UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

          

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Form 10-Q

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(Mark One) 

 

Commission file number: 000-51251

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LifePoint Hospitals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

(615) 372-8500

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ    No ¨

 

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

 

 

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

 

As of October 18, 2013, the number of outstanding shares of the registrant’s Common Stock was 47,016,247.

 

 

 

 

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LifePoint Hospitals, Inc.

 

TABLE OF CONTENTS

 

 

 

 

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Note 1. Organization, Basis of Presentation, and Recently Issued Accounting Pronouncement

Organization

LifePoint Hospitals, Inc., a Delaware corporation, acting through its subsidiaries, operates general acute care hospitals primarily in non-urban communities in the United States (“U.S.”). Unless the context otherwise indicates, LifePoint Hospitals, Inc. and its subsidiaries are referred to herein as the “Company.” At September 30, 2013, on a consolidated basis, the Company operated 57 hospital campuses in 20 states. Unless noted otherwise, discussions in these notes pertain to the Company’s continuing operations, which exclude the results of those facilities that have previously been disposed.

Basis of Presentation

    The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, and disclosures considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September  30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Recently Issued Accounting Pronouncement

 

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-2, “Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-2”).  ASU 2013-2 requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.  The Company adopted ASU 2013-2 during the first quarter of 2013.  At September 30, 2013, the Company’s only component of accumulated other comprehensive income relates to the unrealized gains on changes in the funded status of its pension benefit obligation.  During the three and nine months ended September 30, 2013, there were no reclassifications out of accumulated other comprehensive income into net income. 

 

Note 2. Revenue Recognition and Accounts Receivable

The Company recognizes revenues in the period in which services are performed. Accounts receivable primarily consist of amounts due from third-party payors and patients. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows.  Amounts the Company receives for treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”) and other private insurers are generally less than the Company’s established billing rates.  Additionally, to provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value.  Accordingly, the revenues and accounts receivable reported in the Company’s accompanying unaudited condensed consolidated financial statements are recorded at the net amount expected to be received.

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On April 5, 2012, a settlement agreement (the “Rural Floor Settlement”) was signed between the U.S. Department of Health and Human Services (“HHS”), the Secretary of HHS, the Centers for Medicare and Medicaid Services (“CMS”) and a large number of healthcare service providers, including the Company’s hospitals.   The Rural Floor Settlement is intended to resolve all claims that have been brought or could have been brought relating to CMS’s calculation of the rural floor budget neutrality adjustment that was created by the Balanced Budget Act of 1997 from federal fiscal year 1998 through and including federal fiscal year 2011 for healthcare service providers that participated in certain court cases and group appeals.  As a result of the Rural Floor Settlement, the Company recognized $33.0 million of additional Medicare revenue during the nine months ended September 30, 2012.

 

The Company’s revenues before provision for doubtful accounts by payor and approximate percentages of revenues were as follows for the three and nine months ended September 30, 2013 and 2012 (in millions):

 

The primary uncertainty of the Company’s accounts receivable lies with uninsured patient receivables and deductibles, co-payments or other amounts due from individual patients.  The Company has an established process to determine the adequacy of the allowance for doubtful accounts that relies on a number of analytical tools and benchmarks to arrive at a reasonable allowance. No single statistic or measurement determines the adequacy of the allowance for doubtful accounts. Some of the analytical tools that the Company utilizes include, but are not limited to, historical cash collection experience, revenue trends by payor classification and revenue days in accounts receivable.  Accounts receivable are written off after collection efforts have been followed in accordance with the Company’s policies.

The following is a summary of the Company’s activity in the allowance for doubtful accounts for the nine months ended September 30, 2013 (in millions):

 

   

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The allowances for doubtful accounts as a percent of gross accounts receivable, net of contractual discounts were 55.8% and 51.8% as of September 30, 2013 and December 31, 2012, respectively.  The increase in the resulting ratio of the allowances for doubtful accounts as a percentage of gross accounts receivable, net of contractual discounts, as of September 30, 2013 as compared to December 31, 2012 is primarily the result of a timing difference in the recognition of additional allowances for doubtful accounts and the write-off of aged and fully reserved accounts receivable during the nine months ended September 30, 2013.  Additionally, as of September 30, 2013 and December 31, 2012, the allowances for doubtful accounts plus certain contractual allowances and discounts related to self-pay patients as a percentage of self-pay receivables were comparable at 84.8% and 85.0%, respectively.

