MEDCATH CORP - 10-K Annual Report

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

As of December 10, 2003, there were 17,942,620 shares of the Registrant’s Common Stock outstanding. The aggregate market value of the Registrant’s common stock held by non-affiliates as of March 31, 2003 was approximately $30.9 million (computed by reference to the closing sales price of such stock on the Nasdaq National Market® on such date).

Portions of the Registrant’s proxy statement for its annual meeting of stockholders to be held on March 2, 2004 are incorporated by reference into Part III of this Report.

The data included in this report regarding markets and ranking, including the size of certain markets and our position and the position of our competitors within these markets, are based on independent industry publications, reports of government agencies or other published industry sources and estimates based on management’s knowledge and experience in the markets in which we operate. Our estimates have been based on information obtained from our customers, suppliers, trade and business organizations and other contacts in the markets in which we operate. We believe these estimates to be accurate as of the date of this report. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market, ranking and other similar data included in this report, and estimates and beliefs based on that data, may not be reliable.

In particular, we make reference in this report to reports prepared by The Lewin Group, a nationally recognized consultant to the health and human services industries. In 1999, we engaged The Lewin Group to determine how cardiac care services provided in seven of our hospitals compared on measures of patient severity, quality and community impact to cardiac services provided in 1,192 peer community hospitals across the United States that perform open-heart surgery. The study, which has been updated annually, analyzed publicly available Medicare data for federal fiscal years 1999, 2000 and 2001 using an all procedures defined-diagnosis related group cardiac mix index. Cardiac case mix index calculations were based on Medicare discharges and were calculated using the general approach used by the Centers for Medicare and Medicaid Services. Quality of care was measured through an analysis of in-hospital mortality, average length of stay, discharge destination and patient complications.

Some of the statements and matters discussed in this report constitute forward-looking statements. Words such as expects, anticipates, approximates, believes, estimates, intends and hopes and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. The forward-looking statements contained in this report include, among others, statements about the following:


	•	the impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003 and other healthcare reform initiatives,

	•	the availability and terms of capital to fund our development strategy,

	•	changes in Medicare and Medicaid payment levels,

	•	our ability to successfully develop additional hospitals, open them according to plan and gain significant market share in the market,

	•	our relationships with physicians who use our hospitals,

	•	competition from other hospitals,

	•	our ability to attract and retain nurses and other qualified personnel to provide quality services to patients in our hospitals,

	•	our information systems,

	•	existing governmental regulations and changes in, or failure to comply with, governmental regulations,

	•	liability and other claims asserted against us,

	•	changes in medical or other technology and reimbursement rates for new technologies,


	•	demographic changes,

	•	changes in accounting principles generally accepted in the United States and

	•	our ability, when appropriate, to enter into managed care provider arrangements and the terms of those arrangements.

Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. Other than as may be required by federal securities laws to disclose material developments related to previously disclosed information, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and the discussion of risk factors filed as Exhibit 99.1 to this report, before making an investment decision with respect to our common stock.

Unless otherwise noted, the following references in this report will have the meanings below:


	•	For periods subsequent to July 27, 2001, the terms the Company, MedCath, we, us and our refer to MedCath Corporation and its consolidated subsidiaries;

	•	for the period from July 31, 1998 to July 27, 2001, such terms refer to MedCath Corporation’s predecessor company, MedCath Holdings, Inc., and its consolidated subsidiaries and unconsolidated affiliates;

	•	for periods prior to July 31, 1998, such terms refer to MedCath Incorporated and its consolidated subsidiaries, which was acquired from its public stockholders by several private investment partnerships sponsored by Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe; and

	•	references to fiscal years are to our fiscal years ending September 30. For example, fiscal 2003 refers to our fiscal year ended September 30, 2003.

MedCath is a healthcare provider focused primarily on the diagnosis and treatment of cardiovascular disease. We design, develop, own and operate hospitals in partnership with physicians whom we believe have established reputations for clinical excellence. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services, and the medical staff at each of our hospitals includes qualified physicians in various specialties.

We opened our first hospital in 1996, and currently have an ownership interest in 11 operating hospitals. These hospitals have a total of 667 licensed beds and are located in nine states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, Texas, and Wisconsin. We have a majority interest in ten of these hospitals and a minority interest in the eleventh, Heart Hospital of South Dakota. We also have a majority interest in two additional hospitals that are under development in Texas (TexSAn Heart Hospital) and Louisiana (Heart Hospital of Lafayette) that are expected to open in January 2004 and March 2004, respectively. These hospitals are designed to accommodate a total of 152 inpatient beds and will initially open with 92 licensed beds.

In addition to our hospitals, we provide cardiovascular care services in 23 cardiac diagnostic and therapeutic facilities. Of these 23 facilities, 11 are located at hospitals operated by other parties and offer invasive diagnostic and sometimes therapeutic procedures. We have partners in four of these 11 facilities or the management companies that manage the facilities. The remaining 12 facilities are not located at hospitals and offer only diagnostics services. We have partners in five of these 12 facilities or the companies that manage or provide professional services to these facilities.

