Corporation and was an investment banker with Morgan Stanley in New York City. Mr. Whitman serves as a Colonel in the U.S. Marine Corps Reserves and on the board of directors of the Marine Corps Toys for Tots Foundation. He also previously served as a member of the Board of the Federation of American Hospitals.
Kent P. Dauten , age 52, served on our board of directors from March 1981 through May 1983 and from June 1985 through September 1988. He was again elected a director in November 1988 and has served on our board continuously since that time. Since February 1994, Mr. Dauten has been President, and since June 2005, he has been Managing Director, of Keystone Capital, Inc., a private investment advisory firm that he founded. Mr. Dauten was formerly a Senior Vice President of Madison Dearborn Partners, Inc., a private equity investment firm, and of First Chicago Investment Corporation and First Capital Corporation of Chicago, the venture capital subsidiaries of First Chicago Corporation, where he had been employed in various investment management positions since 1979. Mr. Dauten also serves on the boards of directors of Iron Mountain Incorporated and Northwestern Memorial Foundation.
Donald E. Kiernan , age 67, is the retired Senior Executive Vice President and Chief Financial Officer of SBC Communications, Inc., a telecommunications company, a position he held from October 1993 to August 2001. Prior to that and since 1990, he served as Senior Vice President of Finance and Treasurer for SBC Communications, Inc. Mr. Kiernan is a Certified Public Accountant and former partner of Arthur Young & Company. Mr. Kiernan also serves on the boards of directors of LaBranche & Co Inc., MoneyGram International, Inc. and Seagate Technology.
Robert A. Knox , age 56, has been Senior Managing Director of Cornerstone Equity Investors, LLC, an investment advisory firm, since December 1996. From 1994 until December 1996, he was Chairman and Chief Executive Officer, and from 1984 to 1994 he was President, of Prudential Equity Investors, Inc., an investment capital firm. Prior to that, Mr. Knox was an investment executive of The Prudential Insurance Company of America. He also serves on the boards of Atlas Acquisition Holdings, Corp., Lincoln Vale European Partners and several private companies. Mr. Knox is also Vice Chairman of the Board of Trustees of Boston University.
William E. Mayberry, M.D. , age 78, is the retired President Emeritus and Chief Executive Officer of the Mayo Foundation and the retired Chairman of the Board of Governors of the Mayo Clinic, where he had been employed in various capacities from 1956 until his retirement in 1992.
Vicki A. Oâ€™Meara , age 50, served as President - U.S. Supply Chain Solutions for Ryder System, Inc., a leading transportation and supply chain solutions company headquartered in Miami, Florida through December 2007. Ms. O'Meara joined Ryder as Executive Vice President and General Counsel in June 1997 from the Chicago office of the law firm of Jones Day Reavis & Pogue, where she was a partner and chair of the firm's Global Environmental, Health and Safety Group. Ms. O'Meara has also served in a variety of federal government positions in Washington, D.C., including: Acting Assistant Attorney General under President George H.W. Bush, where she headed the Environmental and Natural Resources Division of the U.S. Department of Justice; Deputy General Counsel of the U.S. Environmental Protection Agency; and Assistant to the General Counsel in the Office of the Secretary of the Army. Ms. O'Meara was a 1986-87 White House Fellow and, in that capacity, she served as Special Assistant to the White House Counsel and as Deputy Secretary of the Cabinet Domestic Policy Council.
William C. Steere, Jr. , age 71, has been the Chairman Emeritus of Pfizer Inc. since July 2001. He has been a director of Pfizer Inc. since 1987, was Chairman of the Board from 1992 to April 2001 and was Chief Executive Officer from February 1991 to December 2000. Mr. Steere also serves on the boards of directors of MetLife, Inc., the New York University Medical Center, The New York Botanical Garden, the Naples Symphony and the Board of Overseers of Memorial Sloan-Kettering Cancer Center.
Randolph W. Westerfield, Ph.D. , age 66, is Dean Emeritus and the Charles B. Thornton Professor of Finance at the Marshall School of Business at the University of Southern California. From 1993 to 2004, Dr. Westerfield served as Dean of the Marshall School of Business. Previously, he was a member of the finance faculty at the Wharton School of Business at the University of Pennsylvania for 20 years. Dr. Westerfield also serves on the Board of Directors of Nicholas-Applegate Fund, Inc.
MANAGEMENT DISCUSSION FROM LATEST 10K
We derive a significant portion of our revenue from Medicare, various state Medicaid programs and managed care health plans. Payments for services rendered to patients covered by these programs are generally less than billed charges. For Medicare and Medicaid revenue, provisions for contractual adjustments are made to reduce the charges to these patients to estimated cash receipts based upon the programsâ€™ principles of payment/reimbursement (i.e., either prospectively determined or retrospectively determined costs). Final settlements under these programs are subject to administrative review and audit and, accordingly, we periodically provide reserves for the adjustments that may ultimately result therefrom. Estimates for contractual allowances under managed care health plans are primarily based on the payment terms of contractual arrangements, such as predetermined rates per diagnosis, per diem rates or discounted fee for service rates. We closely monitor our historical collection rates, as well as changes in applicable laws, rules and regulations and contract terms, to ensure that provisions are made using the most accurate information available. However, due to the complexities involved in these estimations, actual payments from payors may be different from the amounts we estimate and record.
In the ordinary course of business, we provide services to patients who are financially unable to pay for their care. Accounts characterized as charity and indigent care are not recognized in net revenue. Prior to January 1, 2007, our policy and practice was to forego collection of a patientâ€™s entire account balance upon determining that the patient qualified under a hospitalâ€™s local charity care and/or indigent policy. Commencing January 1, 2007, we implemented a uniform policy wherein patient account balances are characterized as charity and indigent care only if the patient meets certain percentages of the federal poverty level guidelines. Local hospital personnel and our collection agencies pursue payments on accounts receivable from patients that do not meet such criteria. We monitor the levels of charity and indigent care provided by our hospitals and the procedures employed to identify and account for those patients.
As a result of our settlement of a class action lawsuit that involved billings to uninsured patients, we began discounting gross charges to uninsured patients for non-elective procedures by 60% in February 2007 (no such discounts were previously provided). In connection with this change, we recorded approximately $576.7 million of uninsured self-pay patient revenue discounts during the 2007 Calendar Year. In addition to such uninsured patient discounts, foregone charges for charity and indigent care patient services (based on established rates) aggregated approximately $82.1 million, $606.3 million, $150.9 million and $549.2 million during the 2007 Calendar Year, the 2006 Calendar Year, the 2005 Three Month Period and the 2005 Fiscal Year, respectively.