 

Note 3. General and Administrative Costs

 

    The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include its hospital support center depreciation and overhead costs, which were $42.5 million and $44.2 million for the three months ended September 30, 2013 and 2012, respectively, and $133.5 million and $127.9 million for the nine months ended September 30, 2013 and 2012, respectively. 

 

Note 4.  Fair Value of Financial Instruments

In accordance with Accounting Standards Codification (“ASC”) 825-10, “Financial Instruments” and ASC 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), the fair value of the Company’s financial instruments are further described as follows.

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable

The carrying amounts reported in the accompanying unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.

 

Long-Term Debt

The carrying amounts and fair values of the Company’s senior secured term loan facility (the “Term Facility”), senior secured incremental term loans (the “Incremental Term Loans”) and senior secured revolving credit facility (the “Revolving Facility”) under its senior secured credit agreement with, among others, Citibank, N.A. (“Citibank”), as administrative agent, and the lenders party thereto (the “Senior Credit Agreement”), 6.625%  unsecured senior notes due October 1, 2020 (the “6.625% Senior Notes”), 3½% convertible senior subordinated notes due May 15, 2014 (the “3½% Notes”) and 3¼% convertible senior subordinated debentures due August 15, 2025 (the “3¼% Debentures”) as of September 30, 2013 and December 31, 2012 were as follows (in millions):

   

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The fair values of the Term Facility, the Incremental Term Loans, the Revolving Facility and the 6.625% Senior Notes were estimated based on the average bid and ask price as determined using published rates and categorized as Level 2 within the fair value hierarchy in accordance with ASC 820-10.  The fair values of the 3½% Notes and the 3¼% Debentures were estimated based on the quoted market prices determined using the closing share price of the Company’s common stock and categorized as Level 1 within the fair value hierarchy in accordance with ASC 820-10. As more fully discussed in Note 7, the Company repurchased all of the outstanding 3¼% Debentures with the proceeds from the issuance of the Incremental Term Loans under the Senior Credit Agreement.

Note 5. Acquisitions

 

Gain on Settlement of Pre-Acquisition Contingent Obligation

In connection with an acquisition completed in 2012, the Company’s management made reasonable estimates and recorded an estimated obligation representing the fair values of its potential contingent obligations to the seller pursuant to the asset purchase agreement.  Subsequently, the seller finalized its settlement of certain of these obligations at an amount that was less than the Company originally estimated.  As a result, during the nine months ended September 30, 2013, the Company reduced its originally recorded contingent obligations and recognized a gain of approximately $5.6 million included under the caption “Gain on settlement of pre-acquisition contingent obligation” in the accompanying condensed consolidated statements of operations.

The Company will continue to analyze and refine its estimates of the remaining contingent obligations to the seller as changes in facts and circumstances warrant.  The Company’s management does not control and cannot predict with certainty the progress or final outcome of any discussions with third parties, such as government agencies.  Therefore, the final amounts paid in settlement of the remaining contingent obligations, if any, could materially differ from amounts currently recorded.  Any such changes in estimate will impact the Company’s future results of operations and cash flows.

Scott Memorial Hospital

 

In May 2012, the Company entered into a joint venture agreement with Norton Healthcare, Inc. to form the Regional Healthcare Network of Kentucky and Southern Indiana (“RHN”), the purpose of which is to own and operate hospitals in non-urban communities in the Kentucky and Southern Indiana region.   Effective January 1, 2013, RHN acquired Scott Memorial Hospital (“Scott Memorial”), a 25 bed hospital located in Scottsburg, Indiana for approximately $9.5 million, including net working capital.  The Company has committed to invest in Scott Memorial an additional $3.0 million in capital expenditures and improvements over the next five years.  The results of operations of Scott Memorial are included in the Company’s results of operations beginning on January 1, 2013.

