HCA Holdings 2011 Annual Report Download - page 87

HCA HOLDINGS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Market Risk (Continued)
On September 30, 2011, we refinanced our $2.000 billion asset-based revolving credit facility maturing on
November 16, 2012 to increase the total capacity to $2.500 billion and extend the maturity to 2016.
The estimated fair value of our total long-term debt was $27.199 billion at December 31, 2011. The
estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt
with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized reduction
to future pretax earnings would be approximately $51 million. To mitigate the impact of fluctuations in interest
rates, we generally target a portion of our debt portfolio to be maintained at fixed rates.
Our international operations and the European term loan expose us to market risks associated with foreign
currencies. In order to mitigate the currency exposure related to debt service obligations through December 31,
2011 under the European term loan, we have entered into cross currency swap agreements. A cross currency
swap is an agreement between two parties to exchange a stream of principal and interest payments in one
currency for a stream of principal and interest payments in another currency over a specified period.
Financial Instruments
Derivative financial instruments are employed to manage risks, including foreign currency and interest rate
exposures, and are not used for trading or speculative purposes. We recognize derivative instruments, such as
interest rate swap agreements and foreign exchange contracts, in the consolidated balance sheets at fair value.
Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders’ equity,
as a component of other comprehensive income, depending on whether the derivative financial instrument
qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge. Gains
and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other
comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when
they occur. Changes in the fair value of derivatives not qualifying as hedges, and for any portion of a hedge that
is ineffective, are reported in earnings.
The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses
resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments
to expense over the remaining period of the debt originally covered by the terminated swap.
Effects of Inflation and Changing Prices
Various federal, state and local laws have been enacted that, in certain cases, limit our ability to increase
prices. Revenues for general, acute care hospital services rendered to Medicare patients are established under the
federal government’s prospective payment system. Total fee-for-service Medicare revenues were 25.8%, 25.7%
and 25.6% of our revenues for 2011, 2010 an 2009, respectively.
Management believes hospital industry operating margins have been, and may continue to be, under
significant pressure because of changes in payer and service mix and growth in operating expenses in excess of
the increase in prospective payments under the Medicare program. In addition, as a result of increasing
regulatory and competitive pressures, our ability to maintain operating margins through price increases to
non-Medicare patients is limited.
84