Community Health Systems 2015 Annual Report Download - page 160

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Company has committed to spend approximately $516 million for costs such as capital improvements,
equipment, selected leases and physician recruiting. These commitments are required to be fulfilled generally
over a five to seven year period after acquisition. Through December 31, 2015, the Company has spent
approximately $254 million related to these commitments.
Physician Recruiting Commitments. As part of its physician recruitment strategy, the Company provides
income guarantee agreements to certain physicians who agree to relocate to its communities and commit to
remain in practice there. Under such agreements, the Company is required to make payments to the physicians in
excess of the amounts they earned in their practice up to the amount of the income guarantee. These income
guarantee periods are typically for 12 months. Such payments are recoverable by the Company from physicians
who do not fulfill their commitment period, which is typically three years, to the respective community. At
December 31, 2015, the maximum potential amount of future payments under these guarantees in excess of the
liability recorded is $34 million.
Professional Liability Claims. As part of the Company’s business of owning and operating hospitals, it is
subject to legal actions alleging liability on its part. The Company accrues for losses resulting from such liability
claims, as well as loss adjustment expenses that are out-of-pocket and directly related to such liability claims.
These direct out-of-pocket expenses include fees of outside counsel and experts. The Company does not accrue
for costs that are part of corporate overhead, such as the costs of in-house legal and risk management
departments. The losses resulting from professional liability claims primarily consist of estimates for known
claims, as well as estimates for incurred but not reported claims. The estimates are based on specific claim facts,
historical claim reporting and payment patterns, the nature and level of hospital operations and actuarially
determined projections. The actuarially determined projections are based on the Company’s actual claim data,
including historic reporting and payment patterns which have been gathered over an approximate 20-year period.
As discussed below, since the Company purchases excess insurance on a claims-made basis that transfers risk to
third-party insurers, the liability it accrues does include an amount for the losses covered by its excess insurance.
The Company also records a receivable for the expected reimbursement of losses covered by excess insurance.
Since the Company believes that the amount and timing of its future claims payments are reliably determinable,
it discounts the amount accrued for losses resulting from professional liability claims using the risk-free interest
rate corresponding to the timing of expected payments.
The net present value of the projected payments was discounted using a weighted-average risk-free rate of
1.6%, 1.7% and 1.6% in 2015, 2014 and 2013, respectively. This liability is adjusted for new claims information
in the period such information becomes known. The Company’s estimated liability for professional and general
liability claims was $901 million and $924 million as of December 31, 2015 and 2014, respectively. The
estimated undiscounted claims liability was $949 million and $964 million as of December 31, 2015 and 2014,
respectively. The current portion of the liability for professional and general liability claims was $156 million
and $164 million as of December 31, 2015 and 2014, respectively, and is included in other accrued liabilities in
the accompanying consolidated balance sheets, with the long-term portion recorded in other long-term liabilities.
Professional malpractice expense includes the losses resulting from professional liability claims and loss
adjustment expense, as well as paid excess insurance premiums, and is presented within other operating expenses
in the accompanying consolidated statements of income.
The Company’s processes for obtaining and analyzing claims and incident data are standardized across all of
its hospitals and have been consistent for many years. The Company monitors the outcomes of the medical care
services that it provides and for each reported claim, the Company obtains various information concerning the
facts and circumstances related to that claim. In addition, the Company routinely monitors current key statistics
and volume indicators in its assessment of utilizing historical trends. The average lag period between claim
occurrence and payment of a final settlement is between four and five years, although the facts and circumstances
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