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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2006 or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to .
Commission File Number: 333-117362 IASIS HEALTHCARE LLC (Exact name of registrant as specified in its charter)
DELAWARE 20-1150104 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
DOVER CENTRE 117 SEABOARD LANE, BUILDING E FRANKLIN, TENNESSEE 37067 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (615) 844-2747 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES NO o 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 the filing requirements for at least the past 90 days. YES NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and non-accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated filer o Accelerated filer o Non-Accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO As of December 19, 2006, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.
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PART I Item 1. Business 1 Item 1A. Risk Factors 25 Item 2. Properties 35 Item 3. Legal Proceedings 35 Item 4. Submission of Matters to a Vote of Security Holders 35 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 36 Item 6. Selected Financial Data 36 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 64 Item 8. Financial Statements and Supplementary Data 66 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 107 Item 9A. Controls and Procedures 107 Item 9B. Other Information 107 PART III Item 10. Directors and Executive Officers of the Registrant 107 Item 11. Executive Compensation 111 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 116 Item 13. Certain Relationships and Related Transactions 118 Item 14. Principal Accountant Fees and Services 119 Item 15. Exhibits and Financial Statement Schedules 120 Ex-4.6 July 20, 2006 Supplemental Indenture Ex-4.7 July 27, 2006 Supplemental Indenture Ex-10.24 Amendment No. 15 to Contract Ex-10.47 Non-qualified Deferred Compensation Program Ex-10.48 July 20, 2006 Joinder Agreement Ex-10.49 July 27, 2006 Joinder Agreement Ex-21 Subsidiaries of IASIS Healthcare Ex-31.1 Section 302 Certification Ex-31.2 Section 302 Certification
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IASIS HEALTHCARE LLC
Item 1. Business. Company Overview We are a leading owner and operator of medium-sized acute care hospitals in high-growth urban and suburban markets. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. As of September 30, 2006, we owned or leased 14 acute care hospitals and one behavioral health hospital with a total of 2,206 beds in service. Our hospitals are located in five regions, each of which has a projected population growth rate in excess of the national average: • Salt Lake City, Utah;
• Phoenix, Arizona;
• Tampa-St. Petersburg, Florida;
• three cities in Texas, including San Antonio; and
• Las Vegas, Nevada. We are currently constructing Mountain Vista Medical Center, a new 172-bed hospital located in Mesa, Arizona, which we expect to be open on June 1, 2007. Our general, acute care hospitals offer a variety of medical and surgical services commonly available in hospitals, including emergency services, general surgery, internal medicine, cardiology, obstetrics, orthopedics, psychiatry and physical rehabilitation. In addition, our facilities provide outpatient and ancillary services including outpatient surgery, physical therapy, radiation therapy, diagnostic imaging and respiratory therapy. We also own and operate a Medicaid and Medicare managed health plan in Phoenix called Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), that served over 114,700 members as of September 30, 2006. For the year ended September 30, 2006, we generated revenue of approximately $1.63 billion, of which approximately 75.0% was derived from our acute care segment. Our principal executive offices are located at Dover Centre, 117 Seaboard Lane, Building E, Franklin, Tennessee 37067 and our telephone number at that address is (615) 844-2747. Our Internet website address is www.iasishealthcare.com. Information contained on our website is not part of this annual report on Form 10-K. In this report, unless we indicate otherwise or the context requires, “we,” “us,” “our” or “our company” refers to IASIS Healthcare LLC (“IASIS”) and its consolidated subsidiaries and includes IASIS Healthcare Corporation (“IAS”), our predecessor company.
Business Strategy Our objective is to provide high-quality, cost-effective healthcare services in the communities we serve. The key elements of our business strategy are: • Provide High-Quality Services. We strive to provide high-quality services at each of our facilities. This includes improving clinical performance and patient safety, which is a focus of all our hospitals. We believe that the measurement of quality of care has become an increasingly important factor in third- party reimbursement as well as in negotiating preferred managed care contracting rates. Reflecting our commitment to the quality of care and in response to these developments, we have implemented an advanced clinical information system at eight of our 14 acute care hospitals to provide us with more timely availability of key clinical care data. We expect to complete installation at the remaining six hospitals in 2007. We believe that this system will help us enhance patient safety, reduce medical errors through bar coding, increase staff time available for direct patient care and continue to meet or exceed quality of care indicators for reimbursement. Our success at delivering high-quality services can be measured by items such as: • dedicated corporate and hospital resources;
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• on-going training and education of clinical personnel;
• focus on information systems;
• JCAHO accreditation at all hospitals;
• four centers of excellence within our hospitals;
• HealthGrades 5 Star ratings and top 5% of Hospitals awards at various hospitals;
• Solucient’s Top 100 Hospital Awards for process improvements at two hospitals; and
• various other independent ratings. • Focus on Operational Excellence. Our management team has extensive multi-facility operating experience and focuses on operational excellence at each of our facilities. We intend to continue to improve our operations and profitability by: • using our advanced information systems platform across all of our hospitals to provide us with accurate, real-time and cost-effective financial and clinical information;
• expanding our profitable product lines and improving our business mix;
• focusing on efficient staffing, outsourcing programs and supply utilization;
• capitalizing on purchasing efficiencies and reducing operating costs through monitoring compliance with our national group purchasing contract; and
• improving our processes for patient registration, including patient qualification for financial assistance and point-of-service collections, billing, collections, managed care contract compliance and all other aspects of our revenue cycle. • Strategically Invest in Our Markets to Expand Services and Increase Revenue . Our disciplined approach to investing our capital includes analyzing demographic data, utilizing our advanced information systems to identify the profitability of our product lines and consulting with physicians and payors to prioritize the healthcare needs of the communities we serve. We intend to continue to increase our revenue and local presence by focusing our investment efforts on: • upgrading and expanding specialty services and surgical capacity, including cardiology, orthopedics, women’s services and sub-acute care;
• expanding emergency room capacity;
• updating our technology in surgery, such as robotic surgery, diagnostic imaging and other medical equipment;
• increasing capacity and utilization of inpatient services at certain of our hospitals; and
• enhancing the convenience and quality of our outpatient services and expanding outpatient specialty services. We are continually engaged in strategic investments in our markets to expand services and increase revenue. Over the past two years, we have invested over $200.0 million in capital expenditures at our existing facilities, including construction of The Medical Center of Southeast Texas, a state-of-the-art hospital in Port Arthur, Texas, which we opened in April 2005. The new facility consolidated the operations of our Mid-Jefferson Hospital and Park Place Medical Center facilities. Long-term, we expect this new hospital to enhance our presence and reduce patient out-migration in the Port Arthur area, increasing our future net revenue. Additionally, we are currently constructing a new hospital, Mountain Vista Medical Center, in the East Valley of our Phoenix, Arizona market. We believe this new hospital will be a leading acute care hospital in the high growth regional service area. We expect this new hospital to open on June 1, 2007 and anticipate spending approximately $100.0 to $105.0 million during the fiscal year 2007 in connection with the construction and equipping of the facility. When complete in June, we expected total costs of the hospital to be $170.0 to $180.0 million. • Recruit and Retain Quality Physicians . Consistent with community needs and regulatory requirements, we intend to continue to recruit and retain quality physicians for our medical staffs and maintain their loyalty to our facilities by:
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• dedicating corporate personnel and resources to physician recruitment;
• equipping our hospitals with technologically advanced equipment;
• enhancing physician convenience and access, including the development of medical office space on or near our medical campuses;
• sponsoring training programs to educate physicians on advanced medical procedures;
• allowing physicians to remotely access clinical data through our information systems to facilitate convenient and timely patient care; and
• employ specialty physicians to meet community needs in certain markets. • Continue to Develop Favorable Managed Care Relationships . By utilizing a market-based approach, we plan to negotiate favorable terms with managed care plans, enter into contracts with additional managed care plans and continue aligning reimbursement with acuity of services. Additionally, our advanced information systems improve our hospitals’ ability to administer managed care contracts, helping to ensure that claims are adjudicated correctly. We believe that the broad geographic coverage of our hospitals in certain of the regions in which we operate increases our attractiveness to managed care plans in those areas. • Selectively Pursue Acquisitions and Strategic Alliances. We intend to selectively pursue hospital acquisitions in existing and new markets where we believe we can improve the financial and operational performance of the acquired hospital and enhance our regional presence. We intend to target hospitals with 100 to 400 beds. We will focus our new market development efforts to acquire under-managed and under-capitalized facilities in growing urban and suburban regions with stable or improving managed care environments, as well as other opportunistic acquisitions. We will also continue to identify opportunities to expand our presence through strategic alliances with other healthcare providers. On July 21, 2006, we announced the signing of a definitive agreement to acquire Glenwood Regional Medical Center located in West Monroe, Louisiana. The purchase price for the hospital is approximately $82.5 million, subject to net working capital and other purchase price adjustments. Additionally, we plan to make capital expenditures on the hospital campus of approximately $30.0 million over the next four years. We expect the acquisition to close during the first calendar quarter of 2007, subject to approval of the Louisiana Attorney General and the satisfaction of other closing conditions. Although we expect our business strategy to increase our patient volumes, certain risk factors could offset those increases to our net revenue. Please see Item 1A, “Risk Factors” beginning on page 25 for a discussion of risk factors affecting our business.
Our Markets Our hospitals are located in regions with some of the fastest growing populations in the United States.
Salt Lake City, Utah We operate four hospitals with a total of 535 licensed beds in the Salt Lake City area. The population in this area is projected to grow by 5.1% from 2006 to 2011, which is approximately 1.1 times above the projected national average growth rate. We believe our hospitals in Utah benefit from attractive strategic locations. We believe the reimbursement environment in Utah is favorable with the majority of our net patient revenue derived from managed care payors. Over the past three fiscal years we have completed expansion projects at our existing facilities in this market totaling $39.0 million. These projects have provided additional capacity for women’s services, inpatient and outpatient surgery, emergency rooms and various diagnostic services, along with upgraded imaging technology. In addition, we expect to spend approximately $40.0 to $45.0 million in fiscal 2007 on new services and various other renovation and expansion projects in the Salt Lake City area, including outpatient services expansion at Jordan Valley Hospital and a market-wide expansion of cardiovascular services. Our significant capital investments in our Salt Lake City area facilities are yielding strong returns. For the year ended September 30, 2006, we generated approximately 29.8% of our total acute care revenue in this market.
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Phoenix, Arizona We operate three acute care hospitals and one behavioral health hospital with a total of 549 licensed beds in the Phoenix area. The population in this area is projected to grow by 13.7% from 2006 to 2011, which is nearly 2.9 times the projected national average growth rate. The population in the primary service area for our Mountain Vista Hospital, which is currently under construction in the East Valley area of Phoenix, is projected to grow 24.6% from 2003 to 2008. The projected population growth in this area provides a strategic basis for construction of our new hospital. In addition, we are planning expansion of cardiovascular services at St. Luke’s Medical Center during fiscal 2007. The population growth, coupled with local nursing shortages, has resulted in greater contract labor utilization compared to our other markets. We have implemented a comprehensive nurse recruiting and retention plan to address this issue. In addition, we have expanded our relationships with local colleges and universities, which included sponsorship of nursing scholarship programs. We believe we can continue to achieve growth in our existing Phoenix facilities through continued focus on profitable product lines and improved managed care contracting rates. For the year ended September 30, 2006, exclusive of Health Choice, we generated approximately 21.9% of our total acute care revenue in this market.
Tampa-St. Petersburg, Florida We operate three hospitals with a total of 688 licensed beds in the Tampa-St. Petersburg area. The population in this area is projected to grow by 8.3% from 2006 to 2011, which is approximately 1.7 times the projected national average growth rate. Florida has a large Medicare population and high managed care penetration. Certain material capital projects, including the addition of new beds or services, require regulatory approval under Florida’s certificate of need program. Such requirements restrict our ability to expand operations in this market. However, we believe we can achieve growth in our Tampa-St. Petersburg market through increasing patient volume and in expanding into profitable profit lines such as psychiatric and cyberknife services. Two of our Florida facilities have recently completed expansion of their emergency rooms. For the year ended September 30, 2006, we generated approximately 16.6% of our total acute care revenue in this market.
Texas We operate three hospitals with a total of 649 licensed beds in San Antonio, Odessa, and Port Arthur, Texas. The weighted average projected population growth rate for these cities from 2006 to 2011 is 6.9%, which is approximately 1.4 times the projected national average growth rate. We believe our facilities in Texas benefit from favorable reimbursement rates and the lack of a single dominant competitor in their service areas. We expect to spend approximately $25.0 to $30.0 million during fiscal 2007, which includes the expansion of obstetric, neonatology and surgical services at our Southwest General Hospital and upgrade of imaging and other diagnostic equipment at our other Texas facilities. For the year ended September 30, 2006, we generated approximately 22.9% of our total acute care revenue in this market. In April 2005, we opened The Medical Center of Southeast Texas, a 212-bed hospital, in Port Arthur, Texas. The hospital consolidated the medical staffs and the operations of Mid-Jefferson Hospital and Park Place Medical Center. We believe that this new state-of-the-art hospital will reduce patient out- migration from, and will be a leading provider of acute care services in, the Port Arthur area. As discussed further in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” this hospital sustained roof and water intrusion damage during Hurricane Rita in September 2005. The majority of services at the hospital became operational during October and November of 2005. Despite reopening of these services, volume at this hospital during our first two fiscal 2006 quarters was adversely impacted by the devastation of Hurricane Rita. Unemployment in Port Arthur remains one of the highest in the state; however, employers and industry in the community appear to be committed to rebuilding the area. We continue to believe this hospital has good opportunity for growth as the community is redeveloped.
Las Vegas, Nevada Effective February 1, 2004, we acquired North Vista Hospital, with a total of 185 licensed beds, in Las Vegas. The population in this area is projected to grow by 18.9% from 2006 to 2011, at approximately 3.9 times the projected national average growth rate, which would make it one of the fastest growing populations in the United States. We plan to continue improvements in the operating performance of North Vista Hospital by expanding women’s services, investing in profitable product lines and focusing on managed care contracting.
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For the year ended September 30, 2006, we generated approximately 8.2% of our total acute care revenue in this market.
Our Properties We operate 14 acute care hospitals and one behavioral health hospital and have ownership interests in three ambulatory surgery centers. We own 13 and lease two of our hospitals. Five of the acute care hospitals we own and our new hospital under construction have third-party investors. The following table contains information concerning our hospitals.
Licensed Hospitals City Beds Utah Davis Hospital & Medical Center (1) Layton 136 Jordan Valley Hospital (2) West Jordan 92 Pioneer Valley Hospital (3) West Valley City 139 Salt Lake Regional Medical Center Salt Lake City 168 Arizona Mesa General Hospital (4) Mesa 126 St. Luke’s Medical Center (5) Phoenix 320 Tempe St. Luke’s Hospital Tempe 103 Florida Memorial Hospital of Tampa Tampa 180 Palms of Pasadena Hospital St. Petersburg 307 Town & Country Hospital Tampa 201 Nevada North Vista Hospital Las Vegas 185 Texas Odessa Regional Hospital (6) Odessa 146 Southwest General Hospital (7) San Antonio 291 The Medical Center of Southeast Texas (8) Port Arthur 212 Total 2,606
(1) Owned by a limited partnership in which we own a 97.5% interest.
(2) Owned by a limited partnership in which we own a 97.4% interest.
(3) Leased under an agreement that expires on January 31, 2019. We have options to extend the term of the lease through January 31, 2039.
(4) Leased under an agreement that expires on July 31, 2008.
(5) Includes St. Luke’s Behavioral Hospital, which has 85 licensed beds.
(6) Owned by a limited partnership in which we own an 88.8% interest.
(7) Owned by a limited partnership in which we own a 93.6% interest.
(8) Owned by a limited partnership in which we own an 87.5% interest. We also operate and lease medical office buildings in conjunction with our hospitals. These office buildings are occupied primarily by physicians who practice at our hospitals. In November 2004, we acquired land for $8.5 million in the East Valley area of Phoenix where our new hospital, Mountain Vista Medical Center, is currently under construction. Various third-party investors own 9.0% of the subsidiary which will operate the new hospital. In September 2005, we invested $3.7 million in a limited partnership which owns land in Las Vegas, Nevada. We are the sole general partner in this limited partnership and intend to hold the land for possible future development for healthcare delivery purposes.
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Hospital Operations Our senior management team has extensive multi-facility operating experience and focuses on maintaining clinical and operational excellence at our facilities. At each hospital we operate, we have implemented policies and procedures to improve the hospital’s operating and financial performance. A hospital’s local management team is generally comprised of a chief executive officer, chief financial officer and chief nursing officer. Local management teams, in consultation with our corporate staff, develop annual operating plans setting forth revenue growth and operating profit strategies. These strategies can include the expansion of services offered by the hospital and the recruitment of physicians in each community, as well as plans to reduce costs by improving operating efficiencies. We believe that the competence, skills and experience of the management team at each hospital is critical to the hospital’s success because of its role in executing the hospital’s operating plan. Our performance-based compensation program for each local management team is based upon the achievement of qualitative and quantitative goals set forth in the annual operating plan. Our hospital management teams are advised by boards of trustees that include members of hospital medical staffs as well as community leaders. Each board of trustees establishes policies concerning medical, professional and ethical practices, monitors such practices and is responsible for ensuring that these practices conform to established standards. Factors that affect demand for our services include: • the geographic location of our hospitals and their convenience for patients and physicians;
• our participation in managed care programs;
• utilization management practices of managed care plans;
• consolidation of managed care payors;
• capital investment at our facilities;
• the quality of our medical staff;
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• competition from other healthcare providers;
• the size of and growth in local population;
• local economic conditions; and
• improved treatment protocols as a result of advances in medical technology and pharmacology. We believe that the ability of our hospitals to meet the healthcare needs of their communities is determined by the: • level of physician support;
• availability of nurses and other healthcare professionals;
• quality, skills and compassion of our employees;
• breadth of our services;
• physical capacity and level of technology at our facilities; and
• emphasis on quality of care. We continuously evaluate our services with a view to expanding our profitable lines of business and improving our business mix. We use our advanced information systems to perform detailed product line margin analyses and monitor the profitability of the services provided at our facilities. We use these analyses to capitalize on price and volume trends through the expansion of certain services. We also use our information systems to monitor patient care and other quality of care assessment activities on a continuing basis. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services is often fixed regardless of the cost incurred or the level of services provided. We expect patient volumes from Medicare to increase over time due to the general aging of the population. Inpatient care is expanding to include sub-acute care when a less-intensive, lower cost level of care is appropriate. By offering cost-effective sub-acute services in appropriate circumstances, we are able to provide a continuum of care when the demand for such services exists. We have identified opportunities to develop post-acute services within our facilities as appropriate, including inpatient psychiatric and skilled nursing services.
Sources of Revenue We receive payment for patient services from: • the federal government, primarily under the Medicare program;
• state Medicaid programs, including managed Medicaid plans;
• managed care payors, including health maintenance organizations, preferred provider organizations and managed Medicare plans; and
• individual patients and private insurers. The following table presents the approximate percentages of net patient revenue from these sources:
Percentage of Net Patient Revenue Years Ended September 30, Payor Source 2006 2005 2004 Medicare 24.2% 26.6% 26.3% Medicaid 14.5 13.1 14.1 Managed care 46.0 44.5 43.5 Self-pay and other 15.3 15.8 16.1 Total(1) 100.0% 100.0% 100.0%
(1) For the years ended September 30, 2006, 2005 and 2004, net patient revenue comprised 74.6%, 76.8% and 78.4%, respectively, of our total net revenue.
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Most of our hospitals offer discounts from established charges to managed care plans if they are large group purchasers of healthcare services. These discount programs generally limit our ability to increase net patient revenue in response to increasing costs. Patients generally are not responsible for any difference between established hospital charges and amounts reimbursed for such services under Medicare, Medicaid, health maintenance organizations, preferred provider organizations or private insurance plans. Patients generally are responsible for services not covered by these plans, and exclusions, deductibles or co-insurance features of their coverage. Collecting amounts due from patients is more difficult than collecting from governmental programs or managed care plans. Increases in the population of uninsured individuals, changes in the states’ indigent and Medicaid eligibility requirements and continued efforts by employers to pass more out-of-pocket health care costs to employees in the form of increased co-payments and deductibles have resulted in an increase in our provision for bad debts. In fiscal 2005, we expanded our charity care policy to cover uninsured patients with incomes above 200% of the federal poverty level. Under the new program, a sliding scale of reduced rates is offered to uninsured patients, who are not otherwise covered through federal, state or private insurance, with incomes between 200% and 400% of the federal poverty level at all of our hospitals. During the third quarter of fiscal 2006, we implemented a company-wide uninsured discount program offering discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care.
Competition Our facilities and related businesses operate in competitive environments. A number of factors affect our competitive position, including: • our managed care contracting relationships;
• the number, availability, quality and specialties of physicians, nurses and other healthcare professionals;
• the scope, breadth and quality of services;
• the reputation of our facilities and physicians;
• growth in hospital capacity in markets we serve;
• the physical condition of our facilities and medical equipment;
• the location of our facilities and availability of physician office space;
• certificate of need restrictions, where applicable;
• the availability of parking or proximity to public transportation;
• accumulation, access and interpretation of publicly reported quality indicators;
• growth in outpatient service providers;
• charges for services; and
• the geographic coverage of our hospitals in the regions in which we operate. We currently face competition from established, not-for-profit healthcare companies, investor-owned hospital companies, large tertiary care centers, specialty hospitals and outpatient service providers such as surgery centers and imaging centers. In addition, some of our hospitals operate in regions with vertically integrated healthcare providers that include both payors and healthcare providers, which could affect our ability to obtain managed care contracts. We expect to encounter increased competition from specialty hospitals, outpatient service providers and companies, like ours, that consolidate hospitals and healthcare companies in specific geographic markets. Continued consolidation in the healthcare industry will be a leading contributing factor to increased competition in markets in which we already have a presence and in markets we may enter in the future. Another factor in the competitive position of a hospital is the ability of its management to obtain contracts with purchasers of group healthcare services. The importance of obtaining managed care contracts has increased in recent years and is expected to continue to increase as private and government payors and others turn to managed care organizations to help control rising healthcare costs. Most of our markets have experienced significant managed care penetration, along with consolidation of major managed care plans. The revenue and operating results of our hospitals are significantly affected by our hospitals’ ability to negotiate favorable contracts with managed care plans. Health maintenance organizations and preferred provider organizations use managed care contracts to encourage patients to use certain hospitals in exchange for discounts from the hospitals’ established charges. Traditional health insurers also are interested in containing costs through similar contracts with hospitals.
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An additional competitive factor is whether a hospital is part of a local hospital network and the scope and quality of services offered by the network and by competing networks. A hospital that is part of a network offering a broad range of services in a wide geographic area is more likely to obtain more favorable managed care contracts than a hospital that is not. We evaluate changing circumstances in each geographic area in which we operate on an ongoing basis. We may position ourselves to compete in these managed care markets by forming our own, or joining with others to form, local hospital networks.
Employees And Medical Staff As of September 30, 2006, we had 8,877 employees, including 2,984 part-time employees. We consider our employee relations to be good. In certain markets, there is currently a shortage of nurses and other medical support personnel. We recruit and retain nurses and medical support personnel by creating a desirable, professional work environment, providing competitive wages, benefits and long-term incentives, and providing career development and other training programs. In order to supplement our current employee base, we are expanding our relationship with colleges, universities and other medical education institutions in our markets and recruiting nurses and other medical support personnel from abroad. Our hospitals are staffed by licensed physicians who have been admitted to the medical staff of our individual hospitals. Any licensed physician may apply to be admitted to the medical staff of any of our hospitals, but admission to the staff must be approved by each hospital’s medical staff and the appropriate governing board of the hospital in accordance with established credentialing criteria. Our employees are not subject to collective bargaining agreements, although nurses at one of the hospitals in our Salt Lake City, Utah market voted in the third quarter of fiscal 2002 regarding union representation. These ballots have been impounded by the National Labor Relations Board (“NLRB”) pending the results of an appeal filed by us. On October 11, 2006, we received a letter from the NLRB advising us that our appeal was being remanded back to the Regional Director in Denver. This remand follows the release of the recent decision involving Oakwood Healthcare where the NLRB attempted to define when a charge nurse becomes a supervisor and therefore becomes ineligible to participate in union activity. The NLRB has instructed the Regional Director to review our appeal in light of the Oakwood Healthcare decision and the role of charge nurses regarding their responsibility to assign, direct and exercise independent judgment. We anticipate a decision from the NLRB regarding our appeal in fiscal 2007. Because we believe that unionization is not in the best interests of the hospital’s employees or patients, we are vigorously opposing the unionization attempt. We do not believe this unionization attempt will be ultimately successful or would have a material effect on our financial condition or results of operations.
Compliance Program Our compliance program is designed to ensure that we maintain high standards of conduct in the operation of our business and implement policies and procedures so that employees act in compliance with all applicable laws, regulations and company policies. The organizational structure of our compliance program includes a compliance committee of our board of directors, a corporate management compliance committee and local management compliance committees at each of our hospitals. These committees have the oversight responsibility for the effective development and implementation of our program. Our Vice President of Ethics and Business Practices, who reports directly to our Chairman and Chief Executive Officer and to the compliance committee of our board of directors, serves as Chief Compliance Officer and is charged with direct responsibility for the development and implementation of our compliance program. Other features of our compliance program include designating a Facility Compliance Officer for each of our hospitals, periodic ethics and compliance training and effectiveness reviews, the development and implementation of policies and procedures and a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations.
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Reimbursement Medicare Medicare is a federal program that provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. All of our hospitals are certified as providers of Medicare services. Under the Medicare program, acute care hospitals receive reimbursement under a prospective payment system for inpatient and outpatient hospital services. Currently, certain types of facilities are exempt or partially exempt from the prospective payment system methodology, including psychiatric hospitals and specially designated units, children’s hospitals and cancer hospitals. Hospitals and units exempt from the prospective payment system are reimbursed on a reasonable cost-based system, subject to cost limits. Under the inpatient prospective payment system, a hospital receives a fixed payment based on the patient’s assigned diagnosis related group. The diagnosis related group classifies categories of illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. The diagnosis related group rates for acute care hospitals are based upon a statistically normal distribution of severity. When treatments for patients fall well outside the normal distribution, providers may receive additional payments known as outlier payments. The diagnosis related group payments do not consider a specific hospital’s actual costs but are adjusted for geographic area wage differentials. Inpatient capital costs for acute care hospitals are reimbursed on a prospective system based on diagnosis related group weights multiplied by geographically adjusted federal weights. In the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“Medicare Modernization Act”), Congress equalized the diagnosis related group payment rate for urban and rural hospitals at the large urban rate for all hospitals for discharges on or after April 1, 2003. The diagnosis related group rates are adjusted each federal fiscal year and have been affected by federal legislation. The index used to adjust the diagnosis related group rates, known as the “market basket index,” gives consideration to the inflation experienced by hospitals and entities outside of the healthcare industry in purchasing goods and services. However, in past years the percentage increases to the diagnosis related group rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. The Medicare Modernization Act provides for diagnosis related group rate increases for federal fiscal years 2006 and 2007 at the full market basket, if the facility submits data for ten patient care indicators to the Secretary of Health and Human Services. The Deficit Reduction Act of 2005 (“DEFRA”), signed into law on February 8, 2006, expands the number of patient care indicators to 21, beginning with discharges occurring in the third quarter of calendar year 2006. On November 1, 2006, the Centers for Medicare & Medicaid Services (“CMS”) announced a final rule that expands to 26 the number of quality measures that must be reported beginning with discharges occurring in the first quarter of calendar year 2007, and requires that hospitals report the results of a 27-question patient perspectives survey beginning with discharges occurring in the third quarter of calendar year 2007. CMS issued a final rule that provides for an increase in the hospital diagnosis related group payment rates by the full market basket of 3.4% for fiscal year 2007 for those hospitals submitting data on these quality indicators. Under the final rule, those hospitals not submitting the required data will receive an increase in payment equal to the market basket minus two percentage points. We currently have the ability to monitor our compliance with the quality indicators and intend to submit the quality data required to receive the full market basket pricing update when appropriate. Based on the historical adjustments to the market baskets, future legislation or rulemaking may decrease the future rate of increase for diagnosis related group payments or make other changes to the diagnosis related groups, but we are unable to predict the amount of the reduction. On August 1, 2006, CMS announced a final rule that refines the diagnosis-related group payment system. CMS announced that it is considering additional changes effective in federal fiscal year 2008. We cannot predict the impact that any such changes, if finalized, would have on our net revenue. Other Medicare payment changes may also affect our net revenue. In 2003, CMS published a final rule modifying the methodology for determining Medicare outlier payments in order to ensure that only the highest cost cases are entitled to receive additional payments under the inpatient prospective payment system. For discharges occurring on or after October 1, 2003, outlier payments are based on either a provider’s most recent tentatively settled cost report or the most recent settled cost report, whichever is from the latest cost reporting period. Previously, outlier payments had been based on the most recent settled cost report, resulting in excessive outlier payments for some hospitals. The final rule requires, in most cases,
10 Table of Contents the use of hospital-specific cost to charge ratios instead of a statewide ratio. Further, outlier payments may be adjusted retroactively to recoup any past outlier overpayments plus interest or to return any underpayments plus interest. We believe that these changes to the outlier payment methodology have not had and will not have a material adverse effect on our business, financial position or results of operations. CMS reimburses hospital outpatient services and certain Medicare Part B services furnished to hospital inpatients who have no Part A coverage on a prospective payment system basis. CMS will continue to use existing fee schedules to pay for physical, occupational and speech therapies, durable medical equipment, clinical diagnostic laboratory services and nonimplantable orthotics and prosthetics. All services paid under the prospective payment system for hospital outpatient services are classified into groups called ambulatory payment classifications or “APCs.” Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. CMS increased the conversion factor for calendar year 2006 by approximately 3.7%. CMS has published a final rule increasing payment rates for calendar year 2007 by 3.4%. We anticipate that future legislation may decrease the future rate of increase for APC payments, but we are unable to predict the amount of the reduction. Under the outpatient prospective payment system, hospitals may receive additional amounts known as “pass-through payments” for using new technology, but the total amount of pass-through payments in a calendar year is subject to a cap. For calendar year 2004 and subsequent years, the cap has been reduced to 2.0% of projected total payments under the hospital outpatient prospective payment system. CMS has announced that pass-through payments for calendar year 2007 will not be reduced because these payments are not expected to exceed the statutory cap. CMS may implement reductions in the pass-through payments in future years to reflect the cap. On November 1, 2006, CMS announced a final rule that will require hospitals to submit quality data relating to outpatient care in order to receive the full market basket increase under the outpatient prospective payment system beginning in calendar year 2009. CMS did not indicate what data must be submitted or other details of the program. Hospitals that fail to submit such data will receive the market basket update minus two percentage points for the outpatient prospective payment system. Hospitals that treat a disproportionately large number of low-income patients (Medicaid and Medicare patients eligible to receive supplemental Social Security income) currently receive additional payments from the federal government in the form of Disproportionate Share Payments. CMS is required by law to study the formula used to calculate these payments. One change being considered would give greater weight to the amount of uncompensated care provided by a hospital than it would to the number of low-income patients treated, and CMS started collecting uncompensated care data from hospitals in 2003. In addition, the Medicare Modernization Act increases Disproportionate Share Payments effective April 1, 2004 for rural hospitals and some urban hospitals. Inpatient rehabilitation hospitals and designated units were fully transitioned from a reasonable cost reimbursement system to a prospective payment system in 2002. Under this prospective payment system, patients are classified into case mix groups based upon impairment, age, comorbidities and functional capability. Inpatient rehabilitation facilities are paid a predetermined amount per discharge that reflects the patient’s case mix group and is adjusted for area wage levels, low-income patients, rural areas and high-cost outliers. For federal fiscal year 2006, CMS updated the payment rate for inpatient rehabilitation facilities by the full market basket rate of 3.6%. The update for federal fiscal year 2007 is the full market basket rate of 3.3%. On May 7, 2004, CMS issued a final rule modifying the criteria for classification as an inpatient rehabilitation facility as a result of data indicating that most facilities do not meet the existing criteria. Under the previous rules, in order for a facility to be considered an inpatient rehabilitation facility, at least 75% of the facility’s inpatient population during the most recent 12-month cost reporting period must have required intensive rehabilitation services for one or more of ten specified conditions. The new rule expands the list of specified conditions to thirteen and temporarily reduces the percentage of the patient population who must have one of the specified conditions. For cost reporting periods beginning on or after July 1, 2004 to June 30, 2005, 50% of the facility’s inpatient population must have one of the specified conditions in order to meet the criteria. For cost reporting periods beginning on or after July 1, 2005 to June 30, 2006, 60% of the facility’s inpatient population must have one of the specified conditions. For cost reporting periods beginning on July 1, 2006 to June 30, 2007, 65% of
11 Table of Contents the facility’s inpatient population must have one of the specified conditions. For cost reporting periods beginning on or after July 1, 2007, 75% of the facility’s inpatient population must have one of the specified conditions. In 2004, Congress enacted legislation preventing CMS from enforcing this rule until the Government Accountability Office (“GAO”) completed a study on the rule’s impact on inpatient rehabilitation facilities and patients. The GAO completed its study in April 2005, and in June 2005 CMS announced that it would enforce the May 2004 rule. DEFRA revised the phase-in period for the “75 percent rule” to retain the 60% threshold for cost reporting periods beginning on or after July 1, 2006 and before July 1, 2007, with the threshold increasing to 65% for cost reporting periods beginning on or after July 1, 2007 and 75% for cost reporting periods beginning on or after July 1, 2008. As of September 30, 2006, we operated seven inpatient rehabilitation units within our hospitals. Currently, Medicare reimburses inpatient psychiatric hospitals and units on a blend of prospective payments and reasonable-cost bases, subject to certain cost limits. In 2004, CMS published a final rule to implement a prospective payment system for these inpatient psychiatric facilities effective for cost report periods beginning on or after January 1, 2005, with a three year transition period. Under this prospective payment system, inpatient psychiatric facilities will receive a federal per diem base rate that is based on the sum of the average routine operating, ancillary and capital costs for each patient day of psychiatric care in an inpatient psychiatric facility, adjusted for budget neutrality. This federal per diem base rate will be further adjusted to reflect certain patient and facility characteristics, including patient age, certain diagnostic related groups, facility wage index adjustment, and facility rural location. The payment rates are adjusted annually on a July 1 update cycle. Inpatient psychiatric facilities receive additional outlier payments for cases in which estimated costs for the case exceed an adjusted threshold amount plus the total adjusted payment amount for the stay. The initial adjusted threshold amount was $5,700. The threshold amount for rate year 2007 (July 1, 2006 to June 30, 2007) is $6,200. CMS updated payments under the blended payment system for rate year 2007 by 4.5% (reflecting the blend of the 4.6% update for the cost-based payment system and the 4.3% update for prospective payment system). The market basket update accounts for moving from a calendar year to a rate year (the annual market basket is estimated to be 3.4%). As of September 30 2006, we operated one behavioral health hospital and four specially designated psychiatric units that will be subject to these rules, as they are implemented. CMS has established a prospective payment system for Medicare skilled nursing units, under which units are paid a federal per diem rate for virtually all covered services. The effect of the new payment system generally has been to significantly reduce reimbursement for skilled nursing services, which has led many hospitals to close such units. For federal fiscal year 2007, CMS updated the payment rate for skilled nursing units by the full market basket of 3.1%. On August 8, 2006 CMS announced proposed regulations that, if adopted, would change payment for procedures performed in an ambulatory surgery center (“ASC”) effective January 1, 2008. Under this proposal, ASC payment groups would increase from the current nine clinically disparate payment groups to the 221 APCs used under the outpatient prospective payment system for these surgical services. CMS estimates that the rates for procedures performed in an ASC setting under this proposal would equal 62% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. Moreover, under the proposed regulations, if CMS determines that a procedure is commonly performed in a physician’s office, the ASC reimbursement for that procedure would be limited to the reimbursement allowable under the Medicare Part B physician fee schedule. In addition, under this proposal, all surgical procedures, other than those that pose a significant safety risk or generally require an overnight stay, which would be listed by CMS, would be payable as ASC procedures. This will expand the number of procedures performed in an ASC for which Medicare will pay. CMS indicates in its discussion of the proposed regulations that it believes that the volumes and service mix of procedures provided in ASCs would change significantly in 2008 under the revised payment system, but that CMS is not able to accurately project those changes. If the proposal is adopted, more Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. ASCs may experience decreased reimbursement depending on their service mix and the final payment rates adopted by CMS. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices. Commercial third-party payors may adopt policies similar to CMS’ proposal.
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Medicaid Medicaid programs are jointly funded by federal and state governments and are administered by states under an approved plan that provides hospital and other healthcare benefits to qualifying individuals who are unable to afford care. All of our hospitals are certified as providers of Medicaid services. State Medicaid programs may use a prospective payment system, cost-based or other payment methodology for hospital services. Medicaid programs are required to take into account and make additional payments to hospitals serving disproportionate numbers of low income patients with special needs. Some of our hospitals receive such additional payments. The federal government and many states from time to time consider altering the level of Medicaid funding or expanding Medicaid benefits in a manner that could adversely affect future levels of Medicaid reimbursements received by our hospitals. DEFRA, signed into law on February 8, 2006, included Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes would, if implemented, reduce federal Medicaid funding by an additional $12.2 billion over five years. Enrollment in managed Medicaid plans has increased in recent years, as state governments seek to control the cost of Medicaid programs.
Annual Cost Reports All hospitals participating in the Medicare and Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, are required to meet specific financial reporting requirements. Federal regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. These annual cost reports are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. The audit process may take several years to reach the final determination of allowable amounts under the programs. Providers also have the right of appeal, and it is common to contest issues raised in audits of prior years’ reports. Cost reports filed by our facilities generally remain open for three years after the notice of program reimbursement date. If any of our facilities are found to have been in violation of federal or state laws relating to preparing and filing of Medicare or Medicaid cost reports, whether prior to or after our ownership of these facilities, our facilities and we could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. If an allegation is lodged against one of our facilities for a violation occurring during the time period before we owned the facility, we may have indemnification rights against the former owner of the facility for any damages we may incur based on negotiated indemnification and hold harmless provisions in the transaction documents. We cannot assure you, however, that any such matter would be covered by indemnification, or if covered, that such indemnification would be adequate to cover any potential losses, fines and penalties. Additionally, we cannot assure you that the former owner would have the financial ability to satisfy indemnification claims.
Managed Care Managed care payors, including health maintenance organizations and preferred provider organizations, are organizations that provide insurance coverage and a network of healthcare providers to members for a fixed monthly premium. To control costs, these organizations typically contract with hospitals and other providers for discounted prices, review medical services to ensure that no unnecessary services are provided, and market providers within their networks to patients. A significant percentage of our overall payor mix is commercial managed care. We generally receive lower payments for similar services from commercial managed care payors than from traditional commercial/indemnity insurers. The Medicare program allows beneficiaries to choose enrollment in certain managed Medicare plans. The Medicare Modernization Act increases reimbursement to managed Medicare plans and includes provisions limiting, to some extent, the financial risk to the companies offering the plans. Following these changes, the number of beneficiaries choosing to receive their Medicare benefits through such plans has increased.
Commercial Insurance Our hospitals provide services to a decreasing number of individuals covered by traditional private healthcare insurance. Private insurance carriers make direct payments to hospitals or, in some cases, reimburse their
13 Table of Contents policy holders, based upon negotiated discounts from the particular hospital’s established charges and the particular coverage provided in the insurance policy. Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment mechanisms, including prospective payment or diagnosis related group-based payment systems, for more inpatient and outpatient services. To the extent that these efforts are successful, hospitals may receive reduced levels of reimbursement, which would have a negative effect on operating results.
Government Regulation and Other Factors Licensure, Certification and Accreditation Healthcare facility construction and operation is subject to federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Our facilities also are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. We believe that all of our operating healthcare facilities are properly licensed under appropriate state healthcare laws. All of our operating hospitals are certified under the Medicare program and are accredited by the Joint Commission on Accreditation of Healthcare Organizations, the effect of which is to permit the facilities to participate in the Medicare and Medicaid programs. If any facility loses its accreditation by this Joint Commission, or otherwise loses its certification under the Medicare program, then the facility will be unable to receive reimbursement from the Medicare and Medicaid programs. We intend to conduct our operations in compliance with current applicable federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, we may need to make changes in our facilities, equipment, personnel and services.
Utilization Review Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients be reviewed by quality improvement organizations that analyze the appropriateness of Medicare and Medicaid patient admissions and discharges, quality of care provided, validity of diagnosis related group classifications and appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided, assess fines and recommend to the Department of Health and Human Services that a provider not in substantial compliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Most non-governmental managed care organizations also require utilization review.
Federal and State Fraud and Abuse Provisions Participation in any federal healthcare program, like Medicare, is regulated heavily by statute and regulation. If a hospital provider fails to substantially comply with the numerous conditions of participation in the Medicare or Medicaid program or performs specific prohibited acts, the hospital’s participation in the Medicare program may be terminated or civil or criminal penalties may be imposed upon it under provisions of the Social Security Act and other statutes. Among these statutes is a section of the Social Security Act known as the federal anti-kickback statute. This law prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent of generating referrals or orders for services or items covered by a federal healthcare program. Violation of this statute is a felony. The Office of the Inspector General of the U.S. Department of Health and Human Services (“OIG”) has published final safe harbor regulations that outline categories of activities that are deemed protected from
14 Table of Contents prosecution under the anti-kickback statute. Currently there are safe harbors for various activities, including the following: investment interests, space rental, equipment rental, practitioner recruitment, personal services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, ambulatory surgery centers, and referral agreements for specialty services. The fact that conduct or a business arrangement does not fall within a safe harbor does not automatically render the conduct or business arrangement illegal under the anti-kickback statute. The conduct or business arrangement, however, does risk increased scrutiny by government enforcement authorities. We may be less willing than some of our competitors to take actions or enter into business arrangements that do not clearly satisfy the safe harbors. As a result, this unwillingness may put us at a competitive disadvantage. The OIG, among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse and waste. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to healthcare providers, the OIG has from time to time issued “fraud alerts” that, although they do not have the force of law, identify features of a transaction that may indicate that the transaction could violate the anti-kickback statute or other federal healthcare laws. The OIG has identified several incentive arrangements as potential violations, including: • payment of any incentive by the hospital when a physician refers a patient to the hospital;
• use of free or significantly discounted office space or equipment for physicians in facilities usually located close to the hospital;
• provision of free or significantly discounted billing, nursing, or other staff services;
• free training for a physician’s office staff, including management and laboratory techniques;
• guaranties that provide that, if the physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder;
• low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital;
• payment of the costs of a physician’s travel and expenses for conferences or a physician’s continuing education courses;
• coverage on the hospital’s group health insurance plans at an inappropriately low cost to the physician;
• rental of space in physician offices, at other than fair market value terms, by persons or entities to which physicians refer;
• payment of services which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of the services rendered; or
• “gainsharing,” the practice of giving physicians a share of any reduction in a hospital’s costs for patient care attributable in part to the physician’s efforts. In addition to issuing fraud alerts, the OIG from time to time issues compliance program guidance for certain types of healthcare providers. In January 2005, the OIG issued supplemental compliance program guidance for hospitals. In the supplemental compliance guidance, the OIG identifies areas of potential risk of liability under federal fraud and abuse statutes and regulations. These areas of risk include compensation arrangements with physicians, recruitment arrangements with physicians and joint venture relationships with physicians. The OIG recommends structuring arrangements to fit squarely within a safe harbor. We have a variety of financial relationships with physicians who refer patients to our hospitals. Physicians currently own interests in three of our ambulatory surgery centers, five of our full service acute care hospitals, one hospital currently under construction and one cardiac catheterization laboratory joint venture. We may sell ownership interests in certain other of our facilities to physicians and other qualified investors in the future. We also have other joint venture relationships with physicians and contracts with physicians providing for a variety of financial arrangements, including employment contracts, leases and professional service agreements. We provide financial incentives to recruit physicians to relocate to communities served by our hospitals, including minimum cash collections guaranties and forgiveness of repayment obligations. Although we have established policies and procedures to ensure that our arrangements with physicians comply with current law and available interpretations, we cannot assure you that regulatory authorities that enforce these laws will not determine that some of these
15 Table of Contents arrangements violate the anti-kickback statute or other applicable laws. This determination could subject us to liabilities under the Social Security Act, including criminal penalties of imprisonment or fines, civil penalties up to $50,000, damages up to three times the total amount of the improper payment to the referral source and exclusion from participation in Medicare, Medicaid or other federal healthcare programs, any of which could have a material adverse effect on our business, financial condition or results of operations. The Social Security Act also imposes criminal and civil penalties for submitting false claims to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered, misrepresenting actual services rendered in order to obtain higher reimbursement and cost report fraud. Like the anti-kickback statute, these provisions are very broad. Further, the Social Security Act contains civil penalties for conduct including improper coding and billing for unnecessary goods and services. To avoid liability, providers must, among other things, carefully and accurately code claims for reimbursement, as well as accurately prepare cost reports. Some of these provisions, including the federal Civil Monetary Penalty Law, require a lower burden of proof than other fraud and abuse laws, including the federal anti-kickback statute. Civil monetary penalties that may be imposed under the federal Civil Monetary Penalty Law range from $10,000 to $50,000 per act, and in some cases may result in penalties of up to three times the remuneration offered, paid, solicited or received. In addition, a violator may be subject to exclusion from federal and state healthcare programs. Federal and state governments increasingly use the federal Civil Monetary Penalty Law, especially where they believe they cannot meet the higher burden of proof requirements under the federal anti-kickback statute. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses that apply to all health benefit programs. This act also created new enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement officials now have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud. Additionally, this act establishes a violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. The Social Security Act also includes a provision commonly known as the “Stark Law.” This law prohibits physicians from referring Medicare and Medicaid patients to entities with which they or any of their immediate family members have a financial relationship for the provision of certain designated health services that are reimbursable by Medicare or Medicaid, including inpatient and outpatient hospital services. The law also prohibits the entity from billing the Medicare program for any items or services that stem from a prohibited referral. Sanctions for violating the Stark Law include civil monetary penalties up to $15,000 per item or service improperly billed and exclusion from the federal healthcare programs. There are a number of exceptions to the self-referral prohibition, including an exception for a physician’s ownership interest in an entire hospital as opposed to an ownership interest in a hospital department. There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment contracts, leases, professional services agreements, non-cash gifts having a value less than $329 (effective January 1, 2007) and recruitment agreements. In 2003, Congress passed legislation that modified the hospital ownership exception to the Stark Law by creating an 18-month moratorium on allowing physicians to own interests in new specialty hospitals. The moratorium applied to hospitals that primarily or exclusively treated cardiac, orthopedic or surgical conditions or any other specialized category of patients or cases designated by regulation, unless the hospitals were in operation or development before November 18, 2003, did not increase the number of physician investors, and met certain other requirements. The moratorium expired on June 8, 2005. In March 2005, the Medicare Payment Advisory Commission issued a report on specialty hospitals, in which it recommended that Congress extend the moratorium until January 1, 2007, modify payments to hospitals to reflect more closely the cost of care and allow certain types of gainsharing arrangements. In May 2005, the Department issued a report of its analysis of specialty hospitals in which it recommended reforming certain inpatient hospital services and ambulatory surgery center services payment rates that may encourage the establishment of specialty hospitals and closer scrutiny of the processes for approving new specialty hospitals for participation in Medicare. Further, the Department of Health and Human Services suspended processing new provider enrollment applications for specialty hospitals until January 2006, creating in effect a moratorium on new specialty
16 Table of Contents hospitals. DEFRA, signed into law February 8, 2006, directed the Department of Health and Human Services to extend this enrollment suspension until the earlier of six months from the enactment of DEFRA or the release of a report regarding physician-owned specialty hospitals by the Department of Health and Human Services. On August 8, 2006, the Department of Health and Human Services issued its final report, in which it announced that it would resume processing and certifying provider enrollment applications for specialty hospitals. The Department of Health and Human Services also announced that it will require hospitals to disclose any financial arrangements with physicians. The Department of Health and Human Services has not announced when it will begin collecting this data, the specific data that hospitals will be required to submit or which hospitals will be required to provide information. In December 2004, the Medicare Payment Advisory Commission considered a draft recommendation that Congress eliminate the exception for physician ownership in an entire hospital. This draft recommendation would have exempted existing physician-owned hospitals from the change in law, subject to certain restrictions. In January 2005, the Medicare Payment Advisory Commission agreed to recommend extending the specialty hospital moratorium, instead of recommending eliminating the exception for physician ownership in an entire hospital. CMS has issued final regulations implementing the Stark Law which became effective on or before July 26, 2004. While these regulations help clarify the requirements of the exceptions to the Stark Law, it is unclear how the government will interpret many of these exceptions for enforcement purposes. We cannot assure you that the arrangements entered into by the Company and our hospitals will be found to be in compliance with the Stark Law, as it ultimately may be interpreted. Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect many of the arrangements entered into by each of our hospitals. In addition, law enforcement authorities, including the OIG, the courts and Congress are increasing scrutiny of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to improperly pay for patient referrals and or other business. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between healthcare providers and potential referral sources. Many of the states in which we operate also have adopted laws that prohibit payments to physicians in exchange for referrals similar to the federal anti-kickback statute or that otherwise prohibit fraud and abuse activities. Many states also have passed self-referral legislation similar to the Stark Law, prohibiting the referral of patients to entities with which the physician has a financial relationship. Often these state laws are broad in scope and they may apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties, as well as loss of licensure. Little precedent exists for the interpretation or enforcement of these state laws. Our operations could be adversely affected by the failure of our arrangements to comply with the anti-kickback statute, the Stark Law, billing laws and regulations, current state laws or other legislation or regulations in these areas adopted in the future. We are unable to predict whether other legislation or regulations at the federal or state level in any of these areas will be adopted, what form such legislation or regulations may take or how they may impact our operations. We are continuing to enter into new financial arrangements with physicians and other providers in a manner structured to comply in all material respects with these laws. We cannot assure you, however, that governmental officials responsible for enforcing these laws will not assert that we are in violation of them or that such statutes or regulations ultimately will be interpreted by the courts in a manner consistent with our interpretation.
The Federal False Claims Act and Similar State Laws Another trend affecting the healthcare industry today is the increased use of the federal False Claims Act, and, in particular, actions being brought by individuals on the government’s behalf under the False Claims Act’s “qui tam” or whistleblower provisions. Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. If the government intervenes in the action and prevails, the party filing the initial complaint may share in any settlement or judgment. If the government does not intervene in the action, the whistleblower plaintiff may pursue the action independently, and may receive a larger share of any settlement or judgment. When a private party brings a qui tam action under the
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False Claims Act, the defendant generally will not be made aware of the lawsuit until the government commences its own investigation or makes a determination whether it will intervene. Under DEFRA, every entity that receives at least five million dollars annually in Medicaid payments must establish, by January 1, 2007, written policies for all employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the federal False Claims Act, and similar state laws. When a defendant is determined by a court of law to be liable under the False Claims Act, the defendant must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 to $11,000 for each separate false claim. Settlements entered into prior to litigation usually involve a less severe calculation of damages. There are many potential bases for liability under the False Claims Act. Although liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government, the False Claims Act defines the term “knowingly” broadly. Thus, simple negligence will not give rise to liability under the False Claims Act, but submitting a claim with reckless disregard to its truth or falsity can constitute “knowingly” submitting a false claim and result in liability. In some cases, whistleblowers, the federal government and some courts have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute or the Stark Law, have thereby submitted false claims under the False Claims Act. A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court. DEFRA creates an incentive for states to enact false claims laws that are comparable to the federal False Claims Act. From time to time, companies in the healthcare industry, including ours, may be subject to actions under the False Claims Act or similar state laws.
Corporate Practice of Medicine/Fee Splitting The states in which we operate have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians or laws that prohibit certain direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements that may violate these restrictions. These statutes vary from state to state, are often vague and seldom have been interpreted by the courts or regulatory agencies. Although we exercise care to structure our arrangements with healthcare providers to comply with the relevant state law, and believe these arrangements comply with applicable laws in all material respects, we cannot assure you that governmental officials responsible for enforcing these laws will not assert that we, or transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretations.
The Health Insurance Portability and Accountability Act of 1996 HIPAA requires the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. The Department of Health and Human Services published final regulations establishing electronic data transmission standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. Compliance with these standards became mandatory for our company on October 16, 2003, although the Department of Health and Human Services accepted noncompliant Medicare claims through September 30, 2005. On September 23, 2005, the Department of Health and Human Services proposed a rule that would establish standards for electronic health care claims attachments. In addition, HIPAA requires that each provider apply for and receive a National Provider Identifier by May 2007. We believe that the cost of compliance with these regulations has not had and is not expected to have a material adverse effect on our business, financial position or results of operations. HIPAA also requires the Department of Health and Human Services to adopt standards to protect the security and privacy of health- related information. The Department of Health and Human Services issued final regulations containing privacy standards, which became mandatory on April 14, 2003. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information. The privacy regulations also provide patients with significant new rights related to understanding and controlling how their health information is used or disclosed. The Department of Health and Human Services released final security regulations which became mandatory on April 20, 2005 and require health care providers to implement administrative, physical and technical practices to protect the security of individually identifiable health information that is electronically maintained or transmitted. We have developed and enforce a HIPAA compliance plan, which we believe complies with HIPAA privacy and security requirements. The privacy regulations and security
18 Table of Contents regulations have and will continue to impose significant costs on our facilities in order to comply with these standards. Violations of HIPAA could result in civil penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation. In addition, there are numerous legislative and regulatory initiatives at the federal and state levels addressing patient privacy and security concerns. Our facilities will continue to remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary and could impose additional penalties.
The Emergency Medical Treatment and Active Labor Act The Federal Emergency Medical Treatment and Active Labor Act (“EMTALA”) was adopted by Congress in response to reports of a widespread hospital emergency room practice of “patient dumping.” At the time of the enactment, patient dumping was considered to have occurred when a hospital capable of providing the needed care sent a patient to another facility or simply turned the patient away based on such patient’s inability to pay for his or her care. The law imposes requirements upon physicians, hospitals and other facilities that provide emergency medical services. Such requirements pertain to what care must be provided to anyone who comes to such facilities seeking care before they may be transferred to another facility or otherwise denied care. The government broadly interprets the law to cover situations in which patients do not actually present to a hospital’s emergency department, but present to a hospital-based clinic that treats emergency medical conditions on an urgent basis or are transported in a hospital-owned ambulance, subject to certain exceptions. EMTALA does not generally apply to patients admitted for inpatient services. Sanctions for violations of this statute include termination of a hospital’s Medicare provider agreement, exclusion of a physician from participation in Medicare and Medicaid programs and civil money penalties. In addition, the law creates private civil remedies that enable an individual who suffers personal harm as a direct result of a violation of the law, and a medical facility that suffers a financial loss as a direct result of another participating hospital’s violation of the law, to sue the offending hospital for damages and equitable relief. Although we believe that our practices are in material compliance with the law, we can give no assurance that governmental officials responsible for enforcing the law, individuals or other medical facilities will not assert from time to time that our facilities are in violation of this statute.
Healthcare Reform The healthcare industry attracts much legislative interest and public attention. Changes in the Medicare, Medicaid and other programs, hospital cost-containment initiatives by public and private payors, proposals to limit payments and healthcare spending and industry-wide competitive factors are highly significant to the healthcare industry. Further, DEFRA, signed into law on February 8, 2006, includes Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes, if implemented, would reduce federal Medicaid funding by an additional $12.2 billion over five years. In addition, a framework of extremely complex federal and state laws, rules and regulations governs the healthcare industry and, for many provisions, there is little history of regulatory or judicial interpretation upon which to rely. Many states have enacted or are considering enacting measures designed to reduce their Medicaid expenditures and change private healthcare insurance. Most states, including the states in which we operate, have applied for and been granted federal waivers from current Medicaid regulations to allow them to serve some or all of their Medicaid participants through managed care providers. We are unable to predict the future course of federal, state or local healthcare legislation. Further changes in the law or regulatory framework that reduce our revenue or increase our costs could have a material adverse effect on our business, financial condition or results of operations.
Conversion Legislation Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-profit hospitals. These laws generally include provisions relating to attorney general approval, advance notification and community involvement. In addition, attorneys general in states without specific conversion legislation may exercise authority over these transactions based upon existing law. In many states, there has been an increased interest in the oversight of not-for-profit conversions. The adoption of conversion legislation and the increased review of not-for-
19 Table of Contents profit hospital conversions may increase the cost and difficulty or prevent the completion of transactions with or acquisitions of not-for-profit organizations in various states.
Healthcare Industry Investigations Significant media and public attention has focused in recent years on the hospital industry. Recently, increased attention has been paid by government investigators as well as private parties pursuing civil lawsuits to the amounts charged by hospitals to uninsured and indigent patients and the related collection practices of hospitals. Other current areas of interest include hospitals with high Medicare outlier payments and recruitment arrangements with physicians. Further, there are numerous ongoing federal and state investigations regarding multiple issues. These investigations have targeted hospital companies as well as their executives and managers. We have substantial Medicare, Medicaid and other governmental billings, which could result in heightened scrutiny of our operations. We continue to monitor these and all other aspects of our business and have developed a compliance program to assist us in gaining comfort that our business practices are consistent with both legal principles and current industry standards. However, because the law in this area is complex and constantly evolving, we cannot assure you that government investigations will not result in interpretations that are inconsistent with industry practices, including ours. In public statements surrounding current investigations, governmental authorities have taken positions on a number of issues, including some for which little official interpretation previously has been available, that appear to be inconsistent with practices that have been common within the industry and that previously have not been challenged in this manner. In some instances, government investigations that have in the past been conducted under the civil provisions of federal law may now be conducted as criminal investigations. Additionally, the federal government has recently indicated that it plans to expand its use of civil monetary penalties and Medicare program exclusions to focus on those in the healthcare industry who accept kickbacks or present false claims, in addition to the federal government’s continuing efforts to focus on the companies that offer or pay kickbacks. Many current healthcare investigations are national initiatives in which federal agencies target an entire segment of the healthcare industry. One example is the federal government’s initiative regarding hospital providers’ improper requests for separate payments for services rendered to a patient on an outpatient basis within three days prior to the patient’s admission to the hospital, where reimbursement for such services is included as part of the reimbursement for services furnished during an inpatient stay. In particular, the government has targeted all hospital providers to ensure conformity with this reimbursement rule. Further, the federal government continues to investigate Medicare overpayments to prospective payment hospitals that incorrectly report transfers of patients to other prospective payment system hospitals as discharges. We are aware that prior to our acquisition of them, several of our hospitals were contacted in relation to certain government investigations that were targeted at an entire segment of the healthcare industry. Although we take the position that, under the terms of the acquisition agreements, the prior owners of these hospitals retained any liability resulting from these government investigations, we cannot assure you that the prior owners’ resolution of these matters or failure to resolve these matters, in the event that any resolution was deemed necessary, will not have a material adverse effect on our operations. In September 2005, IASIS Healthcare Corporation, our parent company (“IAS”), received a subpoena from the OIG. The subpoena requests production of documents, dating back to January 1999, primarily related to contractual arrangements between certain physicians and our hospitals, including leases, medical directorships and recruitment agreements. We maintain a comprehensive compliance program designed to ensure that we maintain high standards of conduct in the operation of our business in compliance with all applicable laws. Although we continue to be fully committed to regulatory compliance and will cooperate diligently with governmental authorities regarding this matter, there can be no assurance as to the outcome of this matter. If this matter were to be determined unfavorably to us, it could have a material adverse effect on our business, financial condition and results of operations. Further, the outcome of this matter may result in significant fines, other penalties and adverse publicity.
Certificates of Need In some states, the construction of new facilities, acquisition of existing facilities or addition of new beds or services may be subject to review by state regulatory agencies under a certificate of need program. Florida and Nevada are the only states in which we currently operate that require approval under a certificate of need program. These laws generally require appropriate state agency determination of public need and approval prior to the addition of beds or services or other capital expenditures. Failure to obtain necessary state approval can result in the
20 Table of Contents inability to expand facilities, add services and complete an acquisition or change ownership. Further, violation may result in the imposition of civil sanctions or the revocation of a facility’s license.
Health Choice Health Choice is a prepaid Medicaid and Medicare managed health plan in the Phoenix, Arizona area. For the years ended September 30, 2006, 2005 and 2004, Health Choice premium revenue comprised approximately 25.0%, 23.2% and 20.9%, respectively, of our consolidated net revenue. Premium revenue is generated through capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic payments from the Arizona Health Care Cost Containment System (“AHCCCS”) and CMS. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services. Health Choice’s contract with AHCCCS expires September 30, 2007. The contract provides AHCCCS with a one-year renewal option and is terminable without cause on 90 days’ written notice or for cause upon written notice if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate our contract in the event of the unavailability of state or federal funding. On October 19, 2005, CMS awarded Health Choice a contract to become a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”). Effective January 1, 2006, Health Choice began providing coverage as a MAPD SNP provider pursuant to the contract with CMS. The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members, or those that are eligible for Medicare and Medicaid. The contract with CMS, which expires on December 31, 2006, has been renewed for calendar 2007 and includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. The Plan subcontracts with hospitals, physicians and other medical providers within Arizona and surrounding states to provide services to its Medicaid enrollees in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties, and to its Medicare enrollees in Maricopa, Pima, Pinal, Coconino, Apache and Navajo counties. These services are provided regardless of the actual costs incurred to provide these services. The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in excess of stated levels of up to $35,000 per claim ($50,000 per claim beginning October 1, 2006), depending on the eligibility classification of the member. Qualified costs must be incurred during the contract year and are the lesser of the amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract, including estimates of such costs at the end of each accounting period. As of September 30, 2006, we provided a performance guaranty in the form of a letter of credit in the amount of $20.6 million for the benefit of AHCCCS to support our obligations under the contract to provide and pay for the healthcare services. The amount of the performance guaranty is based primarily upon the membership in the plan and the related capitation paid to us. Additionally, Health Choice maintains a minimum cash balance of $5.0 million and an intercompany demand note with us, which is required under its contract with CMS to provide coverage as a SNP. Health Choice is subject to state and federal laws and regulations, and CMS and AHCCCS have the right to audit Health Choice to determine the plan’s compliance with such standards. Health Choice is required to file periodic reports with CMS and AHCCCS and to meet certain financial viability standards. Health Choice also must provide its enrollees with certain mandated benefits and must meet certain quality assurance and improvement requirements. Health Choice must also comply with the electronic transactions regulations and privacy and security standards of HIPAA. The federal anti-kickback statute has been interpreted to prohibit the payment, solicitation, offering or receipt of any form of remuneration in return for the referral of federal healthcare program patients or any item or
21 Table of Contents service that is reimbursed, in whole or in part, by any federal healthcare program. Similar anti-kickback statutes have been adopted in Arizona, which apply regardless of the source of reimbursement. The Department of Health and Human Services has adopted safe harbor regulations specifying the following relationships and activities that are deemed not to violate the federal anti-kickback statute that specifically relate to managed care: • waivers by health maintenance organizations of Medicare and Medicaid beneficiaries’ obligation to pay cost-sharing amounts or to provide other incentives in order to attract Medicare and Medicaid enrollees;
• certain discounts offered to prepaid health plans by contracting providers;
• certain price reductions offered to eligible managed care organizations; and
• certain price reductions offered by contractors with substantial financial risk to managed care organizations. We believe that the incentives offered by Health Choice to its Medicaid and Medicare enrollees and the discounts it receives from contracting healthcare providers satisfy the requirements of the safe harbor regulations. However, failure to satisfy each criterion of the applicable safe harbor does not mean that the arrangement constitutes a violation of the law; rather the safe harbor regulations provide that the arrangement must be analyzed on the basis of its specific facts and circumstances. We believe that Health Choice’s arrangements comply in all material respects with the federal anti-kickback statute and similar Arizona statutes.
Environmental Matters We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. The principal environmental requirements applicable to our operations relate to: • the proper handling and disposal of medical waste, hazardous waste and low level radioactive medical waste;
• the proper use, storage and handling of mercury and other hazardous materials;
• underground and above-ground storage tanks;
• management of hydraulic fluid or oil associated with elevators, chiller units or other equipment;
• management of asbestos-containing materials or lead-based paint present or likely to be present at some locations; and
• air emission permits and standards for boilers or other equipment. We do not expect our obligations under these or other applicable environmental laws and requirements to have a material effect on us. In the course of our operations, we may also identify other circumstances at our facilities, such as water intrusion or the presence of mold or fungus, which warrant action, and we can and do incur additional costs to address those circumstances. Under various environmental laws, we may also be required to clean up or contribute to the cost of cleaning up substances that have been released to the environment either at properties owned or operated by us or our predecessors or at properties to which substances from our operations were sent for off-site treatment or disposal. These remediation obligations may be imposed without regard to fault, and liability for environmental remediation can be substantial. While we cannot predict whether or to what extent we might be held responsible for such cleanup costs in the future, at present we have not identified any significant cleanup costs or liabilities that are expected to have a material effect on us.
Professional and General Liability Insurance As is typical in the healthcare industry, we are subject to claims and legal actions by patients in the ordinary course of business. To cover these claims, we maintain professional malpractice liability insurance and general liability insurance in amounts that we believe to be sufficient for our operations, although some claims may exceed the scope of the coverage in effect. We also maintain umbrella coverage. Losses up to our self-insured retentions and any losses incurred in excess of amounts maintained under such insurance will be funded from working capital.
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The cost of malpractice and other liability insurance, and the premiums and self-retention limits of such insurance, have risen historically. Our experience suggests the rate of growth in professional and general liability insurance costs has generally stabilized, as a result of tort reform legislation in certain states such as Florida and Texas to limit the size of malpractice judgments, as well as improvements in claims experience. For fiscal 2007, our self- insured retention for professional and general liability coverage is unchanged at $5.0 million per claim compared to fiscal 2006. The maximum coverage under our insurance policies also remains unchanged at $75.0 million. Our self-insurance reserves for estimated claims incurred but not yet reported is based upon estimates determined by third-party actuaries. Funding for the self-insured retention of such claims is derived from operating cash flows. We cannot assure you that this insurance will continue to be available at reasonable prices that will allow us to maintain adequate levels of coverage. We also cannot assure you that our cash flow will be adequate to provide for professional and general liability claims in the future.
Our Information Systems We use a common information systems platform across all of our hospitals. We use McKesson’s HBOC clinical and patient accounting software and Lawson’s financial application and enterprise resource planning software. We use other vendors for specialized information systems needs for our decision support, emergency and radiology departments. Our information systems are essential to the following areas of our business operations, among others: • patient accounting, including billing and collection of net revenue;
• financial, accounting, reporting and payroll;
• coding and compliance;
• laboratory, radiology and pharmacy systems;
• materials and asset management; and
• negotiating, pricing and administering our managed care contracts. Utilizing a common information systems platform across all our hospitals allows us to: • optimize staffing levels according to patient volumes, acuity and seasonal needs at each facility;
• perform product line analyses;
• track quality of care indicators on a current basis;
• effectively monitor registration, billing, collections, managed care contract compliance and all other aspects of our revenue cycle; and
• control supply costs by complying with our group purchasing organization contract. During 2004, we entered into a three-year agreement with McKesson to provide clinical information technology products and services to our hospitals that we believe will enhance patient safety, automate medication administration, increase staff time available for direct patient care and continue to meet or exceed quality of care indicators for reimbursement purposes. The cost of maintaining our information systems has increased significantly in recent years. Information systems maintenance expense increased $1.1 million to $5.2 million for the fiscal year ending September 30, 2006 as compared to the prior year. We expect the trend of increased maintenance costs in this area to continue in the future. In addition, we expect to spend approximately $21.0 million on hardware and software costs during 2007.
Merger and Related Financing Transactions On June 22, 2004, an investor group led by Texas Pacific Group, (“TPG”), acquired IAS through a merger. In order to effect the acquisition, the investor group established IASIS Investment LLC (“IASIS Investment”), and a wholly owned subsidiary of IASIS Investment, which merged with and into IAS. In the merger, IAS issued shares of common and preferred stock to IASIS Investment, which is the sole stockholder of IAS after giving effect to the merger. Prior to the merger, IAS contributed substantially all of its assets and liabilities to IASIS in exchange for all of the equity interests in IASIS. As a result, IAS is a holding company, IASIS is a limited
23 Table of Contents liability company consisting of 100% common interests owned by IAS and IAS’s operations are conducted by IASIS and its subsidiaries. We refer to the merger, the related financing transactions and the applications of the proceeds from the financing transactions as the “Transactions.”
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Item 1A. Risk Factors. Servicing Our Indebtedness Requires A Significant Amount of Cash. Our Ability To Generate Sufficient Cash Depends On Numerous Factors Beyond Our Control, And We May Be Unable To Generate Sufficient Cash Flow To Service Our Debt Obligations, Including Making Payments On Our 8 3/4% Notes. In connection with the Transactions, we issued $475.0 million in aggregate principal amount of 8 3/4% senior subordinated notes due 2014, that were subsequently exchanged for a like amount of 8 3/4% senior subordinated note due 2014 that have been registered under the Securities Act of 1933, as amended, which we refer to as the 8 3/4% notes. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowing will be available to us under our senior secured credit facilities in an amount sufficient to enable us to pay the principal, premium, if any, and interest on our indebtedness, including the 8 3/4% notes, or to fund our other liquidity needs. Our ability to fund these payments is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may need to refinance all or a portion of our indebtedness, including the 8 3/4% notes, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the senior secured credit facilities, on commercially reasonable terms or at all. In addition, the terms of existing or future debt agreements, including the amended and restated credit agreement governing the senior secured credit facilities and the indenture governing the notes, may restrict us from effecting any of these alternatives. During the next twelve months, we are required to repay $4.3 million in principal under our senior secured credit facilities, $41.6 million in interest under the 8 3/4% notes and $3.0 million in principal under our capital lease obligations. If we cannot make scheduled payments on our debt, we will be in default and, as a result: • our debt holders could declare all outstanding principal and interest to be due and payable;
• our secured debt lenders could terminate their commitments and commence foreclosure proceedings against our assets; and
• we could be forced into bankruptcy or liquidation. Our Substantial Level Of Indebtedness Could Adversely Affect Our Financial Condition And Prevent Us From Fulfilling Our Obligations Under The 8 3/4% Notes. We have a significant amount of indebtedness. At September 30, 2006, we had $475.0 million of outstanding 8 3/4% senior subordinated notes due 2014 and $421.9 million of other indebtedness (of which $415.4 million consisted of borrowings under the senior secured credit facilities, and $6.5 million consisted of capital lease obligations and other debt). All of our other indebtedness ranks senior to the 8 3/4% notes. In addition, subject to restrictions in the indenture governing the 8 3/4% notes and the amended and restated credit agreement governing the senior secured credit facilities, we may incur additional indebtedness. Our substantial indebtedness could have important consequences to our financial condition and results of operations, including the following: • it may be more difficult for us to satisfy our obligations, including debt service requirements under our outstanding debt;
• our ability to obtain additional financing for working capital, acquisitions, capital expenditures, debt service requirements, or other general corporate purposes may be impaired;
• we must use a substantial portion of our cash flow to pay principal and interest on our 8 3/4% notes and other indebtedness which will reduce the funds available to us for other purposes;
• we are more vulnerable to economic downturns and adverse industry conditions;
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• our ability to capitalize on business opportunities and to react to competitive pressures as compared to our competitors may be compromised due to our high level of indebtedness; and
• our ability to borrow additional funds or to refinance indebtedness may be limited. Our senior secured credit facilities are rated by Moody’s and Standard & Poor’s. If these ratings were ever downgraded, our access to and cost of future capital could be adversely affected. Furthermore, all of our indebtedness under the senior secured credit facilities bears interest at variable rates. If these rates were to increase significantly the cost of servicing our debt would increase, which could materially reduce our profitability. In addition, our ability to borrow additional funds may be reduced and the risks related to our substantial indebtedness would intensify. If We Are Unable To Retain And Negotiate Favorable Contracts With Managed Care Plans, Our Net Revenue May Be Reduced. Our ability to obtain favorable contracts with health maintenance organizations, preferred provider organizations and other managed care plans significantly affects the revenue and operating results of our hospitals. Revenue derived from health maintenance organizations, preferred provider organizations and other managed care plans accounted for 46.0% and 44.5% of our net patient revenue for the years ended September 30, 2006 and 2005, respectively. Our hospitals have over 300 managed care contracts with no one commercial payor representing more than 10.0% of our net patient revenue. In most cases, we negotiate our managed care contracts annually as they come up for renewal at various times during the year. Further, many of these contracts are terminable by either party on relatively short notice. Our future success will depend, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts on terms favorable to us. Other healthcare providers, including some with greater geographic coverage or a wider range of services, may impact our ability to enter into managed care contracts or negotiate increases in our reimbursement and other favorable terms and conditions. In one region in which we operate, the largest healthcare provider organization controls one of the largest payor organizations and operates it primarily as a closed network. The patients enrolled in this integrated health system are largely unavailable to us. Changes In Legislation and Regulations May Significantly Reduce Government Healthcare Spending And Our Revenue. Governmental healthcare programs, principally Medicare and Medicaid, accounted for 38.7% and 39.7% of our net patient revenue for the years ended September 30, 2006 and 2005, respectively. In recent years, legislative changes have resulted in limitations on and, in some cases, reductions in levels of, payments to healthcare providers for certain services under many of these government programs. Further, legislative and regulatory changes have altered the method of payment for various services under the Medicare and Medicaid programs. Recently, CMS announced proposed regulations that, if adopted, would change payment for procedures performed in an ASC effective January 1, 2008. Under this proposal, ASC payment groups would increase from the current nine clinically disparate payment groups to the 221 ASCs used under the outpatient prospective payment system for these surgical services. CMS estimates that the rates for procedures performed in an ASC setting would equal 62% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. CMS indicates in its discussion of the proposed regulations that it believes that the volumes and service mix of procedures provided in ASCs would change significantly in 2008 under the revised payment system, but that CMS is not able to accurately project those changes. If the proposal is adopted, more Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. ASCs may experience decreased reimbursement depending on their service mix and the final payment rates adopted by CMS. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices. We believe that hospital operating margins across the country, including ours, have been and may continue to be under pressure because of limited pricing flexibility and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. Further, DEFRA, signed into law on February 8, 2006, includes Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes, if implemented, would reduce federal Medicaid funding by an additional $12.2 billion over five years. In addition, a number of states are experiencing budget problems and have adopted or are considering legislation designed to
26 Table of Contents reduce their Medicaid expenditures and to provide universal coverage and additional care, including enrolling Medicaid recipients in managed care programs and imposing additional taxes on hospitals to help finance or expand states’ Medicaid systems. Our Hospitals Face Competition For Patients From Other Hospitals And Healthcare Providers That Could Impact Patient Volume. In general, the hospital industry is highly competitive. Our hospitals face competition for patients from other hospitals in our markets, large tertiary care centers and outpatient service providers that provide similar services to those provided by our hospitals. All of our facilities are located in geographic areas in which at least one other hospital provides services comparable to those offered by our hospitals. Some of the hospitals that compete with ours are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures and operations on a tax-exempt basis. In addition, the number of freestanding specialty hospitals, outpatient surgery centers and outpatient diagnostic centers has increased significantly in the areas in which we operate. Some of our competitors also have greater geographic coverage, offer a wider range of services or invest more capital or other resources than we do. If our competitors are able to achieve greater geographic coverage, improve access and convenience to physicians and patients, recruit physicians to provide competing services at their facilities, expand or improve their services or obtain more favorable managed care contracts, we may experience a decline in patient volume. In 2005, CMS began making public performance data relating to ten quality measures that hospitals submit in connection with their Medicare reimbursement. DEFRA expands the number of patient care indicators that hospitals must report beginning with discharges occurring in the third quarter of calendar year 2006, and DEFRA requires that CMS further expand the number of patient care indicators in future years. If any of our hospitals should achieve poor results (or results that are lower than our competitors) on these quality criteria, patient volumes could decline. In the future, other trends toward clinical transparency may have an unanticipated impact on our competitive position and patient volume. If We Continue To Experience Growth In Self-Pay Volume And Revenue, Our Financial Condition Or Results Of Operations Could Be Adversely Affected. Like others in the hospital industry, we have experienced an increase in our provision for bad debts as a percentage of acute care revenue due to a growth in self-pay volume and revenue resulting in large part from an increase in the number of uninsured patients, along with an increase in the amount of co- payments and deductibles passed on by employers to employees. Although we continue to seek ways of improving point of service collection efforts and implementing appropriate payment plans with our patients, if we continue to experience growth in self-pay volume and revenue, our results of operations could be adversely affected. Further, our ability to improve collections for self-pay patients may be limited by regulatory and investigatory initiatives, including private lawsuits directed at hospital charges and collection practices for uninsured and underinsured patients. If We Are Unable To Attract And Retain Quality Medical Staffs, Our Financial Condition Or Results Of Operations Could Be Adversely Affected. The success of our hospitals depends on the following factors, among others: • the number and quality of the physicians on the medical staffs of our hospitals;
• the admitting practices of those physicians; and
• our maintenance of good relations with those physicians. Our efforts to attract and retain physicians are affected by our managed care contracting relationships, national shortages in some specialties, such as anesthesiology and radiology, the adequacy of our support personnel, the condition of our facilities and medical equipment, the availability of suitable medical office space and federal and state laws and regulations prohibiting financial relationships that may have the effect of inducing patient referrals. Our efforts to attract physicians have also been impacted by the inability of physicians in certain states to obtain professional liability insurance on acceptable terms. The impact in certain states has been mitigated by the recent enactment of tort reform. We generally require all of the physicians on our medical staffs to maintain professional liability insurance or other financial guaranty as permitted by state law.
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Our Hospitals Face Competition For Staffing, Which May Increase Our Labor Costs And Reduce Profitability. We compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, including nurses and other non-physician healthcare professionals. In some markets, the scarce availability of nurses and other medical support personnel has become a significant operating issue. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other medical support personnel, recruit personnel from foreign countries, and hire more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs could have a material adverse effect on our financial condition or results of operations. If We Fail To Continually Enhance Our Hospitals With The Most Recent Technological Advances In Diagnostic And Surgical Equipment, Our Ability To Maintain And Expand Our Markets Will Be Adversely Affected. Technological advances with respect to computed axial tomography (CT), magnetic resonance imaging (MRI) and positron emission tomography (PET) equipment, as well as other equipment used in our facilities, are continually evolving. In an effort to compete with other healthcare providers, we must constantly be evaluating our equipment needs and upgrading equipment as a result of technological improvements. Such equipment costs typically range from $1.0 million to $3.0 million, exclusive of construction or build-out costs. If We Fail To Comply With Extensive Laws And Government Regulations, We Could Suffer Penalties, Be Required To Alter Arrangements With Investors In Our Hospitals Or Be Required To Make Significant Changes To Our Operations. The healthcare industry, including our company, is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things: • billing for services;
• relationships with physicians and other referral sources;
• adequacy of medical care;
• quality of medical equipment and services;
• qualifications of medical and support personnel;
• confidentiality, maintenance and security issues associated with health-related information and medical records;
• the screening, stabilization and transfer of patients who have emergency medical conditions;
• licensure and certification;
• operating policies and procedures; and
• addition of facilities and services. Because many of these laws and regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. For that reason and because these laws and regulations are so complex, hospital companies face a risk of inadvertent violations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including: • criminal penalties;
• civil penalties, including the loss of our licenses to operate one or more of our facilities; and
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• exclusion of one or more of our facilities from participation in the Medicare, Medicaid and other federal and state healthcare programs. Further, Congress, other governmental entities and private entities currently are performing studies or considering recommendations regarding the effects of physician ownership of both specialty and general acute care hospitals. The results of these studies and recommendations may lead to legislative and regulatory changes that could adversely affect our ability to undertake joint ventures with physicians. DEFRA, signed into law on February 8, 2006, directed the Department of Health and Human Services to extend the Department’s temporary suspension on the enrollment of new specialty hospitals in Medicare until the earlier of six months from the enactment of DEFRA or the release of a report by the Department regarding physician-owned specialty hospitals. On August 8, 2006, the Department issued its final report in which it announced that it would resume processing and certifying provider enrollment applications for specialty hospitals. The Department also announced that it will require hospitals to disclose any financial arrangements with physicians, including ownership interests. The Department has not announced when it will begin collecting this data, the specific data that hospitals will be required to submit or which hospitals will be required to provide information. IAS Has Received A Subpoena From The OIG Regarding Physician Arrangements That, If Ultimately Were Determined Unfavorable To Us, Could Have A Material Adverse Effect On Our Business, Financial Condition And Results of Operations. In September 2005, IAS received a subpoena from the OIG. The subpoena requests production of documents, dating back to January 1999, primarily related to contractual arrangements between certain physicians and our hospitals, including leases, medical directorships and recruitment agreements. We maintain a comprehensive compliance program designed to ensure that we maintain high standards of conduct in the operation of our business in compliance with all applicable laws. Although we continue to be fully committed to regulatory compliance and will cooperate diligently with governmental authorities regarding this matter, there can be no assurance as to the outcome of this matter. If this matter were to be determined unfavorably to us, it could have a material adverse effect on our business, financial condition and results of operations. Further, the outcome of this matter may result in significant fines, other penalties and adverse publicity. In addition, we have and may continue to incur material fees, costs and expenses in connection with responding to the subpoena. Providers In The Healthcare Industry Have Been The Subject Of Federal And State Investigations, And We May Become Subject To Additional Investigations In The Future That Could Result In Significant Liabilities Or Penalties To Us. Both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the healthcare area. As a result, there are numerous ongoing investigations of hospital companies, as well as their executives and managers. The OIG and the Department of Justice have, from time to time, established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Further, under the federal False Claims Act, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. Some states have adopted similar state whistleblower and false claims provisions. Federal and state investigations relate to a wide variety of routine healthcare operations including: • cost reporting and billing practices, including for Medicare outliers;
• financial arrangements with referral sources;
• physician recruitment activities;
• physician joint ventures; and
• hospital charges and collection practices for self-pay patients. We engage in many of these and other activities which could be the subject of governmental investigations or inquiries from time to time. For example, we have significant Medicare and Medicaid billings, we have numerous financial arrangements with physicians who are referral sources to our hospitals, we have non-hospital joint venture arrangements involving physician investors and we have five hospitals that have physician investors (with one additional hospital under construction with physician investors). In addition, our executives and managers, many of
29 Table of Contents whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, may be included in governmental investigations or named as defendants in private litigation. Any additional investigations of us, our executives or managers could result in significant liabilities or penalties to us, as well as adverse publicity. Compliance With Section 404 Of The Sarbanes-Oxley Act May Negatively Impact Our Results Of Operations And Failure To Comply May Subject The Company To Regulatory Scrutiny And A Loss Of Investors’ Confidence In Our Internal Control Over Financial Reporting. On December 15, 2006, the Securities and Exchange Commission (“SEC”) announced it is adopting an extension that will postpone the date by which non-accelerated filers must comply with Section 404 of the Sarbanes-Oxley Act of 2002. The extension requires us to perform an evaluation of our internal control over financial reporting and file management’s attestation with our annual report beginning with fiscal 2008. The SEC’s extension requires our auditors to attest to management’s assessment on the effectiveness of our internal control over financial reporting beginning with fiscal 2009. Compliance with these requirements, and any changes in our internal control over financial reporting in response to our internal evaluations, may be expensive and time-consuming and may negatively impact our results of operations. In addition, we cannot assure you that we will be able to meet the required deadlines for compliance with Section 404. Any failure on our part to meet the required compliance deadlines may subject us to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. A Failure Of Our Information Systems Would Adversely Affect Our Ability To Properly Manage Our Operations. We rely on our advanced information systems and our ability to successfully use these systems in our operations. These systems are essential to the following areas of our business operations, among others: • patient accounting, including billing and collection of net revenue;
• financial, accounting, reporting and payroll;
• coding and compliance;
• laboratory, radiology and pharmacy systems;
• materials and asset management;
• negotiating, pricing and administering managed care contracts; and
• monitoring quality of care. If we are unable to use these systems effectively, we may experience delays in collection of net revenue and may not be able to properly manage our operations or oversee the compliance with laws or regulations. If Any One Of The Regions In Which We Operate Experiences An Economic Downturn Or Other Material Change, Our Overall Business Results May Suffer. Of our 14 acute care hospitals, four are located in Salt Lake City, three are located in Phoenix, three are located in Tampa-St. Petersburg, three are located in the state of Texas and one is located in Las Vegas. In addition, our health plan, Health Choice, and our behavioral health hospital are located in Phoenix. For the year ended September 30, 2006, our net revenue was generated as follows:
Health Choice 25.0% Salt Lake City, Utah 22.5 Phoenix, Arizona (excluding Health Choice) 16.3 Three cities in Texas, including San Antonio 17.3 Tampa-St. Petersburg, Florida 12.6 Las Vegas, Nevada 6.3 Any material change in the current demographic, economic, competitive or regulatory conditions in any of these regions could adversely affect our overall business results because of the significance of our operations in each of these regions to our overall operating performance. Moreover, our business is not as diversified as some competing multi-facility healthcare companies and, therefore, is subject to greater market risks. The projected population growth rates in these regions are based on assumptions beyond our control. Such projected growth may not be realized.