 

Note 6. Goodwill and Intangible Assets 

Goodwill

The Company accounts for its acquisitions in accordance with ASC 805-10, “Business Combinations” using the acquisition method of accounting. Goodwill represents the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. In accordance with ASC 350-10, “Intangibles — Goodwill and Other” goodwill and intangible assets with indefinite lives are reviewed by the Company at least annually for impairment. The Company’s business comprises a single reporting unit for impairment test purposes. For the purposes of these analyses, the Company’s estimates of fair value are based on a combination of the income approach, which estimates the fair value of the Company based on its future discounted cash flows, and the market approach, which estimates the fair value of the Company based on comparable market prices. The Company performed its most recent annual impairment test as of October 1, 2012 and did not incur an impairment charge.

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Intangible Assets

 

Summary of Intangible Assets

 

The following table provides information regarding the Company’s intangible assets, which are included in the accompanying unaudited condensed consolidated balance sheets at September 30, 2013 and December 31, 2012 (in millions):

 

 

 

 

Contract-Based Physician Minimum Revenue Guarantees

The Company has committed to provide certain financial assistance pursuant to recruiting agreements, or “physician minimum revenue guarantees,” with various physicians practicing in the communities it serves. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may advance certain amounts of money to a physician to assist in establishing his or her practice.

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The Company accounts for its physician minimum revenue guarantees in accordance with the provisions of ASC 460-10, “Guarantees” (“ASC 460-10”). In accordance with ASC 460-10, the Company records a contract-based intangible asset and a related guarantee liability for new physician minimum revenue guarantees. The contract-based intangible asset is amortized over the period of the physician contract, which typically ranges from four to five years and is included as an expense under the caption “Other operating expenses” in the accompanying unaudited condensed consolidated statements of operations. As of September 30, 2013 and December 31, 2012, the Company’s liability for contract-based physician minimum revenue guarantees was $14.9 million and $15.2 million, respectively. These amounts are included as a current liability under the caption “Other current liabilities” in the Company’s accompanying unaudited condensed consolidated balance sheets.

 

Non-Competition Agreements

The Company has entered into non-competition agreements with certain physicians and other individuals which are amortized on a straight-line basis over the term of the agreements.

Certificates of Need and Certificates of Need Exemptions

The construction or acquisition of new facilities, the expansion of existing facilities and the addition of new services and certain equipment at the Company’s facilities may be subject to state laws that require prior approval by state regulatory agencies. These certificate of need laws generally require that a state agency determine the public need and give approval prior to the construction or acquisition of facilities or the addition of new services. The Company operates hospitals in certain states that have adopted certificate of need laws.  The Company has determined that these intangible assets have an indefinite useful life.

Licenses, Provider Numbers, Accreditations and Other

    To operate hospitals, the Company must obtain certain licenses, provider numbers and accreditations from federal, state and other accrediting agencies.  The Company has determined that these intangible assets have an indefinite useful life.

 

Note 7. Long-term Debt

 

Issuance and Extinguishment

 

On February 6, 2013, the Company amended its Senior Credit Agreement pursuant to which it issued $325.0 million of Incremental Term Loans.  The proceeds from the Incremental Term Loans were used to repurchase all of the outstanding 3¼% Debentures, plus accrued and unpaid interest. 

 

The Incremental Term Loans mature on July 24, 2017 and require quarterly repayments, which commenced on March 31, 2013, in an amount equal to 0.25% of the aggregate principal amount of all Incremental Term Loans, with the remaining outstanding balance paid at maturity.  The Incremental Term Loans bear interest at a rate equal to either an adjusted base rate (“ABR”) or an adjusted London Interbank Offer Rate (“LIBOR”) from time to time in effect, at the Company’s option, plus an applicable margin above the specified index as follows: (i) in the case of borrowings accruing interest at a rate based on ABR, ABR plus an applicable margin of 1.50% per annum, and (ii) in the case of borrowings accruing interest at a rate based on LIBOR, LIBOR plus an applicable margin of 2.50% per annum.  The Company may prepay the Incremental Term Loans at any time without any prepayment premium.