Provision for Doubtful Accounts
Our hospitals provide services to patients with health care coverage, as well as to those without health care coverage. Those patients with health care coverage are often responsible for a portion of their bill referred to as the co-payment or deductible. This portion is determined by the patientâ€™s specific health care or insurance plan. Patients without health care coverage are evaluated at the time of service, or shortly thereafter, for their ability to pay based on federal and state poverty guidelines, qualification for Medicaid or other state assistance programs, as well as our policies for indigent and charity care. After payment, if any, is received from a third party, statements are sent to individual patients indicating the outstanding balances on their accounts. If an account is still outstanding after a period of time, it is referred to a primary collection agency for assistance in collecting the amount due. The primary collection agency begins the process of debt collection by contacting the patient via mail and phone. The accounts that are sent to these agencies are often difficult to collect and require more focused, dedicated attention than might be available in the local hospital business office. We believe that the primary collection agencies have proven very successful in collecting the accounts that we send to them. A secondary collection agency is utilized when accounts are returned from the primary collection agency as uncollectible. These accounts are written off as uncollectible shortly after they are returned from the primary collection agency. In certain circumstances, we may sell a portfolio of outstanding accounts receivable to an independent third party. We completed one such transaction during the 2007 Calendar Year (see Note 1(g) to the Consolidated Financial Statements in Item 8); however, there can be no assurances that we will enter into similar transactions in future periods.
An account is typically sent to the primary collection agency automatically via electronic transfer of data at the end of the statement cycle although, if deemed necessary or appropriate, the account can be sent to the primary collection agency at any time. Accounts that are identified as self-pay accounts with balances less than $9.99 are automatically written off on the 20th day of each month. All accounts that have been placed with a primary collection agency that are less than $25.00 are also written off.
We closely monitor our cash collection trends and the aging of our accounts receivable. Based on our observations, we periodically adjust our accounting policies and estimates. As discussed at Note 1(g) to the Consolidated Financial Statements in Item 8, we modified our allowance for doubtful accounts reserve policy for self-pay patients during the 2005 Fiscal Year and the 2006 Calendar Year. Our allowance for doubtful accounts reserve policy for self-pay patients was further modified during the 2007 Calendar Year. After implementing a new revenue discounting policy in February 2007, discounted self-pay accounts receivable were initially reserved at 60%. However, as a result of (i) a subsequent cash collection analysis that evaluated the adequacy of the February 2007 self-pay reserve policy modification and (ii) continued deterioration in our self-pay accounts receivable balances, we concluded that it was necessary to reserve a greater portion of self-pay accounts receivable. Accordingly, effective June 30, 2007, we revised our policy for self-pay patients to increase our reserves for those accounts that are aged less than 300 days from the date that the services were rendered. We believe that the June 2007 change in self-pay patient allowances for doubtful accounts appropriately addresses our risk of collection pertaining to the related accounts receivable balances. Over the past several years, we have not experienced similar adverse trends with respect to our other payors such as Medicare, Medicaid and managed care health plans.
Our recent accounting policy modifications for self-pay patients were based on, among other things, our current self-pay patient cash collection rates and significant increases in uninsured and underinsured patient service volume that have been experienced by us and the hospital industry as a whole. Although we believe that our current policy is appropriate and responsive to the current health care environment and the overall economic climate, we will continue to monitor these circumstances and related industry trends. Changes in payor mix, general economic conditions or trends in federal and state governmental health care coverage could adversely affect our accounts receivable collections, cash flows and results of operations and could result in additional accounting policy modifications in the future.
Of accounts receivable identified as due from third party payors at the time of billing, a small percentage may convert to self-pay upon denials from third party payors. Those accounts are closely monitored on a routine basis for potential denial and are reclassified as appropriate.
The increase in self-pay accounts greater than 180 days from December 31, 2006 to December 31, 2007 is a reflection of the fact that accounts are maintained on the aging throughout the collection process as of December 31, 2007 in an effort to better monitor overall collection trends. Accounts receivable are reserved at increasing percentages as they age. All accounts are reserved 100% when they age 300 days from the date of discharge. In addition to days sales outstanding, which is discussed below under â€śLiquidity, Capital Resources and Capital Expenditures,â€ť we utilize other factors to analyze the collectibility of our accounts receivable. In that regard, we compare subsequent cash collections to net accounts receivable recorded on our consolidated balance sheet. We also review the provision for doubtful accounts as a percent of net revenue and the allowance for doubtful accounts as a percent of gross accounts receivable. These and other factors are reviewed monthly and are closely monitored for developing trends in our accounts receivable portfolio.
Impairments of Long-Lived Assets and Goodwill
Long-lived assets . In accordance with Statement of Financial Accounting Standards (â€śSFASâ€ť) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , we review our long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The determination of possible impairment of assets to be held and used is predicated on our estimate of the assetâ€™s undiscounted future cash flows. If the estimated future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the difference between the assetâ€™s estimated fair value and its carrying value. Long-lived assets to be disposed of, including discontinued operations, are reported at the lower of their carrying amounts or fair value less estimated costs to sell. There were no long-lived asset impairment charges that were material to our consolidated financial position or income from continuing operations during the 2007 Calendar Year, the 2005 Three Month Period or the 2005 Fiscal Year; however, during the 2006 Calendar Year, we recognized a long-lived asset impairment charge of $2.0 million, which was predicated on a then pending sale of a hospital that we ultimately retained.
Goodwill . In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , goodwill is no longer amortized. However, goodwill is reviewed for impairment on an annual basis or whenever circumstances indicate that a possible impairment might exist. Our judgment regarding the existence of impairment indicators is based on, among other things, market conditions and operational performance. When performing the impairment test, we initially compare the fair values of our reporting unitsâ€™ net assets, including allocated corporate net assets, to the corresponding carrying amounts on the consolidated balance sheet. The fair values of our reporting units are determined using a market approach methodology based on net revenue multiples. If the fair value of a reporting unitâ€™s net assets is less than the balance sheet carrying amount, we determine the implied fair value of goodwill, compare such fair value to the reporting unitâ€™s goodwill carrying amount and, if necessary, record a goodwill impairment charge. There were no goodwill impairment charges to continuing operations during the 2007 Calendar Year, the 2006 Calendar Year, the 2005 Three Month Period or the 2005 Fiscal Year. We base our fair value estimates on assumptions that we believe to be reasonable but are ultimately unpredictable and inherently uncertain. Additionally, we make certain judgments and assumptions when allocating corporate assets and liabilities to determine the carrying values for each of our reporting units. Changes in the estimates used to conduct goodwill impairment tests, including revenue and profitability projections and market values, could indicate that our goodwill is impaired in future periods and result in a write-off of some or all of our goodwill at that time. Reporting units are one level below the operating segment level (see Note 1(n) to the Consolidated Financial Statements in Item 8). However, after consideration of SFAS No. 142â€™s aggregation rules, we determined that our goodwill impairment testing should be performed at a divisional operating level. Goodwill is discretely allocated to our reporting units (i.e., each hospitalâ€™s goodwill is included as a component of the aggregate reporting unit goodwill being evaluated during the impairment analysis).