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In particular, as a result of Hurricane Rita, the local economy of Port Arthur, Texas and surrounding areas served by our hospital, The Medical Center of Southeast Texas, has been adversely affected. The devastation caused by Hurricane Rita has resulted in a reduction in the availability of habitable housing, an increase in the unemployment rate in Port Arthur and the temporary closure of several local businesses. On an annual basis, this hospital comprises approximately 9.0% of our total acute care revenue. We May Be Subject To Liabilities Because Of Claims Brought Against Our Facilities. Plaintiffs frequently bring actions against hospitals and other healthcare providers, alleging malpractice, product liability or other legal theories. Many of these actions involve large claims and significant defense costs. Certain other hospital companies have been subject to class-action claims in connection with their billing practices relating to uninsured patients. Although we believe that our billing practices with respect to uninsured patients have been and will continue to be in compliance with all applicable legal requirements, we could be subject to similar claims. We maintain professional malpractice liability insurance and general liability insurance in amounts we believe are sufficient to cover claims arising out of the operations of our facilities. Some of the claims could exceed the scope of the coverage in effect or coverage of particular claims or damages could be denied. The rising cost of professional liability insurance and, in some cases, the lack of availability of such insurance coverage, for physicians with privileges at our hospitals increases our risk of vicarious liability in cases where both our hospital and the uninsured or underinsured physician are named as co-defendants. As a result, we are subject to greater self-insured risk and may be required to fund claims out of our operating cash flow to a greater extent than during 2006. We cannot assure you that we will be able to continue to obtain insurance coverage in the future or that such insurance coverage, if it is available, will be available on acceptable terms. Consistent with 2006, our fiscal 2007 self-insured retention for professional and general liability coverage is $5.0 million per claim. Additionally, the maximum coverage under our insurance policies is unchanged at $75.0 million. At September 30, 2006 and 2005, our professional and general liability accrual for asserted and unasserted claims was approximately $38.1 million and $33.4 million, respectively. Our Hospitals Face Increasing Insurance Costs That May Reduce Our Cash Flows And Net Earnings . The cost of liability insurance has negatively affected operating results and cash flows throughout the healthcare industry due to pricing pressures on insurers and fewer carriers willing to underwrite professional and general liability insurance. Although the cost of insurance moderated somewhat in fiscal 2006, the high cost of professional liability insurance coverage and, in some cases, the lack of availability of such insurance coverage for physicians with privileges at our hospitals increases our risk of vicarious liability in cases where both our hospital and the uninsured or underinsured physician are named as co-defendants. For the year ended September 30, 2006, our insurance expense was $25.2 million, an increase of $300,000 from the year ended September 30, 2005. Some states, including certain states in which we operate, have recently passed tort reform legislation or are considering such legislation to place limits on non-economic damages, which contributed to the moderation in liability insurance costs in fiscal 2006. However, there is no assurance that the recent moderation in insurance costs will continue. Furthermore, we cannot assure you that we will be able to continue to obtain insurance coverage in the future or that, such insurance coverage, if it is available, will be available on acceptable terms. Operations At Our Hospitals Have Been And May Be Negatively Impacted By Certain Factors, Including Severe Weather Conditions And The Impact Of Natural Disasters. Our revenue and volume trends will be based on many factors, including physicians’ clinical decisions on patients, physicians’ availability, the change of payor programs to a more outpatient-based environment, availability of services at our facilities, severe weather conditions and the impact of natural disasters, including hurricanes and tornados. Any of these factors could have a material adverse effect on our operations, including revenue and volume trends, and many of these factors will be outside of our control. Damages incurred by us and other companies with operations in the Gulf Coast area as a result of recent catastrophic hurricanes have resulted in significant property
31 Table of Contents loss claims and settlements for the insurance industry. Our current policy for property insurance provides maximum coverage of $500 million per occurrence with a 5% deductible based on insured value of each property or business damaged. Recent damage from these catastrophic hurricanes, as well as the occurrence of future natural disasters, could continue to drive the cost of property insurance higher. We cannot be certain that any future losses from business interruption or property damage, along with increases in property insurance costs, will not have a material effect on our results of operations and cash flows. If We Are Unable To Control Healthcare Costs At Health Choice, Our Profitability May Be Adversely Affected. Health Choice derives its premium revenue, which represents 25.0% of our consolidated net revenue, through a contract with AHCCCS, which is the state agency that administers Arizona’s Medicaid program, and a contract with CMS for the MAPD SNP. For the year ended September 30, 2006, we derived 22.7% of our consolidated net revenue from our contract with AHCCCS, compared to 23.2% in the prior year. AHCCCS and CMS set the capitated rates we receive at Health Choice which, in turn, subcontracts with physicians, hospitals and other healthcare providers to provide services to its enrollees. If we fail to effectively manage healthcare costs, these costs may exceed the payments we receive. Historically, our medical claims expense as a percentage of premium revenue has fluctuated. Our medical loss ratio was 87.2% for the year ended September 30, 2006, compared to 88.0% in the prior year. Relatively small changes in these medical loss ratios can create significant changes in the profitability of Health Choice. Many factors can cause actual healthcare costs to exceed the capitated rates set by AHCCCS and CMS, including: • our ability to contract with cost-effective healthcare providers;
• the increased cost of individual healthcare services;
• the type and number of individual healthcare services delivered; and
• the occurrence of catastrophes, epidemics or other unforeseen occurrences. Although we have been able to manage medical claims expense through a variety of techniques, we may not be able to continue to effectively manage medical claims expense in the future. Additionally, any future growth in members increases the risk associated with effectively managing health claims expense. If our medical claims expense increases or capitated rates set by AHCCCS or CMS decrease, our financial condition or results of operations may be adversely affected. If Health Choice’s Contract with AHCCCS Was Discontinued, Our Net Revenue And Profitability Would Be Adversely Affected. Health Choice’s contract with the AHCCCS expires September 30, 2007. The contract provides AHCCCS with a one-year renewal option and is terminable without cause on 90 days’ written notice or for cause upon written notice if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate our contract in the event of the unavailability of state or federal funding. As other health plans attempt to enter the Arizona market, we may face increased competition. If we are unable to renew, successfully rebid or compete for our contract with the AHCCCS, or if our contract is terminated, our financial condition, cash flows and results of operations would be adversely affected. Significant Competition From Other Healthcare Companies And State Efforts To Regulate The Sale Of Not-For-Profit Hospitals May Affect Our Ability To Acquire Hospitals. One element of our business strategy is to expand through selective acquisitions of hospitals in our existing markets and in new growing markets. We compete for acquisitions with other healthcare companies, some of which have greater competitive advantages or financial resources than us. Therefore, we may not be able to acquire hospitals on terms favorable to us or at all. Additionally, many states, including some where we have hospitals and others where we may in the future acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts focus primarily on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the not- for-profit seller. These review and approval processes can
32 Table of Contents add time to the closing of an acquisition of a not-for-profit hospital and future actions on the state level could seriously delay or even prevent our ability to acquire not-for-profit hospitals in the future. Difficulties With The Integration Of Acquisitions May Disrupt Our Ongoing Operations. On July 21, 2006, we signed a definitive agreement to acquire Glenwood Regional Medical Center located in West Monroe, Louisiana. We expect to close on this acquisition during the first calendar quarter of 2007. If we are able to successfully complete this or other hospital acquisitions, we cannot guarantee that we will be able to effectively integrate the acquired facilities with our existing operations. The process of integrating acquired hospitals may require a disproportionate amount of management’s time and attention, potentially distracting management from its other day-to-day responsibilities. In addition, poor integration of acquired facilities could cause interruptions to our business activities, including those of the acquired facilities. As a result, we may not realize all or any of the anticipated benefits of an acquisition and we may incur significant costs related to the acquisitions or integration of these facilities. In addition, we may acquire hospitals that have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. Although we seek indemnification from prospective sellers covering these matters, we may nevertheless have material liabilities for past activities of acquired hospitals. Difficulties With Construction and Opening Of Our New Hospital May Require Unanticipated Capital Expenditures and Start-up Costs And Adversely Affect Our Business. We are constructing Mountain Vista Medical Center, a new 172-bed hospital in the East Valley of Phoenix, Arizona, which we expect to open on June 1, 2007. The total cost to build and equip the new hospital is currently estimated to be approximately $170.0 to $180.0 million. We expect to incur approximately $100.0 to $105.0 million in capital expenditures during fiscal 2007 related to the construction of this hospital. Our ability to complete construction of the hospital on our anticipated budget and schedule would depend on a number of factors, including, but not limited to: • our ability to control construction costs;
• the failure of general contractors or subcontractors to perform under their contracts;
• adverse weather conditions;
• shortages of labor or materials;
• our ability to obtain necessary licensing and other required governmental authorizations; and
• other unforeseen problems and delays. Additionally, we may incur significant start-up costs in the months preceding the opening of the new hospital, in addition to a time period post-opening as operations and volume ramp-up. The process of opening the new hospital may also require a disproportionate amount of management’s time and attention, potentially distracting management from its other day-to-day responsibilities. We also may experience difficulties with the opening of the new hospital, such as recruiting members to the medical staff of the hospital and attracting patients to the hospital. If patients who we expect to utilize the hospital choose to utilize other facilities, we may experience lower volume and admissions than expected and our business, financial condition and results of operations could be adversely affected. The Construction Of Additional Hospitals Would Involve Significant Capital Expenditures Which Could Have An Adverse Impact On Our Liquidity. We may decide to construct an additional hospital or hospitals in the future. Our ability to complete construction of a hospital on our anticipated budget and schedule would depend on a number of factors, including, but not limited to: • our ability to control construction costs;
• the failure of general contractors or subcontractors to perform under their contracts;
• adverse weather conditions;
• shortages of labor or materials;
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• our ability to obtain necessary licensing and other required governmental authorizations; and
• other unforeseen problems and delays. As a result of these and other factors, we cannot assure you that we will not experience increased construction costs, or that we will be able to construct any new hospitals as originally planned. In addition, the construction of a new hospital would involve a significant commitment of capital with no revenue associated with the hospital during construction, which could have an adverse impact on our liquidity. If The Costs For Construction Materials And Labor Continue To Rise, Such Increased Costs Could Have An Adverse Impact On The Return On Investment Relating To Our New Hospital And Other Expansion Projects. The cost of construction materials and labor has significantly increased over the past two years as a result of global and domestic events. We have experienced significant increases in the cost of steel due to the demand in China for such materials and an increase in the cost of lumber and drywall due to multiple catastrophic hurricanes in the United States. As we continue to invest in modern technologies, emergency rooms and operating room expansions, along with the construction of our new hospital in the East Valley of Phoenix, we expend large sums of cash generated from operating activities. We evaluate the financial viability of such projects based on whether the projected cash flow return on investment exceeds the Company’s cost of capital by an acceptable amount. Such returns may not be achieved if the cost of construction continues to rise significantly or anticipated volumes do not materialize. State Efforts To Regulate The Construction Or Expansion Of Hospitals Could Impair Our Ability To Operate And Expand Our Operations. Some states require healthcare providers to obtain prior approval, known as certificates of need, for: • the purchase, construction or expansion of healthcare facilities;
• capital expenditures exceeding a prescribed amount; or
• changes in services or bed capacity. In giving approval, these states consider the need for additional or expanded healthcare facilities or services. Florida and Nevada are the only states in which we currently own hospitals that have certificate of need laws. The failure to obtain any required certificate of need could impair our ability to operate or expand operations. We Are Dependent On Key Personnel And The Loss Of One Or More Of Our Senior Management Team Or Local Management Personnel Could Have A Material Adverse Effect On Our Business. Our business strongly depends upon the services and management experience of our senior management team. We depend on the ability of our senior management team and key employees to manage growth successfully and on our ability to attract and retain skilled employees. If any of our executive officers resign or otherwise are unable to serve, our management expertise and ability to deliver healthcare services efficiently and to effectively execute our business strategy could be diminished. If we fail to attract and retain managers at our hospitals and related facilities, our operations could be adversely effected. Moreover, we do not maintain key man life insurance policies on any of our officers. Our Hospitals Are Subject To Potential Responsibilities And Costs Under Environmental Laws That Could Lead To Material Expenditures Or Liability. We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. We could incur substantial costs to maintain compliance with these laws and regulations. To our knowledge, we have not been and are not currently the subject of any investigations relating to noncompliance with environmental laws and regulations. We could become the subject of future investigations, which could lead to fines or criminal penalties if we are found to be in violation of these laws and regulations. The principal environmental requirements and concerns applicable to our operations relate to proper management of hazardous materials, hazardous waste and medical waste, above ground and
34 Table of Contents underground storage tanks, operation of boilers, chillers and other equipment, and management of building conditions, such as the presence of mold, lead- based paint or asbestos. Our hospitals engage independent contractors for the transportation and disposal of hazardous waste, and we require that our hospitals be named as additional insureds on the liability insurance policies maintained by these contractors. In addition, we maintain insurance coverage for third-party liability related to the storage tanks located at our facilities in the amount $5.0 million per claim and $10.0 million in the aggregate. We also may be subject to requirements related to the remediation of substances that have been released into the environment at properties owned or operated by us or our predecessors or at properties where substances were sent for off-site treatment or disposal. These remediation requirements may be imposed without regard to fault, and liability for environmental remediation can be substantial. If The Fair Value Of Our Reporting Units Declines, A Material Non-Cash Charge To Earnings From Impairment Of Our Goodwill Could Result. An investor group led by TPG acquired our predecessor company in fiscal 2004. We recorded a significant portion of the purchase price as goodwill. At September 30, 2006, we had approximately $756.5 million of goodwill recorded on our books. We expect to recover the carrying value of this goodwill through our future cash flows. On an ongoing basis, we evaluate, based on the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If the carrying value of our goodwill is impaired, we may incur a material non-cash charge to earnings.
Item 2. Properties. Information with respect to our hospitals and other healthcare related properties can be found in Item 1 of this report under the caption, “Business—Our Properties.” Additionally, our principal executive offices in Franklin, Tennessee are located in approximately 58,000 square feet of office space. This space includes approximately 15,000 square feet occupied by our national call center operations. Our office space is leased pursuant to two contracts which both expire on December 31, 2010. Our principal executive offices, hospitals and other facilities are suitable for their respective uses and generally are adequate for our present needs.
Item 3. Legal Proceedings. In September 2005, IAS received a subpoena from the OIG. The subpoena requests production of documents, dating back to January 1999, primarily related to contractual arrangements between certain physicians and our hospitals, including leases, medical directorships and recruitment agreements. We maintain a comprehensive compliance program designed to ensure that we maintain high standards of conduct in the operation of our business in compliance with all applicable laws. Although we continue to be fully committed to regulatory compliance and will cooperate diligently with governmental authorities regarding this matter, there can be no assurance as to the outcome of this matter. If this matter were to be determined unfavorably to us, it could have a material adverse effect on our business, financial condition and results of operations. Further, the outcome of this matter may result in significant fines, other penalties and/or adverse publicity. We are involved in other litigation and proceedings in the ordinary course of our business. We do not believe the outcome of any such litigation or proceedings will have a material adverse effect on our business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter ended September 30, 2006.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. There is no established public trading market for our common interests. At September 30, 2006, all of our common interests were owned by IASIS Healthcare Corporation, a Delaware corporation, referred to as IAS. See Item 12., “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, included elsewhere in this report for information regarding our equity compensation plans.
Item 6. Selected Financial Data. The following tables present selected historical financial data for the fiscal years ended September 30, 2002 and 2003 and the period ended June 22, 2004, derived from the audited consolidated financial statements of IAS, as predecessor to IASIS. The selected financial data for the period from June 23, 2004 through September 30, 2004 and the fiscal years ended September 30, 2005 and 2006 reflects the results of operations of IASIS following the Transactions and was derived from the audited consolidated financial statements of IASIS, as successor to IAS. The selected historical financial data of the combined predecessor and successor for the year ended September 30, 2004 was derived from the audited financial statements for the respective periods in 2004 discussed above. The audited consolidated financial statements of IAS and IASIS referenced above, together with the related report of the independent registered public accounting firm, are included elsewhere is this report. The selected financial information and other data presented below should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this report.
Combined IASIS Basis IASIS IAS June 23, October 1, 2004 2003 Year Ended Year Ended Year Ended through through Year Ended September 30, September 30, September 30, September 30, June 22, September 30, 2006 2005 2004 2004 2004 (1) 2003 2002 (dollars in thousands) (dollars in thousands) Statement of Operations Data: Net revenue $1,625,996 $1,523,727 $1,386,634 $ 389,474 $ 997,160 $1,088,156 $ 949,888 Costs and expenses: Salaries and benefits 470,171 442,173 424,419 115,538 308,881 375,509 324,713 Supplies and other operating expenses 434,124 396,573 379,239 103,926 275,313 316,681 274,302 Medical claims 343,660 302,204 242,389 74,051 168,338 128,595 116,607 Provision for bad debts 141,774 133,870 126,952 39,486 87,466 86,231 72,238 Rentals and leases 34,956 32,750 31,998 8,840 23,158 33,545 31,998 Interest expense, net 69,687 66,002 59,394 17,459 41,935 57,552 59,664 Depreciation and amortization 71,925 71,037 68,084 19,856 48,228 52,609 41,764 Management fees 4,189 3,791 746 746 — — — Hurricane-related expenses (2) — 4,762 — — — — — Business interruption insurance recoveries (3) (8,974) — — — — — — Loss on early extinguishment of debt — — 52,084 232 51,852 3,900 — Merger expenses (4) — — 19,750 — 19,750 — — Write-off of debt issue costs — — 8,850 — 8,850 — — Impairment of assets held for sale (5) — — — — — 11,741 — Total costs and expenses 1,561,512 1,453,162 1,413,905 380,134 1,033,771 1,066,363 921,286
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Combined IASIS Basis IASIS IAS June 23, October 1, 2004 2003 Year Ended Year Ended Year Ended through through Year Ended September 30, September 30, September 30, September 30, June 22, September 30, 2006 2005 2004 2004 2004 (1) 2003 2002 Earning (loss) from continuing operations before gain (loss) on disposal of assets, minority interests, income taxes and cumulative effect of a change in accounting principle 64,484 70,565 (27,271) 9,340 (36,611) 21,793 28,602
Gain (loss) on disposal of assets, net (5) 899 (231) 3,624 (107) 3,731 588 (7) Minority interests (3,546) (2,891) (4,305) (1,207) (3,098) (1,828) (1,042)
Earnings (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle 61,837 67,443 (27,952) 8,026 (35,978) 20,553 27,553 Income tax expense 22,288 26,851 4,473 3,321 1,152 — —
Net earnings (loss) from continuing operations before cumulative effect of a change in accounting principle 39,549 40,592 (32,425) 4,705 (37,130) 20,553 27,553 Loss from discontinued operations and cumulative effect of a change in accounting principle (6) — — — — — — (38,525) Net earnings (loss) $ 39,549 $ 40,592 $ (32,425) $ 4,705 $ (37,130) $ 20,553 $ (10,972)
Balance Sheet Data (at end of period): Cash and cash equivalents $ 95,415 $ 89,097 $ 98,805 $ 98,805 $ — $ 101,070 $ — Total assets 1,967,835 1,852,724 1,724,161 1,724,161 — 1,029,999 898,483 Long-term debt and capital lease obligations (including current portion) 896,945 904,808 912,754 912,754 — 664,434 582,943 Stockholders’ equity — — — — — 176,099 155,544 Member’s equity 656,496 616,947 573,705 573,705 — — —
(1) The selected financial data includes complete financial data for all of the periods noted with the exception of North Vista Hospital. The results of North Vista Hospital are included from February 1, 2004, the date of acquisition.
(2) Results for the year ended September 30, 2005 include an adverse financial impact of approximately $4.8 million before income taxes as a result of property damage to our facility in Port Arthur, Texas, resulting from the impact of Hurricane Rita.
(3) Results for the year ended September 30, 2006 include $9.0 million of business interruption insurance recoveries received in connection with the temporary closure and disruption of operations at The Medical Center of Southeast Texas, in Port Arthur, Texas, as a result of Hurricane Rita.
(4) Merger expenses include legal and advisory expenses and special bonus compensation of IAS incurred in connection with its acquisition by the investor group led by TPG.
(5) During 2003, we recorded an impairment charge of $11.7 million on the Rocky Mountain Medical Center net assets held for sale to reflect the estimated net proceeds from sale to potential purchasers who would convert the property’s use to retail. During the quarter ended March 31, 2004, we sold the Rocky Mountain Medical Center property and recorded a gain on the sale of this property of approximately $3.6 million.
(6) Consists of the cumulative effect of a change in accounting principle of a $39.5 million non-cash transitional impairment charge related to the adoption of Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, during the fiscal year ended September 30, 2002, and reversal of excess loss accrual on discontinued operations of $1.0 million for the fiscal year ended September 30, 2002.
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Selected Operating Data The following table sets forth certain unaudited operating data for each of the periods presented.
Year Ended September 30, 2006 2005 2004 Acute Care (1): Number of acute care hospitals at end of period (2) 14 14 15 Beds in service at end of period 2,206 2,219 2,267 Average length of stay (days) (3) 4.56 4.43 4.37 Occupancy rates (average beds in service) 50.9% 48.3% 49.8% Admissions (4) 88,701 88,836 90,236 Adjusted admissions (5) 144,929 145,346 145,035 Patient days (6) 404,292 393,523 395,067 Adjusted patient days (5) 638,192 620,717 612,941 Net patient revenue per adjusted admission (7) $ 8,325 $ 7,946 $ 7,461
Health Choice (8): Medicaid covered lives 110,813 113,589 105,372 Dual-eligible lives (9) 3,937 — — Medical loss ratio (10) 87.2% 88.0% 87.2%
(1) Includes North Vista Hospital beginning February 1, 2004.
(2) Excludes St. Luke’s Behavioral Hospital. Beginning April 1, 2005, includes The Medical Center of Southeast Texas and excludes Mid-Jefferson Hospital and Park Place Medical Center.
(3) Represents the average number of days that a patient stayed in our hospitals.
(4) Represents the total number of patients admitted to our hospitals for stays in excess of 23 hours. Management and investors use this number as a general measure of inpatient volume.
(5) Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions/patient days by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.
(6) Represents the number of days our beds were occupied by inpatients over the period.
(7) Includes the impact of our company-wide uninsured discount program, which became effective in the third quarter of fiscal 2006. The uninsured discount program offers discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity. The uninsured discount program had the effect of reducing net revenue and the provision for bad debts by generally corresponding amounts.
(8) Includes our MAPD SNP effective January 1, 2006.
(9) Represents members eligible for Medicare and Medicaid benefits under Health Choice’s contract with CMS to provide coverage as a MAPD SNP.
(10) Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements, the notes to our audited consolidated financial statements, and the other financial information appearing elsewhere in this report. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes. It includes the following sections: • Forward Looking Statements;
• Executive Overview;
• Critical Accounting Policies and Estimates;
• Results of Operations Summary;
• Liquidity and Capital Resources;
• Off-Balance Sheet Arrangements; and
• Recent Accounting Pronouncements. To assist in the comparability of our financial results and facilitate an understanding of our results of operations, the following overview and analysis combines the results of operations of IAS for October 1, 2003 to June 22, 2004, with the results of operations of IASIS for June 23, 2004 to September 30, 2004 to discuss results for the year ended September 30, 2004, and compares such combined results with the results of operations of IASIS for the years ended September 30, 2006 and 2005. Data for the fiscal years ended September 30, 2006, 2005 and 2004 has been derived from our audited consolidated financial statements. References herein to “we,” “us,” “our” and “our company” are to IASIS and its subsidiaries and, unless indicated otherwise or the context requires, include IAS.
FORWARD LOOKING STATEMENTS Some of the statements we make in this annual report on Form 10-K are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties include, among others, the risks and uncertainties discussed under Item 1A, “Risk Factors” in this Annual Report on Form 10-K. Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.
EXECUTIVE OVERVIEW We are a leading owner and operator of medium-sized acute care hospitals in high-growth urban and suburban markets. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working
39 Table of Contents with local managed care plans. At September 30, 2006, we owned or leased 14 acute care hospitals and one behavioral health hospital, with a total of 2,206 beds in service, located in five regions: • Salt Lake City, Utah;
• Phoenix, Arizona;
• Tampa-St. Petersburg, Florida;
• three cities in Texas, including San Antonio; and
• Las Vegas, Nevada. We also own and operate a Medicaid and Medicare managed health plan in Phoenix called Health Choice. We are currently constructing Mountain Vista Medical Center, a new 172-bed hospital located in Mesa, Arizona. The current build-out and cost to equip are estimated at approximately $170.0 to $180.0 million. We currently plan to open our new hospital in the East Valley of Phoenix, Arizona, on June 1, 2007. On July 21, 2006, we announced the signing of a definitive agreement to acquire Glenwood Regional Medical Center located in West Monroe, Louisiana. The purchase price for the hospital is approximately $82.5 million, subject to net working capital and other purchase price adjustments. Additionally, we plan to make capital expenditures on the hospital campus of approximately $30.0 million over the next four years. We expect the acquisition to close during the first calendar quarter of 2007, subject to approval of the Louisiana Attorney General and the satisfaction of other closing conditions. Our operating results for the year ended September 30, 2006 were negatively impacted by the temporary closure and disruption of operations at The Medical Center of Southeast Texas, in Port Arthur, Texas as a result of Hurricane Rita. The Medical Center of Southeast Texas comprises approximately 9.0% of our total acute care revenue as of September 30, 2006. Although we reopened the hospital during the quarter ended December 31, 2005, volumes during the year remained affected while the surrounding community and its residents continue to recover from the aftermath of the hurricane. In addition to lost revenue, we continued to pay all hospital employees’ full wages and benefits during the closure and reopening phase-in periods and incurred other fixed operating expenses. As we phased in the reopening of the hospital, beginning with the emergency room, the volume we experienced was generally higher in its mix of uninsured or self-pay patients. While currently beginning to moderate, this trend continued during most of fiscal year 2006. During the year ended September 30, 2006, we recorded $9.0 million of business interruption insurance recoveries resulting from the temporary closure of and disruption of operations at The Medical Center of Southeast Texas. These proceeds, which are net of $4.6 million in related deductibles, represent advance payments issued during the claim settlement process. We are currently working with our insurer to process a final settlement for these losses; however, the timing and amount of any additional proceeds have not yet been determined. During the third quarter of fiscal 2006, we implemented a company-wide uninsured discount program offering discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care. Since implementing the program, we have provided uninsured discounts totaling $20.3 million for the year ended September 30, 2006. These discounts to the uninsured had the effect of reducing acute care revenue and the provision for bad debts by generally corresponding amounts. The reduction of acute care revenue resulted in an increase in expenses as a percentage of acute care revenue, other than the provision for bad debts, compared to what they would have been if the uninsured discount program had not been implemented. Effective January 1, 2006, we implemented a new MAPD SNP at Health Choice. The roll-out of this new product resulted in approximately 3,900 additional covered lives as of September 30, 2006, resulting in premium revenue of approximately $37.3 million.
Revenue and Volume Trends Net revenue is comprised of acute care and premium revenue. Acute care revenue is comprised of net patient revenue and other revenue. Net patient revenue is reported net of discounts and contractual adjustments. The
40 Table of Contents contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. The calculation of appropriate payments from the Medicare and Medicaid programs as well as terms governing agreements with other third-party payors are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount. Premium revenue consists of revenue from Health Choice, our Medicaid and Medicare managed health plan. Other revenue includes medical office building rental income and other miscellaneous revenue. Net revenue for the year ended September 30, 2006 increased 6.7% to $1.6 billion, compared with $1.5 billion for the prior year. Premium revenue from Health Choice contributed $53.3 million to the total increase in net revenue, of which $37.3 million relates to the new MAPD SNP product. Net patient revenue per adjusted admission increased 4.8% for the year ended September 30, 2006, compared with the prior year. Excluding the impact of uninsured discounts, net patient revenue per adjusted admission increased 6.5% over the prior year. Admissions and adjusted admissions decreased 0.2% and 0.3%, respectively, for the year ended September 30, 2006, when compared with the prior year. Our overall volumes were impacted in part by Hurricane Rita’s devastation of the Port Arthur area. Excluding The Medical Center of Southeast Texas, admissions and adjusted admissions increased 0.2% and 0.5%, respectively, for the year ended September 30, 2006. While we experienced generally weaker volume in fiscal 2006, our operating results continue to benefit from favorable pricing trends and demonstrate our ability to control certain operating costs. This is in part attributable to our product line focus and capital investments in our facilities. The following table provides the sources of our net patient revenue by payor for the years ended September 30, 2006, 2005 and 2004.
Year Ended September 30, 2006 2005 2004 Medicare 24.2% 26.6% 26.3% Medicaid 14.5 13.1 14.1 Managed care 46.0 44.5 43.5 Self-pay and other 15.3 15.8 16.1 Total 100.0% 100.0% 100.0%
A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with have recently begun to reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Since the implementation of Medicare Part D coverage, we have experienced a shift of traditional Medicare beneficiaries to managed Medicare, which we classify as managed care in the table above. We expect patient volumes from Medicare beneficiaries to continue this shift in coverage, while increasing over the long term due to the general aging of the population and the incentives put into place by the federal government to move more beneficiaries to managed Medicare care plans. We have experienced an increase in net patient revenue at our hospital operations due to the introduction of new and expanded services at our hospitals, which in part, have driven favorable pricing trends. We continue to benefit from managed care contracting strategies and related price increases that were obtained throughout the past year. However, the consolidation of payors in certain markets may result in reduced reimbursement from managed care organizations in future periods. During the year ended September 30, 2006, changes in patient and service mix have suppressed our overall acuity levels, which have had the effect of reducing, in part, the positive impact of pricing increases. The decline in the self-pay revenue mix for the year ended September 30, 2006 was primarily due to the implementation of the company-wide uninsured discount program. From a service line standpoint, we experienced a decline in certain higher acuity services, including cardiovascular surgical, orthopedic and bariatric cases, while lower acuity obstetric services increased. We have also experienced moderate increases in volume in our neonatal intensive care units and inpatient psychiatric units, which are considered higher margin service lines that generally experience more favorable reimbursement rates. While emergency room visits increased 3.6% and
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6.1% for the years ended September 30, 2006 and 2005, respectively, we continue to experience increases in the volume of uninsured patients through our emergency rooms, although at levels which have declined in comparison to the prior year. For the years ended September 30, 2006 and 2005, emergency room visits by uninsured patients increased 4.1% and 9.5%, respectively, over visits in the prior year periods. Self-pay admissions increased 6.8% for the year ended September 30, 2006, when compared to the prior year. Additionally, self-pay admissions as a percentage of total admissions increased 0.3% for the year ended September 30, 2006, when compared to the prior year. Health Choice is a prepaid Medicaid and Medicare managed health plan that derives most of its revenue through a contract with AHCCCS to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program. The contract requires the Plan to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice’s contract with AHCCCS expires September 30, 2007. The contract provides AHCCCS with a one-year renewal option and is terminable without cause on 90 days’ written notice or for cause upon written notice if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate our contract in the event of the unavailability of state or federal funding. On October 19, 2005, CMS awarded Health Choice a contract to become a MAPD SNP. Effective January 1, 2006, Health Choice began providing coverage as a MAPD SNP provider pursuant to the contract with CMS. The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members, or those that are eligible for Medicare and Medicaid. Health Choice already served these type members through the AHCCCS Medicaid program. The contract with CMS, which expires on December 31, 2006, has been renewed for calendar 2007 and includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. Premium revenue growth at Health Choice for the year ended September 30, 2006 has been primarily attributable to the implementation of the MAPD SNP. As a result of the three year contract with AHCCCS and the implementation of the MAPD SNP, Health Choice enrollment increased to over 114,700 enrollees at September 30, 2006. Premium revenue generated under the AHCCCS and CMS contracts with Health Choice represented approximately 25.0%, 23.2% and 20.9% of our consolidated net revenue for the years ended September 30, 2006, 2005 and 2004, respectively. The Medicare Modernization Act, which was signed into law on December 8, 2003, made a number of significant changes to the Medicare program. The Medicare Modernization Act provides a number of potential benefits to our hospitals including, but not limited to: • a provision allocating $250.0 million per year for federal years 2005-2008 to pay for healthcare costs of undocumented aliens;
• provisions generally providing hospitals with more reimbursement for outpatient drugs;
• a provision increasing our reimbursement by reducing the labor share percentage from 71% to 62% for hospitals with wage indices less than 1.0; and
• a provision eliminating the requirement that hospitals must obtain secondary payment information from all Medicare beneficiaries receiving reference laboratory services. For federal fiscal years 2006 and 2007, the Medicare Modernization Act provides for hospitals to receive full market basket updates for these years for the provision of inpatient services, but such update amounts are conditioned upon a hospital providing CMS with specific quality data relating to the quality of services provided. Hospitals that fail to provide CMS with the required data specified under the National Voluntary Hospital Reporting Initiative will receive an update equal to the market basket minus 0.4% for federal fiscal year 2006 and the market basket minus 2.0% beginning in federal fiscal year 2007. Our hospitals are currently complying with this reporting requirement.
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DEFRA signed into law on February 8, 2006, expands the number of patient care indicators to 21, beginning with discharges occurring in the third quarter of calendar year 2006. On November 1, 2006, CMS announced a final rule that expands to 26 the number of quality measures that must be reported beginning with discharges occurring in the first quarter of calendar year 2007, and requires that hospitals report the results of a 27-question patient perspectives survey beginning with discharges occurring in the third quarter of calendar year 2007. The Medicare Modernization Act also decreases hospital reimbursement in a few areas, including, but not limited to, a provision denying updates to hospitals with “high-cost” direct medical education programs. CMS recently released a final rule that will increase payments to hospitals for inpatients by an average of 3.4% in federal fiscal year 2007, conditioned upon the submission of the quality data discussed above. On August 1, 2006, CMS announced a final rule that refines the diagnosis-related group payment system. CMS announced that it is considering additional changes effective in federal fiscal year 2008. We cannot predict the impact that any such changes, if finalized, would have on our net revenue. Other Medicare payment changes may also affect our net revenue. Recently CMS announced proposed regulations that, if adopted, would change payment for procedures performed in an ASC effective January 1, 2008. Under this proposal, ASC payment groups would increase from the current nine clinically disparate payment groups to the 221 APCs used under the outpatient prospective payment system for these surgical services. CMS estimates that the rates for procedures performed in an ASC setting would equal 62% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. CMS indicates in its discussion of the proposed regulations that it believes that the volumes and service mix of procedures provided in ASCs would change significantly in 2008 under the revised payment system, but that CMS is not able to accurately project those changes. If the proposal is adopted, more Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. ASCs may experience decreased reimbursement depending on their service mix and the final payment rates adopted by CMS. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices. Currently, we do not believe that these proposed changes would have a material adverse impact on our results of operations or cash flows.
Significant Industry Trends The following paragraphs discuss recent trends that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact these trends, if any, will have on us.
Growth in Bad Debts Resulting From Increased Self-Pay Volume and Revenue Like others in the hospital industry, we have experienced increases in self-pay volume that has caused our provision for bad debts to increase. These increases are primarily due to growth in the number of uninsured patients utilizing our emergency rooms, along with an increase in the amount of co-payments and deductibles passed on by employers to employees. Self-pay or uninsured volume through our emergency rooms increased 4.1% for the year ended September 30, 2006, as compared to a 9.5% increase in the prior year. For the year ended September 30, 2006, self-pay admissions as a percentage of total admissions were 4.6%, compared with 4.3% in the prior year. We monitor our self-pay admissions on a daily basis and continue to focus on the efficiency of our emergency rooms through redesigning certain facilities, Medicaid eligibility automation and process-flow improvements. We anticipate that if we experience further growth in self-pay volume and revenue, our provision for bad debts will increase and our results of operations could be adversely affected.
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The approximate percentages of gross hospital receivables (prior to allowances for contractual adjustments and doubtful accounts) are summarized as follows:
September 30, September 30, 2006 2005 Insured receivables 60.4% 60.2% Uninsured receivables 39.6% 39.8%
Total 100.0% 100.0%
The percentages in the table above are calculated using gross receivable balances. Uninsured receivables with service dates after implementation of the uninsured discount program and insured receivables are net of contractual discounts recorded at the time of billing. Included in insured receivables are accounts that are pending approval from Medicaid. These receivables were approximately 3.3% and 6.6% of gross hospital receivables at September 30, 2006 and 2005, respectively. The approximate percentages of gross hospital receivables in summarized aging categories are as follows:
September 30, September 30, 2006 2005 0 to 90 days 62.7% 63.1% 91 to 180 days 17.7% 18.4% Over 180 days 19.6% 18.5% Total 100.0% 100.0%
Additional Charity Care and Charges to the Uninsured We currently record revenue deductions for patient accounts that meet our guidelines for charity care. We have traditionally provided charity care to patients with income levels below 200% of the federal property level and will continue this practice. In fiscal 2005, we expanded our charity care policy to cover uninsured patients with incomes above 200% of the federal poverty level. Under the expanded program, a sliding scale of reduced rates is offered to uninsured patients, who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the federal poverty level at all of our hospitals. Charity care deductions increased $6.5 million for the year ended September 30, 2006, as compared to the prior year.
Sub-Acute Care Services Inpatient care is expanding to include sub-acute care when a less intensive, lower cost level of care is appropriate. We have been proactive in the development of a variety of sub-acute inpatient services to utilize a portion of our available capacity. By offering cost-effective sub-acute services in appropriate circumstances, we are able to provide a continuum of care when the demand for such services exists. We have identified opportunities to expand sub-acute services within our facilities as appropriate, including inpatient psychiatric and skilled nursing services.
Nursing Shortage The hospital industry continues to experience a shortage of nurses, which is forecasted to continue. This nursing shortage has created an environment that has required an increased use of nursing contract labor in most of our markets, particularly in our Phoenix, Arizona market. While we have experienced continued difficulty in
44 Table of Contents retaining and recruiting nurses in the Phoenix market, similar to other providers in the region, we have experienced slight improvement in our nursing contract labor during the recent months. We believe this improvement is a result of our comprehensive recruiting and retention plan for nurses that focus on competitive salaries and benefits as well as employee satisfaction, best practices, tuition assistance, effective training programs and workplace environment. We have expanded our relationships with colleges and universities, which includes our sponsorship of nursing scholarship programs. Finally, we are continuing to recruit qualified nurses from countries outside of the United States, including India. Contract labor expense for nursing services as a percentage of acute care revenue increased 0.2% for the year ended September 30, 2006, as compared to the prior year. Recent identifiable improvements in the Phoenix market, as well as our Nevada market, have been somewhat mitigated by increasing challenges that continue to face the industry. Should we be unsuccessful in our attempts to maintain nursing coverage adequate for our present and future needs, our future operating results could be adversely affected.
Decreased Federal and State Funding for Medicaid Programs Some of the states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state spending. As a response to these budgetary concerns, some states have proposed and other states may propose decreased funding for these programs or other structural changes. DEFRA, signed into law on February 8, 2006, included Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes would, if implemented, reduce federal Medicaid funding by an additional $12.2 billion over five years. If funding decreases are approved by the states in which we operate, our operating results and cash flows could be adversely affected.
Growth in Outpatient Services We have experienced an increase in the percentage of healthcare services performed on an outpatient basis and we expect this trend to continue. A number of procedures, including certain cardiology procedures, once performed only on an inpatient basis have been, and will continue to be, converted to outpatient procedures. Additionally, advances in pharmaceutical and medical technologies as well as efforts made by payors to control costs have accelerated the conversion to more procedures performed on an outpatient basis. Generally, the payments we receive for outpatient procedures are less than those for similar procedures performed in an inpatient setting.
Volatility of Insurance Costs Our fiscal 2006 self-insured retention for professional and general liability coverage was $5.0 million per claim and $55.0 million in the aggregate. Additionally, the maximum coverage under our insurance policies is $75.0 million. The high cost of professional liability insurance coverage and, in some cases, the lack of availability of such insurance coverage for physicians with privileges at our hospitals, increases our risk of vicarious liability in cases in which both our hospital and the uninsured or underinsured physician are named as co-defendants. Our professional liability exposure also increases when our subsidiaries employ physicians. We have continued to experience some moderation in costs during the current year, including favorable claims experience. Some states, including certain states in which we operate, have recently passed tort reform legislation or are considering such legislation to place limits on non- economic damages, which, in part, has resulted in improved loss experience. The valuation from our independent actuary for professional and general liability losses resulted in a change in our related accrual estimates for prior periods which increased our professional and general liability expense by $589,000 during the year ended September 30, 2006. For the year ended September 30, 2006, our insurance expense as a percentage of acute care revenue declined by 0.1% when compared to the prior year. For the year ended September 30, 2005, our insurance expense decreased 0.3% as a percentage of acute care revenue when compared to the fiscal 2004 year. There is no assurance that insurance costs will continue to moderate. If insurance costs begin to rise again, we cannot be certain that significant increases will not have a material adverse effect on our future operating results and cash flows.
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The Merger On June 22, 2004, an investor group led by TPG acquired IAS through a merger. The total transaction value, including tender premiums, consent fees and other merger-related fees and expenses, was approximately $1.5 billion. The merger has been accounted for as a purchase in accordance with SFAS No. 141, Business Combinations. During the year ended September 30, 2005, we completed the allocation of the merger purchase price. The allocation of the net purchase price of the merger resulted in goodwill of approximately $754.3 million, $45.0 million of other intangible assets and changes to the carrying value of property and equipment based upon information obtained from an independent appraiser. The following financing transactions occurred in connection with the merger: • an investment made by entities controlled by TPG, such entities referred to as TPG, totaling $434.0 million in cash;
• an investment made by an entity controlled by JLL Partners Fund IV, such entity referred to as JLL, totaling $110.0 million in cash;
• a contribution of shares of IAS common stock by entities controlled by Trimaran Fund Management, L.L.C., such entities referred to as Trimaran, of $40.0 million;
• the execution of an amended and restated credit agreement governing new senior secured credit facilities providing for a $425.0 million term loan, drawn at closing, and a $250.0 million revolving credit facility for working capital and general corporate purposes, which was not drawn at closing; and
• the issuance and sale of $475.0 million in aggregate principal amount of 8 3/4% senior subordinated notes due 2014. The proceeds from the financing transactions were used to: • pay all amounts due to the security holders of IAS under the terms of the merger agreement;
• repay all outstanding indebtedness under IAS’s existing senior secured credit facilities;
• repurchase IAS’s 13% senior subordinated notes due 2009, or the 13% notes, and 8 1/2% senior subordinated notes due 2009, or the 8 1/2% notes, and pay the related tender premiums and consent fees, pursuant to a tender offer and consent solicitation by IAS;
• retire, in October 2004, $3.5 million of IAS’s 13% notes that were not tendered pursuant to the tender offer and consent solicitation; and
• pay the fees and expenses related to the merger and the related financing transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements, we make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. We have determined an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and (2) changes in the estimate would have a material impact on our financial condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical as defined herein. Changes in estimates used in these and other items could have a material impact on our financial statements. Allowance for Doubtful Accounts. Our ability to collect outstanding receivables from third-party payors and patients is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts or patient accounts for which primary insurance has paid but a patient portion remains outstanding. The provision for bad debts and the allowance for doubtful accounts relate primarily to amounts due directly from patients. Our estimation of the allowance for doubtful accounts is based primarily upon the type and age of the
46 Table of Contents patient accounts receivable and the effectiveness of our collection efforts. Our policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. We monitor our accounts receivable balances and the effectiveness of our reserve policies on a monthly basis and review various analytics to support the basis for our estimates. These efforts primarily consist of reviewing the following: • Revenue and volume trends by payor, particularly the self-pay components;
• Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;
• Historical write-off and collection experience using a hindsight or look-back approach;
• Cash collections as a percentage of net patient revenue less bad debt expense;
• Trending of days revenue in accounts receivable; and
• Various allowance coverage statistics. In addition, we regularly perform hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of our process for estimating the allowance for doubtful accounts. Due to the implementation of our uninsured discount program, we have modified the methodology used in this analytical tool to account for impact of these uninsured discounts on our accounts receivable. We do not pursue collection of amounts related to patients who qualify for charity care under our guidelines. Charity care accounts are deducted from gross revenue and do not affect the provision for bad debts. At September 30, 2006, our self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, was $144.5 million and our allowance for doubtful accounts was $109.9 million. Excluding third-party settlement balances, days revenue in accounts receivable were 54 at September 30, 2006, compared with 50 days at September 30, 2005. Impacting our days revenue in accounts receivable this year was the delay in Medicare payments of approximately $6.8 million as mandated by DEFRA, which were subsequently received in October 2006. For the year ended September 30, 2006, the provision for bad debts increased to 11.5% of acute care revenue, compared to 11.4% for the prior year. Adjusting for the uninsured discount program, the provision for bad debts as a percentage of acute care revenue would have been 13.0% for the year ended September 30, 2006. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows. Allowance for Contractual Discounts and Settlement Estimates. We derive a significant portion of our net patient revenue from Medicare, Medicaid and managed care payors that receive discounts from our standard charges. For the years ended September 30, 2006, 2005 and 2004, Medicare, Medicaid and managed care revenue accounted for 84.7%, 84.2% and 83.9%, respectively, of net patient revenue. We estimate contractual discounts and allowances based upon payment terms outlined in our managed care contracts, by federal and state regulations for the Medicare and various Medicaid programs and in accordance with terms of our uninsured discount program. Contractual discounts for most of our patient revenue are determined by an automated process that establishes the discount on a patient-by-patient basis. The payment terms or fee schedules for most payors have been entered into our patient accounting systems. Automated (system-generated) contractual discounts are recorded, at the time a patient account is billed, based upon the system-load payment terms. In certain instances for payors that are not significant or who have not entered into a contract with us, we make manual estimates in determining contractual allowances based upon historical collection rates. At the end of each month, we estimate contractual allowances for all unbilled accounts based on payor-specific six-month average contractual discount rates. For governmental payors such as Medicare and Medicaid, we determine contractual discounts or allowances based upon the program’s reimbursement (payment) methodology (i.e. either prospectively determined or retrospectively determined based on costs as defined by the government payor). These contractual discounts are determined by an automated process in a manner similar to the process used for managed care revenue. Under prospective payment programs, we record contractual discounts based upon predetermined reimbursement rates. For retrospective cost-based revenues, which are less prevalent, we estimate contractual allowances based upon
47 Table of Contents historical and current factors which are adjusted as necessary in future periods, when settlements of filed cost reports are received. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and renewals. All contractual adjustments, regardless of type of payor or method of calculation, are reviewed and compared to actual payment experience on an individual patient account basis. Discrepancies between expected and actual payments are reviewed, and as necessary, appropriate corrections to the patient accounts are made to reflect actual payments received. If a discrepancy exists between the payment terms loaded into the contract management system and the actual discount based on payments received, the system is updated accordingly to ensure appropriate discounting of future charges. Additionally, we rely on other analytical tools to ensure our contractual discounts are reasonably estimated. These include, but are not limited to, monitoring of collection experience by payor, reviewing total patient collections as a percentage of net patient revenue (adjusted for the provision for bad debts) on a trailing twelve-month basis, gross to net patient revenue comparisons, contractual allowance metrics, etc. As well, patient accounts are continually reviewed to ensure all patient accounts reflect either system-generated discounts or estimated contractual allowances, as necessary. Medicare and Medicaid regulations and various managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities, requiring complex calculations and assumptions subject to interpretation. Additionally, the services authorized and provided and resulting reimbursement are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updates to regulations and contract renegotiations occur frequently, necessitating continual review and assessment of the estimation process by management. We have made significant investments in our patient accounting information systems, human resources and internal controls, which we believe greatly reduces the likelihood of a significant variance occurring between the recorded and estimated contractual discounts. Given that most of our contractual discounts are pre-defined or contractually based, continual internal monitoring processes and our use of analytical tools, we believe the aggregate differences between amounts recorded for initial contractual discounts and final contractual discounts resulting from payments received are not significant. Finally, we believe that having a wide variety and large number of managed care contracts that are subject to review and administration on a hospital-by-hospital basis minimizes the impact on the Company’s net revenue of any imprecision in recorded contractual discounts caused by the system- load payment terms of a particular payor. We believe that our systems and processes, as well as other items discussed, provide reasonable assurance that any change in estimate related to contractual discounts are immaterial to our financial position, results of operations and cash flows. Insurance Reserves. Given the nature of our operating environment, we may become subject to medical malpractice or workers compensation claims or lawsuits. We maintain third-party insurance coverage for individual malpractice and workers compensation claims to mitigate a portion of this risk. In addition, we maintain excess coverage limiting our exposure to an aggregate annual amount for claims. We estimate our reserve for self-insured professional and general liability and workers compensation risks using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At September 30, 2006 and 2005, our professional and general liability accrual for asserted and unasserted claims was $38.1 million and $33.4 million, respectively, which is included within other long-term liabilities. For the year ended September 30, 2006, our total premiums and self-insured retention cost for professional and general liability insurance was $25.2 million, compared with $24.9 million in the prior year. Our estimated accrual of the self-insurance risk for workers compensation claims at September 30, 2006 was $8.6 million, compared with $10.1 million in the prior year, which is included in accrued expenses and other current liabilities. The estimated accrual for malpractice and workers compensation claims could be significantly affected should current and future occurrences differ from historical claims trends. The estimation process is also complicated by the relatively short period of time in which we have owned our healthcare facilities, as occurrence data under previous ownership may not necessarily reflect occurrence data under our ownership. While we monitor current claims closely and consider outcomes when estimating our insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates.
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The valuation from our independent actuary for professional and general liability losses resulted in a change in related accrual estimates for prior periods which increased professional and general liability expense by the following amounts:
Year ended September 30, 2006: $589,000 Year ended September 30, 2005: $ 163,000 Year ended September 30, 2004: $ — The valuation from our independent actuary for workers’ compensation losses resulted in a change in related accrual estimates for prior periods which increased (decreased) workers’ compensation expense by the following amounts:
Year ended September 30, 2006: $(3.3 million) $ 1.9 Year ended September 30, 2005: million Year ended September 30, 2004: $ — Medical Claims Payable. Medical claims expense, including claims paid to our hospitals, was $354.5 million, $310.7 million and $253.2 million, or 87.2%, 88.0% and 87.2% of Health Choice premium revenue, for the years ended September 30, 2006, 2005 and 2004, respectively. Our liability for medical claims was $81.8 million at September 30, 2006, compared with $60.2 million in the prior year. We estimate the medical claims payable using historical claims experience (including severity and payment lag time) and other actuarial analysis including number of enrollees, age of enrollees and certain enrollee health indicators to predict the cost of healthcare services provided to enrollees during any given period. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from our estimates given changes in healthcare costs or adverse experience. For the years ended September 30, 2006, 2005 and 2004, approximately $10.9 million, $8.5 million and $10.8 million, respectively, of health plan payments made to hospitals and other healthcare entities owned by us for services provided to our enrollees were eliminated in consolidation. Our operating results and cash flows could be materially affected by increased or decreased utilization of our owned healthcare facilities by enrollees of our health plan. Goodwill and Other Intangibles. The accounting policies and estimates related to goodwill and other intangibles are considered critical because of the significant impact that impairment could have on our operating results. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair value as required by SFAS No. 141, Business Combinations. Goodwill, which was $756.5 million at September 30, 2006, is not amortized but is subject to tests for impairment annually or more often if events or circumstances indicate it may be impaired. The initial recording of goodwill and other intangibles requires subjective judgments concerning estimates of the fair value of the acquired assets. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Other identifiable intangible assets, net of accumulated amortization, were $39.0 million at September 30, 2006. These are amortized over their estimated useful lives and are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. Other key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles which require amortization. See “Goodwill and Other Intangibles Assets” in the Notes to Consolidated Financial Statements for additional information regarding intangible assets. To assist in assessing the impact of a goodwill or intangible asset impairment charge at September 30, 2006, we have $795.5 million of goodwill and intangible assets. The impact of a 5% impairment charge would result in a reduction in pre-tax income of approximately $39.8 million. Income Taxes. Certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. Significant judgment is required in determining and assessing the impact of such tax-related contingencies. We establish accruals when, despite our belief that our tax return positions are fully
49 Table of Contents supportable, it is probable that we have incurred a loss related to tax contingencies and the loss or range of loss can be reasonably estimated. We adjust the accruals related to tax contingencies based upon changing facts and circumstances, including the progress of tax audits and legislative, regulatory or judicial developments. Additionally, we estimate and record a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized in future periods based on all relevant information. The estimates, judgments and assumptions used by us under “Allowance for Doubtful Accounts,” “Allowance for Contractual Discounts and Settlement Estimates,” “Insurance Reserves,” “Medical Claims Payable,” “Goodwill and Other Intangibles” and “Income Taxes” are, we believe, reasonable, but involve inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods.
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RESULTS OF OPERATIONS SUMMARY The following table sets forth, for the periods indicated, results of operations data expressed in dollar terms and as a percentage of net revenue. The table includes information both on a consolidated basis and by reportable business segment.
Year Ended Year Ended Year Ended Consolidated ($ in thousands): September 30, 2006 September 30, 2005 September 30, 2004 Amount Percentage Amount Percentage Amount Percentage Net revenue: Acute care revenue $ 1,219,474 75.0% $ 1,170,483 76.8% $1,096,192 79.1% Premium revenue 406,522 25.0% 353,244 23.2% 290,442 20.9% Total net revenue 1,625,996 100.0% 1,523,727 100.0% 1,386,634 100.0%
Costs and expenses: Salaries and benefits 470,171 28.9% 442,173 29.0% 424,419 30.6% Supplies 187,799 11.5% 184,875 12.1% 176,245 12.7% Medical claims 343,660 21.1% 302,204 19.8% 242,389 17.5% Other operating expenses 246,325 15.2% 211,698 13.9% 202,994 14.6% Provision for bad debts 141,774 8.7% 133,870 8.8% 126,952 9.2% Rentals and leases 34,956 2.2% 32,750 2.1% 31,998 2.3% Interest expense, net 69,687 4.3% 66,002 4.4% 59,394 4.3% Depreciation and amortization 71,925 4.4% 71,037 4.7% 68,084 4.9% Management fees 4,189 0.3% 3,791 0.3% 746 0.1% Hurricane-related expenses — — 4,762 0.3% — — Loss on early extinguishment of debt — — — — 52,084 3.8% Merger expenses — — — — 19,750 1.4% Write-off of debt issue costs — — — — 8,850 0.6% Business interruption insurance recoveries (8,974) (0.6)% — — — — Total costs and expenses 1,561,512 96.0% 1,453,162 95.4% 1,413,905 102.0%
Earnings before gain (loss) on disposal of assets, minority interests and income taxes 64,484 4.0% 70,565 4.6% (27,271) (2.0)%
Gain (loss) on disposal of assets, net 899 0.0% (231) 0.0% 3,624 0.3% Minority interests (3,546) (0.2)% (2,891) (0.2)% (4,305) (0.3)%
Earnings (loss) before income taxes 61,837 3.8% 67,443 4.4% (27,952) (2.0)%
Income tax expense 22,288 1.4% 26,851 1.7% 4,473 0.3% Net earnings (loss) $ 39,549 2.4% $ 40,592 2.7% $ (32,425) (2.3)%
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Year Ended Year Ended Year Ended Acute Care ($ in thousands): September 30, 2006 September 30, 2005 September 30, 2004 Amount Percentage Amount Percentage Amount Percentage Net revenue: Acute care revenue $ 1,219,474 99.1% $ 1,170,483 99.3% $1,096,192 99.0% Revenue between segments 10,857 0.9% 8,475 0.7% 10,821 1.0% Total net revenue (1) 1,230,331 100.0% 1,178,958 100.0% 1,107,013 100.0%
Costs and expenses: Salaries and benefits 457,540 37.2% 431,609 36.6% 414,797 37.5% Supplies 187,515 15.2% 184,676 15.7% 176,031 15.9% Other operating expenses 233,041 18.9% 200,411 17.0% 193,189 17.4% Provision for bad debts 141,774 11.5% 133,870 11.4% 126,952 11.5% Rentals and leases 33,874 2.8% 31,849 2.7% 31,296 2.8% Interest expense, net 69,687 5.7% 66,002 5.6% 59,394 5.4% Depreciation and amortization 68,539 5.6% 67,840 5.7% 67,893 6.1% Management fees 4,189 0.3% 3,791 0.3% 746 0.1% Hurricane-related expenses — — 4,762 0.4% — — Business interruption insurance recoveries (8,974) (0.7)% — — — — Loss on early extinguishment of debt — — — — 52,084 4.7% Merger expenses — — — — 19,750 1.8% Write-off of debt issue costs — — — — 8,850 0.8% Total costs and expenses 1,187,185 96.5% 1,124,810 95.4% 1,150,982 104.0%
Earnings before gain (loss) on disposal of assets, minority interests and income taxes 43,146 3.5% 54,148 4.6% (43,969) (4.0)%
Gain (loss) on disposal of assets, net 953 0.1% (231) 0.0% 3,624 0.3% Minority interests (3,546) (0.3)% (2,891) (0.3)% (4,305) (0.4)% Earnings (loss) before income taxes $ 40,553 3.3% $ 51,026 4.3% $ (44,650) (4.1)%
(1) Revenue between segments is eliminated in our consolidated results.
Year Ended Year Ended Year Ended Health Choice ($ in thousands): September 30, 2006 September 30, 2005 September 30, 2004 Amount Percentage Amount Percentage Amount Percentage Premium revenue $406,522 100.0% $ 353,244 100.0% $ 290,442 100.0%
Costs and expenses: Salaries and benefits 12,631 3.1% 10,564 3.0% 9,622 3.3% Supplies 284 0.1% 199 0.1% 214 0.1% Medical claims (1) 354,517 87.2% 310,679 88.0% 253,210 87.2% Other operating expenses 13,284 3.3% 11,287 3.2% 9,805 3.4% Rentals and leases 1,082 0.3% 901 0.2% 702 0.2% Depreciation and amortization 3,386 0.8% 3,197 0.9% 191 0.1% Total costs and expenses 385,184 94.8% 336,827 95.4% 273,744 94.3%
Earnings before loss on disposal of assets 21,338 5.2% 16,417 4.6% 16,698 5.7% Loss of disposal of assets, net (54) 0.0% — — — — Earnings before income taxes $ 21,284 5.2% $ 16,417 4.6% $ 16,698 5.7%
(1) Medical claims paid to our hospitals of $10.9 million, $8.5 million and $10.8 million for the years ended September 30, 2006, 2005 and 2004, respectively, is eliminated in our consolidated results.
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Supplemental Non-GAAP Disclosures During the third quarter of fiscal 2006, we implemented a company-wide uninsured discount program offering discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care. The results of operations for the year ended September 30, 2006, adjusted for the impact of the company-wide uninsured discount program are as follows:
Operating Measures Adjusted for Comparative Analysis (Unaudited) (in thousands, except for statistical measures) Year Ended September 30, 2006 Non-GAAP GAAP Uninsured Adjusted GAAP % Non-GAAP % Amounts Discounts (2) Amounts (3) of Revenue of Revenue (3) 2006 2005 2006 Acute Care Segment:
Net revenue(1) $1,230,331 $ 20,306 $1,250,637 100.0% 100.0% 100.0%
Salaries and benefits 457,540 — 457,540 37.2 36.6 36.6 Supplies 187,515 — 187,515 15.2 15.7 15.0 Other operating expenses 233,041 — 233,041 18.9 17.0 18.6 Provision for bad debts 141,774 20,306 162,080 11.5 11.4 13.0 Rentals and leases 33,874 — 33,874 2.8 2.7 2.7
Net patient revenue per adjusted admission $ 8,325 $ 140 $ 8,465 Percentage change from prior year 4.8% 6.5%
(1) Acute care revenue represents total net revenue of the segment prior to the elimination of revenue between segments.
(2) Includes the impact of discounts provided to uninsured patients for the period.
(3) Acute care revenue, the provision for bad debts and certain operating expense categories as a percentage of acute care revenue have been adjusted to present certain financial measures on a basis comparative with prior periods (non-GAAP financial measures). Management believes these non-GAAP financial measures are useful to investors for the purpose of providing disclosures of our results of operations consistent with those used by management. While management believes these non-GAAP financial measures provide useful information for period-to-period comparisons, investors are encouraged to use GAAP measures when evaluating financial performance or liquidity.
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Year Ended September 30, 2006 and 2005 Net revenue — Net revenue for the year ended September 30, 2006 was $1.626 billion, an increase of $102.3 million or 6.7%, compared to $1.524 billion in the prior year. The increase in net revenue was a combination of an increase of $49.0 million in net revenue from hospital operations, which we refer to as our acute care service segment in our financial statements, and an increase of $53.3 million in premium revenue from Health Choice. Our company-wide uninsured discount program, which became effective during the third quarter of fiscal 2006, resulted in $20.3 million in discounts being provided to uninsured patients during the year ended September 30, 2006. The discounts to the uninsured had the effect of reducing acute care revenue and the provision for bad debts by generally corresponding amounts. The reduction of acute care revenue resulted in an increase in expenses as a percentage of acute care revenue, other than the provision for bad debts, compared to what they would have been if the uninsured discount program had not been implemented. Before eliminations, net revenue from our hospital operations for the year ended September 30, 2006 was $1.230 billion, an increase of $51.4 million or 4.4%, compared to $1.179 billion in the prior year. Excluding the impact of the $20.3 million in uninsured discounts, net revenue from our hospital operations increased 6.1% over the prior year. For the year ended September 30, 2006, hospitals and other healthcare entities owned by us received approximately $10.9 million in net revenue from Health Choice, compared with $8.5 million for the prior year. This net revenue was eliminated in our consolidated results. Net patient revenue per adjusted admission increased 4.8% for the year ended September 30, 2006, when compared to the prior year. Excluding the impact of uninsured discounts, net patient revenue per adjusted admission increased 6.5% over the prior year, due primarily to increases in managed care and Medicare rates. Pricing in the year ended September 30, 2006 was partially affected by changes in patient mix and a decline in higher acuity inpatient services such as cardiovascular surgery, orthopedic and bariatric cases. During the year ended September 30, 2006, we experienced a decline in our Medicare revenue mix, partially attributable to a shift from traditional Medicare to managed Medicare products, coupled with an increase in Medicaid and self-pay as compared to the prior year. Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in net revenue of $433,000 for the year ended September 30, 2006, compared to an increase of $2.1 million in the prior year. Premium revenue from Health Choice was $406.5 million for the year ended September 30, 2006, an increase of $53.3 million or 15.1%, when compared to $353.2 million for the prior year. The increase in premium revenue was primarily the result of the implementation of the MAPD SNP at Health Choice on January 1, 2006. The MAPD SNP resulted in additional covered lives of approximately 3,900, which generated premium revenue of $37.3 million for the year ended September 30, 2006. In addition, annual capitation payment rate increases of 5.0% to 6.0% for the Medicaid business also contributed to the increase in net revenue during the year ended September 30, 2006. Salaries and benefits — Salaries and benefits expense from our hospital operations for the year ended September 30, 2006 was $457.5 million, or 37.2% of acute care revenue, compared to $431.6 million, or 36.6% of acute care revenue in the prior year. Excluding the impact of uninsured discounts, salaries and benefits as a percentage of acute care revenue would have been 36.6% for the year ended September 30, 2006, which is consistent with the prior year. Supplies — Supplies expense from our hospital operations was $187.5 million, or 15.2% of acute care revenue, for the year ended September 30, 2006. Excluding the impact of uninsured discounts, supplies expense would have been 15.0% of acute care revenue for the year ended September 30, 2006, compared with 15.7% in the prior year. The decrease in supply cost as a percentage of acute care revenue was primarily driven by the improvement in the mix of implant costs to total supplies, which is reflective of our decrease in acuity levels experienced during the period. In addition, growth in lower acuity and supply utilization services such as obstetrics and psychiatric care has contributed to the decline in supplies as a percentage of acute care revenue. Medical claims — Medical claims expense before eliminations for Health Choice increased $43.8 million to $354.5 million for the year ended September 30, 2006, compared to $310.7 million for the prior year. Medical claims expense represents the amounts paid by Health Choice for health care services provided to its members.
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Medical claims expense as a percentage of premium revenue was 87.2% for the year ended September 30, 2006, compared to 88.0% in the prior year. The improvement in medical claims expense was primarily the result of improvements in pharmacy, dental and outpatient costs. Additionally, the medical claims expense ratio under the SNP is currently more favorable than the traditional Medicaid business. Other operating expenses — Other operating expenses from our hospital operations for the year ended September 30, 2006 were $233.0 million, or 18.9% of acute care revenue, compared to $200.4 million, or 17.0% of acute care revenue in the prior year. Excluding the impact of uninsured discounts, other operating expenses as a percentage of acute care revenue would have been 18.6% for the year ended September 30, 2006. A portion of the 1.6% increase as a percentage of acute care revenue was due to the continued incurrence of fixed costs at The Medical Center of Southeast Texas during its temporary closure. In addition, during the year ended September 30, 2006, we experienced increases in legal fees, professional fees, physician recruiting costs and utilities expense. During the year ended September 30, 2006, we incurred $8.7 million in legal fees and other expenses associated with responding to the OIG’s request for information, which we received in September 2005. Additionally, professional fees have risen as a result of increases in physician call and anesthesia coverage costs in certain markets. Also contributing to the overall increase in other operating expenses is utility costs, which have increased approximately 17.4% over the prior year. Provision for bad debts — Provision for bad debts for our hospital operations for the year ended September 30, 2006 was $141.8 million, or 11.5% of acute care revenue, compared to $133.9 million, or 11.4% of acute care revenue in the prior year. Excluding the impact of uninsured discounts, the provision for bad debts as a percentage of acute care revenue would have been 13.0% for the year ended September 30, 2006. Charity discounts were $36.7 million for the year ended September 30, 2006, compared to $30.2 million in the prior year. We continue to experience an increase in the volume of uninsured patients through our emergency rooms, which increased 4.1% for the year ended September 30, 2006, when compared to the prior year. This trend of uninsured volume through our emergency rooms continues to be the main driver behind the increase in our provision for bad debts and charity care. Interest expense, net — Interest expense, net of interest income, for the year ended September 30, 2006 was $69.7 million, compared to $66.0 million in the prior year. This increase of $3.7 million was primarily due to an increase in interest rates, offset by a $2.8 million decrease in the amortization of loan costs for the year ended September 30, 2006, when compared with the prior year. Borrowings under our senior secured credit facilities are subject to interest at variable rates. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was approximately 7.0% for the year ended September 30, 2006, compared to 5.0% for the prior year. Depreciation and amortization — Depreciation and amortization expense for the year ended September 30, 2006 was $71.9 million, compared to $71.0 million in the prior year. The increase of $900,000 was primarily the result of incremental depreciation expense on additions to property and equipment during the period, partially offset by a reduction in depreciation expense related to fully depreciated assets. These additions are the result of the implementation of our operating strategy, pursuant to which we have made substantial investments in our existing facilities. Income tax expense — We recorded a provision for income taxes of $22.3 million, resulting in an effective tax rate of 36.0% for the year ended September 30, 2006, compared to $26.9 million, for an effective tax rate of 39.8% in the prior year. The decline in our effective tax rate was due to federal tax credits we expect to receive as a result of Hurricane Rita, a change in Texas law that caused a decrease in previously recorded deferred tax liabilities, and a decrease in our effective state income tax rate. Net earnings — Net earnings decreased $1.1 million for the year ended September 30, 2006 to $39.5 million, compared to $40.6 million for the prior year. Net earnings for the year ended September 30, 2006 include $9.0 million of business interruption insurance recoveries received in connection with the temporary closure and disruption of operations at The Medical Center of Southeast Texas, as a result of Hurricane Rita. Net earnings for the year ended September 30, 2005 include $4.8 million in hurricane-related expenses related primarily to property damage at The Medical Center of Southeast Texas, as a result of Hurricane Rita in September 2005.
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Year Ended September 30, 2005 and 2004 Net revenue — Net revenue for the year ended September 30, 2005 was $1.524 billion, an increase of $137.1 million or 9.9%, when compared to $1.386 billion in the prior year. The increase in net revenue was a combination of an increase of $74.3 million in net revenue from hospital operations and an increase of $62.8 million in premium revenue from Health Choice. Before eliminations, net revenue from our hospital operations for the year ended September 30, 2005 was $1.179 billion, an increase of $71.9 million or 6.5%, when compared to $1.017 billion in the prior year. For the years ended September 30, 2005 and 2004, approximately $8.5 million and $10.8 million, respectively, of net revenue received from Health Choice by hospitals and other healthcare entities owned by us was eliminated in consolidation. On a same facility basis, which excludes the results of North Vista Hospital, net revenue from our hospital operations increased $47.4 million, or 4.6%, which was primarily driven by a 6.8% increase in net patient revenue per adjusted admission. The increase in net patient revenue per adjusted admission is comprised primarily of rate increases and supplemented by increased acuity. Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in net revenue of $2.1 million for the year ended September 30, 2005 compared to a decrease in net revenue of $1.1 million for the prior year. Our net patient revenue per adjusted admission on a consolidated basis increased 6.5% for the year ended September 30, 2005 compared to the prior year. Premium revenue from Health Choice was $353.2 million for the year ended September 30, 2005, an increase of $62.8 million or 21.6%, when compared to $290.4 million in the prior year. Covered lives under this prepaid Medicaid plan increased 7.6% to over 113,000 at September 30, 2005 from 105,000 in the prior year. The increase in covered lives positively impacted Health Choice’s premium revenue for the year ended September 30, 2005 compared to the prior year. The growth in covered lives was due primarily to an increase in the Medicaid eligible population and an increase in our marketshare in the counties where we operate. Salaries and benefits — Salaries and benefits expense from our hospital operations for the year ended September 30, 2005 was $431.6 million, or 36.6% of acute care revenue, compared to $414.8 million, or 37.5% of acute care revenue in the prior year. On a same facility basis, which excludes North Vista Hospital, salaries and benefits expense was 36.5% of acute care revenue for the year ended September 30, 2005, compared to 37.7% in the prior year. The 1.2% decrease as a percentage of acute care revenue on a same facility basis resulted primarily from the leveraging of growth in net revenue achieved through rate increases during the current period, declining volumes requiring less labor utilization and a decrease in benefits expense, offset by increases in contract labor. Benefits expense from our same facility hospital operations decreased 0.6% as a percentage of acute care revenue for the year ended September 30, 2005, when compared to the prior year, due to changes to our employee healthcare benefit program implemented effective January 1, 2004, which has resulted in lower utilization of medical services. Supplies — Supplies expense from our hospital operations for the year ended September 30, 2005 was $184.7 million, or 15.7% of acute care revenue, compared to $176.0 million, or 15.9% of acute care revenue in the prior year. On a same facility basis, supplies expense was 15.7% of acute care revenue compared to 15.9% for the prior year. The 0.2% decrease as a percentage of acute care revenue on a same facility basis resulted primarily from a decrease in the volume of certain bariatric and orthopedic cases, which include a higher than average supply costs component. Medical claims — Medical claims expense before eliminations for Health Choice increased $57.5 million to $310.7 million for the year ended September 30, 2005, compared to $253.2 million for the prior year, as a result of an increase in enrollment from 105,000 members at September 30, 2004 to over 113,000 at September 30, 2005. For the years ended September 30, 2005 and 2004, approximately $8.5 million and $10.8 million, respectively, of medical claims expense paid to our hospitals was eliminated in consolidation. Medical claims expense represents the amounts paid by Health Choice for health care services provided to its members. Medical claims expense as a percentage of premium revenue was 88.0% and 87.2% for the years ended September 30, 2005 and 2004, respectively. The 0.8% increase in medical claims expense as a percentage of premium revenue resulted primarily from higher inpatient and pharmacy costs, coupled with higher utilization in certain of our counties for physician specialty services.
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Other operating expenses — Other operating expenses from our hospital operations for the year ended September 30, 2005 was $200.4 million, or 17.0% of acute care revenue, compared to $193.2 million, or 17.4% acute care revenue in the prior year. On a same facility basis, other operating expenses were 17.2% of acute care revenue for the year ended September 30, 2005, compared to 17.7% in the prior year. The 0.5% decrease as a percentage of acute care revenue on a same facility basis was primarily a result of decreases in insurance and legal expenses. Insurance expense on a same facility basis decreased by approximately $2.1 million, or in excess of 8.4%, for the year ended September 30, 2005, compared to the prior year. Legal expense on a same facility basis decreased $3.1 million during fiscal 2005 compared to fiscal 2004. During the year ended September 30, 2004, we incurred $2.9 million in legal expenses related to litigation associated with Rocky Mountain Medical Center, which we settled in June 2004. Provision for bad debts — Provision for bad debts for our hospital operations for the year ended September 30, 2005 was $133.9 million, or 11.4% of acute care revenue, compared to $127.0 million, or 11.5% of acute care revenue in the prior year. On a same facility basis, the provision for bad debts was $106.7 million, or 9.8% of acute care revenue for the year ended September 30, 2005 compared to 10.2% in the prior year. The 0.4% decrease as a percentage of acute care revenue on a same facility basis was due, in part, to our focus on self-pay cash collections including point-of-service collections which increased 22.0% for the year ended September 30, 2005, when compared to the prior year, coupled with an increase in charity care resulting from our expanded charity care program. We anticipate that growth in self-pay revenue will continue to negatively impact the provision for bad debts. We continue to focus on our emergency rooms through facilities redesign, Medicaid eligibility automation and process-flow improvements. Interest expense, net — Interest expense, net of interest income, increased $6.6 million from $59.4 million for the year ended September 30, 2004 to $66.0 million for the year ended September 30, 2005, due to an increase in average debt outstanding and an increase in interest rates. Borrowings under our senior secured credit facilities are subject to interest at variable rates. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was approximately 5.0% for the year ended September 30, 2005, compared to 4.5% in the prior year. Amortization of deferred financing costs increased $1.7 million to $5.8 million for the year ended September 30, 2005. Depreciation and amortization — The $2.9 million increase in depreciation and amortization expense from $68.1 million for the year ended September 30, 2004 to $71.0 million for the prior year was primarily the result of an additional $3.0 million in amortization incurred during fiscal 2005 associated with Health Choice’s contract with AHCCCS. During the year ended September 30, 2005, we completed the allocation of the purchase price to account for the acquisition of IAS. The allocation included $45.0 million in value assigned to Health Choice’s contract with AHCCCS, which was recorded as other intangible assets and is being amortized over a period of 15 years. Income tax expense — We recorded a provision for income taxes of $26.9 million, resulting in an effective tax rate of 39.8% for the year ended September 30, 2005, compared to $4.5 million in the prior year. As a result of the Transactions and the related application of the purchase method of accounting, we reduced goodwill, rather than income tax expense upon the reduction of the deferred tax valuation allowance. For the periods prior to the Transactions, the deferred portion of the provision for income taxes was reduced by the use of deferred tax assets that were previously reserved with a valuation allowance. Net earnings (loss) — Net earnings were $40.6 million for the year ended September 30, 2005, compared to a net loss of $32.4 million in the prior year. Net earnings for the year ended September 30, 2005 include $4.8 million in hurricane-related expenses related primarily to property damage at one of our hospitals as a result of Hurricane Rita in September 2005, and include $3.8 million in management fees. Net loss for the year ended September 30, 2004 includes $51.9 million in loss on early extinguishment of debt and $19.8 million in merger expenses, both incurred in connection with the Transactions, along with a $3.6 million gain on the sale of our Rocky Mountain Medical Center property and $8.9 million in write-off of deferred financing costs.
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Summary of Operations by Quarter The following table presents unaudited quarterly operating results for the years ended September 30, 2006 and 2005. We believe that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the consolidated financial statements. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.
Quarter Ended Sept. 30, June 30, March 31, Dec. 31, 2006(1) 2006(2) 2006(3) 2005 (in thousands) Net revenue $407,600 $420,963 $417,968 $379,465 Net earnings before income taxes 15,587 25,364 18,927 1,962 Net earnings 11,054 15,912 11,423 1,162
Quarter Ended Sept. 30, June 30, March 31, Dec. 31, 2005(4) 2005 2005 2004 (in thousands) Net revenue $373,516 $389,979 $390,257 $369,975 Net earnings before income taxes 7,331 18,201 27,270 17,763 Net earnings 4,371 10,466 15,796 9,960
(1) Results for the quarter ended September 30, 2006 include $654,000 in business interruption insurance recoveries. Also included is a $3.5 million increase to estimated liabilities for general and professional insurance and a $3.1 million reduction to estimated liabilities for workers compensation insurance as a result of our semi-annual actuarial studies.
(2) Results for the quarter ended June 30, 2006 include $8.3 million in business interruption insurance recoveries.
(3) Results for the quarter ended March 31, 2006 include a $2.9 million and a $228,000 reduction to estimated liabilities for general and professional insurance and worker’s compensation insurance, respectively, as a result of our semi-annual actuarial studies.
(4) Results for the quarter ended September 30, 2005 include $4.8 million in hurricane-related expenses and a $6.8 million reduction to estimated liabilities for general and professional insurance as a result of our semi-annual actuarial study.
LIQUIDITY AND CAPITAL RESOURCES We rely on cash generated from our internal operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see Item 1A, “Risk Factors,” beginning on page 25.
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At September 30, 2006, we had available liquidity as follows (in millions):
Available cash $ 95.4 Available capacity under our senior secured credit facilities 211.1 Net available liquidity at September 30, 2006 $306.5
In addition to our available liquidity, we expect to generate significant operating cash flow in fiscal 2007. We will also utilize proceeds from our financing activities as needed. Our growth strategy requires significant capital expenditures during fiscal 2007 and future years. We expect our capital expenditures for fiscal 2007 to be approximately $230.0 to $240.0 million, including the following significant expenditures: • approximately $100.0 to $105.0 million for the construction of Mountain Vista Medical Center, our new hospital in the East Valley of Phoenix, Arizona, which we plan to open on June 1, 2007;
• approximately $70.0 to $75.0 million for other growth and new business projects;
• approximately $35.0 to $40.0 million in replacement or maintenance related projects at our hospitals; and
• approximately $14.0 million in hardware and software related costs in connection with the implementation of our advanced clinical information system. At September 30, 2006, we had construction and other various projects in progress with an estimated cost to complete and equip over the next three years of approximately $158.6 million. We plan to finance our proposed capital expenditures with borrowings under our senior credit facilities, as well as with cash generated from operations, cash on hand and other capital sources that may become available. At September 30, 2006, we had $415.4 million in borrowings outstanding as a term loan and had issued $38.9 million in letters of credit. Additionally, we had $475.0 million aggregate principal amount of 8 3/4% senior subordinated notes due 2014 outstanding at September 30, 2006. For a further discussion of our debt arrangements, see the section below entitled “Debt Instruments and Related Covenants.” On July 21, 2006, we announced the signing of a definitive agreement to acquire Glenwood Regional Medical Center in West Monroe, Louisiana. The purchase price of the hospital is approximately $82.5 million, subject to net working capital and other purchase price adjustments. Additionally, we plan to make capital expenditures on the hospital campus of approximately $30.0 million over the next four years. Pending approval of the Louisiana Attorney General and the satisfaction of other closing conditions, we expect the transaction to close in the first calendar quarter of 2007. We expect to fund the transaction with cash on hand and available borrowings under our revolving credit facility. Based upon our current level of operations and anticipated growth, we believe we have sufficient liquidity to meet our cash requirements over the short- term (next 12 months) and over the next three years. In evaluating the sufficiency of our liquidity for both the short-term and long-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our senior secured credit facilities compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities. As a result of this evaluation, we believe that we will have sufficient liquidity for the next three years to fund the expenditures set forth in the Tabular Disclosure of Contractual Obligations below, as well as sufficient liquidity to fund cash required for the payment of taxes and the capital expenditures required to maintain our facilities during this period of time. We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you, however, that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our senior secured credit facilities, or otherwise, to enable us to grow our business, service our indebtedness, including the senior secured credit facilities and the 8 3/4% notes, or make anticipated capital expenditures. See Item 1A, “Risk Factors” beginning on page 25.
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One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence of, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance, ability to service or refinance our 8 3/4% notes and ability to service and extend or refinance the senior secured credit facilities will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See Item 1A, “Risk Factors” beginning on page 25.
Overview of Cash Flow Activities for the Years Ended September 30, 2006 and 2005 For the years ended September 30, 2006 and 2005, our cash flows are summarized as follows (in millions):
2006 2005 Cash flow provided by operating activities $ 157.1 $ 149.2 Cash flow used in investing activities (146.2) (151.7) Cash flow used in financing activities (4.6) (7.1)
Operating Activities Our primary sources of liquidity are cash flow provided by our operations, available cash on hand and our revolving credit facility. At September 30, 2006, we had $134.7 million in net working capital, compared to $166.1 million at September 30, 2005. Changes in working capital were impacted by increased medical claims payable of $15.0 million related to our MAPD SNP at Health Choice and an increase in accounts receivable. Net accounts receivable increased $16.0 million to $182.5 million at September 30, 2006, compared to $166.5 million in the prior year. Excluding third-party settlement balances, our days revenue in accounts receivable were 54 at September 30, 2006, compared to 50 at September 30, 2005. Our cash flow provided by operations was also impacted by the CMS delay in Medicare payments as mandated by DEFRA resulting in the delay of $6.8 million of cash, which was ultimately received in October 2006.
Investing Activities Capital expenditures for the year ended September 30, 2006 were approximately $146.9 million. Significant items included the following (in millions): • $66.7 million for the construction of Mountain Vista Medical Center;
• $28.6 million for various expansion and renovation projects at our hospitals; and
• $17.5 million in hardware and software related to our advanced clinicals and other information systems projects.
Financing Activities During the year ended September 30, 2006, we repaid $4.3 million pursuant to the terms of our senior secured credit facilities and repaid $3.6 million in capital lease obligations and other debt. Sources of financing include net proceeds of $5.7 million received in connection with the sale of ownership interests in one of our hospitals and the formation of a joint venture for an outpatient cardiac catheterization laboratory.
Debt Instruments and Related Covenants At September 30, 2006, we had two separate debt arrangements: • $675.0 million senior secured credit facilities; and
• $475.0 million 8 3/4% senior subordinated notes due 2014.
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$675.0 Million Senior Secured Credit Facilities On June 22, 2004, as part of the Transactions, we entered into an amended and restated senior credit agreement with various lenders and repaid all outstanding indebtedness under our former senior secured credit facilities. Our senior secured credit facilities consist of: • a senior secured Tranche B term loan of $425.0 million, which we refer to as the Term Facility; and
• a senior secured revolving credit facility of up to $250.0 million, referred to as the Revolving Facility, which is available for working capital and other general corporate purposes. Our amended and restated senior credit agreement also contains an “accordion” feature that permits us to borrow at a later date additional term loans, maturing no earlier than the Term Facility, in an aggregate amount up to $300.0 million, subject to the receipt of commitments and the satisfaction of other conditions (including compliance with the indebtedness covenant under our 8 3/4% notes). No commitments for such increase have been received at this time. The Term Facility has a maturity of seven years (June 22, 2011), with principal due in 24 consecutive equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Facility during the first six years thereof, with the balance payable in four equal installments in year seven. Unless terminated earlier, the Revolving Facility has a maturity of six years (June 22, 2010). The senior secured credit facilities are subject to mandatory prepayment under specific circumstances, including a portion of excess cash flow, a portion of the net proceeds from an initial public offering, asset sales, debt issuances and specified casualty events, each subject to various exceptions. The Term Facility bears interest at a rate equal to LIBOR plus 2.25% per annum or, at our option, the base rate plus 1.25% per annum. Loans under the Revolving Facility bear interest at a rate equal to LIBOR plus a margin of 2.00% to 2.50% per annum or, at our option, the base rate plus a margin of 1.00% to 1.50% per annum, such rate in each case depending on our current leverage ratios. A commitment fee equal to 0.50% per annum times the daily average undrawn portion of the Revolving Facility accrues and is payable quarterly in arrears. Our amended and restated senior credit agreement provides for capital expenditure limitations and requires that we comply with various other financial ratios and tests and contains covenants limiting our ability to, among other things, incur additional indebtedness; sell or dispose of assets; make investments, loans or advances; pay certain restricted payments and dividends; or amend the terms of our 8 3/4% notes. Under our amended and restated credit agreement, we may acquire hospitals and other related businesses upon satisfaction of certain requirements, including demonstrating pro forma compliance with a maximum senior leverage ratio of 3.5 to 1, along with the maximum total leverage and minimum interest coverage ratios discussed below. Financial related covenants under our amended and restated senior credit agreement, applicable to us at September 30, 2006, include the following ratios:
Actual Total Leverage Ratio 3.81 Maximum Total Leverage Ratio 5.50
Actual Interest Coverage Ratio 3.15 Minimum Interest Coverage Ratio 2.30 Consolidated EBITDA is defined by our amended and restated senior credit agreement as earnings (loss) before interest expense, income taxes, depreciation and amortization, management fees, gain (loss) on sale or disposal of assets, minority interests, non-cash expenses and charges, and non- recurring charges and costs, such as hurricane-related expenses. Consolidated EBITDA is used as a basis for the ratios above. Failure to comply with these ratios would constitute an event of default under the senior secured credit facilities, thereby accelerating all amounts outstanding under the Term Facility and Revolving Facility, including all accrued interest thereon, as
61 Table of Contents due and payable upon demand by the lenders. In addition, the occurrence of an event of default under the senior secured credit facilities would constitute an event of default under the indenture governing our 8 3/4% notes. Such an event would have a material adverse effect on our liquidity and financial condition. At September 30, 2006, $415.4 million was outstanding under the Term Facility, no amounts were outstanding under the Revolving Facility and we had $38.9 million outstanding in letters of credit. During the next twelve months, we are required to repay $4.3 million in principal under our senior secured credit facilities and $6.5 million in principal under our capital leases and other obligations.
$475.0 Million 8 3/4% Senior Subordinated Notes Due 2014 In connection with the Transactions, IAS retired approximately 98.5% of the outstanding principal amount of its 13% senior subordinated notes due 2009 registered under the Securities Act of 1933, as amended, and 100% of the outstanding principal amount of its 8 1/2% senior subordinated notes due 2009 registered under the Securities Act of 1933, as amended, pursuant to a cash tender offer and consent solicitation. The remaining $3.5 million of the 13% notes were retired in October 2004. On June 22, 2004, in connection with the Transactions, IASIS and IASIS Capital Corporation, a wholly owned subsidiary of IASIS formed solely for the purpose of serving as a co-issuer, or IASIS Capital, issued $475.0 million aggregate principal amount of 8 3/4% senior subordinated notes due 2014. On December 15, 2004, IASIS and IASIS Capital exchanged all of their outstanding 8 3/4% senior subordinated notes due 2014 for 8 3/4% senior subordinated notes due 2014 registered under the Securities Act. Terms and conditions of the exchange offer were as set forth in the registration statement on Form S-4 filed with the SEC that became effective on November 12, 2004. Our 8 3/4% notes are general unsecured senior subordinated obligations of the issuers, are subordinated in right of payment to their existing and future senior debt, are pari passu in right of payment with any of their future senior subordinated debt and are senior in right of payment to any of their future subordinated debt. Our existing domestic subsidiaries, other than certain non-guarantor subsidiaries which include Health Choice and our non-wholly owned subsidiaries, are guarantors of our 8 3/4% notes. The indenture governing the notes generally provides that we may designate other subsidiaries as non- guarantors under certain circumstances up to a maximum threshold based on 20% of total consolidated assets. At September 30, 2006, we had approximately $120.0 million available under this threshold to designate other subsidiaries as non-guarantors. Our 8 3/4% notes are effectively subordinated to all of the issuers’ and the guarantors’ secured debt to the extent of the value of the assets securing the debt and are structurally subordinated to all liabilities and commitments (including trade payables and lease obligations) of our subsidiaries that are not guarantors of our 8 3/4% notes. Our 8 3/4% notes require semi- annual interest payments. As of September 30, 2006, we provided a performance guaranty in the form of a letter of credit in the amount of $20.6 million for the benefit of AHCCCS to support our obligations under the Health Choice contract to provide and pay for healthcare services. The amount of the performance guaranty is based in part upon the membership in the plan and the related capitation revenue paid to us. Additionally, Health Choice maintains a cash balance of $5.0 million and an intercompany demand note with us, which is required under its contract with CMS to provide coverage as a SNP.
Credit Ratings The following table summarizes our credit ratings at September 30, 2006:
2006 2005 Rating Agency Moody’s S&P Moody’s S&P Senior Secured Credit Facility Ba2 B+ B1 B+ 3 8 /4% Senior Subordinated Notes B3 B- B3 B-
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OFF-BALANCE SHEET ARRANGEMENTS We are a party to certain rent shortfall agreements, master lease agreements and other similar arrangements with non-affiliated entities and an unconsolidated entity in the ordinary course of business. We do not believe we have engaged in any transaction or arrangement with an unconsolidated entity that is reasonably likely to materially affect liquidity. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Tabular Disclosure of Contractual Obligations The following table reflects a summary of obligations and commitments outstanding including both the principal and interest portions of long-term debt and capital lease obligations at September 30, 2006.
Payments Due By Period Less than More than 1 Year 1-3 Years 3-5 Years 5 Years Total (in millions) Contractual Cash Obligations: Long-term debt, with interest (1) $ 75.0 $ 149.0 $ 525.9 $ 587.6 $ 1,337.5 Capital lease obligations, with interest 3.2 1.5 — — 4.7 Medical claims 81.8 — — — 81.8 Operating leases 27.0 45.1 27.4 63.8 163.3 Estimated self-insurance liabilities 8.7 19.0 14.4 11.0 53.1 Purchase obligations 14.5 6.8 1.0 — 22.3 Subtotal $ 210.2 $ 221.4 $ 568.7 $ 662.4 $1,662.7
Amount of Commitment Expiration Per Period Less than More than 1 Year 1-3 Years 3-5 Years 5 Years Total (in millions) Other Commitments: Construction and improvement commitments $ 145.8 $ 12.8 $ — $ — $ 158.6 Guarantees of surety bonds 0.5 — — — 0.5 Letters of credit — — 38.9 — 38.9 Minimum revenue guarantees 10.7 9.8 7.5 — 28.0 Other commitments 3.9 2.4 0.1 — 6.4 Subtotal 160.9 25.0 46.5 — 232.4 Total obligations and commitments $ 371.1 $ 246.4 $ 615.2 $ 662.4 $1,895.1
(1) We used 7.0%, the weighted average interest rate incurred on our senior secured credit facility in fiscal 2006, as the assumed interest rate to be paid on amounts outstanding under the Term Facility which accrues actual interest at a variable rate. Actual interest will vary based on changes in interest rates.