The Incremental Term Loans are guaranteed, on a senior basis, by the subsidiaries of the Company that guarantee the Senior Credit Agreement.  The Incremental Term Loans are secured by the collateral that secures the Senior Credit Agreement, consisting of a perfected first priority lien on, and pledge of, all of the capital stock and intercompany notes owned by the Company and each guarantor.  The Incremental Term Loans rank pari passu with the outstanding borrowings under the Term Facility.

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Classification 

As of September 30, 2013, the Company classified the 3½% Notes, including unamortized discount, as current under the caption “Current maturities of long-term debt” in the accompanying unaudited condensed consolidated balance sheet.  The 3½% Notes are convertible prior to March 15, 2014 under the following circumstances: (1) if the price of the Company’s common stock reaches a specified threshold during specified periods; (2) if the trading price of the 3½% Notes is below a specified threshold; or (3) upon the occurrence of specified corporate transactions or other events.  On or after March 15, 2014, holders may convert the 3½% Notes at any time prior to the close of business on the scheduled trading day immediately preceding May 15, 2014, regardless of whether any of the foregoing circumstances has occurred.  The Company is currently working to secure financing to repay the borrowings outstanding under the 3½% Notes on or after March 15, 2014.

Debt Transaction Costs

On August 23, 2013, the Company amended its Senior Credit Agreement and its 6.625% Senior Notes pursuant to which it modified certain restrictive covenants regarding subsidiary guarantees.  In connection with these amendments as well as the issuance of the Incremental Term Loans and the repurchase of the 3¼% Debentures, the Company paid  $8.3 million in debt financing costs and recognized $4.7 million in debt transaction costs during the nine months ended September 30, 2013.  The debt transaction costs associated with these transactions include the write-offs of $3.5 million of previously capitalized deferred loan costs related to the 3¼% Debentures and $1.2 million of new non-capital costs related to the issuance of the Incremental Term Loans and the covenant modifications made to the Senior Credit Agreement and the 6.625% Senior Notes.

 

In connection with the Company’s replacement of its prior credit agreement with the Senior Credit Agreement during the nine months ended September 30, 2012, the Company paid $9.6 million in debt financing costs and recognized $4.4 million in debt transaction costs. The debt transaction costs include the write-offs of $2.4 million of previously capitalized deferred loan costs and $2.0 million of new non-capital costs related to the issuance of the Senior Credit Agreement.

 

Note 8. Common Stock in Treasury and Repurchases of Common Stock

The Company’s Board of Directors has authorized the repurchase of outstanding shares of its common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints and other customary factors in accordance with a repurchase plan adopted in 2011, as subsequently amended and extended in February 2013 (the “Repurchase Plan”).  The Repurchase Plan provides for the repurchase of up to $350.0 million in shares of the Company’s common stock through August 20, 2014, although the Company is not obligated to repurchase any specific number of shares.  The Company has designated the shares repurchased in accordance with the Repurchase Plan as treasury stock.

The Company repurchased approximately 0.7 million shares for an aggregate purchase price, including commissions, of $30.1 million at an average purchase price of $45.76 per share in accordance with the Repurchase Plan for both the three and nine months ended September 30, 2013. The Company repurchased a nominal number of shares for an aggregate purchase price, including commissions, of $0.1 million at an average purchase price of $35.01 per share in accordance with the Repurchase Plan during the nine months ended September 30, 2012.  There were no repurchases made in accordance with the Repurchase Plan during the three months ended September 30, 2012.  Through September 30, 2013, the Company had repurchased approximately 5.0 million shares for an aggregate purchase price, including commissions, of approximately $184.7 million in accordance with the Repurchase Plan.  As of September 30, 2013, the Company had remaining authority to repurchase up to an additional $165.3 million in shares in accordance with the Repurchase Plan.  In connection with the Repurchase Plan, the Company has entered into a trading plan in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of the Company’s common stock during the Company’s blackout period (the “10b5-1 Trading Plan”).  The 10b5-1 Trading Plan became effective on September 16, 2013 and will expire on October 29, 2013.