As discussed at Note 12 to the Consolidated Financial Statements in Item 8, we recognized a long-lived asset and goodwill impairment charge of $13.0 million in discontinued operations during the 2006 Calendar Year.
We make estimates to record the provision for income taxes, including conclusions regarding deferred tax assets and deferred tax liabilities, as well as valuation allowances that might be required to offset deferred tax assets. We estimate valuation allowances to reduce deferred tax assets to the amount we believe is more likely than not to be realized in future periods. When establishing valuation allowances, we consider all relevant information, including ongoing tax planning strategies. We believe that, other than certain state net operating loss carryforwards, future taxable income will enable us to realize our deferred tax assets and, therefore, we have not recorded any significant valuation allowances against our deferred tax assets.
We operate in multiple states with differing tax laws. We are subject to both federal and state audits of our tax filings. Our federal income tax returns have been examined by the Internal Revenue Service through the year ended September 30, 2003 and resulted in no material audit adjustments. Our federal income tax returns for the tax periods ended September 30, 2004, September 30, 2005 and December 31, 2005 are currently being audited by the Internal Revenue Service. We make estimates to record tax reserves that adequately provide for audit adjustments, if any.
During June 2006, the Financial Accounting Standards Board (the â€śFASBâ€ť) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (â€śFIN 48â€ť). Among other things, FIN 48 prescribes a minimum recognition threshold that an income tax position must meet before it is recorded in the reporting entityâ€™s financial statements. FIN 48 requires that the effects of such income tax positions be recognized only if, as of the balance sheet reporting date, it is â€śmore likely than notâ€ť (i.e., more than a 50% likelihood) that the income tax position will be sustained based solely on its technical merits. When making this assessment, management must assume that the responsible taxing authority will examine the income tax position and have full knowledge of all relevant facts and other pertinent information. The new accounting guidance also clarifies the method of accruing for interest and penalties when there is a difference between the amount claimed, or expected to be claimed, on a companyâ€™s income tax returns and the benefits recognized in the financial statements. Additionally, FIN 48 requires significant new and expanded footnote disclosures in all annual periods.
We adopted FIN 48 with an effective date of January 1, 2007. Retrospective application of FIN 48 was prohibited. In accordance with the transitional provisions of FIN 48, we recorded a cumulative effect adjustment to reduce retained earnings by approximately $4.7 million on January 1, 2007.
Professional Liability Claims
Commencing October 1, 2002, we began using our wholly owned captive insurance subsidiary, which is domiciled in the Cayman Islands, to self-insure a greater portion of our primary professional liability risk. Since its inception, the captive insurance subsidiary has provided claims-made coverage to all of our hospitals and a limited number of our employed physicians. During the years ended September 30, 2003 and 2004, we also procured claims-made policies from independent commercial carriers to provide coverage for losses and loss expenses beyond the captive insurance companyâ€™s policy limits. Subsequent to September 30, 2004, the captive insurance company provided enhanced coverage to us and, in connection therewith, it obtained claims-made reinsurance policies for professional liability risks above certain self-retention levels.
Prior to March 1, 2007, substantially all of our employed physicians were covered under claims-made policies with third party insurers; however, commencing March 1, 2007, we began providing occurrence-basis insurance policies to most of our employed physicians through a wholly owned risk retention group subsidiary that is domiciled in South Carolina. The risk retention group subsidiary maintains a claims-made reinsurance policy for professional liability risks above certain self-retention levels. Prior to March 1, 2007, when a physician terminated employment with us, tail insurance was generally procured for such physician to cover the portion of employed service that was previously covered under a claims-made policy.
Our reserves for self-insured professional liability claims and related expenses are determined using actuarially-based techniques and methodologies. The underlying data used to establish such reserves is based on asserted and unasserted claim information that has been accumulated by our incident reporting system, historical loss payment patterns and industry trends. We discounted these long-term liabilities to their estimated present values using discount rates of 3.25% and 4.75% at December 31, 2007 and 2006, respectively. We select a discount rate by estimating a risk-free interest rate that correlates to the period when the claims are projected to be paid. The discounted reserves are periodically reviewed and adjustments thereto are recorded as more information about claim trends becomes known to us. As of December 31, 2007, a 25 basis point increase or decrease in the discount rate would have changed our professional liability reserve requirements by approximately $0.9 million. Although the ultimate settlement of these liabilities may vary from our estimates, we believe that the amounts provided in the consolidated financial statements are reasonable and adequate. However, if the actual claim payments and expenses exceed our projected estimates, our reserves could be materially adversely affected.
Other Self-Insured Programs
We provide income continuance and certain reimbursable health care costs (collectively, â€śworkersâ€™ compensationâ€ť) to our disabled employees and we provide health and welfare benefits to our employees, their spouses and certain beneficiaries. Such employee benefit programs are primarily self-insured. We record estimated liabilities for both reported and incurred but not reported workersâ€™ compensation and health and welfare claims based on historical loss experience and other information provided by our third party administrators. The long-term liabilities for our workersâ€™ compensation program are determined using actuarially-based techniques and methodologies and are discounted to their estimated present values. We select a discount rate that represents an estimated risk-free interest rate correlating to the period when such benefits are projected to be paid. As of December 31, 2007, a 25 basis point increase or decrease in the discount rate would have changed our workersâ€™ compensation reserve requirements by approximately $0.3 million. We believe that the estimated liabilities for these self-insured programs are adequate and reasonable but there can be no assurances that the ultimate liability will not exceed our estimates. If the costs of these programs exceed our estimates, the liabilities could be materially adversely affected.