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Seasonality The patient volumes and net revenue at our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.
RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Under SFAS 123(R), we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition method expected to be used is the prospective method. We will adopt SFAS 123(R) on October 1, 2006 and do not believe the adoption of the new standard will have a material effect on our financial condition or results of operations. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. We intend to follow the interpretive guidance set forth in SAB 107 during our adoption of SFAS 123(R). In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of all tax positions accounted for in accordance with SFAS 109. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted in certain circumstances. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings or other appropriate components of equity for that fiscal year. We have not yet determined the potential financial impact of applying FIN 48.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. We have in place $675.0 million of senior secured credit facilities bearing interest at variable rates at specified margins above either the agent bank’s alternate base rate or its LIBOR rate. The senior secured credit facilities consist of the Term Facility, which is a $425.0 million, seven-year Tranche B term loan, and the Revolving Facility, which is a $250.0 million, six-year revolving credit facility. Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations or cash flow would not be material. At September 30, 2006, we had variable rate debt of approximately $415.4 million. Holding other variables constant, including levels of indebtedness, a 1.25% increase in interest rates would have had an estimated impact on pre-tax earnings and cash flows for the next twelve month period of $519,000. We have not taken any action to cover interest rate risk and are not a party to any interest rate market risk management activities.
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The Term Facility bears interest at a rate equal to LIBOR plus 2.25% per annum or, at our option, the base rate plus 1.25% per annum, and will mature in 2011. Loans under the Revolving Facility bear interest at a rate equal to the LIBOR rate, plus a margin of 2.00% to 2.50% or, at our option, the base rate, plus a margin of 1.00% to 1.50%, such rate in each case depending on our current leverage ratios. The Revolving Facility matures in 2010. No amounts were outstanding under the Revolving Facility at September 30, 2006. We have $475.0 million in senior subordinated notes due December 15, 2014, with interest payable semi-annually at the rate of 8 3/4% per annum. At September 30, 2006, the fair market value of the outstanding notes was $460.8 million, based upon quoted market prices as of that date.
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Item 8. Financial Statements and Supplementary Data
IASIS Healthcare LLC Index to Consolidated Financial Statements
Page Report of Independent Registered Public Accounting Firm 67
Consolidated Balance Sheets at September 30, 2006 and 2005 68
Consolidated Statements of Operations for the Years ended September 30, 2006 and 2005 and the periods June 23, 2004 to September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor) 69
Consolidated Statements of Equity for the Years ended September 30, 2006 and 2005 and the periods June 23, 2004 to September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor) 70
Consolidated Statements of Cash Flows for the Years ended September 30, 2006 and 2005 and the periods June 23, 2004 to September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor) 71
Notes to Consolidated Financial Statements 73
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Report of Independent Registered Public Accounting Firm To the Board of Directors of IASIS Healthcare Corporation, sole member of IASIS Healthcare LLC We have audited the accompanying consolidated balance sheets of IASIS Healthcare LLC as of September 30, 2006 and September 30, 2005 and the related consolidated statements of operations, equity and cash flows for the years ended September 30, 2006 and 2005, and the period from June 23, 2004 to September 30, 2004 (Successor) and the related consolidated statements of operations, shareholders’ equity and cash flows for the period from October 1, 2003 to June 22, 2004 (Predecessor). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IASIS Healthcare LLC at September 30, 2006 and September 30, 2005, and the consolidated results of their operations and their cash flows for the years ended September 30, 2006 and 2005, and for the period from June 23, 2004 to September 30, 2004 (Successor) and the consolidated results of their operations and their cash flows for the period from October 1, 2003 to June 22, 2004 (Predecessor) in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP Nashville, Tennessee November 13, 2006
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IASIS HEALTHCARE LLC CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, September 30, 2006 2005 ASSETS Current assets: Cash and cash equivalents $ 95,415 $ 89,097 Accounts receivable, less allowance for doubtful accounts of $109,900 and $103,600 at September 30, 2006 and 2005, respectively 182,452 166,456 Inventories 34,299 29,866 Deferred income taxes 41,416 56,003 Prepaid expenses and other current assets 41,841 25,236 Total current assets 395,423 366,658
Property and equipment, net 727,048 647,596 Goodwill 756,479 754,375 Other intangible assets, net 39,000 42,000 Other assets, net 49,885 42,095 Total assets $1,967,835 $ 1,852,724
LIABILITIES AND EQUITY
Current liabilities: Accounts payable $ 73,351 $ 58,684 Salaries and benefits payable 29,082 24,887 Accrued interest payable 19,965 18,489 Medical claims payable 81,822 60,201 Other accrued expenses and other current liabilities 49,087 30,550 Current portion of long-term debt and capital lease obligations 7,432 7,757 Total current liabilities 260,739 200,568
Long-term debt and capital lease obligations 889,513 897,051 Deferred income taxes 81,179 74,883 Other long-term liabilities 47,611 36,801 Minority interest 32,297 26,474
Equity: Member’s equity 656,496 616,947 Total liabilities and equity $1,967,835 $ 1,852,724
See accompanying notes.
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IASIS HEALTHCARE LLC CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
Predecessor June 23, 2004 Year Ended Year Ended through October 1, September 30, September 30, September 30, 2003 through 2006 2005 2004 June 22, 2004 Net revenue: Acute care revenue $ 1,219,474 $ 1,170,483 $ 301,305 $ 794,887 Premium revenue 406,522 353,244 88,169 202,273 Total net revenue 1,625,996 1,523,727 389,474 997,160
Costs and expenses: Salaries and benefits 470,171 442,173 115,538 308,881 Supplies 187,799 184,875 46,580 129,665 Medical claims 343,660 302,204 74,051 168,338 Other operating expenses 246,325 211,698 57,346 145,648 Provision for bad debts 141,774 133,870 39,486 87,466 Rentals and leases 34,956 32,750 8,840 23,158 Interest expense, net 69,687 66,002 17,459 41,935 Depreciation and amortization 71,925 71,037 19,856 48,228 Management fees 4,189 3,791 746 — Hurricane-related expenses — 4,762 — — Business interruption insurance recoveries (8,974) — — — Loss on early extinguishment of debt — — 232 51,852 Merger expenses — — — 19,750 Write-off of debt issue costs — — — 8,850 Total costs and expenses 1,561,512 1,453,162 380,134 1,033,771
Earnings (loss) before gain (loss) on disposal of assets, minority interests and income taxes 64,484 70,565 9,340 (36,611) Gain (loss) on disposal of assets, net 899 (231) (107) 3,731 Minority interests (3,546) (2,891) (1,207) (3,098)
Earnings (loss) before income taxes 61,837 67,443 8,026 (35,978) Income tax expense 22,288 26,851 3,321 1,152 Net earnings (loss) $ 39,549 $ 40,592 $ 4,705 $ (37,130)
See accompanying notes.
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IASIS HEALTHCARE LLC CONSOLIDATED STATEMENTS OF EQUITY (In thousands except share amounts)
Additional Common Stock Paid-In Treasury Accumulated Member’s Shares Par Value Capital Stock Deficit Equity Total Balance at September 30, 2003 (Predecessor) 31,956,113 $ 320 $ 450,720 $(155,300) $ (119,641) $ — $ 176,099 Net loss for the period October 1, 2003 to June 22, 2004 — — — — (37,130) — (37,130) Balance at June 22, 2004 (Predecessor) 31,956,113 320 450,720 (155,300) (156,771) — 138,969 Elimination of the Predecessor’s equity accounts as a result of the merger (31,956,113) (320) (450,720) 155,300 156,771 — (138,969) Initial equity in IASIS Healthcare LLC — — — — — 544,000 544,000 Rollover equity investment — — — — — 40,000 40,000 Sponsor fees — — — — — (15,000) (15,000) Net earnings for the period June 23, 2004 to September 30, 2004 — — — — — 4,705 4,705 Balance at September 30, 2004 — — — — — 573,705 573,705 Purchase price consideration for vested rollover options — — — — — 2,650 2,650 Net earnings — — — — — 40,592 40,592 Balance at September 30, 2005 — — — — — 616,947 616,947 Net earnings — — — — — 39,549 39,549 Balance at September 30, 2006 — $ — $ — $ — $ — $656,496 $ 656,496
See accompanying notes.
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IASIS HEALTHCARE LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Predecessor June 23, 2004 Year Ended Year Ended through October 1, 2003 September 30, September 30, September 30, through 2006 2005 2004 June 22, 2004 Cash flows from operating activities: Net earnings (loss) $ 39,549 $ 40,592 $ 4,705 $ (37,130) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 71,925 71,037 19,856 48,228 Amortization of loan costs 2,960 5,789 1,792 2,262 Minority interests 3,546 2,891 1,207 3,098 Deferred income taxes 21,002 25,600 3,234 — Loss (gain) on disposal of assets (899) 231 107 (3,731) Hurricane-related expenses — 4,762 — — Loss on early extinguishment of debt — — — 14,993 Write-off of debt issue costs — — — 8,850 Changes in operating assets and liabilities, net of acquisition and disposal: Accounts receivable (15,996) (1,176) 8,722 (8,542) Establishment of accounts receivable of recent acquisition — — — (11,325) Inventories, prepaid expenses and other current assets (16,566) (7,556) (1,581) (5,656) Accounts payable and other accrued liabilities 51,623 6,983 25,978 6,991 Net cash provided by operating activities 157,144 149,153 64,020 18,038
Cash flows from investing activities: Purchases of property and equipment (146,928) (142,368) (44,806) (82,265) Acquisitions including working capital settlement payments — (1,359) (1,950) (23,032) Investment in joint venture — (3,732) — — Proceeds from sale of assets 147 — — 14,928 Change in other assets 598 (4,275) 797 (1,650) Net cash used in investing activities (146,183) (151,734) (45,959) (92,019)
Cash flows from financing activities: Payment of debt and capital leases (7,863) (10,849) (1,852) (651,371) Proceeds from borrowings — 2,274 — 900,000 Debt financing costs incurred — (487) (349) (31,469) Distribution of minority interests (2,507) (4,092) (983) (2,510) Proceeds received from (costs paid for) sale of partnership interests 5,727 6,027 (15) 1,784 Proceeds from issuance of common stock, net — — — 529,000 Cash paid to security holders — — — (677,780) Payment of merger costs incurred by members of IASIS Investment LLC — — — (10,800) Net cash provided by (used in) financing activities (4,643) (7,127) (3,199) 56,854
Increase (decrease) in cash and cash equivalents 6,318 (9,708) 14,862 (17,127) Cash and cash equivalents at beginning of period 89,097 98,805 83,943 101,070 Cash and cash equivalents at end of period $ 95,415 $ 89,097 $ 98,805 $ 83,943
Supplemental disclosure of cash flow information: Cash paid for interest $ 72,271 $ 61,363 $ 3,285 $ 62,069 Cash paid (refund received) for income taxes, net $ 1,082 $ 2,421 $ (3) $ (105)
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IASIS HEALTHCARE LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands)
Predecessor June 23, 2004 Year Ended Year Ended through October 1, 2003 September 30, September 30, September 30, through 2006 2005 2004 June 22, 2004 Supplemental schedule of noncash investing and financing activities: Capital lease obligations incurred to acquire equipment $ — $ — $ — $ 1,542 Property and equipment in accounts payable $ 14,546 $ 7,449 $ 11,006 $ 13,165 Stock consideration received $ — $ — $ — $ 40,000
See accompanying notes.
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1. ORGANIZATION AND BASIS OF PRESENTATION On June 22, 2004, an investor group led by Texas Pacific Group (“TPG”) acquired IASIS Healthcare Corporation (“IAS” or the “Predecessor”) through a merger (the “Merger”). In order to consummate the Merger, the investor group established IASIS Investment LLC, a Delaware limited liability company (“IASIS Investment”), and capitalized it with cash and shares of IAS’s common stock. The initial capital contributed by the investor group was contributed by IASIS Investment to a wholly owned subsidiary of IASIS Investment, which merged with and into IAS. In the Merger, IAS issued shares of common and preferred stock to IASIS Investment, which became the sole stockholder of IAS after giving effect to the Merger. Prior to the Merger, IAS contributed substantially all of its assets and liabilities to IASIS Healthcare LLC, a newly formed Delaware limited liability company (“IASIS”), in exchange for all of the equity interests in IASIS. As a result, IAS is a holding company and IAS’s operations are conducted by IASIS and its subsidiaries. References herein to the “Company” are to IASIS and its subsidiaries and, unless indicated otherwise or the context requires, include the Predecessor. For a discussion of the Merger and related financing transactions, see Notes 3 and 4 to these consolidated financial statements. The Merger, the related financing transactions and the use of the proceeds from the financing transactions are referred to herein as the “Transactions.” The accompanying consolidated financial statements as of and for the period ended June 22, 2004 reflect the financial position, results of operations and cash flows of the Predecessor. The consolidated financial statements as of the dates and for the periods after June 22, 2004, reflect the financial position, results of operations and cash flows of IASIS. IASIS owns and operates medium-sized acute care hospitals in high-growth urban and suburban markets. At September 30, 2006, the Company owned or leased 14 acute care hospitals and one behavioral health hospital, with a total of 2,206 beds in service, located in five regions: • Salt Lake City, Utah;
• Phoenix, Arizona;
• Tampa-St. Petersburg, Florida;
• three cities in Texas, including San Antonio; and
• Las Vegas, Nevada. On April 16, 2005, the Company opened a new hospital, The Medical Center of Southeast Texas, in Port Arthur, Texas. All of the operations of Mid- Jefferson Hospital in Nederland, Texas, and Park Place Medical Center in Port Arthur, Texas, have moved to the new hospital. The Company is currently constructing Mountain Vista Medical Center, a new 172-bed hospital located in Mesa, Arizona. The total cost to build and equip is estimated at $170.0 to $180.0 million. The Company currently plans to open the new hospital on June 1, 2007. The Company also owns and operates a Medicaid and Medicare managed health plan in Phoenix called Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), serving over 114,700 members at September 30, 2006. The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying audited consolidated financial statements and notes. Actual results could differ from those estimates. The consolidated financial statements include all subsidiaries and entities under common control of the Company. Control is generally defined by the Company as ownership of a majority of the voting interest of an entity. In addition, control is demonstrated in instances when the Company is the sole general partner in a limited partnership. Significant intercompany transactions have been eliminated.
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 the IASIS corporate office costs, which were $43.4 million, $41.1 million, $7.4 million and $25.2 million, respectively, for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004.
2. SIGNIFICANT ACCOUNTING POLICIES Net Revenue Acute Care Revenue The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. During the third quarter of fiscal 2006, the Company implemented a company-wide uninsured discount program offering discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care. Since implementing the program, the Company has provided uninsured discounts totaling $20.3 million for the year ended September 30, 2006. These discounts to the uninsured had the effect of reducing acute care revenue and the provision for bad debts by generally corresponding amounts. Net patient revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. Net adjustments to estimated third-party payor settlements (“prior year contractuals”) resulted in an increase in net revenue of $433,000, $2.1 million and $38,000, for the years ended September 30, 2006 and 2005 and for the period ended September 30, 2004, respectively; and a decrease in net revenue of $1.1 million for the period ended June 22, 2004. In the ordinary course of business, the Company provides care without charge to patients who are financially unable to pay for the healthcare services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported in net revenue. The Company currently records revenue deductions for patient accounts that meet its guidelines for charity care. The Company has traditionally provided charity care to patients with income levels below 200% of the federal property level and will continue this practice. In fiscal year 2005, the Company expanded its charity care policy to cover uninsured patients with incomes above 200% of the federal poverty level. Under the expanded program, a sliding scale of reduced rates is offered to uninsured patients, who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the federal poverty level at all of the Company’s hospitals. Charity care deductions for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, were $36.7 million, $30.2 million, $7.0 million and $15.3 million, respectively.
Premium Revenue Health Choice is a prepaid Medicaid and Medicare managed health plan that derives most of its revenue through a contract with the Arizona Health Care Cost Containment System (“AHCCCS”) to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program. The contract requires the Plan to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services. Health Choice’s contract with AHCCCS expires September 30, 2007. The contract provides AHCCCS with a one-year renewal option and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fail to take corrective action as required to
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS comply with the terms of the contract. Additionally, AHCCCS can terminate the contract in the event of the unavailability of state or federal funding. On October 19, 2005, the Centers for Medicare and Medicaid Services (“CMS”) awarded Health Choice a contract to become a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”). Effective January 1, 2006, Health Choice began providing coverage as a MAPD SNP provider pursuant to the contract with CMS. The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members, or those that are eligible for Medicare and Medicaid. The contract with CMS, which expires on December 31, 2006, has been renewed for calendar 2007 and includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. The Plan subcontracts with hospitals, physicians and other medical providers within Arizona and surrounding states to provide services to its Medicaid enrollees in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties, and to its Medicare enrollees in Maricopa, Pima, Pinal, Coconino, Apache and Navajo counties. These services are provided regardless of the actual costs incurred to provide these services. The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in excess of stated levels of up to $35,000 per claim ($50,000 per claim beginning October 1, 2006), depending on the eligibility classification of the member. Qualified costs must be incurred during the contract year and are the lesser of the amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract, including estimates of such costs at the end of each accounting period.
Cash and Cash Equivalents The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents balances primarily with high credit quality financial institutions. The Company manages its credit exposure by placing its investments in high quality securities and by periodically evaluating the relative credit standing of the financial institution.
Accounts Receivable The Company receives payments for services rendered from federal and state agencies (under the Medicare, Medicaid and TRICARE programs), managed care health plans, commercial insurance companies, employers and patients. During the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, approximately 38.7%, 39.7%, 42.0% and 39.0%, respectively, of the Company’s net patient revenue related to patients participating in the Medicare and Medicaid programs. The Company recognizes that revenue and receivables from government agencies are significant to its operations, but does not believe that there is significant credit risks associated with these government agencies. The Company believes that concentration of credit risk from other payors is limited due to the number of patients and payors. Net Medicare settlements estimated at September 30, 2006 and 2005 are included in accounts receivable in the accompanying consolidated balance sheets as a payable of $1.5 million and a receivable of $3.5 million, respectively.
Allowance for Doubtful Accounts The Company’s estimation of the allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of the Company’s collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors its accounts receivable balances and the effectiveness of the Company’s reserve policies on a monthly basis and reviews various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following: • Revenue and volume trends by payor, particularly the self-pay components;
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;
• Historical write-off and collection experience using a hindsight or look-back approach;
• Cash collections as a percentage of net patient revenue less bad debt expense;
• Trending of days revenue in accounts receivable; and
• Various allowance coverage statistics. In addition, the Company regularly performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of its process for estimating the allowance for doubtful accounts. Due to the implementation of its uninsured discount program, the Company has modified the methodology used in this analytical tool to account for the impact of these uninsured discounts on its accounts receivable.
Inventories Inventories, principally medical supplies, implants and pharmaceuticals, are stated at the lower of average cost or market.
Long-lived Assets The primary components of the Company’s long-lived assets are discussed below. When events, circumstances or operating results indicate that the carrying values of certain long-lived assets and related identifiable intangible assets (excluding goodwill) that are expected to be held and used might be impaired, the Company considers the recoverability of assets to be held and used by comparing the carrying amount of the assets to the undiscounted value of future net cash flows expected to be generated by the assets. If assets are identified as impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets as determined by independent appraisals or estimates of discounted future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Property and Equipment Property and equipment are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. Depreciation expense, including amortization of assets capitalized under capital leases, is computed using the straight-line method and was $68.9 million, $68.0 million, $19.9 million and $48.2 million for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, respectively. Buildings and improvements are depreciated over estimated useful lives ranging generally from 14 to 40 years. Estimated useful lives of equipment vary generally from 3 to 25 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the respective leases or their estimated useful lives. The Company capitalized interest associated with construction projects totaling $2.8 million, $3.9 million, $800,000 and $1.5 million, respectively, for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004.
Goodwill and Other Intangible Assets During the year ended September 30, 2005, the Company completed the allocation of the Merger purchase price. See Note 7 for the resulting values of goodwill and other intangible assets assigned to each business segment. Other intangible assets consists solely of Health Choice’s contract with AHCCCS, which is amortized over a period of 15 years, the contract’s estimated useful life, including assumed renewal periods. Intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Goodwill is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate they may be impaired. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company completed its annual impairment test of goodwill during fiscal 2006 noting no impairment.
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Other Assets Other assets consist primarily of costs associated with the issuance of debt, which are amortized over the life of the related debt, and costs to recruit physicians to the Company’s markets, which are deferred and amortized over the term of expected benefit received from the respective physician recruitment agreement. Amortization of deferred financing costs is included in interest expense and equaled $3.0 million, $5.8 million, $1.8 million and $2.3 million, respectively, for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004. Deferred financing costs, net of accumulated amortization, equaled $20.7 million and $23.7 million at September 30, 2006 and 2005, respectively. Amortization of physician recruiting costs is included in other operating expenses and equaled $7.3 million, $5.3 million, $1.9 million and $4.4 million for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, respectively. Net physician recruiting costs at September 30, 2006 and 2005, equaled $12.7 million and $9.1 million, respectively. See Note 8 for more discussion related to costs incurred to recruit physicians.
Insurance Reserves The Company estimates its reserve for self-insured professional and general liability and workers compensation risks using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis.
Income Taxes The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply when the temporary differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income to determine whether a valuation allowance should be established.
Minority Interest in Consolidated Entities The consolidated financial statements include all assets, liabilities, revenue and expenses of less than 100% owned entities controlled by the Company. Accordingly, management has recorded minority interests in the earnings and equity of such consolidated entities.
Medical Claims Payable Monthly capitation payments made by Health Choice to physicians and other healthcare providers are expensed in the month services are contracted to be performed. Claims expense for non-capitated arrangements is accrued as services are rendered by hospitals, physicians and other healthcare providers during the year. Medical claims payable related to Health Choice include claims received but not paid and an estimate of claims incurred but not reported. Incurred but not reported claims are estimated using a combination of historical claims experience (including severity and payment lag time) and other actuarial analysis, including number of enrollees, age of enrollees and certain enrollee health indicators, to predict the cost of healthcare services provided to enrollees during any given period. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from estimates given changes in the healthcare cost structure or adverse experience. The following table shows the components of the change in medical claims payable for the years ended September 30, 2006, 2005 and 2004, respectively (in thousands):
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Year Ended Year Ended Year Ended September 30, September 30, September 30, 2006 2005 2004 Medical claims payable as of October 1 $ 60,201 $ 55,421 $ 25,767 Medical claims expense incurred during the year: Related to current year 362,636 308,157 250,251 Related to prior years (8,119) 2,522 2,959 Total expenses 354,517 310,679 253,210 Medical claims payments during the year: Related to current year (282,326) (248,841) (195,621) Related to prior years (50,570) (57,058) (27,935) Total payments (332,896) (305,899) (223,556) Medical claims payable as of September 30 $ 81,822 $ 60,201 $ 55,421
Stock Based Compensation Although IASIS has no stock option plan or outstanding stock options, the Company, through its parent, IAS, grants stock options for a fixed number of common shares to employees. Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensate plans at fair value. The Company has chosen to account for employee stock option grants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly, recognizes no compensation expense for the stock option grants when the exercise price of the options equals, or is greater than, the market value of the underlying stock on the date of grant. If the Company had measured compensation cost for the stock options granted under the fair value based method prescribed by SFAS 123, net earnings (loss) would have been changed to the pro forma amounts set forth below (in thousands):
Predecessor June 23, 2004 Year Ended Year Ended through October 1, 2003 September 30, September 30, September 30, through June 22, 2006 2005 2004 2004 Net earnings (loss) As reported $ 39,549 $ 40,592 $ 4,705 $ (37,130) Pro forma $ 38,189 $ 39,434 $ 4,441 $ (38,227) The effect of applying SFAS 123 for providing pro forma disclosure is not likely to be representative of the effect on reported net earnings for future years.
Fair Value of Financial Instruments Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s long-term bank facility debt and capital lease obligations also approximate carrying value as they bear interest at current market rates. The estimated fair value of the Company’s 8 3/4% senior subordinated notes was approximately $460.8 million at September 30, 2006. The estimated fair values of the 8 3/4% senior subordinated notes at September 30, 2006 are based upon quoted market prices at that date.
Management Services Agreement Upon the consummation of the Transactions, the Company entered into a management services agreement with TPG GenPar III, L.P., TPG GenPar IV, L.P., both affiliates of TPG, JLL Partners Inc. and Trimaran Fund Management, L.L.C. under which we paid those parties a transaction fee equal to $15.0 million in the aggregate. The management services agreement provides that in exchange for consulting and management advisory services that will be provided to us by the investors, the Company will pay an aggregate monitoring fee of 0.25% of budgeted net revenue up to a maximum
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of $5.0 million per fiscal year to these parties (or certain of their respective affiliates) and reimburse them for their reasonable disbursements and out-of-pocket expenses. This monitoring fee is divided among the parties in proportion to their relative ownership percentages in IASIS Investment. The monitoring fee will be subordinated to the senior subordinated notes in the event of a bankruptcy of the company. The management services agreement does not have a stated term. Pursuant to the provisions of the management services agreement, the Company has agreed to indemnify the investors (or certain of their respective affiliates) in certain situations arising from or relating to the agreement, the investors’ investment in the securities of IAS or any related transactions or the operations of the investors, except for losses that arise on account of the investors’ negligence or willful misconduct. For the years ended September 30, 2006 and 2005 and the period from June 23, 2004 through September 30, 2004, the Company paid $4.2 million, $3.8 million and $746,000, respectively, in monitoring fees under the management services agreement.
Reclassifications Certain prior period amounts have been reclassified to conform to current period presentation. Such reclassifications had no material effect on the financial position and results of operations as previously reported.
Recently Issued Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Under SFAS 123(R), the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition method expected to be used is the prospective method. The Company will adopt SFAS 123(R) on October 1, 2006. Management does not believe the adoption of the new standard will have a material effect on the Company’s financial condition or results of operations. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company intends to follow the interpretive guidance set forth in SAB 107 during its adoption of SFAS 123(R). In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of all tax positions accounted for in accordance with SFAS 109. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted in certain circumstances. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings or other appropriate components of equity for that fiscal year. The Company has not yet determined the potential financial impact of applying FIN 48.
3. THE TRANSACTIONS The Merger Pursuant to the Merger Agreement, an investor group led by TPG acquired IAS on June 22, 2004. In the Merger, IAS’s security holders received, in the aggregate, $738.0 million less the amount of certain expenses and
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS other adjustments. In addition, approximately $647.6 million of existing indebtedness was refinanced in connection with the Merger. The total transaction value, including tender premiums, consent fees and other fees and expenses, was approximately $1.5 billion. In order to consummate the Merger, the investor group established IASIS Investment and capitalized it with $544.0 million in cash and a contribution of shares of IAS’s common stock valued at $40.0 million. The cash contributed by the investor group was contributed by IASIS Investment to a wholly owned subsidiary of IASIS Investment, which merged with and into IAS. Prior to the Merger, IAS contributed substantially all of its assets and liabilities to IASIS in exchange for all of the equity interests in IASIS. As a result, IAS is a holding company, IASIS is a wholly-owned subsidiary of IAS, and IAS’s operations are conducted by IASIS. The following capitalization and financing transactions occurred in connection with the Merger: • a cash investment made by the investor group totaling $544.0 million in cash;
• a contribution of shares of IAS common stock of $40.0 million;
• the execution of an amended and restated credit agreement governing new senior secured credit facilities providing for a $425.0 million term loan, drawn at closing, and a $250.0 million revolving credit facility for working capital and general corporate purposes, which was not drawn at closing as discussed below; and
• the issuance and sale of $475.0 million in aggregate principal amount of the 8 3/4% notes, as discussed below. The proceeds from the financing transactions were used to: • pay all amounts due to the security holders of IAS under the terms of the Merger Agreement;
• repay all outstanding indebtedness under IAS’s existing senior secured credit facilities;
• repurchase IAS’s 13% notes and 8 1/2% notes, as discussed below, and pay the related tender premiums and consent fees, pursuant to a tender offer and consent solicitation by IAS; and
• pay the fees and expenses related to the Merger and the related financing transactions. In connection with the Transactions, the Company incurred a loss on early extinguishment of debt of $51.9 million, which includes tender premiums and consent fees totaling $36.9 million and the write-off of deferred financing costs of $15.0 million. In addition, the Company incurred $19.8 million in merger related expenses, which include legal and advisory costs and special bonus compensation to management of IAS. The Company also paid a sponsor fee of $15.0 million to the investor group, which was recorded as a reduction of the equity investment received from them.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following (in thousands):
September 30, September 30, 2006 2005 Senior secured credit facilities $ 415,438 $ 419,688 Senior subordinated notes 475,000 475,000 Capital leases and other obligations 6,507 10,120 896,945 904,808
Less current maturities 7,432 7,757 $ 889,513 $ 897,051
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Senior Secured Credit Facilities As part of the Transactions, the Company entered into an amended and restated senior credit agreement with various lenders and Bank of America, N.A., as administrative agent, and repaid all outstanding indebtedness under IAS’s existing bank credit facility. The senior secured credit facilities consist of a senior secured term loan of $425.0 million (the “Term Facility”) and a senior secured revolving credit facility of $250.0 million (the “Revolving Facility”). The Term Facility has a maturity of seven years, with principal due in 24 consecutive equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Facility during the first six years thereof, with the balance payable in four equal installments in year seven. Unless terminated earlier, the Revolving Facility has a single maturity of six years. The senior secured credit facilities are also subject to mandatory prepayment under specific circumstances, including a portion of excess cash flow, a portion of the net proceeds from an initial public offering, asset sales, debt issuances and specified casualty events, each subject to various exceptions. The term loans under the Term Facility bear interest at a rate equal to LIBOR plus 2.25% per annum or, at the Company’s option, the base rate plus 1.25% per annum. Loans under the Revolving Facility bear interest at a rate equal to LIBOR plus a margin of 2.00% to 2.50% per annum or, at the Company’s option, the base rate plus a margin of 1.00% to 1.50% per annum, such rate in each case depending on the Company’s current leverage ratios. A commitment fee equal to 0.50% per annum times the daily average undrawn portion of the Revolving Facility will accrue and will be payable quarterly in arrears. All of the obligations under the senior secured credit facilities are guaranteed by IAS and the Company’s existing and subsequently acquired or organized domestic subsidiaries (except Health Choice and Biltmore Surgery Center Limited Partnership). The senior secured credit facilities are secured by first priority security interests in substantially all assets of the Company and the guarantors thereunder. In addition, the senior secured credit facilities are secured by a first priority security interest in 100% of the common interests of the Company and 100% of the capital stock of each of the Company’s present and future domestic subsidiaries to the extent owned by the Company or a guarantor, and all intercompany debt owed to the Company or any guarantor. The senior secured credit facilities contain a number of covenants that, among other things, limit the Company’s ability and the ability of its subsidiaries to (i) dispose of assets; (ii) incur additional indebtedness; (iii) incur guarantee obligations; (iv) repay other indebtedness; (v) pay certain restricted payments and dividends; (vi) create liens on assets or prohibit liens securing the senior secured credit facilities; (vii) make investments, loans or advances; (viii) restrict distributions to the Company; (ix) make certain acquisitions; (x) engage in mergers or consolidations; (xi) enter into sale and leaseback transactions; (xii) engage in certain transactions with subsidiaries and affiliates; or (xiii) amend the terms of the 8 3/4% notes, and otherwise restrict corporate activities. In addition, under the senior secured credit facilities, the Company is required to comply with specified financial ratios and tests, including, but not limited to, a minimum interest coverage ratio, a maximum leverage ratio and maximum capital expenditures. At September 30, 2006, $415.4 million was outstanding under the Term Facility loan and no amounts were outstanding under the Revolving Facility. The Revolving Facility includes a $75.0 million sublimit for letters of credit that may be issued. At September 30, 2006, the Company had $38.9 million in letters of credit outstanding. The weighted average interest rate of outstanding borrowings under the Term Facility was approximately 7.0% and 5.0% for the years ended September 30, 2006 and 2005, respectively.
13% Senior Subordinated Notes and 8 1/2% Senior Subordinated Notes On October 13, 1999, IAS issued $230.0 million of 13% senior subordinated notes due 2009. On May 25, 2000, IAS exchanged all of its outstanding 13% senior subordinated notes due 2009 for 13% senior subordinated exchange notes due 2009 registered under the Securities Act of 1933, as amended (the “13% notes”).
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On June 6, 2003, IAS issued $100.0 million of 8 1/2% senior subordinated notes due 2009. On August 14, 2003, IAS exchanged all of its outstanding 8 1/2% senior subordinated notes due 2009 for 8 1/2% senior subordinated notes due 2009 registered under the Securities Act (the “8 1/2% notes”). In connection with the Transactions, on May 6, 2004, IAS commenced a cash tender offer to purchase any and all of the 13% notes and the 8 1/2% notes. IAS also commenced a solicitation of consents to proposed amendments to the indentures governing the notes that would amend or eliminate substantially all of the restrictive covenants contained in the indentures. As of the consent payment deadline, holders of approximately 98.5% of the outstanding principal amount of the 13% notes and 100% of the outstanding principal amount of the 8 1/2% notes had tendered their notes and consented to the applicable proposed amendments. The remaining $3.5 million of the 13% notes were retired in October 2004.
8 3/4% Senior Subordinated Notes In connection with the Transactions, on June 22, 2004, the Company and IASIS Capital Corporation, a wholly owned subsidiary of IASIS formed solely for the purpose of serving as a co-issuer (“IASIS Capital”) (IASIS and IASIS Capital referred to collectively as the “Issuers”), issued $475.0 million aggregate principal amount of 8 3/4% senior subordinated notes due 2014. On December 15, 2004, the Issuers exchanged all of their outstanding 8 3/4% senior subordinated notes due 2014 for 8 3/4% senior subordinated notes due 2014 registered under the Securities Act (the “8 3/4% notes”). Terms and conditions of the exchange offer were as set forth in the registration statement on Form S-4 filed with the SEC that became effective on November 12, 2004. The 8 3/4% notes are general unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future senior debt of the Company. The Company’s existing domestic subsidiaries, other than certain non-guarantor subsidiaries which include Health Choice and the Company’s non-wholly owned subsidiaries, are guarantors of the 8 3/4% notes. The 8 3/4% notes are effectively subordinated to all of the Issuers’ and the guarantors’ secured debt to the extent of the value of the assets securing the debt and are structurally subordinated to all liabilities and commitments (including trade payables and lease obligations) of the Company’s subsidiaries that are not guarantors of the 8 3/4% notes. Maturities of long-term debt, excluding capital lease obligations, at September 30, 2006 are as follows (in thousands):
2007 $ 4,435 2008 4,435 2009 4,402 2010 104,604 2011 299,625 Thereafter 475,000 $ 892,501
5. ACQUISITIONS Definitive Agreement to Acquire Glenwood Regional Medical Center On July 21, 2006, the Company announced the signing of a definitive agreement to acquire Glenwood Regional Medical Center located in West Monroe, Louisiana. The purchase price for the hospital is approximately $82.5 million, subject to net working capital and other purchase price adjustments. Additionally, the Company plans to make capital expenditures on the hospital campus of approximately $30.0 million over the next four years. The Company expects the acquisition to close during the first calendar quarter of 2007, subject to the approval of the Louisiana Attorney General and the satisfaction of other closing conditions.
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Acquisition of IASIS Healthcare Corporation As previously discussed in Note 3, an investor group led by TPG acquired IAS through the Merger on June 22, 2004. The Merger was accounted for as a purchase in accordance with SFAS No. 141, Business Combinations. During the year ended September 30, 2005, the Company completed the allocation of the Merger purchase price, resulting in the recognition of $512.0 million of additional goodwill, $45.0 million of other intangible assets and changes in the carrying value of property and equipment. The purchase price allocation was based on estimates of the fair value of the assets acquired and liabilities assumed as determined by an independent appraiser. The purchase price for IAS, including direct transaction costs, was $1.5 billion and has been allocated as reflected in the table below. Goodwill resulting from the purchase price allocation did not result in additional deductible goodwill for tax purposes. The following table summarizes the purchase price allocation to reflect the fair values of the net assets acquired and liabilities assumed at the date of acquisition (in thousands):
Current assets, net $ 122,843 Property and equipment 547,462 Non-current assets, net 6,231 Goodwill (see Note 7) 764,328 Other intangible assets (see Note 7) 45,000 Total net assets acquired $1,485,864
Acquisition of North Vista Hospital Effective as of February 1, 2004, the Predecessor, through a wholly-owned subsidiary, acquired substantially all of the assets of North Vista Hospital in Las Vegas, Nevada (“North Vista”). The Predecessor acquired the 198-bed hospital from a subsidiary of Tenet Healthcare Corporation (“Tenet”). The net consideration paid, after working capital adjustments and including direct transaction costs was $25.0 million, which was funded with cash on hand. The Tenet subsidiary retained the accounts receivable related to the operation of the hospital prior to the acquisition. In addition, the Tenet subsidiary agreed to indemnify the purchaser for all liabilities related to the operation of the hospital prior to closing, other than the assumed liabilities. The subsidiary’s indemnification obligations are guaranteed by Tenet. The results of the operations of North Vista are included in the accompanying consolidated statements of operations from the effective date of the acquisition.
6. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
September 30, September 30, 2006 2005 Land $ 97,951 $ 98,068 Buildings and improvements 388,200 363,986 Equipment 312,945 262,185 799,096 724,239 Less accumulated depreciation and amortization (168,725) (102,478) 630,371 621,761
Construction-in-progress (estimated cost to complete at September 30, 2006 - $158.6 million) 96,677 25,835 $ 727,048 $ 647,596
Included in equipment are assets acquired under capital leases of $6.2 million and $8.5 million, net of accumulated amortization of $6.3 million and $3.5 million, at September 30, 2006 and 2005,
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS respectively. Cost to complete at September 30, 2006 of $158.6 million includes $100.0 to $105.0 million for Mountain Vista Medical Center, currently under construction in Mesa, Arizona.
7. GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents the changes in the carrying amount of goodwill from September 30, 2004 through September 30, 2006 (in thousands):
Acute Health Care Choice Total Balance at September 30, 2004 $ 252,204 $ — $ 252,204 Adjustments resulting from purchase price allocation of the Merger (Note 5) 506,367 5,757 512,124 Adjustments for change in deferred tax assets and liabilities existing at the date of the TPG Merger (9,953) — (9,953) Balance at September 30, 2005 748,618 5,757 754,375 Adjustment resulting from change in purchase price allocation 2,104 — 2,104 Balance at September 30, 2006 $ 750,722 $ 5,757 $756,479
Other intangible assets consist solely of Health Choice’s contract with AHCCCS, which is amortized over a period of 15 years, the contract’s estimated useful life, including assumed renewal periods. The gross intangible value originally assigned to the contract during the purchase price allocation related to the Transactions was $45.0 million. The Company expects amortization expense for these intangible assets, to approximate $3.0 million per year over the estimated life of the contract. Amortization of intangible assets is included in depreciation and amortization expense and equaled $3.0 million for the year ended September 30, 2006. Net other intangible assets included in the accompanying consolidated balance sheets at September 30, 2006 and 2005 equaled $39.0 million and $42.0 million, respectively.
8. MINIMUM REVENUE GUARANTEES In order to recruit and retain physicians to meet community needs and to provide specialty coverage necessary for full service hospitals, the Company has committed to certain arrangements in the form of minimum revenue guarantees with various physicians. Amounts advanced under recruiting agreements are generally forgiven pro rata over a period of 24 months, after one year of completed service. Forgiveness of these advances is contingent upon the physician continuing to practice in the respective community. In the event the physician does not fulfill his or her responsibility to maintain a practice in the respective community during the contract period, the physician agrees to repay all outstanding amounts advanced during the guarantee period and to sign a promissory note, with the physician’s accounts receivable serving as collateral for the amounts owed. Certain agreements to provide specialty coverage include provisions to guarantee a minimum monthly collections base over the term of the agreement and do not require repayment. On January 1, 2006, the Company adopted FASB Staff Position No. FIN 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners (“FIN 45-3”). FIN 45-3 requires that a liability for the estimated fair value of minimum revenue guarantees be recorded on new agreements entered into on or after January 1, 2006 and requires disclosure of the maximum amount that could be paid on all minimum revenue guarantees. The Company records an asset for the estimated fair value of the minimum revenue guarantees and amortizes the asset from the beginning of the guarantee payment period through the end of the agreement. At September 30, 2006, the Company had liabilities for the minimum revenue guarantees entered into on or after January 1, 2006 of $10.9 million. At September 30, 2006, the maximum amount of all minimum revenue guarantees that could be paid prospectively was $28.2 million. For recruiting agreements entered into prior to January 1, 2006, amounts advanced during the guarantee period are amortized to other operating expenses generally over the forgiveness period. At September 30, 2006, advances under recruiting agreements executed prior to January 1, 2006 was $8.2 million, net of accumulated amortization, and are included in other assets in the Company’s consolidated balance sheets. The asset related to
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS these recruiting agreements will continue to be amortized over the remaining forgiveness period, unless the physician does not fulfill his or her responsibility outlined in the agreement, at which point it will be pursued for collection.
9. MEMBER’S EQUITY AND STOCKHOLDERS’ EQUITY Common Interests of IASIS As of September 30, 2006, all of the common interests of IASIS were owned by IAS, its sole member. IASIS was formed as a wholly owned subsidiary of IAS in connection with the Transactions.
Shares of Common Stock of IAS As of June 22, 2004, immediately preceding the Merger, IAS had 31,956,113 shares of common stock outstanding. As discussed in Note 3, in connection with the Merger, holders of shares of common stock of IAS received cash proceeds totaling $655.4 million. Certain shareholders of IAS contributed 1.8 million shares of IAS common stock in connection with the Merger to IASIS Investment. Holders of IAS common stock options received cash proceeds totaling $21.9 million.
10. STOCK OPTIONS 2000 Stock Option Plan The Predecessor maintained the IASIS Healthcare Corporation 2000 Stock Option Plan (“2000 Stock Option Plan”). The maximum number of shares of common stock reserved for the grant of stock options under the 2000 Stock Option Plan was 7,208,940, subject to adjustment as provided for in the 2000 Stock Option Plan. As a condition to the exercise of an option, optionees agreed to be bound by the terms and conditions of a stockholders’ agreement among the Company, JLL and certain other stockholders, including restrictions on transferability contained therein. The options were exercisable over a period not to exceed five years after the date of grant, subject to earlier vesting provisions as provided for in the 2000 Stock Option Plan. Information regarding the Predecessor’s stock option activity for the periods indicated is summarized below:
Weighted Option Price Per Average Stock Options Share Exercise Price Balance at September 30, 2003 (Predecessor) 6,833,704 $9.52 –40.00 $ 24.33 Granted 133,856 $9.52 –40.00 $ 24.35 Exercised (1,792,193) $ 9.52 $ 9.52 Rolled over (299,900) $ 9.52 $ 9.52 Cancelled/Forfeited (4,875,467) $9.52 –40.00 $ 24.35 Balance at June 22, 2004 (Predecessor) —
In connection with the Merger, holders of Predecessor common stock options effectively exercised 1,792,193 of in-the-money options, receiving cash proceeds totaling $21.9 million, or $12.24 per share, calculated as the excess of the $21.76 per share Merger consideration over the option exercise price of $9.52. In addition, certain holders of 299,900 of in-the-money Predecessor common stock options (the “Rollover Options”) elected to rollover and convert such options into options to purchase an aggregate 3,263 shares of preferred stock, with an exercise price of $437.48 per share, and 163,152 shares of common stock, with an exercise price of $8.75 per share, of IAS. All remaining outstanding options of the Predecessor were cancelled upon consummation of the Merger.
2004 Stock Option Plan The IASIS Healthcare Corporation 2004 Stock Option Plan (the “2004 Stock Option Plan”) was established to promote the Company’s interests by providing additional incentives to its key employees, directors, service
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS providers and consultants. The options granted under the plan represent the right to purchase IAS common stock upon exercise. Each option shall be identified as either an incentive stock option or a non-qualified stock option. The plan was adopted by the board of directors and sole stockholder of IAS in connection with the Transactions. The maximum number of shares of IAS common stock that may be issued pursuant to options granted under the 2004 Stock Option Plan is 1,902,650; provided, however, that on each anniversary of the closing of the Transactions prior to an initial public offering, an additional 146,000 shares of common stock will be available for grant. The options become exercisable over a period not to exceed five years after the date of grant, subject to earlier vesting provisions as provided for in the 2004 Stock Option Plan. All options granted under the 2004 Stock Option Plan expire no later than 10 years from the respective dates of grant. At September 30, 2006, there were 307,165 options available for grant. Information regarding the Company’s stock option activity for the periods indicated is summarized below:
2004 Stock Option Plan Rollover Options Weighted Weighted Average Average Option Price Exercise Option Price Exercise Options Per Share Price Options Per Share Price Balance at June 23, 2004 — — — — — — Granted/Rolled over 1,105,750 $ 20.00 $ 20.00 166,413 $8.75 - $437.48 $ 17.16 Exercised — — — — — — Cancelled/Forfeited — — — — — — Balance at September 30, 2004 1,105,750 $ 20.00 $ 20.00 166,413 $8.75 - $437.48 $ 17.16 Granted 503,563 $ 20.00 $ 20.00 — — — Exercised — — — — — — Cancelled/Forfeited (98,550) $ 20.00 $ 20.00 — — — Balance at September 30, 2005 1,510,763 $ 20.00 $ 20.00 166,413 $8.75 - $437.48 $ 17.16 Granted 237,472 $ 35.68 $ 35.68 — — — Exercised — — — — — — Cancelled/Forfeited (152,750) $20.00 - $35.68 $ 20.61 — $8.75 - $437.48 $ 17.16 Balance at September 30, 2006 1,595,485 $20.00 - $35.68 $ 22.28 166,413 $8.75 - $437.48 $ 17.16
The following table summarizes information regarding the options outstanding and exercisable at September 30, 2006:
Options Outstanding Weighted- Number Average Options Outstanding Remaining Exercisable at Exercise at September 30, Contractual September 30, Price 2006 Life 2006 $ 8.75 163,152 4.5 163,152 $ 20.00 1,363,553 8.0 496,725 $ 35.68 231,932 9.5 — $437.48 3,263 4.5 3,263 1,761,900 663,140
The per share weighted-average fair value of stock options granted at an exercise price of $35.68 during the year ended September 30, 2006 was $11.12. The per share weighted-average fair value of stock options granted at an exercise price of $20.00 during the year ended September 30, 2005 and the period ended September 30, 2004 was $6.23. The per share weighted-average fair value of stock options granted at an exercise price of $9.52 during the period ended June 22, 2004 was $1.63 on the date of grant. All fair value amounts were determined using a minimum value option-pricing model based on the following assumptions:
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Predecessor June 23, 2004 Year Ended Year Ended through October 1, September 30, September 30, September 30, 2003 through 2006 2005 2004 June 22, 2004 Risk-free interest rate 4.64% 3.94% 4.24% 3.15% Expected life 8.1 years 9.5 years 9.8 years 6.0 years Expected dividend yield 0.0% 0.0% 0.0% 0.0%
11. INCOME TAXES Income tax expense on income from continuing operations consists of the following (in thousands):
Predecessor June 23, 2004 Year Ended Year Ended through October 1, September 30, September 30, September 30, 2003 through 2006 2005 2004 June 22, 2004 Current: Federal $ 1,095 $ 1,241 $ — $ (136) State 192 10 87 1,288 Deferred: Federal 19,718 21,168 2,700 — State 1,283 4,432 534 — $ 22,288 $ 26,851 $ 3,321 $ 1,152
A reconciliation of the federal statutory rate to the effective income tax rate applied to earnings (losses) before income taxes for the year ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004 is as follows (in thousands):
Predecessor June 23, 2004 Year Ended Year Ended through October 1, September 30, September 30, September 30, 2003 through 2006 2005 2004 June 22, 2004 Federal statutory rate $ 21,643 $ 23,605 $ 2,809 $ (12,592) State income taxes, net of federal income tax benefit 959 2,887 404 837 Other non-deductible expenses 681 385 78 4,417 Change in valuation allowance charged to federal tax provision — — — 8,097 Other items, net (995) (26) 30 393 Provision for income taxes $ 22,288 $ 26,851 $ 3,321 $ 1,152
A summary of the items comprising the deferred tax assets and liabilities at September 30, 2006 and 2005 is as follows (in thousands):
2006 2005 Assets Liabilities Assets Liabilities Depreciation and fixed asset basis differences $ — $ 52,991 $ — $ 58,020 Amortization and intangible asset basis differences — 47,802 — 39,701 Allowance for doubtful accounts 26,663 — 26,710 — Professional liability 14,331 — 13,102 — Accrued expenses and other liabilities 10,581 — 11,337 — Deductible carryforwards and credits 11,615 — 27,530 — Other, net 1,238 — 975 — Valuation allowance (3,398) — (813) — Total $ 61,030 $100,793 $ 78,841 $97,721
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net current deferred tax assets of $41.4 million and $56.0 million and net noncurrent deferred tax liabilities of $81.2 million and $74.9 million are included in the accompanying consolidated balance sheets at September 30, 2006 and 2005, respectively. The Company had a net income tax payable of $400,000 and $200,000 at September 30, 2006 and 2005, respectively, which is included in other current liabilities in the accompanying consolidated balance sheets. The Merger constituted a tax-free transaction to the Company; although the Merger was accounted for as a purchase for financial statement purposes (see Note 5). Whereas the purchase price allocation resulted in changes to the carrying values of assets and liabilities, the respective tax bases were not affected by the Merger. As a result, certain items of deferred tax assets and liabilities were adjusted. The Company maintains a valuation allowance for deferred tax assets it believes may not be utilized. The deferred tax assets offset by a valuation allowance on the merger date will result in an adjustment to goodwill if realized in the future. During the year ended September 30, 2005, the Company utilized approximately $6.7 million of net deferred tax assets previously reserved by a valuation allowance which resulted in a $6.7 million decrease to goodwill. During the year ended September 30, 2006, the Company created an additional valuation allowance of $2.6 million primarily related to state net operating losses. At September 30, 2006, the Company had a valuation allowance of $3.4 million, of which $800,000 relates to deferred tax assets recorded at the merger date and will result in an adjustment to goodwill if such deferred tax assets are realized in the future. At September 30, 2006, federal and state net operating loss carryforwards were available to offset future taxable income of approximately $13.0 million. The net operating losses begin to expire in 2019. A portion of the net loss carryforwards is subject to annual usage limitations after the ownership change caused by the Merger. The Company has an alternative minimum tax credit carryforward of $2.4 million at September 30, 2006. State net operating losses in the amount of $114.0 million were also available, but largely offset by a valuation allowance. During the year ended September 30, 2004, the IRS concluded its examination of the Predecessor’s federal income tax returns for the years ended September 30, 2000 and 2001. The Company consented to the adjustments proposed by the IRS, all of which were temporary differences. As a result of the adjustments, the Company received a refund of approximately $200,000, attributable to an overpayment of alternative minimum tax, offset by interest charges on certain temporary differences. The net tax refund reduced current federal income tax expense for the period October 1, 2003 through June 22, 2004. During the year ended September 30, 2006, the IRS concluded field work for its examination of the Company’s federal income tax return for the year ended September 30, 2004. The agent proposed several adjustments, all of which the Company is in the process of appealing. Management believes that the ultimate outcome of the examination will not have a material adverse effect on results of operations or financial position.
12. CONTINGENCIES Net Revenue The calculation of appropriate payments from the Medicare and Medicaid programs as well as terms governing agreements with other third-party payors are complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.
Professional, General and Workers Compensation Liability Risks The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through a commercial insurance
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in management’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for general and professional liability claims using historical claims data, demographic factors, severity factors, current incident logs and other external actuarial analysis. At September 30, 2006 and 2005, the Company’s professional and general liability accrual for asserted and unasserted claims was $38.1 million and $33.4 million, respectively, which is included within other long-term liabilities in the accompanying consolidated balance sheets. The valuation from the Company’s independent actuary for professional and general liability losses resulted in a change in related accrual estimates for prior periods which increased professional and general liability expense by $589,000 and $163,000 during the years ended September 30, 2006 and 2005, respectively. No change in estimate related to prior year periods was recorded in fiscal year 2004. The Company is subject to claims and legal actions in the ordinary course of business relative to workers compensation and other labor and employment matters. To cover these types of claims, the Company maintains workers compensation insurance coverage with a self-insured retention. The Company accrues costs of workers compensation claims based upon external actuarial estimates derived from its claims experience. The valuation from the Company’s independent actuary for workers’ compensation losses resulted in a change in related accrual estimate for prior periods which decreased workers’ compensation expense by $3.3 million during the year ended September 30, 2006 and increased worker’s compensation expense by $1.9 million during the year ended September 30, 2005. No change in estimate related to prior year periods was recorded in fiscal year 2004.
Health Choice Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from AHCCCS and CMS. These services are provided regardless of the actual costs incurred to provide these services. The Company receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of September 30, 2006, the Company provided a performance guaranty in the form of a letter of credit in the amount of $20.6 million for the benefit of AHCCCS to support its obligations under the Health Choice contract to provide and pay for the healthcare services. The amount of the performance guaranty is generally based in part upon the membership in the Plan and the related capitation revenue paid to Health Choice. Additionally, Health Choice maintains a cash balance of $5.0 million and an intercompany demand note with the Company, which is required under its contract with CMS to provide coverage as a SNP.
Capital Expenditure Commitments The Company is building a new hospital and is expanding and renovating some of its existing facilities to more effectively deliver patient care and provide a greater variety of services. The Company had incurred approximately $96.7 million in uncompleted projects as of September 30, 2006, which is included in property and equipment in the accompanying consolidated balance sheets. At September 30, 2006, the Company had various construction and other projects in progress with an estimated additional cost to complete and equip of approximately $158.6 million, including $100.0 to $105.0 million for the construction of Mountain Vista Medical Center, the Company’s new hospital in Mesa, Arizona.
Variable Interest Entities The Company is a party to certain contractual agreements pursuant to which it may be required to make monthly payments to the developers and managers of certain medical office buildings located on its hospital campuses through minimum rent revenue support arrangements. The Company entered into these commercial arrangements to cause developers to commence construction of medical office buildings and manage the buildings upon their completion in order to meet the need for physician office space in the communities served by its
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS hospitals. One of the contracts commenced in 1996. The Company currently is not making payments under this contract, although it could be required to make payments in the future. The remaining contracts were entered into at various times since 2003 and each have a term of seven years starting 30 days after completion of the related building construction. Three of these buildings were complete at September 30, 2006. The Company has determined that it is not the primary beneficiary under any of these contracts. The maximum annual amount the Company would pay in the aggregate under these contracts assuming no changes to current lease levels would be approximately $1.7 million.
Tax Sharing Agreement and Consolidated Group Tax Liabilities Prior to the consummation of the Transactions, the Predecessor and some of its subsidiaries were included in JLL’s consolidated group for U.S. federal income tax purposes as well as in some consolidated, combined or unitary groups which included JLL for state, local and foreign income tax purposes. The Predecessor and JLL entered into a tax sharing agreement in connection with the recapitalization transaction with Paracelsus Healthcare Corporation (currently known as Clarent Hospital Corporation) and the acquisition of hospitals and related facilities from Tenet that occurred in October 1999. The tax sharing agreement required the Predecessor to make payments to JLL such that, with respect to tax returns for any taxable period in which the Predecessor or any of its subsidiaries were included in JLL’s consolidated group or any combined group including JLL, the amount of taxes to be paid by the Predecessor would be determined, subject to some adjustments, as if it and each of its subsidiaries included in JLL’s consolidated group or a combined group including JLL filed their own consolidated, combined or unitary tax returns. The tax sharing agreement with JLL terminated on June 22, 2004. IASIS and some of its subsidiaries are included in IAS’s consolidated group for U.S. federal income tax purposes as well as in some consolidated, combined or unitary groups which include IAS for state, local and foreign income tax purposes. With respect to tax returns for any taxable period in which IASIS or any of its subsidiaries are included in IAS’s consolidated group or any combined group including IAS, the amount of taxes to be paid by IASIS is determined, subject to some adjustments, as if it and each of its subsidiaries included in IAS’s consolidated group or a combined group including IAS filed their own consolidated, combined or unitary tax returns. Each member of a consolidated group for U.S. federal income tax purposes is jointly and severally liable for the federal income tax liability of each other member of the consolidated group. Accordingly, although tax liabilities will be allocated between the Company and its consolidated group parent, the Company could be liable in the event that any federal tax liability was incurred, but not discharged, by any other member of the consolidated group.
Acquisitions The Company may choose to acquire businesses with prior operating histories. If acquired, such companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has policies designed to conform business practices to its policies following the completion of any acquisitions, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally would seek to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.
Other In September 2005, IAS received a subpoena from the OIG. The subpoena requests production of documents, dating back to January 1999, primarily related to contractual arrangements between certain physicians and the Company’s hospitals, including leases, medical directorships and recruitment agreements. The Company maintains a comprehensive compliance program designed to ensure that the Company maintains high standards of conduct in the operation of the Company’s business in compliance with all applicable laws. Although the Company
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continues to be fully committed to regulatory compliance and will cooperate diligently with governmental authorities regarding this matter, there can be no assurance as to the outcome of this matter. If this matter were to be determined unfavorably to the Company, it could have a material adverse effect on the Company’s business, financial condition and results of operations. Further, the outcome of this matter may result in significant fines, other penalties and/or adverse publicity. During the year ended September 30, 2006 and 2005, the Company incurred $8.7 million and $233,000, respectively, in legal fees and other expenses associated with responding to the OIG’s request for information. The Company believes it is in material compliance with all applicable laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties and exclusion from the Medicare and Medicaid programs.
13. LEASES The Company leases various buildings, office space and equipment under capital and operating lease agreements. The leases expire at various times and have various renewal options. In April 2005, the Company amended one of its facility lease agreements. The Company exercised an option under the amended lease agreement to extend the lease for an additional three-year term with an annual lease cost of $1.5 million, beginning in July 2005. The Company is a party to an amended facility lease with a 15 year term that expires in January 31, 2019, and includes options to extend the term of the lease through January 31, 2039. The annual cost under this agreement is $6.4 million, payable in monthly installments.
Capital Operating Leases Leases 2007 $ 3,167 $ 26,991 2008 1,376 25,576 2009 122 19,526 2010 — 15,359 2011 — 12,050 Thereafter — 63,748 Total minimum lease payments $4,665 $163,250 Amount representing interest (at rates ranging from 5.67% to 10.20%) 215 Present value of net minimum lease payments (including $3.0 million classified as current) $ 4,450
Aggregate future minimum rentals to be received under noncancellable subleases as of September 30, 2006 were approximately $11.1 million.
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14. RETIREMENT PLANS Substantially all employees who are employed by the Company or its subsidiaries, upon qualification, are eligible to participate in a defined contribution 401(k) plan (the “Retirement Plan”). Employees who elect to participate generally make contributions from 1% to 20% of their eligible compensation, and the Company matches, at its discretion, such contributions up to a maximum percentage. Generally, employees immediately vest 100% in their own contributions and vest in the employer portion of contributions in a period not to exceed five years. Company contributions to the Retirement Plan were approximately $3.9 million, $3.8 million, $840,000 and $2.5 million for years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, respectively.
15. SEGMENT AND GEOGRAPHIC INFORMATION The Company’s acute care hospitals and related healthcare businesses are similar in their activities and the economic environments in which they operate (i.e., urban and suburban markets). Accordingly, the Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively, and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):
For the Year Ended September 30, 2006 Acute Care Health Choice Eliminations Consolidated Acute care revenue $1,219,474 $ — $ — $ 1,219,474 Premium revenue — 406,522 — 406,522 Revenue between segments 10,857 — (10,857) — Net revenue 1,230,331 406,522 (10,857) 1,625,996
Salaries and benefits 457,540 12,631 — 470,171 Supplies 187,515 284 — 187,799 Medical claims — 354,517 (10,857) 343,660 Other operating expenses 233,041 13,284 — 246,325 Provision for bad debts 141,774 — — 141,774 Rentals and leases 33,874 1,082 — 34,956 Business interruption insurance recoveries (8,974) — — (8,974) Adjusted EBITDA(1) 185,561 24,724 — 210,285
Interest expense, net 69,687 — — 69,687 Depreciation and amortization 68,539 3,386 — 71,925 Management fees 4,189 — — 4,189 Earnings before gain (loss) on disposal of assets, minority interests and income taxes 43,146 21,338 — 64,484 Gain (loss) on disposal of assets, net 953 (54) — 899 Minority interests (3,546) — — (3,546) Earnings before income taxes $ 40,553 $ 21,284 $ — $ 61,837 Segment assets $ 1,833,737 $ 134,098 $ 1,967,835 Capital expenditures $ 146,299 $ 629 $ 146,928 Goodwill $ 750,722 $ 5,757 $ 756,479
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For the Year Ended September 30, 2005 Acute Care Health Choice Eliminations Consolidated Acute care revenue $ 1,170,483 $ — $ — $ 1,170,483 Premium revenue — 353,244 — 353,244 Revenue between segments 8,475 — (8,475) — Net revenue 1,178,958 353,244 (8,475) 1,523,727
Salaries and benefits 431,609 10,564 — 442,173 Supplies 184,676 199 — 184,875 Medical claims — 310,679 (8,475) 302,204 Other operating expenses 200,411 11,287 — 211,698 Provision for bad debts 133,870 — — 133,870 Rentals and leases 31,849 901 — 32,750 Hurricane-related expenses 4,762 — — 4,762 Adjusted EBITDA(1) 191,781 19,614 — 211,395
Interest expense, net 66,002 — — 66,002 Depreciation and amortization 67,840 3,197 — 71,037 Management fees 3,791 — — 3,791 Earnings before loss on disposal of assets, minority interests and income taxes 54,148 16,417 — 70,565 Loss on disposal of assets, net (231) — — (231) Minority interests (2,891) — — (2,891) Earnings before income taxes $ 51,026 $ 16,417 $ — $ 67,443 Segment assets $ 1,756,404 $ 96,320 $1,852,724 Capital expenditures $ 141,625 $ 743 $ 142,368 Goodwill $ 748,618 $ 5,757 $ 754,375
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For the Period June 23, 2004 through September 30, 2004 Acute Care Health Choice Eliminations Consolidated Acute care revenue $ 301,305 $ — $ — $ 301,305 Premium revenue — 88,169 — 88,169 Revenue between segments 2,790 — (2,790) — Net revenue 304,095 88,169 (2,790) 389,474
Salaries and benefits 112,702 2,836 — 115,538 Supplies 46,513 67 — 46,580 Medical claims — 76,841 (2,790) 74,051 Other operating expenses 54,655 2,691 — 57,346 Provision for bad debts 39,486 — — 39,486 Rentals and leases 8,602 238 — 8,840 Adjusted EBITDA(1) 42,137 5,496 — 47,633
Interest expense, net 17,459 — — 17,459 Depreciation and amortization 19,795 61 — 19,856 Management fees 746 — — 746 Loss on early extinguishment of debt 232 — — 232 Earnings before loss on disposal of assets, minority interests and income taxes 3,905 5,435 — 9,340 Loss on disposal of assets, net (107) — — (107) Minority interests (1,207) — — (1,207) Earnings before income taxes $ 2,591 $ 5,435 $ — $ 8,026 Capital expenditures $ 44,638 $ 168 $ 44,806
For the Period October 1, 2003 through June 22, 2004 Predecessor Acute Care Health Choice Eliminations Consolidated Acute care revenue $ 794,887 $ — $ — $ 794,887 Premium revenue — 202,273 — 202,273 Revenue between segments 8,031 — (8,031) — Net revenue 802,918 202,273 (8,031) 997,160
Salaries and benefits 302,095 6,786 — 308,881 Supplies 129,518 147 — 129,665 Medical claims — 176,369 (8,031) 168,338 Other operating expenses 138,534 7,114 — 145,648 Provision for bad debts 87,466 — — 87,466 Rentals and leases 22,694 464 — 23,158 Adjusted EBITDA(1) 122,611 11,393 — 134,004
Interest expense, net 41,935 — — 41,935 Depreciation and amortization 48,098 130 — 48,228 Loss on early extinguishment of debt 51,852 — — 51,852 Merger expenses 19,750 — — 19,750 Write-off of debt issue costs 8,850 — — 8,850 Earnings (loss) before gain on disposal of assets, minority interests and income taxes (47,874) 11,263 — (36,611) Gain on disposal of assets, net 3,731 — — 3,731 Minority interests (3,098) — — (3,098) Earnings (loss) before income taxes $ (47,241) $ 11,263 $ — $ (35,978) Capital expenditures $ 81,945 $ 320 $ 82,265
(1) Adjusted EBITDA represents net earnings (loss) before interest expense, income tax expense, depreciation and amortization, loss on early extinguishment of debt, write-off of debt issue costs, merger expenses, management fees, gain (loss) on disposal of assets, and minority interests. Management fees represent monitoring and advisory fees paid to TPG, the Company’s majority financial sponsor, and certain other members of IASIS Investment. Merger expenses include legal and advisory expenses and special bonus compensation of the Predecessor incurred in connection with the acquisition of IASIS by TPG. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate hospital performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business 94 Table of Contents
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segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles (GAAP), and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Company’s senior secured credit facilities and may not be comparable to similarly titled measures of other companies.
16. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES A summary of accrued expenses and other current liabilities consists of the following (in thousands):
September 30, September 30, 2006 2005 Employee health insurance payable $ 8,274 $ 6,926 Taxes other than income taxes 8,095 7,718 Workers compensation insurance payable 8,567 10,066 Construction retention payable related to construction of new hospital 5,320 — Other 18,831 5,840 $ 49,087 $ 30,550
17. ALLOWANCE FOR DOUBTFUL ACCOUNTS A summary of activity in the Company’s allowance for doubtful accounts is as follows (in thousands):
Accounts Written Off, Beginning Provision for Net of Ending Balance Bad Debts Other (1) Recoveries Balance Period October 1, 2003 to June 22, 2004 (Predecessor) $ 51,255 87,466 4,647 (51,407) $ 91,961 Period June 23, 2004 to September 30, 2004 $ 91,961 39,486 (532) (28,434) $ 102,481 Year Ended September 30, 2005 $ 102,481 133,870 (1,560) (131,172) $ 103,619 Year Ended September 30, 2006 $ 103,619 141,774 — (135,516) $ 109,877
(1) Included in the allowance for doubtful accounts are amounts representing estimated uncollectible accounts receivable from managed care companies and other third-party payors. Such amounts were recorded as adjustments to revenue during fiscal years 2005 and 2004. Effective October 1, 2005, these adjustments have been recorded as a component of the provision for bad debts. The provision for bad debts increased $7.9 million during the year end September 30, 2006, primarily as a result of increases in self-pay volume and revenue, particularly related to patients arriving through our emergency rooms. The provision for bad debts increased $6.9 million during the year ended September 30, 2005, as a result of having a full year’s operations for North Vista Hospital in the 2005 fiscal year, compared with only eight months in fiscal 2004.
18. IMPACT OF HURRICANE RITA The Medical Center of Southeast Texas, the Company’s hospital located in Port Arthur, Texas, which comprises approximately 9.0% of the Company’s acute care revenue, was damaged during Hurricane Rita in September 2005. The hospital sustained roof and water intrusion damage. The majority of services at the hospital became operational during October and November of 2005. The Company’s results from operations for the year ended September 30, 2005 include $4.8 million in hurricane-related costs. These costs were principally for restoration-related costs and property damage. The Company has received $9.0 million in partial business
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS interruption insurance recoveries during the year ended September 30, 2006, net of the deductible of approximately $4.6 million. No additional recoveries are accrued on the Company’s balance sheet at September 30, 2006, as those amounts are not determinable at this time. The Company continues to work with its insurer to process a final settlement for these losses.
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION The 8 3/4% notes described in Note 4 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing domestic subsidiaries, other than non-guarantor subsidiaries which include Health Choice and the Company’s non-wholly owned subsidiaries. On February 28, 2006, Southwest General Hospital, LP (“Southwest General”) sold limited partner units representing, in the aggregate, a 6.4% ownership interest in Southwest General. As a result, the Company’s ownership interest in Southwest General was reduced to 93.6%. Southwest General is included in the summarized condensed consolidating financial statements as a subsidiary non-guarantor. On February 2, 2006, Cardiovascular Specialty Centers of Utah, LP (“CSCU”) sold limited partner units representing, in the aggregate, a 15.6% ownership interest in CSCU. As a result, the Company’s ownership interest in CSCU was reduced to 84.4%. CSCU is included in the summarized condensed consolidating financial statements as a subsidiary non-guanantor. Summarized condensed consolidating balance sheets at September 30, 2006 and 2005, condensed consolidating statements of operations and cash flows for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004 for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below. Prior year amounts have been reclassified to conform to the current year presentation.
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IASIS Healthcare LLC Condensed Consolidating Balance Sheet September 30, 2006 (in thousands)
Subsidiary Subsidiary Condensed Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Assets Current assets: Cash and cash equivalents $ — $ 94,518 $ 897 $ — $ 95,415 Accounts receivable, net — 110,128 72,324 — 182,452 Inventories — 22,249 12,050 — 34,299 Deferred income taxes 41,416 — — — 41,416 Prepaid expenses and other current assets — 23,767 18,074 — 41,841 Total current assets 41,416 250,662 103,345 — 395,423
Property and equipment, net — 376,069 350,979 — 727,048 Intercompany — (123,864) 123,864 — — Net investment in and advances to subsidiaries 1,479,245 — — (1,479,245) — Goodwill 22,008 207,301 527,170 — 756,479 Other intangible assets, net — — 39,000 — 39,000 Other assets, net 20,715 22,024 7,146 — 49,885 Total assets $ 1,563,384 $ 732,192 $ 1,151,504 $(1,479,245) $1,967,835
Liabilities and Equity Current liabilities: Accounts payable $ — $ 51,806 $ 21,545 $ — $ 73,351 Salaries and benefits payable — 19,314 9,768 — 29,082 Accrued interest payable 19,965 (1,517) 1,517 — 19,965 Medical claims payable — — 81,822 — 81,822 Other accrued expenses and other current liabilities — 38,050 11,037 — 49,087 Current portion of long-term debt and capital lease obligations 4,402 2,009 7,317 (6,296) 7,432 Total current liabilities 24,367 109,662 133,006 (6,296) 260,739
Long-term debt and capital lease obligations 886,188 2,939 242,353 (241,967) 889,513 Deferred income taxes 81,179 — — — 81,179 Other long-term liabilities — 15,245 32,366 — 47,611 Minority interest — 32,297 — — 32,297 Total liabilities 991,734 160,143 407,725 (248,263) 1,311,339 Member’s equity 571,650 572,049 743,779 (1,230,982) 656,496 Total liabilities and equity $ 1,563,384 $ 732,192 $ 1,151,504 $(1,479,245) $1,967,835
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IASIS Healthcare LLC Condensed Consolidating Balance Sheet September 30, 2005 (in thousands)
Subsidiary Subsidiary Condensed Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Assets Current assets: Cash and cash equivalents $ — $ 88,597 $ 500 $ — $ 89,097 Accounts receivable, net — 102,127 64,329 — 166,456 Inventories — 19,343 10,523 — 29,866 Deferred income taxes 56,003 — — — 56,003 Prepaid expenses and other current assets — 11,106 14,130 — 25,236 Total current assets 56,003 221,173 89,482 — 366,658
Property and equipment, net — 368,821 278,775 — 647,596 Intercompany — (83,539) 83,539 — — Net investment in and advances to subsidiaries 1,458,056 — — (1,458,056) — Goodwill 22,128 205,151 527,096 — 754,375 Other intangible assets, net — — 42,000 — 42,000 Other assets, net 23,675 14,338 4,082 — 42,095 Total assets $1,559,862 $ 725,944 $ 1,024,974 $(1,458,056) $1,852,724
Liabilities and Equity Current liabilities: Accounts payable $ — $ 39,295 $ 19,389 $ — $ 58,684 Salaries and benefits payable — 17,532 7,355 — 24,887 Accrued interest payable 18,489 (1,070) 1,070 — 18,489 Medical claims payable — — 60,201 — 60,201 Other accrued expenses and other current liabilities — 25,686 4,864 — 30,550 Current portion of long-term debt and capital lease obligations 4,402 2,241 5,991 (4,877) 7,757 Total current liabilities 22,891 83,684 98,870 (4,877) 200,568
Long-term debt and capital lease obligations 890,438 5,198 244,328 (242,913) 897,051 Deferred income taxes 74,883 — — — 74,883 Other long-term liabilities — 36,801 — — 36,801 Minority interest — 26,474 — — 26,474 Total liabilities 988,212 152,157 343,198 (247,790) 1,235,777 Member’s equity 571,650 573,787 681,776 (1,210,266) 616,947 Total liabilities and equity $1,559,862 $ 725,944 $ 1,024,974 $(1,458,056) $1,852,724
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IASIS Healthcare LLC Condensed Consolidating Statement of Operations (in thousands)
For the Year Ended September 30, 2006 Subsidiary Subsidiary Condensed Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Net revenue: Acute care revenue $ — $ 753,420 $ 476,911 $ (10,857) $ 1,219,474 Premium revenue — — 406,522 — 406,522 Total net revenue — 753,420 883,433 (10,857) 1,625,996
Costs and expenses: Salaries and benefits — 301,335 168,836 — 470,171 Supplies — 128,894 58,905 — 187,799 Medical claims — — 354,517 (10,857) 343,660 Other operating expenses — 158,239 88,086 — 246,325 Provision for bad debts — 91,063 50,711 — 141,774 Rentals and leases — 22,500 12,456 — 34,956 Interest expense, net 69,687 — 20,234 (20,234) 69,687 Depreciation and amortization — 44,075 27,850 — 71,925 Management fees 4,189 (10,379) 10,379 — 4,189 Business interruption insurance recoveries — — (8,974) — (8,974) Equity in earnings of affiliates (115,489) — — 115,489 — Total costs and expenses (41,613) 735,727 783,000 84,398 1,561,512
Earnings (loss) before gain (loss) on disposal of assets, minority interests and income taxes 41,613 17,693 100,433 (95,255) 64,484 Gain (loss) on disposal of assets, net — 2,162 (1,263) — 899 Minority interests — (3,546) — — (3,546)
Earnings (loss) before income taxes 41,613 16,309 99,170 (95,255) 61,837 Income tax expense 22,288 — — — 22,288 Net earnings (loss) $ 19,325 $ 16,309 $ 99,170 $(95,255) $ 39,549
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For the Year Ended September 30, 2005 Subsidiary Subsidiary Condensed Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Net revenue: Acute care revenue $ — $ 731,021 $ 447,937 $ (8,475) $ 1,170,483 Premium revenue — — 353,244 — 353,244 Total net revenue — 731,021 801,181 (8,475) $1,523,727
Costs and expenses: Salaries and benefits — 286,388 155,785 — 442,173 Supplies — 131,081 53,794 — 184,875 Medical claims — — 310,679 (8,475) 302,204 Other operating expenses — 134,300 77,398 — 211,698 Provision for bad debts — 86,112 47,758 — 133,870 Rentals and leases — 19,873 12,877 — 32,750 Interest expense, net 66,002 — 17,467 (17,467) 66,002 Depreciation and amortization — 45,616 25,421 — 71,037 Management fees 3,791 (9,579) 9,579 — 3,791 Hurricane-related expenses — — 4,762 — 4,762 Equity in earnings of affiliates (119,769) — — 119,769 — Total costs and expenses (49,976) 693,791 715,520 93,827 1,453,162
Earnings (loss) before loss on disposal of assets, minority interests and income taxes 49,976 37,230 85,661 (102,302) 70,565 Loss on disposal of assets, net — (178) (53) — (231) Minority interests — (2,891) — — (2,891)
Earnings (loss) before income taxes 49,976 34,161 85,608 (102,302) 67,443 Income tax expense 26,851 — — — 26,851 Net earnings (loss) $ 23,125 $ 34,161 $ 85,608 $ (102,302) $ 40,592
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For the Period June 23, 2004 through September 30, 2004 Subsidiary Subsidiary Condensed Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Net revenue: Acute care revenue $ — $192,772 $ 111,321 $ (2,788) $ 301,305 Premium revenue — — 88,169 — 88,169 Total net revenue — 192,772 199,490 (2,788) 389,474
Costs and expenses: Salaries and benefits — 75,089 40,449 — 115,538 Supplies — 33,396 13,184 — 46,580 Medical claims — — 76,839 (2,788) 74,051 Other operating expenses — 37,686 19,660 — 57,346 Provision for bad debts — 28,645 10,841 — 39,486 Rentals and leases — 5,484 3,356 — 8,840 Interest expense, net 17,459 — 3,624 (3,624) 17,459 Depreciation and amortization — 15,125 4,731 — 19,856 Management fees — (2,000) 2,746 — 746 Loss on early extinguishment of debt 232 — — — 232 Equity in earnings of affiliates (22,093) — — 22,093 — Total costs and expenses (4,402) 193,425 175,430 15,681 380,134
Earnings (loss) before loss on disposal of assets, minority interests and income taxes 4,402 (653) 24,060 (18,469) 9,340 Loss on disposal of assets, net — (107) — — (107) Minority interests — (1,207) — — (1,207)
Earnings (loss) before income taxes 4,402 (1,967) 24,060 (18,469) 8,026 Income tax expense 3,321 — — — 3,321 Net earnings (loss) $ 1,081 $ (1,967) $ 24,060 $ (18,469) $ 4,705
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For the Period October 1, 2003 through June 22, 2004 Subsidiary Subsidiary Condensed Predecessor Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Net revenue: Acute care revenue $ — $ 499,326 $ 303,592 $ (8,031) $ 794,887 Premium revenue — — 202,273 — 202,273 Total net revenue — 499,326 505,865 (8,031) 997,160
Costs and expenses: Salaries and benefits — 199,139 109,742 — 308,881 Supplies — 91,960 37,705 — 129,665 Medical claims — — 176,369 (8,031) 168,338 Other operating expenses — 94,152 51,496 — 145,648 Provision for bad debts — 56,611 30,855 — 87,466 Rentals and leases — 14,189 8,969 — 23,158 Interest expense, net 41,935 — 11,641 (11,641) 41,935 Depreciation and amortization — 36,520 11,708 — 48,228 Management fees — (7,840) 7,840 — — Write-off of debt issue costs 8,850 — — — 8,850 Loss on early extinguishment of debt 51,852 — — — 51,852 Merger expenses 19,750 — — — 19,750 Equity in earnings of affiliates (74,767) — — 74,767 — Total costs and expenses 47,620 484,731 446,325 55,095 1,033,771
Earnings (loss) before gain on disposal of assets, minority interests and income taxes (47,620) 14,595 59,540 (63,126) (36,611) Gain on disposal of assets, net — 3,731 — — 3,731 Minority interests — (3,098) — — (3,098)
Earnings (loss) before income taxes (47,620) 15,228 59,540 (63,126) (35,978) Income tax expense 1,152 — — — 1,152 Net earnings (loss) $ (48,772) $ 15,228 $ 59,540 $ (63,126) $ (37,130)
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IASIS Healthcare LLC Condensed Consolidating Statement of Cash Flows (in thousands)
For the Year Ended September 30, 2006 Subsidiary Subsidiary Condensed Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Cash flows from operating activities Net earnings (loss) $ 19,325 $ 16,309 $ 99,170 $(95,255) $ 39,549 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization — 44,075 27,850 — 71,925 Amortization of loan costs 2,960 — — — 2,960 Minority interests — 3,546 — — 3,546 Deferred income taxes 21,002 — — — 21,002 Loss (gain) on disposal of assets — (2,162) 1,263 — (899) Equity in earnings of affiliates (115,489) — — 115,489 — Changes in operating assets and liabilities: Accounts receivable — (8,001) (7,995) — (15,996) Inventories, prepaid expenses and other current assets — (11,096) (5,470) — (16,566) Accounts payable and other accrued liabilities 1,476 32,057 18,090 — 51,623 Net cash provided by (used in) operating activities (70,726) 74,728 132,908 20,234 157,144
Cash flows from investing activities Purchases of property and equipment — (52,446) (94,482) — (146,928) Proceeds from sale of assets — 147 — — 147 Change in other assets — (55) 653 — 598 Net cash used in investing activities — (52,354) (93,829) — (146,183)
Cash flows from financing activities Payment of debt and capital leases (4,402) (2,298) (1,163) — (7,863) Proceeds from sale of partnership interests — 1,105 4,622 — 5,727 Change in intercompany balances with affiliates, net 75,128 (15,260) (39,634) (20,234) — Distribution of minority interests — — (2,507) — (2,507) Net cash provided by (used in) financing activities 70,726 (16,453) (38,682) (20,234) (4,643) Increase (decrease) in cash and cash equivalents — 5,921 397 — 6,318 Cash and cash equivalents at beginning of period — 88,597 500 — 89,097 Cash and cash equivalents at end of period $ — $ 94,518 $ 897 $ — $ 95,415
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For the Year Ended September 30, 2005 Subsidiary Subsidiary Condensed Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Cash flows from operating activities Net earnings (loss) $ 23,125 $ 34,161 $ 85,608 $ (102,302) $ 40,592 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization — 45,616 25,421 — 71,037 Amortization of loan costs 5,789 — — — 5,789 Minority interests — 2,891 — — 2,891 Deferred income taxes 25,600 — — — 25,600 Loss on disposal of assets — 178 53 — 231 Hurricane-related expenses — — 4,762 — 4,762 Equity in earnings of affiliates (119,769) — — 119,769 — Changes in operating assets and liabilities: Accounts receivable — 2,355 (3,531) — (1,176) Inventories, prepaid expenses and other current assets — (4,841) (2,715) — (7,556) Accounts payable and other accrued liabilities 4,668 803 1,512 — 6,983 Net cash provided by (used in) operating activities (60,587) 81,163 111,110 17,467 149,153
Cash flows from investing activities Purchases of property and equipment — (70,305) (72,063) — (142,368) Acquisitions including working capital settlement payments — (1,359) — — (1,359) Investment in joint venture — — (3,732) — (3,732) Change in other assets — (4,285) 10 — (4,275) Net cash used in investing activities — (75,949) (75,785) — (151,734)
Cash flows from financing activities Payment of debt and capital leases (7,876) (1,742) (1,231) — (10,849) Proceeds from borrowings 2,274 — — — 2,274 Debt financing costs incurred (487) — — — (487) Proceeds from sale of partnership interests — 6,027 — — 6,027 Change in intercompany balances with affiliates, net 66,676 (18,145) (31,064) (17,467) — Distribution of minority interests — — (4,092) — (4,092) Net cash provided by (used in) financing activities 60,587 (13,860) (36,387) (17,467) (7,127) Decrease in cash and cash equivalents — (8,646) (1,062) — (9,708) Cash and cash equivalents at beginning of period — 97,243 1,562 — 98,805 Cash and cash equivalents at end of period $ — $ 88,597 $ 500 $ — $ 89,097
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For the Period June 23, 2004 through September 30, 2004 Subsidiary Subsidiary Condensed Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Cash flows from operating activities Net earnings (loss) $ 1,081 $ (1,967) $ 24,060 $ (18,469) $ 4,705 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization — 15,125 4,731 — 19,856 Amortization of loan costs 1,792 — — — 1,792 Minority interests — 1,207 — — 1,207 Deferred income taxes — 3,234 — — 3,234 Loss on disposal of assets, net — 107 — — 107 Equity in earnings of affiliates (22,093) — — 22,093 — Changes in operating assets and liabilities: Accounts receivable — 9,080 (358) — 8,722 Inventories, prepaid expenses and other current assets — 2,656 (4,237) — (1,581) Accounts payable and other accrued liabilities 12,538 (1,347) 14,787 — 25,978 Net cash provided by (used in) operating activities (6,682) 28,095 38,983 3,624 64,020
Cash flows from investing activities Purchases of property and equipment — (4,140) (40,666) — (44,806) Acquisitions including working capital settlement payments — (1,950) — — (1,950) Change in other assets — 1,067 (270) — 797 Net cash used in investing activities — (5,023) (40,936) — (45,959)
Cash flows from financing activities Payment of debt and capital leases (1,129) (578) (145) — (1,852) Debt financing costs incurred (349) — — — (349) Costs paid for sale of partnership interests — (15) — — (15) Change in intercompany balances with affiliates, net 8,160 (5,141) 605 (3,624) — Distribution of minority interests — — (983) — (983) Net cash provided by (used in) financing activities 6,682 (5,734) (523) (3,624) (3,199) Increase (decrease) in cash and cash equivalents — 17,338 (2,476) — 14,862 Cash and cash equivalents at beginning of period — 79,905 4,038 — 83,943 Cash and cash equivalents at end of period $ — $ 97,243 $ 1,562 $ — $ 98,805
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IASIS HEALTHCARE LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IASIS Healthcare LLC Condensed Consolidating Statement of Cash Flows (in thousands)
For the Period October 1, 2003 through June 22, 2004 Subsidiary Subsidiary Condensed Predecessor Parent Issuer Guarantors Non-Guarantors Eliminations Consolidated Cash flows from operating activities Net earnings (loss) $ (48,772) $ 15,228 $ 59,540 $ (63,126) $ (37,130) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization — 36,520 11,708 — 48,228 Amortization of loan costs 2,262 — — — 2,262 Minority interests — 3,098 — — 3,098 Gain on disposal of assets, net — (3,731) — — (3,731) Loss on early extinguishment of debt 14,993 — — — 14,993 Write-off of debt issue costs 8,850 — — — 8,850 Equity in earnings of affiliates (74,767) — — 74,767 — Changes in operating assets and liabilities: Accounts receivable — (3,980) (4,562) — (8,542) Establishment of accounts receivable of recent acquisition — (11,325) — — (11,325) Inventories, prepaid expenses and other current assets — (3,417) (2,239) — (5,656) Accounts payable and other accrued liabilities (19,695) 10,471 16,215 — 6,991 Net cash provided by (used in) operating activities (117,129) 42,864 80,662 11,641 18,038
Cash flows from investing activities Purchase of property and equipment — (42,958) (39,307) — (82,265) Acquisitions including working capital settlement payments — (23,032) — — (23,032) Proceeds from sale of assets — 14,928 — — 14,928 Change in other assets — (1,950) 300 — (1,650) Net cash used in investing activities — (53,012) (39,007) — (92,019)
Cash flows from financing activities Proceeds from issuance of common stock, net 529,000 — — — 529,000 Proceeds from debt borrowings 900,000 — — — 900,000 Cash paid to security holders (677,780) — — — (677,780) Payment of merger costs incurred by members of IASIS Investment LLC (10,800) — — — (10,800) Payment of debt and capital leases (649,309) (1,019) (1,043) — (651,371) Debt financing costs incurred (31,469) — — — (31,469) Proceeds from sale of partnership interests — 1,784 — — 1,784 Change in intercompany balances with affiliates, net 57,487 (11,497) (34,349) (11,641) — Distribution of minority interests — — (2,510) — (2,510) Net cash provided by (used in) financing activities 117,129 (10,732) (37,902) (11,641) 56,854 Increase (decrease) in cash and cash equivalents — (20,880) 3,753 — (17,127) Cash and cash equivalents at beginning of period — 100,785 285 — 101,070 Cash and cash equivalents at end of period $ — $ 79,905 $ 4,038 $ — $ 83,943
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.
Item 9A. Controls and Procedures Evaluations of Disclosure Controls and Procedures Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2006. Based on this evaluation, the principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports. Changes in Internal Control Over Financial Reporting During the fourth fiscal quarter of the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information None.
PART III
Item 10. Directors and Executive Officers of the Registrant The following table sets forth the name, age and position of the directors and executive officers of IAS and executive officers of IASIS. See “Certain Relationships and Related Transactions.”