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Additionally, the Company redeems shares from employees for minimum statutory tax withholding purposes upon vesting of certain stock awards granted pursuant to the Company’s Amended and Restated 1998 Long-Term Incentive Plan (the “1998 LTIP”) and Amended and Restated Management Stock Purchase Plan (“MSPP”). The Company redeemed approximately 0.2 million shares vested under the 1998 LTIP and MSPP during each of the nine months ended September 30, 2013 and 2012 for aggregate purchase price of approximately $8.4 million and $6.1 million, respectively. The Company has designated these shares as treasury stock.

 

Note 9. Stock-Based Compensation 

 

Overview

 

The Company issues stock-based awards, including stock options and other stock-based awards (nonvested stock, restricted stock, restricted stock units, performance shares and deferred stock units) to certain officers, employees and non-employee directors in accordance with the Company’s various stockholder-approved stock-based compensation plans. The Company accounts for its stock-based awards in accordance with the provisions of ASC 718-10, “Compensation – Stock Compensation” (“ASC 718-10”), and accordingly recognizes compensation expense over each of the stock-based award’s requisite service period based on the estimated grant date fair value.

Effective June 4, 2013, upon the approval of the Company’s stockholders, the Company replaced the 1998 LTIP and Amended and Restated Outside Directors Stock and Incentive Compensation Plan (the “ODSICP”) with the 2013 Long-Term Incentive Plan (the “2013 LTIP”), a new combined plan covering all of the Company’s employees and non-employee directors.  The 2013 LTIP provides for 3.6 million shares available for grant at a rate of 1.00 share for each stock option or appreciation rights award granted and 2.09 shares for each full-value award granted.  No shares remain available for issuance in accordance with the 1998 LTIP or the ODSICP.

Stock Options

Prior to replacing the 1998 LTIP and the ODSICP with the 2013 LTIP, the Company granted options to purchase 735,200 and 789,800 shares of the Company’s common stock to certain officers and employees in accordance with the 1998 LTIP during the nine months ended September 30, 2013 and 2012, respectively.  Additionally, in accordance with the 2013 LTIP, the Company granted options to purchase 60,600 shares of the Company’s common stock to certain officers and employees during the nine months ended September 30, 2013.  Options to purchase shares granted to the Company’s officers and employees in accordance with the 1998 LTIP and the 2013 LTIP were granted with an exercise price equal to the fair market value of the Company’s common stock on the day prior to the grant date. The options granted during the nine months ended September 30, 2013 and 2012 become ratably exercisable beginning one year from the date of grant to three years after the date of grant and expire ten years from the date of grant.

The Company estimated the fair value of stock options granted using the Hull-White II (“HW-II”) lattice option valuation model and a single option award approach.  The Company uses HW-II because it considers characteristics of fair value option pricing, such as an option’s contractual term and the probability of exercise before the end of the contractual term.  In addition, the complications surrounding the expected term of an option are material, as indicated in ASC 718-10.  Given the Company’s relatively large pool of unexercised options, the Company believes a lattice model that specifically addresses this fact and models a full term of exercises is the most appropriate and reliable means of valuing its stock options.  The Company is amortizing the fair value on a straight-line basis over the requisite service period of the awards, which is the vesting period of three years.  The stock options vest 33.3% on each grant anniversary date over three years of continued employment.

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The following table shows the weighted average assumptions the Company used to develop the fair value estimates under its HW-II option valuation model and the resulting estimates of weighted-average fair value per share of stock options granted during the nine months ended September 30, 2013 and 2012:

 

 

The total intrinsic value of stock options exercised during the nine months ended September 30, 2013 and 2012 was $11.7 million and $8.2 million, respectively. The Company received $6.2 million and $15.9 million in cash from stock option exercises for the three months ended September 30, 2013 and 2012, respectively, and $34.4 million and $21.4 million in cash from stock option exercises for the nine months ended September 30, 2013 and 2012, respectively. The actual tax benefit realized for the tax deductions from stock option exercises totaled $0.7 million and $2.8 million for the nine months ended September 30, 2013 and 2012, respectively. 

As of September 30, 2013, there was $10.6 million of total estimated unrecognized compensation cost related to stock option compensation arrangements. Total estimated unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 1.3 years.