Legal and Other Loss Contingencies
We regularly review the status of our legal matters and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability. Significant judgment is required when determining probability and whether an exposure is reasonably estimable. Predicting the final outcome of claims and lawsuits and estimating financial exposure involves substantial uncertainties and, therefore, actual costs may vary materially from our estimates. When making determinations of likely outcomes of legal matters and the related financial exposure, we consider many factors, including, but not limited to, the nature of the claim (including unasserted claims), the availability of insurance, our experience with similar types of claims, the jurisdiction where the matter is disputed, input from legal counsel, the likelihood of resolution through alternative dispute resolution means and the current status of the matter. As additional information becomes available, we reassess our potential liability and, at that time, we may revise and adjust our estimates. Adjustments to liabilities reflect the status of negotiations, settlements, rulings, advice of legal counsel and other relevant information. Changes in our estimates of the financial exposure for legal matters and other loss contingencies could have a material impact on our consolidated financial position, results of operations and liquidity. See Note 13 to the Consolidated Financial Statements in Item 8 for information regarding our material legal matters and loss contingencies.
Recent Accounting Pronouncements
Fair Value Measurements
During September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , which, among other things, established a framework for measuring fair value and required supplemental disclosures about such fair value measurements. The modifications to current practice resulting from the application of this new accounting pronouncement primarily relate to the definition of fair value and the methods used to measure fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within the year of adoption; however, the FASB recently deferred SFAS No. 157 for one year insofar as it relates to certain non-financial assets and liabilities. We do not believe that the adoption of this new accounting standard will materially impact our financial position or results of operations.
Business Combinations and Noncontrolling Interests
During December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations , (â€śSFAS No. 141(R)â€ť) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements . These accounting pronouncements are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008, as well as interim periods within the year of adoption. Earlier adoption of these new accounting pronouncements is prohibited.
Among other things, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize (i) all (and only) assets acquired, liabilities assumed and noncontrolling interests of acquired businesses; (ii) contingent consideration arrangements at their acquisition date fair values (subsequent changes in fair value are generally reflected in earnings); (iii) acquisition-related transaction costs as expense when incurred; and (iv) non-contractual contingencies at fair value on the acquisition date if they meet the â€śmore than likelyâ€ť threshold. Additionally, SFAS No. 141(R) establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed. Disclosure of the information necessary to evaluate and understand the nature and financial effects of a business combination must also be provided.
Among other things, SFAS No. 160 requires entities to report (i) noncontrolling (minority) interests as equity in their consolidated financial statements; (ii) earnings attributable to noncontrolling interests as part of consolidated earnings and not as a separate component of income or expense; and (iii) attribution of losses to the noncontrolling interest, even when those losses exceed the noncontrolling interest in the equity of the subsidiary. SFAS No. 160 also provides guidance for step transactions that differs significantly from current accounting practice.
We are required to adopt SFAS No. 141(R) and SFAS No. 160 on January 1, 2009. Due to the recent issuance of such accounting guidance and the complex analyses required thereunder, we have not yet determined the impact thereof on our consolidated financial statements.
Convertible Debt Instruments
On August 31, 2007, the FASB exposed for comment Proposed FASB Staff Position APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), (the â€śExposure Draftâ€ť), which would, among other things, require the issuer of a convertible debt instrument to separately account for the liability and equity components thereof and reflect interest expense at the entityâ€™s market rate of borrowing for non-convertible debt instruments. If adopted, the Exposure Draft would require retrospective restatement of all periods presented with the cumulative effect of the change in accounting principle on periods prior to those presented being recognized as of the beginning of the first period presented. The Exposure Draftâ€™s proposed effective date would be the first reporting period beginning after December 15, 2007, including interim periods within the year of adoption; however, due to the FASBâ€™s redeliberations of the Exposure Draft, we believe that it is unlikely that the proposed effective date will be retained. Due to the complex analyses required, we have not yet determined the impact that the proposed accounting guidance set forth in the Exposure Draft would have on our consolidated financial statements if it were to be adopted in its current form.
Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes in Item 8.
On December 31, 2007, we operated 59 hospitals with a total of 8,458 licensed beds in non-urban communities in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Washington and West Virginia. On July 31, 2007, we sold our two Virginia-based general acute care hospitals and certain affiliated entities with a combined total of 213 licensed beds. On February 5, 2007, we opened our de novo 100-bed general acute care hospital in Naples, Florida. Subsequent to December 31, 2007, we closed Gulf Coast Medical Center, a 189-bed general acute care hospital in Biloxi, Mississippi.
During the 2007 Calendar Year, we made certain changes and additions to our senior executive management team. Burke W. Whitman, who previously served as our President and Chief Operating Officer, was named President and Chief Executive Officer, succeeding Joseph V. Vumbacco, and appointed to our Board of Directors. Mr. Vumbacco continued to serve as our Vice Chairman and a member of our Board of Directors until his retirement on December 31, 2007. Additionally, Kelly E. Curry was named Executive Vice President and Chief Operating Officer effective July 1, 2007 and we hired a Treasurer effective July 9, 2007.
Unless specifically indicated otherwise, the following discussion excludes our discontinued operations, which are identified at Note 12 to the Consolidated Financial Statements in Item 8. Other than (i) pre-tax gains of approximately $21.8 million and $20.7 million from the dispositions of businesses and assets during the 2007 Calendar Year and the 2006 Calendar Year, respectively, and (ii) a pre-tax long-lived asset and goodwill impairment charge of $13.0 million during the 2006 Calendar Year, such discontinued operations were not material to our consolidated results of operations during the periods presented herein.
The first full fiscal year affected by our change in fiscal year end from September 30 to December 31 was the 2006 Calendar Year. In order to provide meaningful financial and other comparative operational analyses, we included herein unaudited consolidated financial information for the year ended December 31, 2005 (the â€ś2005 Calendar Yearâ€ť). Such unaudited financial information was derived from our unaudited results of operations during the last nine months of the 2005 Fiscal Year and the audited 2005 Three Month Period.
During the 2007 Calendar Year, we experienced net revenue growth over the 2006 Calendar Year of approximately 8.4%. Such net revenue growth resulted primarily from (i) our de novo general acute care hospital that opened on February 5, 2007, (ii) favorable case mix trends and (iii) improvements in reimbursement rates. Income from continuing operations and diluted earnings per share from continuing operations decreased by approximately $63.9 million and $0.27, respectively, during the 2007 Calendar Year when compared to the 2006 Calendar Year. Offsetting the increase in net revenue during the 2007 Calendar Year and ultimately causing a year-over-year reduction in income from continuing operations were higher interest costs and an increase in depreciation and amortization expense. When compared to the 2006 Calendar Year, the 2007 Calendar Year was favorably impacted by (i) a reduced provision for doubtful accounts, (ii) a decrease of approximately $6.8 million in refinancing and debt modification costs and (iii) a lower effective income tax rate.