Name Age Position David R. White 59 Chairman of the Board and Chief Executive Officer Sandra K. McRee 50 President and Chief Operating Officer W. Carl Whitmer 42 Chief Financial Officer Frank A. Coyle 42 Secretary and General Counsel James Moake 37 Operations Chief Financial Officer John M. Doyle 46 Vice President and Chief Accounting Officer Larry D. Hancock 48 President, Utah Market Brian Dunn 43 President, Arizona Market Jim McKinney 53 President, Florida, Texas and Nevada Markets Steve King 40 Chief Financial Officer, Utah Market Roger Armstrong 57 Chief Financial Officer, Arizona Market Shane Wells 37 Chief Financial Officer, Florida, Texas and Nevada Markets Peter Stanos 43 Vice President, Ethics and Business Practices David Bonderman 64 Director Jonathan J. Coslet 42 Director Kirk E. Gorman 56 Director Curtis S. Lane 49 Director Todd B. Sisitsky 35 Director Paul S. Levy 59 Director Jeffrey C. Lightcap 47 Director Sharad Mansukani 37 Director
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David R. White was non-executive Chairman of the Board of Directors of IAS from October 1999 until November 30, 2000. Mr. White was appointed Chief Executive Officer of IAS on December 1, 2000. He also served as President of IAS from May 2001 through May 2004. He was appointed Chief Executive Officer of IASIS upon consummation of the Transactions. Mr. White served as President and Chief Executive Officer of LifeTrust, an assisted living company, from November 1998 until November 2000. From June 1994 to September 1998, Mr. White served as President of the Atlantic Group at Columbia/HCA, where he was responsible for 45 hospitals located in nine states. Previously, Mr. White was Executive Vice President and Chief Operating Officer at Community Health Systems, Inc., a for-profit hospital management company that operated approximately 20 acute-care hospitals. Sandra K. McRee was appointed Chief Operating Officer of IAS in May 2001 and President in May 2004. She was appointed President and Chief Operating Officer of IASIS upon consummation of the Transactions. Ms. McRee was a Regional Vice President for Province Healthcare Corporation from April 1999 until May 2001, where she oversaw the operations of five facilities in Florida, Louisiana and Mississippi. Ms. McRee also served as Vice President, Operations of Province Healthcare Corporation from October 1998 through March 1999. From August 1997 through September 1998, she served as a Division President for Columbia/ HCA. Ms. McRee also served as a Group Vice President, Operations for Columbia/HCA from May 1995 through July 1997. Prior to joining Columbia/HCA, Ms. McRee served as an Assistant Vice President for Community Health Systems Inc. where she oversaw 36 facilities. Ms. McRee has spent her entire professional career in the healthcare industry. W. Carl Whitmer served as Vice President and Treasurer of IAS from March 2000 through October 2001, and was appointed Chief Financial Officer of IAS effective November 2001. He was appointed Chief Financial Officer of IASIS upon consummation of the Transactions. Prior to joining our company, Mr. Whitmer served as Vice President of Finance and Treasurer of PhyCor Inc., where he was employed from July 1994 through February 2000. Mr. Whitmer’s responsibilities at PhyCor included acquisitions, capital planning and management, investor relations, treasury management and external financial reporting. Prior to joining PhyCor, Inc. Mr. Whitmer served as a Senior Manager with the accounting firm of KPMG LLP, where he was employed from July 1986 to July 1994. Frank A. Coyle has been Secretary and General Counsel of IAS since October 1999. He was appointed Secretary and General Counsel of IASIS upon consummation of the Transactions. From August 1998 until October 1999, Mr. Coyle served as Secretary and General Counsel of a company formed by members of our management that was merged into one of our subsidiaries. Mr. Coyle served from May 1995 to August 1998 as Assistant Vice President Development in Physician Services and in-house Development Counsel for Columbia/HCA. From May 1990 to May 1995, Mr. Coyle was an attorney with Baker, Worthington, Crossley, Stansberry & Woolf where his work included mergers, acquisitions, securities transactions, not-for-profit representation and formation of Tennessee health maintenance organizations. James Moake was appointed Operations Chief Financial Officer in February 2005. Previously, he has served as a Division Chief Financial Officer of IASIS since March 2003. From November 2002 to March 2003, Mr. Moake served as Operations Controller of IAS. Prior to joining the company, from March 2000 to November 2002, he served as the Chief Financial Officer for two regional medical centers of Province Healthcare Corporation. Mr. Moake served as the Chief Financial Officer of HMA, Inc.’s Community Hospital of Lancaster (PA) from July 1999 to March 2000 and the Assistant Chief Financial Officer of HMA, Inc.’s Biloxi Regional Medical Center (MS) from June 1998 to June 1999. From December 1994 to May 1998, he served as the Chief Financial Officer of Grant Regional Health Center, Inc. in Wisconsin. John M. Doyle served as Vice President and Treasurer of IAS from April 2002 and was appointed Vice President and Treasurer of IASIS upon consummation of the Transactions. He was appointed Vice President and Chief Accounting Officer of IASIS effective July 2006. Mr. Doyle was a Senior Manager at Ernst & Young LLP from February 1997 until March 2002 and at KPMG LLP from August 1994 to January 1997, where he specialized in healthcare audit and business advisory services, including mergers and acquisitions. In addition, from October 1991 to August 1994, Mr. Doyle was the Chief Financial Officer for two community hospitals in East Tennessee and North Carolina. Larry D. Hancock was named President for the Utah Market of IAS in June 2003. He was appointed President of the Utah Market of IASIS upon consummation of the Transactions. He served as President of Altius
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Health Plans in Salt Lake City, Utah from 1998 to June 2003. Prior to joining Altius, he served as President and Chief Executive Officer of American Family Care of Utah from July 1996 to September 1998. He was Chief Financial Officer of St. Mark’s Hospital in Salt Lake City from 1989 to 1994 and then served as President and Chief Executive Officer of St. Mark’s from 1994 to 1996. Prior to 1989, Mr. Hancock served as Chief Financial Officer and Controller of various hospitals owned and operated by proprietary healthcare organizations. Brian Dunn was named President of the Arizona Market of IASIS in April 2006. From August 2002 to March 2006, Mr. Dunn was Chief Executive officer for Salt Lake Regional Medical Center, an IASIS Utah hospital. From August 2001 to August 2002, Mr. Dunn was Senior Vice President for Ingenix, Inc., a subsidiary of United Health Group. From October 1995 to August 2001, Mr. Dunn was employed by Community Health Systems, Inc. as Director of Acquisitions and Chief Executive Officer of Lakeway Regional Hospital. Mr. Dunn has also served as Chief Executive Officer and Chief Operating Officer for various hospitals with HCA and HealthTrust. Mr. Dunn received a Bachelor of Arts Degree from the University of Utah and Master of Health Administration Degree from Virginia Commonwealth University. Jim McKinney was named President of the Texas Market effective April 2006 and the Florida Market effective July 2006 in addition to President of the Nevada Market of IAS and IASIS, which he has held since August 2004. He served as Vice President, Operations and Development from April 2004 to August 2004. Before joining IAS, Mr. McKinney was President/Chief Operating Officer for Leland Medical Centers, a hospital development and management corporation. Prior to joining Leland Medical Centers, Mr. McKinney served as President/CEO of Brim Healthcare, Inc., the nation’s second largest hospital management company. While at Brim Healthcare, Inc., Mr. McKinney was responsible for 60 hospitals representing $700 million in net revenue and over 13,000 employees. Additionally, Mr. McKinney has served in numerous operational, management and development positions in hospital systems for the past 30 years. Steve King was named Chief Financial Officer of the Utah Market in October 2006. Mr. King served as a Hospital Chief Financial Officer for Baptist Health System in San Antonio, Texas from 2003 to October 2006. From 2000 to 2003, Mr. King worked for Tenet Healthcare Corporation. Mr King has 17 years of experience in the healthcare industry. Roger Armstrong was named Chief Financial Officer of the Arizona Market in July 2006. Mr. Armstrong was employed by Vanguard Health Systems, Inc. as Chief Financial Officer of Paradise Valley Medical Center from May 2003 to July 2006. Prior to that time, Mr. Armstrong served as a Regional Chief Financial Officer for Brim Healthcare, Inc. from April 2000 to May 2003. Shane Wells joined IASIS in August 2006 as the market Chief Financial Officer for the Texas and Nevada Markets. On October 1, 2006, Mr. Wells assumed Market Chief Financial Officer responsibility for the Florida market as well. Prior to joining IASIS, Mr. Wells was a hospital Chief Financial Officer with Health Management Associates, Inc. Peter Stanos served as Regional Director Clinical Operations, Utah Market of IAS from July 2002 until April 2003. Mr. Stanos was appointed Vice President, Ethics & Business Practices of IAS in April 2003. He was appointed Vice President, Ethics & Business Practices of IASIS upon consummation of the Transactions. From May 2000 until July 2002, Mr. Stanos was employed by Province Healthcare Corporation as Chief Quality Officer of Havasu Regional Medical Center and as Regional Director of Quality and Resource Management. From 1997 until 2000, Mr. Stanos was employed by HCA and Triad Hospitals, Inc. as an Associate Administrator and Director of Quality and Resource Management, Materials, Pharmacy and Risk Management. Prior to joining HCA, Mr. Stanos served as Regional Director of several healthcare companies, as well as an independent healthcare consultant. David Bonderman became a Director of IAS upon the consummation of the Transactions. Mr. Bonderman is a founder of TPG and serves as a principal and general partner of the firm. Prior to forming TPG in 1993, Mr. Bonderman was Chief Operating Officer of the Robert M. Bass Group, Inc. (now doing business as Keystone, Inc.) in Fort Worth, Texas. Mr. Bonderman serves on the boards of directors of the following public companies: Burger King Holdings, Inc., CoStar Group, Inc., Gemalto N.V. and Ryanair Holdings, plc. He also serves on the boards of directors of the Wilderness Society, Grand Canyon Trust, World Wildlife Fund, University of Washington Foundation and the American Himalayan Foundation. Jonathan J. Coslet became a Director of IAS upon the consummation of the Transactions. Mr. Coslet is a Senior Partner of TPG, responsible for the firm’s generalist and healthcare investment activities. Mr. Coslet is also a member of the firm’s Investment Committee and Management Committee. Prior to joining TPG in 1993, Mr. Coslet
109 Table of Contents was in the Investment Banking department of Donaldson, Lufkin & Jenrette, specializing in leveraged acquisitions and high yield finance from 1991 to 1993. Mr. Coslet serves on the boards of directors of Quintiles Transnational Corp., J.Crew Group, Inc., The Neiman Marcus Group, Inc., and PETCO Animal Supplies, Inc. Kirk E. Gorman was appointed a Director of IAS in August 2004. Mr. Gorman currently serves as Senior Vice President and Chief Financial Officer of Jefferson Health System, a not-for-profit health system based in Radnor, Pennsylvania, which he joined in October 2003. Prior to joining Jefferson Health System, Mr. Gorman served as Senior Vice President and Chief Financial Officer of Universal Health Services, Inc., a public hospital company based in Pennsylvania, from 1987 to February 2003. Mr. Gorman also has 13 years of experience in the banking industry and served as Senior Vice President of Mellon Bank prior to his work in the healthcare industry. Mr. Gorman serves as a director of Viasys Healthcare Inc. Curtis S. Lane became a Director of IAS upon the consummation of the Transactions. Mr. Lane is a Senior Managing Director of MTS Health Partners, L.P., a merchant banking firm focused on healthcare advisory and investment opportunities. Prior to forming MTS Health Partners, L.P. in 2000, Mr. Lane founded and managed the healthcare investment banking group at Bear, Stearns & Co. Inc. from its inception in 1986 until 1998. Todd B. Sisitsky became a Director of IAS upon the consummation of the Transactions. Mr. Sisitsky manages TPG’s health care investment activities. Prior to joining TPG in 2003, Mr. Sisitsky worked at Forstmann Little & Company from 2001 to 2003 and Oak Hill Capital Partners from 1999 to 2001. Paul S. Levy has been a Director of IAS since October 1999. Mr. Levy is a Senior Managing Director of JLL Partners, Inc., which he founded in 1988. Mr. Levy serves as a director of several companies, including Builders FirstSource, Inc., Fairfield Manufacturing Company, Inc., Lancer Industries Inc., Motor Coach Industries International Inc., Mosaic Sales Solutions and PGT Industries. Jeffrey C. Lightcap has been a Director of IAS since October 1999. Mr. Lightcap is a Senior Managing Director of HealthCor Group. Prior to HealthCor Group, Mr. Lightcap was a Senior Managing Director at JLL Partners, which he joined in June 1997. From February 1993 to May 1997, Mr. Lightcap was a Managing Director at Merrill Lynch & Co., Inc., where he was the head of leveraged buyout firm coverage for the mergers and acquisitions group. Sharad Mansukani became a Director of IAS in April 2005. Dr. Mansukani serves as a senior advisor of TPG, and serves on the faculty at both the University of Pennsylvania and Temple University School of Medicine. Dr. Mansukani completed a residency and fellowship in ophthalmology at the University of Pennsylvania School of Medicine and a fellowship in quality management and managed care at the Wharton School of Business. The certificate of incorporation and by-laws of IAS provide that its board of directors will consist of not less than three nor more than 15 members, the exact number of which shall be determined by the board of directors in a resolution. The directors are elected at the annual meeting of stockholders for one-year terms and until their successors are duly elected and qualified. The executive officers serve at the discretion of the board of directors. Pursuant to the limited liability company operating agreement of IASIS Investment, JLL is entitled to nominate two directors to IAS’s board of directors. TPG is entitled to nominate the remaining directors. Messrs. Levy and Lightcap serve on IAS’s board of directors as designees of JLL. The remaining directors serve as designees of TPG.
Audit Committee Financial Expert The current members of our audit committee are Messrs. Lane, Sisitsky, Lightcap and Gorman. IAS’s board of directors has determined that Todd Sisitsky is an “audit committee financial expert” as that term is defined in Item 401(h) of Regulation S-K promulgated by the SEC.
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Code of Ethics We have adopted a code of ethics for our principal executive officer, principal accounting and financial officer, controller and persons performing similar functions, which is Exhibit 14 to this annual report on Form 10-K and which also has been posted on our Internet website at www.iasishealthcare.com. Please note that our Internet website address is provided as an inactive textual reference only. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our Internet website.
Item 11. Executive Compensation The following table provides information as to annual, long-term or other compensation during the last three fiscal years for: – the individual serving as Chief Executive Officer of the Company during the fiscal year ended September 30, 2006; and
– the four other most highly compensated executive officers of the Company who were serving as executive officers of the Company at September 30, 2006.
Annual Compensation Long-Term Compensation Awards Securities Other Annual Underlying All Other Name and Principal Position Year Salary ($) Bonus ($) Compensation ($)(1) Options (#) Compensation ($) David R. White (2) 2006 $ 740,385 $ 370,192 $— 5,500 $ 6,521(4) Chairman of the Board 2005 770,000 1,248,940 — 194,000 5,967 & Chief Executive Officer 2004 700,000 4,400,000(3) — 292,000 6,500
Sandra K. McRee (5) 2006 $ 514,800 $ 128,700 $— 3,250 $ 7,500(4) President & 2005 514,800 417,503 — 85,200 7,000 Chief Operating Officer 2004 468,000 1,968,000(3) — 116,800 6,500
W. Carl Whitmer (6) 2006 $ 458,920 $ 114,730 $— 3,250 $ 6,543(4) Chief Financial Officer 2005 459,000 372,184 — 85,200 6,055 2004 417,200 1,917,200(3) — 116,800 4,936
Frank A. Coyle (7) 2006 $ 317,744 $ 55,605 $— 10,000 $ 6,435(4) Secretary & General Counsel 2005 307,764 107,717 — 30,000 6,093 2004 274,917 96,221(3) — 30,000 5,628
Larry Hancock (8) 2006 $ 301,913 $ 150,956 $— 10,000 $ 4,935(4) President, Utah Market 2005 260,738 164,516 — 20,000 7,000 2004 191,250 34,135 — 20,000 —
(1) Perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus for any named executive officer.
(2) Mr. White served as IAS’s non-executive Chairman of the Board of Directors from October 1999 until November 2000. He was appointed Chief Executive Officer in December 2000 and President in May 2001. He served as President of IAS until May 2004 and continues to serve as Chief Executive Officer of IAS. Mr. White was appointed Chief Executive Officer of IASIS upon consummation of the Transactions.
(3) Includes annual bonus compensation and special bonus compensation received in connection with the Transactions.
(4) Contribution on behalf of the employee to 401(k) plan.
(5) Ms. McRee was appointed IAS’s Chief Operating Officer in May 2001 and President in May 2004. She was appointed President and Chief Operating Officer of IASIS upon consummation of the Transactions.
(6) Mr. Whitmer served as IAS’s Vice President and Treasurer from March 2000 until October 2001. He was appointed Chief Financial Officer of IAS in November 2001. He was appointed Chief Financial Officer of IASIS upon consummation of the Transactions.
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(7) Mr. Coyle has been Secretary and General Counsel of IAS since October 1999. He was appointed Secretary and General Counsel of IASIS upon consummation of the Transactions.
(8) Mr. Hancock was appointed President, Utah Market for IAS in June 2003. He was appointed President Utah Market for IASIS upon consummation of the Transactions.
OPTION GRANTS IN LAST FISCAL YEAR The following table provides information concerning individual grants of stock options made during the fiscal year ended September 30, 2006 to each of the named executive officers:
Number of Percent of Total Potential Realizable Value at Securities Options Assumed Annual Rates of Stock Price Underlying Granted to Appreciation Options Employees in Exercise for Option Term Name Granted (#) Fiscal Year (%) Price ($) Expiration Date 5% ($) 10% ($) David R. White 5,500 2.3% $35.68 April 1, 2016 $ 123,414 $ 312,756 Sandra K. McRee 3,250 1.4% $35.68 April 1, 2016 $ 72,927 $ 184,810 W. Carl Whitmer 3,250 1.4% $35.68 April 1, 2016 $ 72,927 $ 184,810 Frank A. Coyle 10,000 4.2% $35.68 April 1, 2016 $ 224,390 $ 568,647 Larry Hancock 10,000 4.2% $35.68 April 1, 2016 $ 224,390 $ 568,647 The following table summarizes certain information with respect to unexercised options to purchase common and preferred stock of IAS held by the named executive officers at September 30, 2006. The securities underlying unexercised options were valued at $35.68 per common share and $1,000.00 per preferred share.
2006 FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised Unexercised-Options Held at In-The-Money Options at September 30, 2006 September 30, 2006(1) Name Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($) David R. White 256,371 297,000 $ 5,743,136 $ 4,570,720 Sandra K. McRee 109,151 141,490 $ 2,198,180 $ 2,167,603 W. Carl Whitmer 99,828 141,490 $1,952,049 $ 2,167,603 Frank A. Coyle 23,549 52,000 $ 428,746 $ 658,560 Larry Hancock 15,773 38,000 $ 287,784 $ 439,040
(1) There is no public market for the common stock of IAS. The dollar values of unexercised in-the-money options to purchase IAS common shares represent the difference between the assumed fair market value of $35.68 per share at September 30, 2006, as determined by the Board of Directors in accordance with IAS’s 2004 Stock Option Plan, and the exercise price of the options. Value of the unexercised in-the-money options to purchase preferred shares of IAS were based on the difference of the preferred stock’s accreted value per share of $1,311.09 and the exercise price of the rollover options of $437.48 per share. The accreted value of IAS preferred stock has been determined based on the initial value of $1,000 per share at date of issuance on June 22, 2004, plus a dividend rate of 11.75% per year accumulated and unpaid since such date. There were no option exercises during 2006 by the named executive officers in the table above. We entered into rollover option agreements in connection with the Transactions with each of the named executive officers and other executive officers pursuant to which such individuals agreed to roll over options to purchase an aggregate 299,900 shares of common stock of IAS into options to purchase an aggregate 3,263 shares of preferred stock of IAS, with an exercise price of $437.48 per share, and an aggregate 163,152 shares of new common stock of IAS, with an exercise price of $8.75 per share. These new rollover options are fully vested and shall remain outstanding and exercisable for the remainder of their original term. In connection with the Transactions, each outstanding option other than the rollover options granted under the IASIS Healthcare Corporation 2000 Stock Option Plan was cancelled in exchange for a per share cash payment equal to the excess of the per share merger consideration over the per share exercise price of such option. In addition, the 2000 Stock Option Plan was terminated in connection with the Transactions. In addition, in connection with the Transactions, IAS adopted the IASIS Healthcare Corporation 2004 Stock Option Plan. Each of Mr. White, Ms. McRee and Mr. Whitmer were granted options to purchase 292,000, 116,800 and 116,800 shares of common stock of IAS, respectively, at an exercise price of $20.00 per share. Mr. White’s options vest in four equal installments on each anniversary of the closing of the Transactions, and Ms.
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McRee’s and Mr. Whitmer’s options vest in five equal installments on each anniversary of the closing of the Transactions.
Directors’ Compensation On February 14, 2005, IAS granted Kirk Gorman options to purchase 1,175 shares of IAS’s common stock and committed to grant Mr. Gorman, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, options to purchase a number of shares valued at $18,750 based on the fair market value of the common stock on each such anniversary. These grants were made pursuant to the Form of Stock Option Grant Agreement under IAS’s 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award Agreement with Mr. Gorman on the grant date. Pursuant to the Director Compensation and Restricted Share Award Agreement, IAS agreed to pay Mr. Gorman cash compensation of $9,375 for the fiscal quarter ended December 31, 2004 and annual cash compensation of $37,500 for the remaining term of the Director Compensation and Restricted Share Award Agreement, payable in equal quarterly installments, in consideration for his services as a member of IAS’s Board of Directors. IAS also granted Mr. Gorman 1,175 shares of restricted common stock on the grant date and committed to grant Mr. Gorman, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, restricted common stock valued at $18,750 based on the fair market value of the common stock on each such anniversary. On April 14, 2005, IAS granted Sharad Mansukani options to purchase 938 shares of IAS’s common stock and committed to grant Dr. Mansukani, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, options to purchase a number of shares of common stock valued at $18,750 based on the fair market value of the common stock on each such anniversary. These grants were made pursuant to the Form of Stock Option Grant Agreement under IAS’s 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award Agreement with Dr. Mansukani on the grant date. Pursuant to the Director Compensation and Restricted Share Award Agreement, IAS agreed to pay Dr. Mansukani annual cash compensation of $37,500 for the term of the Director Compensation and Restricted Share Award Agreement, payable in equal quarterly installments, in consideration for his services as a member of IAS’s Board of Directors. IAS also granted Dr. Mansukani 938 shares of restricted common stock on the grant date and committed to grant Dr. Mansukani, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, restricted common stock valued at $18,750 based on the fair market value of the common stock on each such anniversary. Currently, IAS’s other directors do not receive any compensation for their services. IAS does, however, reimburse them for travel expenses and other out-of-pocket costs incurred in connection with attendance at board of directors and committee meetings.
Employment Agreements On May 4, 2004, we entered into five-year employment agreements that commenced upon the consummation of the Transactions with each of David R. White, under which he serves as Chairman of the Board and Chief Executive Officer, Sandra K. McRee, under which she serves as Chief Operating Officer and President, and W. Carl Whitmer, under which he serves as Chief Financial Officer. Mr. White’s employment agreement provides for an initial base salary of $700,000 each year. Ms. McRee’s employment agreement provides for an initial base salary of $468,000 per year. Mr. Whitmer’s employment agreement provides for an initial base salary of $417,200 each year. Mr. White is entitled to receive an annual target bonus of up to 100% of his base salary and an annual maximum bonus of up to 200% of his base salary based upon the achievement of certain performance objectives set annually by the IAS board of directors. Ms. McRee and Mr. Whitmer also are entitled to receive an annual target bonus of up to 50% of their base salaries and an annual maximum bonus of up to 100% of their base salaries based upon the achievement of certain performance objectives set annually by the IAS board of directors. The base salaries of Mr. White, Ms. McRee and Mr. Whitmer under such employment agreements during fiscal year 2006 were $740,385, $514,800 and $458,920, respectively. The employment agreements also contain severance provisions regarding compensation upon termination of employment under certain circumstances. If we terminate Mr. White’s, Ms. McRee’s or Mr. Whitmer’s employment without cause or any of them leave our company for “good reason,” such person will be entitled to
113 Table of Contents receive a severance payment that includes an amount equal to two times the applicable annual base salary, a lump sum payment equal to the present value of all other benefits such person would have received through two years after the date of termination and, if eligible to receive a pro-rata bonus (such bonus to be determined based on a formula described in such person’s employment agreement) then two-times the pro rata bonus plus an additional pro-rata bonus payment. Additionally, the next tranche of options scheduled to vest will immediately vest and become exercisable and all vested options (other than the rollover options) may be exercised within one year from the date of termination or if eligible to receive a pro-rata bonus, then such options can be exercised within two years of termination. In addition, each of Mr. White and Ms. McRee has the right to terminate their employment one year after a change in control, or six months if the acquirer is in the healthcare facilities business, and receive their severance payments. The agreements contain non-competition and non- solicitation provisions pursuant to which Mr. White, Ms. McRee, and Mr. Whitmer will not compete with IAS or its subsidiaries within 25 miles of the location of any hospital we manage for two years following the date of termination of such person’s employment. The agreements provide that during this time such person will not solicit or recruit our business partners and employees. In certain circumstances following a change in control, IAS has agreed to compensate Mr. White in the event any payment under his employment agreement is subject to an excise tax under Section 4999 of the Internal Revenue Code. By the terms of their employment agreements, upon the consummation of the Transactions, Mr. White was granted an option to purchase 2% of the total outstanding common stock of IAS, and each of Ms. McRee and Mr. Whitmer were granted options to purchase 0.8% of the total outstanding common stock of IAS under the IASIS Healthcare Corporation 2004 Stock Option Plan. Mr. White’s options vest in four equal installments on each anniversary of the closing of the Transactions and Ms. McRee and Mr. Whitmer’s options vest in five equal installments on each anniversary of the closing of the Transactions. In the event of a change in control, any portion of the stock option that is not vested and exercisable shall immediately vest and become exercisable. Additionally, in the event IAS consummates a merger, business combination or other similar transaction with a company or entity that does not constitute a change in control and immediately following the consummation of such a transaction, the investor group led by TPG, which established IASIS Investment, as of the consummation of the Transactions and their affiliates beneficially own less than 50% of the voting power of such person and Mr. White, Ms. McRee or Mr. Whitmer’s employment is terminated by IAS without cause or by the executive for “good reason,” any portion of the stock option that has not become vested and exercisable as of the date of termination shall become immediately vested and exercisable.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions During fiscal 2006, IAS’s compensation committee was comprised of Messrs. White, Bonderman and Coslet. Messrs. Bonderman and Coslet have never been officers of IAS.
Non-qualified Executive Savings Plan We introduced our non-qualified executive savings plan July 1, 2006. The plan is a voluntary, tax-deferred savings vehicle that is available to those employees, including physicians, who have reached a specific level of earnings and who will play a significant role in the long-term strategy of our Company. An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) Retirement Savings Plan in order to participate in the non- qualified executive savings plan. There are two types of deferrals available under the plan: excess deferrals and additional deferrals. Excess deferrals are contributions that are deposited into the non-qualified executive savings plan because either (a) the participant’s earnings have exceeded $225,000 and/or (b) the participant’s deferrals into the 401(k) retirement plan have reached a stipulated dollar limit ($15,000 in 2006). Excess deferrals are automatically deposited into the nonqualified executive savings plan if these limits are reached. Physician excess deferrals are not matched. Executive excess deferrals are matched at the same rate as contributions to the 401(k) retirement plan. There is a five-year service requirement for participants to vest in the IASIS excess matching contributions. Additional deferrals are contributions to the non-qualified executive savings plan that are independent of a participant’s 401(k) contribution election.
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The non-qualified executive savings plan offers a range of investment options that act as “benchmark funds.” Benchmark funds are defined as the investment fund or funds used to represent the performance and current deemed balance of a participant’s non-qualified account, which is considered a notional deferred compensation account. Contributions become part of our general assets.
Stock Option Plan IAS’s 2004 Stock Option Plan was established to promote our interests by providing our key employees, directors, service providers and consultants with an additional incentive to continue to work for or to perform services for us, and to improve our growth and profitability. The options granted under the plan represent the right to purchase IAS common stock upon exercise. Each option shall be identified as either an incentive stock option or a non-qualified stock option. The plan was adopted by the board of directors and sole stockholder of IAS in connection with the Transactions. Generally, the exercise price of the options will equal the fair market value of a share of the common stock as of the grant date as determined by the IAS board of directors. Upon a change in control, the options will become 100% vested if the participant’s employment is terminated without “cause” or by the participant for good reason within the 2-year period immediately following such change in control. On a termination of a participant’s employment, unvested options automatically expire and vested options expire on the earlier of (i) the commencement of business on the date the employment is terminated for “cause”; (ii) 90 days after the date employment is terminated for any reason other than cause, death or disability; (iii) one year after the date employment is terminated by reason of death or disability; or (iv) the 10th anniversary of the grant date for such option. In connection with the plan, each participant is expected to enter into an agreement that will generally provide that for the 90-day period following the later of (i) a termination of employment or (ii) six months and one day following the date that shares of common stock were acquired pursuant to the exercise of the option, we have the right to repurchase each share then owned by the participant at fair value, as determined in good faith by the IAS board of directors. The plan is designed to comply with the requirements of “performance-based compensation” under Section 162(m) of the Internal Revenue Code, and the conditions for exemption from the short-swing profit recovery rules under Rule 16b-3 under the Securities Exchange Act. Under the terms of this plan, a committee established by the IAS board of directors administers this plan and may grant, in its discretion, incentive stock options and non-qualified stock options to our selected directors, officers, employees and consultants. Among other things, the committee has the power to determine at what time options may be granted as well as the terms, conditions, restrictions and performance criteria, if any, relating to the options. In addition, the plan prohibits the transfer of options, except by will or the laws of descent. The maximum number of shares of IAS common stock that may be issued pursuant to options granted under the plan is 1,902,650; provided, however, that on each anniversary of the closing of the Transactions prior to an initial public offering, an additional 146,000 shares of common stock will be available for grant. The terms and conditions applicable to options are set forth by the committee in each individual option agreement. However, no option granted under this plan may expire later than ten years from its date of grant. In addition, the committee may not grant incentive stock options to any person who is not our employee on the date of the grant, and the exercise price of an incentive stock option cannot be less than the fair market value of a share of IAS common stock on the date of its grant. The exercise price of an incentive stock option granted to a stockholder who owns at the time of the grant shares of IAS common stock with more than ten percent of the total combined voting power of all classes of IAS capital stock cannot be less than 110% of the fair market value of a share of IAS common stock on the date of the grant and the exercise period shall not exceed five years from the date of the grant. Furthermore, the aggregate fair market value of the shares of IAS common stock for which incentive stock options granted under this plan or any other stock option plan, determined as of the date of grant, that become exercisable
115 Table of Contents for the first time by any person during any calendar year may not exceed $100,000. Any incentive stock options granted in excess of this limitation will be treated for all purposes as non-qualified stock options. As of September 30, 2006, we had no incentive stock options outstanding. The IAS board of directors may amend this plan at any time for any reason subject to the stockholders approval to the extent necessary to meet the requirements of applicable law. However, no amendment can adversely affect an optionee’s right under a previously granted option without the consent of the optionee. Unless terminated earlier by the board, this plan will terminate by its terms effective June 22, 2014, although previously granted options may be exercised after plan termination in accordance with the terms of the plan as in effect upon termination. As of September 30, 2006, options to purchase a total of 1,595,485 shares had been granted and were outstanding under this plan, of which 496,725 were then vested and exercisable.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Equity Compensation Plans The table below sets forth the following information as of September 30, 2006 with respect to IAS’s compensation plans (including individual compensation arrangements) under which its equity securities are authorized for issuance, aggregated by (i) all compensation plans previously approved by IAS’s security holders and (ii) all compensation plans not previously approved by IAS’s security holders: — the number of securities to be issued upon the exercise of outstanding options; — the weighted-average exercise price of the outstanding options; and — the number of securities remaining available for future issuance under the plans. IAS’s 2004 Stock Option Plan has been approved by its stockholders. IAS has not issued any warrants or other rights to purchase its equity securities.
Remaining Available for Future Issuance Number of Under Equity Securities to be Compensation Plans Issued Upon Weighted-average (excluding securities Exercise of Exercise Price of reflected in the Plan Category Outstanding Options Outstanding Options first column) Equity compensation plans approved by security holders Preferred stock(1) 3,263 $ 437.48 — Common stock(2) 1,758,637 $ 21.02 307,165 Equity compensation plans not approved by security holders — — — Total 1,761,900 $ 21.80 307,165
(1) Shares of preferred stock to be issued upon exercise of rollover options issued in connection with the Transactions.
(2) Consists of 163,152 shares of common stock to be issued upon exercise of rollover options issued in connection with the Transactions, with an exercise price of $8.75 per share, and 1,595,485 shares of common stock to be issued upon exercise of options issued under IAS’s 2004 Stock Option Plan, with exercise prices ranging from $20.00 to $35.68 per share. Of the 1,902,650 shares of common stock currently authorized for issuance under the 2004 Stock Option Plan, 307,165 shares remain available for future issuance.
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Beneficial Ownership of Common Stock After giving effect to the Transactions, IASIS is a limited liability company consisting of 100% common interests owned by IAS. IAS’s outstanding shares consist of one class of common stock and one class of preferred stock, and 100% of the outstanding common and preferred stock is owned by IASIS Investment. In addition, senior members of IAS’s management converted a portion of their in-the-money options into options to purchase IAS’s common and preferred shares in connection with the Transactions. The outstanding equity interest of IASIS Investment is held 74.4% by TPG, 18.8% by JLL and approximately 6.8% by Trimaran. The following table presents information as of December 19, 2006 regarding ownership of shares of IAS common stock and preferred stock by each person known to be a holder of more than 5% of IAS common stock and preferred stock, the members of the IAS board of directors, each executive officer named in the summary compensation table and all current directors and executive officers as a group. When reviewing the following table, you should be aware that the amounts and percentage of common stock and preferred stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Unless otherwise indicated, the address of each person listed below is 117 Seaboard Lane, Building E, Franklin, Tennessee 37067.
Percentage of Percentage of Preferred Shares Common Shares Preferred Shares Common Shares Beneficial Owners Beneficially Owned (a) Beneficially Owned (b) Beneficially Owned Beneficially Owned IASIS Investment (c) 292,000 14,600,000 100.0% 100.0% David R. White 1,213 255,158 * * Sandra K. McRee 890 108,261 * * W. Carl Whitmer 707 99,121 * * Frank A. Coyle 109 23,440 * * Larry Hancock 74 15,699 * * David Bonderman (d) — — — — Jonathan J. Coslet (d) — — — — Kirk E. Gorman — 1,701(e) * * Curtis Lane — — — — Todd B. Sisitsky — — — — Paul S. Levy (f) 54,986 2,744,800 18.8% 18.8% Jeffrey C. Lightcap 54,986 2,744,800 18.8% 18.8% Sharad Mansukani — 1,464(e) * * Current directors and executive officers as a group (21 persons) 295,067 15,134,613 100.0% 100.0%
* Less than 1%.
(a) The following shares of preferred stock subject to options converted by management in connection with the Transactions currently exercisable or exercisable within 60 days of December 19, 2006, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options but are not deemed outstanding for the purpose of computing the percentage ownership of any other person: Mr. White, 1,213; Ms. McRee, 890; Mr. Whitmer, 707; Mr. Coyle, 109; Mr. Hancock, 74; and all current directors and executive officers as a group (21 persons), 3,067.
(b) The following shares of common stock subject to options converted by management in connection with the Transactions currently exercisable or exercisable within 60 days of December 19, 2006, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options but are not deemed outstanding for the purpose of computing the percentage ownership of
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any other person: Mr. White, 255,158; Ms. McRee, 108,261; Mr. Whitmer, 99,121; Mr. Coyle, 23,440; Mr. Hancock, 15,699; and all current directors and executive officers as a group (21 persons), 534,613.
(c) The membership interests of IASIS Investment are owned as follows: TPG, 74.4%, JLL, 18.8%, and Trimaran, 6.8%. TPG Advisors III, Inc. and TPG Advisors IV, Inc. through their ownership of TPG, which owns a controlling interest in IASIS Investment, may be deemed to beneficially own all of the shares of preferred stock and common stock owned by IASIS Investment.
(d) David Bonderman, James G. Coulter and William S. Price, III are directors, executive officers and the sole shareholders of TPG Advisors III, Inc. and TPG Advisors IV, Inc. TPG Advisors III, Inc. and TPG Advisors IV, Inc. through their ownership of TPG, which owns a controlling interest in IASIS Investment, may be deemed to beneficially own all of the shares of preferred stock and common stock owned by IASIS Investment. Messrs. Bonderman, Coulter and Price, by virtue of their positions with TPG Advisors III, Inc. and TPG Advisors IV, Inc. may be deemed to have investment powers and beneficial ownership with respect to all of the shares of preferred stock and common stock owned by IASIS Investment. Each of Messrs. Bonderman, Coulter and Price disclaims beneficial ownership of these shares of preferred stock and common stock. None of Messrs. Coslet and Sisitsky has investment power over any of the shares of preferred stock and common stock owned by IASIS Investment.
(e) Represents shares of restricted stock granted to Messrs. Gorman and Mansukani pursuant to Director Compensation and Restricted Stock Award Agreements.
(f) Mr. Levy is a senior managing director of JLL Partners, Inc. and Mr. Lightcap is a shareholder of JLL Partners, Inc. which, through its controlling interest in JLL, which owns 18.8% of IASIS Investment, may be deemed to beneficially own 18.8% of the shares of preferred stock and common stock owned by IASIS Investment. Accordingly, Messrs. Levy and Lightcap may be deemed to beneficially own 18.8% of the shares of preferred stock and common stock owned by IASIS Investment. All of the membership interests in IASIS are pledged to our lenders as security for our obligations under our senior secured credit facilities. In the event of a default under our senior secured credit facilities, our lenders would have the right to foreclose on such membership interests, which would result in a change in control of our company.
Item 13. Certain Relationships and Related Transactions. IASIS Investment Limited Liability Company Operating Agreement TPG is party to a limited liability company operating agreement of IASIS Investment with Trimaran and JLL. TPG, JLL and Trimaran hold approximately 74.4%, 18.8% and 6.8%, respectively, of the equity interests of IASIS Investment. TPG is the managing member of IASIS Investment. Pursuant to this agreement, initially JLL is entitled to nominate two directors to the IAS board of directors, with the remainder of the board of directors to be nominated by TPG. The right of JLL to nominate two directors is subject to its ownership percentage in IASIS Investment remaining at or above 9.4%. In the event JLL’s ownership percentage in IASIS Investment falls below 9.4%, but is at least 4.7%, JLL will have the right to nominate one director. If JLL’s ownership percentage falls below 4.7%, it will not have the right to nominate any directors. The agreement also places certain restrictions on the transfer of membership interests in IASIS Investment. JLL and Trimaran have the right to participate in certain dispositions by TPG and can be required to participate on the same terms in any sale by TPG in excess of a specified percentage of its collective interest.
Investor Rights Agreement After giving effect to the Transactions, IASIS Investment is the sole stockholder of IAS, which owns 100% of the common interests of IASIS. IASIS Investment is party to an investor rights agreement with IAS. Pursuant to this agreement, IASIS Investment can cause IAS to register its interests in IAS under the Securities Act and to maintain a shelf registration statement effective with respect to such interests. IASIS Investment is also entitled to participate on a pro rata basis in any registration of our equity interests under the Securities Act that IAS may undertake. The agreement also grants IASIS Investment preemptive rights over certain additional issuances of equity securities by IAS.
Management Services Agreement Upon the consummation of the Transactions, we entered into a management services agreement with TPG GenPar III, L.P., TPG GenPar IV, L.P., both affiliates of TPG, JLL Partners Inc. and Trimaran Fund Management,
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L.L.C. under which we paid those parties a transaction fee equal to $15.0 million in the aggregate. The management services agreement provides that in exchange for consulting and management advisory services that will be provided to us by the investors, we will pay an aggregate monitoring fee of 0.25% of budgeted net revenue up to a maximum of $5.0 million per fiscal year to these parties (or certain of their respective affiliates) and reimburse them for their reasonable disbursements and out-of-pocket expenses. This monitoring fee will be subordinated to the senior subordinated notes in the event of a bankruptcy of the company. For the years ended September 30, 2006 and 2005, we paid $4.2 million and $3.8 million, respectively, in monitoring fees under the management services agreement.
Stockholders Agreement In connection with the 1999 recapitalization transaction with Paracelsus Healthcare Corporation (currently known as Clarent Hospital Corporation) and acquisition of hospitals and related facilities from Tenet, JLL and the other investors in our company entered into a stockholders agreement dated October 8, 1999, as amended, governing their ownership of our company. We agreed to pay the administrative fees and expenses of JLL during the term of the stockholders agreement. During the year ended September 30, 2004, we paid JLL approximately $165,000 for its administrative fees and expenses. The stockholders agreement terminated on June 22, 2004.
Tax Sharing Agreement and Other Tax Allocations Prior to the consummation of the Transactions, IAS and some of its subsidiaries were included in JLL’s consolidated group for U.S. federal income tax purposes as well as in some consolidated, combined or unitary groups which included JLL for state, local and foreign income tax purposes. IAS and JLL entered into a tax sharing agreement in connection with the recapitalization that occurred in October 1999. The tax sharing agreement required IAS to make payments to JLL such that, with respect to tax returns for any taxable period in which IAS or any of its subsidiaries were included in JLL’s consolidated group or any combined group including JLL, the amount of taxes to be paid by IAS would be determined, subject to some adjustments, as if it and each of its subsidiaries included in JLL’s consolidated group or a combined group including JLL filed their own consolidated, combined or unitary tax returns. The tax sharing agreement with JLL terminated on June 22, 2004. IASIS and some of its subsidiaries are included in IAS’s consolidated group for U.S. federal income tax purposes as well as in some consolidated, combined or unitary groups which include IAS for state, local and foreign income tax purposes. With respect to tax returns for any taxable period in which IASIS or any of its subsidiaries are included in IAS’s consolidated group or any combined group including IAS, the amount of taxes to be paid by IASIS is determined, subject to some adjustments, as if it and each of its subsidiaries included in IAS’s consolidated group or a combined group including IAS filed their own consolidated, combined or unitary tax returns.
Item 14. Principal Accountant Fees and Services The following table sets forth the aggregate fees for services related to fiscal years 2006 and 2005 provided by Ernst & Young LLP, our principal accountants:
Fiscal Fiscal 2006 2005 Audit Fees (a) $1,115,700 $1,010,400 Audit-Related Fees (b) 315,500 6,400 Tax Fees 12,000 86,700 All Other Fees (c) 64,000 —
(a) Audit Fees represent fees billed for professional services rendered for the audit of our annual financial statements and review of our quarterly financial statements, and audit services provided in connection with other statutory or regulatory filings.
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(b) Audit-Related Fees represent fees billed for assurance services related to the audit of our financial statements, as well as certain due diligence projects.
(c) All Other Fees represent fees for services provided to us not otherwise included in the categories above. During fiscal 2006, we reviewed our existing practices regarding the use of our independent auditors to provide non-audit and consulting services, to ensure compliance with SEC proposals. Our audit committee pre-approval policy provides that our independent auditors may provide certain non-audit services which do not impair the auditors’ independence. In that regard, our audit committee must pre-approve all audit services provided to our company, as well as all non-audit services provided by our company’s independent auditors. This policy is administered by our senior corporate financial management, which reports throughout the year to our audit committee. Our audit committee pre-approved all audit and non-audit services provided by Ernst & Young LLP during fiscal 2006 and fiscal 2005.
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements: See Item 8
2. Financial Statement Schedules: Not Applicable
3. Management Contracts and Compensatory Plans and Arrangements
— Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and David R. White (1)
— Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and Sandra K. McRee (1)
— Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and W. Carl Whitmer (1)
— Form of Roll-over Option Letter Agreement (1)
— IASIS Healthcare Corporation 2004 Stock Option Plan (1)
— Form of Management Stockholders Agreement between IAS and each of David R. White, Sandra K. McRee and W. Carl Whitmer (1)
— Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)
— Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)
— Form of Management Stockholders Agreement for Rollover Options (1)
— IASIS Corporate Incentive Plan (1)
— IASIS Market Executive Incentive Program (1)
— Director Compensation and Restricted Share Award Agreement, dated as of February 14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (11)
— First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (12)
— Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005, between IASIS Healthcare Corporation and Sharad Mansukani (13)
— IASIS Healthcare Non-Qualified Deferred Compensation Program
(b) Exhibits:
Exhibit No. Description 2.1 Agreement and Plan of Merger, dated as of May 4, 2004, by and among IASIS Investment LLC, Titan Merger Corporation and IASIS Healthcare Corporation (1)
2.2 Indemnification Agreement dated as of May 4, 2004, by and among IASIS Investment LLC, IASIS Healthcare Corporation, and the stockholders and option holders of IASIS Healthcare
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Exhibit No. Description Corporation listed on the signature pages thereof (2)
2.3 Asset Sale Agreement dated as of January 16, 2004, by and between NLVH, Inc. and IASIS Healthcare Corporation (3)
2.4 Assignment and Assumption of Asset Sale Agreement dated as of January 16, 2004, by and between IASIS Healthcare Corporation and Lake Mead Hospital, Inc. (3)
2.5 Guaranty of Payment and Performance dated as of January 16, 2004, executed by IASIS Healthcare Corporation in favor of NLVH, Inc. (3)
3.1 Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State of the State of Delaware on May 11, 2004 (1)
3.2 Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (1)
4.1 Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC, IASIS Capital Corporation, the Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1)
4.2 Form of Notation of Subsidiary Guarantee (1)
4.3 Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (1)
4.4 Supplemental Indenture, dated as of June 30, 2004, by and between IASIS Finance Texas Holdings, LLC, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1)
4.5 Supplemental Indenture, effective as of August 1, 2005, by and among Cardiovascular Specialty Centers of Utah, LP, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (15)
4.6 Supplemental Indenture, dated as of July 20, 2006, by and among IASIS Glenwood Regional Medical Center, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee
4.7 Supplemental Indenture, dated as of July 27, 2006, by and among The Heart Center of Central Phoenix, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee
10.1 Lease, dated as of July 29, 1977, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)
10.2 Addendum to Lease entered into by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)
10.3 Conforming Amendment to Lease, dated as of June 10, 1991, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)
10.4 Amendment to Hospital Lease, dated as of October 31, 2000, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, L.P., as Tenant (4)
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Exhibit No. Description 10.5 Amendment to Lease, dated April 30, 2003, by and between Sierra Equities, Inc. and Mesa General Hospital, L.P. (5)
10.6 Letter Agreement effective May 6, 2005, amending Lease by and between Sierra Equities Inc. and Mesa General Hospital, L.P. (6)
10.7 Amended and Restated Pioneer Hospital Lease, dated as of June 28, 2002, by and between Health Care Property Investors, Inc. and Pioneer Valley Hospital, Inc. (7)
10.8 Lease Agreement, dated as of October 6, 2003, between The Dover Centre, LLC and IASIS Healthcare Corporation (8)
10.9 Form of Indemnification Agreement (1)
10.10 Contract between Arizona Health Care Cost Containment System and Health Choice Arizona (including Amendment No. 1 thereto), effective as of October 1, 2003 (5)
10.11 Amendment No. 2 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.12 Amendment No. 3 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.13 Amendment No. 4 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.14 Amendment No. 5 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.15 Amendment No. 6 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.16 Amendment No. 7 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of April 1, 2004 (1)
10.17 Amendment No. 8 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2004 (1)
10.18 Amendment No. 9 to Contact between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2004 (9)
10.19 Amendment No. 10 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (17)
10.20 Amendment No. 11 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of September 1, 2005 (14)
10.21 Amendment No. 12 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of January 1, 2006 (14)
10.22 Amendment No. 13 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (15)
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Exhibit No. Description 10.23 Amendment No. 14 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (15)
10.24 Amendment No. 15 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2006
10.25 Purchase and Sale Agreement dated as of December 15, 2003, by and between Rocky Mountain Medical Center, Inc. and Board of Education of the Granite School District (10)
10.26 Letter Agreement dated as of January 26, 2004 by and among Rocky Mountain Medical Center, Inc., Board of Education of Granite School District and Merrill Title Company (10)
10.27 Information System Agreement, dated February 23, 2000, between McKesson Information Solutions LLC and IASIS Healthcare Corporation, as amended (1)**
10.28 Amended and Restated Credit Agreement, dated June 22, 2004, by and among IASIS Healthcare LLC, IASIS Healthcare Corporation, the Subsidiary Guarantors, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swingline Lender and the other lenders party thereto (1)
10.29 Joinder Agreement, dated as of June 30, 2004, by and between IASIS Finance Texas Holdings, LLC and Bank of America, N.A., as Administrative Agent (1)
10.30 Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and David R. White (1)
10.31 Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and Sandra K. McRee (1)
10.32 Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and W. Carl Whitmer (1)
10.33 Form of Roll-over Option Letter Agreement (1)
10.34 IASIS Healthcare Corporation 2004 Stock Option Plan (1)
10.35 Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS Co-Invest II LLC (1)
10.36 Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment LLC and IASIS Healthcare Corporation (1)
10.37 Form of Management Stockholders Agreement between IAS and each of David R. White, Sandra K. McRee and W. Carl Whitmer (1)
10.38 Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)
10.39 Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)
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Exhibit No. Description 10.40 Form of Management Stockholders Agreement for Rollover Options (1)
10.41 IASIS Corporate Incentive Plan (1)
10.42 IASIS Market Executive Incentive Program (1)
10.43 Director Compensation and Restricted Share Award Agreement, dated as of February 14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (11)
10.44 First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (12)
10.45 Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005, between IASIS Healthcare Corporation and Sharad Mansukani (13)
10.46 Asset Purchase Agreement, dated July 20, 2006, by and among Glenwood Regional Medical Center, Glenwood Health Services, Inc., Hospital Service District No. 1 of the Parish of Ouachita, State of Louisiana, IASIS Glenwood Regional Medical Center, L.P. and IASIS Healthcare, LLC (16)
10.47 IASIS Healthcare Non-Qualified Deferred Compensation Program
10.48 Joinder Agreement, dated as of July 20, 2006, between IASIS Glenwood Regional Medical Center, L.P. and Bank of America, N.A., as Administrative Agent
10.49 Joinder Agreement, dated as of July 27, 2006, between The Heart Center of Central Phoenix, L.P. and Bank of America, N.A., as Administrative Agent
14 Code of Ethics (8)
21 Subsidiaries of IASIS Healthcare Corporation
31.1 Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
** Portions of this exhibit have been omitted and filed separately with the Commission pursuant to a grant of confidential treatment pursuant to Rule 24(b)- 2 promulgated under the Securities Exchange Act of 1934, as amended.
(1) Incorporated by reference to the Company’s Registration Statement on Form S-4 (Registration No. 333-117362).
(2) Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004.
(3) Incorporated by reference to IASIS Healthcare Corporation’s Current Report on Form 8-K filed on February 2, 2004.
(4) Incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000.
(5) Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003.
(6) Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 12, 2005.
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(7) Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002.
(8) Incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.
(9) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
(10) Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2003.
(11) Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 18, 2005.
(12) Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 22, 2005.
(13) Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2005.
(14) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2005.
(15) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006.
(16) Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 24, 2006.
(17) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
IASIS HEALTHCARE LLC
Date: December 19, 2006 By: /s/ David R. White David R. White Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ David R. White Chairman of the Board and Chief Executive December 19, 2006 David R. White Officer (Principal Executive Officer)
/s/ W. Carl Whitmer Chief Financial Officer (Principal Financial December 19, 2006 W. Carl Whitmer Officer)
/s/ John M. Doyle Chief Accounting Officer (Principal Accounting December 19, 2006 John M. Doyle Officer)
/s/ David Bonderman Director of IASIS Healthcare Corporation (sole December 19, 2006 David Bonderman member of IASIS Healthcare LLC)
/s/ Jonathan J. Coslet Director of IASIS Healthcare Corporation (sole December 19, 2006 Jonathan J. Coslet member of IASIS Healthcare LLC)
/s/ Kirk E. Gorman Director of IASIS Healthcare Corporation (sole December 19, 2006 Kirk E. Gorman member of IASIS Healthcare LLC)
/s/ Curtis Lane Director of IASIS Healthcare Corporation (sole December 19, 2006 Curtis Lane member of IASIS Healthcare LLC)
/s/ Todd B. Sisitsky Director of IASIS Healthcare Corporation (sole December 19, 2006 Todd B. Sisitsky member of IASIS Healthcare LLC)
/s/ Paul S. Levy Director of IASIS Healthcare Corporation (sole December 19, 2006 Paul S. Levy member of IASIS Healthcare LLC)
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Signature Title Date
/s/ Jeffrey C. Lightcap Director of IASIS Healthcare Corporation (sole December 19, 2006 Jeffrey C. Lightcap member of IASIS Healthcare LLC)
/s/ Sharad Mansukani Director of IASIS Healthcare Corporation (sole December 19, 2006 Sharad Mansukani member of IASIS Healthcare LLC)
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SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT No annual report or proxy material has been sent to security holders.
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EXHIBIT INDEX
Exhibit No. Description 2.1 Agreement and Plan of Merger, dated as of May 4, 2004, by and among IASIS Investment LLC, Titan Merger Corporation and IASIS Healthcare Corporation (1)
2.2 Indemnification Agreement dated as of May 4, 2004, by and among IASIS Investment LLC, IASIS Healthcare Corporation, and the stockholders and option holders of IASIS Healthcare Corporation listed on the signature pages thereof (2)
2.3 Asset Sale Agreement dated as of January 16, 2004, by and between NLVH, Inc. and IASIS Healthcare Corporation (3)
2.4 Assignment and Assumption of Asset Sale Agreement dated as of January 16, 2004, by and between IASIS Healthcare Corporation and Lake Mead Hospital, Inc. (3)
2.5 Guaranty of Payment and Performance dated as of January 16, 2004, executed by IASIS Healthcare Corporation in favor of NLVH, Inc. (3)
3.1 Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State of the State of Delaware on May 11, 2004 (1)
3.2 Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (1)
4.1 Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC, IASIS Capital Corporation, the Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1)
4.2 Form of Notation of Subsidiary Guarantee (1)
4.3 Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (1)
4.4 Supplemental Indenture, dated as of June 30, 2004, by and between IASIS Finance Texas Holdings, LLC, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1)
4.5 Supplemental Indenture, effective as of August 1, 2005, by and among Cardiovascular Specialty Centers of Utah, LP, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (15)
4.6 Supplemental Indenture, dated as of July 20, 2006, by and among IASIS Glenwood Regional Medical Center, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee
4.7 Supplemental Indenture, dated as of July 27, 2006, by and among The Heart Center of Central Phoenix, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee
10.1 Lease, dated as of July 29, 1977, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)
10.2 Addendum to Lease entered into by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)
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Exhibit No. Description 10.3 Conforming Amendment to Lease, dated as of June 10, 1991, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)
10.4 Amendment to Hospital Lease, dated as of October 31, 2000, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, L.P., as Tenant (4)
10.5 Amendment to Lease, dated April 30, 2003, by and between Sierra Equities, Inc. and Mesa General Hospital, L.P. (5)
10.6 Letter Agreement effective May 6, 2005, amending Lease by and between Sierra Equities Inc. and Mesa General Hospital, L.P. (6)
10.7 Amended and Restated Pioneer Hospital Lease, dated as of June 28, 2002, by and between Health Care Property Investors, Inc. and Pioneer Valley Hospital, Inc. (7)
10.8 Lease Agreement, dated as of October 6, 2003, between The Dover Centre, LLC and IASIS Healthcare Corporation (8)
10.9 Form of Indemnification Agreement (1)
10.10 Contract between Arizona Health Care Cost Containment System and Health Choice Arizona (including Amendment No. 1 thereto), effective as of October 1, 2003 (5)
10.11 Amendment No. 2 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.12 Amendment No. 3 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.13 Amendment No. 4 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.14 Amendment No. 5 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.15 Amendment No. 6 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)
10.16 Amendment No. 7 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of April 1, 2004 (1)
10.17 Amendment No. 8 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2004 (1)
10.18 Amendment No. 9 to Contact between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2004 (9)
10.19 Amendment No. 10 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (17)
10.20 Amendment No. 11 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of September 1, 2005 (14)
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Exhibit No. Description 10.21 Amendment No. 12 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of January 1, 2006 (14)
10.22 Amendment No. 13 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (15)
10.23 Amendment No. 14 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (15)
10.24 Amendment No. 15 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2006
10.25 Purchase and Sale Agreement dated as of December 15, 2003, by and between Rocky Mountain Medical Center, Inc. and Board of Education of the Granite School District (10)
10.26 Letter Agreement dated as of January 26, 2004 by and among Rocky Mountain Medical Center, Inc., Board of Education of Granite School District and Merrill Title Company (10)
10.27 Information System Agreement, dated February 23, 2000, between McKesson Information Solutions LLC and IASIS Healthcare Corporation, as amended (1)**
10.28 Amended and Restated Credit Agreement, dated June 22, 2004, by and among IASIS Healthcare LLC, IASIS Healthcare Corporation, the Subsidiary Guarantors, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swingline Lender and the other lenders party thereto (1)
10.29 Joinder Agreement, dated as of June 30, 2004, by and between IASIS Finance Texas Holdings, LLC and Bank of America, N.A., as Administrative Agent (1)
10.30 Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and David R. White (1)
10.31 Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and Sandra K. McRee (1)
10.32 Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and W. Carl Whitmer (1)
10.33 Form of Roll-over Option Letter Agreement (1)
10.34 IASIS Healthcare Corporation 2004 Stock Option Plan (1)
10.35 Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS Co-Invest II LLC (1)
10.36 Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment LLC and IASIS Healthcare Corporation (1)
10.37 Form of Management Stockholders Agreement between IAS and each of David R. White, Sandra K. McRee and W. Carl Whitmer (1)
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Exhibit No. Description 10.38 Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)
10.39 Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)
10.40 Form of Management Stockholders Agreement for Rollover Options (1)
10.41 IASIS Corporate Incentive Plan (1)
10.42 IASIS Market Executive Incentive Program (1)
10.43 Director Compensation and Restricted Share Award Agreement, dated as of February 14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (11)
10.44 First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (12)
10.45 Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005, between IASIS Healthcare Corporation and Sharad Mansukani (13)
10.46 Asset Purchase Agreement, dated July 20, 2006, by and among Glenwood Regional Medical Center, Glenwood Health Services, Inc., Hospital Service District No. 1 of the Parish of Ouachita, State of Louisiana, IASIS Glenwood Regional Medical Center, L.P. and IASIS Healthcare, LLC (16)
10.47 IASIS Healthcare Non-Qualified Deferred Compensation Program
10.48 Joinder Agreement, dated as of July 20, 2006, between IASIS Glenwood Regional Medical Center, L.P. and Bank of America, N.A., as Administrative Agent
10.49 Joinder Agreement, dated as of July 27, 2006, between The Heart Center of Central Phoenix, L.P. and Bank of America, N.A., as Administrative Agent
14 Code of Ethics (8)
21 Subsidiaries of IASIS Healthcare Corporation
31.1 Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
** Portions of this exhibit have been omitted and filed separately with the Commission pursuant to a grant of confidential treatment pursuant to Rule 24(b)- 2 promulgated under the Securities Exchange Act of 1934, as amended.
(1) Incorporated by reference to the Company’s Registration Statement on Form S-4 (Registration No. 333-117362).
(2) Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004.
(3) Incorporated by reference to IASIS Healthcare Corporation’s Current Report on Form 8-K filed on February 2, 2004.
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(4) Incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000.
(5) Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003.
(6) Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 12, 2005.
(7) Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002.
(8) Incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.
(9) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
(10) Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2003.
(11) Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 18, 2005.
(12) Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 22, 2005.
(13) Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2005.
(14) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2005.
(15) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006.
(16) Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 24, 2006.
(17) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
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Exhibit 4.6
SUPPLEMENTAL INDENTURE Supplemental Indenture (this “Supplemental Indenture”), effective as of July 20, 2006, among IASIS Glenwood Regional Medical Center, L.P. (the “Guaranteeing Subsidiary”), a subsidiary of IASIS Healthcare LLC (or its permitted successor), (the “ Company”), the Company, IASIS Capital Corporation (or its permitted successor), (“ IASIS Capital,” and together with the Company, the “Issuers”), the other Guarantors (as defined in the Indenture referred to herein) and The Bank of New York Trust Company, N.A., as trustee under the Indenture referred to below (the “ Trustee”).
W I T N E S S E T H WHEREAS, the Issuers have heretofore executed and delivered to the Trustee an indenture (the “ Indenture”), dated as of June 22, 2004 providing for the 3 issuance of 8 /4% Senior Subordinated Notes due 2014 (the “ Notes”); WHEREAS, the Indenture provides that under certain circumstances the Guaranteeing Subsidiary shall execute and deliver to the Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally guarantee all of the Company’s Obligations under the Notes and the Indenture on the terms and conditions set forth herein (the “ Subsidiary Guarantee”); and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Parties mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. Capitalized Terms. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. Agreement to Guarantee. The Guaranteeing Subsidiary hereby agrees to provide an unconditional Guarantee on the terms and subject to the conditions set forth in the Subsidiary Guarantee and in this Indenture including but not limited to Article 11 thereof. 3. No Recourse Against Others. No past, present or future director, officer, employee, incorporator, stockholder or agent of the Guaranteeing Subsidiary, as such, shall have any liability for any obligations of the Issuers or any Guaranteeing Subsidiary under the Notes, any Subsidiary Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy. 4. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF
CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 5. Counterparts. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 6. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof. 7. The Trustee. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiary and the Issuers.
[Signature Pages Follow]
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first above written.
IASIS GLENWOOD REGIONAL MEDICAL CENTER, L.P.
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
IASIS HEALTHCARE LLC
By: /s/ W. Carl Whitmer Name: W. Carl Whitmer Title: Chief Financial Officer
IASIS CAPITAL CORPORATION
By: /s/ W. Carl Whitmer Name: W. Carl Whitmer Title: Chief Financial Officer
ARIZONA DIAGNOSTIC & SURGICAL CENTER, INC. BAPTIST JOINT VENTURE HOLDINGS, INC. BEAUMONT HOSPITAL HOLDINGS, INC. BILTMORE SURGERY CENTER, INC. BILTMORE SURGERY CENTER HOLDINGS, INC. BROOKWOOD DIAGNOSTIC CENTER OF TAMPA, INC. DAVIS HOSPITAL HOLDINGS, INC. DAVIS SURGICAL CENTER HOLDINGS, INC. DECISIONPOINT SERVICES, INC. FIRST CHOICE PHYSICIANS NETWORK HOLDINGS, INC. IASIS FINANCE, INC. IASIS HEALTHCARE HOLDINGS, INC. IASIS MANAGEMENT COMPANY IASIS PHYSICIAN SERVICES, INC. IASIS TRANSCO, INC. JORDAN VALLEY HOSPITAL HOLDINGS, INC. MCS/AZ, INC. METRO AMBULATORY SURGERY CENTER, INC.
NORTH VISTA HOSPITAL, INC. PALMS OF PASADENA HOMECARE, INC. PIONEER VALLEY HEALTH PLAN, INC. PIONEER VALLEY HOSPITAL, INC. PIONEER VALLEY HOSPITAL PHYSICIANS, INC. ROCKY MOUNTAIN MEDICAL CENTER, INC. SALT LAKE REGIONAL MEDICAL CENTER, INC. SALT LAKE REGIONAL PHYSICIANS, INC. IASIS HOSPITAL NURSE STAFFING COMPANY SOUTHRIDGE PLAZA HOLDINGS, INC. SSJ ST. PETERSBURG HOLDINGS, INC. TAMPA BAY STAFFING SOLUTIONS, INC.
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
SEABOARD DEVELOPMENT LLC
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
IASIS FINANCE TEXAS HOLDINGS, LLC
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
ST. LUKE’S BEHAVIORAL HOSPITAL, LP MEMORIAL HOSPITAL OF TAMPA, LP MESA GENERAL HOSPITAL, LP PALMS OF PASADENA HOSPITAL, LP SOUTHWEST GENERAL HOSPITAL, LP ST. LUKE’S MEDICAL CENTER, LP TEMPE ST. LUKE’S HOSPITAL, LP TOWN & COUNTRY HOSPITAL, LP MOUNTAIN VISTA MEDICAL CENTER, LP CARDIOVASCULAR SPECIALTY CENTERS OF UTAH, LP
By: IASIS HEALTHCARE HOLDINGS, INC., as General Partner
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
THE BANK OF NEW YORK TRUST COMPANY, N.A., as Trustee
By: /s/ Stefan Victory Authorized Signature
Exhibit 4.7
SUPPLEMENTAL INDENTURE Supplemental Indenture (this “Supplemental Indenture”), effective as of July 27, 2006, among The Heart Center of Central Phoenix, L.P. (the “Guaranteeing Subsidiary”), a subsidiary of IASIS Healthcare LLC (or its permitted successor), (the “ Company”), the Company, IASIS Capital Corporation (or its permitted successor), (“ IASIS Capital,” and together with the Company, the “Issuers”), the other Guarantors (as defined in the Indenture referred to herein) and The Bank of New York Trust Company, N.A., as trustee under the Indenture referred to below (the “ Trustee”).
W I T N E S S E T H WHEREAS, the Issuers have heretofore executed and delivered to the Trustee an indenture (the “ Indenture”), dated as of June 22, 2004 providing for the 3 issuance of 8 /4% Senior Subordinated Notes due 2014 (the “ Notes”); WHEREAS, the Indenture provides that under certain circumstances the Guaranteeing Subsidiary shall execute and deliver to the Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally guarantee all of the Company’s Obligations under the Notes and the Indenture on the terms and conditions set forth herein (the “ Subsidiary Guarantee”); and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Parties mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. Capitalized Terms. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. Agreement to Guarantee. The Guaranteeing Subsidiary hereby agrees to provide an unconditional Guarantee on the terms and subject to the conditions set forth in the Subsidiary Guarantee and in this Indenture including but not limited to Article 11 thereof. 3. No Recourse Against Others. No past, present or future director, officer, employee, incorporator, stockholder or agent of the Guaranteeing Subsidiary, as such, shall have any liability for any obligations of the Issuers or any Guaranteeing Subsidiary under the Notes, any Subsidiary Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy. 4. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF
CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 5. Counterparts. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 6. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof. 7. The Trustee. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiary and the Issuers.
[Signature Pages Follow]
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first above written.
THE HEART CENTER OF CENTRAL PHOENIX, L.P.
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
IASIS HEALTHCARE LLC
By: W. Carl Whitmer Name: W. Carl Whitmer Title: Chief Financial Officer
IASIS CAPITAL CORPORATION
By: W. Carl Whitmer Name: W. Carl Whitmer Title: Chief Financial Officer
ARIZONA DIAGNOSTIC & SURGICAL CENTER, INC. BAPTIST JOINT VENTURE HOLDINGS, INC. BEAUMONT HOSPITAL HOLDINGS, INC. BILTMORE SURGERY CENTER, INC. BILTMORE SURGERY CENTER HOLDINGS, INC. BROOKWOOD DIAGNOSTIC CENTER OF TAMPA, INC. DAVIS HOSPITAL HOLDINGS, INC. DAVIS SURGICAL CENTER HOLDINGS, INC. DECISIONPOINT SERVICES, INC. FIRST CHOICE PHYSICIANS NETWORK HOLDINGS, INC. IASIS FINANCE, INC. IASIS HEALTHCARE HOLDINGS, INC. IASIS MANAGEMENT COMPANY IASIS PHYSICIAN SERVICES, INC. IASIS TRANSCO, INC. JORDAN VALLEY HOSPITAL HOLDINGS, INC. MCS/AZ, INC. METRO AMBULATORY SURGERY CENTER, INC.
NORTH VISTA HOSPITAL, INC. PALMS OF PASADENA HOMECARE, INC. PIONEER VALLEY HEALTH PLAN, INC. PIONEER VALLEY HOSPITAL, INC. PIONEER VALLEY HOSPITAL PHYSICIANS, INC. ROCKY MOUNTAIN MEDICAL CENTER, INC. SALT LAKE REGIONAL MEDICAL CENTER, INC. SALT LAKE REGIONAL PHYSICIANS, INC. IASIS HOSPITAL NURSE STAFFING COMPANY SOUTHRIDGE PLAZA HOLDINGS, INC. SSJ ST. PETERSBURG HOLDINGS, INC. TAMPA BAY STAFFING SOLUTIONS, INC.
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
SEABOARD DEVELOPMENT LLC
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
IASIS FINANCE TEXAS HOLDINGS, LLC
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
ST. LUKE’S BEHAVIORAL HOSPITAL, LP MEMORIAL HOSPITAL OF TAMPA, LP MESA GENERAL HOSPITAL, LP PALMS OF PASADENA HOSPITAL, LP SOUTHWEST GENERAL HOSPITAL, LP ST. LUKE’S MEDICAL CENTER, LP TEMPE ST. LUKE’S HOSPITAL, LP TOWN & COUNTRY HOSPITAL, LP MOUNTAIN VISTA MEDICAL CENTER, LP CARDIOVASCULAR SPECIALTY CENTERS OF UTAH, LP IASIS GLENWOOD REGIONAL MEDICAL CENTER, L.P.
By: IASIS HEALTHCARE HOLDINGS, INC., as General Partner
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
THE BANK OF NEW YORK TRUST COMPANY, N.A., as Trustee
By: /s/ Stefan Victory Authorized Signature
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Exhibit 10.24
ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION DIVISION OF BUSINESS AND FINANCE CONTRACT AMENDMENT
1. AMENDMENT NO.: 2. CONTRACT NO.: 3. EFFECTIVE DATE OF AMENDMENT: 4. PROGRAM: 15 YH04-0001-03 October 1, 2006 DHCM
5. CONTRACTOR/PROVIDER NAME AND ADDRESS: Health Choice Arizona 1600 W. Broadway, Suite 260 Tempe, Arizona 85282-1136
6. PURPOSE: To amend Sections B, C, D and E and Attachments A, H and I.
7. The above referenced contract is hereby amended as follows: A. CHANGES IN REQUIREMENTS: In accordance with Section E, Paragraph 30, “Changes”, various changes in contract requirements are indicated in this contract restatement.
B. By signing this contract amendment, the Contractor is agreeing to the terms of the contract as amended.
NOTE: Please sign and date both and return one original to: Pat Watkinson, Contracts Manager AHCCCS Contracts and Purchasing 701 E. Jefferson, MD 5700 Phoenix, AZ 85034
8. EXCEPT AS PROVIDED FOR HEREIN, ALL TERMS AND CONDITIONS OF THE ORIGINAL CONTRACT NOT HERETOFORE CHANGED AND/OR AMENDED REMAIN UNCHANGED AND IN FULL EFFECT.
IN WITNESS WHEREOF THE PARTIES HERETO SIGN THEIR NAMES IN AGREEMENT.
9. NAME OF CONTRACTOR: 10. ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM HEALTH CHOICE ARIZONA SIGNATURE OF AUTHORIZED INDIVIDUAL: /s/ CAROLYN ROSE SIGNATURE: /s/ MICHAEL VEIT
TYPED NAME: TYPED NAME: CAROLYN ROSE MICHAEL VEIT TITLE: CHIEF EXECUTIVE OFFICER TITLE: CONTRACTS AND PURCHASING ADMINISTRATOR DATE 9/26/06 DATE: August 9, 2006
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Janet Napolitano, Governor Anthony D. Rodgers, Director 801 East Jefferson, Phoenix AZ 85034 PO Box 25520, Phoenix AZ 85002 Our first care is your health care phone 602 417 4000 ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM www.ahcccs.state.az.us
August 25, 2006 The Acute Care contract for October 1, 2006–September 30, 2007, Paragraph 57 — Reinsurance, as amended, establishes the following deductible and coinsurance levels for the reinsurance program based on enrollment as of the beginning of each contract year:
Title XIX Waiver Group Annual Deductible* Annual Deductible Statewide Plan Prospective Enrollment Reinsurance Coinsurance 0-34,999 $ 20,000 $ 15,000 75% 35,000-49,999 $ 35,000 $ 15,000 75% 50,000 and over $ 50,000 $ 15,000 75%
* applies to all members except for Title XIX Waiver Group, SSDI and SOBRA Family Planning members Per the RFP, Contractors that fall into the $35,000 and $50,000 deductible levels for prospective reinsurance are allowed to elect a lower deductible level at the beginning of each contract year. Contractors at the $20,000 deductible level are not allowed to elect a higher deductible level. All Contractors must complete the following form electing your deductible choice. If your plan is at the $20,000 deductible level, check the $20,000 box. If your health plan is above the $20,000 deductible level, determine if you would like to remain at the deductible level according to the table above, or if you would like to elect a lower deductible level. Please complete the attached form, by checking the appropriate deductible level box and return to Division of Health Care Management by September 1, 2006. Attached are the Reinsurance Offsets for CYE’07.
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Reinsurance Deductible Choice August 25, 2006 Contract Year Ending 9/30/07 Reinsurance Deductible Level Choice: o $20,000 Prospective Reinsurance Deductible Level o $35,000 Prospective Reinsurance Deductible Level o $50,000 Prospective Reinsurance Deductible Level
Signature Date
Title
Health Plan Please sign and return this form to Kathy Rodham, AHCCCS, Division of Health Care Management, Mail Drop 6100, by Friday, September 1, 2006.
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State of Arizona — AHCCCS Updated Reinsurance Offsets Proprietary & Confidential by Deductible Level
Reinsurance Offsets at $20,000 Deductible Level 1 TANF/KC<1 TANF/KC 1-13 TANK/KC 14-44 F 2 TANF/KC 14-44 M 2 TANF 45 + SSIW/MED SSIW/O MED GSA 2 $ 62.94 $ 1.38 $ 4.99 $ 6.33 $ 12.02 $ 1.01 $ 75.39 GSA 4 $ 61.91 $ 1.34 $ 4.97 $ 5.96 $ 12.17 $ 2.07 $ 69.70 GSA 6 $ 62.51 $ 1.47 $ 5.56 $ 6.06 $ 11.60 $ 1.64 $ 67.09 GSA 8 $ 56.84 $ 1.29 $ 5.35 $ 6.02 $ 11.02 $ 0.96 $ 64.26 GSA 10 $ 61.68 $ 1.38 $ 5.09 $ 6.51 $ 12.24 $ 1.71 $ 74.39 GSA 12 $ 57.09 $ 1.37 $ 5.25 $ 6.16 $ 11.65 $ 1.16 $ 70.98 GSA 14 $ 57.12 $ 1.40 $ 4.75 $ 5.77 $ 11.01 $ 0.96 $ 64.28
Reinsurance Offsets at $35,000 Deductible Level 1 TANF/KC<1 TANF/KC 1-13 TANK/KC 14-44 F 2 TANF/KC 14-44 M 2 TANF 45 + SSIW/MED SSIW/O MED GSA 2 $ 46.48 $ 1.07 $ 3.69 $ 4.79 $ 8.89 $ 0.80 $ 60.55 GSA 4 $ 45.69 $ 1.04 $ 3.70 $ 4.42 $ 9.01 $ 1.88 $ 54.85 GSA 6 $ 46.13 $ 1.14 $ 4.12 $ 4.50 $ 8.59 $ 1.49 $ 54.90 GSA 8 $ 41.95 $ 1.07 $ 3.96 $ 4.47 $ 8.34 $ 0.77 $ 50.57 GSA 10 $ 45.52 $ 1.14 $ 3.79 $ 4.98 $ 9.05 $ 1.37 $ 60.95 GSA 12 $ 42.13 $ 1.14 $ 3.91 $ 4.68 $ 8.67 $ 1.04 $ 58.06 GSA 14 $ 42.15 $ 1.08 $ 3.52 $ 4.28 $ 8.42 $ 0.84 $ 51.97
Reinsurance Offsets at $55,000 Deductible Level 1 TANF/KC<1 TANF/KC 1-13 TANK/KC 14-44 F 2 TANF/KC 14-44 M 2 TANF 45 + SSIW/MED SSIW/O MED GSA 2 $ 36.62 $ 0.88 $ 2.92 $ 3.87 $ 7.02 $ 0.68 $ 51.65 GSA 4 $ 35.98 $ 0.86 $ 2.94 $ 3.50 $ 7.11 $ 1.77 $ 45.96 GSA 6 $ 36.32 $ 0.94 $ 3.25 $ 3.56 $ 6.80 $ 1.40 $ 47.60 GSA 8 $ 33.02 $ 0.94 $ 3.13 $ 3.54 $ 6.73 $ 0.65 $ 42.37 GSA 10 $ 35.84 $ 1.00 $ 3.01 $ 4.06 $ 7.15 $ 1.16 $ 52.89 GSA 12 $ 33.17 $ 1.00 $ 3.11 $ 3.79 $ 6.89 $ 0.96 $ 50.32 GSA 14 $ 33.18 $ 0.89 $ 2.78 $ 3.39 $ 6.88 $ 0.77 $ 44.59
1 These offsets are inclusive of the inpatient, transplant, and catastrophic PMPMs;
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SUMMARY OF CHANGES — AMENDMENT 10/1/06 This summary is provided as a convenience to the Contractor and does not supersede the revised text of the renewal document. This summary is believed to be an accurate summary of changes; however, any conflict between the summary and the text will be resolved in favor of the text. All text revisions summarized below are considered either an actual change to contract requirements or a clarification of existing requirements. Finally, punctuation, grammar and style changes have been made throughout the revised text which have no effect on the contract requirements and which may not be otherwise identified.
Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: Throughout the Document
Throughout the Document
Definitions BIDDER’S LIBRARY — deleted “at the AHCCCS Office in Phoenix. A limited, virtual library is located”.
Definitions Deleted “HMO” definition.
Definitions Inserted definition for “Medical Management”.
Definitions Deleted “Medicare HMO” definition and added “Medicare Advantage” definition.
Definitions Revised “Appeal Resolution” to be “Notice of Appeal Resolution”
Definitions Added “filed by a provider or Contractor, whichever is applicable” to Claim Dispute definition
Definitions Added definition for Adjudicated Claims : Claims which have been received and processed by the Contractor which resulted in a payment or denial of payment.
Definitions Added the following definitions:
Delegated Agreements, Management Service Agreements and Service Level Agreements
Definitions Further defined definition for Management Service Agreements: An agreement with an entity in which the owner of the Contractor delegates some or all of the comprehensive management and administrative services necessary for the operation of the Contractor
Definitions Added definition — Medicare Managed Care Plan: A managed care entity that has a Medicare contract with CMS to provide services to Medicare beneficiaries, including Medicare Advantage Prescription Drug Plan (MAPDP), MAPDP Special Needs Plan, or Medicare Prescription Drug Plan
Definitions Added definition for Major Upgrade to clarify language in Paragraph 38, Claims Payment/Health Information System: Major Upgrade — Any upgrade or system changes that may result in a disruption to the following: Loading of contracts, providers or members, issuing prior authorizations or the adjudication of claims.
Definitions Subcontractor — updated definition: (1) A provider of health care who agrees to furnish covered services to members (2) A person, agency or organization with which the Contractor has contracted or delegated some of its management/administrative functions or responsibilities (3) A person, agency or organization with which a fiscal agent has entered into a contract, agreement, purchase order or lease (or leases of real property) to obtain space, supplies, equipment or services provided under the AHCCCS agreement.
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: D-2 Eligibility Categories Added : Social Security Disability Insurance Temporary Medical Coverage (SSDI-TMC) Laws 2006, Chapter 373 established a Temporary Medical Coverage Program. SSDI-TMC provides health care coverage to persons who: 1 . Are citizens and residents who have been enrolled in AHCCCS at any time within the last 24 months
2. And became ineligible for AHCCCS coverage due to federal disability insurance benefit payments making them over income for Medicaid,
3. And they are not yet eligible for Medicare.
In order to participate in SSDI-TMC, eligible persons must pay a premium. Participants become ineligible for SSDI-TMC once they become eligible for Medicare. SSDI-TMC is funded entirely by the State. Contractors will be capitated for these members under unique rate codes and AHCCCS may provide a reconciliation to limit the profit or loss of this population. If reconciliation is to be implemented, an SSDI- TMC reconciliation policy will be developed which will discuss the details of the reconciliation calculations and timelines. SSDI-TMC members will not be eligible for behavioral health services, prior period coverage, any supplemental payments or reinsurance. Members will be entitled to all other AHCCCS Acute Care benefits.
D-3 Enrollment and Disenrollment Revised Policy title.
D-3 Enrollment and Disenrollment Native Americans — change IHS to AHCCCS FFS
D-8 Mainstreaming of ALTCS Deleted “sex” and replaced with “gender”. In the 1 st subparagraph inserted “literacy and” and “including Members assistance for the visual and hearing impaired”. Removed “of any language” Added back in “free of charge”
D-9 Transition of Members Added language to include CMDP.
D-9 Transition of Members Removed HIS, a PL 93-638 tribal entity
D-10 Scope of Services — Notice Added “reduce, terminate or suspend” to the “written notice of any decision to deny...” of Action
D-10 Covered Services — Inserted “or others as medically indicated” and referenced the AMPM for current immunization Immunizations requirements.
D-10 Covered Services — Deleted second sentences beginning with “Such limitations ...... ” Transplants
D-10 Emergency Services Inserted “Claims submission by the hospital constitutes notice to the Contractor.” Into the second item #2. Added to #2 – Claim submission by the hospital within 10 calendar days of presentation for the emergency services constitutes notice to the Contractor.
D-10 Emergency Services Insert “Emergency Room” Provider -
D-10 Emergency Services Added sentence to the end: For additional information and requirements regarding emergency services, refer to AHCCCS Rules R9-22-201 et seq.
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: D-10 Children’s Rehabilitative Updated 4th Paragraph: A member with private insurance is not required to utilize CRSA. This includes Services (CRS) members with Medicare whether they are enrolled in Medicare FFS or a Medicare Managed Care Plan. If the member uses the private insurance network or Medicare for a CRS covered condition, the Contractor is responsible for all applicable deductibles and copayments. If the member is on Medicare, the AHCCCS Policy 201- Medicare Cost Sharing for Members in Traditional Fee for Service Medicare and Policy 202 — Medicare Cost Sharing for Members in Medicare Managed Care Plans shall apply. When the private insurance or Medicare is exhausted, or certain annual or lifetimes limits are reached with respect to CRS covered conditions, the Contractor shall refer the member to CRSA for determination for CRS services. If the member with private insurance or Medicare chooses to enroll with CRS, CRS becomes the secondary payer responsible for all applicable deductibles and copayments. The Contractor is not responsible to provide services in instances when the CRS eligible member, who has no primary insurance or Medicare, refuses to receive CRS covered services through the CRS Program....”
D-10 CRS CRS Regional Medical Director when it denies a service for the reason that it is not covered by the CRS Program. The Contractor may also request a hearing with the Administration if it is dissatisfied with the CRSA determination. If the AHCCCS Hearing Decision determines that the service should have been provided by CRSA, CRSA shall be financially responsible for the costs incurred by the Contractor in providing the service
D-12 Behavioral Health Adjusted First two sentences to read:
AHCCCS members, except for SOBRA Family Planning and SSDI-TMC members, are eligible for comprehensive behavioral health services. For SOBRA Family Planning and SSDI-TMC members, there is no behavioral health coverage.
D-12 Behavioral Health Updated list of covered services to coincide with the Behavioral Health Services Guide.
D-12 Behavioral Health Substitute the first 2 sentences under Emergency Services with: Contractors are responsible for providing up to 72 hours inpatient emergency behavioral health services to members with psychiatric or substance abuse diagnoses who are not behavioral health recipients in accordance with AHCCCS Rule R9-22-210.01. For additional information regarding behavioral health services refer to Title 9 Chapter 22 Articles 2 and 12. It is expected that Contractors initiate a referral to the RBHA for evaluation and behavioral health recipient eligibility as soon as possible after admission.
D-13 AHCCC Guidelines, Policies Paragraph revised to reference all AHCCCS guidelines, policies and manuals. and Manuals
D-13 AHCCC Guidelines, Policies Added (Arizona Administrative Code) to the end of AHCCCS Rules and Manuals
D-13 AHCCC Guidelines, Policies Added “or upon request” to “All AHCCCS guidelines, policies and manuals are available on the AHCCCS and Manuals Home Page on the Internet @ www.azahcccs.gov”
D-13 AHCCC Guidelines, Policies Added language to the end of paragraph: Upon adoption by AHCCCS, updates will be made available to and Manuals the Contractors. Once notification to the Contractors has taken place, the Contractor shall be responsible for implementing and maintaining current copies of updates.
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: D-15 Pediatric Immunizations and Changed Vaccine to plural to match verbiage of the CDC the Vaccine for Children’s Program.
D-15 Pediatric Immunizations and The last sentence of the 1st subparagraph deleted “providing immunizations” and inserted “a physician the Vaccine for Children’s acting as primary care physician (PCP)”. In the last sentence of the 2nd subparagraph deleted “are Program. encouraged” and inserted “must” and “and monitor to ensure compliance.”
D-16 Staff Requirements and Replace bullet n. “Grievance Manager” with the following: Support Services “A Grievance Manager who will manage and adjudicate member and provider grievances and requests for hearings.” Changed to read “A Grievance Manager who will manage and adjudicate member and provider disputes arising under the Grievance System including member grievances, appeals, and requests for hearing and provider claim disputes.”.
D-16 Staff Requirements and Replace bullet s. “Pharmacy Coordinator/Director” with the following: Support Services “A Pharmacy Coordinator/Director who is an Arizona licensed pharmacist or physician who oversees and administers the prescription drug and pharmacy benefits. The Pharmacy Coordinator/Director may be an employee or contractor of the Plan.”
D-16 Staff Requirements and Replace bullet f. “Maternal Health/EPSDT Coordinator” title with the following: Support Services “Maternal Health/EPSDT (child health) Coordinator”
D-16 Staff Requirements and Changed item e to read : A Utilization Management/Medical Management Coordinator Support Services
D-16 Staff Requirements and Added bullet t. Dental Director/Coordinator as follows: Support Services t. Dental Director/Coordinator that is responsible for coordinating dental activities of the health plan and providing required communication between the plan and AHCCCS. The Dental Director/Coordinator may be an employee or contractor of the plan and must be licensed in Arizona if they are required to review or deny dental services
D-1S Member Information Added requirement for Contractors to develop and distribute a member newsletter at least quarterly.
D-18 Member Information Changed the 4th grade level requirement to read: The Contractor shall make every effort to ensure that all information prepared for distribution to members is written using an easily understood language and format and as further described in the AHCCCS Member Information Policy.
D-I9 Surveys Deleted “The Program Contractor will not be required to conduct a member survey during CYE 06”.
D-21 Medical Records Inserted “medical (including dental) records”. - removed from this paragraph but added as a requirement for subcontracts #37, H
D-23 Medical Management Updated all references from UM to MM. Added new language. It addresses MM assessment, monitoring and reporting requirements.
D-23 Medical Management Removed the word “all” from the statement “the Contractor will asses, monitor and report quarterly through the MM Committee, all medical decisions. . . . .
D-23 Medical Management Changed order of paragraphs to state the requirement of the MM Committee first, then the expectations of the committee.
D-23 Medical Management 8. Disease Management or Chronic Care Program that reports results and provides for analysis of the program through the MM Committee; and...
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: D-24 Performance Standards Changed “Dental Visits” in the Performance Standards table to read “Children’s Dental Visits”
D-24 Performance Standards Updated Table : Minimum Performance Standards, Goals and Benchmarks for each measure
D-25 Grievance System Inserted in 1st subparagraph “non-contracted” in front of “providers”.
D-26 Quarterly Grievance Last Paragraph — updated to read: The Contractor shall trend and analyze Enrollee Appeal and Provider System Reports Claim Disputes at least quarterly; any identified trends and corrective action plans shall be reported to AHCCCS, Division of Health Care Management with the Enrollee Appeal and Provider Claim Dispute Report.