Other Stock-Based Awards

Prior to replacing the 1998 LTIP and the ODSICP with the 2013 LTIP, the Company granted 410,000 and 521,011 shares of other stock-based awards to certain officers, employees and non-employee directors in accordance with the 1998 LTIP and the ODSICP during the nine months ended September 30, 2013 and 2012, respectively.  Additionally, in accordance with the 2013 LTIP, the Company granted 52,962 other stock-based awards to certain officers, employees, and non-employee directors during the nine months ended September 30, 2013. The fair value of these other stock-based awards is determined based on the closing price of the Company’s common stock on the day prior to the grant date. The other stock-based awards granted during the nine months ended September 30, 2013 and 2012 have either cliff-vesting periods from the grant date of three years, cliff-vesting periods from the grant date of six months and one day or ratable vesting periods beginning one year from the date of grant to three years after the date of grant. 

Of the other stock-based awards granted during the nine months ended September 30, 2013 and 2012, 322,000 and 320,000, respectively, were performance-based awards.  In addition to requiring continuing service of an employee, the vesting of these performance-based awards is contingent upon the satisfaction of certain financial goals, specifically related to the achievement of targeted annual revenues or earnings goals within a three-year period. If these goals are achieved, the performance-based awards will cliff-vest three years after the grant date. The performance criteria for the 320,000 performance-based awards granted during 2012 have been certified as met by the Compensation Committee of the Company’s Board of Directors, however, these awards are still subject to continuing service requirements and the three year cliff-vesting provisions.  For purposes of estimating compensation expense for the performance-based awards granted during the nine months ended September 30, 2013, the Company has assumed that the performance goals will be achieved. If the performance goals are not met for the performance-based awards granted during the nine months ended September 30, 2013, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed. 

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Notwithstanding the specific grant vesting requirements, other stock-based awards granted in accordance with the 1998 LTIP become fully vested upon the death or disability of the participant.  Additionally, in the event of termination without cause of a participant, other stock-based awards otherwise subject to cliff-vesting become vested in a percentage equal to the number of full months of continuous employment following the date of grant through the date of termination divided by the total number of months in the vesting period, and in the case of performance-based awards, only in the event that the performance goals are attained. Additionally, subject to certain limitations and notwithstanding the specific grant vesting requirements, awards granted in accordance with the 2013 LTIP may become fully exercisable or vested within the sole discretion and direction of a committee appointed by the Company’s Board of Directors to administer the plan.

As of September 30, 2013, there was $20.0  million of total estimated unrecognized compensation cost related to other stock-based awards granted in accordance with the 2013 LTIP, the 1998 LTIP and MSPP. Total estimated unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 1.7 years.

    The following table summarizes the Company’s total stock-based compensation expense as well as the total recognized tax benefits related thereto for the three and nine months ended September 30, 2013 and 2012 (in millions):

 

 

    The Company did not capitalize any stock-based compensation cost during the three or nine months ended September 30, 2013 or 2012. As of September 30, 2013, there was $30.6 million of total estimated unrecognized compensation cost related to all of the Company’s stock-based compensation arrangements. Total estimated unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted-average period of 1.6 years.

 

Note 10. Commitments and Contingencies 

Legal Proceedings and General Liability Claims

Hospitals are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, medical malpractice, breach of contracts, wrongful restriction of or interference with physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages that may not be covered by insurance.

 

In addition, hospitals are subject to the regulation and oversight of various state and federal governmental agencies. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against hospitals that submit false claims for payments to, or improperly retain overpayments from, governmental payors. Some states have adopted similar state whistleblower and false claims provisions. Although the healthcare industry has seen numerous ongoing investigations related to compliance and billing practices,  hospitals, in particular, continue to be a primary enforcement target for the Office of the Inspector General (“OIG”), the Department of Justice (“DOJ”) and other governmental fraud and abuse programs. Certain of the Company’s individual facilities have received, and from time to time, other facilities may receive, inquiries from federal and state agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material adverse effect on the Company’s financial position, results of operations and liquidity.