At our hospitals that were in operation as general acute care hospitals during all of the 2007 Calendar Year and the 2006 Calendar Year, which we refer to as same 2007 hospitals, emergency room visits increased approximately 3.7%; however, corresponding same 2007 hospital admissions and surgical volume declined by 0.5% and 0.7%, respectively. We recently implemented corrective action plans at certain hospitals to improve operating trends, including hiring new management teams, modifying physician employment agreements, renegotiating payor contracts and initiating patient/physician/employe e satisfaction surveys. Furthermore, we continue to add physicians to our medical staffs and medical equipment to our hospitals in order to meet the needs of the communities that our hospitals serve. We believe that, over time, these investments, coupled with improving demographics, will yield increased hospital surgical volume, emergency room visits and admissions.
Outpatient services continue to play an important role in the delivery of health care in our markets, with approximately half of our net revenue during the 2007 Calendar Year and the 2006 Calendar Year generated on an outpatient basis. We continue to improve our emergency room and diagnostic imaging services to meet the needs of the communities that our hospitals serve and we have invested capital in nearly every one of our hospitals during the last five years in one of these two areas. As a result of this continuous focus, our same 2007 hospital adjusted admissions, which adjusts admissions for outpatient volume, increased approximately 1.6% during the 2007 Calendar Year when compared to the 2006 Calendar Year.
Economic conditions and changes in commercial health insurance benefit plans over the past several years have contributed to an increase in the number of uninsured and underinsured patients seeking health care in the United States. This general industry trend has affected us. Our same 2007 hospital self-pay admissions as a percent of total admissions increased to approximately 7.3% during the 2007 Calendar Year, as compared to 7.0% during the 2006 Calendar Year. However, our same 2007 hospital self-pay admissions as a percent of total admissions decreased 70 basis points during the three months ended December 31, 2007 when compared to the three months ended September 30, 2007. In light of these trends, we regularly evaluate our policies and programs and consider changes or modifications as circumstances warrant.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
2008 Three Month Period Compared to the 2007 Three Month Period
Net revenue during the 2008 Three Month Period was approximately $1,105.3 million as compared to $1,064.1 million during the 2007 Three Month Period. This change represented an increase of $41.2 million or 3.9%. Substantially all such increase resulted from reimbursement rate increases and favorable case mix trends.
Net revenue per adjusted admission at our same three month hospitals increased approximately 5.4% during the 2008 Three Month Period as compared to the 2007 Three Month Period. The factors contributing to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial health insurance providers.
Our provision for doubtful accounts during the 2008 Three Month Period declined 210 basis points to 11.3% of net revenue as compared to 13.4% of net revenue during the 2007 Three Month Period. As discussed at Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1, during the 2007 Three Month Period we modified our provision for doubtful accounts policy for self-pay accounts receivable, resulting in the recognition of incremental expense of approximately $39.0 million. Excluding the impact of such change in estimate, we experienced an increase of approximately 160 basis points in the 2008 Three Month Period provision for doubtful accounts as a percent of net revenue. Such increase was primarily attributable to a consistent application of our modified allowance for doubtful accounts policy for self-pay patients subsequent to June 30, 2007. This modified policy is discussed under the heading â€śNet Revenue, Accounts Receivable and Allowance for Doubtful Accountsâ€ť at Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1.
Our consistently applied accounting policy is that accounts written off as charity and indigent care are not recognized in net revenue and, accordingly, such amounts have no impact on our provision for doubtful accounts. However, as a measure of our fiscal performance, we routinely aggregate amounts pertaining to our (i) provision for doubtful accounts, (ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized revenue for charity and indigent care and then we divide the resulting total by the sum of our (i) net revenue, (ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized revenue for charity and indigent care. We believe that this fiscal measure, which we refer to as our Uncompensated Patient Care Percentage, is important because it provides us with key information regarding the level of patient care for which we do not receive remuneration. During the 2008 Three Month Period, such percentage was determined to be 23.1%. As a result of the allowance for doubtful accounts policy modifications discussed at Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1, the Uncompensated Patient Care Percentage for the 2008 Three Month Period is more readily comparable to each of the three months ended March 31, 2008 and December 31, 2007, which were 22.7% and 23.9%, respectively. The drop in our Uncompensated Patient Care Percentage during 2008 reflects, among other things, declining uninsured and underinsured patient volume.
Salaries and benefits as a percent of net revenue increased to 40.6% during the 2008 Three Month Period from 39.9% during the 2007 Three Month Period. Same three month hospital salaries and benefits increased from 38.8% of net revenue during the 2007 Three Month Period to 39.4% during the 2008 Three Month Period. These increases were primarily due to higher employed physician costs and routine salary and wage increases.
Depreciation and amortization as a percent of net revenue increased from 4.9% during the 2007 Three Month Period to 5.4% during the 2008 Three Month Period. This increase primarily resulted from 2007 calendar year capital expenditures for renovation and expansion projects at certain of our facilities. Additionally, the intangible assets from our physician and physician group guarantees generated approximately $1.6 million of incremental amortization expense during the 2008 Three Month Period.
Other operating expenses as a percent of net revenue decreased from 18.1% during the 2007 Three Month Period to 17.8% during the 2008 Three Month Period. This decrease is primarily attributable to reductions in sales and use taxes, professional fees and advertising costs. Partially offsetting these reductions was an increase in physician recruitment costs.
During the 2008 Three Month Period, among other things, we recognized a gain on sale of assets of approximately $6.2 million attributable to the sale of three home health agencies. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding this divestiture.
Interest expense decreased from approximately $61.6 million during the 2007 Three Month Period to $58.7 million during the 2008 Three Month Period. Such decrease was primarily attributable to (i) reduced interest expense on our 1.50% Convertible Senior Subordinated Notes due 2023 (the â€ś2023 Notesâ€ť), which were partially repurchased during the 2008 Three Month Period, and (ii) a lower average outstanding principal balance under our $2.75 billion seven-year term loan (the â€śTerm Loanâ€ť) during the 2008 Three Month Period as compared to the 2007 Three Month Period. The 2008 Three Month Period was adversely impacted by incremental interest expense from the 3.75% Convertible Senior Subordinated Notes due 2028 (the â€ś2028 Notesâ€ť) that we sold on May 21, 2008. See â€śLiquidity, Capital Resources and Capital Expendituresâ€ť below and Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt arrangements.