D-29 Network Management In the subparagraph language that Contractors may be directed by AHCCCSA to meet with providers.
D-29 Network Management Updated language regarding meetings with providers (4th paragraph): Contractors may be required to conduct meetings with providers to address issues (or to provider general information, technical assistance, etc.) related to federal and state requirements, changes in policy, reimbursement matters, prior authorization and other matters as identified or requested by the Administration.
D-29 Network Management Changed the word physician groups to provider groups in paragraph 5 – regarding 90 days prior notice of a contract termination without cause.
D-32 Referral Management Changed Medicare HMO to Medicare Managed Care Plan in item “g.” Procedures and Standards
D-35 Provider Manual Added website manual reference to the following:
“The Contractor shall develop, distribute and maintain a provider manual. The Contractor shall ensure that each contracted provider is made aware of a website provider manual or, if requested, issued a hard copy of the provider manual and is encouraged to distribute a provider manual to any individual or group that submits claim and encounter data.
D-35 Provider Manual Added the following to letter f. “EPSDT providers must document immunizations into ASIIS and enroll every year in the Vaccine for Children program.”
D-35 Provider Manual Added item dd. “How to access or obtain Practice Guidelines and coverage criteria for authorization decisions.”
D-36 Provider Registration Removed “and receive an AHCCCS Provider ID Number.” And replaced “each provider who does not already have a current AHCCCS ID Number” with “each provider who is not already an AHCCCS registered provider.” Added : The National Provider Identifier (NPI) will be required on all claim submissions and subsequent encounters (from providers who are eligible for a NPI) effective for dates of service on or after May 23, 2007. Contractors shall work with providers to obtain their NPI
D-37 Subcontracts Added dental to h.
D-37 Subcontracts Added to “r” “concurrent review”, Under Provider Agreements, 3 rd subparagraph inserted “at the request of the Contractor” and deleted “on its behalf.”
Changed letters a-c to reflect Delegated Agreements, Management Service Agreements, and Service Level agreements and removed letter d.
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: D-37 Subcontracts a. Further defined types of contracts that require approval : All subcontracts or delegated agreements that delegate any function related to the management of the contract with AHCCCS. Examples include quality management, medical management (e.g., prior authorization, concurrent review, medical claims review) b. All subcontracts or delegated agreements that delegate claims processing, including pharmacy claims. c. All subcontracts or delegated agreements that delegate credentialing including those for only primary source verification d. All service level agreements with any Division or Subsidiary of a corporate parent owner
D-38 Claims Payment Added “Tax Identification Number to the following “ ...... recoupment greater than $50,000 per provider Tax Identification Number per contract year.” Changed submission of recoupment requests to DHCM Acute Operations Unit.
D-38 Claims Payment Changed timeliness requirements to be based on adjudicated claims vs. paid claims — see paragraph.
D-38 Claims Payment Added a new 4th subparagraph regarding remittance advice requirements. There was also reordering of some paragraphs along with some wording changes.
D-38 Claims Payment Interest Payments — Removed “The Contractor must report the interest separately from the health plan paid amount on the encounter. Interest should be reported in the 837 CAS adjustment loop using reason code 85”. Replaced with “When interest is paid, the Contractor must report the interest as directed in the Encounter Manual”
D-40 Hospital Subcontracting and In the first paragraph, replaced the following language: “The Contractor shall submit all hospital Reimbursement subcontracts and any amendments to AHCCCSA, Division of Health Care Management, for prior approval.” with “The Contractor, upon request, shall make available to AHCCCSA, all hospital subcontracts and any amendments.”
D-40 Hospital Subcontracting and Added “For non-contracted out-of-state providers of emergency services, Contractors shall pay no more Reimbursement than the AHCCCS Fee-For-Service rates, pursuant to Section 6085 of the Federal Deficit Reduction Act.”
D-46 Performance Bond or Added the following language: “The Contractor must request an annual acceptance from AHCCCSA when Bond Substitute a substitute security in lieu of the performance bond, irrevocable letter of credit or cash deposit is established.”
D-49 Advances, Distributions, Deleted “All investments, other than investments in U.S. Government securities or Certificates of Deposit, Loans and Investments also require AHCCCSA prior approval.”
D-49 Advances, Distributions, Added language: The Contractor shall not, without the prior approval of AHCCCSA, make any advances, Loans and Investments distributions, loans or loan guarantees to related parties or affiliates including another fund or line of business within its organization. The Contractor shall not, without prior notification to AHCCCSA, make advances to its subcontractors in excess of $50,000. All requests for prior approval and notifications are to be submitted to the AHCCCSA Division of Health Care Management.
D-50 Financial Viability Standards Changed Equity Per Member: For purposes of this measurement, the equity will be measured according to and Performance Guidelines the “Performance Bond and Equity per Member Requirements” policy effective October 1, 2007.
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: D-50 Financial Viability Standards Clarified that sanctions will not be automatically imposed if a Contractor does not meet the financial and Performance Guidelines viability criteria.
D-50 Financial Viability Standards Added the following language to criteria: and Performance Guidelines • Current Ratio: added “A request to include long-term investments that can be converted to cash within 24 hours in the current ratio calculation must be sent to AHCCCS, DHCM, within 30 days of the contract start date and within 30 days of contract renewal). • Equity per Member: “Non restricted equity”
D-53 Compensation Removed Title XIX Waiver Member reconciliation language and added the following: “Effective October 1, 2006, AHCCCSA will no longer reconcile the Title XIX Waiver Member population.
D-53 Compensation Added “if applicable” to the end of item h.
D-53 Compensation Added second sentence to Risk Sharing for Title XIX Waiver Members: The PPC TWG population will be reconciled with the PPC reconciliation referred to above. Capitation rates will be adjusted where necessary.
D-53 Compensation Added sentence to the end of the Hospitalized Supplemental Payment: If the member has Medicare Part A or other third party insurance coverage, they will not be eligible for the supplemental payment
D-56 Incentives Removed the Use of Website language from this location in the contract and added it to paragraph 74.
D-56 Incentives Added reporting periods to auto assignment algorithm incentive.
D-57 Reinsurance Added “....SSDI TMC and SOBRA family planning” underneath RI deductible table.
D-57 Reinsurance Removed the last sentence from b) Prior Period Coverage “except Title XIX Waiver members. See section C below for additional information”.
D-57 Reinsurance Removed the prior period reference and the last sentence from c) Title XIX Waiver Members — “ There can only be one reinsurance case for prior period and prospective enrollment”
D-57 Reinsurance Removed “Transplant case types have another risk limitation methodology described in the AHCCCSA Reinsurance Claims Processing Manual.”
D-57 Reinsurance Added “and pass all encounter edits” to the following sentence: Encounters for reinsurance claims that have passed the fifteen month deadline and are being adjusted due to a claim dispute or hearing decision must be submitted and pass all encounter and reinsurance edits within 90 calendar days of the date of the claim dispute or hearing decision.
D-57 Reinsurance Added language addressing quick pay discounts, slow payment penalties and interest and Medicare/TPL payments — see paragraph.
D-57 Reinsurance Removed the following: “AHCCCSA will also provide a reconciliation of reinsurance payments in the case where encounters used in the calculation of reinsurance benefits are subsequently adjusted or voided.”
D-57 Reinsurance Added “whichever is applicable” to the last paragraph for a) under Encounter Submission and Payments for Reinsurance.
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: D-58 Coordination of Benefits - Updated 4th Paragraph: A member with private insurance is not required to utilize CRSA. This includes Members with CRS members with Medicare whether they are enrolled in Medicare FFS or a Medicare Managed Care Plan. If the Conditions member uses the private insurance network or Medicare for a CRS covered condition, the Contractor is responsible for all applicable deductibles and copayments. If the member is on Medicare, the AHCCCS Policy 201- Medicare Cost Sharing for Members in Traditional Fee for Service Medicare and Policy 202 — Medicare Cost Sharing for Members in Medicare Managed Care Plans shall apply. When the private insurance or Medicare is exhausted, or certain annual or lifetimes limits are reached with respect to CRS covered conditions, the Contractor shall refer the member to CRSA for determination for CRS services. If the member with private insurance or Medicare chooses to enroll with CRS, CRS becomes the secondary payer responsible for all applicable deductibles and copayments. The Contractor is not responsible to provide services in instances when the CRS eligible member, who has no primary insurance or Medicare, refuses to receive CRS covered services through the CRS Program....”
D-58 Coordination of Benefits - Removed the following sentences from second paragraph: The Contractor must decide whether it is more Cost Avoidance cost-effective to provide the service within its network or pay coinsurance and deductibles for a service outside its network. For continuity of care, the Contractor may also choose to provide the service within its network.
D-62 Corporate Compliance Added information regarding False Claims Act.
D-65 Encounter Data Reporting Inserted the following language to the 3 rd subparagraph: “received by AHCCCSA no later than 240 days after the end of the month in which the service was rendered, or the effective date of the enrollment with the Contractor, whichever date is later.” “Twice” was inserted to begin the 3rd subparagraph.
D-72 Sanctions Added The Contractor may dispute the decision to impose a sanction in accordance with the process outlined in A.A.C. R9-34-401
D-73 Business Continuity and Added language to include the loss of satellite offices. Recovery Plan
D-74 Technological See changes Advancement
D-74 Technological Added “use of Website” language from paragraph 56 Advancement
D-74 Technological Added e-health language Advancement
D-75 Pending Legislative /Other Added Waiver language : AHCCCS is in negotiations with CMS to renew the 1115 waiver that enables Issues AHCCCS to operate a mandatory managed care program. These negotiations may result in changes to the program. AHCCCS will either amend the contract or incorporate changes in policies incorporated in the contract by reference.
D-77 Healthcare Group of Arizona Removed paragraph, reserved for future use
D-78 Medicare Modernization Language was slightly modified with no substantive changes. Act (MMA)
Section E General Comment There were several changes throughout this section that were not substantive (Paragraphs 3, 6, 7, 10, 15, 19, 32, 33, 34, 40, 42 and 46).
8 Indemnification The paragraph language was deleted and replaced with two subparagraphs: “Contractor/Vendor Indemnification (Not Public Agency)” and “Contractor/Vendor Indemnification (Public Agency)”.
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: 12 Property of the State Deleted the two subparagraphs and replaced with two new subparagraphs.
12 Property of the State Replaced the word paragraph with contract
20 Termination — Availability Added the second subparagraph. of Funds
20 Termination — Availability Changed the term Contractor to AHCCCSA in the first sentence of the second paragraph of Funds
20 Termination — Availability Added to the last sentence “except as otherwise provided in this contract” of Funds
25 Term of Contract and Option Deleted paragraph and inserted four new subparagraphs. to Renew
26 Disputes Language noting that contract claims and disputes will be adjudicated in accordance with AHCCCS rules. The Rules and ARS citations are included.
26 Disputes Updated to Chapter 22 and ARS 36.2903.01
29 Contract Deleted paragraph and inserted two new subparagraphs.
31 Type of Contract Added except as otherwise provided to the end of sentence
48 IRS W9 New contract term and condition.
49 Continuation of Performance New contract term and condition. Through Termination
Attach A 8, Confidentiality Updated reference from 36-2932 to 36-2903 Requirement
Attach A Minimum Subcontractor Added statute and rules references so all Contractors and Health Plans use the same Minimum Provisions Subcontractor requirements. Updated language and references throughout Attachment A.
Attach A 15, Insurance At the end of paragraph inserted “The requirement for Worker’s Compensation Insurance doesn’t apply when a Subcontractor is exempt under ARS 23-901, and when such Subcontractor executes the appropriate waiver (Sole Proprietor/Independent Contractor) form.
Attach A 16, Limitations on Billing This paragraph was rewritten to clarify that a subcontractor shall not bill, or attempt to collect payment and Collection Practices from a person who was AHCCCS eligible at the time the covered service(s) were provided.
Attach A 20 Records Retention Added and/or Dental after medical records (l st paragraph, last sentence)
Attach A 15 —Insurance Corrected typo — replaced underarms with under ARS
Attach F Periodic Report Moved Claim recoupments >$50,000 from the DHCM finance unit to the Operations unit. Requirements
Attach G Auto Assignment Updated to read: Performance Measures as reported from the data warehouse at AHCCCS — Measurement Algorithm —Factor #3 period CYE05, reported in 2006
Attach Enrollee Grievance System Changed #2: Information explaining the grievance, appeal, and fair hearing procedures and timeframes. H(l) Standards and Policy This information shall include a description of the circumstances when there is a right to a hearing, the method for obtaining a hearing, the requirements which govern representation at the hearing, the right to file grievance and appeals and the requirements and timeframes for filing a grievance, appeal, or request for hearing.
Attach Enrollee Grievance System Added the following as the last sentence: The Notice of Action must comply with the advance notice H(l) Standards and Policy requirements when there is a termination or reduction of a previously authorized service OR when there is a denial of an authorization request and the physician asserts that the requested service/treatment is a necessary continuation of a previously authorized service.
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Para #: PARAGRAPH TITLE: SUMMARY OF CHANGE OR CLARIFICATION: Attach Enrollee Grievance System Modified #25 regarding the mailing of a Notice of Action to state in subpart 1) “except as provided in (a)- H(l) Standards and Policy (e) below; eliminate subpart 5) and modify subpart 4) to state: within 14 days from receipt of a standard service authorization request and within three business days from receipt of an expedited service authorization request, unless an extension is in effect. For service authorization decisions, the Contractor shall also ensure that the Notice of Action provides the enrollee with advance notice and the right to request continued benefits for all terminations and reductions of a previously authorized service and for denials when the physician asserts that the requested service/treatment which has been denied is a necessary continuation of a previously authorized service. As described below, the Contractor may elect to mail a Notice of Action no later than the date of action when....
Attach Enrollee Grievance System Modified # 36 regarding the provision of services by a Contractor when a denial/reduction is reversed: That H(l) Standards and Policy if the Contractor or the State fair decision reverses a decision to deny, limit or delay services not furnished during the appeal or the pendency of the hearing process, the Contractor shall authorize or provide the services promptly and as expeditiously as the enrollee’s health condition requires irrespective of whether the Contractor contests the decision.
Attach H Provider Claims Dispute Added ....unless otherwise provided by law.” to item 8. (2) System and Standards Policy
Attach I Enrollee Grievance System Minor language changes for clarification. “grievance or” was deleted from #8.
Attach I Encounter Submission Language clarification under Encounter validation Studies — Timeliness paragraph. Standards and Sanctions
Contract #23 Replaced the duplicated word “religion” with “gender” Clauses
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM CAPITATION RATE SUMMARY — ACUTE RATES Health Choice Arizona 10/1/06-9/30/07
Maternity TANF TANF TANF TANF TANF SSI SSI Delivery MED Hospital Title XIX and KidsCare Rates: <1, M/F 1-13, M/F 14-44, F 14-44, M 45+, M/F w/Med w/o Med SFP Supplement Non-MED MED Supplement 4 Apache/Coconino/Mohave/Navajo $ 429.47 $ 104.12 $ 206.67 $ 162.10 $ 376.72 $ 202.59 $ 691.75 $16.82 $ 5,942.20 $ 450.86 $ 918.14 $11,694.29 8 Gila/Pinal $ 494.94 $ 109.92 $ 177.47 $ 124.64 $343.84 $ 180.02 $ 552.23 $ 18.71 $6,286.38 $ 415.06 $ 979.58 $ 10,372.10 10 Pima $ 485.18 $ 100.53 $188.88 $ 130.61 $ 370.41 $ 187.60 $683.49 $ 15.01 $ 6,143.79 $385.55 $ 942.74 $10,780.45 12 Maricopa $ 492.24 $ 110.09 $ 183.30 $ 138.66 $ 375.13 $ 173.55 $ 613.54 $ 19.70 $ 6,338.50 $ 458.01 $ 981.99 $10,249.18
TANF TANF TANF TANF TANF SSI SSI PPC Rates: <1, M/F 1-13, M/F 14-44, F 14-44, M 45+, M/F w/Med w/o Med Non-MED MED 4 Apache/Coconino/Mohave/Navajo $ 831.54 $ 47.94 $ 172.04 $ 150.56 $333.68 $ 73.38 $ 156.67 $ 737.17 $ 1,719.07 8 Gila/Pinal $ 831.54 $ 47.94 $ 172.04 $ 150.56 $333.68 $ 73.38 $ 156.57 $ 692.11 $ 1,701.01 10 Pima $ 1,353.11 $ 47.94 $ 178.93 $ 156.58 $ 347.02 $ 57.37 $ 147.72 $ 750.14 $1,743.68 12 Maricopa $1,348.09 $ 47.94 $ 178.93 $ 156.58 $ 347.02 $ 57.58 $ 147.72 $ 672.07 $1,688.16
HIFA HIFA HIFA HIV/AIDS Other Rates: 14-44, F 14-44, M 45+, M/F Supplement SSDI 4 Apache/Coconino/Mohave/Navajo $ 229.08 $ 159.57 $ 386.58 $1,051.86 $696.76 8 Gila/Pinal $ 203.23 $ 135.91 $ 380.74 $1,051.86 $696.76 10 Pima $ 203.10 $128.97 $ 410.59 $1,051.86 $696.76 12 Maricopa $ 205.43 $ 139.42 $ 387.80 $1,051.86 $696.76
* Rates have been adjusted for $35,000 Reinsurance Deductible
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Contract/RFP No. YH04-0001
ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION DIVISION OF BUSINESS AND FINANCE SECTION A. CONTRACT AMENDMENT
1. AMENDMENT 2. CONTRACT 3. EFFECTIVE DATE OF 4. PROGRAM NUMBER: NO.: AMENDMENT: YH04-0001 October 1, 2006 DHCM 5. CONTRACTOR’S NAME AND ADDRESS:
6. PURPOSE OF AMENDMENT: To amend Sections B, C, D and E and Attachments A, B, F, G, H, I and L. 7. THE CONTRACT REFERENCED ABOVE IS AMENDED AS FOLLOWS: A. CHANGES IN REQUIREMENTS: In accordance with Section E, Paragraph 30, “Changes”, various changes in contract requirements are indicated in this contract restatement. B. By signing this contract amendment, the Contractor is agreeing to the terms of the contract as amended.
NOTE: Please sign and date both and then return one to: Michael Veit, MD 5700
AHCCCS Contracts and Purchasing 701 E Jefferson Street Phoenix AZ 85034
8. EXCEPT AS PROVIDED FOR HEREIN, ALL TERMS AND CONDITIONS OF THE ORIGINAL CONTRACT NOT HERETOFORE CHANGED AND/OR AMENDED REMAIN UNCHANGED AND IN FULL EFFECT. IN WITNESS WHEREOF THE PARTIES HERETO SIGN THEIR NAMES IN AGREEMENT
9. SIGNATURE OF AUTHORIZED REPRESENTATIVE: 10. SIGNATURE OF AHCCCSA CONTRACTING OFFICER:
TYPED NAME: MICHAEL VEIT
TITLE: CONTRACTS & PURCHASING ADMINISTRATOR
DATE: DATE:
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TABLE OF CONTENTS
SECTION A. CONTRACT AMENDMENT 1
SECTION B: CAPITATION RATES 6
SECTION C: DEFINITIONS 7
SECTION D: PROGRAM REQUIREMENTS 15
1. TERM OF CONTRACT AND OPTION TO RENEW 15 2. ELIGIBILITY CATEGORIES 16 3. ENROLLMENT AND DISENROLLMENT 17 4. ANNUAL ENROLLMENT CHOICE 20 5. OPEN ENROLLMENT 20 6. AUTO-ASSIGNMENT ALGORITHM 20 7. AHCCCS MEMBER IDENTIFICATION CARDS 20 8. MAINSTREAMING OF AHCCCS MEMBERS 20 9. TRANSITION OF MEMBERS 21 10. SOPE OF SERVICES 22 11. SPECIAL HEALTH CARE NEEDS 30 12. BEHAVIORAL HEALTH SERVICES 30 13. AHCCCS GUIDELINES, POLICIES AND MANUALS 33 14. MEDICAID SCHOOL BASED CLAIMING PROGRAM (MSBC) 33 15. PEDIATRIC IMMUNIZATIONS AND THE VACCINES FOR CHILDREN PROGRAM 33 16. STAFF REQUIREMENTS AND SUPPORT SERVICES 34 17. WRITTEN POLICIES, PROCEDURES AND JOB DESCRIPTIONS 35 18. MEMBER INFORMATION 36 19. SURVEYS 37 20. CULTURAL COMPETENCY 37 21. MEDICAL RECORDS 37 22. ADVANCE DIRECTIVES 38 23. QUALITY MANAGEMENT AND MEDICAL MANAGEMENT (QM/MM) 39 24. PERFORMANCE STANDARDS 41 25. GRIEVANCE SYSTEM 45 26. QUARTERLY GRIEVANCE SYSTEM REPORTS 45 27. NETWORK DEVELOPMENT 46 28. PROVIDER AFFILIATION TRANSMISSION 48 29. NETWORK MANAGEMENT 48 30. PRIMARY CARE PROVIDER STANDARDS 50 31. MATERNITY CARE PROVIDER STANDARDS 51 32. REFERRAL MANAGEMENT PROCEDURES AND STANDARDS 51 33. APPOINTMENT STANDARDS 52 34. FEDERALLY QUALIFIED HEALTH CENTERS (FQHC) and RURAL HEALTH CLINICS (RHC) 53 35. PROVIDER MANUAL 53 36. PROVIDER REGISTRATION 54 37. SUBCONTRACTS 54 38. CLAIMS PAYMENT/HEALTH INFORMATION SYSTEM 57 39. SPECIALTY CONTRACTS 58 40. HOSPITAL SUBCONTRACTING AND REIMBURSEMENT 59 41. NURSING FACILITY REIMBURSEMENT 60 42. PHYSICIAN INCENTIVES/PAY FOR PERFORMANCE 60 43. MANAGEMENT SERVICES AGREEMENT AND COST ALLOCATION PLAN 61
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44. RESERVED 61 45. MINIMUM CAPITALIZATION REQUIREMENTS 61 46. PERFORMANCE BOND OR BOND SUBSTITUTE 62 47. AMOUNT OF PERFORMANCE BOND 63 48. ACCUMULATED FUND DEFICIT 63 49. ADVANCES, DISTRIBUTIONS, LOANS AND INVESTMENTS 63 50. FINANCIAL VIABILITY STANDARDS / PERFORMANCE GUIDELINES 63 51. SEPARATE INCORPORATION 64 52. MERGER, REORGANIZATION AND CHANGE OF OWNERSHIP 65 53. COMPENSATION 65 54. PAYMENTS TO CONTRACTORS 66 55. CAPITATION ADJUSTMENTS 67 56. INCENTIVES 67 57. REINSURANCE 68 58. COORDINATION OF BENEFITS / THIRD PARTY LIABILITY 71 59. COPAYMENTS 74 60. MEDICARE SERVICES AND COST SHARING 74 61. MARKETING 75 62. CORPORATE COMPLIANCE 75 63. RECORDS RETENTION 76 64. DATA EXCHANGE REQUIREMENTS 77 65. ENCOUNTER DATA REPORTING 77 66. ENROLLMENT AND CAPITATION TRANSACTION UPDATES 78 67. PERIODIC REPORT REQUIREMENTS 79 68. REQUESTS FOR INFORMATION 79 69. DISSEMINATION OF INFORMATION 79 70. OPERATIONAL AND FINANCIAL READINESS REVIEWS 79 71. OPERATIONAL AND FINANCIAL REVIEWS 80 72. SANCTIONS 80 73. BUSINESS CONTINUITY AND RECOVERY PLAN 81 74. TECHNOLOGICAL ADVANCEMENT 82 75. PENDING LEGISLATIVE / OTHER ISSUES 83 76. BALANCED BUDGET ACT OF 1997 (BBA) 83 77. RESERVED 83 78. MEDICARE MODERNIZATION ACT (MMA) 83
SECTION E: CONTRACT CLAUSES 85
1) APPLICABLE LAW 85 2) AUTHORITY 85 3) ORDER OF PRECEDENCE 85 4) CONTRACT INTERPRETATION AND AMENDMENT 85 5) SEVERABILITY 85 6) RELATIONSHIP OF PARTIES 85 7) ASSIGNMENT AND DELEGATION 85 8} INDEMNIFICATION 85 9) INDEMNIFICATION— PATENT AND COPYRIGHT 86 10) COMPLIANCE WITH APPLICABLE LAWS, RULES AND REGULATIONS 86 11) ADVERTISING AND PROMOTION OF CONTRACT 86 12) PROPERTY OF THE STATE 86 13) THIRD PARTY ANTITRUST VIOLATIONS 86 14) RIGHT TO ASSURANCE 86 15) TERMINATION FOR CONFLICT OF INTEREST 87 16) GRATUITIES 87 17) SUSPENSION OR DEBARMENT 87 18) TERMINATION FOR CONVENIENCE 87
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19) TEMPORARY MANAGEMENT/OPERATION OF A CONTRACTOR AND TERMINATION 87 20) TERMINATION -AVAILABILITY OF FUNDS 88 21) RIGHT OF OFFSET 88 22) NON-EXCLUSIVE REMEDIES 88 23) NON-DISCRIMINATION 89 24) EFFECTIVE DATE 89 25) INSURANCE 89 26) DISPUTES 89 27) RIGHT TO INSPECT PLANT OR PLACE OF BUSINESS 90 28) INCORPORATION BY REFERENCE 90 29) COVENANT AGAINST CONTINGENT FEES 90 30) CHANGES 90 31) TYPE OF CONTRACT 90 32) AMERICANS WITH DISABILITIES ACT 90 33) WARRANTY OF SERVICES 90 34) NO GUARANTEED QUANTITIES 90 35) CONFLICT OF INTEREST 90 36) DISCLOSURE OF CONFIDENTIAL INFORMATION 91 37) COOPERATION WITH OTHER CONTRACTORS 91 38) ASSIGNMENT OF CONTRACT AND BANKRUPTCY 91 39) OWNERSHIP OF INFORMATION AND DATA 91 40) AHCCCSA RIGHT TO OPERATE CONTRACTOR 91 41) AUDITS AND INSPECTIONS 92 42) LOBBYING 92 43) CHOICE OF FORUM 92 44) DATA CERTIFICATION 92 45) OFF SHORE PERFORMANCE OF WORK PROHIBITED 92 46) FEDERAL IMMIGRATION AND NATIONALITY ACT 93 47) IRS W-9 FORM 93 48) CONTINUATION OF PERFORMANCE THROUGH TERMINATION 93
SECTION F: INDEX — PROGRAM REQUIREMENTS AND CONTRACT CLAUSES 94
ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS 97
1. ASSIGNMENT AND DELEGATION OF RIGHTS AND RESPONSIBILITIES 97 2. AWARDS OF OTHER SUBCONTRACTS 97 3. CERTIFICATION OF COMPLIANCE — ANTI-KICKBACK AND LABORATORY TESTING 97 4. CERTIFICATION OF TRUTHFULNESS OF REPRESENTATION 97 5. CLINICAL LABORATORY IMPROVEMENT AMENDMENTS OF 1988 98 6. COMPLIANCE WITH AHCCCSA RULES RELATING TO AUDIT AND INSPECTION 98 7. COMPLIANCE WITH LAWS AND OTHER REQUIREMENTS 98 8. CONFIDENTIALITY REQUIREMENT 98 9. CONFLICT IN INTERPRETATION OF PROVISIONS 98 10. CONTRACT CLAIMS AND DISPUTES 98 11. ENCOUNTER DATA REQUIREMENT 98 12. EVALUATION OF QUALITY, APPROPRIATENESS, OR TIMELINESS OF SERVICES 98 13. FRAUD AND ABUSE 99 14. GENERAL INDEMNIFICATION 99 15. INSURANCE 99 16. LIMITATIONS ON BILLING AND COLLECTION PRACTICES 99 17. MAINTENANCE OF REQUIREMENTS TO DO BUSINESS AND PROVIDE SERVICES 99 18. NON-DISCRIMINATION REQUIREMENTS 99 19. PRIOR AUTHORIZATION AND UTILIZATION MANAGEMENT 100 20. RECORDS RETENTION 100 21. SEVERABILITY 100
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22. SUBJECTION OF SUBCONTRACT 100 23. TERMINATION OF SUBCONTRACT 100 24. VOIDABILITY OF SUBCONTRACT 101 25. WARRANTY OF SERVICES 101 26. OFF-SHORE PERFORMANCE OF WORK PROHIBITED 101 27. FEDERAL IMMIGRATION AND NATIONALITY ACT 101
ATTACHMENT B: MINIMUM NETWORK STANDARDS (BY GEOGRAPHIC SERVICE AREA) 102
ATTACHMENT F: PERIODIC REPORT REQUIREMENTS 106
ATTACHMENT G: AUTO-ASSIGNMENT ALGORITHM 110
ATTACHMENT H (1): ENROLLEE GRIEVANCE SYSTEM STANDARDS AND POLICY 113
ATTACHMENT H(2) PROVIDER CLAIM DISPUTE STANDARDS AND POLICY 118
ATTACHMENT I: ENCOUNTER SUBMISSION REQUIREMENTS 120
ATTACHMENT L: COST SHARING COPAYMENTS 123
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CAPITATION RATES Contract/RFP No. YH04-0001
SECTION B: CAPITATION RATES The Contractor shall provide services as described in this contract. In consideration for these services, the Contractor will be paid the attached Contractor specific rates per member per month for the term October 1, 2006 through September 30, 2007.
See attached.
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DEFINITIONS Contract/RFP No. YH04-0001
SECTION C: DEFINITIONS
638 TRIBAL A facility that is operated by an Indian tribe and that is authorized to provide services pursuant to Public Law 93- FACILITY 638, as amended.
1931 Eligible individuals and families under the 1931 provision of the Social Security Act, with household income levels at or below 100% of the FPL.
ACOM AHCCCS Contractor Operations Manual, available on the AHCCCS Website at www.azahcccs.gov.
ADHS Arizona Department of Health Services, the state agency mandated to serve the public health needs of all Arizona citizens.
ADHS BEHAVIORAL A Title XIX or Title XXI acute care member who is eligible for, and is receiving, behavioral health services HEALTH RECIPIENT through ADHS and its subcontractors.
ADJUDICATED Claims which have been received and processed by the Contractor which resulted in a payment or denial of CLAIMS payment
AGENT Any person who has been delegated the authority to obligate or act on behalf of another person or entity.
AHCCCS Arizona Health Care Cost Containment System, which is composed of the Administration, Contractors, and other arrangements through which health care services are provided to an eligible person, as defined by A.R.S. § 36- 2902, et seq.
AHCCCS BENEFITS See “COVERED SERVICES”.
AHCCCS MEMBER See “MEMBER”.
AHCCCSA Arizona Health Care Cost Containment System Administration.
ALTCS The Arizona Long Term Care System, a program under AHCCCSA that delivers long term, acute, behavioral health and case management services to members, as authorized by A.R.S. § 36-2932.
AMBULATORY CARE Preventive, diagnostic and treatment services provided on an outpatient basis by physicians, nurse practitioners, physician assistants and other health care providers.
AMPM AHCCCS Medical Policy Manual.
ANNUAL The opportunity, given each member annually, to change to another Contractor in their GSA. ENROLLMENT CHOICE (AEC)
APPEAL The written determination by the Contractor concerning an appeal. RESOLUTION
ARIZONA ADMINISTRATIVE State regulations established pursuant to relevant statutes. For purposes of this solicitation, the relevant sections of CODE (A.A.C.) the AAC are referred to throughout this document as “AHCCCS Rules”.
A.R.S. Arizona Revised Statutes.
BBA The Balanced Budget Act of 1997.
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DEFINITIONS Contract/RFP No. YH04-0001
BCCTP Breast and Cervical Cancer Treatment Program, a Title XIX eligibility expansion program for women who are not otherwise Title XIX eligible and are diagnosed as needing treatment for breast and/or cervical cancer or lesions.
BIDDER’S LIBRARY A repository of manuals, statutes, rules and other reference material located on the AHCCCS website at www.azahcccs.gov.
BOARD CERTIFIED An individual who has successfully completed all prerequisites of the respective specialty board and successfully passed the required examination for certification.
CAPITATION Payment to Contractor by AHCCCSA of a fixed monthly payment per person in advance for which the Contractor provides a full range of covered services as authorized under A.R.S. § 36-2904 and § 36-2907.
CATEGORICALLY LINKED Member eligible for Medicaid under Title XIX of the Social Security Act including those eligible under 1931 TITLE XIX provisions of the Social Security Act, Sixth Omnibus Budget Reconciliation Act (SOBRA), Supplemental MEMBER Security Income (SSI), SSI-related groups. To be categorically linked, the member must be aged 65 or over, blind, disabled, a child under age 19, a parent of a dependent child, or pregnant
CLAIM DISPUTE A dispute, filed by a provider or Contractor, whichever is applicable, involving a payment of a claim, denial of a claim, imposition of a sanction or reinsurance.
CLEAN CLAIM A claim that may be processed without obtaining additional information from the provider of service or from a third party; but does not include claims under investigation for fraud or abuse or claims under review for medical necessity.
CMS Centers for Medicare and Medicaid Services, an organization within the U.S. Department of Health and Human Services, which administers the Medicare and Medicaid programs and the State Children’s Health Insurance Program.
COMPETITIVE BID PROCESS A state procurement system used to select Contractors to provide covered services on a geographic basis.
CONTINUING OFFEROR An AHCCCS Contractor during CYE 03 that submits a proposal pursuant to this solicitation. (INCUMBENT)
CONTRACT See “COVERED SERVICES”. SERVICES
CONTRACT YEAR Corresponds to Federal fiscal year (Oct. 1 through Sept. 30). For example, Contract Year 04 is 10/01/03 — 9/30/04. (CY)
CONTRACTOR An organization or entity agreeing through a direct contracting relationship with AHCCCSA to provide the goods and services specified by this contract in conformance with the stated contract requirements, AHCCCS statute and rules and Federal law and regulations.
CONVICTED A judgment of conviction has been entered by a Federal, State or local court, regardless of whether an appeal from that judgment is pending.
COPAYMENT A monetary amount specified by the Director that the member pays directly to a Contractor or provider at the time covered services are rendered, as defined in R9-22-107.
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DEFINITIONS Contract/RFP No. YH04-0001
COVERED SERVICES Health care services to be delivered by a Contractor which are designated in Section D of this contract, AHCCCS Rules R9-22, Article 2 and R9-31, Article 2 and the AMPM. [42 CER 438.210(a)(4)]
CRS The Children’s Rehabilitative Services administered by ADHS, as defined in R9-22-114.
CRS ELIGIBLE An individual who has completed the CRS application process, as delineated in the CRS Policy and Procedure Manual, and has met all applicable criteria to be eligible to receive CRS related services.
CRS RECIPIENT A CRS recipient is a CRS eligible individual who has completed the initial medical visit at an approved CRS Clinic, which allows the individual to participate in the CRS program.
CY See “CONTRACT YEAR”.
CYE Contract Year Ending; same as “CONTRACT YEAR”.
DAYS Calendar days unless otherwise specified as defined in the text, as defined in R9-22-101.
DELEGATED AGREEMENT An agreement with a qualified organization or person to perform one or more functions required to be provided by the Contractor pursuant to this contract.
DIRECTOR The Director of AHCCCSA.
DISCLOSING ENTITY An AHCCCS provider or a fiscal agent.
DISENROLLMENT The discontinuance of a member’s ability to receive covered services through a Contractor.
DME Durable Medical Equipment, which is an item, or appliance that can withstand repeated use, is designated to serve a medical purpose, and is not generally useful to a person in the absence of a medical condition, illness or injury as defined in R9-22-102.
DUAL ELIGIBLE A member who is eligible for both Medicare and Medicaid.
ELIGIBILITY A process of determining, through a written application and required documentation, whether an applicant meets DETERMINATION the qualifications for Title XIX or Title XXI.
EMERGENCY MEDICAL A medical condition manifesting itself by acute symptoms of sufficient severity (including severe pain) such that a CONDITION prudent layperson, who possesses an average knowledge of health and medicine, could reasonably expect the absence of immediate medical attention to result in: a) placing the patient’s health (or, with respect to a pregnant woman, the health of the woman or her unborn child) in serious jeopardy; b) serious impairment to bodily functions; or c) serious dysfunction of any bodily organ or part. [42 CFR 438.114(a)]
EMERGENCY MEDICAL Covered inpatient and outpatient services provided after the sudden onset of an emergency medical condition as SERVICE defined above. These services must be furnished by a qualified provider, and must be necessary to evaluate or stabilize the emergency medical condition. [42 CFR 438.114(a)]
ENCOUNTER A record of a health care related service rendered by a provider or providers registered with AHCCCSA to a member who is enrolled with a Contractor on the date of service.
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DEFINITIONS Contract/RFP No. YH04-0001
ENROLLEE A Medicaid recipient who is currently enrolled with a contractor. [42 CFR 438.10(a)]
ENROLLMENT The process by which an eligible person becomes a member of a contractor’s plan.
EPSDT Early and Periodic Screening, Diagnosis and Treatment; services for persons under 21 years of age as described in AHCCCS rules R9-22, Article 2.
FAMILY PLANNING A program that provides only family planning services for a maximum of 24 months to SOBRA women whose SERVICES EXTENSION pregnancy has ended and who are not otherwise eligible for full Title XIX services. PROGRAM
FEDERALLY QUALIFIED An entity which meets the requirements and receives a grant and funding pursuant to Section 330 of the Public HEALTH CENTER (FQHC) Health Service Act. An FQHC includes an outpatient health program or facility operated by a tribe or tribal organization under the Indian Self-Determination Act (PL 93-638) or an urban Indian organization receiving funds under Title V of the Indian Health Care Improvement Act.
FEE-FOR-SERVICE (FFS) A method of payment to registered providers on an amount per service basis.
FES Federal Emergency Services program covered under R9-22-217, to treat an emergency medical condition for a member who is determined eligible under A.R.S. § 36-2903.03 (D).
FFP Federal financial participation (FFP) refers to the contribution that the Federal government makes to the Title XIX and Title XXI program portions of AHCCCS as defined in 42 CFR 400.203.
FISCAL YEAR (FY) The budget year — Federal Fiscal Year: October 1 through September 30; State fiscal year: July 1 through June 30.
FREEDOM TO WORK A Federal program that expands Title XIX eligibility to individuals, 16 through 64 years old, who are disabled (TICKET TO WORK) and whose earned income, after allowable deductions, is at or below 250% of the Federal Poverty Level.
GEOGRAPHIC SERVICE A specific county or defined grouping of counties designated by AHCCCSA within which a Contractor provides, AREA (GSA) directly or through subcontract, covered health care to members enrolled with that Contractor.
GRIEVANCE A system that includes a process for enrollee grievances, enrollee appeals, provider claim disputes, and access to SYSTEM the state fair hearing system.
HEALTHCARE GROUP OF A prepaid medical coverage plan marketed to small, uninsured businesses and political subdivisions within the ARIZONA (HCG) state.
HEALTH PLAN See “CONTRACTOR”.
HIFA The CMS Health Insurance Flexibility and Accountability Demonstration Initiative , which targets State Children’s Health Insurance Program (Title XXI) funding for populations with incomes below 200 percent of the Federal Poverty Level, seeking to maximize private health insurance coverage options.
HIFA PARENTS Parents of Medicaid (SOBRA) and KidsCare eligible children who are eligible for AHCCCS benefits under the HIFA Waiver. All eligible parents must pay an enrollment fee and a monthly premium based on household income.
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DEFINITIONS Contract/RFP No. YH04-0001
IBNR Incurred But Not Reported liability for services rendered for which claims have not been received.
IHS Indian Health Service authorized as a Federal agency pursuant to 25 U.S.C. 1661.
KIDSCARE Individuals under the age of 19, eligible under the SCHIP program, in households with income at or below 200% FPL. All members, except Native American members, are required to pay a premium amount based on the number of children in the family and the gross family income. Also referred to as Title XXI.
LIEN A legal claim, filed with the County Recorder’s office in which a member resides and in the county an injury was sustained, for the purpose of ensuring that AHCCCS receives reimbursement for medical services paid. The lien is attached to any settlement the member may receive as a result of an injury.
MANAGED CARE Systems that integrate the financing and delivery of health care services to covered individuals by means of arrangements with selected providers to furnish comprehensive services to members; establish explicit criteria for the selection of health care providers; have financial incentives for members to use providers and procedures associated with the plan; and have formal programs for quality, utilization management and the coordination of care.
MANAGEMENT SERVICES An agreement with an entity in which the owner of the Contractor delegates some or all of the comprehensive AGREEMENT management and administrative services necessary for the operation of the Contractor.
MANAGEMENT SERVICES An entity to which the Contractor delegates the comprehensive management and administrative services necessary SUBCONTRACTOR for the operation of the Contractor
MANAGING EMPLOYEE A general manager, business manager, administrator, director, or other individual who exercises operational or managerial control over, or who directly or indirectly conducts the day-to-day operation of an institution, organization or agency.
MATERIAL OMISSION Facts, data or other information excluded from a report, contract, etc., the absence of which could lead to erroneous conclusions following reasonable review of such report, contract, etc.
MAJOR UPGRADE Any upgrade or changes that may result in a disruption to the following: Loading of contracts, providers, members, issuing prior authorizations or the adjudication of claims.
MEDICAID A Federal/State program authorized by Title XIX of the Social Security Act, as amended.
MEDICAL EXPENSE Title XIX Waiver member whose family income is more than 100% of the Federal Poverty Level and has family DEDUCTION medical expenses that reduce income to or below 40% of the Federal Poverty Level. MED’s may have a categorical (MED) link to a Title XIX category; however, their income exceeds the limits of the Title XIX category.
MEDICAL MANAGEMENT An integrated process or system that is designed to assure appropriate utilization of health care resources, in the amount and duration necessary to achieve desired health outcomes, across the continuum of care (from prevention to end of life care).
MEDICARE A Federal program authorized by Title XVIII of the Social Security Act, as amended.
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DEFINITIONS Contract/RFP No. YH04-0001
MEDICARE MANAGED CARE A managed care entity that has a Medicare contract with CMS to provide services to Medicare beneficiaries, PLAN including Medicare Advantage Prescription Drug Plan (MAPDP), MAPDP Special Needs Plan, or Medicare Prescription Drug Plan
MEDICARE PART D Medicare Part D is the Prescription Drug Coverage option available to Medicare beneficiaries, including those also EXCLUDED DRUGS eligible for Medicaid. Medications that are available under this benefit will not be covered by AHCCCS post January 1, 2006. There are certain drugs that are excluded from coverage by Medicare, and will continue to be covered by AHCCCS. Those medications are barbiturates, benzodiazepines, and over the counter medication as defined in the AMPM. Prescription medications that are covered under Medicare, but are not on a Part D Health Plan’s formulary are not considered excluded drugs, and will not be covered by AHCCCS.
MEMBER An eligible person who is enrolled in the system, as defined in A.R.S. § 36-2901, A.R.S. § 36-2981 and A.R.S. § 36-2981.01.
NEW OFFEROR An organization or entity that submits a proposal in response to this solicitation and which has not been an AHCCCS Contractor during CYE 03.
NON-CONTRACTING A person who provides services as prescribed in A.R.S. § 36-2939 and who does not have a subcontract with an PROVIDER AHCCCS Contractor.
OFFEROR An organization or other entity that submits a proposal to the Administration in response to this RFP, as defined in R9-22-106.
PERFORMANCE A set of standardized indicators designed to assist AHCCCSA in evaluating, comparing and improving the STANDARDS performance of its Contractors. Specific descriptions of health services measurement goals are found in Section D, Paragraph 24, Performance Standards.
PMMIS AHCCCSA’s Prepaid Medical Management Information System.
POST Medically necessary services, related to an emergency medical condition, provided after the member’s condition is STABILIZATION SERVICES sufficiently stabilized in order to maintain, improve or resolve the member’s condition so that the member could alternatively be safely discharged or transferred to another location. [42 CFR 438-114(a)]
POTENTIAL ENROLLEE A Medicaid eligible recipient who is not yet enrolled with a contractor. [42 CFR 438.10(a)]
PRIMARY CARE PROVIDER An individual who meets the requirements of A.R.S. § 36-2901, and who is responsible for the management of a (PCP) member’s health care. A PCP may be a physician defined as a person licensed as an allopathic or osteopathic physician according to A.R.S. Title 32, Chapter 13 or Chapter 17 or a practitioner defined as a physician assistant licensed under A.R.S. Title 32, Chapter 25, or a certified nurse practitioner licensed under A.R.S. Title 32, Chapter 15.
PRIOR PERIOD The period of time, prior to the member’s enrollment, during which a member is eligible for covered services. The time frame is from the effective date of eligibility to the day a member is enrolled with a Contractor.
PROVIDER Any person or entity who contracts with AHCCCSA or a Contractor for the provision of covered services to members according to the provisions A.R.S. § 36-2901 or any subcontractor of a provider delivering services pursuant to A.R.S. § 36-2901.
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DEFINITIONS Contract/RFP No. YH04-0001
QUALIFIED MEDICARE A person, eligible under A.R.S. § 36-2971(6), who is entitled to Medicare Part A insurance and meets certain BENEFICIARY (QMB) income and residency requirements of the Qualified Medicare Beneficiary program. A QMB, who is also eligible for Medicaid, is commonly referred to as a QMB dual eligible.
RATE CODE Eligibility classification for capitation payment purposes.
REGIONAL BEHAVIORAL An organization under contract with ADHS, who administers covered behavioral health services in a HEALTH geographically specific area of the state. Tribal governments, through an agreement with ADHS, may operate a AUTHORITY (RBHA) tribal regional behavioral health authority (TRBHA) for the provision of behavioral health services to Native American members living on-reservation.
REINSURANCE A risk-sharing program provided by AHCCCSA to Contractors for the reimbursement of certain contract service costs incurred for a member beyond a certain monetary threshold.
RELATED PARTY A party that has, or may have, the ability to control or significantly influence a Contractor, or a party that is, or may be, controlled or significantly influenced by a Contractor. “Related parties” include, but are not limited to, agents, managing employees, persons with an ownership or controlling interest in the disclosing entity, and their immediate families, subcontractors, wholly-owned subsidiaries or suppliers, parent companies, sister companies, holding companies, and other entities controlled or managed by any such entities or persons.
RISK GROUP Grouping of rate codes that are paid at the same capitation rate.
RFP Request For Proposal is a document prepared by AHCCCSA, which describes the services required and instructs prospective offerors about how to prepare a response (proposal), as defined in R9-22-106.
SCHIP State Children’s Health Insurance Program under Title XXI of the Social Security Act. The Arizona version of SCHIP is referred to as “Kidscare”. See Kidscare.
SCOPE OF SERVICES See “COVERED SERVICES”.
SERVICE LEVEL An agreement with a a corporate owner, or any of its Divisions or Subsidiaries, that requires specific levels of AGREEMENT service for administrative functions or services for the Contractor specifically related to fulfilling the Contractor’s obligations to AHCCCSA under the terms of this contract, as defined in R9-22-101.
SOBRA Section 9401 of the Sixth Omnibus Budget and Reconciliation Act, 1986, amended by the Medicare Catastrophic Coverage Act of 1988, U.S.C. 1396a(a)(10)(A)(ii)(IX), November 5, 1990.
SPECIAL HEALTH CARE Members with special health care needs are those members who have serious and chronic physical, developmental NEEDS or behavioral conditions, and who also require medically necessary health and related services of a type or amount beyond that required by members generally.
STATE The State of Arizona.
STATE PLAN The written agreements between the State and CMS which describe how the AHCCCS program meets CMS requirements for participation in the Medicaid program and the State Children’s Health Insurance Program.
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DEFINITIONS Contract/RFP No. YH04-0001
SUBCONTRACT An agreement entered into by the Contractor with a provider of health care services, who agrees to furnish covered services to members or with any other organization or person who agrees to perform any administrative function or service for the Contractor specifically related to fulfilling the Contractor’s obligations to AHCCCSA under the terms of this contract, as defined in R9-22-101.
SUBCONTRACTOR (1) A provider of health care who agrees to furnish covered services to members.
(2) A person, agency or organization with which the Contractor has contracted or delegated some of its management/administrative functions or responsibilities
(3) A person, agency or organization with which a fiscal agent has entered into a contract, agreement, purchase order or lease (or leases of real property) to obtain space, supplies, equipment or services provided under the AHCCCS agreement.
SUPPLEMENTAL SECURITY Federal cash assistance program under Title XVI of the Social Security Act. INCOME (SSI)
TEMPORARY A Federal cash assistance program under Title IV of the Social Security Act established by the Personal ASSISTANCE TO NEEDY Responsibility and Work Opportunity Act of 1996. It replaced Aid To Families With Dependent Children FAMILIES (AFDC). (TANF)
THIRD PARTY An individual, entity or program that is or may be liable to pay all or part of the medical cost of injury, disease or disability of an AHCCCS applicant or member, as defined in R9-22-1001.
THIRD PARTY The resources available from a person or entity that is, or may be, by agreement, circumstance or otherwise, liable LIABILITY to pay all or part of the medical expenses incurred by an AHCCCS applicant or member, as defined in R9-22- 1001,
TITLE XIX MEMBER Member eligible for Federally funded Medicaid programs under Title XIX of the Social Security Act including those eligible under 1931 provisions of the Social Security Act, Sixth Omnibus Budget Reconciliation Act (SOBRA), Supplemental Security Income (SSI), SSI-related groups, Title XIX Waiver groups. Medicare Cost Sharing groups, Breast and Cervical Cancer Treatment program and Freedom to Work.
TITLE XIX WAIVER All MED (Medical Expense Deduction) members, and adults or childless couples at or below 100% of the Federal MEMBER Poverty Level who are not categorically linked to another Title XIX program. This would also include Title XIX linked individuals whose income exceeds the limits of the categorical program.
TITLE XXI MEMBER Member eligible for acute care services under Title XXI of the Social Security Act, referred to in Federal legislation as the “State Children’s Health Insurance Program” (SCHTP and HIFA). The Arizona version of SCHIP is referred to as “KidsCare.”
WWHP Well Woman Health check Program, administered by the Arizona Department of Health Services and funded by the Centers for Disease Control and Prevention. (See AMPM Chapter 400)
YEAR See “Contract Year”.
[END OF DEFINITIONS]
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
SECTION D: PROGRAM REQUIREMENTS
1. TERM OF CONTRACT AND OPTION TO RENEW The initial term of this contract shall be 10/1/03 through 9/30/06, with two one-year options to renew. All contract renewals shall be through contract amendment. AHCCCSA shall issue amendments prior to the end date of the contract when there is an adjustment to capitation rates and/or changes to the scope of service contained herein. Changes to scope of service include but are not limited to changes in the enrolled population, changes in covered services, changes in GSA’s If the Contractor has been awarded a contract in more than one GSA, each such contract will be considered separately renewable. AHCCCSA may renew the Contractor’s contract in one GSA, but not in another. In addition, if the Contractor has had significant problems of non-compliance in one GSA, it may result in the capping of the Contractor’s enrollment in all GSAs. Further, AHCCCSA may require the Contractor to renew all currently awarded GSA’s, or may terminate the contract if the Contractor does not agree to renew all currently awarded GSA’s. When AHCCCSA issues an amendment to the contract, the provisions of such renewal will be deemed to have been accepted 60 days after the date of mailing by AHCCCSA, even if the amendment has not been signed by the Contractor, unless within that time the Contractor notifies AHCCCSA in writing that it refuses to sign the renewal amendment If the Contractor provides such notification, AHCCCSA will initiate contract termination proceedings. Contractor’s Notice of Intent Not To Renew: If the Contractor chooses not to renew this contract, the Contractor may be liable for certain costs associated with the transition of its members to a different Contractor. If the Contractor provides AHCCCSA written notice of its intent not to renew this contract at least 180 days before its expiration, this liability for transition costs may be waived by AHCCCSA. Contract Termination:In the event the contract, or any portion thereof, is terminated for any reason, or expires, the Contractor shall assist AHCCCSA in the transition of its members to other contractors, and shall abide by standards and protocols set forth in Paragraph 9, Transition of Members. In addition, AHCCCSA reserves the right to extend the term of the contract on a month-to-month basis to assist in any transition of members. The Contractor shall make provision for continuing all management and administrative services until the transition of all members is completed and all other requirements of this contract are satisfied. The Contractor shall be responsible for providing all reports set forth in this contract and necessary for the transition process and shall be responsible for the following: a. Notification of subcontractors and members. b. Payment of all outstanding obligations for medical care rendered to members. c. Until AHCCCSA is satisfied that the Contractor has paid all such obligations, the Contractor shall provide the following reports to AHCCCSA: (1) A monthly claims aging report by provider/creditor including IBNR amounts;
(2) A monthly summary of cash disbursements;
(3) Copies of all bank statements received by the Contractor. d. Such reports shall be due on the fifth day of each succeeding month for the prior month. e. In the event of termination or suspension of the contract by AHCCCSA, such termination or suspension shall not affect the obligation of the Contractor to indemnify AHCCCSA for any claim by any third party against the State or AHCCCSA arising from the Contractor’s performance of this contract and for which the Contractor would otherwise be liable under this contract. f. Any dispute by the Contractor, with respect to termination or suspension of this contract by AHCCCSA, shall be exclusively governed by the provisions of Section E, Paragraph 26, Disputes.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 g. Any funds, advanced to the Contractor for coverage of members for periods after the date of termination, shall be returned to AHCCCSA within 30 days of termination of the contract.
2. ELIGIBILITY CATEGORIES AHCCCS is Arizona’s Title XIX Medicaid program operating under an 1115 Waiver and Title XXI program operating under Title XXI State Plan authority. Arizona has the authority to require mandatory enrollment in managed care. All members eligible for AHCCCS benefits, with few exceptions, are enrolled with acute care contractors and paid for on a capitated basis. AHCCCSA pays for health care expenses on a fee for service (FFS) basis for Title XIX and Title XXI eligible members who receive services through the Indian Health Service; for Title XIX eligible members who are entitled to emergency services under the Federal Emergency Services (FES) program; for Medicare cost sharing beneficiaries under QMS programs. The following describes the eligibility groups enrolled in the managed care program and covered under this contract [42 CFR 434.6(a)(2)].
TitleXIX 1931 (Also referred to as TANF): Eligible individuals and families under the 1931 provision of the Social Security Act, with household income levels at or below 100% of the FPL. SSI and SSI Related Groups: Eligible individuals receiving Supplemental Security Income (SSI) or who are aged, blind or disabled with household income levels at or below 100% of the FPL. Freedom to Work (Ticket to Work): Eligible individuals under the Title XIX expansion program that extends eligibility to individuals, 16 through 64 years old who meet SSI disability criteria, whose earned income, after allowable deduction, is at or below 250% of the FPL and who are not eligible for any other Medicaid program. These members must pay a premium to AHCCCSA ranging from $10 to $35, depending on income. SOBRA: Under the Sixth Omnibus Budget and Reconciliation Act of 1986, eligible pregnant women, with household income levels at or below 133% of the FPL, and children in families with household incomes ranging from below 100% to 340% of the FPL, depending on the age of the child. SOBRA Family Planning: Family planning extension program that covers the costs for family planning services only, for a maximum of 24 months following the loss of SOBRA eligibility. Breast and Cervical Cancer Treatment Program (BCCTP): Eligible individuals under the Title XIX expansion program for women with income up to 250% of the FPL, who are diagnosed with and need treatment for breast and/or cervical cancer or cervical lesions and are not eligible for other Title XIX programs providing full Title XIX services. Eligible members cannot have other creditable health insurance coverage, including Medicare.
Title XIX Waiver Group Non-MED: Eligible individuals and couples whose income is at or below 100% of the FPL, and who are not categorically linked to another Title XIX program. MED: Eligible individuals and families whose income is above 100% of the FPL with medical expenses that reduce income to or below 40% of the FPL.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
Title XXI KidsCare: Individuals under the age of 19, whose income does not exceed 200% FPL. All members, except Native American members, are required to pay a premium amount to AHCCCSA based on the number of children in the family and the gross family income. HIFA Parents: Non-Title XIX-eligible parents of KidsCare children or parents of Title XIX SOBRA eligible children who are eligible under the HIFA demonstration initiative waiver. HIFA parents are required to pay a one-time enrollment fee and a monthly premium to AHCCCSA ranging from $15 to $25 per parent (except Native American members), based on household income. Due to funding considerations, this program has an enrollment cap.
Social Security Disability Insurance Temporary Medical Coverage (SSDI-TMC) Laws 2006, Chapter 373 established a Temporary Medical Coverage Program. SSDI-TMC provides health care coverage to persons who: 1. Are citizens and residents who have been enrolled in AHCCCS at any time within the last 24 months 2. And became ineligible for AHCCCS coverage due to federal disability insurance benefit payments making them over income for Medicaid, 3. And they are not yet eligible for Medicare. In order to participate in SSDI-TMC, eligible persons must pay a premium. Participants become ineligible for SSDI-TMC once they become eligible for Medicare. SSDI-TMC is funded entirely by the State. Contractors will be capitated for these members under unique rate codes and AHCCCS may provide a reconciliation to limit the profit or loss of this population. If reconciliation is to be implemented, an SSDI-TMC reconciliation policy will be developed which will discuss the details of the reconciliation calculations and timelines. SSDI-TMC members will not be eligible for behavioral health services, prior period Coverage, any supplemental payments or reinsurance. Members will be entitled to all other AHCCCS Acute Care benefits.
3. ENROLLMENT AND DISENROLLMENT AHCCCSA has the exclusive authority to enroll and disenroll members. The Contractor shall -not disenroll any member for any reason unless directed to do so by AHCCCSA. The Contractor may request AHCCCSA to change the member’s enrollment in accordance with the ACOM Enrollment Choice and Change of Contractor Policy. The Contractor may not request disenrollment because of an adverse change in the member’s health status, or because of the member’s utilization of medical services, diminished mental capacity, or uncooperative or disruptive behavior resulting from his or her special needs. An AHCCCS member may request disenrollment from the Contractor for cause at any time. Refer those requests due to situations defined in Section A (1) of the ACOM Change of Plan Policy to AHCCCSA to the AHCCCS Verification Unit via mail or at (602) 417-4000 or (800) 962-6690. For medical continuity requests, the Contractor shall follow the procedures outlined in the ACOM Change of Plan Policy, before notifying the AHCCCSA. AHCCCSA will disenroll the member when the member becomes ineligible for the AHCCCS program, moves out of the Contractor’s service areas, changes contractors during the member’s open enrollment/annual enrollment choice period, the Contractor does not, because of moral or religious objections, cover the service the member seeks or when approved for a Contractor change through the ACOM Change of Plan Policy, [42 CFR 438.56] Eligibility for the various AHCCCS coverage groups is determined by one of the following agencies:
Social Security Administration (SSA) SSA determines eligibility for the Supplemental Security Income (SSI) cash program. SSI cash recipients are automatically eligible for AHCCCS coverage.
Department of Economic Security (DBS) DES determines eligibility for the families with children under
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
section 1931 of the Social Security Act, pregnant women and children under SOBRA, the Adoption Subsidy Program, Title IV-E foster care children, Young Adult Transitional Insurance Program, the Federal Emergency Services program (FES), HIFA parents of SOBRA eligible children, the Title XIC Waiver Members.
AHCCCSA AHCCCSA determines eligibility for the SSI/Medical Assistance Only groups, including the FES program for this population (aged, disabled, blind), the Arizona Long-Term Care System (ALTCS), the Qualified Medicare Beneficiary program and other Medicare cost sharing programs, BCCTP, the Freedom to Work program, the Title XXI KidsCare program, and HIFA parents of KidsCare children.
AHCCCS acute care members are enrolled with Contractors in accordance with the rules set forth in R9-22, Article 17, R9-31-306,307,309 and 1719.
Health Plan Choice All AHCCCS members eligible for services covered under this contract have a choice of available contractors. Information about these contractors will be given to each applicant during the application process for AHCCCS benefits. If there is only one contractor available for the applicant’s Geographic Service Area, no choice is offered as long as the contractor offers the member a choice of PCPs. Members, who do not choose prior to AHCCCSA being notified of their eligibility, are automatically assigned to a contractor based on family continuity or the auto assignment algorithm. Once assigned, AHCCCS sends a choice notice to the member and gives them 16 days to choose a different contractor from the auto-assigned contractor. See Section D, Paragraph 6, Auto-Assignment Algorithm, for further explanation. The Contractor will share with AHCCCSA the cost of providing information about the acute care contractors to potential members and to those eligible for annual enrollment choice. Exceptions to the above enrollment policies for Title XIX members include previously enrolled members who have been disenrolled for less than 90 days. These members will be automatically enrolled with the same Contractor, if still available. Members who have less than 30 days of continued eligibility will not be enrolled with a Contractor, but will be placed on Fee for Service. FES members are not enrolled with a contractor. Women, who become eligible for the Family Planning Services Extension Program, will remain assigned to their current contractor. Some specialty groups will also be FFS, such as persons approved only for the inpatient hospital stay. These are inmates who are temporarily residing in a hospital. The effective date of enrollment for a new Title XIX member with the Contractor is the day AHCCCSA takes the enrollment action, generally the day prior to the date the Contractor receives notification from AHCCCSA via the daily roster. However, the Contractor is responsible for payment of medically necessary covered services retroactive to the member’s beginning date of eligibility. KidsCare members must select a contractor prior to being determined eligible and therefore, will not be auto-assigned. If the HIFA parent does not choose, they will be enrolled with their child’s contractor following the enrollment rules set forth in R9-31-1719. When a member is transferred from Title XIX to Title XXI and has not made a contractor choice for Title XXI, the member will remain with their current contractor and a choice notice will be sent to the member. The member may then change plans no later than 16 days from the date the choice notice is sent.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
The effective date of enrollment for a Title XXI member, including HIFA parents, will be the first day of the month following notification to the contractor, with few exceptions. Prior Period Coverage: AHCCCS provides prior period coverage for the period of time, prior to the Title XIX member’s enrollment, during which a member is eligible for covered services. The time frame is from the effective date of eligibility to the day a member is enrolled with the Contractor. The Contractor receives notification from the Administration of the member’s enrollment. The Contractor is responsible for payment of all claims for medically necessary covered services provided to members during prior period coverage. This may include services provided prior to the contract year (See Section D, Paragraph 53, Compensation, for a description of the Contractor’s reimbursement from AHCCCSA for this eligibility time period.) Newborns: Newborns, born to AHCCCS eligible mothers enrolled at the time of the child’s birth, will be enrolled with the mother’s contractor, when newborn notification is received by AHCCCSA. The Contractor is responsible for notifying AHCCCSA of a child’s birth to an enrolled member. Capitation for the newborn will begin on the date notification is received by AHCCCSA (except for cases of births during prior period coverage). The effective date of AHCCCS eligibility will be the newborn’s date of birth, and the Contractor is responsible for all covered services to the newborn whether or not AHCCCSA has received notification of the child’s birth. AHCCCSA is currently available to receive notification 24 hours a day, 7 days a week via phone or the AHCCCS website. Eligible mothers of newborns are sent a letter advising them of their right to choose a different contractor for their child; the date of the change will be the date of processing the request from the mother. If the mother does not request a change, the child will remain with the mother’s contractor. Newborns of FES mothers are auto-assigned to a contractor and mothers of these newborns are sent a letter advising them of their right to choose a different contractor for their child. In the event the FES mother chooses a different contractor, AHCCCS will recoup all capitation paid to the originally assigned contractor and the baby will be enrolled retroactive to the date of birth in the second contractor. The second contractor will receive prior period capitation from the date of birth to the day before assignment and prospective capitation from the date of assignment forward. The second contractor will be responsible for all covered services to the newborn from date of birth. Enrollment Guarantees: Upon initial capitated enrollment as a Title XIX-eligible member, the member is guaranteed a minimum of five full months of continuous enrollment. Upon initial capitated enrollment as a Title XXI-eligible member, the member is guaranteed a minimum of 12 full months of continuous enrollment. Enrollment guarantees do not apply to HIFA parents. The enrollment guarantee is a one-time benefit. If a member changes from one contractor to another within the enrollment guarantee period, the remainder of the guarantee period applies to the new contractor. The enrollment guarantee may not be granted or may be terminated if the member is incarcerated or, if a minor child is adopted. AHCCCS Rule R9-22, Article 17 and R9-31, Article 3 describes other reasons for which the enrollment guarantee may not apply. Native Americans: Native Americans, on or off-reservation, may choose to receive services from Indian Health Service (IHS), a PL 93-638 tribal facility or any available contractor. If a choice is not made within the specified time limit, Native American Title XIX members living on-reservation will be assigned to AHCCCS FFS. Native American Title XIX members living off-reservation will be assigned to an available contractor using AHCCCS’ Family Continuity Policy and auto-assignment algorithm. Native American Title XXI members must make a choice prior to being determined eligible. Title XXI HIFA parent members’ enrollment will follow the Title XIX enrollment rules. Native Americans may change from AHCCCS FFS to a contractor or from a contractor to AHCCCS FFS at any time. Member Rights: Members may submit plan change requests to the Contractor or the AHCCCS Administration. A denial of any plan change request must include a description of the member’s right to appeal the denial.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
4. ANNUAL ENROLLMENT CHOICE AHCCCSA conducts an Annual Enrollment Choice (AEC) for members on their annual anniversary date, [42 CFR 438.56(c)(2)(ii)] AHCCCSA may hold an open enrollment as deemed necessary. During AEC, members may change contractors subject to the availability of other contractors within their Geographic Service Area. Members are mailed a printed enrollment form and other information required by the Balanced Budget Act of 1997 (BBA) 60 days prior to their AEC date and may choose a new contractor by contacting AHCCCSA to complete the enrollment process. If the member does not participate in the AEC, no change of contractor will be made (except for approved changes under the ACOM Change of Plan Policy) during the new anniversary year. This holds true if a contractor’s contract is renewed and the member continues to live in a contractor’s service area. The Contractor shall comply with the ACOM Member Transition for Annual Enrollment Choice, Open Enrollment and Other Plan Changes Policy and the AMPM.
5. OPEN ENROLLMENT In the event that AHCCCSA does not award a CYE ‘04 contract to an incumbent contractor, AHCCCSA will hold an open enrollment for those members enrolled with the exiting contractor. If those members do not elect to choose a contractor, they will be auto assigned. In addition to open enrollment, AHCCCSA will make changes to both annual enrollment choice materials and new enrollee materials prior to October 1, 2003 to reflect the change in available contractors. The auto assignment algorithm will be adjusted to exclude auto assignment of new enrollees to exiting contractors(s). The exact dates for the open enrollment and other changes described above have not yet been determined, but will be communicated when they are finalized.
6. AUTO-ASSIGNMENT ALGORITHM Once auto-assigned, AHCCCS sends a choice notice to the member and gives them 16 days to choose a different contractor from the auto-assigned contractor. Members who do not exercise their right to choose and do not have family continuity, are assigned to a contractor through an auto-assignment algorithm. The algorithm is a mathematical formula used to distribute members to the various contractors in a manner that is predictable and consistent with AHCCCSA goals. The algorithm favors those contractors with lower capitation rates in the latest contract award and higher rates in selected Performance Measures. For further details on the AHCCCS Auto-Assignment Algorithm, refer to Attachment G. AHCCCSA may change the algorithm at any time during the term of the contract in response to contractor-specific issues (e.g. imposition of an enrollment cap). Capitation rates may be adjusted to reflect changes to a contractor’s risk due to changes in the algorithm.
7. AHCCCS MEMBER IDENTIFICATION CARDS Contractors are responsible for paying the costs of producing AHCCCS member identification cards. The Contractor will receive an invoice the month following the issue date of the identification card.
8. MAINSTREAMING OF AHCCCS MEMBERS To ensure mainstreaming of AHCCCS members, the Contractor shall take affirmative action so that members are provided covered services without regard to payer source, race, color, creed, gender, religion, age, national origin (to include those with limited English proficiency), ancestry, marital status, sexual preference, genetic information, or physical or mental handicap, except where medically indicated. Contractors must take into account a member’s literacy and culture, when addressing members and their concerns, and must take reasonable steps to encourage subcontractors to do the same. The Contractor must make interpreters, including assistance for the visual or hearing impaired, available free of charge for all members to ensure appropriate
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PROGRAM REQUIREMENTS Contract/RFP No, YH04-0001 delivery of covered services. The Contractor must provide members with information instructing them about how to access these services. Examples of prohibited practices include, but are not limited to, the following, in accordance with Title VI of the US Civil Rights Act of 1964, 42 USC, Section 2001, Executive Order 13166, and rules and regulation promulgated according to, or as otherwise provided by law: a. Denying or not providing a member any covered service or access to an available facility. b. Providing to a member any covered service which is different, or is provided in a different manner or at a different time from that provided to other members, other public or private patients or the public at large, except where medically necessary. c. Subjecting a member to segregation or separate treatment in any manner related to the receipt of any covered service; restricting a member in any way in his or her enjoyment of any advantage or privilege enjoyed by others receiving any covered service. d. The assignment of times or places for the provision of services on the basis of the race, color, creed, religion, age, sex, national origin, ancestry, marital status, sexual preference, income status, AHCCCS membership, or physical or mental handicap of the participants to be served. If the Contractor knowingly executes a subcontract with a provider with the intent of allowing or permitting the subcontractor to implement barriers to care (i.e. the terms of the subcontract act to discourage the full utilization of services by some members), the Contractor will be in default of its contract. If the Contractor identifies a problem involving discrimination by one of its providers, it shall promptly intervene and implement a corrective action plan. Failure to take prompt corrective measures may place the Contractor in default of its contract.
9. TRANSITION OF MEMBERS The Contractor shall comply with the AMPM, and the ACOM Member Transition for Annual Enrollment Choice, Open Enrollment and Other Plan Changes Policy standards for member transitions between contractors or GSAs, participation in or discharge from CRS or CMDP, to or from an ALTCS Contractor and upon termination or expiration of a contract. The Contractor shall develop and implement policies and procedures, which comply with these policies to address transition of: a. Members with significant medical conditions such as a high-risk pregnancy or pregnancy within the last 30 days, the need for organ or tissue transplantation, chronic illness resulting in hospitalization or nursing facility placement, etc.; b. Members who are receiving ongoing services such as dialysis, home health, chemotherapy and/or radiation therapy or who are hospitalized at the time of transition; c. Members who have received prior authorization for services such as scheduled surgeries, out-of-area specialty services, nursing home admission; d. Prescriptions, DME and medically necessary transportation ordered for the transitioning member by the relinquishing contractor; and e. Medical records of the transitioning member (the cost, if any, of reproducing and forwarding medical records shall be the responsibility of the relinquishing AHCCCS contractor). f. Any members transitioning to CMDP. When relinquishing members, the Contractor is responsible for timely notification to the receiving contractor regarding pertinent information related to any special needs of transitioning members. The Contractor, when receiving a transitioning member with special needs, is responsible for coordinating care with the relinquishing contractor in order that services not be interrupted, and for providing the new member with contractor and service information, emergency numbers and instructions about how to obtain services.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
10. SCOPE OF SERVICES The Contractor shall provide covered services to AHCCCS members in accordance with all applicable Federal, State and local laws, rules, regulations and policies, including services listed in this document, listed by reference in attachments, and AHCCCS policies referenced in this document The services are described in detail in AHCCCS Rules R9-22, Article 2 and the AHCCCS Medical Policy Manual (AMPM}, all of which are incorporated herein by reference, except for provisions specific to the Fee-for-Service program, and may be found in the Bidder’s Library. [42 CFR 438.210(a)(l)] The covered services must be medically necessary and are briefly described below. [42 CFR 438.210(a)(4)] Except for annual well woman exams, behavioral health and children’s dental services, covered services must be provided by, or coordinated with, a primary care provider. The Contractor shall coordinate the services it provides to a member with services the member receives from other entities, including behavioral health services the member receives through an ADHS/RBHA provider. The Contractor shall ensure that, in the process of coordinating care, each member’s privacy is protected in accordance with the privacy requirements in 45 CFR Parts 160 and 164 Subparts A and E, to the extent that they are applicable. [42 CFR 438.208(b)(4) and 438.224] Services must be rendered by providers that are appropriately licensed or certified, operating within their scope of practice, and registered as an AHCCCS provider. The Contractor shall provide the same standard of care for all members regardless of the member’s eligibility category. The Contractor shall ensure that the services are sufficient in amount, duration, or scope to reasonably be expected to achieve the purpose for which the services are furnished. The Contractor shall not arbitrarily deny or reduce the amount, duration, or scope of a required service solely because of diagnosis, type of illness, or condition of the member. The Contractor may place appropriate limits on a service on the basis of criteria such as medical necessity; or for utilization control, provided the services furnished can reasonably be expected to achieve their purpose. [42 CFR 438.210(a)(3)] Authorization of Services: For the processing of requests for initial and continuing authorizations of services, the Contractor shall have in place, and follow, written policies and procedures. The Contractor shall have mechanisms in place to ensure consistent application of review criteria for authorization decisions. Any decision to deny a service authorization request or to authorize a service in an amount, duration, or scope that is less than requested, shall be made by a health care professional who has appropriate clinical expertise in treating the member’s condition or disease. [42 CFR 438.2I0(b)] Notice of Action: The Contractor shall notify the requesting provider, and give the member written notice of any decision by the Contractor to deny, reduce, suspend or terminate a service authorization request, or to authorize a service in an amount, duration, or scope that is less than requested. The notice shall meet the requirements of 42 CFR 438.404, except for the requirement that the notice to the provider be in writing. [42 CFR 438.210(c)] The Contractor shall ensure that its providers are not restricted or inhibited in any way from communicating freely with members regarding the members’ health care, medical needs and treatment options, even if needed services are not covered by the Contractor. Ambulatory Surgery and Anesthesiology: The Contractor shall provide surgical services for either emergency or scheduled surgeries when provided in an ambulatory or outpatient setting such as a freestanding surgical center or a hospital based outpatient surgical setting. Anti-hemophilic Agents and Related Services: The Contractor shall provide services for the treatment of hemophilia and Von Willebrands disease (See Paragraph 57, REINSURANCE, Catastrophic Reinsurance). AHCCCSA holds a single-source specialty contract for anti-hemophilic agents and related services for hemophilia. Non-hemophilia related services are not covered under this contract. Non-hemophilia-related care is defined as any care that is provided not related to the hemophilia services.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 AHCCCSA’s participating Contractors may access anti-hemophilic agents and related pharmaceutical services for hemophilia or Von Willebrands under the terms and conditions of this contract for members enrolled in their plans. In that instance, the Contractor is the authorizing payor. As such, the Contractor will provide prior authorization, care coordination, and reimbursement for all components covered under the contract for their members. Contractors utilizing the contract will comply with the terms and conditions of the contract. Contractors may use the AHCCCSA contract or contract with a provider of their choice. Audiology: The Contractor shall provide audiology services to members under the age of 21 including the identification and evaluation of hearing loss and rehabilitation of the hearing loss through medical or surgical means (i.e. hearing aids). Only the identification and evaluation of hearing loss are covered for members 21 years of age and older unless the hearing loss is due to an accident or injury-related emergent condition. Behavioral Health: The Contractor shall provide behavioral health services as described in Section D, Paragraph 12, Behavioral Health Services. Children’s Rehabilitative Services (CRS): The program for children with CRS-covered conditions is administered by the Arizona Department of Health Services (ADHS) for children who meet CRS eligibility criteria. The Contractor shall refer children to the CRS program who are potentially eligible for services related to CRS covered conditions, as specified in R9-22, Article 2 and A.R.S. Title-36; Chapter 2, Article 3. The Contractor is responsible for care of members until Children’s Rehabilitative Services Administration (CRSA) determines those members eligible. In addition, the Contractor is responsible for covered services for CRS eligible members unless and until the Contractor has received written confirmation from CRSA that CRSA will provide the requested service. The Contractor shall require the member’s Primary Care Provider (PCP) to coordinate the member’s care with the CRS Program. For more detailed information regarding eligibility criteria, referral practices, and contractor-CRS coordination issues, refer to the CRS Policy and Procedures Manual and the ACOM, including Section 409 “Notices of Action.” The Contractor shall respond to requests for services potentially covered by CRSA in accordance with Section 409 “Notices of Action” of the ACOM. The Contractor is responsible to address prior authorization requests if CRSA fails to comply with the timeframes specified in Section 409. The Contractor remains ultimately responsible for the provision of all covered services to its members, including emergency services not related to a CRS condition, emergency services related to a CRS condition rendered outside the CRS network, and AHCCCS covered services denied by CRSA for the reason that it is not a service related to a CRS condition. Referral to CRSA does not relieve the Contractor of the responsibility for timely providing medically necessary AHCCCS services not covered by CRSA. In the event that CRSA denies a medically necessary AHCCCS service for the reason that it is not related to a CRS condition, the Contractor must promptly respond to the service authorization request and authorize the provision of medically necessary services. CRSA cannot contest the Contractor prior authorization determination if CRSA fails to timely respond to a service authorization request. Contractors, through their Medical Directors, may request review from CRS Regional Medical Director when it denies a service for the reason that it is not covered by the CRS Program. The Contractor may also request a hearing with the Administration if it is dissatisfied with the CRSA determination. If the AHCCCS Hearing Decision determines that the service should have been provided by CRSA, CRSA shall be financially responsible for the costs incurred by the Contractor in providing the service. A member with private insurance is not required to utilize CRSA. This includes members with Medicare whether they are enrolled in Medicare FFS or a Medicare Managed Care Plan. If the member uses the private insurance network or Medicare for a CRS covered condition, the Contractor is responsible for all applicable deductibles and copayments. If the member is on Medicare, the AHCCCS Policy 201- Medicare Cost Sharing for Members in Traditional Fee for Service Medicare and Policy 202 — Medicare Cost Sharing for Members in Medicare Managed Care Plans shall apply. When the private insurance or Medicare is exhausted, or certain annual or lifetime limits are reached with respect to CRS covered conditions, the Contractor shall refer the member to CRSA for determination for CRS services. If the member with private insurance or Medicare
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 chooses to enroll with CRS, CRS becomes the secondary payer responsible for all applicable deductibles and copayments. The Contractor is not responsible to provide services in instances when the CRS eligible member, who has no primary insurance or Medicare, refuses to receive CRS covered services through the CRS Program. If the Contractor becomes aware that a member with a CRS covered condition refuses to participate in the CRS application process or refuses to receive services through the CRS Program, the member may be billed by the provider in accordance with AHCCCS regulations regarding billing for unauthorized services. Chiropractic Services: The Contractor shall provide chiropractic services to members under age 21 when prescribed by the member’s PCP and approved by the Contractor in order to ameliorate the member’s medical condition. Medicare approved chiropractic services shall also be covered, subject to limitations specified in CFR 410.22, for Qualified Medicare Beneficiaries if prescribed by the member’s PCP and approved by the Contractor. Dental: The Contractor shall provide all members under the age of 21 with all medically necessary dental services including emergency dental services, dental screening and preventive services in accordance with the AHCCCS periodicity schedule, as well as therapeutic dental services, dentures, and pre- transplantation dental services. The Contractor shall monitor compliance with the EPSDT periodicity schedule for dental screening services. The Contractor is required to meet specific utilization rates for members as described in Section D, Paragraph 24, Performance Standards. The Contractor shall ensure that members are notified when dental screenings are due if the member has not been scheduled for a visit. If a dental screening is not received by the member, a second notice must be sent. Members under the age of 21 may request dental services without referral and may choose a dental provider from the Contractor’s provider network. For members who are 21 years of age and older, the Contractor shall provide emergency dental care, medically necessary dentures and dental services for transplantation services as specified in the AMPM. Dialysis: The Contractor shall provide medically necessary dialysis, supplies, diagnostic testing and medication for all members when provided by Medicare-certified hospitals or Medicare-certified end stage renal disease (ESRD) providers. Services may be provided on an outpatient basis, or on an inpatient basis if the hospital admission is not solely to provide chronic dialysis services. Early and Periodic Screening, Diagnosis and Treatment (EPSDT): The Contractor shall provide comprehensive health care services through primary prevention, early intervention, diagnosis and medically necessary treatment to correct or ameliorate defects and physical or mental illness discovered by the screenings for members under age 21. The Contractor shall ensure that these members receive required health screenings, including those for developmental/behavioral health, in compliance with the AHCCCS periodicity schedule. The Contractor shall submit all EPSDT reports to the AHCCCS Division of Health Care Management, as required by the AMPM. The Contractor is required to meet specific participation/utilization rates for members as described in Section D, Paragraph 24, Performance Standards. The Contractor shall ensure the initiation and coordination of a referral to the ADHS/RBHA system for members in need of behavior health services. The Contractor shall follow up with the RBHA to monitor whether members have received these health services. Emergency Services: The Contractor shall have and/or provide the following as a minimum: a. Emergency services facilities adequately staffed by qualified medical professionals to provide pre- hospital, emergency care on a 24-hour-a-day, 7-day- a-week basis, for the sudden onset of a medically emergent condition. Emergency medical services are covered without prior authorization. The Contractor is encouraged to contract with emergency service facilities for the provision of emergency services. The Contractor is also encouraged to contract with or employ the services of non-emergency facilities (e.g, urgent care centers) to address member non-emergency care issues occurring after regular office hours or on weekends. The Contractor shall be responsible for educating members and providers regarding appropriate utilization of emergency room services including behavioral health emergencies.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 The Contractor shall monitor emergency service utilization (by both provider and member) and shall have guidelines for implementing corrective action for inappropriate utilization; b. All medical services necessary to rule out an emergency condition;
c. Emergency transportation; and
d. Member access by telephone to a physician, registered nurse, physician assistant or nurse practitioner for advice in emergent or urgent situations, 24 hours per day, 7 days per week. Per the Balanced Budget Act of 1997, CFR 438.114, the following conditions apply with respect to coverage and payment of emergency services: The Contractor must cover and pay for emergency services regardless of whether the provider that furnishes the service has a contract with the Contractor. The Contractor may not deny payment for treatment obtained under either of the following circumstances: 1. A member had an emergency medical condition, including cases in which the absence of medical attention would not have resulted in the outcomes identified in the definition of emergency medical condition CFR 438.114.
2. A representative of the Contractor (an employee or subcontracting provider) instructs the member to seek emergency medical services. Additionally, the Contractor may not: 1. Limit what constitutes an emergency medical condition as defined in CFR 438.114, on the basis of lists of diagnoses or symptoms.
2. Refuse to cover emergency services based on the failure of the emergency room provider, hospital, or fiscal agent to notify the Contractor of the member’s screening and treatment within 10 calendar days of presentation for emergency services. Claims submission by the hospital within 10 calendar days of presentation for the emergency services constitutes notice to the Contractor. This notification stipulation is only related to the provision of emergency services.
3. Require notification of Emergency Department treat and release visits as a condition of payment unless the plan has prior approval of the AHCCCS Administration. A member who has an emergency medical condition may not be held liable for payment of subsequent screening and treatment needed to diagnose the specific condition or stabilize the patient. The attending emergency physician, or the provider actually treating the member, is responsible for determining when the member is sufficiently stabilized for transfer or discharge, and such determination is binding on the Contractor responsible for coverage and payment. The Contractor shall comply with BBA guidelines regarding the coordination of post-stabilization care. For additional information and requirements regarding emergency services, refer to AHCCCS Rules R9-22-201 et seq.. Eye Examinations/Optometry: The Contractor shall provide all medically necessary emergency eye care, vision examinations, prescriptive lenses, and treatments for conditions of the eye for all members under the age of 21. For members who are 21 years of age and older, the Contractor shall provide emergency care for eye conditions which meet the definition of an emergency medical condition. Also covered for this population is cataract removal, and medically necessary vision examinations and prescriptive lenses, if required, following cataract removal and other eye conditions as specified in the AMPM. Family Planning: The Contractor shall provide family planning services in accordance with the AMPM, for all members who choose to delay or prevent pregnancy. These include medical, surgical, pharmacological and
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 laboratory services, as well as contraceptive devices. Information and counseling, which allow members to make informed decisions regarding family planning methods, shall also be included. If the Contractor does not provide family planning services, it must contract for these services through another health care delivery system, which allows members freedom of choice in selecting a provider. The Contractor shall provide services to members enrolled in the Family Planning Services Extension Program, a program that provides family planning services only, for a maximum of 24 months, to women whose SOBRA eligibility has terminated. The Contractor is also responsible for notifying AHCCCSA when a SOBRA woman is sterilized to prevent inappropriate enrollment in the SOBRA Family Planning Services Extension Program. Notification should be made at the time the newborn is reported or after the sterilization procedure is completed. Health Risk Assessment and Screening: The Contractor shall provide these services for non-hospitalized members, 21 years of age and older. These services include, but are not limited to, screening for hypertension, elevated cholesterol, colon cancer, sexually transmitted diseases, tuberculosis and HIV/AIDS; nutritional assessment in cases when the member has a chronic debilitating disease affected by nutritional needs; mammograms and prostate screenings; physical examinations and diagnostic work-ups; and immunizations. Required assessment and screening services for members under age 21 are included in the AHCCCS EPSDT periodicity schedule. Home and Community Based Services (HCBS): Assisted living facility, alternative residential setting, or home and community based services (HCBS) as defined in R9-22, Article 2 and R9-28, Article 2 that meet the provider standards described in R9-28, Article 5, and subject to the limitations set forth in the AMPM. This service is covered in lieu of a nursing facility. Home Health: This service shall be provided under the direction of a physician to prevent hospitalization or institutionalization and may include nursing, therapies, supplies and home health aide services. It shall be provided on a part-time or intermittent basis. Hospice: These services are covered for members under 21 years of age who are certified by a physician as being terminally ill and having six months or less to live. See the AMPM for details on covered hospice services. Hospital: Inpatient services include semi-private accommodations for routine care, intensive and coronary care, surgical care, obstetrics and newborn nurseries, and behavioral health emergency/crisis services. If the member’s medical condition requires isolation, private inpatient accommodations are covered. Nursing services, dietary services and ancillary services such as laboratory, radiology, Pharmaceuticals, medical supplies, blood and blood derivatives, etc. are also covered. Outpatient hospital services include any of the above, which may be appropriately provided on an outpatient or ambulatory basis (i.e. laboratory, radiology, therapies, ambulatory surgery, etc.). Observation services may be provided on an outpatient basis, if determined reasonable and necessary, when deciding whether the member should be admitted for impatient care. Observation services include the use of a bed and periodic monitoring by hospital nursing staff and/or other staff to evaluate, stabilize or treat medical conditions of a significant degree of instability and/or disability. Immunizations: The Contractor shall provide immunizations for adults (21 years of age and older) to include diphtheria-tetanus, influenza, pneumococcus, rubella, measles and hepatitis-B, or others as medically indicated. For all members under the age of 21, immunization requirements include diphtheria, tetanus, pertussis vaccine (DPT), inactivated polio vaccine (IPV), measles, mumps, rubella (MMR) vaccine, H. influenza, type B (HIB) vaccine, hepatitis B (Hep B) vaccine, varicella zoster virus (VZV) vaccine and pneumococcal conjugate vaccine (PCV). The Contractor is required to meet specific immunization rates for members under the age of 21, which are described in Paragraph 24, Performance Standards, (Please refer to the AMPM for current immunization requirements.)