 

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The Affordable Care Act imposed an affirmative obligation on healthcare providers to report and refund any overpayments received. “Overpayments” in this context include any amount received from a government program by a provider to which it is not entitled, regardless of the cause. Such overpayments are deemed to be fraudulent and become violations of the False Claims Act if not reported and refunded within 60 days of identification. Hospitals can meet the obligation to report and refund in three ways: (1) refunding overpayments directly to the program; (2) self-disclosing the overpayment to the OIG via its voluntary self-disclosure protocol (with respect to False Claims Act and other violations not related to the Stark law); and (3) self-disclosing to CMS via the self-referral disclosure protocol (with respect to overpayments caused by potential violations of the Stark law only) for which CMS has the authority to reduce the amounts otherwise owed.

 

During August 2012, Minden Medical Center (“Minden”) finalized an independent review of the medical necessity of certain services rendered to patients in its intensive outpatient psychiatric program (“IOP”), which was managed by a third party, Allegiance Health Management, Inc. (“Allegiance”). This review was commenced by Minden in 2011 and, in August 2011, the hospital voluntarily disclosed its concerns regarding its billing of these services to the OIG pursuant to the OIG’s self-disclosure protocol. On January 3, 2012, Minden received notice that it had been accepted into the OIG’s self-disclosure protocol. At the time, Allegiance also managed the IOP at Bolivar Medical Center, a hospital owned by a subsidiary of the Company (“Bolivar”). On February 23, 2012, Bolivar received a subpoena from the OIG seeking information about its IOP program and its relationship with Allegiance. The Company believes that the OIG has served similar subpoenas on other non-LifePoint facilities that had contracts with Allegiance. In September 2013, the Company finalized settlement agreements for both the Minden and Bolivar matters.  The final settlement amounts are expected to be paid during the fourth quarter of 2013.  The Company's reserves for uninsured litigation at September 30, 2013 include these final settlement amounts.

 

In connection with the Company’s acquisition of Marquette General Health System (“Marquette General”), Marquette General Hospital, Inc. (the “Marquette Seller”) self-disclosed various potentially non-compliant physician arrangements under the CMS voluntary self-disclosure protocol.  The self-disclosure is pending with CMS.  To the extent that the Marquette Seller’s satisfaction of its retained liabilities, including those under its CMS voluntary self-disclosure, causes its net proceeds from the acquisition to be less than $15.0 million, the Company has agreed to pay additional purchase consideration to the Marquette Seller.  The Company has made reasonable estimates of these potential liabilities and at September 30, 2013 has recorded an aggregate of $18.0 million representing the fair values of its potential obligation to the Marquette Seller.  The Company’s management does not control and cannot predict with certainty the progress or final outcome of any discussions with third parties, such as government agencies.  Therefore, the final amounts paid in settlement of these contingent obligations, if any, could materially differ from amounts currently recorded.  Any such changes in estimate will impact the Company’s future results of operations and cash flows.

On September 16, 2013, the Company and two of its hospitals made a voluntary self-disclosure to the Civil Division of the DOJ.  The voluntary self-disclosure relates to concerns regarding the medical necessity of certain interventional cardiology procedures conducted by one physician in each of these hospitals’ cardiac catheterization laboratories.  On September 24, 2013, the U.S. Attorney’s Office in the district in which one of these hospitals is located served a subpoena requesting information related to the subject matter of the voluntary self-disclosure.  The Company is cooperating with the government in addressing these matters. 

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Physician Commitments

The Company has committed to provide certain financial assistance pursuant to recruiting agreements with various physicians practicing in the communities it serves.  In consideration for a physician’s relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may advance certain amounts of money to a physician, normally over a period of one year, to assist in establishing the physician’s practice.  The Company has committed to advance a maximum amount of approximately $32.4 million at September 30, 2013.   The actual amount of such commitments to be subsequently advanced to physicians is estimated at $14.9 million and often depends upon the financial results of a physician’s private practice during the guarantee period.  Generally, amounts advanced under the recruiting agreements may be forgiven pro rata over a period of 36 to 48 months contingent upon the physician continuing to practice in the respective community.  Pursuant to the Company’s standard physician recruiting agreement, any breach or non-fulfillment by a physician under the physician recruiting agreement gives the Company the right to recover any payments made to the physician under the agreement.  Additionally, the Company is subject to annual commitments for certain physician recruiting activities, including the continuation of existing or initiation of new activities with several of its facilities.