Refinancing and debt modification costs during the 2008 Three Month Period included (i) losses on the early extinguishment of debt of approximately $10.0 million in connection with our repurchases of certain of the 2023 Notes in the open market and (ii) a write-off of deferred financing costs of approximately $0.8 million in connection with a prepayment of principal under the Term Loan. See â€śLiquidity, Capital Resources and Capital Expendituresâ€ť below and Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding the 2023 Notes, including a discussion of repurchases thereof subsequent to June 30, 2008.
Minority interests in earnings of consolidated entities increased to approximately $5.4 million during the 2008 Three Month Period from $0.2 million during the 2007 Three Month Period. This increase was primarily due to a joint venture arrangement in North Carolina and South Carolina with Novant Health, Inc. that became effective March 31, 2008. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our recent joint venture activity.
Our effective income tax rates were approximately 37.3% and 38.8% during the 2008 Three Month Period and the 2007 Three Month Period, respectively. Our provision for income taxes was favorably impacted during the 2008 Three Month Period by, among other things, the finalization of certain federal income tax returns and the lapsing of certain state statutes of limitations.
I would like to welcome you to HMAâ€™s second quarter 2008 earnings conference call.
Before we get started with the call, I would like to read our disclosure statement. Certain statements contained in this presentation including without limitation statements containing the words believes, anticipates, intends, expects, optimistic, objectives, and words with similar import constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include projections of revenue, income or loss, capital expenditures, capital structure, or other financial items, statements regarding the plans and objectives of management for future operations, statements of future economic performance, statements of the assumptions underlying or relating to any of the foregoing statements, and other statements which are other than statements of historical fact.
Statements made throughout this presentation are based on current estimates of future events, and the company has no obligation to update or correct these estimates. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially as a result of these various factors.
In addition EBITDA is mentioned on this call as defined as earnings before interest, income taxes, depreciation, amortization, gains on sales of assets, refinancing costs and minority interests. I will refer you to HMAâ€™s earnings press release issued yesterday for a disclosure statement regarding EBITDA as a non-GAAP financial measure.
On the call with me this morning is Chief Executive Officer Burke Whitman, Chief Financial Officer Bob Farnham, and Chief Operating Officer Kelly Curry.
For the second quarter we reported earnings per share from continuing operations excluding refinancing calls and gains from sales of $0.10 per share. Patient volumes declined during the quarter in part due to some short-term issues that we can correct, that I have already begun to address, and from which we expect to see gradual improvement, but we succeeded in minimizing the impact of the volume decline on our earnings and cash flow during the quarter through enhanced, focused, managerial discipline on the fundamentals of our operations.
Kelly Curry, our COO, will address in a few moments some of the short-term volume opportunities and what weâ€™re doing about them in some detail, but Iâ€™d like to summarize those here before I move on to address some aspects of the direction of the company overall.
There were really six volume related issues this quarter that we can and will do something about directly. We believe these are responsible for the majority of the decline and we believe that our actions will have an impact on them over the course of the remainder of this year. There is one additional issue that we cannot address so directly, but that we can react to by adjusting our operations to minimize the impact and Iâ€™ll just go through these quickly with you.
First, we did decrease the number of non-emergent admissions and outpatient visits from uninsured or non-paying patients. This is good news. It is the result of a deliberate effort to program that Kelly and our operational leaders put into place a couple of quarters ago. We have achieved this while still ensuring that those patients received their non-emergent care with us or in some other appropriate setting.
The second reason for the decline in volume this quarter is that in being successful in reducing the number of no-pay patients, it appears that we inadvertently chased away a portion of our paying patients. This was not our intent, but it was the unexpected secondary effect of an otherwise successful program. The solution is that we are modifying our approach to ensure that we incorporate compassion and wisdom into our dealings with all of our patients up front.
The third cause is in our emergency room operations: we lost a bit of focus on the fundamentals in some, but not all, of our hospitals. The solution is that we are reinforcing that focus now with the media improvements to the ER management, quality, and systems, in order to get this back on track.
Fourth, our North and South Carolina volumes were down far more than the rest of the company, the biggest decline of any region. This was primarily the result of short-term disruption to physician referrals resulting from our partnership with Novant that we closed on in April. While we expected some disruption to the volumes in the care line as following that transaction, particularly because of the change in employment for all the physicians there, the disruption has been greater then we expected; however it will be short lived. The solution, we believe those issues will settle down on their own very soon and we are more excited now than ever before about the go forward benefits of that partnership on man fronts, so the hospitals, the communities and HMA and even to our financial performance going forward.
The fifth cause for the decline, our physician recruiting effort, although ahead of last year, is short of goal; Kelly will talk about that some more, but in broad terms we are augmenting our recruiting operations at the corporate and division levels.
The sixth cause, we believe, is the public reports of comparative hospital quality and satisfaction information that are now publicly available. In many cases our hospitals fared less well than our competitor and thatâ€™s because the data thatâ€™s being reported now is from periods before we had implemented our turn around as a company, which Iâ€™ll talk about in a few minutes. The solution here is simply to continue to drive toward industry leadership and quality satisfaction, which we are doing, and upon which we are making enormous strides and Iâ€™ll speak to that more in a minute.
All six of those reasons for the volume declines we are doing things about. The seventh one is a little hard to do something about. The economy does appear to have impacted us in some of our markets, especially Florida where the volumes were a little lower than the rest of the company. The solution to this, we canâ€™t impact that directly, but we are prepared to manage our resources I a smart manner. Again, Kelly will provide for the details on all of this.
Now let me address the direction of the company. I am really encouraged by the unambiguous progress weâ€™re making in the core elements of our deliberate turn around of the company. Let me quickly review those elements and then tell you about the progress.
We launched a new direction for the company January 1 of this year, having spent the final months of 2007 organizing all of the elements. The new direction builds on the companyâ€™s 30-year bedrock strengths of knowledge, commitment, hard work, discipline, integrity. The new direction comprises a new mission, vision, strategy, and plan. The most important is our vision to lead the industry in quality and satisfaction in two to three years. This will help us better accomplish our mission and it will lead us to become the hospital most preferred by patients and physicians in communities in a manner that eventually will earn their loyalty to our hospital and lead to stronger patient volume and market share.
To achieve that vision we launched a seven part strategy; first stabilize our operations; second build a foundation for more sustainable performance; third enhance our operational discipline in revenues and managing our resources; fourth rationalize our portfolio of assets; fifth gradually de-leverage our balance sheet; sixth take the necessary steps to become the industry leader I quality and satisfaction; and seventh, resulting from the sixth item, seize and defend market share.