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Indian Health Service (IHS): AHCCCSA will reimburse claims on a FFS basis for acute care services that are medically necessary, eligible for 100% Federal reimbursement, and are provided to Title XIX members enrolled with the Contractor, in an IHS or a 638 tribal facility. The Contractor is responsible for reimbursement to IHS or tribal facilities for emergency services provided to Title XXI Native American members enrolled with the Contractor. The Contractor may choose to subcontract with an IHS or 638 tribal facility as part of their provider network for the delivery of covered services, however, the Contractor will be liable for the cost of the care in the event they choose to do so. Laboratory: Laboratory services for diagnostic, screening and monitoring purposes are covered when provided by a CLIA (Clinical Laboratory Improvement Act) approved free standing, hospital, clinic, physician office or other health care facility laboratory. Upon written request, the Contractor may obtain laboratory test data on members from a freestanding laboratory or hospital- based laboratory subject to the requirements specified in A.R.S. § 36-2903(R) and (S). The data shall be used exclusively for quality improvement activities and health care outcome studies required and/or approved by the Administration. Maternity: The Contractor shall provide pre-conception counseling, pregnancy identification, prenatal care, treatment of pregnancy related conditions, labor and delivery services, and postpartum care for members. Services may be provided by physicians, physician assistants, nurse practitioners, or certified nurse midwives. Members may select or be assigned to a PCP specializing in obstetrics. All members, anticipated to have a low-risk delivery, may elect to receive labor and delivery services in their home, if this setting is included in the allowable settings of the Contractor and the Contractor has providers in its network that offer home labor and delivery services. All members, anticipated to have a low-risk prenatal course and delivery, may elect to receive prenatal care, labor and delivery and postpartum care provided by licensed midwives, if these providers are in the Contractor’s network. All licensed midwife labor and delivery services must be provided in the member’s home, as licensed midwives do not have admitting privileges in hospitals or AHCCCS registered freestanding birthing centers. Members receiving maternity services from a licensed midwife must also be assigned to a PCP for other health care and medical services. The Contractor shall allow women and their newborns to receive up to 48 hours of inpatient hospital care after a routine vaginal delivery and up to 96 hours of inpatient care after a cesarean delivery. The attending health care provider, in consultation with the mother, may discharge the mother or newborn prior to the 48-hour minimum length of stay. A normal newborn may be granted an extended stay in the hospital of birth when the mother’s continued stay in the hospital is beyond the 48 or 96 hour stay. The Contractor shall inform all assigned AHCCCS pregnant women of voluntary prenatal HIV testing and the availability of medical counseling if the test is positive. The Contractor shall provide information in the member handbook and annually in the member newsletter, which encourages pregnant women to be tested and provides instructions about where testing is available. Semi-annually, the Contractor shall report to AHCCCS the number of pregnant women who have been identified as HIV/AIDS positive. This report is due no later than 30 days after the end of the second and fourth quarters of the contract year. Medical Foods: Medical foods are covered within limitations defined in the AMPM for members diagnosed with a metabolic condition included under the ADHS Newborn Screening Program and specified in the AMPM. The medical foods, including metabolic formula and modified low protein foods, must be prescribed or ordered under the supervision of a physician. Medical Supplies, Durable Medical Equipment (DME), Orthotic and Prosthetic Devices: These services are covered when prescribed by the member’s PCP, attending physician, practitioner, or by a dentist. Medical equipment may be rented or purchased only if other sources, which provide the items at no cost, are not available. The total cost of the rental must not exceed the purchase price of the item. Reasonable repairs or
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 adjustments of purchased equipment are covered to make the equipment serviceable and/or when the repair cost is less than renting or purchasing another unit. Nursing Facility: The Contractor shall provide services in nursing facilities, including religious non-medical health care institutions, for members who require short-term convalescent care not to exceed 90 days per contract year. In lieu of a nursing facility, the member may be placed in an assisted living facility, an alternative residential setting, or receive home and community based services (HCBS) as defined in R9-22, Article 2 and R9-28, Article 2 that meet the provider standards described in R9-28, Article 5, and subject to the limitations set forth in the AMPM. Nursing facility services must be provided in a dually-certified Medicare/Medicaid nursing facility, which includes in the per-diem rate: nursing services; basic patient care equipment and sickroom supplies; dietary services; administrative physician visits; non-customized DME; necessary maintenance and rehabilitation therapies; over-the-counter medications; social, recreational and spiritual activities; and administrative, operational medical direction services. See Paragraph 41, Nursing Facility Reimbursement, for further details. The Contractor shall notify the Assistant Director of the Division of Member Services, in writing, when a member has been residing in a nursing facility for 75 days. This will allow AHCCCSA time to follow-up on the status of the ALTCS application and to prepare for potential fee-for-service coverage,-if the stay goes beyond the 90-day maximum. Nutrition: Nutritional assessments may be conducted as a part of the EPSDT screenings for members under age 21, and to assist members 21 years of age and older whose health status may improve with nutritional intervention. Assessment of nutritional status on a periodic basis may be provided as determined necessary, and as a part of the health risk assessment and screening services provided by the member’s PCP. AHCCCS covers nutritional therapy on an enteral, parenteral or oral basis, when determined medically necessary to provide either complete daily dietary requirements or to supplement a member’s daily nutritional and caloric intake and when AHCCCS criteria specified in the AMPM are met. Physician: The Contractor shall provide physician services to include medical assessment, treatments and surgical services provided by licensed allopathic or osteopathic physicians. Podiatry: The Contractor shall provide podiatry services to include bunionectomies, casting for the purpose of constructing or accommodating orthotics, medically necessary orthopedic shoes that are an integral part of a brace, and medically necessary routine foot care for patients with a severe systemic disease which prohibits care by a nonprofessional person. Post-stabilization Care Services Coverage and Payment: Pursuant to 42 CFR 438.114, 422.113(c) and 422.133, the following conditions apply with respect to coverage and payment of emergency and of post-stabilization care services, except where otherwise noted in the contract: The Contractor must cover and pay for post-stabilization care services without authorization, regardless of whether the provider that furnishes the service has a contract with the Contractor, for the following situations: 1. Post-stabilization care services that were pre-approved by the Contractor, or,
2. Post-stabilization care services were not pre-approved by the Contractor because the Contractor did not respond to the treating provider’s request for pre-approval within one hour after being requested to approve such care or could not be contacted for pre-approval.
3. The Contractor representative and the treating physician cannot reach agreement concerning the member’s care and a contractor physician is not available for consultation. In this situation, the Contractor must give the treating physician the opportunity to consult with a contractor physician and the treating physician may continue with care of the patient until a contractor physician is reached or one of the criteria in CFR 422.113(c)(3) is met.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Pursuant to CFR 422.113(c)(3), the Contractor’s financial responsibility for post-stabilization care services that have not been pre-approved ends when: 1. A contractor physician with privileges at the treating hospital assumes responsibility for the member’s care;
2. A contractor physician assumes responsibility for the member’s care through transfer;
3. A contractor representative and the treating physician reach an agreement concerning the member’s care; or
4. The member is discharged. Pregnancy Terminations: AHCCCS covers pregnancy termination if the pregnant member suffers from a physical disorder, physical injury, or physical illness, including a life endangering physical condition caused by, or arising from, the pregnancy itself, that would, as certified by a physician, place the member in danger of death unless the pregnancy is terminated; the pregnancy is a result of rape or incest. The attending physician must acknowledge that a pregnancy termination has been determined medically necessary by submitting the Certificate of Necessity for Pregnancy Termination. This certificate must be submitted to the appropriate assigned Contractor Medical Director. The Certificate must certify that, in the physician’s professional judgment, one or more of the previously mentioned criteria have been met. Prescription Drugs: Medications ordered by a PCP, attending physician, dentist or other authorized prescriber and dispensed under the direction of a licensed pharmacist are covered subject to limitations related to prescription supply amounts, contractor formularies and prior authorization requirements. Contractors may include over-the-counter medications in their formulary, as defined in the AMPM. An appropriate over-the-counter medication may be prescribed, when it is determined to be a lower-cost alternative to prescription drugs. Primary Care Provider (PCP): PCP services are covered when provided by a physician, physician assistant or nurse practitioner selected by, or assigned to, the member. The PCP provides primary health care and serves as a coordinator in referring the member for specialty medical services. [42 CFR 438.208(b)] The PCP is responsible for maintaining the member’s primary medical record, which contains documentation of all health risk assessments and health care services of which they are aware whether or not they were provided by the PCP. Radiology and Medical Imaging: These services are covered when ordered by the member’s PCP, attending physician or dentist and are provided for diagnosis, prevention, treatment or assessment of a medical condition. Services are generally provided in hospitals, clinics, physician offices and other health care facilities. Rehabilitation Therapy: The Contractor shall provide occupational, physical and speech therapies. Therapies must be prescribed by the member’s PCP or attending physician for an acute condition and the member must have the potential for improvement due to the rehabilitation. Physical therapy for all members, and occupational and speech therapies for members under the age of 21, are covered in both inpatient and outpatient settings. For those members who are 21 and over, occupational and speech therapies are covered in inpatient settings only. Respiratory Therapy: This therapy is covered in inpatient and outpatient settings when prescribed by the member’s PCP or attending physician, and is necessary to restore, maintain or improve respiratory functioning. Transplantation of Organs and Tissue, and Related Immunosuppressant Drugs: These services are covered within limitations defined in the AMPM for members diagnosed with specified medical conditions. Services include pre-transplant inpatient or outpatient evaluation; donor search; organ/tissue harvesting or procurement; preparation and transplantation services; and convalescent care. In addition, if a member receives, or has
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 received, a transplant covered by a source other than AHCCCS, medically necessary non-experimental services are provided, within limitations, after the discharge from the acute care hospitalization for the transplantation. AHCCCS has contracted with transplantation providers for the Contractor’s use or the Contractor may select its own transplantation provider. Transportation: These services include emergency and non-emergency medically necessary transportation. Emergency transportation, including transportation initiated by an emergency response system such as 911, may be provided by ground, air or water ambulance to manage an AHCCCS member’s emergency medical condition at an emergency scene and transport the member to the nearest appropriate medical facility. Non-emergency transportation shall be provided for members who are unable to provide their own transportation for medically necessary services. Triage/Screening and Evaluation: These are covered services when provided by acute care hospitals, IHS facilities and urgent care centers to determine whether or not an emergency exists, assess the severity of the member’s medical condition and determine what services are necessary to alleviate or stabilize the emergent condition. Triage/screening services must be reasonable, cost effective and meet the criteria for severity of illness and intensity of service.
11. SPECIAL HEALTH CARE NEEDS The Contractor shall have in place a mechanism to identify and stratify all members with special health care needs [42 CFR 438.240(b)(4)]. The Contractor shall implement mechanisms to assess each member identified as having special health care needs, in order to identify any ongoing special conditions of the member which require a course of treatment or regular care monitoring. The assessment mechanisms shall use appropriate health care professionals [42 CFR 438.208(c)(2)]. The Contractor shall share with other entities providing services to that member the results of its identification and assessment of that member’s needs so that those activities need not be duplicated [42 CFR 438.208(b)(3)]. For members with special health care needs determined to need a specialized course of treatment or regular care monitoring, the Contractor must have procedures in place to allow members to directly access a specialist (for example through a standing referral or an approved number of visits) as appropriate for the member’s condition and identified needs. [42 CFR 438.208(c)(4)] The Contractor shall have a methodology to identify providers willing to provide medical home services and make reasonable efforts to offer access to these providers. The American Academy of Pediatrics (AAP) describes care from a medical home as: • Accessible
• Continuous
• Coordinated
• Family-centered
• Comprehensive
• Compassionate
• Culturally effective
12. BEHAVIORAL HEALTH SERVICES AHCCCS members, except for SOBRA Family Planning and SSDI-TMC members, are eligible for comprehensive behavioral health services. For SOBRA Family Planning and SSDI-TMC members, there is no behavioral health coverage. With the exception of the Contractor’s providers’ medical management of certain behavioral health conditions as described under “Medication Management Services” below, the behavioral
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 health benefit for these members is provided through the ADHS — Regional Behavioral Health Authority (RBHA) system. The Contractor shall be responsible for member education regarding these benefits; provision of limited emergency inpatient services; and screening and referral to the RBHA system of members identified as requiring behavioral health services. Member Education: The Contractor shall be responsible for educating members in the member handbook and other printed documents about covered behavioral health services and where and how to access services. Covered services include: a. Behavior Management (behavioral health personal care, family support/home care training, self-help/peer support) b. Behavioral Health Case Management Services (limited) c. Behavioral Health Nursing Services d. Emergency Behavioral Health Care e. Emergency and Non-Emergency Transportation f. Evaluation and Assessment g. Individual, Group and Family Therapy and Counseling h. Inpatient Hospital Services i. Non-Hospital Inpatient Psychiatric Facilities Services (Level I residential treatment centers and sub-acute facilities) j. Laboratory and Radiology Services for Psychotropic Medication Regulation and Diagnosis k. Opioid Agonist Treatment l. Partial Care (Supervised day program, therapeutic day program and medical day program) m. Psychosocial Rehabilitation (living skills training; health promotion; supportive employment services) n. Psychotropic Medication o. Psychotropic-Medication Adjustment and Monitoring p. Respite Care (with limitations) q. Rural Substance Abuse Transitional Agency Services r. Screening s. Therapeutic Foster Care Services Referrals: As specified in Section D, Paragraph 10, Scope of Services, EPSDT, the Contractor must provide developmental/behavioral health .screenings for members up to 21 years of age in compliance with the AHCCCS periodicity schedule. The Contractor shall ensure the initiation and coordination of behavioral health referrals of these members to the RBHA when determined necessary through the screening process. The Contractor is responsible for RBHA referral and follow-up collaboration, as necessary, for other members identified as needing behavioral health evaluation and treatment. Members may also access the RBHA system for evaluation by self-referral or be referred by schools, State agencies or other service providers. The Contractor is responsible for providing transportation to a member’s first RBHA evaluation appointment if a member is unable to provide his/her own transportation. Emergency Services: Contractors are responsible for providing up to 72 hours inpatient emergency behavioral health services to members with psychiatric or substance abuse diagnoses who are not behavioral health recipients in accordance with AHCCCS Rule R9-22-210.01. For additional information regarding behavioral health services refer to Title 9 Chapter 22 Articles 2 and 12. It is expected that Contractors initiate a referral to the RBHA for evaluation and behavioral health recipient eligibility as soon as possible after admission. When members present in an emergency room setting, the Contractor is responsible for all emergency medical services including triage, physician assessment and diagnostic tests. For members who are not ADHS behavioral health recipients, the Contractor is responsible to provide medically necessary psychiatric consultations or psychological consultations in emergency room settings to help stabilize the member or determine the need for inpatient behavioral health services. ADHS is responsible for medically necessary psychiatric consultations provided to ADHS behavioral health recipients in emergency room settings.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Coordination of Care: The Contractor is responsible for ensuring that a medical record is established by the PCP when behavioral health information is received from the RBHA or provider about an assigned member even if the PCP has not yet seen the assigned member. In lieu of actually establishing a medical record, such information may be kept in an appropriately labeled file but must be associated with the member’s medical record as soon as one is established. The Contractor shall require the PCP to respond to RBHA/provider information requests pertaining to ADHS behavioral health recipient members within 10 business days of receiving the request. The response should include all pertinent information, including, but not limited to, current diagnoses, medications, laboratory results, last PCP visit, and recent hospitalizations. The Contractor shall require the PCP to document or initial signifying review of member behavioral health information received from a RBHA behavioral health provider who is also treating the member. All affected subcontracts shall include this provision by July 1, 2005. For prior period coverage, the Contractor is responsible for payment of all claims for medically necessary covered behavioral health services to members who are not ADHS behavioral health recipients. Medication Management Services: The Contractor shall allow PCPs to provide medication management services (prescriptions, medication monitoring visits, laboratory and other diagnostic tests necessary for diagnosis and treatment of behavioral disorders) to members with diagnoses of depression, anxiety and attention deficit hyperactivity disorder. The Contractor shall make available, on the Contractor’s formulary, medications for the treatment of these disorders. The Contractor shall ensure that training and education are available to PCPs regarding behavioral health referral and consultation procedures. The Contractor shall establish policies and procedures for referral and consultation and shall describe them in its provider manual. Policies for referral must include, at a minimum, criteria, processes, responsible parties and minimum requirements no less stringent than those specified in this contract for the forwarding of member medical information. Transfer of Care: When a PCP has initiated medication management services for a member to treat a behavioral health disorder, and it is subsequently determined by the PCP or contractor that the member should be transferred to a RBHA prescriber for evaluation and/or continued medication management services, the Contractor will require and ensure that the PCP or contractor coordinates the transfer of care. All affected subcontracts shall include this provision by July 1, 2005. The Contractor shall establish policies and procedures for the transition of members who are referred to the RBHA for ongoing treatment. The contractor shall ensure that PCPs maintain continuity of care for these members. The policies and procedures must address, at a minimum, the following: 1. Guidelines for when a transition of the member to the RBHA for ongoing treatment is indicated.
2. Protocols for notifying the RBHA of the member’s transfer, including reason for transfer, diagnostic information, and medication history.
3. Protocols and guidelines for the transfer of medical records, including but not limited to which parts of the medical record are to be copied, timeline for making the medical record available to the RBHA, observance of confidentiality of the member’s medical record, and protocols for responding to RBHA requests for additional medical record information.
4. Protocols for transition of prescription services, including but not limited to notification to the RBHA of the member’s current medications and timeframes for dispensing and refilling medications during the transition period. This coordination must ensure at a minimum, that the member does not run out of prescribed medications prior to the first appointment with a RBHA prescriber and that all relevant member pertinent medical information as outlined above and, including the reason for transfer is forwarded to the receiving RBHA prescriber prior to the member’s first scheduled appointment with the RBHA prescriber.
5. Contractor activities to monitor to ensure that members are appropriately transitioned to the RBHA for care.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 The Contractor shall ensure that its quality management program incorporates monitoring of the PCP’s management of behavioral health disorders and referral to, coordination of care with and transfer of care to RBHA providers as required under this contract.
13. AHCCCS GUIDELINES, POLICIES and MANUALS All AHCCCS guidelines, policies and manuals are hereby incorporated by reference into this contract. All guidelines, policies and manuals are available on the AHCCCS Home Page on the Internet at www.azahcccs.gov or upon request. The Contractor is responsible for complying with the requirements set forth within. In addition, linkages to AHCCCS rules (Arizona Administrative Code), Statutes and other resources are also available to all interested parties through the AHCCCS Home Page. Upon adoption by AHCCCS, updates will be made available to the Contractors. Once notification to the Contractors has taken place, the Contractor shall be responsible for implementing and maintaining current copies of updates.
14. MEDICAID SCHOOL BASED CLAIMING PROGRAM (MSBC) Pursuant to an Intergovernmental Agreement with the Department of Education, and a contract with a Third Party Administrator, AHCCCSA reimburses participating school districts for specifically identified Medicaid services when provided to Medicaid eligible children who are included under the Individuals with Disabilities Education Act (IDEA). The Medicaid services must be identified in the member’s Individual Education Plan (IEP) as medically necessary for the child to obtain a public school education. MSBC services are provided in a school setting or other approved setting specifically to allow children to receive a public school education. They do not replace medically necessary services provided outside the school setting or other MSBC approved alternative setting. Currently, services include audiology, therapies (OT, PT and speech/language); behavioral health evaluation and counseling; nursing and attendant care; and specialized transportation. The Contractor’s evaluations and determinations, about whether services are medically necessary, should be made independent of the fact that the child is receiving MSBC services. Contractors and their providers must coordinate with schools and school districts that provide MSBC services to the Contractor’s enrolled members. Services should not be duplicative. Contractor case managers, working with special needs children, should coordinate with school or school district case managers/special education teachers, working with these members. Transfer of member medical information and progress toward treatment goals between the Contractor and the member’s school or school district is required and should be used to enhance the services provided to members.
15. PEDIATRIC IMMUNIZATIONS AND THE VACCINES FOR CHILDREN PROGRAM Through the Vaccines for Children Program, the Federal and State governments purchase, and make available to providers free of charge, vaccines for AHCCCS children under age 19. The Contractor shall not utilize AHCCCS funding to purchase vaccines for members under the age of 19. If vaccines are not available through the VFC Program, the Contractor shall contact the AHCCCSA Division of Health Care Management, Clinical Quality Management Unit. Any provider, licensed by the State to administer immunizations, may register with ADHS as a “VFC provider” and receive free vaccines. The Contractor shall not reimburse providers for the administration of the vaccines in excess of the maximum allowable as set by CMS. The Contractor shall comply with all VFC requirements and monitor its providers to ensure that, a physician if acting as primary care physician (PCP) to AHCCCS members under the age of 19, is registered with ADHS/VFC. Arizona State law requires the reporting of all immunizations given to children under the age of 19. Immunizations must be reported at least monthly to the ADHS. Reported immunizations are held in a central
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 database known as ASIIS (Arizona State Immunization Information System), which can be accessed by providers to obtain complete, accurate immunization records. Software is available from ADHS to assist providers in meeting this reporting requirement. Contractors must educate their provider network about these reporting requirements and the use of this resource and monitor to ensure compliance.
16. STAFF REQUIREMENTS AND SUPPORT SERVICES The Contractor shall have in place the organization, management and administrative systems capable of fulfilling all contract requirements. For the purposes of this contract, the Contractor shall not employ or contract with any individual that has been debarred, suspended or otherwise lawfully prohibited from participating in any public procurement activity or from participating in non-procurement activities under regulations issued under Executive Order No. 12549 or under guidelines implementing Executive Order 12549. [42 CFR 438.610(a) and (b)]. The Contractor is responsible for maintaining a significant local (within the State of Arizona) presence. This presence would include staff as described in a., b., d., e., f., g., i., k., n,, o., p. and q. below. The Contractor must obtain approval from AHCCCS prior to moving functions outside the State of Arizona. Such a request for approval must include a description of the processes in place that assure rapid responsiveness to effect changes for contract compliance. The Contractor shall be responsible for any additional costs associated with on-site audits or other oversight activities which result from required system located outside of the State of Arizona. At a minimum, the following staff is required: a. A full-time Administrator/CEO/COO or designee must be available during working hours to fulfill the responsibilities of the position and to oversee the entire operation of the contractor. The Administrator shall devote sufficient time to the Contractor’s operations to ensure adherence to program requirements and timely responses to AHCCCS Administration. b. A Medical Director who shall be an Arizona-licensed physician. The Medical Director shall be actively involved in all-major clinical programs and QM/UM components of the Contractor. The Medical Director shall devote sufficient time to the Contractor to ensure timely medical decisions, including after-hours consultation as needed. c. A Chief Financial Officer/CFO who is available at all times to fulfill the responsibilities of the position and to oversee the budget and accounting systems implemented by the Contractor. d. A Quality Management/ Coordinator who is an Arizona-licensed registered nurse, physician or physician’s assistant. e. A Utilization Management/Medical Management Coordinator who is an Arizona licensed registered nurse, physician or physician’s assistant. f. A Maternal Health/EPSDT (child health) Coordinator who shall be an Arizona licensed nurse, physician or physician’s assistant; or have a Master’s degree in health services, public health or health care administration or other related field. g. A Behavioral Health Coordinator who shall be a behavioral health professional as described in Health Services Rule R9-20. The Behavioral Health Coordinator shall devote sufficient time to ensure that the Contractor’s behavioral health referral and coordination activities are implemented per AHCCCSA requirements. h. Prior Authorization staff to authorize health care 24 hours per day, 7 days per week. This staff shall include an Arizona-licensed nurse, physician or physician’s assistant. The staff will work under the direction of an Arizona-licensed registered nurse, physician, or physician’s assistant. i. Concurrent Review staff to conduct inpatient concurrent review. This staff shall consist of an Arizona-licensed nurse, physician, physician’s assistant. The staff will work under the direction of an Arizona-licensed registered nurse, physician or physician’s assistant. j. Member Services Manager and staff to coordinate communications with members and act as member advocates. There shall be sufficient Member Service staff to enable members to receive prompt resolution
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 to their inquiries/problems, and to meet the Contractor’s standards for resolution, telephone abandonment rates and telephone hold times. k. Provider Services Manager and staff to coordinate communications between the Contractor and its subcontractors. There shall be sufficient Provider Services staff to enable providers to receive prompt resolution to their problems or inquiries and appropriate education about participation in the AHCCCS program. l. A Claims Administrator and Claims Processors to ensure the timely and accurate processing of original claims, resubmissions and overall adjudication of claims. m. Encounter Processors to ensure the timely and accurate processing and submission to AHCCCSA of encounter data and reports. n. A Grievance Manager who will manage and adjudicate member and provider disputes arising under the Grievance System including member grievances, appeals, and requests for hearing and provider claim disputes. o. A Compliance Officer who will implement and oversee the Contractor’s compliance program. The compliance officer shall be an on-site management official, available to all employees, with designated and recognized authority to access records and make independent referrals to the AHCCCSA, Office of Program Integrity, See Paragraph 62, Corporate Compliance, for more information. p. Contractor Staff sufficient to implement and oversee compliance with both the Contractor’s Cultural Competency Plan and the A COM Cultural Competency Policy, and to oversee compliance with all AHCCCS requirements pertaining to limited English proficiency (LEP). q. Clerical and Support staff to ensure appropriate functioning of the Contractor’s operation. r. Business Continuity Planning Coordinator as noted in the ACOM Business Continuity and Recovery Plan Policy . s. A Pharmacy Coordinator/Director who is an Arizona licensed pharmacist or physician who oversees and administers the prescription drug and pharmacy benefits. The Pharmacy Coordinator/Director may be an employee or contractor of the Plan. t. Denial Director/Coordinator that is responsible for coordinating dental activities of the health plan and providing required communication between the plan and AHCCCS. The Dental Director/Coordinator may be an employee or contractor of the plan and must be licensed in Arizona if they are required to review or deny dental services. The Contractor shall inform AHCCCS, Division of Health Care Management, in writing within seven days, when an employee leaves one of the key positions listed below. The name of the interim contact person should be included with the notification. The name and resume of the permanent employee should be submitted as soon as the new hire has taken place.
Administrator Member Services Manager Medical Director Provider Services Manager Chief Financial Officer Claims Administrator Maternal Health/ EPSDT Coordinator Quality Management/Utilization Management Grievance Manager Coordinator Compliance Officer Behavioral Health Coordinator The Contractor shall ensure that all staff have appropriate training, education, experience and orientation to fulfill the requirements of the position.
17. WRITTEN POLICIES, PROCEDURES AND JOB DESCRIPTIONS The Contractor shall develop and maintain written policies, procedures and job descriptions for each functional area of its plan, consistent in format and style. The Contractor shall maintain written guidelines for developing, reviewing and approving all policies, procedures and job descriptions. All policies and procedures shall be reviewed at least annually to ensure that the Contractor’s written policies reflect current practices.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Reviewed policies shall be dated and signed by the Contractor’s appropriate manager, coordinator, director or administrator. Minutes reflecting the review and approval of the policies by an appropriate committee are also acceptable documentation. All medical and quality management policies must be approved and signed by the Contractor’s Medical Director. Job descriptions shall be reviewed at least annually to ensure that current duties performed by the employee reflect written requirements.
18. MEMBER INFORMATION The Contractor shall be accessible by phone for general member information during normal business hours. All enrolled members will have access to a toll free phone number. All informational materials, prepared by the Contractor, shall be approved by AHCCCSA prior to distribution to members. The reading level and name of the evaluation methodology used should be included. All materials shall be translated when the Contractor is aware that a language is spoken by 3,000 or 10%, whichever is less, of the Contractor’s members, who also have limited English proficiency (LEP). All vital materials shall be translated when the Contractor is aware that a language is spoken by 1,000 or 5%, whichever is less, of the Contractor’s members, who also have LEP. Vital materials must include, at a minimum, Notices of Action, vital information from the member handbooks and consent forms. All written notices informing members of their right to interpretation and translation services in a language shall be translated when the Contractor is aware that 1,000 or 5 % (whichever is less) of the Contractor’s members speak that language and have LEP. [42 CFR 438.10(c)(3)] Oral interpretation services must be available and free of charge to all members regardless of the prevalence of the language. The Contractor must notify all members of their right to access oral interpretation services and how to access them. Refer to the ACOM Member Information Policy. [42 CFR 438.10(c)(4) and (5)] The Contractor shall make every effort to ensure that all information prepared for distribution to members is written using an easily understood language and format and as further described in the AHCCCS Member Information Policy. Regardless of the format chosen by the Contractor, the member information must be printed in a type, style and size, which can easily be read by members with varying degrees of visual impairment. The Contractor must notify its members that alternative formats are available and how to access them. [42 CFR 438.10(d)] When there are program changes, notification shall be provided to the affected members at least 30 days before implementation. The Contractor shall produce and provide the following printed information to each member or family within 10 days of receipt of notification of the enrollment date [42 CFR 438.10(f)(3)]: I. A member handbook which, at a minimum, shall include the items listed in the ACOM Member Information Policy.
The Contractor shall review and update the Member Handbook at least once a year. The handbook must be submitted to AHCCCS, Division of Health Care Management for approval by August 15th of each contract year, or within four weeks of receiving the annual renewal amendment, whichever is later.
II. A description of the Contractor’s provider network, which at a minimum, includes those items listed in the ACOM Member Information Policy.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 The Contractor must give written notice about termination of a contracted provider, within 15 days after receipt or issuance of the termination notice, to each member who received their primary care from, or is seen on a regular basis by, the terminated provider. Affected members must be informed of any other changes in the network 30 days prior to the implementation date of the change. [42 CFR 438.10(f)(4) and (5)]The Contractor shall have information available for potential enrollees as described in the ACOM Member Information Policy. The Contractor must develop and distribute, at a minimum, quarterly newsletters during the contract year. The following types of information are to be contained in the newsletter: • Educational information on chronic illnesses and ways to self-manage care
• Reminders of flu shots and other prevention measures at appropriate times
• Medicare Part D issues
• Cultural Competency
• Contractor specific issues The Contractor will, on an annual basis, inform all members of their right to request the following information [42 CFR 438.10(f)(6) and 42 CFR 438.100(a)(l) and (2)]: a. An updated member handbook at no cost to the member b. The network description as described in the ACOM Member Information Policy This information may be sent in a separate written communication or included with other written information such as in a member newsletter.
19. SURVEYS The Contractor may be required to perform its own annual general or focused member survey. All such contractor surveys, along with a timeline for the project, shall be approved in advance by AHCCCS DHCM. The results and the analysis of the results shall be submitted to the Health Plan Operations Unit within 45 days of the completion of the project. AHCCCSA may require inclusion of certain questions. AHCCCSA may periodically conduct surveys of a representative sample of the Contractor’s membership and providers. AHCCCSA will consider suggestions from the Contractor for questions to be included in each survey. The results of these surveys, conducted by AHCCCSA, will become public information and available to all interested parties upon request. The draft reports from the surveys will be shared with the Contractor prior to finalization. The Contractor will be responsible for the cost of these surveys based on its share of AHCCCS enrollment.
20. CULTURAL COMPETENCY The Contractor shall have a Cultural Competency Plan that meets the requirements of the ACOM Cultural Competency Policy. An annual assessment of the effectiveness of the plan, along with any modifications to the plan, must be submitted to the Division of Health Care Management, no later than 45 days after the start of each contract year. This plan should address all services and settings. [42 CFR 438.206(c)(2)]
21. MEDICAL RECORDS
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 The member’s medical record is the property of the provider who generates the record. Each member is entitled to one copy of his or her medical record free of charge. The Contractor shall have written policies and procedures to maintain the confidentiality of all medical records. The Contractor is responsible for ensuring that a medical record is established when information is received about a member. If the PCP has not yet seen the member, such information may be kept temporarily in an appropriately labeled file, in lieu of establishing a medical record, but must be associated with the member’s medical record as soon as one is established. The Contractor shall have written policies and procedures for the maintenance of medical records so that those records are documented accurately and in a timely manner, are readily accessible, and permit prompt and systematic retrieval of information. The Contractor shall have written standards for documentation on the medical record for legibility, accuracy and plan of care, which comply with the AMPM. The Contractor shall have written plans for providing training and evaluating providers’ compliance with the Contractor’s medical records standards. Medical records shall be maintained in a detailed and comprehensive manner, which conforms to good professional medical practice, permits effective professional medical review and medical audit processes, and which facilitates an adequate system for follow-up treatment. Medical records must be legible, signed and dated. When a member changes PCPs, his or her medical records or copies of medical records must be forwarded to the new PCP within 10 business days from receipt of the request for transfer of the medical records. AHCCCSA is not required to obtain written approva from a member, before requesting the member’s medical record from the PCP or any other agency. The Contractor may obtain a copy of a member’s medical records without written approval of the member, if the reason for such request is directly related to the administration of the AHCCCS program. AHCCCSA shall be afforded access to all members’ medical records whether electronic or paper within 20 business days of receipt of request. Information related to fraud and abuse may be released so long as protected HIV-related information is not disclosed (A.R.S. §36-664(I)).
22. ADVANCE DIRECTIVES In accordance with 42 CFR 422.128, the Contractor shall maintain policies and procedures addressing advanced directives for adult members that specify: a. Each contract or agreement with a hospital, nursing facility, home health agency, hospice or organization responsible for providing personal care, must comply with Federal and State law regarding advance directives for adult members [42 CFR 438.6(i)(1)]. Requirements include: (1) Maintaining written policies that address the rights of adult members to make decisions about medical care, including the right to accept or refuse medical care, and the right to execute an advance directive. If the agency/organization has a conscientious objection to carrying out an advance directive, it must be explained in policies. (A health care provider is not prohibited from making such objection when made pursuant to A.R.S. § 36- 3205.C.1.)
(2) Provide written information to adult members regarding each individual’s rights under State law to make decisions regarding medical care, and the health care provider’s written policies concerning advance directives (including any conscientious objections). [42 CFR 438.6(i)(3)]
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 (3) Documenting in the member’s medical record whether or not the adult member has been provided the information and whether an advance directive has been executed.
(4) Not discriminating against a member because of his or her decision to execute or not execute an advance directive, and not making it a condition for the provision of care.
(5) Providing education to staff on issues concerning advance directives including notification of direct care providers of services, such as home health care and personal care, of any advanced directives executed by members to whom they are assigned to provide services. b. Contractors shall require subcontracted PCPs, which have agreements with the entities described in paragraph a. above, to comply with the requirements of subparagraphs a. (2) through (5) above. Contractors shall also encourage health care providers specified in subparagraph a. to provide a copy of the member’s executed advanced directive, or documentation of refusal, to the member’s PCP for inclusion in the member’s medical record. c. The Contractor shall provide written information to adult members that describe the following: (1) A member’s rights under State law, including a description of the applicable State law
(2) The organization’s policies respecting the implementation of those rights, including a statement of any limitation regarding the implementation of advance directives as a matter of conscience.
(3) The member’s right to file complaints directly with AHCCCSA.
(4) Changes to State law as soon as possible, but no later than 90 days after the effective date of the change. [42 CFR 438.6(i)(4)]
23. QUALITY MANAGEMENT AND MEDICAL MANAGEMENT (QM/MM) Quality Management (QM): The Contractor shall provide quality medical care to members, regardless of payer source or eligibility category. The Contractor shall use and disclose medical records and any other health and enrollment information that identifies a particular member in accordance with Federal and State privacy requirements. The Contractor shall execute processes to assess, plan, implement and evaluate quality management and performance improvement activities, as specified in the AMPM, that include at least the following [42 CFR 438.240(a)(1) and (e)(2)]: 1. Conducting Performance Improvement Projects (PIPs);
2. QM monitoring and evaluation activities;
3. Investigation, analysis, tracking and trending of quality of care issues, abuse and/or complaints that includes: a. Acknowledgement letter to the originator of the concern
b. Documentation of all steps utilized during the investigation and resolution process
c. Follow-up with the member to assist in ensuring immediate health care needs are met
d. Closure/resolution letter that provides sufficient detail to ensure that the member has an understanding of the resolution of their issue, any responsibilities they have in ensuring all covered, medically necessary care needs are met, and a contact name/telephone number to call for assistance or to express any unresolved concerns
e. Documentation of implemented corrective action plan(s) or action(s) taken to resolve the concern 4. AHCCCS mandated performance measures; and
5. Credentialing, recredentialing and provisional credentialing processes for provider and organizations [42 CFR 438.206(b)(6)]. AHCCCS has established a uniform credentialing, recredentialing and provisional credentialing policy. The Contractor shall demonstrate that its providers are credentialed [42 CFR 438.214] and: a. Shall follow a documented process for credentialing and recredentialing of providers who have signed contracts or participation agreements with the Contractor;
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 b. Shall not discriminate against particular providers that serve high-risk populations or specialize in conditions that require costly treatment; and
c. Shall not employ or contract with providers excluded from participation in Federal health care programs. The Contractor shall submit, within timelines specified in Attachment F, a written QM plan, QM evaluation of the previous year’s QM program, and Quarterly Quality Management Report that addresses its strategies for performance improvement and conducting the quality management activities described in this section. The Contractor shall conduct performance improvement projects as required in the AMPM. The Contractor may combine its quality management plan with the plan that addresses utilization management as described below. Medical Management (MM); The Contractor shall execute processes to assess, plan, implement and evaluate medical management activities, as specified in the AMPM, that include at least the following: 1. Pharmacy Management; including the evaluation, reporting, analysis and interventions based on the data and reported through the MM Committee
2. Prior authorization and Referral Management;
For the processing of requests for initial and continuing authorizations of services the Contractor shall: a) Have in effect mechanisms to ensure consistent application of review criteria for authorization decisions; and
b) Consult with the requesting provider when appropriate [42 CFR 438.210(b)(2)]
c) Monitor and ensure that all enrollees with special health care needs have direct access to care 3. Development and/or Adoption of Practice Guidelines [42 CFR 438.236(b)], that a) Are based on valid and reliable clinical evidence or a consensus of health care professionals in the particular field;
b) Consider the needs of the Contractor’s members;
c) Are adopted in consultation with contracting health care professionals;
d) Are reviewed and updated periodically as appropriate;
e) Are disseminated by Contractors to all affected providers and, upon request, to enrollees and potential enrollees [42 CFR 438.236(c)]; and
f) Provide a basis for consistent decisions for utilization management, member education, coverage of services, and other areas to which the guidelines apply [42 CFR 438.236(d)]
4. Concurrent review; a) Consistent application of review criteria; Provide a basis for consistent decisions for utilization management, coverage of services, and other areas to which the guidelines apply;
b) Discharge planning 5. Continuity and coordination of care;
6. Monitoring and evaluation of over and/or under utilization of services [42 CFR 438-240(b)(3)];
7. Evaluation of new medical technologies, and new uses of existing technologies; 8. Disease Management or Chronic Care Program that reports results and provides for analysis of the program through the MM Committee; and
8. Quarterly Utilization Management Report (details in the AMPM) The Contractor shall have a process to report MM data and management activities through a MM Committee. The Contractor’s MM committee will analyze the data, make recommendations for action, monitor the effectiveness of actions and report these findings to the committee. The Contractor shall have in effect mechanisms to assess the quality and appropriateness of care furnished to members with special health care needs. [42 CFR 438.240(b)(4)]
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 The Contractor will assess, monitor and report quarterly through the MM Committee medical decisions to assure compliance with timeliness, language and Notice of Action intent, and that the decisions comply with all Contractor coverage criteria. The Contractor shall maintain a written MM plan that addresses its plan for monitoring MM activities described in this section. The plan must be submitted for review by AHCCCS Division of Health Care Management within timelines specified in Attachment F.
24. PERFORMANCE STANDARDS Administrative Measures: The maximum allowable speed of answer (SOA) is 45 seconds. The SOA is defined as the on line wait time in seconds that the member/provider waits from the moment the call is connected in the Contractor’s phone switch until the call is picked up by a contractor representative or Interactive Voice Recognition System (IVR). If the Contractor has IVR capabilities, callers must be given the choice of completing their call by IVR or by contractor representative. The Contractor shall meet the following standards for its member services and centralized provider telephone line statistics. All calls to the line shall be included in the measure. a. The Monthly Average Abandonment Rate shall be 5% or less;
b. First Contact Call Resolution shall be 70% or better; and
c. The Monthly Average Service Level shall be 75% or better. The Monthly Average Abandonment Rate (AR) is: Number of calls abandoned in a 24-hour period. Total number of calls received in a 24-hour period The ARs are then summed and divided by the number of days in the reporting period. First Contact Call Resolution Rate (FCCR) is: Number of calls received in 24-hour period for which no follow up communication or internal phone transfer is needed, divided by Total number of calls received in 24-hour period The daily FCCRs are then summed and divided by the number of days in the reporting period. The Monthly Average Service Level (MASL) is: Calls answered within 45 seconds for the month reported Total of month’s answered calls + month’s abandoned calls + (if available) month’s calls receiving a busy signal Note: Do not use average daily service levels divided by the days in the reporting period. On a monthly basis the measures are to be reported for both the Member Services and Provider telephone lines. For each of the Administrative Measures a. through c., the Contractor shall also report the number of days in the reporting period that the standard was not met. The Contractor shall include in the report the instances of down time for the centralized telephone lines, the dates of occurrence and the length of time they were out of service. The reports should be sent to the Contractor’s assigned Operations and Compliance Officer in the Health Plan Operations Unit of the Division of Health Care Management. The deadline for submission of the reports is the 15th day of the month following the reporting period (or the first business day following the
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 15th). Back up documentation for the report, to the level of measured segments in the 24-hour period, shall be retained for a rolling 12-month period. AHCCCSA will review the performance measure calculation procedures and source data for this report.
Performance Measures: All Performance Measures described below apply to all member populations [42 CFR 438.240(a)(2), (b)(2) and (c)]. Contractors must meet AHCCCS stated Minimum Performance Standards. However, it is equally important that Contractors continually improve their performance measure outcomes from year to year. Contractors shall strive to meet the ultimate standard, or benchmark, established by AHCCCS. AHCCCS has established three levels of performance: Minimum Performance Standard — A Minimum Performance Standard is the minimal expected level of performance by the Contractor. If a Contractor does not achieve this standard, or any measure rate declines to a level below the AHCCCS Minimum Performance Standard, the Contractor will be required to submit a corrective action plan and may be subject to sanctions. Goal — A Goal is a reachable standard for a given performance measure for the Contract Year, If the Contractor has already met or exceeded the AHCCCS Minimum Performance Standard for any measure, the Contractor must strive to meet the established Goal for the measure(s). Benchmark — A Benchmark is the ultimate standard to be achieved. Contractors that have already achieved or exceeded the Goal for any performance measure must strive to meet the Benchmark for the measure(s). Contractors that have achieved the Benchmark are expected to maintain this level of performance for future years. A Contractor must show demonstrable and sustained improvement toward meeting AHCCCS Performance Standards. In addition to corrective action plans, AHCCCS may impose sanctions on Contractors that do not meet the Minimum Performance Standard and do not show statistically significant improvement in a measure rate and/or require those Contractors to demonstrate that they are allocating increased administrative resources to improving rates for a particular measure or service area. AHCCCS also may require a corrective action plan of any Contractor that shows a statistically significant decrease in its rate, even if it meets or exceeds the Minimum Performance Standard. The corrective action plan must be received by AHCCCS within 30 days of receipt of notification from AHCCCS. This plan must be approved by AHCCCS prior to implementation. AHCCCS may conduct one or more follow-up on-site reviews to verify compliance with a corrective action plan. Performance Measures:The Contractor shall comply with AHCCCS quality management requirements to improve performance for all AHCCCS established performance measures. Complete descriptions of these measures can be found in the most recently published results and analysis of acute-care performance measures, or upon request from AHCCCSA. The measures for postpartum visits and low birth weight deliveries have been eliminated as contractual performance standards. The Contractor shall continue to monitor rates for postpartum visits and low birth weight deliveries and implement interventions as necessary to improve or sustain these rates. These activities will be monitored by AHCCCSA during the Operational and Financial Review. CMS has been working in partnership with states in developing core performance measures for Medicaid and SCHIP programs. The current AHCCCS established performance measures may be subject to change when these core measures are finalized and implemented.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 In addition, AHCCCS has established standards for the following measures: EPSDT Participation:The Contractor shall take affirmative steps to increase member participation in the EPSDT program. The participation rate is the number of children younger than 21 years receiving at least one medical screen during the contract year, compared to the number of children expected to receive at least one medical screen. The number of children expected to receive at least one medical screen is based on the AHCCCS EPSDT periodicity schedule and the average period of eligibility. The following table identifies the Minimum Performance Standards, Goals and Benchmarks for each measure:
Acute-care Contractor Performance Standards
Performance CYE 07 Minimum Benchmark (Healthy Measure Performance Standard CYE 07 Goal People Goals) Immunization of Two-year-olds 4:3:1 Series 84% 90% 90% 4:3:1:3:3 Series 74% 80% 80% DTaP — 4 doses 85% 90% 90% Polio - 3 doses 90% 90% 90% MMR - 1 dose 90% 90% 90% Hib - 3 doses 86% 90% 90% HBV-3 doses 90% 90% 90% Varicella - 1 dose 86% 90% 90% Adolescent Immunizations(l) 60% 63% 90% Children’s Dental Visits 51% 57% 57% Well-child Visits 15 Months (2) 70% 72% 90% Well-child Visits 3 - 6 Years 56% 58% 80% Adolescent Well-care Visits 37% 38% 50% EPSDT Participation 68% 69% 80% Children’s Access to PCPs 12-24 Months 85% 86% 97% Children’s Access to PCPs 25 months-6 Years 78% 80% 97% Children’s Access to PCPs 7-11 Years 77% 79% 97% Children’s Access to PCPs 12-19 Years 79% 81% 97% Cervical Cancer Screening 57% 60% 90% Breast Cancer Screening 50% 52% 70% Adult Preventive/Ambulatory Care 20-44 Years 78% 80% 96% Adult Preventive/Ambulatory Care 45-64 Years 83% 84% 96% Timeliness of Prenatal Care 70% 72% 90% Chlamydia Screening(3) 43% 45% 62%
(1) This measure cannot be reliably generated through administrative data, and current AHCCCS data is not yet available. MPS and Goal are based on NCQA Medicaid average
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 (2) CYE 2007 Minimum Performance Standard and Goal for Well-child Visits in the First 15 Months of Life is unchanged from the CYE 2006 contract because validated data for this measure was not available in time to be incorporated into the contract renewal. (3) Baseline rate generated from AHCCCS Decision Support System (ADDS) MeasureBase and used to establish MPS and Goal; Benchmark based on HP 2010 objective 25-16b.
Quality Improvement: Contractors shall implement an ongoing quality assessment and performance improvement programs for the services it furnishes to members. [42 CFR 438.240(a)(l)] Basic elements of the Contractor quality assessment and performance improvement programs, at a minimum, shall comply with the following requirements:
A. Quality Assessment Program: The Contractor shall have an ongoing quality assessment program for the services it furnishes to members that includes the following: 1. The program shall be designed to achieve, through ongoing measurements and intervention, significant improvement, sustained over time, in clinical care and non-clinical care areas that are expected to have a favorable effect on health outcomes and member satisfaction.
2. The Contractor must [42 CFR 438.240(b)(2) and (c)]: a. Measure and report to the State its performance, using standard measures required by the State, or as required by CMS,
b. Submit to the State, data specified by the State, that enables the State to measure the Contractor’s performance; or
c. Perform a combination of the activities. 3. The Contractor must have in effect mechanisms to detect both under utilization and over utilization of services.
4. The Contractor must have in effect mechanisms to assess the quality and appropriateness of care furnished to members with special health care needs.
5. The Contractor must have in place a process for internal monitoring of Performance Measure rates, using standard methodology established or adopted by AHCCCS, for each required Performance Measure. The Contractor’s Quality Assessment/Performance Improvement Program will report its performance on an ongoing basis to its administration. It also will report this Performance Measure data to AHCCCSA in conjunction with its Quarterly EPSDT Progress Report, according to a format developed by AHCCCS.
B. Performance Improvement Program: The Contractor shall have an ongoing program of performance improvement projects that focus on clinical and non-clinical areas, and that involve the following [42 CFR 438.240(b)(l) and (d)(l)]: 1. Measurement of performance using objective quality indicators.
2. Implementation of system interventions to achieve improvement in quality
3. Evaluation of the effectiveness of the interventions.
4. Planning and initiation of activities for increasing or sustaining improvement. The Contractor shall report the status and results of each project to the AHCCCSA as requested. Each performance improvement project must be completed in a reasonable time period so as to generally allow information on the success of performance improvement projects in the aggregate to produce new information on quality of care every year. [42 CFR 438.240(d)(2)]
C. Data Collection Procedures:
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 When requested, the Contractor must submit data for standardized Performance Measures and/or Performance Improvement Projects as required by AHCCCS within specified timelines and according to AHCCCS procedures for collecting and reporting the data. Contractor is responsible for collecting valid and reliable data, using qualified staff and personnel to collect the data. Data collected for Performance Measures and/or Performance Improvement Projects must be returned by the Contractor in the format and according to instructions from AHCCCS, by the due date specified. Any extension for additional time to collect and report data must be made in writing in advance of the initial due date. Failure to follow the data collection and reporting instructions that accompany the data request may result in sanctions imposed on the Contractor. The Contractor shall participate in immunization audits, at intervals specified by AHCCCSA, based on random sampling to verify the immunization status of members at 24 months of age. If records are missing for more than 5 percent of the Contractor’s final sample, the Contractor is subject to sanctions by AHCCCSA. An External Quality Review Organization (EQRO) may conduct a study to validate the Contractor’s reported rates.
25. GRIEVANCE SYSTEM The Contractor shall have in place a written grievance system process for subcontractors, enrollees and non-contracted providers, which defines their rights regarding disputed matters with the Contractor. The Contractor’s grievance system for enrollees includes a grievance process (the procedures for addressing enrollee grievances), an appeals process and access to the state’s fair hearing process. The Contractor shall provide the appropriate personnel to establish, implement and maintain the necessary functions related to the grievance systems process. Refer to Attachments H(l) and H(2) for Enrollee Grievance System and Provider Grievance System Standards and Policy, respectively. The Contractor may delegate the grievance system process to subcontractors, however, the Contractor must ensure that standards which are delegated comply with applicable Federal and State laws, regulations and policies, including, but not limited to 42 CFR Part 438 Subpart F. The Contractor shall remain responsible for compliance with all requirements. The Contractor shall also ensure that it timely provides written information to both enrollees and providers, which clearly explains the grievance system requirements. This information must include a description of: the right to a state fair hearing, the method for obtaining a state fair hearing, the rules that govern representation at the hearing, the right to file grievances, appeals and claim disputes, the requirements and timeframes for filing grievances, appeals and claim disputes, the availability of assistance in the filing process, the toll-free numbers that the enrollee can use to file a grievance or appeal by phone, that benefits will continue when requested by the enrollee in an appeal or state fair hearing request concerning certain actions which are timely filed, that the enrollee may be required to pay the cost of services furnished during the appeal/hearing process if the final decision is adverse to the enrollee, and that a provider may file an appeal on behalf of an enrollee with the enrollee’s written consent. Information to enrollees must meet cultural competency and limited English proficiency requirements as specified in Section D, Paragraph 18, Member Information, and Paragraph 20, Cultural Competency. The Contractor shall be responsible to provide the necessary professional, paraprofessional and clerical services for the representation of the Contractor in all issues relating to the grievance system and any other matters arising under this contract which rise to the level of administrative hearing or a judicial proceeding. Unless there is an agreement with the State in advance, the Contractor shall be responsible for all attorney fees and costs awarded to the claimant in a judicial proceeding.
26. QUARTERLY GRIEVANCE SYSTEM REPORTS
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Enrollee Appeal and Provider Claim Dispute Report: The Contractor must submit the Enrollee Appeal and Provider Claim Dispute Report to AHCCCSA, Division of Health Care Management, using the Quarterly Grievance System Report Format, no later than 45 days from the end of each quarter. Enrollee Grievance Report: The Contractor must accept, resolve and track enrollee grievances as required in the ACOM Enrollee Grievance Policy. The Contractor must submit the Enrollee Grievance Report no later than 45 days from the end of each quarter. The report must include the following: A. Number of grievances received in the reporting period i. Total
ii. By the categories used in the Contractor’s executive summary reports B. Number of days to resolution i. Number resolved within 10 days
ii. Number resolved in 11 or more days, but less than 29 days
iii. Number resolved in 30 or more days, but less than 59 days
iv. Number resolved in 60 to 90 days
v. Average days to resolution Report A. and B. above by the current quarter, prior quarter and current quarter for the previous year. The Contractor shall trend and analyze grievance, appeals and claim disputes at least quarterly; any identified trends and corrective action plans shall be reported to AHCCCSA, Division of Health Care Management with the Enrollee Appeal and Provider Claim Dispute Report.
27. NETWORK DEVELOPMENT The Contractor shall develop and maintain a provider network that is designed to support a medical home for members and sufficient to provide all covered services to AHCCCS members [42 CFR 438.206(b)(l)]. It shall ensure covered services are provided promptly and are reasonably accessible in terms of location and hours of operation. [42 CFR 438.206(c)(l)(i) and (ii)] There shall be sufficient personnel for the provision of covered services, including emergency medical care on a 24-hour-a-day, 7-days-a-week basis [42 CFR 438.206(c)(l)(iii). The proposed network shall be sufficient to provide covered services within designated time and distance limits. For Maricopa and Pima Counties only, this includes a network such that 95% of its members residing within the boundary area of metropolitan Phoenix and Tucson do not have to travel more than 5 miles to see a PCP, dentist or pharmacy. PCPs and specialists who provide inpatient services to the Contractor’s members shall have admitting and treatment privileges in a minimum of one general acute care hospital within the Contractor’s service area. Hospitalists may satisfy this requirement. Contractors in Maricopa and/or Pima counties must have at least one hospital contract in each of the service districts specified in Attachments B. Contractors must provide a comprehensive provider network that ensures its membership has access at least equal to, or better than, community norms. Services shall be as accessible to AHCCCS members in terms of timeliness, amount, duration and scope as those services are to non-AHCCCS persons within the same service area [42 CFR 438.210(a)(2)]. The Contractor is expected to consider the full spectrum of care when developing its network. The Contractor must also consider communities whose residents typically receive care in neighboring states. If the Contractor is unable to provide those services locally, it must so demonstrate to AHCCCSA and shall provide reasonable alternatives for members to access care. These alternatives must be approved by AHCCCSA. If the Contractor’s network is unable to provide medically necessary services required under contract, the Contractor must adequately and timely cover these services through an out of network provider until a network provider is contracted. The Contractor and out of network provider must coordinate with respect to authorization and payment issues in these circumstances. [42 CFR 438.206(b)(4) and (5)] The Contractor is also encouraged to develop non-financial incentive programs to increase participation in its provider network.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 AHCCCS is committed to workforce development and support of the medical residency and dental student training programs in the state of Arizona. Working proactively with these programs is beneficial to protect their viability, and also provides an excellent opportunity for the Contractors to educate future providers on the principles of managed care. In addition, AHCCCS believes that these programs can influence the provider capacity issues in Arizona. In the future, AHCCCS would like to provide incentives to those programs that are working to retain physicians in Arizona after completion of the program. AHCCCS encourages plans to work with the many residency programs currently operating in the state and to investigate opportunities for resident participation in contractor medical management and committee activities. If any Contractor or Contractors enter into the Graduate Medical Education Memorandum of Understanding with a residency program and assign members to it, AHCCCSA may increase the auto-assignment algorithm to favor those Contractors. The Contractor shall not discriminate with respect to participation in the AHCCCS program, reimbursement or indemnification against any provider based solely on the provider’s type of licensure or certification [42 CER 438.12(a)(l)]. In addition, the Contractor must not discriminate against particular providers that service high-risk populations or specialize in conditions that require costly treatment [42 CFR 438.214(c)]. This provision, however, does not prohibit the Contractor from limiting provider participation to the extent necessary to meet the needs of the Contractor’s members. This provision also does not interfere with measures established by the Contractor to control costs consistent with its responsibilities under this contract [42 CFR 438.12(b)(l)]. If a Contractor declines to include individual or groups of providers in its network, it must give the affected providers written notice of the reason for its decision [42 CFR 438.12(a)(l)]. The Contractor may not include providers excluded from participation in Federal health care programs, under either section 1128 or section 1128A of the Social Security Act [42 CFR 438.214(d)]. See Attachment B, Minimum Network Requirements, for details on network requirements by Geographic Service Area. Provider Network Development and Management Plan: The Contractor shall develop and maintain a provider network development and management plan, which ensures that the provision of covered services will occur as stated above. [42 CFR 438.207(b)] This plan shall be updated annually and submitted to AHCCCSA, Division of Health Care Management, 45 days from the start of each contract year. The plan shall identify the methodology used by the Contractor to determine a geographically appropriate distribution of medical disciplines for primary care, obstetrical care and individual medical specialties for its membership. The plan shall also contain a description of the Contractor’s criteria used to determine the numbers and kinds of PCP providers and of specialists, and whether hospital privileges are considered when making this determination. A similar, description should be included for the dental and pharmacy networks and for the adequacy of non-emergency transportation services. The plan shall identify the current status of the Contractor’s network, and project future needs based upon, at a minimum, membership growth; the number and types (in terms of training, experience and specialization) of providers that exist in the Contractor’s service area, as well as the number of physicians who have privileges with and practice in hospitals; the expected utilization of service, given the characteristics of its population and its health care needs; the numbers of providers not accepting new Medicaid patients; and access of its membership to specialty services as compared to the general population of the community. [42 CFR 438.206(b)(l)] The plan, at a minimum, shall also include the following: a. Current network gaps and the methodology used to identify them;
b. Immediate short-term interventions when a gap occurs, including expedited or temporary credentialing;
c. Interventions to fill network gaps and barriers to those interventions;
d. Outcome measures/evaluation of interventions;
e. Ongoing activities for network development;
f. Coordination between internal departments;
g. Coordination with outside organizations;
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 h. A description of network design by GSA for the general population, including details regarding special populations including, but not limited to, the developmentally delayed (Arizona Early Intervention Program (AzEIP), the homeless and those in border communities. The description should cover: i. how members access the system
ii. relationships between various levels of the system
iii. the plan for incorporating the medical home for members and the progress in its implementation i. A description of the adequacy of the geographic access to tertiary hospital services for the Contractor’s membership.
j. The assistance provided to PCPs when they refer members to specialists. The methods used to communicate the availability of this assistance to the providers.
k. The methodology (ies) the Contractor uses to collect and analyze provider feedback about the network designs and implementation. When specific provider issues are identified, the protocols for handling them. The plan must include answers to the following questions: a. How does the Contractor assess the medical and social needs of new members to determine how the contractor may assist the member in navigating the network more efficiently?
b. What assistance is provided to members with a high severity of illness or higher utilization to better navigate the provider network?
c. Does the Contractor utilize any of the following strategies to reduce unnecessary emergency department utilization by the membership? If so, how are members educated about these options? i. Physician coverage/call availability after-hours and on weekends
ii. Same-day PCP appointments
iii. Nurse call-in centers/information lines
iv. Urgent Care facilities d. Are members with special health care needs assigned to specialists for their primary care needs?
e. What are the most significant barriers to efficient network deployment within the Contractor’s service area? How can AHCCCS best support the Contractor’s efforts to improve its network and the quality of care delivered to its membership?
28. PROVIDER AFFILIATION TRANSMISSION The Contractor shall submit information quarterly regarding its provider network. This information shall be submitted in the format described in the Provider Affiliation Transmission User Manual on October 15, January 15, April 15, and July 15 of each contract year. The manual may be found in the Bidder’s Library. If the provider affiliation transmission is not timely, accurate and complete, the Contractor may be required to submit a corrective action plan and may be subject to sanction.
29. NETWORK MANAGEMENT The Contractor shall have policies and procedures in place that pertain to all service specifications described in the AMPM. In addition, the Contractor shall have policies on how the Contractor will [42 CFR 438.214(a)]: a. Communicate with the network regarding contractual and/or program changes and requirements; b. Monitor network compliance with policies and rules of AHCCCSA and the Contractor, including compliance with all policies and procedures related to the grievance process and ensuring the member’s care is not compromised during the grievance process; c. Evaluate the quality of services delivered by the network;
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 d. Provide or arrange for medically necessary covered services should the network become temporarily insufficient within the contracted service area; e. Monitor the adequacy, accessibility and availability of its provider network to meet the needs of its members, including the provision of care to members with limited proficiency in English; f. Process expedited and temporary credentials; g. Recruit, select, credential, re-credential and contract with providers in a manner that incorporate quality management, utilization, office audits and provider profiling; and h. Provide training for its providers and maintain records of such training. Contractor policies shall be subject to approval by AHCCCSA, Division of Health Care Management, and shall be monitored through operational audits. A material change in Contractor policy or process requires 30 days advance notice to affected providers and members. A material change is defined as any change in overall business practice that could have an impact on 5% or more of the members, providers, or AHCCCS program, or may significantly impact the delivery of services provided by an AHCCCS Contractor. Contractors are required to submit the member notices to AHCCCS for approval 30 days prior to the notice being sent. Upon receipt of the member notice for review, AHCCCSA may comment on the material change or may intervene if the policy/process change will have an adverse affect to the overall system. Provider notices do not require prior approval, however, the Contractor must notify AHCCCSA of the material policy change 15 days prior to the provider notice being sent out. During the 15 day time period, AHCCCS shall have the right to comment or may intervene if the change to policy/process will lead to an adverse affect to the overall system. This provision is not intended to include contract negotiations between Contractors and providers. Contractors may be required to conduct meetings with providers to address issues (or to provider general information, technical assistance, etc.) related to federal and state requirements, changes in policy, reimbursement matters, prior authorization and other matters as identified or requested by the Administration. Contractors shall give hospitals and provider groups 90 days notice prior to a contract termination without cause. Contracts between the Contractor and single practitioners are exempt from this requirement. All material changes in the Contractor’s provider network must be approved in advance by AHCCCSA, Division of Health Care Management [42 CFR 438.207(c)]. A material change is defined as one which affects, or can reasonably be foreseen to affect, the Contractor’s ability to meet the performance and network standards as described in this contract. AHCCCSA will assess proposed changes in the Contractor’s provider network for potential impact on members’ health care and provide a written response to the Contractor. For emergency situations, AHCCCSA will expedite the approval process. The Contractor shall notify AHCCCSA, Division of Health Care Management, within one business day of any unexpected changes that would impair its provider network. This notification shall include (1) information about how the change will affect the delivery of covered services, and (2) the Contractor’s plans for maintaining the quality of member care, if the provider network change is likely to affect the delivery of covered services.
Homeless Clinics: Contractors in Maricopa and Pima County must contract with homeless clinics at the AHCCCS Fee-for-Service rate for Primary Care services on or before April 1, 2006. Contracts must stipulate that: 1. Only those members that request a homeless clinic as a PCP may be assigned to them; and
2. Members assigned to a homeless clinic may be referred out-of-network for needed specialty services The Contractor must make resources available to assist homeless clinics with administrative issues such as obtaining Prior Authorization, and resolving claims issues.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 AHCCCSA will convene meetings, as necessary, with the Contractors and the homeless clinics to resolve administrative issues and perceived barriers to the homeless members receiving care. Representatives from the Contractor must attend these meetings.
30. PRIMARY CARE PROVIDER STANDARDS The Contractor shall include in its provider network a sufficient number of PCPs to meet the requirements of this contract. Health care providers designated by the Contractor as PCPs shall be licensed in Arizona as allopathic or osteopathic physicians who generally specialize in family practice, internal medicine, obstetrics, gynecology, or pediatrics; certified nurse practitioners or certified nurse midwives; or physician’s assistants. [42 CFR 438.206(b)(2)] The Contractor shall assess the PCP’s ability to meet AHCCCS appointment availability and other standards when determining the appropriate number of its members to be assigned to a PCP. The Contractor should also consider the PCP’s total panel size (i.e. AHCCCS and non-AHCCCS patients) when making this determination. AHCCCS members shall not comprise the majority of a PCP’s panel of patients. AHCCCSA shall inform the Contractor when a PCP has a panel of more than 1,800 AHCCCS members (assigned by a single Contractor or multiple Contractors), to assist in the assessment of the size of their panel. This information will be provided on a quarterly basis. The Contractor will adjust the size of a PCP’s panel, as needed, for the PCP to meet AHCCCS appointment and clinical performance standards. The Contractor shall have a system in place to monitor and ensure that each member is assigned to an individual PCP and that the Contractor’s data regarding PCP assignments is current. The Contractor is encouraged to assign members with complex medical conditions, who are age 12 and younger, to board certified pediatricians. PCP’s, with assigned members diagnosed with AIDS or as HIV positive, shall meet criteria and standards set forth in the AMPM. To the extent required by this contract, the Contractor shall offer members freedom of choice within its network in selecting a PCP [42 CFR 438.6(m) and 438.52(d)]. The Contractor may restrict this choice when a member has shown an inability to form a relationship with a PCP, as evidenced by frequent changes, or when there is a medically necessary reason. When a new member has been assigned to the Contractor, the Contractor shall inform the member in writing of his enrollment and of his PCP assignment within 10 days of the Contractor’s receipt of notification of assignment by AHCCCSA. The Contractor shall include with the enrollment notification a list of all the Contractor’s available PCPs, the process for changing the PCP assignment, should the member desire to do so, as well as the information required in the ACOM Member Information Policy. The Contractor shall confirm any PCP change in writing to the member. Members may make both their initial PCP selection and any subsequent PCP changes either verbally or in writing. At a minimum, the Contractor shall hold the PCP responsible for the following activities [42 CFR 438.208(b)(1)]; a. Supervision, coordination and provision of care to each assigned member; b. Initiation of referrals for medically necessary specialty care; c. Maintaining continuity of care for each assigned member; and d. Maintaining the member’s medical record, including documentation of all services provided to the member by the PCP, as well as any specialty or referral services. Services potentially requiring medical follow up are the only dental services whose documentation must be included in the medical record. The Contractor shall establish and implement policies and procedures to monitor PCP activities and to ensure that PCPs are adequately notified of, and receive documentation regarding, specialty and referral services provided to assigned members by specialty physicians, and other health care professionals. Contractor policies
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 and procedures shall be subject to approval by AHCCCSA, Division of Health Care Management, and shall be monitored through operational audits. Contractors will work with AHCCCSA to develop a methodology to reimburse clinics for the homeless and school based clinics. AHCCCSA and Contractors will identify coordination of care processes and reimbursement mechanisms. The Contractor will be responsible for payment of these services directly to the clinics.
31. MATERNITY CARE PROVIDER STANDARDS The Contractor shall ensure that a maternity care provider is designated for each pregnant member for the duration of her pregnancy and postpartum care and that maternity services are provided in accordance with the AMPM. The Contractor may include in its provider network the following maternity care providers: a. Arizona licensed allopathic and/or osteopathic physicians who are general practitioners or specialize in family practice or obstetrics b. Physician Assistants c. Nurse Practitioners d. Certified Nurse Midwives Pregnant members may choose, or be assigned, a PCP who provides obstetrical care. Such assignment shall be consistent with the freedom of choice requirements for selecting health care professionals while ensuring that the continuity of care is not compromised. Members who choose to receive maternity services from a licensed midwife shall also be assigned to a PCP for medical care, as primary care is not within the scope of practice for licensed midwives. All physicians and certified nurse midwives who perform deliveries shall have OB hospital privileges or a documented hospital coverage agreement for those practitioners performing deliveries in alternate settings. Licensed midwives perform deliveries only in the member’s home. Labor and delivery services may also be provided in the member’s home by physicians, certified nurse practitioners and certified nurse midwives who include such services within their practice.
32. REFERRAL MANAGEMENT PROCEDURES AND STANDARDS The Contractor shall have adequate written procedures regarding referrals to specialists, to include, at a minimum, the following: a. Use of referral forms clearly identifying the Contractor b. A system for resolving disputes regarding the referrals c. PCP referral shall be required for specialty physician services, except that women shall have direct access to in-network GYN providers, including physicians, physician assistants and nurse practitioners within the scope of their practice, without a referral for preventive and routine services [42 CFR 438.206(b)(2)]. In addition, for members with special health care needs determined to need a specialized course of treatment or regular care monitoring, the Contractor must have a mechanism in place to allow such members to directly access a specialist (for example through a standing referral or an approved number of visits) as appropriate for the member’s condition and identified needs. Any waiver of this requirement by the Contractor must be approved in advance by AHCCCSA. d. Specialty physicians shall not begin a course of treatment for a medical condition other than that for which the member was referred, unless approved by the member’s PCP. e. A process in place that ensures the member’s PCP receives all specialist and consulting reports and a process to ensure PCP follow-up of all referrals including EPSDT referrals for behavioral health services
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 f. A referral plan for any member who is about to lose eligibility and who requests information on low-cost or no-cost health care services g. Referral to Medicare Managed Care Plan including payment of copayments h. Allow for a second opinion from a qualified health care professional within the network, or if one is not available in network, arrange for the member to obtain one outside the network, at no cost to the member [42 CFR 438.206(b)(3)]. The Contractor shall comply with all applicable physician referral requirements and conditions defined in Sections 1903(s) and 1877 of the Social Security Act. Upon finalization of the regulations, the Contractor shall comply with all applicable physician referral requirements and conditions defined in 42 CFR Part 411, Part 424, Part 435 and Part 455. Sections 1903(s) and 1877 of the Act prohibits physicians from making referrals for designated health services to health care entities with which the physician or a member of the physician’s family has a financial relationship. Designated health services include: a. Clinical laboratory services
b. Physical therapy services
c. Occupational therapy services
d. Radiology services
e. Radiation therapy services and supplies
f. Durable medical equipment and supplies
g. Parenteral and enteral nutrients, equipment and supplies
h. Prosthetics, orthotics and prosthetic devices and supplies
i. Home health services
j. Outpatient prescription drugs
k. Inpatient and outpatient hospital services
33. APPOINTMENT STANDARDS For purposes of this section, “urgent” is defined as an acute, but not necessarily life-threatening disorder, which, if not attended to, could endanger the patient’s health. The Contractor shall have procedures in place that ensure the following standards are met: a. Emergency PCP appointments — same day of request b. Urgent care PCP appointments — within 2 days of request c. Routine care PCP appointments — within 21 days of request For specialty referrals, the Contractor shall be able to provide: a. Emergency appointments — within 24 hours of referral b. Urgent care appointments — within 3 days of referral c. Routine care appointments — within 45 days of referral For dental appointments, the Contractor shall be able to provide: a. Emergency appointments — within 24 hours of request b. Urgent care appointments — within 3 days of request c. Routine care appointments — within 45 days of request For maternity care, the Contractor shall be able to provide initial prenatal care appointments for enrolled pregnant members as follows: a. First trimester — within 14 days of request
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 b. Second trimester - within 7 days of request c. Third trimester - within 3 days of request d. High risk pregnancies - within 3 days of identification of high risk by the Contractor or maternity care provider, or immediately if an emergency exists If a member needs non-emergent medically necessary transportation, the Contractor shall require its transportation provider to schedule the transportation so that the member arrives on time for the appointment, but no sooner than one hour before the appointment; does not have to wait more than one hour after making the call to be picked up; nor have to wait for more than one hour after conclusion of the appointment for transportation home. The Contractor shall actively monitor the adequacy of its appointment processes and reduce the unnecessary use of alternative methods such as emergency room visits [42 CFR 438.206(c)(l)(i)]. The Contractor shall, actively monitor and ensure that a member’s waiting time for a scheduled appointment at the PCP’s or specialist’s office is no more than 45 minutes, except when the provider is unavailable due to an emergency. The Contractor shall have written policies and procedures about educating its provider network regarding appointment time requirements. The Contractor must assign a specific staff member or unit within its organization to monitor compliance with appointment standards. The Contractor must develop a corrective action plan when appointment standards are not met; if appropriate, the corrective action plan should be developed in conjunction with the provider [42 CFR 438.206(c)(l)(iv), (v) and (vi)]. Appointment standards shall be included in the Provider Manual. The Contractor is encouraged to include the standards in the provider subcontract.
34. FEDERALLY QUALIFIED HEALTH CENTERS (FQHC) and RURAL HEALTH CLINICS (RHC) The Contractor is encouraged to use FQHCs/RHCs in Arizona to provide covered services and must comply with the Federal mandates. AHCCCS expects the contractors to negotiate rates of payment with FQHCs/RHCs for non-pharmacy services that are comparable to the rates paid to providers that provide similar services. Contractors are required to submit member information for Title XIX members for each FQHC/RHC on a quarterly basis to the AHCCCSA Division of Health Care Management. AHCCCSA will perform periodic audits of the member information submitted. Contractors should refer to the AHCCCS Division of Health Care Management’s policy on FQHC/RHC reimbursement for further guidance. The FQHCs/RHCs registered with AHCCCS are listed on the AHCCCS website (www.azahcccs.gov).
35. PROVIDER MANUAL The Contractor shall develop, distribute and maintain a provider manual. The Contractor shall ensure that each contracted provider is made aware of a website provider manual or, if requested, issued a hard copy of the provider manual and is encouraged to distribute a provider manual to any individual or group that submits claim and encounter data. The Contractor remains liable for ensuring that all providers, whether contracted or not, meet the applicable AHCCCS requirements such as covered services, billing, etc. At a minimum, the Contractor’s provider manual must contain information on the following: a. Introduction to the Contractor which explains the Contractor’s organization and administrative structure b. Provider responsibility and the Contractor’s expectation of the provider c. Overview of the Contractor’s Provider Service department and function d. Listing and description of covered and non-covered services, requirements and limitations including behavioral health services e. Emergency room utilization (appropriate and non-appropriate use of the emergency room)
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 f. EPSDT Services — screenings include a comprehensive history, developmental/behavioral health screening, comprehensive unclothed physical examination, appropriate vision testing, hearing testing, laboratory tests, dental screenings and immunizations. EPSDT providers must document immunizations into ASIIS and enroll every year in the Vaccine for Children program. g. Dental services h. Maternity/Family Planning services i. The Contractor’s policy regarding PCP assignments j. Referrals to specialists and other providers, including access to behavioral health services provided by the ADHS/RBHA system k. Grievance system process and procedures for providers and enrollees l. Billing and encounter submission information m. Information about policies and procedures relevant to the providers including, but not limited to, utilization management and claims submission n. Reimbursement, including reimbursement for dual eligibles (i.e. Medicare and Medicaid) or members with other insurance o. Cost sharing responsibility p. Explanation of remittance advice q. Prior authorization and notification requirements r. Claims medical review s. Concurrent review t. Fraud and Abuse u. Formulary information, including updates when changes occur, must be provided in advance to providers, including pharmacies. The Contractor is not required to send a hard copy, unless requested, of the formulary each time it is updated. A memo may be used to notify providers of updates and changes, and refer providers to view the updated formulary op the Contractor’s website. v. AHCCCS appointment standards w. Americans with Disabilities Act (ADA) requirements and Title VI, as applicable x. Eligibility verification y. Cultural competency information, including notification about Title VI of the Civil Rights Act of 1964. Providers should also be informed of how to access interpretation services to assist members who speak a language other the English or who use sign language. z. Peer review and appeal process. aa. Medication management services as described in Section D, Paragraph 12. bb. Information about a member’s right to be treated with dignity and respect as specified in 42 CFR 438.100. cc. Notification that the contractor has no policies which prevent the provider from advocating on behalf of the member. dd. Information on how to access or obtain Practice Guidelines and coverage criteria for authorization decisions.
36. PROVIDER REGISTRATION The Contractor shall ensure that all of its subcontractors register with AHCCCSA as an approved service provider. A Provider Participation Agreement must be signed by each provider who is not already an AHCCCS registered provider. The original shall be forwarded to AHCCCSA. This provider registration process must be completed in order for the Contractor to report services a subcontractor renders to enrolled members and for the Contractor to be paid reinsurance. The National Provider Identifier (NPI) will be required on all claim submissions and subsequent encounters (from providers who are eligible for a NPI) effective for dates of service on or after May 23, 2007. Contractors shall work with providers to obtain their NPI.
37. SUBCONTRACTS
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 The Contractor shall be legally responsible for contract performance whether or not subcontracts are used [42 CFR 438.230(a) and 434.6(c)]. No subcontract shall operate to terminate the legal responsibility of the Contractor to assure that all activities carried out by the subcontractor conform to the provisions of this contract. Subject to such conditions, any function required to be provided by the Contractor pursuant to this contract may be subcontracted to a qualified person or organization. All such subcontracts must be in writing [42 CFR 438.6(L)]. See the ACOM Contractor Claims Processing by Health Plan Subcontracted Providers Policy. All subcontracts entered into by the Contractor are subject to prior review and written approval by AHCCCS, Division of Health Care Management, and shall incorporate by reference the terms and conditions of this contract. The following types of subcontracts shall be submitted to AHCCCS, Division of Health Care Management for prior approval at least 30 days prior to the beginning date of the subcontract: a. Delegated agreements that delegate: 1) Any function related to the management of the contract with AHCCCS. Examples include quality management, medical management (e.g., prior authorization, concurrent review, medical claims review)
2) Claims processing, including pharmacy claims.
3) Credentialing including those for only primary source verification b. All Management Service Agreements c. All Service Level Agreements with any Division or Subsidiary of a corporate parent owner The Contractor shall maintain a fully executed original of all subcontracts, which shall be accessible to AHCCCS A within two business days of request by AHCCCSA. All requested subcontracts must have full disclosure of all terms and conditions and must fully disclose all financial or other requested information. Information may be designated as confidential but may not be withheld from AHCCCS as proprietary. Information designated as confidential may not be disclosed by AHCCCS without the prior written consent of the Contractor except as required by law. All subcontracts shall comply with the applicable provisions of Federal and State laws, regulations and policies. Before entering into a subcontract which delegates Contractor duties or responsibilities to a subcontractor, the Contractor must evaluate the prospective subcontractor’s ability to perform the activities to be delegated. If the Contractor delegates duties or responsibilities such as utilization management or claims processing to a subcontractor, then the Contractor shall establish a written agreement that specifies the activities and reporting responsibilities delegated to the subcontractor. The written agreement shall also provide for revoking delegation or imposing other sanctions if the subcontractor’s performance is inadequate. In order to determine adequate performance, the Contractor shall monitor the subcontractor’s performance on an ongoing basis and subject it to formal review according to a periodic schedule. The schedule for review shall be submitted to AHCCCSA, Division of Health Care Management for prior approval. As a result of the performance review, any deficiencies must be communicated to the subcontractor in order to establish a corrective action plan. The results of the performance review and the correction plan shall be communicated to AHCCCS upon completion. [42 CFR 438.230(b)] The Contractor must submit annually (within 90 days from the start of the contract year) a statement whether any Contractor duties or responsibilities have been delegated to a subcontractor. If duties or responsibilities have been delegated to a subcontractor, the Contractor must submit annually (within 90 days from the start of the contract year) a report listing the following: • Subcontractor’s name
• Delegated duties and responsibilities
• Most recent review date of the duties, responsibilities and financial position of the subcontractor
• Next scheduled review date
• Identified areas of deficiency
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 • Contractor’s corrective action plan The Contractor shall promptly inform AHCCCS, Division of Health Care Management, in writing if a subcontractor is in significant non-compliance that would affect their abilities to perform the duties and responsibilities of the subcontract. The Contractor shall not include covenant-not-to-compete requirements in its provider agreements. Specifically, the Contractor shall not contract with a provider and require that the provider not provide services for any other AHCCCS Contractor. In addition, except for cost sharing requirements, the Contractor shall not enter into subcontracts that contain compensation terms that discourage providers from serving any specific eligibility category. The Contractor must enter into a written agreement with any provider (including out-of-state providers) the Contractor reasonably anticipates will be providing services at the request of the Contractor more than 25 times during the contract year [42 CFR 438.206(b)(l)]. Exceptions to this requirement include the following: a. If a provider who provides services more than 25 times during the contract year refuses to enter into a written agreement with the Contractor, the Contractor shall submit documentation of such refusal to AHCCCS, Division of Health Care Management within seven days of its final attempt to gain such agreement. b. If a provider performs emergency services such as an emergency room physician or an ambulance company, a written agreement is not required. c. Individual providers as detailed in the AMPM. d. Hospitals, as discussed in Section D, Paragraph 40, Hospital Subcontracting and Reimbursement. e. If a provider primarily performs services in an inpatient setting. f. If upon the Medical Director’s review, it is determined that the Contractor or members would not benefit by adding the provider to the contracted network. Any other exceptions to this requirement must be approved by AHCCCS, Division of Health Care Management, If AHCCCS does not respond within 30 days, the requested exception is deemed approved. The Contractor may request an expedited review and approval. All subcontracts must contain verbatim all the provisions of Attachment A, Minimum Subcontract Provisions. In addition, each provider subcontract must contain the following [42 CER 438.206(b)(l)]: a. Full disclosure of the method and amount of compensation or other consideration to be received by the subcontractor. b. Identification of the name and address of the subcontractor. c. Identification of the population, to include patient capacity, to be covered by me subcontractor. d. The amount, duration and scope of medical services to be provided, and for which compensation will be paid. e. The term of the subcontract including beginning and ending dates, methods of extension, termination and renegotiation. f. The specific duties of the subcontractor relating to coordination of benefits and determination of third-party liability. g. A provision that the subcontractor agrees to identify Medicare and other third-party liability coverage and to seek such Medicare or third party liability payment before submitting claims to the Contractor. h. A description of the subcontractor’s patient, medical, dental and cost record keeping system. i. Specification that the subcontractor shall cooperate with quality management/quality improvement programs, and comply with the utilization management and review procedures specified in 42 CFR Part 456, as specified in the AMPM. j. A provision stating that a merger, reorganization or change in ownership of a subcontractor that is related to or affiliated with the Contractor shall require a contract amendment and prior approval of AHCCCSA.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 k. Procedures for enrollment or re-enrollment of the covered population (may also refer to the Provider Manual).
1. A provision that the subcontractor shall be fully responsible for all tax obligations, Worker’s Compensation Insurance, and all other applicable insurance coverage obligations which arise under this subcontract, for itself and its employees, and that AHCCCSA shall have no responsibility or liability for any such taxes or insurance coverage. m. A provision that the subcontractor must obtain any necessary authorization from the Contractor or AHCCCSA for services provided to eligible and/or enrolled members. n. A provision that the subcontractor must comply with encounter reporting and claims submission requirements as described in the subcontract. o. Provision(s) that allow the Contractor to suspend, deny, refuse to renew or terminate any subcontractor in accordance with the terms of this contract and applicable law and regulation. p. A provision that the subcontractor may provide the member with factual information, but is prohibited from recommending or steering a member in the member’s selection of a Contractor. q. A provision that compensation to individuals or entities that conduct utilization management and concurrent review activities is not structured so as to provide incentives for the individual or entity to deny, limit or discontinue medically necessary services to any enrollee (42 CFR 438.210(e)).
38. CLAIMS PAYMENT/HEALTH INFORMATION SYSTEM The Contractor shall develop and maintain a health information system that collects, analyzes, integrates, and reports data. The system shall provide information on areas including, but not limited to, service utilization, claim disputes and appeals. [42 CFR 438.242(a)] The Contractor will ensure that changing or making major upgrades to the information systems affecting claims processing, or any other major business component, will be accompanied by a plan which includes a timeline, milestones, and adequate testing before implementation. At least six months before the anticipated implementation date, the contractor shall provide the system change plan to AHCCCSA for review and comment. The Contractor shall develop and maintain a claims payment system capable of processing, cost avoiding and paying claims in accordance with A.R.S. §§ 36-2903 and 2904 and AHCCCS Rules R9-28 Article 7. This system must produce a remittance advice related to the Contractor’s payments to providers and must contain, at a minimum: • an adequate description of all denials and adjustments,
• the reasons for such denials and adjustments,
• the amount billed,
• the amount paid,
• application of COB and
• provider rights for claim disputes. The related remittance advice must be sent with the payment, unless the payment is made by electronic funds transfer (EFT). The remittance advice sent related to an EFT must be mailed, or sent to the provider, no later than the date of the EFT. The Contractor’s claims payment system, as well as its prior authorization and concurrent review process, must minimize the likelihood of having to recoup already-paid claims. Any individual recoupment in excess of $50,000 per provider within a contract year must be approved in advance by AHCCCSA, Division of Health Care Management, Acute Operations Unit. If AHCCCS does not respond within 30 days, the recoupment request is deemed approved. AHCCCS must be notified of any cumulative recoupment greater than $50,000 per provider Tax Identification Number per contract year. A Contractor shall not recoup monies from a provider later than 12 months after the date of original payment on a clean claim, without prior approval from AHCCCSA, unless the
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 recoupment is a result of fraud, reinsurance audit findings, data validation or audits conducted by the AHCCCSA Office of Program Integrity. The Contractor is required to reimburse providers for previously recouped monies if the provider was subsequently denied payment by the primary insurer based on timely filing limits or lack of prior authorization and the member failed to disclose additional insurance coverage other than AHCCCS. Unless a subcontract specifies otherwise, Contractors with 50,000 or more members shall ensure that 95% of all clean claims are adjudicated within 30 days of receipt of the clean claim and 99% are adjudicated within 60 days of receipt of the clean claim. Unless a subcontract specifies otherwise, Contractors with fewer than 50,000 members shall ensure that 90% of all clean claims are adjudicated within 30 days of receipt of the clean claim and 99% are adjudicated within 60 days of receipt of the clean claim. Additionally, unless a shorter time period is specified in contract, the Contractor shall not pay a claim initially submitted more than 6 months after date of service or pay a clean claim submitted more than 12 months after date of service. Claim payment requirements pertain to both contracted and non-contracted providers. The receipt date of the claim is the date stamp on the claim or the date electronically received. The receipt date is the day the claim is received at the Contractor’s specified claim mailing address. The paid date of the claim is the date on the check or other form of payment. [42 CFR 447.45(d)] Claims submission deadlines shall be calculated from the date of service or the effective date of eligibility posting, whichever is later. Remittance advices accompanying the Contractor’s payments to providers must contain, at a minimum, adequate descriptions of all denials and adjustments, the reasons for such denials and adjustments, the amount billed, the amount paid, and provider rights for claim dispute. Effective for all non-hospital clean claims with dates of service October 1, 2004 and thereafter, in the absence of a contract specifying other late payment terms, Contractors are required to pay interest on late payments. Late claims payments are those that are paid after 45 days of receipt of the clean claim (as defined in this contract). In grievance situations, interest shall be paid back to the date interest would have started to accrue beyond the applicable 45 day requirement. Interest shall be at the rate of ten per cent per annum, unless a different rate is stated in a written contract. In the absence of interest payment terms in a subcontract, interest shall accrue starting on the first day after a clean claim is contracted to be paid. For hospital clean claims, a slow payment penalty shall be paid in accordance with A.R.S. 2903.01. When interest is paid, the Contractor must report the interest as directed in the Encounter Manual. Contractors are required to accept HIPAA compliant electronic claims transactions from any provider interested and capable of electronic submission; and must be able to make claims payments via electronic funds transfer. In addition, Contractors shall implement and meet the following milestone in order to make claims processing and payment more efficient and timely: • Receive and pay 50% of all claims (based on volume of actual claims excluding claims processed by Pharmacy Benefit Managers (PBMs)) electronically by July 1, 2006 The Contractor shall submit a monthly Claims Dashboard as specified in the AHCCCS Claims Reporting Guide. Beginning October 1, 2006, the Contractor shall submit: 1) Claims Dashboard reporting claims received on a UB92 or 83712) Claims Dashboard reporting claims received on a CMS1500, dental claim form, 837P or 837D 3) Claims Dashboard combining all claims. The Monthly report must be received by the AHCCCSA, Division of Healthcare Management, no later than 15 days from the end of each month.
39. SPECIALTY CONTRACTS AHCCCSA may at any time negotiate or contract on behalf of the Contractor and AHCCCSA for specialized hospital and medical services. AHCCCSA will consider existing Contractor resources in the development and execution of specialty contracts. AHCCCSA may require the Contractor to modify its delivery network to accommodate the provisions of specialty contracts. Specialty contracts shall take precedence over, and
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 supersede, existing and future subcontracts for services that are subject to specialty contracts. AHCCCSA may consider waiving this requirement in particular situations if such action is determined to be in the best interest of the State; however, in no case shall reimbursement exceed that payable under the relevant AHCCCSA specialty contract. During the term of specialty contracts, AHCCCSA may act as an intermediary between the Contractor and specialty contractors to enhance the cost effectiveness of service delivery. Adjudication of claims related to such payments provided under specialty contracts shall remain the responsibility of the Contractor. AHCCCSA may provide technical assistance prior to the implementation of any specialty contracts. Currently, AHCCCSA only has specialty contracts for transplant services and anti-hemophilic agents and related pharmaceutical services. AHCCCSA shall provide at least 60 days advance written notice to the Contractor prior to the implementation of any specialty contract.