Capital Expenditure Commitments

 

    The Company is reconfiguring some of its hospitals to more effectively accommodate patient services and to provide for a greater variety of services, as well as implementing various information system initiatives in its efforts to comply with the Health Information Technology for Economic and Clinical Health Act. The Company has incurred approximately $91.1 million in costs related to uncompleted projects as of September 30, 2013, which is included under the caption “Construction in progress” in the Company’s accompanying unaudited condensed consolidated balance sheet. At September 30, 2013, these uncompleted projects had an estimated cost to complete and equip of approximately $56.2 million.  Additionally, the Company is subject to annual capital expenditure commitments in connection with several of its facilities. As part of the Company’s current acquisition strategy, management expects capital expenditure commitments to be a significant component of future purchase transactions.

 

Hospital Support Center Lease

 

The Company has entered into an agreement with an unrelated third party to lease a new hospital support center with a targeted occupancy date in the fourth quarter of 2013.  Under the terms of the lease agreement, the Company will lease from the third party the newly constructed hospital support center for a period of approximately 15 years following construction completion.  The Company’s management has determined that it has substantially all of the risks of ownership of the new hospital support center during the construction period and in accordance with ASC 840-40, “Leases – Sale-Leaseback Transactions” (“ASC 840-40”) has recorded an asset under the caption “Construction in progress” and related financing obligation under the caption “Other long-term liabilities” in the accompanying unaudited condensed consolidated balance sheets of $35.2 million as of September 30, 2013.  This asset and related liability represents the cumulative costs incurred to date and funded by the unrelated third party to construct the new hospital support center.  Once construction is complete, the Company will consider the applicable requirements of ASC 840-40 for sale-leaseback treatment, including the transfer back of all risks of ownership to the unrelated third party and whether the Company has any continuing involvement in the leased property. Currently, the Company anticipates that its lease agreement will qualify as a financing lease in accordance with ASC 840-40 and accordingly, the Company will recognize depreciation expense on the related asset and amortize the related financing obligation over the expected lease agreement term. 

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Note 11. Earnings Per Share 

 

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2013 and 2012 (dollars and shares in millions, except per share amounts):

 

 

 

     The 3½% Notes and the 3¼% Debentures are included in the calculation of diluted earnings per share whether or not the contingent requirements have been met for conversion if the conversion price of $51.79 and $61.22, respectively, is less than the average market price of the Company’s common stock for the period. Upon conversion, the par value is settled in cash, and only the conversion premium is settled in shares of the Company’s common stock. The impact of the 3½% Notes has been excluded for the three and nine months ended September 30, 2013 and 2012 because the effects would have been anti-dilutive.  Additionally, the impact of the 3¼% Debentures has been excluded for the nine months ended September 30, 2013 and the three and nine months ended September 30, 2012 because the effects would have been anti-dilutive. During the nine months ended September 30, 2013, as more fully discussed in Note 7, the Company repurchased all of the outstanding 3¼% Debentures with the proceeds from the issuance of the Incremental Term Loans under the Senior Credit Agreement. Additionally, certain outstanding stock-based awards have been excluded from the calculation of diluted earnings per share to the extent they were anti-dilutive for the three and nine months ended September 30, 2013 and 2012.

 

 

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Note 12. Guarantor and Non-Guarantor Supplementary Information

 

The 6.625% Senior Notes are jointly and severally guaranteed on an unsecured senior basis by substantially all of the Company’s existing subsidiaries that guarantee the Senior Credit Agreement. The following presents the condensed consolidating financial information for the parent issuer, guarantor subsidiaries, non-guarantor subsidiaries, certain eliminations and the Company for the three and nine months ended September 30, 2013 and 2012 and as of September 30, 2013 and December 31, 2012:

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2013

(In millions)

 

 

 

 

 

 

 

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LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2012

(In millions)

 

 

 

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LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2013

(In millions)

 

 

 

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LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2012

(In millions)

 

 

 

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LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Balance Sheets
September 30, 2013

(In millions)  

 

 

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LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Balance Sheets
December 31, 2012

(In millions)

 

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LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended September 30, 2013

(In millions)

 

 

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LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended September 30, 2012

(In millions)