As we said at the beginning of the year, we expect to make reportable progress during the first year in six of the seven parts of that strategy, the exception being market share, which we said would take a bit longer to impact the increase, probably beginning within one to two years, maybe sooner, and driven by the improvements we would make to quality and patient satisfaction.
Our timeline for this is based on historical precedent, including our own personal experiences and the documented experience of others in the industry who have had similar opportunities. In the first six months since launching the new direction, weâ€™ve achieved real improvement in all six of those areas we had hoped to improve and we have begun to position ourselves to improve the market share.
Both Bob and Kelly will have specifics on these in a few moments, but I would like to address one right now myself and thatâ€™s the progress we have made toward quality and satisfaction leadership.
Bottom line our hospitals have improved patient satisfaction and quality scores sizably in every category, in some cases moving up two core tiles nationally, relative to other hospitals. The improvements are measurable and theyâ€™re sustainable. They are the direct result of a proven system of capable leaders new and old, a new incentive system that emphasizes rewards and pays our operations leaders for success in these areas and relentless focus. Most importantly for our investors, we expect these improvements in quality and satisfaction to influence physician and patient preferences for our hospitals and that will in turn build volumes and market share within one to two years, maybe sooner.
It is important to note here that we had a long way to go with the number of our hospitals when we started this. While all of them provided great care on an absolute basis, a number of them began the year with a legacy of satisfaction levels and quality levels that were below their local competitors. Moreover, as some of these relative ratings have now become available publicly and reported with about a one-year time lag, our lower scores from the legacy period, from a year ago, before we were able to launch the companyâ€™s new direction are the ones that are now in the public. This legacy we believe, as I mentioned earlier, has been one of the causes of our short-term volume declines, but weâ€™re tracking our own scores on a real-time basis, not on a year lag basis now. Weâ€™re confident that our scores reported a year from now will be better and we are also tracking and holding our people accountable for the underlying indicators.
We will need to make adjustments along the way, just was we are doing now, in response to some of these volume issues this quarter, but we are moving in the right direction. As we said when we began, our progress will not be linear it will be an upwardly moving sign way that HMA remains poised to achieve its vision, make us more of a preferred provider among physicians and patients and build volumes and market share. When you combine that with the potential that we have in our managerial and cost discipline, already proven, the managed care improvements, a heightened level that our leaders in the hospitals have in the way of enthusiasm, the numerous partnerships that weâ€™re entering with highly regarded not for private hospitals, academic medical centers and physicians, when you combine all of that, we get out of this company a tremendous amount of operating leverage when those volumes kick in.
When the volumes kick in on the operating base we have, we have a lot of leverage to move the earnings of the company and we have the opportunity to generate exciting returns for HMA shareholders including all of us sitting around this table.
So, even with the near-term volume declines, I believe we are moving in the right direction with our company for our communities and for our shareholders and I feel good about our future.
For the second quarter HMA reported net revenue of $1 billion, 105.3 million; EBITDA of $163.3 million; income from continuing operations of $21.9 million; net income of $12.4 million; diluted EPS from continuing operations of $0.09; and diluted EPS of $0.05. Excluding refinancing costs and gains from the sales of assets, HMA reported diluted EPS from continuing operations of $0.10.
Hospital admissions from continuing operations for the second quarter decreased 3.85 while continuing same hospital adjusted admissions decreased 1.5% compared to the same quarter a year ago. A decline in uninsured admissions contributed approximately 1% of the 3.8% decrease in continuing hospital admissions. Continuing hospital emergency room visits grew 1.6% and surgeries declined 0.8% compared to the same quarter a year ago.
Pricing in the quarter showed a 5.4% increase and continuing hospital net revenue per adjusted admission relative to the same period a year ago, which contributed to a continuing hospital net revenue increase of 3.9%.
The second quarter of 2008 marks the second quarter in which the impact our discount policy, which was instituted in February of 2007 was included in both comparable quarters for the entire quarter. Our EBITDA from continuing operations for the second quarter was $183.5 million and a corresponding hospital EBITDA margin from continuing operations was 16.6%
Uninsured patient volumes and bad debt expense continue to be an industry issue affecting operating returns and despite a turbulent economy and recession our uninsured patient volumes declined for the second quarter in a row compared to the same period a year ago.
Continuing hospital uninsured admissions for the second quarter totaled approximately 6.8% of total admissions which is down 75 basis points from the same quarter a year ago. There are three components that comprise how HMA accounts for uninsured and underinsured patients. Bad debt expense, uninsured discounts and charity and indigent write offs. Bad debt expense for the second quarter was $124.8 million or 11.3% of net revenue compared to $142.7 million or 13.4% of net revenue the same period a year ago.
The provision for doubtful accounts for the second quarter ended June 30, 2007 included $39 million of additional reserve to deflect a decline in the collect ability of accounts receivable from uninsured patients. Recall that bad debt expense for the first quarter ended March 31. 2008 was 11.2% of net revenue. Since February of 2007 HMA has given a 60% discount to uninsured patients for non-elective services.
Uninsured discounts for the second quarter were $149.7 million compared to $147.7 million for the same quarter a year ago. HMAâ€™s charity and indigent care write offs for the second quarter were $20.3 million compared to $18.3 million for the same period a year ago. To accurately compare how HMA accounts for the uninsured it is necessary to review all three components together. Therefore the sum of bad debt expense, uninsured discounts and charity and indigent write offs as a percent of the sum of net revenue, uninsured discounts and charity and indigent write offs was 23.1% for the second quarter compared to 25.1% for the same quarter a year ago.
We are convinced that our continuing efforts in the emergency room are having a positive effect on our uninsured volumes. By offering the discount clearly explaining payment responsibilities and then triaging for truly emergent care, we have increased the awareness of our expectations.
Moving over to the balance sheet and cash flow statements, total assets are more than $4.8 billion. The balance in accounts receivable net as of June 30, 2008 was $624.1 million and the balance for doubtful accounts was $463.9 million. Year-to-date cash flows from continuing operation activities was 4286.2 million after cash, interest, and cash tax payments aggregating $83.4 million.
For the quarter cash flow from continuing operating activities was $141.1 million, after cash, interest and cash tax payments aggregating $63.7 million. Lastly days sales outstanding or DSOs as of June 30, 2008 were 50 days, two days less than as of June 30, 2007 and one day less sequentially from March 31, 2008.
