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Acute Care ServicesNet revenues from the Company’s acute care hospitals, ambulatory treatment centers and specialized women’s health centers accounted for 86%, 87% and 85% of consolidated net revenues in 1999, 1998 and 1997, respectively. Net revenues at the Company’s acute care facilities owned in both 1999 and 1998 increased 4% in 1999 as compared to 1998 due primarily to a 5% increase in admissions and a 6% increase in patient days. The average length of stay at these facilities remained unchanged at 4.7 days in both 1999 and 1998. Net revenues at the Company’s acute care facilities owned in both 1998 and 1997 increased 4% in 1998 as compared to 1997 due primarily to a 4% increase in admissions and a 1% increase in patient days. The average length of stay at these facilities decreased 3% to 4.7 days in 1998 as compared to 4.8 days in 1997.The Company’s facilities have experienced an increase in inpatient acuity and intensity of services as less intensive services shift from an inpatient basis to an outpatient basis due to technological and pharmaceutical improvements and continued pressures by payors, including Medicare, Medicaid and managed care companies to reduce admissions and lengths of stay. To accommodate the increased utilization of outpatient services, the Company has expanded or redesigned several of its outpatient facilities and services. Gross outpatient revenues at the Company’s acute care facilities owned during the last three years increased 11% in 1999 as compared to 1998 and 14% in 1998 as compared to 1997, and comprised 26% of the Company’s acute care gross patient revenue in each year. Despite the increase in patient volume at the Company’s facilities, inpatient utilization continues to be negatively affected by payor-required, pre-admission authorization and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Additionally, the hospital industry in the United States as well as the Company’s acute care facilities continue to have significant unused capacity which has created substantial competition for patients. The Company expects the increased competition, admission constraints and payor pressures to continue. The increase in net revenue as discussed above was partially offset by lower payments from the government under the Medicare program as a result of the Balanced Budget Act of 1997 (“BBA-97”) and increased discounts to insurance and managed care companies (see General Trends for additional disclosure). The Company anticipates that the percentage of its revenue from managed care business will continue to increase in the future. The Company generally receives lower payments per patient from managed care payors than it does from traditional indemnity insurers. Additionally, the Company assumed a greater share of risk by entering into a capitated arrangement during 1999 with a managed care payor for its three acute care facilities located in Las Vegas, Nevada. The capitation contract, which contributed to the decline in the Company’s earnings and operating margins during 1999 as compared to 1998, has been replaced by a standard per diem contract commencing in January, 2000. At the Company’s acute care facilities, operating expenses (operating expenses, salaries and wages and provision for doubtful accounts) as a percentage of net revenues were 81.6% in 1999, 79.9% in 1998 and 78.7% in 1997. Operating margins (EBITDAR) at these facilities were 18.4% in 1999, 20.1% in 1998 and 21.3% in 1997. During 1999, the Company’s acute care division experienced earnings pressure due to government reimbursement reductions, continued increases in the provision for doubtful accounts and weakened operating performance at facilities in Las Vegas, Nevada and Amarillo, Texas. On a combined basis, the Company’s three acute care facilities in Las Vegas and the acute care facility in Amarillo contributed 32% of the Company’s acute care net revenue in both 1999 and 1998 and had operating margins of 15.7% in 1999 and 20.9% in 1998. Excluding the Las Vegas and Amarillo facilities, on a combined basis, the Company’s other acute care facilities had operating margins of 19.6% in 1999 and 19.7% in 1998. The decrease in the com-bined operating margins of the Las Vegas facilities in 1999 as compared to 1998 was due primarily to the capitation agreement with a managed care provider, as mentioned above, and collection issues resulting from continued delays in payments from managed care payors. The oper-ating margins at the Company’s facility in Amarillo have been negatively impacted by reductions in Medicaid disproportionate share payments stemming from BBA-97 and program redesigns by Texas, reduced levels of business in a few high margin services and higher than anticipated indigent care costs. The decrease in the operating margins in 1998 as compared to 1997 was due primarily to: (i) lower operating margins experienced at three acute care hospitals located in Puerto Rico (one of which opened in April 1998) and one acute care hospital located in Las Vegas, Nevada which were acquired during the first quarter of 1998; (ii) lower operating margins experienced at the 501-bed acute care facility of which the Company acquired an 80% interest in during the third quarter of 1997; (iii) the opening of a newly constructed 129-bed acute care facility located in Edinburg, Texas during the third quarter of 1997 and the opening of a newly constructed 148-bed acute care facility in Summerlin, Nevada which opened during the fourth quarter of 1997; (iv) changes in Medicare payments mandated by the Balanced Budget Act of 1997 which became effective October 1, 1997, and; (v) $2.5 million of pre-tax adverse financial effects of Hurricane Georges ($2.3 million of which affected acute care facilities) which damaged property and curtailed business at three hospitals in Puerto Rico and four hospitals in Louisiana (three of which were acute care facilities) during the third quarter of 1998. The Company’s facilities continue to experience a shift in payor mix resulting from an increase in the percentage of revenues attributable to managed care payors and unfavorable general industry trends which include pressures to control healthcare costs. Providers participating in managed care programs agree to provide services to patients for a discount from established rates which generally results in pricing concessions by the providers and lower operating margins. Additionally, managed care companies generally encourage alternatives to inpatient treatment settings and reduced utilization of inpatient services. In response to increased pressure on revenues, the Company continues to implement cost control programs at its facilities including more efficient staffing standards and re-engineering of services. The Company’s ability to increase its net revenues and operating margins, is dependent upon its ability to successfully respond to these trends as well as reductions in spending on governmental healthcare programs. Operating expenses (operating expenses, salaries and wages and provision for doubtful accounts) at the Company’s facilities owned in both 1999 and 1998 were 81.4% of net revenues in 1999 and 79.9% in 1998. Operating margins at the Company’s acute care facilities owned in both 1999 and 1998 were 18.6% in 1999 as compared to 20.1% in 1998. The decrease in the same facility operating margins in 1999 as compared to 1998 was due primarily to the decreased operating performance at the Company’s acute care facilities in Las Vegas, Nevada and Amarillo, Texas, as discussed above. Excluding the facilities in Las Vegas and Amarillo, the operating margins at the Company’s other acute care facilities owned in both years increased to 20.1% in 1999 as compared to 19.7% in 1998. Operating expenses at the Company’s acute care facilities owned in both 1998 and 1997 were 77.4% of net revenues in 1998 as compared to 78.5% in 1997. Operating margins at the Company’s acute care facilities owned in both 1998 and 1997 were 22.6% in 1998 as compared to 21.5% in 1997. Pressure on operating margins may continue due to, among other things, the changes in Medicare payments mandated by BBA-97 which became effective October 1, 1997, reductions in Medicaid disproportionate share reimbursements and the industry-wide trend towards managed care which limits the Company’s ability to increase its prices.
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