40. HOSPITAL SUBCONTRACTING AND REIMBURSEMENT Maricopa and Pima counties only: Effective October 1, 2003, legislation authorizes the Inpatient Hospital Reimbursement Program (Program). The Program is defined in the Arizona Revised Statutes (A.R.S.) 36-2905.01, and requires hospital subcontracts to be negotiated between contractors and hospitals in Maricopa and Pima counties to establish reimbursement levels, terms and conditions. Subcontracts shall be negotiated by the Contractor and hospitals to cover operational concerns, such as timeliness of claims submission and payment, payment of discounts or penalties and legal resolution which may, as an option, include establishing arbitration procedures. These negotiated subcontracts shall remain under close scrutiny by AHCCCSA to ensure availability of quality services within specific service districts, equity of related party interests and reasonableness of rates. The general provisions of this program encompass acute care hospital services and outpatient hospital services that result in an admission. The Contractor, upon request, shall make available to AHCCCSA, all hospital subcontracts and amendments. For non-emergency patient-days, the Contractor shall ensure that at least 65% of its members use contracted hospitals. AHCCCSA reserves the right to subsequently adjust the 65% standard. Further, if in AHCCCSA’s judgment the number of emergency days at a particular non-contracted hospital becomes significant, AHCCCSA may require a subcontract at that hospital. Pursuant to Section 6085 of the Federal Deficit Reduction Act, non-contracted providers of emergency services shall be paid no more than the AHCCCS Fee-for-Service rates. Furthermore, in accordance with R9-22-718, unless otherwise negotiated by both parties, the reimbursement for inpatient services provided at a non-contracted hospital shall be based on the rates as defined in A.R.S. § 36-2903.01, multiplied by 95%. All counties EXCEPT Maricopa and Pima: The Contractor shall reimburse hospitals for member care in accordance with AHCCCS Rule R9-22-705. The Contractor is encouraged to obtain subcontracts with hospitals in all GSA’s and must submit copies of these subcontracts, including amendments, to AHCCCSA, Division of Health Care Management. Out-of-State Hospitals: The Contractor shall reimburse out-of-state hospitals in accordance with AHCCCS Rule R9-22-705. Contractors serving border communities (excluding Mexico) are strongly encouraged to establish contractual agreements with those out-of-state hospitals that are identified by GSA in Attachment B. For non-contracted out-of-state providers of emergency services, Contractors shall pay no more than the AHCCCS Fee-For-Service rates, pursuant to Section 6085 of the Federal Deficit Reduction Act. Outpatient hospital services: With passage, of SB 1410 (Laws of 2004, Chapter 279), effective for dates of service on and after July 1, 2005, in absence of a contract, the default payment rate for outpatient hospital services billed on a UB-92 will be based on the AHCCCS outpatient hospital fee schedule, rather than a hospital specific cost-to-charge ratio (pursuant to ARS 36-2904).
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Hospital Recoupments: The Contractor may conduct prepayment and post-payment medical reviews of all hospital claims including outlier claims. Erroneously paid claims are subject to recoupment. If the Contractor fails to identify lack of medical necessity through concurrent review and/or prepayment medical review, lack of medical necessity identified during post-payment medical review shall not constitute a basis for recoupment by the Contractor. This prohibition does not apply to recoupments that are a result of an AHCCCS reinsurance audit. See also Section D, Paragraph 38, Claims Payment System. For a more complete description of the guidelines for hospital reimbursement, please consult the Bidder’s Library for applicable statutes and rules.
41. NURSING FACILITY REIMBURSEMENT The Contractor shall not deny nursing facility services if the nursing facility is unable to obtain prior authorization in situations where acute care eligibility and ALTCS eligibility overlap and the member is enrolled with an AHCCCS acute care contractor. In such situations, the Contractor shall impose reasonable authorization requirements. The Contractor’s payment responsibility, described above, applies only in situations where the nursing facility has not been notified in advance of the member’s enrollment with an AHCCCS acute care contractor. When ALTCS eligibility overlaps AHCCCS acute care enrollment, the acute care enrollment takes precedence. Although the member could be ALTCS eligible for this time period, there is no ALTCS enrollment that occurs on the same days as AHCCCS acute enrollment. The Contractor shall provide medically necessary nursing facility services for any member who has a pending ALTCS application, who is currently residing in a nursing facility and is eligible for services provided under this contract If the member becomes ALTCS eligible and is enrolled with an ALTCS Contractor before the end of the maximum 90 days per contract year of nursing facility coverage, the Contractor is only responsible for nursing facility coverage during the time the member is enrolled with the Contractor. Nursing facility services, covered by a third party insurer (including Medicare) while the member is enrolled with the Contractor, shall be applied to the 90 day per contract year limitation. The Contractor shall notify the Assistant Director of the Division of Member Services in writing, when a member has been residing in a nursing facility for 75 days. This will allow AHCCCSA time to follow-up on the status of the ALTCS application process and to prepare for potential fee-for-service coverage if the stay goes beyond the 90-day per contract year maximum.
42. PHYSICIAN INCENTIVES/PAY FOR PERFORMANCE Physician Incentives Reporting of Physician Incentive Plans has been suspended by CMS until further notice. No reporting is required until suspension is lifted. The Contractor must comply with all applicable physician incentive requirements and conditions defined in 42 CFR 417.479. These regulations prohibit physician incentive plans that directly or indirectly make payments to a doctor or a group as an inducement to limit or refuse medically necessary services to a member. The Contractor is required to disclose all physician incentive agreements to AHCCCSA and to AHCCCS members who request them. The Contractor shall not enter into contractual arrangements that place providers at significant financial risk as defined in CFR 417.479 unless specifically approved in advance by the AHCCCSA Division of Health Care Management. In order to obtain approval, the following must be submitted to the AHCCCSA Division of Health Care Management 45 days prior to the implementation of the contract [42 CFR 438.6(g)]: 1. A complete copy of the contract
2. A plan for the member satisfaction survey
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 3. Details of the stop-loss protection provided
4. A summary of the compensation arrangement that meets the substantial financial risk definition. The Contractor shall disclose to AHCCCSA the information on physician incentive plans listed in 42 CFR 417.479(h)(l) through 417.479(I) upon contract renewal, prior to initiation of a new contract, or upon request from AHCCCSA or CMS. Please refer to the Physician Incentive Plan Disclosure by Contractors Policy in the Bidder’s Library for details on providing required disclosures. The Contractor shall also provide for compliance with physician incentive plan requirements as set forth in 42 CFR 422.208, 422.210 and 438.6(h). These regulations apply to contract arrangements with subcontracted entities that provide utilization management services. Pay for Performance Any pay for performance that meets the requirements of 42 CFR 417.479 must be approved by AHCCCS Division of Health Care Management prior to implementation.
43. MANAGEMENT SERVICES AGREEMENT AND COST ALLOCATION PLAN If a Contractor has subcontracted for management services, the management service agreement and the corporate cost allocation plan must be approved in advance by AHCCCSA, Division of Health Care Management. The cost allocation plan must be submitted with the proposed management fee agreement. AHCCCSA reserves the right to perform a thorough review of actual management fees charged and/or corporate allocations made. If the fees or allocations actually paid out are determined to be unjustified or excessive, amounts may be subject to repayment to the Contractor. In addition, sanctions may be imposed.
44. RESERVED
45. MINIMUM CAPITALIZATION REQUIREMENTS In order to be considered for a contract award, the Offeror must meet a minimum capitalization requirement for each GSA bid. The capitalization requirement for both new and continuing offerors must be met within 30 days after contract award. [42 CFR 438.116] Minimum capitalization requirements by GSA are as follows:
Capitalization Capitalization Requirement — Requirement — Geographic Service Area (GSA) New Contractors Existing Contractors Mohave/Coconino/Apache/Navajo $ 4,400,000 $ 3,000,000 La Paz/Yuma $ 3,000,000 $ 2,000,000 Maricopa $ 5,000,000 $ 4,000,000 Pima/Santa Cruz $ 4,500,000 $ 3,000,000 Cochise/Graham/ Greenlee $ 2,150,000 $ 2,000,000 Pinal/Gila $ 2,400,000 $ 2,000,000 Yavapai* $ 1,600,000 $ 1,600,000
* Yavapai’s minimum capitalization requirement for both new and existing offerors is limited to $150 times the estimated number of members. New Offerors: To be considered for a contract award in a given GSA or group of GSA’s, a new offerer must meet the minimum capitalization requirements listed above. The capitalization requirement is subject to a $10,000,000 ceiling regardless of the number of GSA’s awarded. This requirement is in addition to the
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Performance Bond requirements defined in Paragraphs 46 and 47 below and must be met with cash with no encumbrances, such as a loan subject to repayment. The capitalization requirement may be applied toward meeting the equity per member requirement (see Section D, Paragraph 50, Financial Viability Standards/Performance Guidelines) and is intended for use in operations of the Contractor. Continuing Offerors: Continuing offerors that are bidding a county or GSA in which they currently have a contract must meet the equity per member standard (see Section D, Paragraph 50, Financial Viability Standards/Performance Guidelines) for their current membership. Continuing offerors that do not meet the equity standard must fund, through capital contribution, the necessary amount to meet the minimum capitalization requirement. Continuing offerors that are bidding a new GSA must provide the additional capitalization for the new GSA they are bidding. The amount of the required capitalization for continuing offers may differ from that for new offerors due to size of the existing offerors current enrollment. (See the table of requirements by GSA above). Continuing offerors will not be required to provide additional capitalization if they currently meet the equity per member standard with their existing membership and their excess equity is sufficient to cover the proposed additional members, or they have at least $10,000,000 in equity.
46. PERFORMANCE BOND OR BOND SUBSTITUTE The Contractor shall be required to provide a performance bond of standard commercial scope issued by a surety company doing business in this State, an irrevocable letter of credit, or a cash deposit (“Performance Bond”) to AHCCCSA for as long as the Contractor has ABCCCS-related liabilities of $50,000 or more outstanding, or 15 months following the effective date of this contract, whichever is later, to guarantee: (1) payment of the “Contractor’s obligations to providers, non-contracting providers, and non-providers; and (2) performance by the Contractor of its obligations under this contract [42 CFR 438.116(a)(l) and (b)(l)]. The Performance Bond shall be in a form acceptable to AHCCCSA as described in the ACOM Performance Bond Policy available in the Bidder’s Library. In the event of a default by the Contractor, AHCCCSA shall, in addition to any other remedies it may have under this contract, obtain payment under the Performance Bond or substitute security for the purposes of the following: a. Paying any damages sustained by providers, non-contracting providers and non-providers by reason of a breach of the Contractor’s obligations under this contract, b. Reimbursing AHCCCSA for any payments made by AHCCCSA on behalf of the Contractor, and c. Reimbursing AHCCCSA for any extraordinary administrative expenses incurred by reason of a breach of the Contractor’s obligations under this contract, including, but not limited to, expenses incurred after termination of this contract for reasons other than the convenience of the State by AHCCCSA. In the event AHCCCSA agrees to accept substitute security in lieu of the Performance Bond, irrevocable letter of credit or cash deposit, the Contractor agrees to execute any and all documents and perform, any and all acts necessary to secure and enforce AHCCCSA’s security interest in such substitute security including, but not limited to, security agreements and necessary UCC filings pursuant to the Arizona Uniform Commercial Code. In the event such substitute security is agreed to and accepted by AHCCCSA, the Contractor acknowledges that it has granted AHCCCSA a security interest in such substitute security to secure performance of its obligations under this contract. The Contractor is solely responsible for establishing the credit-worthiness of all forms of substitute security. AHCCCSA may, after written notice to the Contractor, withdraw its permission for substitute security, in which case the Contractor shall provide AHCCCSA with a form of security described above. The Contractor may not change the amount, duration or scope of the performance bond without prior written approval from AHCCCSA, Division of Health Care Management.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 The Contractor must request an annual acceptance from AHCCCSA when a substitute security in lieu of the performance bond, irrevocable letter of credit or cash deposit is established. The Contractor shall not leverage the bond for another loan or create other creditors using the bond as security.
47. AMOUNT OF PERFORMANCE BOND The initial amount of the Performance Bond shall be equal to 80% of the total capitation payment expected to be paid to the Contractor in the first month of the contract year, or as determined by AHCCCSA. The total capitation amount shall include delivery and hospital supplemental payments. This requirement must be satisfied by the Contractor no later than 30 days after notification by AHCCCSA of the amount required. Thereafter, AHCCCSA shall evaluate the enrollment statistics of the Contractor on a monthly basis to determine if the Performance Bond must be increased. The Contractor shall have 30 days following notification by AHCCCSA to increase the amount of the Performance Bond. The Performance Bond amount that must be maintained after the contract term shall be sufficient to cover all outstanding liabilities and will be determined by AHCCCSA. The Contractor may not change the amount of the performance bond without prior written approval from AHCCCS, Division of Health Care Management. Refer to the ACOM Performance Bond and Equity Per Member Policy for more details.
48. ACCUMULATED FUND DEFICIT The Contractor and its owners shall fund any accumulated fund deficit through capital contributions in a form acceptable to AHCCCSA within 30 days after receipt by AHCCCSA of the final audited financial statements, or as otherwise requested by AHCCCSA. AHCCCSA may, at its option, impose enrollment caps in any or all USA’s as a result of an accumulated deficit, even if unaudited.
49. ADVANCES, DISTRIBUTIONS, LOANS AND INVESTMENTS The Contractor shall not, without the prior approval of AHCCCSA, make any advances, distributions, loans or loan guarantees to related parties or affiliates including another fund or line of business within its organization. The Contractor shall not, without prior notification to AHCCCSA, make advances to its subcontractors in excess of $50,000. All requests for prior approval and notifications are to be submitted to the AHCCCSA Division of Health Care Management.
50. FINANCIAL VIABILITY STANDARDS / PERFORMANCE GUIDELINES AHCCCSA has established financial viability standards/performance guidelines. On a quarterly basis, AHCCCSA will review the following ratios with the purpose of monitoring the financial health of the Contractor. The two financial viability standards, the Current Ratio and Equity per Member, are the standards that best represent the financial solvency of the Contractor. Therefore, the Contractor must comply with these two financial viability standards. AHCCCSA will also monitor the Medical Expense Ratio, the Administrative Cost Percentage, and the RBUC’s Days Outstanding. These guidelines are analyzed as part of AHCCCSA’s due diligence in financial statement monitoring. Sanctions will not automatically be imposed if the Contractor does not meet these performance guidelines. AHCCCSA takes into account Contractors’ unique programs for managing care and improving the heath status of members when analyzing medical expense and administrative ratio results. However, if a critical combination of the Financial Viability Standards and Performance Guidelines are not met, or if a Contractor’s experience differs significantly from other Contractors’, additional monitoring, such as monthly reporting, may be required.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
FINANCIAL VIABILITY STANDARDS
Current Ratio Current assets divided by current liabilities. “Current assets” includes any long-term investments that can be converted to cash within 24 hours without significant penalty (i.e., greater than 20%). A request to include long-term investments that can be converted to cash within 24 hours in the current ratio calculation must be sent to AHCCCS, DHCM, within 30 days of the contract start date and within 30 days of contract renewal).
Standard: At least 1.00
If current assets include a receivable from a parent company, the parent company must have liquid assets that support the amount of the inter- company loan.
Equity per Member Unrestricted equity, less on-balance sheet performance bond, divided by the number of non-SOBRA Family Planning Extension Services members enrolled at the end of the period.
Standard: At least $150 for Contractors with enrollment < 100,000 $100 for Contractors with enrollment of 100,000+
For purposes of this measurement, the equity will be measured according to the “Performance Bond and Equity per Member Requirements” policy effective October 1, 2007.
(Failure to meet this standard may result in an enrollment cap being imposed in any or all contracted GSAs.)
PERFORMANCE GUIDELINES
Medical Expense Ratio Total medical expenses divided by the sum of total capitation + Delivery Supplement + Hospital Supplemental Payment + TPL + Reinsurance + HIV/AIDS Supplement less premium tax
Standard: At least 84%
Administrative Cost Percentage Total administrative expenses divided by the sum of total capitation + Delivery Supplement + Hospital Supplemental Payment + TPL + Reinsurance + HIV/AIDS Supplement less premium tax
Standard: No more than 10%
Received But Unpaid Claims (Days Received but unpaid claims divided by the average daily medical expenses for Outstanding) the period, net of sub-capitation expense.
Standard: No more than 30 days
51. SEPARATE INCORPORATION
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Within 60 days of contract award, a non-governmental contractor shall have established a separate corporation for the purposes of this contract, whose sole activity is the performance of contract function with AHCCCS.
52. MERGER, REORGANIZATION AND CHANGE OF OWNERSHIP A proposed merger, reorganization or change in ownership of the Contractor shall require prior approval of AHCCCSA and a subsequent contract amendment. The Contractor must submit a detailed merger, reorganization and/or transition plan to AHCCCSA, Division of Health Care Management, for review. The purpose of the plan review is to ensure uninterrupted services to members, evaluate the new entity’s ability to support the provider network, ensure that services to members are not diminished and that major components of the organization and AHCCCS programs are not adversely affected by such merger, reorganization or change in ownership.
53. COMPENSATION The method of compensation under this contract will be Prior Period Coverage (PPC) capitation, prospective capitation, delivery supplement, hospitalized supplement for Medical Expense Deduction (MED) members, HIV-AIDS supplement, reinsurance and third party liability, as described and defined within this contract and appropriate laws, regulations or policies. Actuaries establish the capitation rates using practices established by the Actuarial Standards Board. AHCCCS provides the following data to its actuaries to establish rates for the purposes of rebasing the capitation rates. a. Utilization and unit cost data derived from reported encounters
b. Both Audited and unaudited financial statements reported by Contractors
c. Local market basket inflation trends
d. AHCCCS fee for service schedule pricing adjustments
e. Programmatic or Medicaid covered service changes that affect reimbursement
f. Additional administrative requirements for Contractors
g. Other changes to medical practices that affect reimbursement AHCCCS adjusts its rates to best match payment to risk. This further ensures the actuarial basis for the capitation rates. The following risk factors will be included: a. Reinsurance (as described in Paragraph 57)
b. HIV/AIDS supplemental payment
c. Age/Gender for the 1931 (b), SOBRA, KidsCare and BCCTP eligibility groups
d. Medicare enrollment for SSI members
e. Delivery supplemental payment
f. Hospitalized supplemental payments for MED members
g. Geographic Service Area adjustments
h. Risk sharing for Title XIX Waiver Group reimbursement (if applicable)
i. Risk sharing for PPC reimbursement
j. Member choice statistic for Title XIX Waiver Group
k. Member share of cost amounts The above information is reviewed by AHCCCS’ actuaries in renewal years to determine if adjustments are necessary to maintain actuarially sound rates. A Contractor may cover services for members that are not covered under the State Plan; however those services are not included in the data provided to actuaries for setting capitation rates [42 CFR 438.6(e)]. In addition to the above data used to review the appropriateness of capitation rates, during renewal years, AHCCCS may look at other factors that potentially impact appropriate
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 reimbursement including the medical cost experience of members who exercise their right to choose a contractor upon initial enrollment versus those who are auto assigned to a contractor. Prospective Capitation: The Contractor will be paid capitation for all prospective member months, including partial member months. This capitation includes the cost of providing medically necessary covered services to members during the prospective period coverage. Prior Period Coverage (PPC) Capitation: Except for SOBRA Family Planning, KidsCare and HIFA Parents, the Contractor will be paid capitation for all PPC member months, including partial member months. This capitation includes the cost of providing medically necessary covered services to members during prior period coverage. The PPC capitation rates will be set by AHCCCSA and will be paid to the Contractor along with the prospective capitation described below. Contractors will not receive PPC capitation for newborns of members who were enrolled at the time of delivery. Reconciliation of PPC Costs to Reimbursement: AHCCCSA will reconcile the Contractor’s PPC medical cost expenses to PPC capitation paid to the Contractor during the year. This reconciliation will limit the Contractor’s profits and losses to 2%. Any losses in excess of 2% will be reimbursed to the Contractor, and likewise, profits in excess of 2% will be recouped. Encounter data will be used to determine medical expenses. Refer to the ACOM. PPC Reconciliation Policy for further details. Risk Sharing for Title XIX Waiver Members: Effective October 1, 2006, AHCCCSA will no longer reconcile the prospective Title XIX Waiver Member population (TWG). The PPC TWG population will be reconciled with the PPC reconciliation, referred to above. Capitation rates will be adjusted where necessary. Delivery Supplement: When the Contractor has an enrolled woman who delivers during a prospective enrollment period, the Contractor will be entitled to a supplemental payment. Supplemental payments will not apply to women who deliver in a prior period coverage time period. AHCCCSA reserves the right at any time during the term of this contract to adjust the amount of this payment for women who deliver at home. The delivery supplemental payment is not made if the hospitalized supplemental payment has already been paid. Hospitalized Supplemental Payment: If an MED member is an inpatient on the date of application for AHCCCS eligibility, and the date of application falls within the member’s eligibility period, the Contractor is entitled to a supplemental payment to help defray costs related to the inpatient stay. The payment is a one-time supplement that is paid when the member is enrolled with the Contractor and is subject to review during the term of the contract. If the member has Medicare Part A or other third party insurance coverage, they will not be eligible for the supplemental payment. HIV-AIDS Supplement: On a quarterly basis, the Contractor shall submit to AHCCCSA, Division of Health Care Management, an unduplicated monthly count of members, by rate code, who are using approved HIV/AIDS drugs along with the supporting pharmacy log. The report shall be submitted, along with the quarterly financial reporting package, within 60 days after the end of each quarter. AHCCCSA reserves the right to recoup any amounts paid for ineligible members as well as an associated penalty for incorrect encounter reporting. The approved HIV/AIDS drug list is located on the AHCCCS website at www.azahcccs.gov. Refer to the ACOM Contractor HIV/AIDS Supplemental Payments Policy for further details and requirements.
54. PAYMENTS TO CONTRACTORS Subject to the availability of funds, AHCCCSA shall make payments to the Contractor in accordance with the terms of this contract provided that the Contractor’s performance is in compliance with the terms and conditions of this contract. Payment must comply with requirements of A.R.S. Title 36. AHCCCSA reserves the option to
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 make payments to the Contractor by wire or National Automated Clearing House Association (NACHA) transfer and will provide the Contractor at least 30 days notice prior to the effective date of any such change. Where payments are made by electronic funds transfer, AHCCCSA shall not be liable for any error or delay in transfer or indirect or consequential damages arising from the use of the electronic funds transfer process. Any charges or expenses imposed by the bank for transfers or related actions shall be borne by the Contractor. Except for adjustments made to correct errors in payment, and as otherwise specified in this section, any savings remaining to the Contractor as a result of favorable claims experience and efficiencies in service delivery at the end of the contract term may be kept by the Contractor. All funds received by the Contractor pursuant to this contract shall be separately accounted for in accordance with generally accepted accounting principles. Except for funds received from the collection of permitted copayments and third-party liabilities, the only source of payment to the Contractor for the services provided hereunder is the Arizona Health Care Cost Containment System Fund. An error discovered by the State, with or without an audit, in the amount of fees paid to the Contractor will be subject to adjustment or repayment by AHCCCSA making a corresponding decrease in a current Contractor’s payment or by making an additional payment to the Contractor. When a contractor identifies an overpayment, AHCCCSA must be notified and reimbursed within 30 days of identification. No payment due the Contractor by AHCCCSA may be assigned or pledged by the Contractor. This section shall not prohibit AHCCCSA at its sole option from making payment to a fiscal agent hired by Contractor.
55. CAPITATION ADJUSTMENTS Except for changes made specifically in accordance with this contract, the rates set forth in Section B shall not be subject to re-negotiation or modification during the contract period. AHCCCSA may, at its option, review the effect of a program change and determine if a capitation adjustment is needed. In these instances the adjustment will be prospective with assumptions discussed with the Contractor prior to modifying capitation rates. The Contractor may request a review of a program change if it believes the program change was not equitable; AHCCCSA will not unreasonably withhold such a review. If the Contractor is in any manner in default in the performance of any obligation under this contract; AHCCCSA may, at its option and in addition to other available remedies, adjust the amount of payment until there is satisfactory resolution of the default. The Contractor shall reimburse AHCCCSA and/or AHCCCSA may deduct from future monthly capitation for any portion of a month during which the Contractor was not at risk due to, for example: a. death of a member b. member’s incarceration (not eligible for AHCCCS benefits from the date of incarceration) c. duplicate capitation to the same Contractor d. adjustment based on change in member’s contract type e. voluntary withdrawal If a member is enrolled twice with the same Contractor, recoupment will be made as soon as the double capitation is identified. AHCCCSA reserves the right to modify its policy on capitation recoupments at any time during the term of this contract.
56. INCENTIVES
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 AHCCCSA will be implementing an incentive program that utilizes financial and/or non-financial incentives to promote program quality. AHCCCSA will use contractor clinical performance indicators in the development of an incentive program. Examples of incentive programs are listed below. Auto assignment algorithm: Effective CYE ‘07, AHCCCSA will adjust the auto assignment algorithm methodology to incorporate contractor’s clinical performance indicator results in the calculation of target percentages. AHCCCSA will use the following performance indicators: Prenatal Care in the First Trimester, measurement period CYE 2005, reported in CYE 2006 Well-Child Visits 3-6 Years, measurement period CYE 2005, reported in CYE 2006 Administrative requirements: AHCCCSA may elect to reduce Operational Financial Review (OFR) requirements for high performing contractors.
57. REINSURANCE Reinsurance is a stop-loss program provided by AHCCCSA to the Contractor for the partial reimbursement of covered services, as described below, for a member with an acute medical condition beyond an annual deductible level, AHCCCSA “self-insures” the reinsurance program through a deduction to capitation rates that is intended to be budget neutral. Refer to the AHCCCSA Reinsurance Claims Processing Manual for further details on the Reinsurance Program.
Inpatient Reinsurance Inpatient reinsurance covers partial reimbursement of covered inpatient facility medical services. See the table below for applicable deductible levels and coinsurance percentages. The coinsurance percent is the rate at which AHCCCSA will reimburse the Contractor for covered inpatient services incurred above the deductible. The deductible is the responsibility of the Contractor. Per diem rates paid for nursing facility services provided within 30 days of an acute hospital stay, including room and board, provided in lieu of hospitalization for up to 90 days in any contract year shall be eligible for reinsurance coverage. The following table represents deductible and coinsurance levels:
Title XIX Waiver Group Annual Deductible* Annual Deductible Statewide Plan Prospective Prospective Enrollment Reinsurance Reinsurance Coinsurance 0-34,999 $ 20,000 $ 15,000 75% 35,000-49,999 $ 35,000 $ 15,000 75% 50,000 and over $ 50,000 $ 15,000 75%
* applies to all members except for Title XIX Waiver Group, SSDI-TMC and SOBRA Family Planning members a) Prospective Reinsurance: This coverage applies to prospective enrollment periods. The deductible level is based on the Contractor’s statewide AHCCCS acute care enrollment (not including SOBRA Family Planning Extension services) as of October 1st each contract year for all rate codes and counties, as shown in the table above. AHCCCSA will adjust the Contractor’s deductible level at the beginning of a contract year if the Contractor’s enrollment changes to the next enrollment level. A Contractor at the $35,000 or $50,000 deductible level may elect a lower deductible prior to the beginning of a new contract year. These deductible
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 levels are subject to change by AHCCCSA during the term of this contract. Any change will have a corresponding impact on capitation rates. b) Prior Period Coverage Reinsurance: Effective October 1, 2007, AHCCCSA will no longer cover PPC inpatient expenses under the reinsurance program for any members. c) Title XIX Waiver Members: A separate reinsurance deductible for the Title XIX Waiver Group applies for the prospective coverage time period.
Catastrophic Reinsurance The reinsurance program includes a special Catastrophic Reinsurance program. This program encompasses members diagnosed with hemophilia, von Willebrand’s Disease, and Gaucher’s Disease. For additional detail and restrictions refer to the AHCCCS Reinsurance Claims Processing Manual and the AMPM. There are no deductibles for catastrophic reinsurance cases. All medically necessary covered services provided during the contract year shall be eligible for reimbursement at 85% of the AHCCCS allowed amount or the Contractor’s paid amount, depending on subcap code. Reinsurance coverage for anti-hemophilic blood factors will be limited to 85% of the AHCCCS contracted amount or the Contractor’s paid amount, whichever is lower. Capitation rates may be adjusted to reflect any cost savings resulting from the implementation of the AHCCCS anti-hemophilic blood factor contract. All catastrophic claims are subject to medical review by AHCCCSA. The Contractor shall notify AHCCCSA, Division of Health Care Management, Reinsurance Unit, of cases identified for catastrophic reinsurance coverage within 30 days of (a) initial diagnosis, (b) enrollment with the Contractor, and (c) the beginning of each contract year. Catastrophic reinsurance will be paid for a maximum 30-day-retroactive period •from the date of notification to AHCCCSA. The determination of whether a case or type of case is catastrophic shall be made by the Director or designee based on the following criteria; 1) severity of medical condition including prognosis; and 2) the average cost or average length of hospitalization and medical care, or both, in Arizona, for the type of case under consideration. HEMOPHILIA: Catastrophic reinsurance coverage is available for all members diagnosed with Hemophilia (ICD9 codes 286.0, 286.1, 286.2). VON WILLEBRAND’S DISEASE: Catastrophic reinsurance coverage is available for all members diagnosed with von Willebrand’s Disease who are non- DDAVP responders and dependent on Plasma Factor VIII. GAUCHER’S DISEASE: Catastrophic reinsurance is available for members diagnosed with Gaucher’s Disease classified as Type I and are dependent on enzyme replacement therapy.
Transplants This program covers members who are eligible to receive covered major organ and tissue transplantation including bone marrow, heart, heart/lung, lung, liver, kidney, and other organ transplantation. Bone grafts and cornea transplantation services are not eligible for transplant reinsurance coverage but are eligible under the regular inpatient reinsurance program. Refer to the AMPM for covered services for organ and tissue transplants. Reinsurance coverage for transplants is limited to 85% of the AHCCCS contract amount for the transplantation services rendered, or 85% of the Contractor’s paid amount, whichever is lower. The AHCCCS contracted transplantation rates may be found in the Bidder’s Library. When a member is referred to a transplant facility for an AHCCCS-covered organ transplant, the Contractor shall notify AHCCCSA, Division of Health Care Management.
Other
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 For all reinsurance case types other than transplants, Contractors will be reimbursed 100% for all medically necessary covered expenses provided in a contract year, after the reinsurance case reaches $650,000.
Encounter Submission and Payments for Reinsurance a) Encounter Submission: A Contractor shall prepare, review, verify, certify, and submit, encounters for consideration to AHCCCSA. Upon submission, the Contractor certifies that the services listed were actually rendered. The encounters must be submitted in the format prescribed by AHCCCSA. The Contractor must initiate and evaluate an encounter for probable 1st and 3rd party liability before submitting the encounter for reinsurance consideration, unless the encounter involves underinsured or uninsured motorist liability insurance, 1st and 3rd party liability insurance or a tort feasor. The Contractor must maintain evidence that costs incurred have been paid by the Contractor before submitting reinsurance encounters. This information is subject to AHCCCSA review. Collections from lst and 3rd parties should be reflected by the Contractor as reductions in the encounters submitted on a dollar- for-dollar basis. For purposes of AHCCCSA reinsurance, payments made by Contractor-purchased reinsurance are not considered l st and 3rd party collections. All reinsurance claims must reach a clean claim status within fifteen months from the end date of service, or date of eligibility posting, whichever is later. Encounters for reinsurance claims that have passed the fifteen month deadline and are being adjusted due to a claim dispute or hearing decision must be submitted and pass all encounter and reinsurance edits within 90 calendar days of the date of the claim dispute decision or hearing decision, whichever is applicable. Failure to submit the encounter within this timeframe will result in the loss of any related reinsurance dollars. b) Encounter Processing: AHCCCSA will accept for processing only those encounters that are submitted directly by an AHCCCS Contractor and that comply with the AHCCCSA Encounter Reporting User Manual. c) Payment of Inpatient and Catastrophic Reinsurance Cases: AHCCCSA will reimburse a Contractor for costs incurred in excess of the applicable deductible level, subject to coinsurance percentages and Medicare/TPL payment, less any applicable quick pay discounts, slow payment penalties and interest. Amounts in excess of the deductible level shall be paid based upon costs paid by the Contractor, minus the coinsurance and Medicare/TPL payment, unless the costs are paid under a subcapitated arrangement. In subcapitated arrangements, the Administration shall base reimbursement of reinsurance encounters on the lower of the AHCCCS allowed amount or the reported health plan paid amount, minus the coinsurance and Medicare/TPL payment and applicable quick pay discounts, slow payment penalties and interest. Reimbursement for these reinsurance benefits will be made to the Contractor each month. When a member with an annual enrollment choice changes Contractors within a contract year, for reinsurance purposes, all eligible inpatient costs, nursing facility costs and inpatient psychiatric costs incurred for that member will follow the member to the receiving contractor. Therefore, all submitted encounters from the contractor the member is leaving (for dates of service within the current contract year) will be applied toward, but not exceed, the receiving contractor’s deductible level. For further details regarding this policy and other reinsurance policies refer to the AHCCCS Reinsurance Claims Processing Manual. d) Payment of Transplant Reinsurance Cases: Reinsurance benefits are based upon the lower of the AHCCCS contract amount or the Contractor’s paid amount, subject to coinsurance percentages. Effective for dates of service on or after October 1, 2004, Contractors are required to submit all supporting service encounters for transplant services. Reinsurance payments will be linked to transplant encounter submissions. Please refer to the AHCCCS Reinsurance Claims Processing Manual for the appropriate billing of transplant services. Reimbursement for these reinsurance benefits will be made to the Contractor each month.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
Reinsurance Audits For CYE 2002, CYE 2003, CYE 2004, and CYE 2005, the Reinsurance Audit Process as described in contract is discontinued. No audit related recoupments will be made on reinsurance payments made for services delivered in the above listed contract years. Pre-Audit: Beginning in CYE 2006 medical audits on prospective and prior period coverage reinsurance cases will be conducted on a statistically significant random sample selected based on utilization trends. The Division of Health Care Management will select reinsurance cases based on encounter data received during the contract year to assure timeliness of the audit process. The Contractor will be notified of the documentation required for the medical audit. For closed contracts, a 100% audit may be conducted. Audit: AHCCCSA will give the Contractor at least 45 days advance notice of any audit. The Contractor shall have all requested medical records and financial documentation available to the nurse auditors. Any documents not requested in advance by AHCCCSA shall be made available upon request of the Audit Team during the course of the audit. The Contractor representative shall be available to the Audit Team at all times during AHCCCSA audit activities. If an audit should be conducted on-site, the Contractor shall provide the Audit Team with workspace, access to a telephone, electrical outlets and privacy for conferences. Audits may be completed without an on-site visit. For these audits, the Contractor will be asked to send the required documentation to AHCCCSA. The documentation will then be reviewed by AHCCCS. Audit Considerations: Reinsurance consideration will be given to inpatient facility contracts and hearing decisions rendered by the Office of Legal Assistance. Pre-hearing and/or hearing penalties discoverable during the review process will not be reimbursed under reinsurance. Per diem rates may be paid for nursing facility and rehabilitation services provided the services are rendered within 30 days of an acute hospital stay, including room and board, provided in lieu of hospitalization for up to 90 days in any contract year. The services rendered in these sub-acute settings must be of an acute nature and, in the case of rehabilitative or restorative services, steady progress must be documented in the medical record. Audit Determinations: The Contractor will be furnished a copy of the Reinsurance Post-Audit Results letter approximately 45 days after the audit and given an opportunity to comment and provide additional medical or financial documentation on any audit findings. AHCCCSA may limit reinsurance reimbursement to a lower or alternative level of care if the Director or designee determines that the less costly alternative could and should have been used by the Contractor. A recoupment of reinsurance reimbursements made to the Contractor may occur based on the results of the medical audit. A Contractor whose reinsurance case is reduced or denied shall be notified in writing by AHCCCSA and will be informed of rationale for reduction or denial determination and the applicable grievance and appeal process available.
58. COORDINATION OF BENEFITS / THIRD PARTY LIABILITY Pursuant to federal and state law, AHCCCSA is the payer of last resort. This means AHCCCSA shall be used as a source of payment for covered services only after all other sources of payment have been exhausted. The Contractor shall coordinate benefits in accordance with 42 CFR 433.135 et seq., ARS 36- 2903, and A.A.C. R9-22-1001 et seq. so that costs for services otherwise payable by the Contractor are cost avoided or recovered from a liable first or third- party payer. The Contractor may require subcontractors to be responsible for coordination of benefits for services provided pursuant to this contract. The two methods used in the coordination of benefits are cost avoidance and post payment recovery. The Contractor shall use these methods as described in A.A.C. R9-22-1001 et seq. and federal and state law. See also Section D, Paragraph 60, Medicare Services and Cost Sharing.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Cost Avoidance: The Contractor shall take reasonable measures to determine the legal liability of third parties who are liable to pay for covered services. The Contractor shall cost-avoid a claim if it establishes the probable existence of a third party or has information that establishes that third party liability exists. However, if the probable existence of third party liability cannot be established or third party liability benefits are not available to pay the claim at the time the claim is filed, the Contractor must process the claim. If a third party insurer (other than Medicare) requires the member to pay any co-payment, coinsurance or deductible, the Contractor is responsible for making these payments, even if the services are provided outside of the Contractor network. The Contractor is not responsible for paying coinsurance and deductibles that are in excess of what the Contractor would have paid for the entire service per a written contract with the provider performing the service, or the AHCCCS FFS payment equivalent. If the Contractor refers the member for services to a third-party insurer, other than Medicare, and the insurer requires payment in advance of all co-payments, coinsurance and deductibles, the Contractor must make such payments in advance. If the Contractor knows that the third party insurer will not pay the claim for a covered service due to untimely claim filing or as a result of the underlying insurance coverage (e.g. the service is not a covered benefit), the Contractor shall not deny the service, deny payment of the claim based on third party liability, or require a written denial letter if the service is medically necessary. The Contractor shall communicate any known change in health insurance information, including Medicare, to AHCCCS Administration, Division of Member Services, not later than 10 days from the date of discovery using the approved AHCCCS correspondence. Failure to report these cases may result in one of the remedies specified in Section D, Paragraph 72, Sanctions. If the Contractor does not know whether a particular service is covered by the third party, and the service is medically necessary, the Contractor shall contact the third party and determine whether or not such service is covered rather than requiring the member to do so. In the event that the service is not covered by the third party, the Contractor shall arrange for the timely provision of the service. (See also Section D, Paragraph 60, Medicare Services and Cost Sharing.) The requirement to cost-avoid applies to all AHCCCS covered services. For prenatal care and preventive pediatric services, AHCCCS may require the Contractor to provide such service and then coordinate payment with the potentially liable third party (“pay and chase”). In emergencies, the Contractor shall provide the necessary services and then coordinate payment with the third-party payer. The Contractor shall also provide medically necessary transportation so the member can receive medical benefits. Further, if a service is medically necessary, the Contractor shall ensure that its cost avoidance efforts do not prevent a member from receiving such service and that the member shall not be required to pay any coinsurance or deductibles for use of the other insurer’s providers.
Members with CRS condition: A member with private insurance is not required to utilize CRSA. This includes members with Medicare whether they are enrolled in Medicare FFS or a Medicare Managed Care Plan. If the member uses the private insurance network or Medicare for a CRS covered condition, the Contractor is responsible for all applicable deductibles and copayments. If the member is on Medicare, the AHCCCS Policy 201- Medicare Cost Sharing for Members in Traditional Fee for Service Medicare and Policy 202 — Medicare Cost Sharing for Members in Medicare Managed Care Plans shall apply. When the private insurance or Medicare is exhausted, or certain annual or lifetime limits are reached with respect to CRS covered conditions, the Contractor shall refer the member to CRSA for determination for CRS services. If the member with private insurance or Medicare chooses to enroll with CRS, CRS becomes the secondary payer responsible for all applicable deductibles and copayments. The Contractor is not responsible to provide services in instances when the CRS eligible member, who has no primary insurance or Medicare, refuses to receive CRS covered services through the CRS Program. If the Contractor becomes aware that a member with a CRS covered condition refuses to participate in the CRS application process or refuses to receive services through the CRS Program, the member may be billed by the provider in accordance with AHCCCS regulations regarding billing for unauthorized services.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Post-payment Recoveries: Post-payment recovery is necessary in cases where the Contractor was not aware of third-party coverage at the time services were rendered or paid for, or was unable to cost-avoid. The Contractor shall identify, through the use of trauma code edits, utilizing diagnostic codes 799.9 and 800 to 999.9 (excluding code 994.6), and other procedures. The Contractor shall notify AHCCCSA’s authorized representative within 10 business days of the identification of a third-party liability case with reinsurance or fee-for service payments made by AHCCCS. Failure to report these cases may result in one of the remedies specified in Section D, Paragraph 72, Sanctions. The Contractor shall identify all potentially liable third parties and pursue reimbursement from them except in the circumstances below. The Contractor shall not pursue reimbursement in the following circumstances, unless the case has been referred to the Contractor by AHCCCSA or AHCCCSA’s authorized representative:
Uninsured/underinsured motorist insurance Restitution Recovery First-and third-party liability insurance Worker’s Compensation Tortfeasors, including casualty Estate Recovery Special Treatment Trust Recovery The Contractor shall report any cases involving the above circumstances to AHCCCSA’s authorized representative should the Contractor identify such a situation. The Contractor shall cooperate with AHCCCSA’s authorized representative in all collection efforts. In joint cases involving both AHCCCS fee-for- service or reinsurance and the Contractor, AHCCCSA’s authorized representative is responsible for performing all research, investigation and payment of lien- related costs, subsequent to the referral of any and all relevant case information to AHCCCSA’s authorized representative by the Contractor. AHCCCSA’s authorized representative is also responsible for negotiating and acting in the best interest of all parties to obtain a reasonable settlement in joint cases and may compromise a settlement in order to maximize overall reimbursement, net of legal and other costs. The Contractor will be responsible for their prorated share of the contingency fee. The Contractor’s share of the contingency fee will be deducted from the settlement proceeds prior to AHCCCSA remitting the settlement to the Contractor. For total plan cases involving only payments made by the Contractor, the Contractor is responsible for performing all research, investigation, the mandatory filing of initial liens on cases that exceed $250, lien amendments, lien releases, and payment of other related costs in accordance with A.R.S. 36-2915 and A.R.S. 36-2916. The Contractor shall use the AHCCCS approved casualty recovery correspondence when filing liens and when corresponding to others in regard to casualty recovery. The Contractor may retain up to 100% of its third-party collections if all of the following conditions exist: a. Total collections received do not exceed the total amount of the Contractor’s financial liability for the member;
b. There are no payments made by AHCCCS related to fee-for-service, reinsurance or administrative costs (i.e. lien filing , etc.); and
c. Such recovery is not prohibited by state or Federal law. Reporting: The Contractor may be required to report the amount of third-party collections and cost avoidance. In addition, upon AHCCCSA’s request, the Contractor shall provide an electronic extract of the Casualty cases, including open and closed cases. Data elements include, but are not limited to: the member’s first and last name; AHCCCS ID; date of incident; claimed amount; paid/recovered amount; and case status. The AHCCCSA TPL Section shall provide the format and reporting schedule for this information to the Contractor. Prior to negotiating a settlement on a total plan case, the Contractor shall notify AHCCCSA to ensure that there is no reinsurance or fee for service payments that have been made by AHCCCS. For total plan cases, the contractor shall report settlement information to AHCCCS, utilizing the AHCCCS approved casualty recovery Notification of Settlement form, within 10 business days from the settlement date. Failure to report these cases may result in one of the remedies specified in Section D, Paragraph 72, Sanctions.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 AHCCCSA will provide the Contractor, on an agreed upon schedule, with a complete file of all third-party coverage information (other than Medicare) for the purpose of updating the Contractor’s files. The Contractor shall notify AHCCCSA of any known changes in coverage within deadlines and in a format prescribed by AHCCCSA. Title XXI (KidsCare), HIFA Parents and BCCTP: Eligibility for KidsCare, HIFA Parents and BCCTP benefits require that the applicant/member not be enrolled with any other creditable health insurance plan. If the Contractor becomes aware of any such coverage, the Contractor shall notify AHCCCSA immediately. AHCCCSA will determine if the other insurance meets the creditable definition in A.R.S. 36-2982(G). Contract Termination: Upon termination of this contract, the Contractor will complete the existing third party liability cases or make any necessary arrangements to transfer the cases to AHCCCSA’s authorized TPL representative.
59. COPAYMENTS Most of the AHCCCS members remain exempt from copayments while others are subject to an optional copayment. Those populations exempt or subject to optional copayments may not be denied services for the inability to pay the copayment. [42 CFR 438.108] Any copayments collected shall belong to the Contractor or its subcontractors. Attachment L provides detail of the populations and their related copayment structure.
60. MEDICARE SERVICES AND COST SHARING AHCCCS has members enrolled who are eligible for both Medicaid and Medicare. These members are referred to as “dual eligibles”. Generally, Contractors are responsible for payment of Medicare coinsurance and/or deductibles for covered services provided to dual eligible members. However, there are different cost sharing responsibilities that apply to dual eligible members based on a variety of factors. Unless prior approval is obtained from AHCCCSA, the Contractor must limit their cost sharing responsibility according to the ACOM Medicare Cost Sharing Policy. The Contractor shall have no cost sharing obligation if the Medicare payment exceeds what the Contractor would have paid for the same service of a non-Medicare member. When a person with Medicare who is also eligible for Medicaid (dual eligible) is in a medical institution that is funded by Medicaid for a full calendar month, the dual eligible person is not required to pay co-payments for their Medicare covered prescription medications for the remainder of the calendar year. To ensure appropriate information is communicated for these members to the Center for Medicare and Medicaid Services (CMS), effective January 1, 2006 the Contractor must, using the approved form, notify the AHCCCS Member File Integrity Section (MFIS), via fax at (602) 253-4807 as soon as it determines that a dual eligible person is expected to be in a medical institution that is funded by Medicaid for a full calendar month, regardless of the status of the dual eligible person’s Medicare lifetime or annual benefits. This includes: a. Members who have Medicare part “B” only;
b. Members who have used their Medicare part “A” life time inpatient benefit;
c. Members who are in a continuous placement in a single medical institution or any combination of continuous placements in a medical institution. For purposes of the medical institution notification, medical institutions are defined as acute hospitals, psychiatric hospital – Non IMD, psychiatric hospital – IMD, residential treatment center – Non IMD,
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 residential treatment center – IMD, skilled nursing facilities, and Intermediate Care Facilities for the Mentally Retarded.
61. MARKETING The Contractor shall submit all proposed marketing and outreach materials and events that will involve the general public to the AHCCCS Marketing Committee for prior approval in accordance with the ACOM Marketing Outreach and Incentives Policy. [42 CFR 438.104] The Contractor must have signed contracts with PCPs, specialists, dentists, and pharmacies in order for them to be included in marketing materials.
62. CORPORATE COMPLIANCE In accordance with A.R.S. Section 36-2918.01, all contractors are required to notify the AHCCCS, Office of Program Integrity (OPI) immediately of all suspected fraud or abuse. The Contractor agrees to promptly (within ten business days of discovery) inform OPI in writing of instances of suspected fraud or abuse [42 CFR 455.1(a)(l)]. This shall include acts of suspected fraud or abuse that were resolved internally but involved AHCCCS funds, contractors or sub-contractors. As stated in A.R.S. Section 13-2310, incorporated herein by reference, any person who knowingly obtains any benefit by means of false or fraudulent pretenses, representations, promises, or material omissions is guilty of a Class 2 felony. The Contractor agrees to permit and cooperate with any onsite review. A review by AHCCCS, OPI may be conducted without notice and for the purpose of ensuring program compliance. The Contractor also agrees to respond to electronic, telephonic or written requests for information within the timeframe specified by AHCCCSA. The Contractor shall be in compliance with 42 CFR 43S.608. The Contractor must have a mandatory compliance program, supported by other administrative procedures, that is designed to guard against fraud and abuse. The Contractor shall have written criteria for selecting a Compliance Officer and a job description that clearly outlines the responsibilities and the authority of the position. The Compliance Officer shall have the authority to access records and independently refer suspected member fraud, provider fraud and member abuse cases to AHCCCS, OPI or other duly authorized enforcement agencies. Pursuant to the Deficit Reduction Act of 2005 (DRA) the contractor will not be entitled to payment for services unless they establish a compliance program which shall both prevent and detect suspected fraud or abuse and must include: 1. Written policies, procedures, and standards of conduct that articulate the organization’s commitment to and processes for complying with all applicable federal and state standards.
2. The written designation of a compliance committee who are accountable to the Contractor’s top management.
3. The Compliance Officer must be an onsite management official who reports directly to the Contractor’s top management. Any exceptions must be approved by AHCCCSA.
4. Effective training and education.
5. Effective lines of communication between the compliance officer and the organization’s employees.
6. Enforcement of standards through well-publicized disciplinary guidelines.
7. Provision for internal monitoring and auditing.
8. Provision for prompt response to problems detected.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 9. A Compliance Committee which will be made up of, at a minimum, the Compliance Officer, a budgetary official and other executive officials with the authority to commit resources. The Compliance Committee will assist the Compliance Officer with monitoring, reviewing and assessing the effectiveness of the compliance program and timeliness of compliance reporting.
10. The Contractor must establish written policies for employees detailing: a. The federal False Claims Act provisions;
b. The administrative remedies for false claims and statements;
c. Any state laws relating to civil or criminal penalties for false claims and statements;
d. The whistleblower protections under such laws. 11. The Contractor must establish A process for training existing staff and new hires on the compliance program and on the items in section 10. All training must be conducted in such a manner that can be verified by AHCCCS.
12. The Contractor must require, through policies documented in the Provider Manual and subsequent contract amendments, that providers train their staff on the following aspects of the Federal False Claims Act provisions; • The administrative remedies for false claims and statements;
• Any state laws relating to civil or criminal penalties for false claims and statements;
• The whistleblower protections under such laws. The Contractor Provider. Manual must be updated to include the requirements listed above on or before January 1, 2007. Contracts must be amended according to the Contractor contract update schedule, but no later than April 1,2007 The Contractor is required to research potential overpayments identified by AHCCCS, OPI. After conducting a cost benefit analysis to determine if such action is warranted, the Contractor should attempt to recover any overpayments identified. The AHCCCS OPI shall be advised of the final disposition of the research and advised of actions, if any, taken by the Contractor.
63. RECORDS RETENTION The Contractor shall maintain books and records relating to covered services and expenditures including reports to AHCCCSA and working papers used in the preparation of reports to AHCCCSA. The Contractor shall comply with all specifications for record keeping established by AHCCCSA. All books and records shall be maintained to the extent and in such detail as required by AHCCCS Rules and policies. Records shall include but not be limited to financial statements, records relating to the quality of care, medical records, prescription files and other records specified by AHCCCSA. The Contractor agrees to make available, at all reasonable times during the term of this contract, any of its records for inspection, audit or reproduction by any authorized representative of AHCCCSA, State or Federal government. The Contractor shall be responsible for any costs associated with the reproduction of requested information. The Contractor shall preserve and make available all records for a period of five years from the date of final payment under this contract. HIPAA related documents must be retained for a period of six years per 45 CFR 164.530(j). If this contract is completely or partially terminated, the records relating to the work terminated shall be preserved and made available for a period of five years from the date of any such termination. Records which relate to grievances, disputes, litigation or the settlement of claims arising out of the performance of this contract, or costs and expenses of this contract to which exception has been taken by AHCCCSA, shall be retained by the Contractor for a period of five years after the date of final disposition or resolution thereof.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
64. DATA EXCHANGE REQUIREMENTS The Contractor is authorized to exchange data with AHCCCSA relating to the information requirements of this contract and as required to support the data elements to be provided AHCCCSA in the formats prescribed by AHCCCSA and in formats prescribed by the Health Insurance Portability and Accountability Act (HIPAA). Details for the formats may be found in the draft HIPAA Transaction Companion Documents & Trading Partner Agreements, and in the AHCCCS Technical Interface Guidelines, available in the Bidder’s Library. The information so recorded and submitted to AHCCCSA shall be in accordance with all procedures, policies, rules, or statutes in effect during the term of this contract. If any of these procedures, policies, rules, regulations or statutes are hereinafter changed both parties agree to conform to these changes following appropriate notification to both parties by AHCCCSA. The Contractor is responsible for any incorrect data, delayed submission or payment (to the Contractor or its subcontractors), and/or penalty applied due to any error, omission, deletion, or erroneous insert caused by Contractor-submitted data. Any data that does not meet the standards required by AHCCCSA shall not be accepted by AHCCCSA. The Contractor is responsible for identifying any inconsistencies immediately upon receipt of data from AHCCCSA. If any unreported inconsistencies are subsequently discovered, the Contractor shall be responsible for the necessary adjustments to correct its records at its.own expense. The Contractor shall accept from AHCCCSA original evidence of eligibility and enrollment in a form appropriate for electronic data exchange. Upon request by AHCCCSA, the Contractor shall provide to AHCCCSA updated date sensitive PCP assignments in a form appropriate for electronic data exchange. The Contractor shall be provided with a Contractor-specific security code for use in all data transmissions made in accordance with contract requirements. Each data transmission by the Contractor shall include the Contractor’s security code. The Contractor agrees that by use of its security code, it certifies that any data transmitted is accurate and truthful, to the best of the Contractor’s Chief Executive Officer, Chief Financial Officer or designee’s knowledge [42 CFR 438.606]. The Contractor further agrees to indemnify and hold harmless the State of Arizona and AHCCCSA from any and all claims or liabilities, including but not limited to consequential damages, reimbursements or erroneous billings and reimbursements of attorney fees incurred as a consequence of any error, omission, deletion or erroneous insert caused by the Contractor in the submitted input data. Neither the State of Arizona nor AHCCCSA shall be responsible for any incorrect or delayed payment to the Contractor’s AHCCCS services providers (subcontractors) resulting from such error, omission, deletion, or erroneous input data caused by the Contractor in the submission of AHCCCS claims. The costs of software changes are included in administrative costs paid to the Contractor, There is no separate payment for software changes. A PMMIS systems contact will be assigned after contract award. AHCCCSA will work with the contractors as they evaluate Electronic Data Interchange options. Health Insurance Portability and Accountability Act (HIPAA): The Contractor shall comply with the Administrative Simplification requirements of Subpart F of the HIPAA of 1996 (Public Law 107–191,110 Statutes 1936) and all Federal regulations implementing that Subpart that are applicable to the operations of the Contractor by the dates required by the implementing Federal regulations.
65. ENCOUNTER DATA REPORTING The accurate and timely reporting of encounter data is crucial to the success of the AHCCCS program. AHCCCSA uses encounter data to pay reinsurance benefits, set fee-for-service and capitation rates, determine disproportionate share payments to hospitals, and to determine compliance with performance standards. The
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 Contractor shall submit encounter data to AHCCCSA for all services for which the Contractor incurred a financial liability and claims for services eligible for processing by the Contractor where no financial liability was incurred, Including services provided during prior period coverage. This requirement is a condition of the CMS grant award. [42 CFR438.242(b)(l)] A Contractor shall prepare, review, verify, certify, and submit, encounters for consideration to AHCCCSA. Upon submission, the Contractor certifies that the services listed were actually rendered [42 CFR 455.1 (a)(2)]. The encounters must be submitted in the format prescribed by AHCCCSA. Encounter data must be provided to AHCCCSA by electronic media and should be received by AHCCCSA no later than 240 days after the end of the month in which the service was rendered, or the effective date of the enrollment with the Contractor, whichever date is later. Requirements for encounter data are described in the AHCCCSA Encounter Manual and the AHCCCSA Encounter Companion Document, The Encounter Submission Requirements are included herein as Attachment L Refer to Paragraph 64, Data Exchange Requirements, for further information. An Encounter Submission Tracking Report must be maintained and made available to AHCCCSA upon request. The Tracking Report’s purpose is to link each claim to an adjudicated or pended encounter returned to the Contractor. Further information regarding the Encounter Submission Tracking Report may be found in The AHCCCSA Encounter Reporting User’s Manual. Twice each month AHCCCSA provides the Contractor with full replacement files containing provider and medical procedure coding information. These files should be used to assist the Contractor in accurate Encounter Reporting. Refer to Paragraph 64, Data Exchange Requirements, for further information.
66. ENROLLMENT AND CAPITATION TRANSACTION UPDATES AHCCCSA produces daily enrollment transaction updates identifying new members and changes to members’ demographic, eligibility and enrollment data, which the Contractor shall use to update its member records. The daily enrollment transaction update, which is run prior to the monthly enrollment and capitation transaction update, is referred to as the “last daily” and will contain all rate code changes made for the prospective month, as well as any new enrollments and disenrollments. AHCCCSA also produces a daily Manual Payment Transaction, which identifies enrollment or disenrollment activity that was not included on the daily enrollment transaction update due to internal edits. The Contractor shall use the Manual Payment Transaction in addition to the daily enrollment transaction update to update its member records. A weekly capitation transaction will be produced to provide contractors with member-level capitation payment information. This file will show changes to the prospective capitation payments, as sent in the monthly file, resulting from enrollment changes that occur after the monthly file is produced. This file will also identify mass adjustments to and/or manual capitation payments that occurred at AHCCCS after the monthly file is produced. The monthly enrollment and monthly capitation transaction updates are generally produced two days before the end of every month. The update will identify the total active population for the Contractor as of the first day of the next month. These updates contain the information used by AHCCCSA to produce the monthly capitation payment for the next month. The Contractor will reconcile their member files with the AHCCCS monthly update. After reconciling the monthly update information, the Contractor resumes posting daily updates beginning with the last two days of the month. The last two daily updates are different from the regular daily updates in that they pay and/or recoup capitation into the next month. If the Contractor detects an error through the monthly update process, the Contractor shall notify AHCCCSA, Division of Health Care Management.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001
Refer to Paragraph 64, Data Exchange Requirements, for further information.
67. PERIODIC REPORT REQUIREMENTS AHCCCSA, under the terms and conditions of its CMS grant award, requires periodic reports, encounter data, and other information from the Contractor. The submission of late, inaccurate, or otherwise incomplete reports shall constitute failure to report subject to the penalty provisions described in this contract. Standards applied for determining adequacy of required reports are as follows [42 CFR 438.242(b)(2)]: a. Timeliness: Reports or other required data shall be received on or before scheduled due dates.
b. Accuracy: Reports or other required data shall be prepared in strict conformity with appropriate authoritative sources and/or AHCCCS defined standards.
c. Completeness: All required information shall be fully disclosed in a manner that is both responsive and pertinent to report intent with no material omissions. AHCCCS requirements regarding reports, report content and frequency of submission of reports are subject to change at any time during the term of the contract. The Contractor shall comply with all changes specified by AHCCCSA. The Contractor shall be responsible for continued reporting beyond the term of the contract. For example, processing claims and reporting encounter data will likely continue beyond the term of the contract because of lag time in filing source documents by subcontractors. The Contractor shall comply with all financial reporting requirements contained in the Reporting Guide for Acute Health Care Contractors with the Arizona Health Care Cost Containment System, a copy of which may be found in the Bidder’s Library. The required reports, which are subject to change during the contract term, are summarized in Attachment F, Periodic Report Requirements.
68. REQUESTS FOR INFORMATION AHCCCSA may, at any time during the term of this contract, request financial or other information from the Contractor. Responses shall fully disclose all financial or other information requested. Information may be designated as confidential but may not be withheld from AHCCCS as proprietary. Information designated as confidential may not be disclosed by AHCCCS without the prior written consent of the Contractor except as required by law. Upon receipt of such written requests for information, the Contractor shall provide complete information as requested no later than 30 days after the receipt of the request unless otherwise specified in the request itself.
69. DISSEMINATION OF INFORMATION Upon request, the Contractor shall assist AHCCCSA in the dissemination of information prepared by AHCCCSA or the Federal government to its members. The cost of such dissemination shall be borne by the Contractor. All advertisements, publications and printed materials that are produced by the Contractor and refer to covered services shall state that such services are funded under contract with AHCCCSA.
70. OPERATIONAL AND FINANCIAL READINESS REVIEWS AHCCCSA may conduct Operational and Financial Readiness Reviews on all contractors and will, subject to the availability of resources, provide technical assistance as appropriate. The Readiness Reviews will be conducted
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 prior to the start of business. The purpose of Readiness Reviews is to assess new Contractors’ readiness and ability to provide covered services to members at the start of the contract year and current Contractors’ readiness to expand to new geographic service areas. A new Contractor will be permitted to commence operations only if the Readiness Review factors are met to AHCCCSA’s satisfaction.
71. OPERATIONAL AND FINANCIAL REVIEWS In accordance with CMS requirements, AHCCCSA, or an independent external agent, will conduct annual Operational and Financial Reviews for the purpose of (but not limited to) ensuring operational and financial program compliance [42 CFR 438.204]. The reviews will identify areas where improvements can be made and make recommendations accordingly, monitor the Contractor’s progress towards implementing mandated programs and provide the Contractor with technical assistance if necessary. The Contractor shall comply with all other medical audit provisions as required by AHCCCS Rule R9-22-521 and R9-31- 521. The type and duration of the Operational and Financial Review will be solely at the discretion of AHCCCSA. Except in cases where advance notice is not possible or advance notice may render the review less useful, AHCCCSA will give the Contractor at least three weeks advance notice of the date of the on-site. review. In preparation for the on-site Operational and Financial Reviews, the Contractor shall cooperate fully with AHCCCSA and the AHCCCSA Review Team by forwarding in advance such policies, procedures, job descriptions, contracts, logs and other information that AHCCCSA may request. The Contractor shall have all requested medical records on-site. Any documents, not requested in advance by AHCCCSA, shall be made available upon request of the Review Team during the course of the review. The Contractor personnel, as identified in advance, shall be available to the Review Team at all times during AHCCCSA on-site review activities. While on-site, the Contractor shall provide the Review Team with workspace, access to a telephone, electrical outlets and privacy for conferences. Certain documentation submission requirements may be waived at the discretion of AHCCCSA, if the Contractor has obtained accreditation from NCQA, JCAHO or any other nationally recognized accrediting body. The Contractor must submit the entire accreditation report to AHCCCSA for such waiver consideration. The Contractor will be furnished a draft copy of the Operational and Financial Review Report and given an opportunity to comment on any review findings prior to AHCCCSA publishing the final report. Operational and Financial Review findings may be used in the scoring of subsequent bid proposals by that Contractor. Recommendations, made by the Review Team to bring the Contractor into compliance with Federal, State, AHCCCS, and/or contract requirements, must be implemented by the Contractor. AHCCCSA may conduct a follow-up Operational and Financial Review to determine the Contractor’s progress in implementing recommendations and achieving program compliance. Follow-up reviews may be conducted at any time after the initial Operational and Financial Review. The Contractor shall not distribute or otherwise make available the Operational and Financial Review Tool, draft Operational and Financial Review Report nor final report to other AHCCCS Contractors. AHCCCSA may conduct an Operational and Financial Review in the event the Contractor undergoes a merger, reorganization, change in ownership or makes changes in three or more key staff positions within a 12-month period. AHCCCSA may request, at the expense of the Contractor, to conduct on-site reviews of functions performed at out-of-state locations. AHCCCSA will coordinate travel arrangements and accommodations with the Contractor at their request.
72. SANCTIONS
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 AHCCCSA may impose monetary sanctions, suspend, deny, refuse to renew, or terminate this contract or any related subcontracts in accordance with AHCCCS Rules R9-22-606, ACOM Sanctions Policy and the terms of this contract and applicable Federal or State law and regulations. [42 CFR 422.208,42 CFR 438.700,702,704 and 45 CFR 92.36(i)(l)] Written notice will be provided to the Contractor specifying the sanction to be imposed, the grounds for such sanction and either the length of suspension or the amount of capitation prepayment to be withheld. The Contractor may dispute the decision to impose a sanction in accordance with the process outlined in A.A.C. 9-34-401 et seq. Intermediate sanctions may be imposed, but are not limited to the following actions: a. Substantial failure to provide medically necessary services that the Contractor is required to provide under the terms of this contract to its enrolled members. b. Imposition of premiums or charges in excess of the amount allowed under the AHCCCS 1115 Waiver. c. Discrimination among members on the basis of their health status of need for health care services. d. Misrepresentation or falsification of information furnished to CMS or AHCCCSA. e. Misrepresentation or falsification of information furnished to an enrollee, potential enrollee, or provider. f. Failure to comply with the requirement for physician incentive plan as delineated in Paragraph 42. g. Distribution directly, or indirectly through any agent or independent contractor, of marketing materials that have not been approved by AHCCCSA or that contain false or materially misleading information. h. Failure to meet AHCCCS Financial Viability Standards. i. Material deficiencies in the Contractor’s provider network. j. Failure to meet quality of care and quality management requirements. k. Failure to meet AHCCCS encounter standards. l. Violation of other applicable State or Federal laws or regulations. m. Failure to fund accumulated deficit in a timely manner. n. Failure to increase the Performance Bond in a timely manner. o. Failure to comply with any provisions contained in this contract. p. Failure to report third party liability cases as described in Paragraph 58. AHCCCSA may impose the following types of intermediate sanctions: a. Civil monetary penalties b. Appointment of temporary management for a Contractor as provided in 42 CFR 438.706 and A.R.S. §36-2903 (M). c. Granting members the right to terminate enrollment without cause and notifying the affected members of their right to disenroll [42 CFR 438.702(a)(3)]. d. Suspension of all new enrollment, including auto assignments after the effective date of the sanction. e. Suspension of payment for recipients enrolled after the effective date of the sanction until CMS or AHCCCSA is satisfied that the reason for imposition of the sanction no longer exists and is not likely to recur. f. Additional sanctions allowed under statue or regulation that address areas of noncompliance. Cure Notice Process: Prior to the imposition of a sanction for non-compliance, AHCCCSA may provide a written cure notice to the Contractor regarding the details of the non-compliance. The cure notice will specify the period of time during which the Contractor must bring its performance back into compliance with contract requirements. If, at the end of the specified time period, the Contractor has complied with the cure notice requirements, AHCCCSA will take no further action. If, however, the Contractor has not complied with the cure notice requirements, AHCCCSA may proceed with the imposition of sanctions. Refer to the ACOM Sanctions Policy for details.
73. BUSINESS CONTINUITY AND RECOVERY PLAN
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 The Contractor shall adhere to all elements of the ACOM Business Continuity and Recovery Plan Policy. The Contractor shall develop a Business Continuity and Recovery Plan to deal with unexpected events that may affect its ability to adequately serve members. This plan shall, at a minimum, include planning and training for: • Electronic/telephonic failure at the Contractor’s main place of business
• Complete loss of use of the main site and satellite offices out of state
• Loss of primary computer system/records
• Communication between the Contractor and AHCCCSA in the event of a business disruption
• Periodic Testing The Business Continuity and Recovery Plan shall be updated annually. The Contractor shall submit a summary of the plan as specified in the ACOM Business Continuity and Recovery Plan Policy 15 days after the start of the contract year. All key staff shall be trained and familiar with the Plan.
74. TECHNOLOGICAL ADVANCEMENT Contractors must have a website with links to the following information: 1. Formulary
2. Provider manual
3. Member handbook
4. Provider listing
5. When available, Member and Provider Survey Results
6. Performance Measure Results Contractors must be able to perform the following functions electronically: 1. Enrollment Verification
2. Claims inquiry
3. Accept HIPAA compliant electronic claims transactions (See paragraph 38)
4. Make Claims payments via electronic funds transfer (See paragraph 38) Contractors must also provide searchable provider directories on their web site. Web based directories must include the following search functions and must be updated at least monthly, if necessary: 1. Name
2. Specialty/Service
3. Languages spoken by Practitioner
4. Office locations (e.g. county, city or zip code) Use of Website: Contractors are required to post their clinical performance indicators compared to AHCCCS standard and statewide averages on their website. In addition, AHCCCSA will post contractor performance indicators on its website.
Arizona Health-e Connection AHCCCS supports the Governor executive order # 2005-25 on Arizona Health-e Connection Roadmap. This executive order directs the development of an electronic health information data exchange (HIE) of personal health information between providers, payers and members and the deployment of necessary health information technology to facilitate electronic health records in provider offices. AHCCCS will develop a unified approach for AHCCCS health plans and program contractors to meet the goal of the executive order and to connect AHCCCS, AHCCCS Contractors, ancillary subcontractors and registered providers into a common web based electronic health information data exchange that will meet the standards
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 established by State and Federal governments. AHCCCS health plans and program contractors will cooperate in assisting AHCCCS with developing the Health-e project plan and shall implement required data exchange interfaces as required to meet the goals of the Governor’s executive order. CMS will provide grants to state Medicaid agencies to support development of IT infrastructure and applications to achieve the goal of health information data exchange. AHCCCS Contractors will be required to: 1) Encourage lab, pharmacy and ancillary subcontractors to develop common electronic interfaces for the exchange of data in standard file formats.
2) AHCCCS may issue Minimum Subcontract language that will require subcontractors to participate in the e-Health Initiative. Contractors must amend all provider subcontracts to include the amended Minimum Subcontract provisions within six (6) months of issuance.
3) Contractors will cooperate in passing on any AHCCCS professional fee or facility reimbursement rate adjustments to primary care providers, nursing facility contractor, hospitals and any other providers determined by AHCCCS to be eligible for reimbursement for participation in the health information data exchange. AHCCCS will continually work to enhance the functionality of the health information exchange and web based applications. AHCCCS health plan and program contractors are expected to deploy upgrades and enhancements as necessary to contracted providers.
75. PENDING LEGISLATIVE/OTHER ISSUES The following constitute pending items that may be resolved after the issuance of this contract. Any program changes due to the resolution of the issues will be reflected in future amendments to the contract. Capitation rates may also be adjusted to reflect the financial impact of program changes.
1115 Waiver Changes: AHCCCS is in negotiations with CMS to renew the 1115 waiver that enables AHCCCS to operate a mandatory managed care program. These negotiations may result in changes to the program. AHCCCS will either amend the contract or incorporate changes in policies incorporated in the contract by reference.
76. BALANCED BUDGET ACT OF 1997 (BBA) In August 2002, CMS issued final regulations for the implementation of the BBA. AHCCCS continues to review all areas of the regulations to ensure full compliance with the BBA; however, there are some issues that may require further clarification from CMS. Any program changes due to the resolution of the issues will be reflected in amendments to the contract. Capitation rates may also be adjusted to reflect the financial impact of the program changes.
77. RESERVED
78. MEDICARE MODERNIZATION ACT (MMA) The Medicare Modernization Act of 2003 created a prescription drug benefit called Medicare Part D for individuals who are eligible for Medicare Part A and/or enrolled in Medicare Part B. Beginning January 1, 2006, AHCCCS no longer covers prescription drugs that are covered under Part D for dual eligible members.
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PROGRAM REQUIREMENTS Contract/RFP No. YH04-0001 AHCCCS win not cover prescription drugs for this population whether or not they are enrolled in Medicare Part D. Capitation rates reflect this coverage. Drugs Excluded from Medicare Part D: AHCCCS does cover those drugs ordered by a PCP, attending physician, dentist or other authorized prescriber and dispensed under the direction of a licensed pharmacist subject to limitations related to prescription supply amounts, contractor formularies and prior authorization requirements if they are excluded from Medicare Part D coverage. Medications that are covered by Part D, but are not on a specific Part D Health Plan’s formulary are not considered excluded drugs and will not be covered by AHCCCS. As the Medicare Modernization Act is fully implemented, there may be required changes to business practices of AHCCCS and contractors or the contract. AHCCCS will identify potential impacts and work with contractors to implement necessary program changes.
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CONTRACT CLAUSES Contract/RFP No. YH04-0001
SECTION E: CONTRACT CLAUSES
1) APPLICABLE LAW Arizona Law — The law of Arizona applies to this contract including, where applicable, the Uniform Commercial Code, as adopted in the State of Arizona. Implied Contract Terms — Each provision of law and any terms required by law to be in this contract are a part of this contract as if fully stated in it.
2) AUTHORITY This contract is issued under the authority of the Contracting Officer who signed this contract. Changes to the contract, including the addition of work or materials, the revision of payment terms, or the substitution of work or materials, directed by an unauthorized state employee or made unilaterally by the Contractor are violations of the contract and of applicable law. Such changes, including unauthorized written contract amendments, shall be void and without effect, and the Contractor shall not be entitled to any claim under this contract based on those changes.
3) ORDER OF PRECEDENCE The parties to this contract shall be bound by all terms and conditions contained herein. For interpreting such terms and conditions the following sources shall have precedence in descending order: The Constitution and laws of the United States and applicable Federal regulations; the terms of the CMS 1115 waiver for the State of Arizona; the Constitution and laws of Arizona, and applicable State rules; the terms of this contract, including any attachments and executed amendments and modifications; and AHCCCSA policies and procedures.
4) CONTRACT INTERPRETATION AND AMENDMENT No Parol Evidence —This contract is intended by the parties as a final and complete expression of their agreement. No course of prior dealings between the parties and no usage of the trade shall supplement or explain any term used in this contract. No Waiver —Either party’s failure to insist on strict performance of any term or condition of the contract shall not be deemed a waiver of that term or condition even if the party accepting or acquiescing in the non-conforming performance knows of the nature of the performance and fails to object to it. Written Contract Amendments — The contract shall be modified only through a written contract amendment within the scope of the contract signed by the procurement officer on behalf of the State.
5) SEVERABILITY The provisions of this contract are severable to the extent that any provision or application held to be invalid shall not affect any other provision or application of the contract, which may remain in effect without the invalid provision, or application.
6) RELATIONSHIP OF PARTIES The Contractor under this contract is an independent contractor. Neither party to this contract shall be deemed to be the employee or agent of the other party to the contract.
7) ASSIGNMENT AND DELEGATION The Contractor shall not assign any right nor delegate any duty under this contract without prior written approval of the Contracting Officer, who will not unreasonably withhold such approval.
8) INDEMNIFICATION Contractor/Vendor Indemnification (Not Public Agency)
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CONTRACT CLAUSES Contract/RFP No. YH04-0001 The parties to this contract agree that the State of Arizona, its departments, agencies, boards and commissions shall be indemnified and held harmless by the Contractor for the vicarious liability of the State as a result of entering into this contract. However, the parties further agree that the State of Arizona, its departments, agencies, boards and commissions shall be responsible for its own negligence. Each party to this contract is responsible for its own negligence.
Contractor/Vendor Indemnification (Public Agency) Each party (“as indemnitor”) agrees to indemnify, defend, and hold harmless the other party (“as indemnitee”) from and against any and all claims, losses, liability, costs, or expenses (including reasonable attorney’s fees) (hereinafter collectively referred to as ‘claims’) arising out of bodily injury of any person (including death) or property damage but only to the extent that such claims which result in vicarious/derivative liability to the indemnitee, are caused by the act, omission, negligence, misconduct, or other fault of the indemnitor, its officers, officials, agents, employees, or volunteers.
9) INDEMNIFICATION — PATENT AND COPYRIGHT The Contractor shall defend, indemnify and hold harmless the State against any liability including costs and expenses for infringement of any patent, trademark or copyright arising out of contract performance or use by the State of materials furnished or work performed under this contract. The State shall reasonably notify the Contractor of any claim for which it may be liable under this paragraph.
10) COMPLIANCE WITH APPLICABLE LAWS, RULES AND REGULATIONS The Contractor shall comply with all applicable Federal and State laws and regulations including Title VI of the Civil Rights Act of 1964; Title IX of the Education Amendments of 1972 (regarding education programs and activities); the Age Discrimination Act of 1975; the Rehabilitation Act of 1973 (regarding education programs and activities), and the Americans with Disabilities Act; EEO provisions; Copeland Anti-Kickback Act; Davis-Bacon Act; Contract Work Hours and Safety Standards; Rights to Inventions Made Under a Contract or Agreement; Clean Air Act and Federal Water Pollution Control Act; Byrd Anti-Lobbying Amendment. The Contractor shall maintain all applicable licenses and permits.
11) ADVERTISING AND PROMOTION OF CONTRACT The Contractor shall not advertise or publish information for commercial benefit concerning this contract without the prior written approval of the Contracting Officer.
12) PROPERTY OF THE STATE Except as otherwise provided in this contract, any materials, including reports, computer programs and other deliverables, created under this contract are the sole property of AHCCCSA. The Contractor is not entitled to maintain any rights on those materials and may not transfer any rights to anyone else. The Contractor shall not use or release these materials without the prior written consent of AHCCCSA. If a Contractor declares information to be confidential, AHCCCSA will maintain the information as confidential and will not disclose it unless it is required by law or court order.
13) THIRD PARTY ANTITRUST VIOLATIONS The Contractor assigns to the State any claim for overcharges resulting from antitrust violations to the extent that those violations concern materials or services supplied by third parties to the Contractor toward fulfillment of this contract.
14) RIGHT TO ASSURANCE If AHCCCSA, in good faith, has reason to believe that the Contractor does not intend to perform or continue performing this contract, the procurement officer may demand in writing that the Contractor give a written assurance of intent to perform. The demand shall be sent to the Contractor by certified mail, return receipt required. Failure by the Contractor to provide written assurance within the number of days specified in the demand may, at the State’s option, be the basis for terminating the contract.
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CONTRACT CLAUSES Contract/RFP No. YH04-0001
15) TERMINATION FOR CONFLICT OF INTEREST AHCCCSA may cancel this contract without penalty or further obligation if any person significantly involved in initiating, negotiating, securing, drafting or creating the contract on behalf of AHCCCSA is, or becomes at any time while the contract or any extension of the contract is in effect, an employee of, or a consultant to, any other party to this contract with respect to the subject matter of the contract. The cancellation shall be effective when the Contractor receives written notice of the cancellation unless the notice specifies a later time. If the Contractor is a political subdivision of the State, it may also cancel this contract as provided by A.R. S. 38-511.
16) GRATUITIES AHCCCSA may, by written notice to the Contractor, immediately terminate this contract if it determines that employment or a gratuity was offered or made by the Contractor or a representative of the Contractor to any officer or employee of the State for the purpose of influencing the outcome of the procurement or securing the contract, an amendment to the contract, or favorable treatment concerning the contract, including the making of any determination or decision about contract performance. AHCCCSA, in addition to any other rights or remedies, shall be entitled to recover exemplary damages in the amount of three times the value of the gratuity offered by the Contractor.
17) SUSPENSION OR DEBARMENT The Contractor shall not employ, consult, subcontract or enter into any agreement for Title XIX services with any person or entity who is debarred, suspended or otherwise excluded from Federal procurement activity or from participating in non-procurement activities under regulations issued under Executive Order No. 12549 or under guidelines implementing Executive Order 12549 [42 CFR 438.610(a) and (b)]. This prohibition extends to any entity which employs, consults, subcontracts with or otherwise reimburses for services any person substantially involved in the management of another entity which is debarred, suspended or otherwise excluded from Federal procurement activity. The Contractor shall not retain as a director, officer, partner or owner of 5% or more of the Contractor entity, any person, or affiliate of such a person, who is debarred, suspended or otherwise excluded from Federal procurement activity. AHCCCSA may, by written notice to the Contractor, immediately terminate this contract if it determines that the Contractor has been debarred, suspended or otherwise lawfully prohibited from participating in any public procurement activity.
18) TERMINATION FOR CONVENIENCE AHCCCSA reserves the right to terminate the contract in whole or in part at any time for the convenience of the State without penalty or recourse. The Contracting Officer shall give written notice by certified mail, return receipt requested, to the Contractor of the termination at least 90 days before the effective date of the termination. In the event of termination under this paragraph, all documents, data and reports prepared by the Contractor under the contract shall become the property of and be delivered to AHCCCSA. The Contractor shall be entitled to receive just and equitable compensation for work in progress, work completed and materials accepted before the effective date of the termination.
19) TEMPORARY MANAGEMENT/OPERATION OF A CONTRACTOR AND TERMINATION Temporary Management/Operation by AHCCCSA: Pursuant to the Balanced Budget Act of 1997, 42 CFR 438.700 et seq. and State Law ARS §36-2903, AHCCCSA is authorized to impose temporary management for a Contractor under certain conditions. Under federal law, temporary management may be imposed if AHCCCS determines that there is continued egregious behavior by the Contractor, including but not limited to the following: substantial failure to provide medically necessary services the Contractor is required to provide; imposition on enrollees premiums or charges that exceed those permitted by AHCCCSA, discrimination
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CONTRACT CLAUSES Contract/RFP No. YH04-0001 among enrollees on the basis of health status or need for health care services; misrepresentation or falsification of information to AHCCCSA or CMS; misrepresentation or falsification of information furnished to an enrollee or provider; distribution of marketing materials that have not been approved by AHCCCS or that are false or misleading; or behavior contrary to any requirements of Sections 1903(m) or 1932 of the Social Security Act. Temporary management may also be imposed if AHCCCSA determines that there is substantial risk to enrollees’ health or that temporary management is necessary to ensure the health of enrollees while the Contractor is correcting the deficiencies noted above or until there is an orderly transition or reorganization of the Contractor. Under federal law, temporary management is mandatory if AHCCCSA determines that the Contractor has repeatedly failed to meet substantive requirements in Sections 1903(m) or 1932 of the Social Security Act. In these situations, AHCCCSA shall not delay imposition of temporary management to provide a hearing before imposing this sanction. State law ARS §36-2903 authorizes AHCCCSA to operate a Contractor as specified in this contract. Prior to operation of the Contractor by AHCCCSA pursuant to state statute, the Contractor shall have the opportunity for a hearing. If AHCCCSA determines that emergency action is required, operation of the Contractor may take place prior to hearing. Operation by AHCCCSA shall occur only as long as it is necessary to assure delivery of uninterrupted care to members, to accomplish orderly transition of those members to other contractors, or until the Contractor reorganizes or otherwise corrects contract performance failure. Termination: AHCCCSA reserves the right to terminate this contract in whole or in part due to the failure of the Contractor to comply with any term or condition of the contract and as authorized by the Balanced Budget Act of 1997 and 42 CFR 438.708. If the Contractor is providing services under more than one contract with AHCCCSA, AHCCCSA may deem unsatisfactory performance under one contract to be cause to require the Contractor to provide assurance of performance under any and all other contracts. In such situations, AHCCCSA reserves the right to seek remedies under both actual and anticipatory breaches of contract if adequate assurance of performance is not received. The Contracting Officer shall mail written notice of the termination and the reason(s) for it to the Contractor by certified mail, return receipt requested. Pursuant to the Balanced Budget Act of 1997 and 42 CFR 438.708, AHCCCSA shall provide the contractor with a pre-termination hearing before termination of the contract Upon termination, all documents, data, and reports prepared by the Contractor under the contract shall become the property of and be delivered to AHCCCSA on demand.
AHCCCSA may, upon termination of this contract, procure on terms and in the manner that it deems appropriate, materials or services to replace those under this contract. The Contractor shall be liable for any excess costs incurred by AHCCCSA in re-procuring the materials or services.
20) TERMINATION — AVAILABILITY OF FUNDS Funds are not presently available for performance under this contract beyond the current fiscal year. No legal liability on the part of AHCCCSA for any payment may arise under this contract until funds are made available for performance of this contract. Notwithstanding any other provision in the Agreement, this Agreement may be terminated by AHCCCSA, if, for any reason, there are not sufficient appropriated and available monies for the purpose of maintaining this Agreement. In the event of such termination, the Contractor shall have no further obligation to AHCCCSA, except as otherwise provided in this contract.
21) RIGHT OF OFFSET AHCCCSA shall be entitled to offset against any amounts due the Contractor any expenses or costs incurred by AHCCCSA concerning the Contractor’s non- conforming performance or failure to perform the contract.
22) NON-EXCLUSIVE REMEDIES The rights and the remedies of AHCCCSA under this contract are not exclusive.
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CONTRACT CLAUSES Contract/RFP No. YH04-0001
23) NON-DISCRIMINATION The Contractor shall comply with State Executive Order No. 99-4, which mandates that all persons, regardless of race, color, religion, gender, national origin or political affiliation, shall have equal access to employment opportunities, and all other applicable Federal and state laws, rules and regulations, including the Americans with Disabilities Act and Title VI. The Contractor shall take positive action to ensure that applicants for employment, employees, and persons to whom it provides service are not discriminated against due to race, creed, color, religion, gender, national origin or disability.
24) EFFECTTVE DATE The effective date of this contract shall be the date referenced on page 1 of this contract.
25) INSURANCE A certificate of insurance naming the State of Arizona and AHCCCSA as the “additional insured” must be submitted to AHCCCSA within 10 days of notification of contract award and prior to commencement of any services under this contract. This insurance shall be provided by carriers rated as “A+” or higher by the A.M. Best Rating Service. The following types and levels of insurance coverage are required for this contract: a. Commercial General Liability: Provides coverage of at least $1,000,000 for each occurrence for bodily injury and property damage to others as a result of accidents on the premises of or as the result of operations of the Contractor. b. Commercial Automobile Liability: Provides coverage of at least $1,000,000 for each occurrence for bodily injury and property damage to others resulting from accidents caused by vehicles operated by the Contractor. c. Workers Compensation: Provides coverage to employees of the Contractor for injuries sustained in the course of their employment. Coverage must meet the obligations imposed by Federal and State statutes and must also include Employer’s Liability minimum coverage of $100,000. Evidence of qualified self- insured status will also be considered. d. Professional Liability (if applicable): Provides coverage for alleged professional misconduct or lack of ordinary skills in the performance of a professional act of service. The above coverages may be evidenced by either one of the following: a. The State of Arizona Certificate of Insurance: This is a form with the special conditions required by the contract already pre-printed on the form. The Contractor’s agent or broker must fill in the pertinent policy information and ensure the required special conditions are included in the Contractor’s policy. b. The Accord form: This standard insurance industry certificate of insurance does not contain the preprinted special conditions required by this contract. These conditions must be entered on the certificate by the agent or broker and read as follows: The State of Arizona and Arizona Health Care Cost Containment System are hereby added as additional insureds. Coverage afforded under this Certificate shall be primary and any insurance carried by the State or any of its agencies, boards, departments or commissions shall be in excess of that provided by the insured Contractor. No policy shall expire, be canceled or materially changed without 30 days written notice to the State. This Certificate is not valid unless countersigned by an authorized representative of the insurance company.
26) DISPUTES Contract claims and disputes shall be adjudicated in accordance with AHCCCS rules. Except as provided by 9AAC Chapter 28, Article 6, the exclusive manner for the Contractor to assert any dispute against AHCCCSA shall be in accordance with the process outlined in 9 A.A.C. Chapter 22 and ARS §36-2903.01. Pending the final resolution of any disputes involving this contract, the Contractor shall proceed
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CONTRACT CLAUSES Contract/RFP No. YH04-0001 with performance of this contract in accordance with AHCCCSA’s instructions, unless AHCCCSA specifically, in writing, requests termination or a temporary suspension-of performance.
27) RIGHT TO INSPECT PLANT OR PLACE OF BUSINESS AHCCCSA may, at reasonable times, inspect the part of the plant or place of business of the Contractor or subcontractor that is related to the performance of this contract, in accordance with A.R.S. §41-2547.
28) INCORPORATION BY REFERENCE This solicitation and all attachments and amendments, the Contractor’s proposal, best and final offer accepted by AHCCCSA, and any approved subcontracts are hereby incorporated by reference into the contract.
29) COVENANT AGAINST CONTINGENT FEES The Contractor warrants that no person or agency has been employed or retained to solicit or secure this contract upon an agreement or understanding for a commission, percentage, brokerage or contingent fee. For violation of this warranty, AHCCCSA shall have the right to annul this contract without liability.