During the second quarter HMA completed a private placement of $210 million of 3.75% senior subordinated convertible notes due at 2028. The notes are convertible into cash and in select circumstances shares of the companies common stock or a combination there of calculated on a proportionate basis over a 20-day trading period observation at a base conversion rate of 85.0340 shares per 1,000 principle amount of notes, which is equal to a base conversion price of approximately $11.76 per share subject to adjustment upon the occurrence of certain events. HMA utilized the net proceeds from the offering together with additional cash on hand to repurchase, in the open market, approximately 292 million of HMAâ€™s 4 3/8% convertible senior subordinated notes due 2023, leaving $282.7 million of the 4 3/8 convertible subordinated notes outstanding as of June 30, 2008.
On August 1 of 2008 holders of the 4 3/8 convertible notes exercised their put right and HMA repurchased $282.5 million or 99% of the outstanding convertible notes; so we are de-levering the balance sheet. Principle payments on debt through June 30 for the cash flow statement were $438 million, after deducting $244 million representing the net proceeds of the $250 million convertible debt issued in May to partially refinance the $575 million of outstanding converts, we had paid down a net $194 million of debt through June 30 with the retirement of $282.5 million of the remaining 4 3/8 convert on August 1, we have paid down as of today a net $476 million of debt.
To review the second quarter results, net revenue per adjusted admission from continuing operations increased 5.4% contributing to a net revenue increase of 3.9%. EBITDA margins from continuing operations were 16.6%. Bad debt expense was 11.3% of net revenue. Year-to-date cash flow from operations was $286 million or $370 million after adding back $83 million in cash, interest, and taxes paid. For the second time in many quarters, same hospital uninsured admissions declined to 6.8% of total admits.
Lastly after the end of the second quarter we repurchased $282.5 million of the 4 3/8 convertible notes due 2023 as a result of the exercising put right on August 1 of 2008.
We continue to have good results here at midyear given our managerial and cost discipline. In the quarter the company experienced an approximate 80 basis point decline in continuing operations from no pay admissions over the quarter, resulting in a bad debt expense of 11.3% for the quarter, basically flat to the first quarter and 210 basis points lower than the seam quarter a year ago which included our $39 million increased reserve.
On a year-to-date basis bad debt expense as a percentage of net revenue was 11.2% versus 12% reflecting a reduction in no-pay admissions and an improvement in collections for both our ER and direct admit volumes. During the quarter our admissions declined another approximately 3% after giving effect to the reduction in no pay business. Our analysis indicates that our tighter collection policies also negatively affected patients with insurance who were not intending to pay their personal amounts due under the policies.
As a result we are now fine-tuning our collection efforts to address this issue proactively to continue to appropriately manage both our paying and no-pay business. In addition the transition of our North Carolina and South Carolina hospitals in implementing our previously announced joint venture with Novant Health, including the integration of our 110 physicians resulted in an approximately 1% drop of our overall 3.8% decline in our admissions for the quarter.
As this process is now nearly complete, we expect our admissions in these markets to stabilize over the balance of the fiscal year. Finally, we believe the balance of the decline is attributable to economic factors in our markets. Our reviews indicate that people, especially in our more rural markets, are avoiding or postponing trips to the doctor due to fuel costs, general economic conditions, higher deductibles and co-pays and to avoid using company health benefits in a time of workforce reductions.
The company continues to make significant improvement in its documentation which is reflected in its increased case mix index from 1.32 to 1.35 for the quarter. This matches the increase we saw in the first quarter and this quarterâ€™s index actually exceeds the first quarterâ€™s case mix index of 1.34.
HMAâ€™s program to improve our medical record completion and coding called Document Our Excellence continues to develop improved documentation leading to more accurate coding. We continue to emphasize with our leadership teams the importance of attracting direct admissions to the hospital which generally results in an overall better payer mix. We seek to provide a concierge type service offering improved customer service for both the patient and the physicians, making the admission process as seamless as possible for all involved. This service is already beginning to attract our better paying sources for its ease of use.
The company continues to implement its program to improve and promote quality outcomes and customer satisfaction called Process for Perfection and we are seeing internal improvements that will be reported publicly in the future. Ultimately we expect that even in difficult economic times our improvement in quality will help differentiate HMA hospitals to attract patients and new physicians.
We continue to work very hard on satisfactions as another important volume builder. Overall, we have seen an increase in every category as compared to the prior year and importantly we are moving up appreciably in the percentile category as compared to the national database maintained by our vendor. In fact it is a greater improvement than they have seen in other large organizations in the past. Continuous educational programs are in place to develop the customer-focused attitudes of all our hospital employees.
We have renegotiated 125 of our managed care contracts and added 60 new contracts. The increases in the rates on the renegotiated contracts continue to range from 7 to 8%. We are now 75% of the way to our goal for 2008.
The Novant relationship continues on track with our initial integration complete at this time and with progress continuing in the development of our partnership. The initial challenges integrating our position in North Carolina and South Carolina to the transition to Novant have been overcome by both HMA and Novant and we believe historical hospital referral patterns will return by year-end. In addition, we are in talks with other non-profit groups that have indicated an interest in a similar relationship with HMA as a result of this unique partnership with Novant. We would expect that we will have similar opportunities for partnership in the future.
The company has continued to develop our program to recruit, develop, and retain physicians called HMA Physician Security Plus program and we will be on track with the total process by the end of this fiscal year. Physician recruitment continues to be a challenge and we have recently made organizational changes adding specific personnel and additional resources to better manage this process. This will be a high priority for the remainder of 2008 as we build our medical stats for 2009. We are ahead of last years recruitment pace, but we are not where we want to be.
The company continues to focus on its turn around initiatives and we are confident of the ultimate success of these measures even in the face of the significant economic headwinds we feel. We believe that we are uniquely poised for success given our progress in expense control, bad debt management, managed care negotiations, and the resolution of our convertible bonds put. We believe achieving our initiatives in satisfaction and quality will ultimately drive increased patient volumes and returns. We have said that this is a turn around and the improvement in our operations will be upwardly moving and slow but not linear.
Finally we have definitely seen a momentum shift in our markets with very positive comments from our customers. This shift is easily identifiable in our hospitals through much improved relationships with our customers, physicians, and patients. In addition, we continue to invest significant capital and this increased activity has been very well received. In the past our customers have been looking to see if we were going to deliver on our words for increased investment, significantly improved satisfactions and the level of commitment we had to achieve our, as we call it, big hairy audacious goal of being the number one quality provider in the next two years. Their recent comments to us now show they are seeing the proof.
We are positioning ourselves to benefit significantly from the ultimate improvement of the economic climate and to successfully negotiate the existing challenges.