30) CHANGES AHCCCSA may at any time, by written notice to the Contractor, make changes within the general scope of this contract. If any such change causes an increase or decrease in the cost of, or, the time required for, performance of any part of the work under this contract, the Contractor may assert its right to an adjustment in compensation paid under this contract. The Contractor must assert its right to such adjustment within 30 days from the date of receipt of the change notice. Any dispute or disagreement caused by such notice shall constitute a dispute within the meaning of Section E, Paragraph 26, Disputes, and be administered accordingly. When AHCCCSA issues an amendment to modify the contract, the provisions of such amendment will be deemed to have been accepted 60 days after the date of mailing by AHCCCSA, even if the amendment has not been signed by the Contractor, unless within that time the Contractor notifies AHCCCSA in writing that it refuses to sign the amendment. If the Contractor provides such notification, AHCCCSA will initiate termination proceedings.
31) TYPE OF CONTRACT Firm Fixed-Price stated as capitated per member per month, except as otherwise provided
32) AMERICANS WITH DISABILITIES ACT People with disabilities may request special accommodations such as interpreters, alternative formats or assistance with physical accessibility. Requests for special accommodations must be made with at least three days prior notice by contacting the Solicitation Contact person.
33) WARRANTY OF SERVICES The Contractor warrants that all services provided under this contract will conform to the requirements stated herein. AHCCCSA’s acceptance of services provided by the Contractor shall not relieve the Contractor from its obligations under this warranty. In addition to its other remedies, AHCCCSA may, at the Contractor’s expense, require prompt correction of any services failing to meet the Contractor’s warranty herein. Services corrected by the Contractor shall be subject to all of the provisions of this contract in the manner and to the same extent as the services originally furnished.
34) NO GUARANTEED QUANTITIES AHCCCSA does not guarantee the Contractor any minimum or maximum quantity of services or goods to be provided under this contract.
35) CONFLICT OF INTEREST The Contractor shall not undertake any work that represents a potential conflict of interest, or which is not in the best interest of AHCCCSA or the State without prior written approval by AHCCCSA. The Contractor shall fully and completely disclose any situation that may present a conflict of interest. If the Contractor is now performing or elects to perform during the term of this contract any services for any AHCCCS contractor,
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CONTRACT CLAUSES Contract/RFP No. YH04-0001 provider or Contractor or an entity owning or controlling same, the Contractor shall disclose this relationship prior to accepting any assignment involving such party.
36) DISCLOSURE OF CONFIDENTIAL INFORMATION The Contractor shall not, without prior written approval from AHCCCSA, either during or after the performance of the services required by this contract, use, other than for such performance, or disclose to any person other than AHCCCSA personnel with a need to know, any information, data, material, or exhibits created, developed, produced, or otherwise obtained during the course of the work required by this contract. This nondisclosure requirement shall also pertain to any information contained in reports, documents, or other records furnished to the Contractor by AHCCCSA.
37) COOPERATION WITH OTHER CONTRACTORS AHCCCSA may award other contracts for additional work related to this contract and Contractor shall fully cooperate with such other contractors and AHCCCSA employees or designated agents, and carefully fit its own work to such other contractors’ work. The Contractor shall not commit or permit any act which will interfere with the performance of work by any other contractor or by AHCCCSA employees.
38) ASSIGNMENT OF CONTRACT AND BANKRUPTCY This contract is voidable and subject to immediate cancellation by AHCCCSA upon the Contractor becoming insolvent or filing proceedings in bankruptcy or reorganization under the United States Code, or assigning rights or obligations under this contract without the prior written consent of AHCCCSA.
39) OWNERSHIP OF INFORMATION AND DATA Any data or information system, including all software, documentation and manuals, developed by the Contractor pursuant to this contract, shall be deemed to be owned by AHCCCSA. The Federal government reserves a royalty-free, nonexclusive, and irrevocable license to reproduce, publish, or otherwise use and to authorize others to use for Federal government purposes, such data or information system, software, documentation and manuals. Proprietary software which is provided at established catalog or market prices and sold or leased to the general public shall not be subject to the ownership or licensing provisions of this section. Data, information and reports collected or prepared by the Contractor in the course of performing its duties and obligations under this contract shall be deemed to be owned by AHCCCSA. The ownership provision is in consideration of the Contractor’s use of public funds in collecting or preparing such data, information and reports. These items shall not be used by the Contractor for any independent project of the Contractor or publicized by the Contractor without the prior written permission of AHCCCSA. Subject to applicable state and Federal laws and regulations, AHCCCSA shall have full and complete rights to reproduce, duplicate, disclose and otherwise use all such information. At the termination of the contract, the Contractor shall make available all such data to AHCCCSA within 30 days following termination of the contract or such longer period as approved by AHCCCSA, Office of the Director. For purposes of this subsection, the term “data” shall not include member medical records. Except as otherwise provided in this section, if any copyrightable or patentable material is developed by the Contractor in the course of performance of this contract, the Federal government, AHCCCSA and the State of Arizona shall have a royalty-free, nonexclusive, and irrevocable right to reproduce, publish, or otherwise use, and to authorize others to use, the work for state or Federal government purposes. The Contractor shall additionally be subject to the applicable provisions of 45 CFR Part 74 and 45 CFR Parts 6 and 8.
40) AHCCCSA RIGHT TO OPERATE CONTRACTOR If, in the judgment of AHCCCSA, the Contractor’s performance is in material breach of the contract or the Contractor is insolvent, AHCCCSA may directly operate the Contractor to assure delivery of care to members enrolled with the Contractor until cure by the Contractor of its breach, by demonstrated financial solvency or until the successful transition of those members to other contractors.
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CONTRACT CLAUSES Contract/RFP No. YH04-0001 If AHCCCS undertakes direct operation of the Contractor, AHCCCS, through designees appointed by the Director, shall be vested with full and exclusive power of management and control of the Contractor as necessary to ensure the uninterrupted care to persons and accomplish the orderly transition of persons to a new or existing Contractor, or until the Contractor corrects the Contract Performance failure to the satisfaction of AHCCCS. AHCCCS shall have the power to employ any necessary assistants, to execute any instrument in the name of the Contractor, to commence, defend and conduct in its name any action or proceeding in which the Contractor may be a party. All reasonable expenses of AHCCCS related to the direct operation of the Contractor, including attorney fees, cost of preliminary or other audits of the Contractor and expenses related to the management of any office or other assets of the Contractor, shall be paid by the Contractor or withheld from payment due from AHCCCS to the Contractor.
41) AUDITS AND INSPECTIONS The Contractor shall comply with all provisions specified in applicable AHCCCS Rule R9-22-521 and AHCCCS policies and procedures relating to the audit of the Contractor’s records and the inspection of the Contractor’s facilities. The Contractor shall fully cooperate with AHCCCSA staff and allow them reasonable access to the Contractor’s staff, subcontractors, members, and records. [42 CFR 438.6(g)] At any time during the term of this contract, the Contractor’s or any subcontractor’s books and records shall be subject to audit by AHCCCSA and, where applicable, the Federal government, to the extent that the books and records relate to the performance of the contract or subcontracts. [42 CFR 438.242(b)(3)] AHCCCSA, or its duly authorized agents, and the Federal government may evaluate through on-site inspection or other means, the quality, appropriateness and timeliness of services performed under this contract.
42) LOBBYING No funds paid to the Contractor by AHCCCSA, or interest earned thereon, shall be used for the purpose of influencing or attempting to influence an officer or employee of any Federal or State agency, a member of the United States Congress or State Legislature, an officer or employee of a member of the United States Congress or State Legislature in connection with awarding of any Federal or State contract, the making of any Federal or State grant, the making of any Federal or State loan, the entering into of any cooperative agreement, and the extension, continuation, renewal, amendment or modification of any Federal or State contract, grant, loan, or cooperative agreement. The Contractor shall disclose if any funds, other than those paid to the Contractor by AHCCCSA, have been used or will be used to influence the persons and entities indicated above and will assist AHCCCSA in making such disclosures to CMS.
43) CHOICE OF FORUM The parties agree that jurisdiction over any action arising out of or relating to this contract shall be brought or filed in a court of competent jurisdiction located in the State of Arizona.
44) DATA CERTIFICATION The Contractor shall certify that financial and encounter data submitted to AHCCCS is complete, accurate and truthful. Certification of financial and encounter data must be submitted concurrently with the data. Certification may be provided by the Contractor CEO, CFO or an individual who is delegated authority to sign for, and who report directly to the CEO or CFO. 42 CFR 438.604 et seq.
45) OFF SHORE PERFORMANCE OF WORK PROHIBITED Due to security and identity protection concerns, direct services under this contract shall be performed within the borders of the United States. Any services that are described in the specifications or scope of work that directly serve the State of Arizona or its clients and may involve access to secure or sensitive data or personal client data or development or modification of software for the State shall be performed within the borders of the United States. Unless specifically stated otherwise in the specifications, this definition does not apply to
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CONTRACT CLAUSES Contract/RFP No. YH04-0001 indirect or “overhead” services, redundant back-up services or services that are incidental to the performance of the contract. This provision applies to work performed by subcontractors at all tiers.
46) FEDERAL IMMIGRATION AND NATIONALITY ACT The Contractor shall comply with all federal, state and local immigration laws and regulations relating to the immigration status of their employees during the term of the contract. Further, the Contractor shall flow down this requirement to all subcontractors utilized during the term of the contract. The State shall retain the right to perform random audits of Contractor and subcontractor records or to inspect papers of any employee thereof to ensure compliance. Should the State determine that the Contractor and/or any subcontractors be found noncompliant, the State may pursue all remedies allowed by law, including, but not limited to; suspension of work, termination of the contract for default and suspension and/or debarment of the Contractor.
47) IRS W-9 FORM In order to receive payment under any resulting contract, the Contractor shall have a current IRS W-9 Form on file with the State of Arizona.
48) CONTINUATION OF PERFORMANCE THROUGH TERMINATION The Contractor shall continue to perform, in accordance with the requirements of the contract, up to the date of termination and as directed in the termination notice. [END OF SECTION E]
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INDEX — PROGRAM REQUIREMENTS AND CONTRACT CLAUSES Contract/RFP No. YH8-0001 SECTION F: INDEX — PROGRAM REQUIREMENTS AND CONTRACT CLAUSES
A Accumulated Fund Deficit, 65 Advance Directives, 40 Advances, 66 Ambulatory, 23, 27 Annual Enrollment, 21 Appointment Standards, 54 Auto-Assignment, 19, 20, 21 Auto-Assignment Algorithm, 19, 20, 21
B BBA, 21, 26, 88 Behavioral Health, 23, 24, 25, 27, 32, 33, 34, 35, 36, 37, 54, 56 Breast and Cervical Cancer, 17, 19, 68, 77 Business Continuity Plan, 86
C Capitalization, 64 Capitation, 20, 21, 65, 67, 68, 69, 70, 82, 85 Chiropractic, 25 Claims Clean, 60, 73 Payment, 59, 62 Compensation, 67 Contraceptive, 27 Convalescent Care, 29, 31 Coordination of Benefits, 74 Coordination of Care, 33 Copayment, 54, 70 Copayments, 77 Cost Avoidance, 75 Cost Sharing, 17, 19, 56, 75, 77 Covered Services, 23, 33
Credentialing, 41, 49 CRS, 22, 24 Cultural Competency, 39 Cure Notice, 85
D Data Exchange, 81 Denials, 60, 74 Dental, 23, 25, 54, 56 Dialysis, 22, 25 Disenrollment, 82 Distributions, 66 DME, 22, 28, 29 Dual Eligibles, 56, 77
E Eligibility CRS, 24 Emergency, 17, 25, 26, 28, 31, 54, 55, 58 Encounter, 36, 55, 56, 59, 68, 69, 73, 81, 82, 83,85 Enrollment, 18, 21, 82 Annual, 18, 21, 22, 73 Guarantees, 20 Open, 18, 21 EPSDT, 25, 27, 29, 33, 36, 37, 45, 54, 56 F Family Planning, 17, 19, 26, 27, 56, 67 Fee-for-Service, 23, 29, 63, 76, 82 Financial Viability Standards, 66 Formulary, 30, 33, 86 FQHC, 55 Fraud and Abuse, 40, 56, 78 Freedom to Work, 17, 19
G Geographic Service Area, 16, 19, 21, 49, 62, 64, 66, 68, 84 Grievance, 47
H HIFA, 18, 19, 20, 68, 77 HIFA Parents, 18, 19, 20, 68, 77 HIFA PARENTS, 18, 19, 20, 77 HIPAA, 81 HIV/AIDS, 27, 28, 40, 52, 67, 68, 69 Home Health, 22, 27, 40, 54 Hospice, 27, 40 Hospital Subcontracting, 61
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INDEX — PROGRAM REQUIREMENTS AND CONTRACT CLAUSES Contract/RFP No. YH8-0001
I IBNR, 16 Identification Cards, 21 Immunizations, 27, 35, 56 Indian Health Service, 17, 18, 20, 22, 28, 31 Inpatient, 25, 27, 28, 30, 31, 32, 33, 36, 48, 54, 69, 71, 72, 73, 74 Investments, 66
K KidsCare, 18, 19, 68, 77
L Laboratory, 27, 28, 33, 54, 56 Limited English Proficiency (LEP), 38 Loans, 66
M Management-Services, 33, 63, 64 Maternity, 28, 53, 55, 56 Medicaid in the Public Schools (MIPS), 34, 35 Medical Expense Deduction, 67 Medical Foods, 28 Member Education, 32 Handbook, 38 Information, 37, 38, 52 Mainstreaming, 21 Surveys, 39 Transition, 22 Midwives, 28, 53
N Network Management, 50 Non-Contracting Provider, 65 Nurse Practitioners, 28, 52, 53 Nursing Facility, 22, 29, 40, 62, 63, 71, 73, 74 Nutrition, 29
O Observation, 27 Omission, 81 Optometry, 26 Outpatient, 23, 25, 27, 30, 31, 54, 61
P Performance Bond, 64, 65 Performance Standards, 25, 27, 43, 44, 45, 82 Periodicity Schedule, 25, 27, 33, 45 Pharmacy, 42, 48, 69 Physician Assistants, 28, 53 Physician Incentives, 63 Podiatry, 29 Postpartum Care, 28, 44, 53 Post-stabilization, 26, 29, 30 Pregnancy, 22, 26, 28, 30, 53 Terminations, 30 Prenatal Care, 28, 55, 70, 75 Prescription Drugs, 30, 54, 80 Prescription Medication, 25, 30, 33, 54, 80 Primary Care Physician, 25, 28, 29, 30, 33, 34, 39, 40, 41, 48, 52, 53, 54, 55, 56, 81 Prior Authorization, 22, 25, 30, 42, 56, 60, 62 Prior Period Coverage, 20, 33, 67, 68, 69, 71, 72, 82 Provider, 50, 52, 53, 55, 56 Provider Manual, 55, 59 Provider Registration, 56
Q QMB, 19 Quality Management, 35, 36, 37, 41
R Radiology, 27, 30, 54 Rate Code, 69, 71, 82 RBHA, 32, 33, 56 Referral, 25, 31, 32, 33, 36, 37, 52, 53, 54, 56, 76, 77 Rehabilitation, 24, 29, 30, 74 Reinsurance, 56, 62, 67, 68, 71, 72, 73, 74, 76, 82 Related Party, 61 Reporting Requirements, 81, 83 Respiratory, 30 Reviews, 84 REP, 84, 85, 88 Risk Sharing, 27, 69
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INDEX — PROGRAM REQUIREMENTS AND CONTRACT CLAUSES Contract/RFP No. YH8-0001 Roster, 19, 82 S Sanctions, 44, 63, 66, 85 SOBRA, 17, 18, 27, 65, 67, 68, 71 SOBRA Family Planning, 17, 27, 67, 71 SSI, 17, 18, 19, 68 Staff Requirements, 35 Sterilization, 27 Subcontract, 22, 28, 55, 57, 58,59, 60, 62, 93 Subcontractor, 22, 56, 57, 58, 59, 95, 98 Supplies, 25, 27, 28, 29, 54 T TANF, 17 Technological Advancement, 86 Third Party, 16, 35, 59, 62, 68, 74, 75, 77, 92 Third Party Liability, 74 Ticket to Work, 17, 19 Title IX, 17, 18, 19, 20, 28, 33, 55, 67, 68, 69, 71, 72, 93 Title IX Waiver, 17, 18, 67, 68, 69, 71, 72 Title XXI, 17, 18, 19, 20, 28, 33, 77 Transplants, 22, 25, 30, 72 Transportation, 22, 26, 31, 33, 35, 55, 75 Triage, 31, 33 U Utilization Management, 37, 42 V Vaccine for Children, 35 Vision, 26, 56
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ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS Contract/RFP No. YH04-0001
ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS For the sole purpose of this Attachment, the following definitions apply: “Subcontract” means any contract between the Contractor and a third party for the performance of any or all services or requirements specified under the Contractor’s contract with AHCCCS. “Subcontractor” means any third party with a contract with the Contractor for the provision of any or all services or requirements specified under the Contractor’s contract with AHCCCS. Subcontractors who provide services under both the AHCCCS ALTCS and the Acute Care Program please see the following: • Rules for the ALTCS are found in Arizona Administrative Code (AAC) Tide 9, Chapter 28. AHCCCS statutes for long term care are generally found in Arizona Revised Statue (ARS) 36, Chapter 29, Article 2. • Rules for the Acute Care Program are found in AAC Title 9, Chapter 22. AHCCCS statutes for the Acute Care Program are generally found in ARS 36, Chapter 29, Article 1. Rules for the KidsCare Program are found in AAC Title 9, Chapter 31 and the statutes for KidsCare Program may be found in ARS 36, Chapter 29, Article 4. All statutes, rules and regulations cited in this attachment are listed for reference purposes only and are not intended to be all inclusive. [The following provisions must be included verbatim in every contract.]
1. ASSIGNMENT AND DELEGATION OF RIGHTS AND RESPONSIBILITIES No payment due the Subcontractor under this subcontract may be assigned without the prior approval of the Contractor. No assignment or delegation of the duties of this subcontract shall be valid unless prior written approval is received from the Contractor. (AAC R2-7-305)
2. AWARDS OF OTHER SUBCONTRACTS AHCCCSA and/or the Contractor may undertake or award other contracts for additional or related work to the work performed by the Subcontractor and the Subcontractor shall fully cooperate with such other contractors, subcontractors or state employees. The Subcontractor shall not commit or permit any act which will interfere with the performance of work by any other contractor, subcontractor or state employee. (AAC R2-7-308)
3. CERTIFICATION OF COMPLIANCE — ANTI-KICKBACK AND LABORATORY TESTING By signing this subcontract, the Subcontractor certifies that it has not engaged in any violation of the Medicare Anti-Kickback statute (42 USC §§1320a-7b) or the “Stark I” and “Stark II” laws governing related-entity referrals (PL 101-239 and PL 101-432) and compensation there from. If the Subcontractor provides laboratory testing, it certifies that it has complied with 42 CFR §411.361 and has sent to AHCCCSA simultaneous copies of the information required by that rule to be sent to the Centers for Medicare and Medicaid Services. (42 USC §§1320a-7b; PL 101-239 and PL 101-432; 42 CFR §411.361)
4. CERTIFICATION OF TRUTHFULNESS OF REPRESENTATION By signing this subcontract, the Subcontractor certifies that all representations set forth herein are true to the best of its knowledge.
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ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS Contract/RFP No. YH04-0001
5. CLINICAL LABORATORY IMPROVEMENT AMENDMENTS OF 1988 The Clinical Laboratory Improvement Amendment (CLIA) of 1988 requires laboratories and other facilities that test human specimens to obtain either a CLIA Waiver or CLIA Certificate in order to obtain reimbursement from the Medicare and Medicaid (AHCCCS) programs. In addition, they must meet all the requirements of 42 CFR 493, Subpart A. To comply with these requirements, AHCCCSA requires all clinical laboratories to provide verification of CLIA Licensure or Certificate of Waiver during the provider registration process. Failure to do so shall result in either a termination of an active provider ID number or denial of initial registration. These requirements apply to all clinical laboratories. Pass-through billing or other similar activities with the intent of avoiding the above requirements are prohibited. The Contractor may not reimburse providers who do not comply with the above requirements. (CLIA of 1988; 42 CFR 493, Subpart A)
6. COMPLIANCE WITH AHCCCSA RULES RELATING TO AUDIT AND INSPECTION The Subcontractor shall comply with all applicable AHCCCS Rules and Audit Guide relating to the audit of the Subcontractor’s records and the inspection of the Subcontractor’s facilities. If the Subcontractor is an inpatient facility, the Subcontractor shall file uniform reports and Title XVIII and Title XIX cost reports with AHCCCSA. (ARS 41-2548; 45 CFR 74.48 (d))
7. COMPLIANCE WITH LAWS AND OTHER REQUIREMENTS The Subcontractor shall comply with all federal, State and local laws, rules, regulations, standards and executive orders governing performance of duties under this subcontract, without limitation to those designated within this subcontract. (42 CFR 434.70) [42 CFR 438.6(1)]
8. CONFIDENTIALITY REQUIREMENT Confidential information shall be safeguarded pursuant to 42 CFR Part 431, Subpart F, ARS §36-107, 36-2932, 41-1959 and 46-135, AHCCCS Rules and the Health Insurance Portability and Accountability Act (CFR 164).
9. CONFLICT IN INTERPRETATION OF PROVISIONS In the event of any conflict in interpretation between provisions of this subcontract and the AHCCCS Minimum Subcontract Provisions, the latter shall take precedence.
10. CONTRACT CLAIMS AND DISPUTES Contract claims and disputes shall be adjudicated in accordance with AHCCCS Rules.
11. ENCOUNTER DATA REQUIREMENT If the Subcontractor does not bill the Contractor (e.g., Subcontractor is capitated), the Subcontractor shall submit encounter data to the Contractor in a form acceptable to AHCCCSA.
12. EVALUATION OF QUALITY, APPROPRIATENESS, OR TIMELINESS OF SERVICES AHCCCSA or the U.S. Department of Health and Human Services may evaluate, through inspection or other means, the quality, appropriateness or timeliness of services performed under this subcontract.
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ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS Contract/RFP No. YH04-0001
13. FRAUD AND ABUSE If the Subcontractor discovers, or is made aware, that an incident of suspected fraud or abuse has occurred, the Subcontractor shall report the incident to the prime Contractor as well as to AHCCCSA, Office of Program Integrity. All incidents of potential fraud should be reported to AHCCCSA, Office of the Director, Office of Program Integrity.
14. GENERAL INDEMNIFICATION The parties to this contract agree that AHCCCS shall be indemnified and held harmless by the Contractor and Subcontractor for the vicarious liability of AHCCCS as a result of entering into this contract. However, the parties further agree that AHCCCS shall be responsible for its own negligence. Each party to this contract is responsible for its own negligence.
15. INSURANCE [This provision applies only if the Subcontractor provides services directly to AHCCCS members] The Subcontractor shall maintain for the duration of this subcontract a policy or policies of professional liability insurance, comprehensive general liability insurance and automobile liability insurance in amounts that meet Contractor’s requirements. The Subcontractor agrees that any insurance protection required by this subcontract, or otherwise obtained by the Subcontractor, shall not limit the responsibility of Subcontractor to indemnify, keep and save harmless and defend the State and AHCCCSA, their agents, officers and employees as provided herein. Furthermore, the Subcontractor shall be fully responsible for all tax obligations, Worker’s Compensation Insurance, and all other applicable insurance coverage, for itself and its employees, and AHCCCSA shall have no responsibility or liability for any such taxes or insurance coverage. (45 CFR Part 74) The requirement for Worker’s Compensation Insurance does not apply when a Subcontractor is exempt under ARS 23-901, and when such Subcontractor executes the appropriate waiver (Sole Proprietor/Independent Contractor) form.
16. LIMITATIONS ON BILLING AND COLLECTION PRACTICES Except as provided in federal and state law and regulations, the Subcontractor shall not bill, or attempt to collect payment from a person who was AHCCCS eligible at the time the covered service(s) were rendered, or from the financially responsible relative or representative for covered services that were paid or could have been paid by the System.
17. MAINTENANCE OF REQUIREMENTS TO DO BUSINESS AND PROVIDE SERVICES The Subcontractor shall be registered with AHCCCSA and shall obtain and maintain all licenses, permits and authority necessary to do business and render service under this subcontract and, where applicable, shall comply with all laws regarding safety, unemployment insurance, disability insurance and worker’s compensation.
18. NON-DISCRIMINATION REQUIREMENTS The Subcontractor shall comply with State Executive Order No. 99-4, which mandates that all persons, regardless of race, color, religion, gender, national origin or political affiliation, shall have equal access to employment opportunities, and all other applicable Federal and state laws, rules and regulations, including the Americans with Disabilities Act and Title VI. The Subcontractor shall take positive action to ensure that applicants for employment, employees, and persons to whom it provides service are not discriminated against due to race, creed, color, religion, sex, national origin or disability. (Federal regulations, State Executive order # 99-4)
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ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS Contract/RFP No. YH04-0001
19. PRIOR AUTHORIZATION AND UTILIZATION MANAGEMENT The Contractor and Subcontractor shall develop, maintain and use a system for Prior Authorization and Utilization Review that is consistent with AHCCCS Rules and the Contractor’s policies.
20. RECORDS RETENTION The Subcontractor shall maintain books and records relating to covered services and expenditures including reports to AHCCCSA and working papers used in the preparation of reports to AHCCCSA. The Subcontractor shall comply with all specifications for record keeping established by AHCCCSA. All books and records shall be maintained to the extent and in such detail as required by AHCCCS Rules and policies. Records shall include but not be limited to financial statements, records relating to the quality of care, medical records, dental records, prescription files and other records specified by AHCCCSA. The Subcontractor agrees to make available at its office at all reasonable times during the term of this contract and the period set forth in the following paragraphs, any of its records for inspection, audit or reproduction by any authorized representative of AHCCCSA, State or Federal government. The Subcontractor shall preserve and make available all records for a period of five years from the date of final payment under this contract unless a longer period of time is required by law.. If this contract is completely or partially terminated, the records relating to the work terminated shall be preserved and made available for a period of five years from the date of any such termination. Records which relate to grievances, disputes, litigation or the settlement of claims arising out of the performance of this contract, or costs and expenses of this contract to which exception has been taken by AHCCCSA, shall be retained by the Subcontractor for a period of five years after the date of final disposition or resolution thereof unless a longer period of time is required by law. (45 CFR 74.53; 42 CFR 433.17; ARS 41-2548)
21. SEVERABILITY If any provision of these standard subcontract terms and conditions is held invalid or unenforceable, the remaining provisions shall continue valid and enforceable to the full extent permitted by law.
22. SUBJECTION OF SUBCONTRACT The terms of this subcontract shall be subject to the applicable material terms and conditions of the contract existing between the Contractor and AHCCCSA for the provision of covered services.
23. TERMINATION OF SUBCONTRACT AHCCCSA may, by written notice to the Subcontractor, terminate this subcontract if it is found, after notice and hearing by the State, that gratuities in the form of entertainment, gifts, or otherwise were offered or given by the Subcontractor, or any agent or representative of the Subcontractor, to any officer or employee of the State with a view towards securing a contract or securing favorable treatment with respect to the awarding, amending or the making of any determinations with respect to the performance of the Subcontractor; provided, that the existence of the facts upon which the state makes such findings shall be in issue and may be reviewed in any competent court. If the subcontract is terminated under this section, unless the Contractor is a governmental agency, instrumentality or subdivision thereof, AHCCCSA shall be entitled to a penalty, in addition to any other damages to which it may be entitled by law, and to exemplary damages in the amount of three times the cost incurred by the Subcontractor in providing any such gratuities to any such officer or employee. (AAC R2-5-501; ARS 41-2616 C; 42 CFR 434.6, a. (6))
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ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS Contract/RFP No. YH04-0001
24. VOIDABILITY OF SUBCONTRACT This subcontract is voidable and subject to immediate termination by AHCCCSA upon the Subcontractor becoming insolvent or filing proceedings in bankruptcy or reorganization under the United States Code, or upon assignment or delegation of the subcontract without AHCCCSA’s prior written approval.
25. WARRANTY OF SERVICES The Subcontractor, by execution of this subcontract, warrants that it has the ability, authority, skill, expertise and capacity to perform the services specified in this contract.
26. OFF-SHORE PERFORMANCE OF WORK PROHIBITED Due to security and identity protection concerns, direct services under this contract shall be performed within the borders of the United States. Any services that are described in the specifications or scope of work that directly serve the State of Arizona or its clients and may involve access to secure or sensitive data or personal client data or development or modification of software for the State shall be performed within the borders of the United States. Unless specifically stated otherwise in specifications, this definition does not apply to indirect or “overhead” services, redundant back-up services or services that are incidental to the performance of the contract. This provision applies to work performed by subcontractors at all tiers.
27. FEDERAL IMMIGRATION AND NATIONALITY ACT The Subcontractor shall comply with all federal, state and local immigration laws and regulations relating to the immigration status of their employees during the term of the contract. Further, the Subcontractor shall flow down this requirement to all subcontractors utilized during the term of the contract. The State shall retain the right to perform random audits of Contractor and subcontractor records or to inspect papers of any employee thereof to ensure compliance. Should the State determine that the Contractor and/or any subcontractors be found noncompliant, the State may pursue all remedies allowed by law, including, but not limited to; suspension of work, termination of the contract for default and suspension and/or debarment of the Contractor.
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ATTACHMENT B: MINIMUM NETWORK STANDARDS Contract/RFP No. YH04-0001
ATTACHMENT B: MINIMUM NETWORK STANDARDS (By Geographic Service Area) INSTRUCTIONS: Contractors shall have in place an adequate network of providers capable of meeting contract requirements. The information that follows describes the minimum network requirements by Geographic Service Area (GSA). Irs some GSA’s there are required service sites located outside of the geographical boundary of a GSA. The reason for this relates to practical access to care. In certain instances, a member must travel a much greater distance to receive services within their assigned GSA, if the member were not allowed to receive services in an adjoining GSA or state. Split zip codes occur in some counties. Split zip codes are those which straddle two different counties. Enrollment for members residing in these zip codes is based upon the county and GSA to which the entire zip code has been assigned by AHCCCS. The Contractor shall be responsible for providing services to members residing in the entire zip code that is assigned to the GSA for which the Contractor has agreed to provide services. The split zip codes GSA assignments are as follows:
SPLIT BETWEEN COUNTY ASSIGNED ZIP CODE THESE COUNTIES TO ASSIGNED GSA 85220 Pinal and Maricopa Maricopa 12 85242 Pinal and Maricopa Maricopa 12 85292 Gila and Pinal Gila 8 85342 Yavapai and Maricopa Maricopa 12 85358 Yavapai and Maricopa Maricopa 12 85390 Yavapai and Maricopa Maricopa 12 85643 Graham and Cochise Cochise 14 85645 Pima and Santa Cruz Santa Cruz 10 85943 Apache and Navajo Navajo 4 86336 Coconino and Yavapai Yavapai 6 86351 Coconino and Yavapai Coconino 4 86434 Mohave and Yavapai Yavapai 6 86340 Coconino and Yavapai Yavapai 6 If outpatient specialty services (OB, family planning, and pediatrics) are not included in the primary care provider contract, at least one subcontract is required for each of these specialties in the service sites specified. In Tucson (GSA 10) and Metropolitan Phoenix (GSA 12), the Contractor must demonstrate its ability to provide PCP, dental and pharmacy services so that members don’t need to travel more than 5 miles from their residence. Metropolitan Phoenix is defined on the Minimum Network Standard page specific to GSA #12. At a minimum, the Contractor shall have a physician with admitting and treatment privileges with each hospital in its network. Contractors in GSA 10 and/or GSA 12 must have at least one hospital contract in each service district. This requirement is part of the Hospital Subcontracting and Reimbursement. Pilot Program, described more fully in Section D, Paragraph 35, Hospital Reimbursement A list of Phoenix and Tucson area hospitals are included. Provider categories required at various service delivery sites included in the Service Area Minimum Network Standards are indicated as follows:
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ATTACHMENT B: MINIMUM NETWORK STANDARDS Contract/RFP No. YH04-0001
H Hospitals P Primary Care Providers (physicians, certified nurse practitioners and physician assistants) D Dentists Ph Pharmacies
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ATTACHMENT B: MINIMUM NETWORK STANDARDS Contract/RFP No. YH04-0001 HOSPITALS IN PHOENIX METROPOLITAIN AREA (By service district. by zip code) DISTRICT 1
85006 Banner Good Samaritan Medical Center St. Luke’s Medical Center 85008 Maricopa Medical Center 85013 St. Joseph’s Hospital & Medical Center 85020 John C. Lincoln Hospital — North Mountain
DISTRICT 2
85015 Phoenix Baptist Hospital & Medical Center 85027 John C. Lincoln Hospital — Deer Valley 85037 Banner Estrella Medical Center 85306 Banner Thunderbird Medical Center 85308 Arrowhead Community Hospital & Medical Center 85338 West Valley Hospital 85351 Walter O. Boswell Memorial Hospital 85375 Del E. Webb Memorial Hospital
DISTRICT 3
85031 Paradise Valley Hospital 85054 Mayo Clinic Hospital 85251 Scottsdale Healthcare — Osborn 85261 Scottsdale Healthcare — Shea
DISTRICT 4
85201 Mesa General Hospital Medical Center Mesa Lutheran Hospital Banner Mesa Medical Center 85202 Banner Desert Medical Center 85206 Valley Lutheran Hospital 85224 Chandler Regional Hospital 85281 Tempe St. Luke’s Hospital
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ATTACHMENT B: MINIMUM NETWORK STANDARDS Contract/RFP No. YH04-0001
HOSPITALS IN TUCSON METROPOLITAN AREA (By service district. by zip code) DISTRICT 1
85719 University Medical Center 85741 Northwest Hospital 85745 Carondelet St. Mary’s Hospital
DISTRICT 2
85711 Carondelet St. Joseph’s Hospital 85712 El Dorado Hospital Tucson Medical Center 85713 Kino Community Hospital
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ATTACHMENT F: PERIODIC REPORT REQUIREMENTS Contract/RFP No. YH04-0001
ATTACHMENT F: PERIODIC REPORT REQUIREMENTS The following table is a summary of the periodic reporting requirements for AHCCCS acute care contractors and is subject to change at any time during the term of the contract. The table is presented for convenience only and should not be construed to limit the Contractor’s responsibilities in any manner. “Reporting Guide” refers to the Reporting Guide for Acute Health Care Contractors with the Arizona Health Care Cost Containment System,
REPORT WHEN DUB SOURCE/REFERENCE SEND TO: DHCM Finance Monthly Financial Reporting Package 30 days after the end of the month, Reporting Guide Financial Manager only when required by AHCCCSA Quarterly Financial Reporting 60 days after the end of each quarter Reporting Guide Financial Manager Package FQHC Member Information 60 days after the end of each quarter Reporting Guide Section D, Financial Manager Paragraph 34 HIV/AIDS Report 60 days after the end of each quarter Reporting Guide Section D, Financial Manager Paragraph 53 Draft Annual Financial Reporting 90 days after the end of each fiscal Reporting Guide Financial Manager Package year Final Annual Financial Reporting 120 days after the end of each fiscal Reporting Guide Financial Manager Package year Non-Transplant Catastrophic Annually, within 30 days of the Section D, Paragraph 57 Reinsurance Manager Reinsurance covered Diseases beginning of the contract year, enrollment to the plan, and when newly diagnosed. Cost Allocation Plans Within 30 days of the effective date Section D, Paragraph 43 Financial Manager Subcontracts As required per Contract Section D, Paragraph 37 Financial Manager TPA Subcontracts Within 30 days of the effective date Section D, Paragraph 37 Financial Manager Physician Incentive Plan Suspended by CMS Section D, Paragraph 42 Financial Manager (PIP) reporting Advances/Loans/Equity Distributions Submit for approval prior to effective Section D, Paragraph 49 Financial Manager date
DHCM Health Plan Operations Report of all subcontracts which 90 days after the beginning of the Section D, Paragraph 37 Operations and Compliance delegate Contractor duties and contract year Officer responsibilities Provider Affiliation 15 days after the end of each quarter Provider Affiliation Transmission Operations and Compliance Transmission Manual, submitted to PMMIS Officer Provider-to-Contractor FTP Claims Dashboard 15th day of each month following the Section D, Paragraph 38 Operations and Compliance reporting period Officer Claim recoupments Upon identification by Section D, Paragraph 38 Operations and Compliance >$50,000 Contractor Officer
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ATTACHMENT F: PERIODIC REPORT REQUIREMENTS Contract/RFP No. YH04-0001
REPORT WHEN DUB SOURCE/REFERENCE SEND TO: Administrative Measures 15th day of each month following the Section D, Paragraph 24 Operations and Compliance reporting period Officer Enrollee Appeal and Provider Claim 45 days after the end of each quarter Section D, Paragraph 26 Operations and Compliance Dispute Report Officer Enrollee Grievance Report 45 days after the end of each quarter Section D, Paragraph 26 Operations and Compliance Officer Provider Network Development and 45 days after the first day of a new Section D, Paragraph 27 Operations and Compliance Management Plan contract year Officer Cultural Competency Plan 45 days after the first day of a new ACOM Cultural Competency Operations and Compliance contract year Policy Officer Business Continuity and Recovery 15 days after the beginning of each ACOM Business Continuity and Operations and Compliance Plan contract year Recovery Plan Policy Officer Marketing Attestation 45 days after the beginning of each ACOM Marketing Outreach and Operations and Compliance Statement contract year Incentives Policy Officer Marketing and Outreach Materials 30 days prior to dissemination ACOM Marketing Outreach and Operations and Compliance Incentives Policy Officer Member Handbook By August 15th of contract year, or Section D, Paragraph 18 Operations and Compliance within 4 weeks of receiving annual Officer amendment, whichever is later. Provider Network—Material Submit change for approval prior to Section D, Paragraph 29 Operations and Compliance Change effective date Officer Provider Network—Unexpected Within one business day Section D, Paragraph 29 Operations and Compliance change Officer System Change Plan Six months prior to implementation Section D, Paragraph 38 Operations and Compliance Officer
REPORT WHEN DUE SOURCE/REFERENCE SEND TO: DHCM Data Analysis Corrected Pended Monthly, according to established Encounter Manual Encounter Encounter Data schedule Administrator New Day Encounter Monthly, according to established Encounter Manual Encounter schedule Administrator Medical Records for 90 days after the request received from RFP Attachment I, Encounter Data Validation AHCCCSA Encounter Submission Administrator Requirements
REPORT WHEN DUE SOURCE/REFERENCE SEND TO: DHCM Clinical Operations Annually on December 15th RFP Section D, Paragraph 24 DHCM/CQM Management Comprehensive EPSDT Plan including Dental EPSDT Progress Report including 15 days after the end of each quarter AMPM, Chapter 400 DHCM/CQM Dental -
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ATTACHMENT F: PERIODIC REPORT REQUIREMENTS Contract/RFP No. YH04-0001
REPORT WHEN DUB SOURCE/REFERENCE SEND TO: Quarterly Update Quality Management Plan and Annually on December 15th AMPM, Chapter 900 DHCM/CQM Evaluation Monthly Pregnancy Termination End of the month following the AMPM, Chapter 400 DHCM/CQM Report pregnancy termination Maternity Care Plan Annually on December 15th AMPM, Chapter 400 DHCM/CQM Sterilization Immediately following AMPM, Chapter 400 DHCM/CQM procedure Semi-annual report of number of 30 days after the end of the 2nd and 4th AMPM, Chapter 400 DHCM/CQM pregnant women who are HIV/AIDS quarter of each contract year positive Performance Improvement Project Annually on December 15th AMPM, Chapter 900 DHCM/CQM Proposal (initial/baseline year of the project) Performance Improvement Project Re- Annually on December 15th AMPM, Chapter 900 DHCM/CQM measurement Report Performance Improvement Project Within 180 days of the end of the AMPM, Chapter 900 DHCM/CQM Final Report project, as defined in the project proposal approved by AHCCCS DHCM QM Quarterly Report 45 Days after the end of each quarter Section D, Paragraph 23 DHCM/CQM Pediatric Immunization Audit As requested Section D, Paragraph 24 DHCM/CQM
REPORT WHEN DUE SOURCE/REFERENCE SEND TO: DHCM Medical Management Quarterly Inpatient 15 days after the end of each quarter State Medicaid Manual and the DHCM/MM Hospital Showing AMPM, Chapter 1000 Utilization Management Plan and Annually on AMPM, Chapter 900 DHCM/MM Evaluation December 15th UM Quarterly Report 45 Days after the end of each quarter Section D, Paragraph 23 DHCM/MM HIV Specialty Provider Annually, on December 15th AMPM, Chapter 300 DHCM/MM List Transplant Report 15 days after the end of each month AMPM, Chapter 1000 DHCM/MM
REPORT WHEN DUE SOURCE/REFERENCE SEND TO: Office of Program Integrity Immediately following discovery Section D, Paragraph 62 Office of Program Integrity Provider Fraud/Abuse Report Manager
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ATTACHMENT F: PERIODIC REPORT REQUIREMENTS Contract/RFP No. YH04-0001
REPORT WHEN DUB SOURCE/REFERENCE SEND TO: Eligible Person Fraud/Abuse Report Immediately following discovery Section D, Paragraph 62 Office of Program Integrity Manager
REPORT WHEN DUE SOURCE/REFERENCE SEND TO: Office of the Director Prescription Drug Utilization Report Quarterly, within 45 days of quarter AMPM Pharmacy Program end Administrator
REPORT WHEN DUE SOURCE/REFERENCE SEND TO: As Required/Needed 5 days after the end of each month Section D, Paragraph 1 Financial Manager Contract Termination Reports Nursing Facility Stay When a member has been residing in a Section D, Paragraph 10, Nursing Division of Member Services nursing facility for 75 days Facility Assistant Director Key Position Change Within 7 days after an employee leaves Section D, Paragraph 16 DHCM Assistant Director and as soon as new hire has taken place Within 10 Third Party Liability Updates days of discovery Section D, Paragraph 58 TPL Administrator Within 10 Third Party Liability Case days of discovery Section D, Paragraph 58 TPL Administrator Identification Certificate of Insurance Within 10 days of contract award Section E, #25 Contract Manager Generic Extra Credit Requirement As required per your contract Per Contract Award Requirement Per Your Contract
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ATTACHMENT G: AUTO-ASSIGNMENT ALGORITHM Contract/RFP No. YH04-0001
ATTACHMENT G: AUTO-ASSIGNMENT ALGORITHM Members who do not have the right to choose a Contractor or members who have the right to choose but do not exercise this right, are assigned to a Contractor through an auto-assignment algorithm. The algorithm is a mathematical formula used to distribute members to the various Contractors in a manner that is predictable and consistent with AHCCCSA goals. The algorithm employs a data table and a formula to assign cases (a case may be a member or a household of members) to Contractors using the target percentages developed. The algorithm data table consists of all the geographic service areas (GSA) in the state, all Contractors serving each GSA, and the target percentages by risk group within each GSA. The Contractor farthest away from its target percentage within a GSA and risk group, the largest negative difference, is assigned the next case for that GSA. The equation used is: (t/T)–P = d t = The total members assigned to the GSA, per risk group category, for the Contractor T = The total members assigned to the GSA, per risk group category, all Contractors combined P = The target percentage of members per risk group for the Contractor d = The difference The algorithm is calculated after each assignment to give a new difference for each Contractor. When more than one Contractor has the same difference, and their differences are greater than all other Contractors, the Contractor with the lowest Health Plan I.D. Number will be assigned the case. Assignment by the algorithm applies to: 1. Members that are newly eligible to the AHCCCS program that did not choose a Contractor within the prescribed time limits.
2. Members whose assigned health plan is no longer available after the member moves to a new GSA and did not choose a new Contractor within the prescribed time limits.
3. Members whose assigned plan is no longer available at the beginning of a contract cycle that did not choose a Contractor within the prescribed time limits. All Contractors, within a given geographic service area (GSA) and for each risk group, will have a placement in the algorithm and will receive members accordingly. A Contractor with a more favorable target percentage in the algorithm will receive proportionally more members. Conversely, a Contractor with a lower target percentage in the algorithm will receive proportionally fewer members. The algorithm favors Contractors with both lower final bids and awarded rates. The algorithm also favors those Contractors that score higher on selected Performance Measures (See Section D, Paragraph 24, Performance Measures). For Contractors in the Maricopa and Pima/Santa Cruz GSAs with fewer than 25,000 members statewide, a temporary adjustment will be made to the algorithm formula in order to ensure a minimum membership (see the discussion entitled “Adjustment Methodology for Contractors with Fewer than 25,000 Members” for more information). Development of the Target Percentages
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ATTACHMENT G: AUTO-ASSIGNMENT ALGORITHM Contract/RFP No. YH04-0001 Beginning in CYE ‘06, the algorithm target percentages will be developed using the methodology described below. However, for subsequent years, AHCCCS reserves the right to change the algorithm methodology to assure assignments are made in the best interest of the AHCCCS program and the State. A Contractor’s placement in the algorithm is based upon the following three factors, which are weighted as follows:
# Factor Weighting 1 The final capitation rate bid submitted by the Contractor. Final bids that are below the bottom of the rate range will be assigned to the bottom of the rate range for development of the target percentages. 30% 2 The Contractor’s final awarded rate from AHCCCSA. 30% 3 The Contractor’s ranking in Well-Child visits, 3, 4, 5, and 6 Years of Age (weighted 75%) and Timeliness of Prenatal Care (weighted 25%) Performance measures as reported from the Data Warehouse at AHCCCS (measurement period CYE 2005, reported in CYE 2006). 40% Points will be assigned to each Contractor by risk group by GSA. Based on the rankings of the Final bid rates and the final awarded rates, each Contractor will be assigned a number of points for each of these two components separately as follows:
TABLE FOR FACTORS #1 AND #2
2nd 3rd 4th 5th 6th 7th Number of Lowest Lowest Lowest Lowest Lowest Lowest Lowest Awards in GSA Rate Rate Rate Rate Rate Rate Rate 2 60 40 3 44 32 24 4 35 28 22 15 5 30 25 20 15 10 6 26 23 19 15 11 6 7 25 20 17 14 11 8 5 Contractors that have equal bids in a GSA for the same risk group will be given an equal percentage of the points for all of the positions combined. The third component of the calculation, Performance Measure Rates(PMR), will be assigned a number of points based on the Contractor’s ranking among the rates for the selected Performance Measures. The higher the rate, the more points assigned. AHCCCS may update the algorithm assignment annually based on the results of Factor #3. For this component, points will be assigned as follows:
TABLE FOR FACTOR #3
2nd 3rd 4th 5th 6th 7th Number of Highest Highest Highest Highest Highest Highest Highest Awards in GSA PMR PMR PMR PMR PMR PMR PMR 2 60 40 3 44 32 24 4 35 28 22 15 5 30 25 20 15 10 6 26 23 19 15 11 6 7 25 20 17 14 11 8 5
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ATTACHMENT G: AUTO-ASSIGNMENT ALGORITHM Contract/KFP No. YH04-0001 Contractors that have equal Performance Measure Rates will be given an equal percentage of the points for all of the positions combined. The points awarded for the three components will be combined as follows to give the target percentage for each Contractor by GSA by risk group: Final Bid Points (.30) + Awarded Bid Points (.30) + Performance Measure Points (.40) = TARGET PERCENTAGE 100 Adjustment Methodology for Contractors with Fewer than 25,000 Members At the beginning of the new contract cycle, the auto-assignment algorithm for the Maricopa and Pima/Santa Cruz GSAs will be adjusted to favor Contractors with fewer than 25,000 members statewide. The adjusted algorithm will be utilized until a target membership of 25,000 members statewide, per Contractor, is reached. The adjustment will be made to the final percentages developed using the methodology above. A pre-determined percentage, based on the table below, will be added to the affected Contractor(s) and subtracted evenly from the other Contractors.
Number of Contractors Percentage Added below 25,000 statewide to New miminum enrollment Contractor Large [ILLEGIBLE] 1 20% 20% 2 15% 30% 3 10% 30%
* In the event that there are more than three affected Contractors, AHCCCS will disclose adjustment methodology by July 1, 2003. In the event that a Contractor only receives an award in rural GSAs, AHCCCS reserves the right to make a temporary adjustment to the auto-assignment target to favor the new Contractor until a minimum enrollment is reached. AHCCCSA reserves the right to adjust capitation rates for potential changes to the populations risk due to the adjusted algorithm.
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ATTACHMENT H: GRIEVANCE SYSTEM AND STANDARDS Contract/RFP No. YH04-0001
ATTACHMENT H (1): ENROLLEE GRIEVANCE SYSTEM STANDARDS AND POLICY The Contractor shall have a written policy delineating its Grievance System which shall be in accordance wish applicable Federal and State laws, regulations and policies, including, but not limited to 42 CFR Part 438 Subpart F. The Contractor shall provide the ACOM Enrollee Grievance Policy to all providers and subcontractors at the time of contract. The Contractor shall also furnish this information to enrollees within a reasonable time after the Contractor receives notice of the enrollment. Additionally, the Contractor shall provide written notification of any significant change in this policy at least 30 days before the intended effective date of the change. The written information provided to enrollees describing the Grievance System including the grievance process, the appeals process, enrollee rights, the grievance system requirements and timeframes, shall be in each prevalent non-English language occurring within the subcontractor’s service area and in an easily understood language and format. The Contractor shall inform enrollees that oral interpretation services are available in any language, that additional information is available in prevalent non-English languages upon request and how enrollees may obtain this information. Written documents, including but not limited to the Notice of Action, the Notice of Appeal Resolution, Notice of Extension for Resolution, and Notice of Extension of Notice of Action shall be translated in the enrollee’s language if information is received by the Contractor, orally or in writing, indicating that the enrollee has a limited English proficiency. Otherwise, these documents shall be translated in the prevalent non-English language(s) or shall contain information in the prevalent non-English language(s) advising the enrollee that the information is available in the prevalent non-English language(s) and in alternative formats along with an explanation of how enrollees may obtain this information. This information must be in large, bold print appearing in a prominent location on the first page of the document. At a minimum, the Contractor’s Grievance System Standards and Policy shall specify: 1. That the Contractor shall maintain records of all grievances and appeals and requests for hearing.
2. Information explaining the grievance, appeal, and fair hearing procedures and timeframes. This information shall include a description of the circumstances when there is a right to a hearing, the method for obtaining a hearing, the requirements which govern representation at the hearing, the right to file grievance and appeals and the requirements and timeframes for filing a grievance, appeal, or request for hearing.
3. The availability of assistance in the filing process and the Contractor’s toll-free numbers that an enrollee can use to file a grievance or appeal by phone if requested by the enrollee.
4. That the Contractor shall acknowledge receipt of each grievance and appeal. For Appeals, the Contractor shall acknowledge receipt of standard appeals in writing within five business days of receipt and within one business day of receipt of expedited appeals.
5. That the Contractor shall permit both oral and written appeals and grievances and that oral inquiries appealing an action are treated as appeals.
6. That the Contractor shall ensure that individuals who make decisions regarding grievances and appeals are individuals not involved in any previous level of review or decision making and that individuals who make decisions regarding: 1) appeals of denials based on lack of medical necessity, 2) a grievance regarding denial of expedited resolution of an appeal or 3) grievances or appeals involving clinical issues are health care professionals as defined in 42 CFR 438.2 with the appropriate clinical expertise in treating the enrollee’s condition or disease.
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ATTACHMENT H: Contract/RFP No. YH04-0001 GRIEVANCE SYSTEM AND STANDARDS 7. The resolution timeframes for standard appeals and expedited appeals may be extended up to 14 days if the enrollee requests the extension or if the Contractor establishes a need for additional information and that the delay is in the enrollee’s interest.
8. That if the Contractor extends the timeframe for resolution of an appeal when not requested by the enrollee, the Contractor shall provide the enrollee with written notice of the reason for the delay.
9. The definition of grievance as a member’s expression of dissatisfaction with any aspect of their care, other than the appeal of actions.
10. That an enrollee must file a grievance with the Contractor and that the enrollee is not permitted to file a grievance directly with the State.
11. That the Contractor must dispose of each grievance in accordance with the ACOM Enrollee Grievance Policy, but in no case shall the timeframe exceed 90 days.
12. The definition of action as the [42 CFR 438.400(b)]: a. Denial or limited authorization of a requested service, including the type or level of service;
b. Reduction, suspension, or termination of a previously authorized service;
c. Denial, in whole or in part, of payment for a service;
d. Failure to provide services in a timely manner;
e. Failure to act within the timeframes required for standard and expedited resolution of appeals and standard disposition of grievances; or
f. Denial of a rural enrollee’s request to obtain services outside the Contractor’s network under 42 CFR 438.52(b)(2)(ii), when the contractor is the only Contractor in the rural area. 13. The definition of a service authorization request as an enrollee’s request for the provision of a service [42 CFR 431.201].
14. The definition of appeal as the request for review of an action, as defined above.
15. Information explaining that a provider acting on behalf of an enrolle and with the enrollee’s written consent, may file an appeal.
16. That an enrollee may file an appeal of: 1) the denial or limited authorization of a requested service including the type or level of service, 2) the reduction, suspension or termination of a previously authorized service, 3) the denial in whole or in pan of payment for service, 4) the failure to provide services in a timely manner, 5) the failure of the Contractor to comply with the timeframes for dispositions of grievances and appeals and 6) the denial of a rural enrollee’s request to obtain services outside the Contractor’s network under 42 CFR 438.52(b)(2)(ii) when the Contractor is the only Contractor in the rural area.
17. The definition of a standard authorization request. For standard authorization decisions, the Contractor must provide a Notice of Action to the enrollee as expeditiously as the enrollee’s health condition requires, but not later than 14 days following the receipt of the authorization with a possible extension of up to 14 days if the enrollee or provider requests an extension or if the Contractor establishes a need for additional information and delay is in the enrollee’s best interest [42 CFR 438.210(d)(1)]. The Notice of Action must comply with the advance notice requirements when there is a termination or reduction of a previously authorized service OR when there is a denial of an authorization request and the physician asserts that the requested service/treatment is a necessary continuation of a previously authorized service.
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ATTACHMENT H: Contract/RFP No. YH04-0001 GRIEVANCE SYSTEM AND STANDARDS 18. The definition of an expedited authorization request. For expedited authorization decisions, the Contractor must provide a Notice of Action to the enrollee as expeditiously as the enrollee’s health condition requires, but not later than 3 business days following the receipt of the authorization with a possible extension of up to 14 days if the enrollee or provider requests an extension or if the Contractor establishes a need for additional information and delay is in the enrollee’s interest, [42 CFR 438.210(d)(2)]
19. That the Notice of Action for a service authorization decision not made within the standard or expedited timeframes, whichever is applicable, will be made on the date that the timeframes expire. If the Contractor extends the timeframe to make a standard or expedited authorization decision, the contractor must give the enrollee written notice of the reason to extend the timeframe and inform the enrollee of the right to file a grievance if the enrollee disagrees with the decision. The Contractor must issue and carry out its decision as expeditiously as the enrollee’s health condition requires and no later than the date the extension expires.
20. That the Contractor shall notify the requesting provider of the decision to deny or reduce a service authorization request. The notice to the provider need not be written.
21. The definition of a standard appeal and that the Contractor shall resolve standard appeals no later than 30 days from the date of receipt of the appeal unless an extension is in effect.
22. The definition of an expedited appeal and that the Contractor shall resolve all expedited appeals not later than three business days from the date the Contractor receives the appeal (unless an extension is in effect) where the Contractor determines (for a request from the enrollee), or the provider (in making the request on the enrollee’s behalf indicates) that the standard resolution tirneframe could seriously jeopardize the enrollee’s life or health or ability to attain, maintain or regain maximum function. The Contractor shall make reasonable efforts to provide oral notice to an enrollee regarding an expedited resolution appeal.
23. That if the Contractor denies a request for expedited resolution, it must transfer the appeal to the 30-day timeframe for a standard appeal. The Contractor must make reasonable efforts to give the enrollee prompt oral notice and follow-up within two days with a written notice of the denial of expedited resolution.
24. That an enrollee shall be given 60 days from the date of the Contractor’s Notice of Action to file an appeal.
25. That the Contractor shall mail a Notice of Action: 1) at least 10 days before the date of a termination, suspension or reduction of previously authorized AHCCCS services, except as provided in (a)—(e) below; 2) at least 5 days before the date of action in the case of suspected fraud; 3) at the time of any action affecting the claim when there has been a denial of payment for a service, in whole or in part; 4) within 14 days from receipt of a standard service authorization request and within three business days from receipt of an expedited service authorization request, unless an extension is in effect. For service authorization decisions, the Contractor shall also ensure that the Notice of Action provides the enrollee with advance notice and the right to request continued benefits for all terminations and reductions of a previously authorized service and for denials when the physician asserts that the requested service/treatment which has been denied is a necessary continuation of a previously authorized service. As described below, the Contractor may elect to mail a Notice of Action no later than the date of action when: a. The Contractor receives notification of the death of an enrollee;
b. The enrollee signs a written statement requesting service termination or gives information requiring termination or reduction of services (which indicates understanding that the termination or reduction will be the result of supplying that information);
c. The enrollee is admitted to an institution where he is ineligible for further services;
d. The enrollee’s address is unknown and mail directed to the enrollee has no forwarding address;
e. The enrollee has been accepted for Medicaid in another local jurisdiction;
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ATTACHMENT H: Contract/RFP No. YH04-0001 GRIEVANCE SYSTEM AND STANDARDS 26. That the Contractor include, as parties to the appeal, the enrollee, the enrollee’s legal representative, or the legal representative of a deceased enrollee’s estate,
27. That the Notice of Action must explain: 1) the action the Contractor has taken or intends to take, 2) the reasons for the action, 3) the enrollee’s right to file an appeal with the Contractor, 4) the procedures for exercising these rights, 5) circumstances when expedited resolution is available and how to request it and 6) the enrollee’s right to receive continued benefits pending resolution of the appeal, how to request continued benefits’ and the circumstances under which the enrollee may be required to pay for the cost of these services.
28. That benefits shall continue until a hearing decision is rendered if: 1) the enrollee files an appeal before the later of a) 10 days from the mailing of the Notice of Action or b) the intended date of the Contractor’s action, 2) a) the appeal involves the termination, suspension, or reduction of a previously authorized course of treatment or b) the appeal involves a denial and the physician asserts that the requested service/treatment is a necessary continuation of a previously authorized service, 3) the services were ordered by an authorized provider and 4) the enrollee requests a continuation of benefits.
For purposes of this paragraph, benefits shall be continued based on the authorization which was in place prior to the denial, termination, reduction, or suspension which has been appealed.
29. That for appeals, the Contractor provides the enrollee a reasonable opportunity to present evidence and allegations of fact or law in person and in writing and that the Contractor informs the enrollee of the limited time available in cases involving expedited resolution.
30. That for appeals, the Contractor provides the enrollee and his representative the opportunity before and during the appeals process to examine the enrollee’s case file including medical records and other documents considered during the appeals process.
31. That the Contractor must ensure that punitive action is not taken against a provider who either requests an expedited resolution or supports an enrollee’s appeal.
32. That the Contractor shall provide written Notice of Appeal Resolution to the enrollee and the enrollee’s representative or the representative of the deceased enrollee’s estate which must contain: 1) the results of the resolution process, including the legal citations or authorities supporting the determination, and the date it was completed, and 2) for appeals not resolved wholly in favor of enrollees: a) the enrollee’s right to request a State fair hearing (including the requirement that the enrollee must file the request for a hearing in writing) no later than 30 days after the date the enrollee receives the Contractor’s notice of appeal resolution and how to do so, b) the right to receive continued benefits pending the hearing and how to request continuation of benefits and c) information explaining that the enrollee may be held liable for the cost of benefits if the hearing decision upholds the Contractor.
33. That the Contractor continues extended benefits originally provided to the enrollee until any of the following occurs: 1) the enrollee withdraws appeal, 2) the enrollee has not specifically requested continued benefits pending a hearing decision within 10 days of the Contractor mailing of the appeal resolution notice, or 3) the AHCCCS Administration issues a state fair hearing decision adverse to the enrollee.
34. That if the enrollee files a request for hearing the Contractor must ensure that the case file and all supporting documentation is received by the AHCCCSA, Office of Legal Assistance (OLA) as specified by OLA. The file provided by the Contractor must contain a cover letter that includes: a. Enrollee’s name
b. Enrollee’s AHCCCS I.D. number
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ATTACHMENT H: Contract/RFP No. YH04-0001 GRIEVANCE SYSTEM AND STANDARDS c. Enrollee’s address
d. Enrollee’s phone number (if applicable)
e. date of receipt of the appeal
f. summary of the Contractor’s actions undertaken to resolve the appeal and summary of the appeal resolution 35. The following material shall be included in the file sent by the Contractor: a. the Enrollee’s written request for hearing
b. copies of the entire appeal file which includes all supporting documentation including pertinent findings and medical records;
c. the Contractor’s Notice of Appeal Resolution
d. other information relevant to the resolution of the appeal 36. That if the Contractor or the State fair decision reverses a decision to deny, limit or delay services not furnished during the appeal or the pendency of the hearing process, the Contractor shall authorize or provide the services promptly and as expeditiously as the enrollee’s health condition requires irrespective of whether the Contractor contests the decision..
37. That if the Contractor or State fair hearing decision reverses a decision to deny authorization of services and the disputed services were received pending appeal, the Contractor shall pay for those services, as specified in policy and/or regulation.
38. That if the Contractor or State fair hearing decision upholds a decision to deny authorization of services and the disputed services were received pending appeal, the Contractor may recover the cost of those services from the enrollee.
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ATTACHMENT H: Contract/RFP No. YH04-0001 GRIEVANCE SYSTEM AND STANDARDS
ATTACHMENT H(2) PROVIDER CLAIM-DISPUTE STANDARDS AND POLICY The Contractor shall have in place a written claim dispute policy for providers. The policy shall be in accordance with applicable Federal and State laws, regulations and policies. The claim dispute policy shall include the following provisions: 1. The Provider Claim Dispute Policy shall be provided to all subcontractors at the time of contract. For providers without a contract, the claim dispute policy may be mailed with a remittance advice, provided the remittance is sent within 45 days of receipt of a claim.
2. The Provider Claim Dispute Policy must specify that all claim disputes challenging claim payments, denials or recoupments must be filed in writing with the Contractor no later than 12 months from the date of service, 12 months after the date of eligibility posting or within 60 days after the payment, denial or recoupment of a timely claim submission, whichever is later.
3. Specific individuals are appointed with authority to require corrective action and with requisite experience to administer the claim dispute process.
4. A log is maintained for all claim disputes containing sufficient information to identify the Complainant, date of receipt, nature of the claim dispute and the date the claim dispute is resolved. Separate logs must be maintained for provider and behavioral health recipient claim disputes.
5. Within five business days of receipt, the Complainant is informed by letter that the claim dispute has been received.
6. Each claim dispute is thoroughly investigated using the applicable statutory, regulatory, contractual and policy provisions, ensuring that facts are obtained from all parties.
7. All documentation received by the Contractor during the claim dispute process is dated upon receipt.
8. All claim disputes are filed in a secure designated area and are retained for five years following the Contractor’s decision, the Administration’s decision, judicial appeal or close of the claim dispute, whichever is later, unless otherwise provided by law.
9. A copy of the Contractor’s Notice of Decision (hereafter referred to as Decision) will be communicated in writing to all parties. The Decision must include and describe in detail, the following: a. the nature of the claim dispute
b. the issues involved
c. the reasons supporting the Contractor’s Decision, including references to applicable statute, rule, applicable contractual provisions, policy and procedure
d. the Provider’s right to request a hearing by filling a written request for hearing to the Contractor no later than 30 days after the date the Provider receives the Contractor’s decision.
e. If the claim dispute is overturned, the requirement that the Contractor shall reprocess and pay the claim(s) in a manner consistent with the decision within 15 business days of the date of the Decision. 10. If the Provider files a written request for hearing, the Contractor must ensure that all supporting documentation is received by the AHCCCSA, Office of Legal Assistance, no later than five business days from the date the Contractor receives the provider’s written hearing request. The file sent by the Contractor must contain a cover letter that includes:
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ATTACHMENT H: Contract/RFP No. YH04-0001 GRIEVANCE SYSTEM AND STANDARDS a. Provider’s name
b. Provider’s AHCCCS ID number
c. Provider’s address
d. Provider’s phone number (if applicable)
e. the date of receipt of claim dispute
f. a summary of the Contractor’s actions undertaken to resolve the claim dispute and basis of the determination 11. The following material shall be included in the file sent by the Contractor: a. written request for hearing filed by the Provider
b. copies of the entire file which includes pertinent records; and the Contractor’s Decision
c. other information relevant to the Notice of Decision of the claim dispute 12. If the Contractor’s decision regarding a claim dispute is reversed through the appeal process, the Contractor shall reprocess and pay the claim (s) in a manner consistent with the decision within 15 business days of the date of the Decision.
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ATTACHMENT I: ENCOUNTER SUBMISSION REQUIREMENTS Contract/RFP No. YH04-0001
ATTACHMENT I: ENCOUNTER SUBMISSION REQUIREMENTS The Contractor will be assessed sanctions for noncompliance with encounter submission requirements. AHCCCSA may also perform special reviews of encounter data, such as comparing encounter reports to the Contractor’s claims files. Any findings of incomplete or inaccurate encounter data may result in the imposition of sanctions or requirement of a corrective action plan.
Pended Encounter Corrections The Contractor must resolve all pended encounters within 120 days of the original processing date. Sanctions will be imposed according to the following schedule for each encounter pended for more than 120 days unless the pend is due to AHCCCSA error:
0 – 120 days 121 – 180 days 181 – 240 days 241 – 360 days 361 + days No sanction $5 per month $ 10 per month $ 15 per month $20 per month “AHCCCSA error” is defined as a pended encounter, which (1) AHCCCSA acknowledges to be the result of its own error, and (2) requires a change to the system programming, an update to the database reference table, or further research by AHCCCSA. AHCCCSA reserves the right to adjust the sanction amount if circumstances warrant. When the Contractor notifies AHCCCSA, in writing, that the resolution of a pended encounter depends on AHCCCSA rather than the Contractor, AHCCCSA will respond in writing within 30 days of receipt of such notification. The AHCCCSA response will report the status of each pending encounter problem or issue in question. Pended encounters will not qualify as AHCCCSA errors if AHCCCSA reviews the Contractor’s notification and asks the Contractor to research the issue and provide additional substantiating documentation, or if AHCCCSA disagrees with the Contractor’s claim of AHCCCSA error. If a pended encounter being researched by AHCCCSA is later determined not to be caused by AHCCCSA error, the Contractor may be sanctioned retroactively. Before imposing sanctions, AHCCCSA will notify the Contractor, in writing, of the total numbers of sanctionable encounters pended more than 120 days. Pended encounters shall not be deleted by the Contractor as a means of avoiding sanctions for failure to correct encounters within 120 days. The Contractor shall document deleted encounters and shall maintain a record of the deleted CRNs with appropriate reasons indicated. The Contractor shall, upon request, make this documentation available to AHCCCSA for review.
Encounter Validation Studies Per CMS requirement, AHCCCSA will conduct encounter validation studies of the Contractor’s encounter submissions, and sanction the Contractor for noncompliance with encounter submission requirements. The purpose of encounter validation studies is to compare recorded utilization information from a medical record or other source with the Contractor’s submitted encounter data. Any and all covered services may be validated as part of these studies. Encounter validation studies will be conducted at least yearly. AHCCCSA may revise study methodology, timelines, and sanction amounts based on agency review or as a result of consultations with CMS. The Contractor will be notified in writing of any significant change in study methodology. AHCCCSA will conduct two encounter validation studies. Study “A” examines non-institutional services (form HCFA 1500 encounters), and Study “B” examines institutional services (form UB-92 encounters).
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ATTACHMENT I: ENCOUNTER SUBMISSION REQUIREMENTS Contract/RFP No. YH04-0001 AHCCCSA will notify the Contractor in writing of the sanction amounts and of the selected data needed for encounter validation studies. The Contractor will have 90 days to submit the requested data to AHCCCSA. In the case of medical records requests, the Contractor’s failure to provide AHCCCSA with the records requested within 90 days may result in a sanction of £1,000 per missing medical record. If AHCCCSA does not receive a sufficient number of medical records from the Contractor to select a statistically valid sample for a study, the Contractor may be sanctioned up to 5% of its annual capitation payment The criteria used in encounter validation studies may include timeliness, correctness, and omission of encounters. These criteria are defined as follows: Timeliness: The time elapsed between the date of service and the date that the encounter is received at AHCCCS. For all encounters for which timeliness is evaluated, a sanction per encounter error extrapolated to the population of encounters may be assessed if the encounter record is received by AHCCCSA more than 240 days after the end of the month in which the service was rendered, or the effective date of the enrollment. It is anticipated that the sanction amount will be $1.00 per error extrapolated to the population of encounters; however, sanction amounts may be adjusted if AHCCCSA determines that encounter quality has changed, or if . CMS changes sanction requirements. The Contractor will be notified of the sanction amount in effect for the studies at the time the studies begin. Correctness: ‘A correct encounter contains a complete and accurate description of AHCCCS covered services provided to a member. A sanction per encounter error extrapolated to the population of encounters may be assessed if the encounter is incomplete or incorrectly coded. It is anticipated that the sanction amount will be $1.00 per error extrapolated to the population of encounters; however, sanction amounts may be adjusted if AHCCCSA determines that encounter quality has changed, or if CMS changes sanction requirements. The Contractor will be notified of the sanction amount in effect for the studies at the time the studies begin. Omission of data: An encounter not submitted to AHCCCSA or an encounter inappropriately deleted from AHCCCS A’s pending encounter file or historical files in lieu of correction of such record. For Study “A” and for Study “B”, a sanction per encounter error extrapolated to the population of encounters may be assessed for an omission. It is anticipated that the sanction amount will be $ 5.00 per error extrapolated to the population of encounters for Study “A” and $10.00 per error extrapolated to the population of encounters for Study “B”; however, sanction amounts may be adjusted if AHCCCSA determines that encounter quality has changed, or if CMS changes sanction requirements. The Contractor will be notified of the sanction amount in effect for the studies at the time the studies begin. For encounter validation studies, AHCCCSA will select all approved and pended encounters to be studied no earlier than 240 days after the end of the month in which the service was rendered. Once AHCCCSA has selected the Contractor’s encounters for encounter validation studies, subsequent encounter submissions for the period being studied will not be considered. AHCCCSA may review all of the Contractor’s submitted encounters, or may select a sample. The sample size, or number of encounters to be reviewed, will be determined using statistical methods in order to accurately estimate the Contractor’s error rates. Error rates will be calculated by dividing the number of errors found by the number of encounters reviewed. A 95% confidence interval will be used to account for limitations caused by sampling. The confidence interval shows the range within which the true error rate is estimated to be. If error rates are based on a sample, the error rate used for sanction purposes will be the lower limit of the confidence interval. Encounter validation methodology and statistical formulas are provided in the AHCCCS Encounter Data Validation Technical Document, which is available in the Bidders Library. This document also provides
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ATTACHMENT I: ENCOUNTER SUBMISSION REQUIREMENTS Contract/RFP No. YH04-0001 examples, which illustrate how AHCCCSA determines study sample sizes, error rates, confidence intervals, and sanction amounts. Written preliminary results of all encounter validation studies will be sent to the Contractor for review and comment. The Contractor will have a maximum of 30 days to review results and provide AHCCCSA with additional documentation that would affect the final calculation of error rates and sanctions. AHCCCSA will examine the Contractor’s documentation and may revise study results if warranted. Written final results of the study will then be sent to the Contractor and communicated to CMS, and any sanctions will be assessed. The Contractor may file a written challenge to sanctions assessed by AHCCCSA not more than 35 days after the Contractor receives final study results from AHCCCSA. Challenges will be reviewed by AHCCCSA and a written decision will be rendered no later than 60 days from the date of receipt of a timely challenge. Sanctions shall not apply to encounter errors successfully challenged. A challenge must be filed on a timely basis and a decision must be rendered by AHCCCSA prior to filing a claim dispute and request for hearing pursuant to A.A.C. 9-34-401 et seq. Sanction amounts will be’deducted from the Contractor’s capitation payment.
Encounter Corrections Contractors are required to submit replacement or voided encounters in the event that claims are subsequently corrected following the initial encounter submission. This includes corrections as a result of inaccuracies identified by fraud and abuse audits or investigations conducted by AHCCCSA or the Contractor. Contractors shall refer to the Encounter Reporting User Manual for instructions regarding submission of corrected encounters.
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ATTACHMENT L: COST SHARING COPAYMENTS Contract/RFP No. YH04-0001
ATTACHMENT L: COST SHARING COPAYMENTS I. EXEMPT POPULATIONS (REGARDLESS OF RATE CODE)
The following populations are exempt from copayments for ALL services ($0 copay): • All members under the age of 19, including all KidsCare members
• All Pregnant Women
• All ALTCS enrolled members
• All persons with Serious Mental Illness receiving RBHA services
• All members who are receiving CRS services
• SOBRA Family Planning Services Only members Additionally, no member may be asked to make a copayment for family planning services or supplies. II. STANDARD COPAYMENTS APPLY TO THE TITLE XIX WAIVER GROUP
Services to this population may not be denied for failure to pay copayment
The standard copayrnents apply to the Title XIX Waiver Group, including RBHA General Mental Health and Substance Abuse service members. The standard copayrnents are as follows:
Service Copayment Generic Prescriptions or Brand Name if generic not available $0 per Rx Brand Name Prescriptions when generic is available $ 0 Non Emergency Use of ER $ 1 Physician Office Visits $ 1 III. STANDARD COPAYMENTS APPLY TO THE FOLLOWING POPULATIONS
Services to this population may not be denied for failure to pay copayment. • AHCCCS for Families with Children
• Supplemental Security Income with and without Medicare
Service Copayment Generic Prescriptions or Brand Name if generic not available $ 0 Brand Name Prescriptions when generic is available $ 0 Non Emergency Use of ER $ 1 Physician Office Visits $ 1 IV. OTHER CO-PAYS
HIFA Parents (Parents of KidsCare and SOBRA Children) • Copayment is not mandatory
• EXCEPTION: Native American Contractor Enrolled Parents are exempt from any copayment
Service Copayment Generic Prescriptions or Brand Name if generic not available $ 0 Brand Name Prescriptions when generic is available $ 0 Non Emergency Use of ER $ 1 Physician Office Visits $ 0
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Exhibit 10.47
The IASIS Healthcare LLC Non-qualified Executive Savings Plan IASIS introduced its nonqualified executive savings plan July 1, 2006. The plan is a voluntary, tax-deferred savings vehicle that is available to those employees, including physicians, who have reached a specific level of earnings and who will play a significant role in the long-term strategy of the Company. An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) Retirement Savings Plan in order to participate in the non-qualified executive savings plan. There are two types of deferrals available under the non-qualified executive savings plan: excess deferrals and additional deferrals. Excess deferrals are contributions that are deposited into the non-qualified executive savings plan because either (a) the participant’s earnings have exceeded $225,000 and/or (b) the participant’s deferrals into the 401(k) retirement plan have reached the dollar limit ($15,000 in 2006). Excess deferrals are automatically deposited into the non-qualified executive savings plan if these limits are reached. Physician excess deferrals are not matched. Executive excess deferrals are matched at the same rate as contributions to the 401(k) retirement plan. There is a five-year service requirement for participants to vest in the excess matching contributions. Additional deferrals are contributions to the non-qualified executive savings plan that are independent of a participant’s 401(k) plan contribution election. The non-qualified executive savings plan offers a range of investment options that act as “benchmark funds.” Benchmark funds are defined as the investment fund or funds used to represent the performance and current deemed balance of a participant’s nonqualified account, which is considered a notional deferred compensation account. Contributions become part of the general assets of IASIS.
Exhibit 10.48
JOINDER AGREEMENT THIS JOINDER AGREEMENT (the “Agreement”), effective as of July 20, 2006, is by and between IASIS GLENWOOD REGIONAL MEDICAL CENTER, L.P., a Delaware limited partnership (the “Subsidiary”), and BANK OF AMERICA, N.A., in its capacity as Administrative Agent under that certain Amended and Restated Credit Agreement (as it may be amended, modified, restated or supplemented from time to time, the “Credit Agreement”), dated as of June 22, 2004, by and among IASIS HEALTHCARE LLC, a Delaware limited liability company (the “Borrower”), the Guarantors, the Lenders and Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C Issuer. All of the defined terms in the Credit Agreement are incorporated herein by reference. The Loan Parties are required by Section 7.11 of the Credit Agreement to cause the Subsidiary to become a “Guarantor”. Accordingly, the Subsidiary hereby agrees as follows with the Administrative Agent, for the benefit of the Lenders: 1. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Credit Agreement and a “Guarantor” for all purposes of the Credit Agreement, and shall have all of the obligations of a Guarantor thereunder as if it had executed the Credit Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Guarantors contained in the Credit Agreement. Without limiting the generality of the foregoing terms of this paragraph 1, the Subsidiary hereby jointly and severally together with the other Guarantors, guarantees to each Lender and the Administrative Agent, as provided in Article IV of the Credit Agreement, the prompt payment and performance of the Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) strictly in accordance with the terms thereof. 2. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Security Agreement and shall have all the obligations of an “Obligor” (as such term is defined in the Security Agreement) thereunder as if it had executed the Security Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Security Agreement. Without limiting the generality of the foregoing terms of this paragraph 2, the Subsidiary hereby grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in, and a right of set off against, any and all right, title and interest of the Subsidiary in and to the Collateral (as such term is defined in Section 2 of the Security Agreement) of the Subsidiary. The Subsidiary hereby represents and warrants to the Agent that: (i) The Subsidiary’s chief executive office and chief place of business are (and for the prior four months have been) located at the locations set forth on Schedule 1 attached hereto and the Subsidiary keeps its books and records at such locations.
(ii) The type of Collateral owned by the Subsidiary and the location of all Collateral owned by the Subsidiary is as shown on Schedule 2 attached hereto. (iii) The Subsidiary’s legal name is as shown in this Agreement and the Subsidiary has not in the past four months changed its name, been party to a merger, consolidation or other change in structure or used any tradename except as set forth in Schedule 3 attached hereto. (iv) The patents and trademarks listed on Schedule 4 attached hereto constitute all of the registrations and applications for the patents and trademarks owned by the Subsidiary. (v) The Subsidiary Equity (as such term is defined in Section 1 of the Security Agreement) owned by the Subsidiary is listed on Schedule 5 attached hereto. 3. The address of the Subsidiary for purposes of all notices and other communications is 117 Seaboard Lane, Building E, Franklin, TN 37067, Attention of President or General Counsel of IASIS Healthcare Corporation (Facsimile No. 615-846-3006). 4. The Subsidiary hereby waives acceptance by the Administrative Agent and the Lenders of the guaranty by the Subsidiary under Section 4 of the Credit Agreement upon the execution of this Agreement by the Subsidiary. 5. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract. 6. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York.
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IN WITNESS WHEREOF, the Subsidiary has caused this Joinder Agreement to be duly executed by its authorized officers, and the Administrative Agent, for the benefit of the Lenders, has caused the same to be accepted by its authorized officer, as of the day and year first above written. IASIS GLENWOOD REGIONAL MEDICAL CENTER, L.P. By: IASIS Healthcare Holdings, Inc., its general partner
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
Acknowledged and accepted:
BANK OF AMERICA, N.A., as Administrative Agent
By: /s/ Kevin R. Wagley
Name: Kevin R. Wagley
Title: Senior Vice President
3
Schedule 1 Chief Executive Office and Chief Place of Business
117 Seaboard Lane, Building E Franklin, TN 37067
Schedule 2 Types and Locations of Collateral None of the Collateral of the Subsidiary consists of, or is Proceeds of, As-Extracted Collateral, Consumer Goods, Farm Products, Manufactured Homes or Standing Timber. All Collateral of the Subsidiary is or will be located at (1) the Subsidiary’s chief executive office and chief place of business as set forth on Schedule 1, and/or (2) the campus of Glenwood Regional Medical Center.
Schedule 3 Tradenames
IASIS Glenwood Regional Medical Center, L.P.
Schedule 4 Patents and Trademarks
None.
Schedule 5 Subsidiary Equity
None.
Exhibit 10.49
JOINDER AGREEMENT THIS JOINDER AGREEMENT (the “Agreement”), effective as of July 27, 2006, is by and between THE HEART CENTER OF CENTRAL PHOENIX, L.P., a Delaware limited partnership (the “Subsidiary”), and BANK OF AMERICA, N.A., in its capacity as Administrative Agent under that certain Amended and Restated Credit Agreement (as it may be amended, modified, restated or supplemented from time to time, the “Credit Agreement”), dated as of June 22, 2004, by and among IASIS HEALTHCARE LLC, a Delaware limited liability company (the “Borrower”), the Guarantors, the Lenders and Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C Issuer. All of the defined terms in the Credit Agreement are incorporated herein by reference. The Loan Parties are required by Section 7.11 of the Credit Agreement to cause the Subsidiary to become a “Guarantor”. Accordingly, the Subsidiary hereby agrees as follows with the Administrative Agent, for the benefit of the Lenders: 1. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Credit Agreement and a “Guarantor” for all purposes of the Credit Agreement, and shall have all of the obligations of a Guarantor thereunder as if it had executed the Credit Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Guarantors contained in the Credit Agreement. Without limiting the generality of the foregoing terms of this paragraph 1, the Subsidiary hereby jointly and severally together with the other Guarantors, guarantees to each Lender and the Administrative Agent, as provided in Article IV of the Credit Agreement, the prompt payment and performance of the Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) strictly in accordance with the terms thereof. 2. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Security Agreement and shall have all the obligations of an “Obligor” (as such term is defined in the Security Agreement) thereunder as if it had executed the Security Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Security Agreement. Without limiting the generality of the foregoing terms of this paragraph 2, the Subsidiary hereby grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in, and a right of set off against, any and all right, title and interest of the Subsidiary in and to the Collateral (as such term is defined in Section 2 of the Security Agreement) of the Subsidiary. The Subsidiary hereby represents and warrants to the Agent that: (i) The Subsidiary’s chief executive office and chief place of business are (and for the prior four months have been) located at the locations set forth on Schedule 1 attached hereto and the Subsidiary keeps its books and records at such locations.
(ii) The type of Collateral owned by the Subsidiary and the location of all Collateral owned by the Subsidiary is as shown on Schedule 2 attached hereto. (iii) The Subsidiary’s legal name is as shown in this Agreement and the Subsidiary has not in the past four months changed its name, been party to a merger, consolidation or other change in structure or used any tradename except as set forth in Schedule 3 attached hereto. (iv) The patents and trademarks listed on Schedule 4 attached hereto constitute all of the registrations and applications for the patents and trademarks owned by the Subsidiary. (v) The Subsidiary Equity (as such term is defined in Section 1 of the Security Agreement) owned by the Subsidiary is listed on Schedule 5 attached hereto. 3. The address of the Subsidiary for purposes of all notices and other communications is 117 Seaboard Lane, Building E, Franklin, TN 37067, Attention of President or General Counsel of IASIS Healthcare Corporation (Facsimile No. 615-846-3006). 4. The Subsidiary hereby waives acceptance by the Administrative Agent and the Lenders of the guaranty by the Subsidiary under Section 4 of the Credit Agreement upon the execution of this Agreement by the Subsidiary. 5. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract. 6. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York.
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IN WITNESS WHEREOF, the Subsidiary has caused this Joinder Agreement to be duly executed by its authorized officers, and the Administrative Agent, for the benefit of the Lenders, has caused the same to be accepted by its authorized officer, as of the day and year first above written. THE HEART CENTER OF CENTRAL PHOENIX, L.P. By: IASIS Healthcare Holdings, Inc., its general partner
By: /s/ Frank A. Coyle Name: Frank A. Coyle Title: Secretary
Acknowledged and accepted:
BANK OF AMERICA, N.A., as Administrative Agent
By: /s/ Kevin R. Wagley
Name: Kevin R. Wagley
Title: Senior Vice President
3
Schedule 1 Chief Executive Office and Chief Place of Business
117 Seaboard Lane, Building E Franklin, TN 37067
Schedule 2 Types and Locations of Collateral None of the Collateral of the Subsidiary consists of, or is Proceeds of, As-Extracted Collateral, Consumer Goods, Farm Products, Manufactured Homes or Standing Timber. All Collateral of the Subsidiary is or will be located at (1) the Subsidiary’s chief executive office and chief place of business as set forth on Schedule 1, and/or (2) the campus of St. Luke’s Regional Medical Center.
Schedule 3 Tradenames
The Heart Center of Central Phoenix, L.P.
Schedule 4 Patents and Trademarks
None.
Schedule 5 Subsidiary Equity
None.
Exhibit 21
Subsidiaries Jurisdiction of Organization Arizona Diagnostic & Surgical Center, Inc. Delaware Baptist Joint Venture Holdings, Inc. Delaware Beaumont Hospital Holdings, Inc. Delaware Biltmore Surgery Center Holdings, Inc. Delaware Biltmore Surgery Center Limited Partnership Arizona Biltmore Surgery Center, Inc. Arizona Brookwood Diagnostic Center of Tampa, Inc. Delaware Cardiovascular Specialty Centers of Utah, LP Delaware Davis Hospital & Medical Center, LP Delaware Davis Hospital Holdings, Inc. Delaware Davis Surgical Center Holdings, Inc. Delaware DecisionPoint Services, Inc. Delaware First Choice Physicians Network Holdings, Inc. Delaware Health Choice Arizona, Inc. Delaware IASIS Capital Corporation Delaware IASIS Finance Texas Holdings, LLC Delaware IASIS Finance, Inc. Delaware IASIS Glenwood Regional Medical Center, L.P. Delaware IASIS Healthcare Foundation Tennessee IASIS Healthcare Holdings, Inc. Delaware IASIS Healthcare LLC Delaware IASIS Hospital Nurse Staffing Company Delaware IASIS Management Company Delaware IASIS Physician Services, Inc. Delaware IASIS Transco, Inc. Delaware Jordan Valley Hospital Holdings, Inc. Delaware Jordan Valley Hospital, LP Delaware MCS/AZ, Inc. Delaware Memorial Hospital of Tampa, LP Delaware Mesa General Hospital, LP Delaware Metro Ambulatory Surgery Center, Inc. Delaware Mountain Vista Medical Center, LP Delaware NLV Healthcare Development, LP Delaware North Vista Hospital, Inc. Delaware Odessa Regional Hospital, LP Delaware
Subsidiaries Jurisdiction of Organization Palms of Pasadena Homecare, Inc. Delaware Palms of Pasadena Hospital, LP Delaware Permian Premier Health Services, Inc. Texas Pioneer Valley Hospital Physicians, Inc. Delaware Pioneer Valley Hospital, Inc. Delaware Rocky Mountain Medical Center, Inc. Delaware Salt Lake Regional Medical Center, Inc. Delaware Salt Lake Regional Physicians, Inc. Delaware Seaboard Development LLC Utah Southridge Plaza Holdings, Inc. Delaware Southwest General Hospital, LP Delaware SSJ St. Petersburg Holdings, Inc. Delaware St. Luke’s Behavioral Hospital, LP Delaware St Luke’s Medical Center, LP Delaware Tampa Bay Staffing Solutions, Inc. Delaware Tempe St Luke’s Hospital, LP Delaware The Heart Center of Central Phoenix, L.P. Delaware The Medical Center of Southeast Texas, L.P. Delaware The Surgery Center at Salt Lake Regional, LLC Delaware Town & Country Hospital, LP Delaware Utah Transcription Services, Inc. Delaware
Exhibit 31.1
CERTIFICATIONS I, David R. White, certify that: 1. I have reviewed this annual report on Form 10-K of IASIS Healthcare LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 19, 2006
/s/ David R. White David R. White Chairman of the Board
and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS I, W. Carl Whitmer, certify that: 1. I have reviewed this annual report on Form 10-K of IASIS Healthcare LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 19, 2006
/s/ W. Carl Whitmer W. Carl Whitmer Chief Financial Officer