The United States Congress recently passed and President Bush signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Modernization Act), which imposes an 18-month moratorium on the development of new physician-owned “specialty hospitals,” as such hospitals are defined in the statute, and in regulations we expect to be issued by the Department of Health and Human Services. The Medicare Modernization Act will not have an immediate impact on our operations. It does not affect our ability to open the two hospitals we have under development, and no additional hospitals were planned for the period covered by the moratorium. Management is currently conducting an in-depth, strategic review process to determine what changes to the Company’s basic business model are appropriate in response to the Medicare Modernization Act and other regulatory and operational developments. This process is expected to be completed during the second fiscal quarter of 2004, and will identify and access potential growth opportunities that meet our internal requirements, allow us to leverage our core strengths and provide adequate returns on invested capital. While we cannot project the specific nature of our growth opportunities at this time, we believe they will continue to involve the participation of physicians and other healthcare providers in a meaningful manner. Among other matters, we expect to consider investment opportunities in the treatment of additional disease categories, the acquisition of existing healthcare facilities and partnering with other providers to expand existing services or initiate new services.

Geographically Diversified Portfolio of Hospitals. We currently have ownership interests in and operate 11 hospitals in nine states, which diversifies our revenue base and reduces our exposure to any one geographic market. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that includes an emergency department, operating rooms, catheterization laboratories, pharmacy, laboratory, and a radiology department, and is capable of providing a wide range of health services. While we focus on cardiovascular care, in fiscal 2003 approximately 61% of patient cases that entered our emergency departments required health services not related to cardiac care. We treated over 97% of these cases at our hospitals.

Leading Local Market Positions. Based on 2001 Medicare reimbursement data, each of our seven majority-owned hospitals that has been open more than 18 months has achieved a number one or two ranking in

local market position for cardiovascular care, as measured by the number of Medicare cardiac procedures performed. Furthermore, these seven hospitals are also located in markets with demographic characteristics that are favorable for cardiovascular services. For example, the estimated five-year population growth rate in each of these markets for those people 55 years and older, the primary recipients of cardiac care services, is between 12.0% and 29.3%.

Superior Clinical Outcomes. We believe our hospitals, on average, achieve lower mortality rates and a shorter average length of stay, adjusted for severity, for patients with higher patient acuity levels as compared to our competitors. In 2002, we engaged The Lewin Group, a national health and human services consulting group, to conduct a study on cardiovascular patient outcomes based on 2001 Medicare reimbursement data. For more information regarding The Lewin Group study, see “Market, Ranking and Other Data” in the forepart of this report. The Lewin Group’s most recent report, which is entitled “A Comparative Study of Patient Severity, Quality of Care and Community Impact at MedCath Heart Hospitals,” indicated that in fiscal 2001, on average, MedCath hospitals, compared to the peer community hospitals:


	•	as a group, have 20.3% higher case mix severity for cardiac patients;

	•	after adjusting for risk of mortality, exhibit a 17.1% lower in-hospital mortality rate for Medicare cardiac cases;

	•	have shorter lengths of stay for cardiac cases (3.84 days versus 4.81 days), on a severity adjusted basis;

	•	discharge a higher proportion of patients to their homes (91.4% versus 72.5%) and transfer a lower proportion of patients to other facilities or home health agencies; and

	•	rank near the middle of their respective markets for the total volume of inpatient cardiac care provided to Medicaid and uninsured patients.

Active Physician Participation. Physicians practicing at our hospitals participate in decisions on a wide range of strategic and operational matters such as development of clinical care protocols, patient procedure scheduling, hospital marketing plans, annual operating budgets and large capital expenditures. The opportunity to have a role in how our hospitals are managed empowers physicians and encourages them to share new ideas, concepts and practices. We believe physicians take pride and interest in our hospitals and that the influence they have over decisions on a wide range of operational and strategic matters provides further motivation for them to provide quality, cost-effective healthcare.

Efficient, Quality Care Delivery Model. Our hospitals have innovative facility designs and operating characteristics that we believe enhance the quality of care, enable efficient patient care and improve physician and staff productivity. The innovative characteristics of our hospital designs include: fully-equipped patient rooms capable of providing the majority of services needed during a patient’s entire length of stay; centrally located inpatient services such as radiology, pharmacy and laboratories that reduce the amount of transportation patients must endure; strategically located nursing stations that serve specific patients and are located in close proximity to their rooms between procedures, which allows the same nursing rotation to serve the patient from admittance to discharge; and efficiently arranged departments and services that interact frequently. As a result of the innovative characteristics of our hospital design, we believe we have a cost-efficient operating environment due to: elimination of duplicative layers of administrative and support personnel; hospital staffing with only four non-caregiver executives; use of working team leaders to supervise nurses, medical technical personnel, as well as other departments throughout the hospital; centralization of non-clinical support services; investment in leading technology; and cardiovascular care training for our clinical employees.

We believe the benefits of both our facility design and operating characteristics include superior clinical outcomes, reduced patient waiting time, lower patient and family anxiety, increased physician productivity, elimination of costly patient transportation staff, fewer scheduling conflicts, better resource allocation and lower non-clinical staffing ratios. As a result, our average labor costs as a percentage of revenue is approximately 30% versus, we believe, approximately 40% for for-profit hospitals and approximately 45 - 50% for not-for-profit hospitals. Furthermore, our patient surveys have consistently demonstrated a high level of satisfaction with our facilities, staff and care coordination. For example, during fiscal 2002, 98% of our patients who completed these

surveys indicated that they would return to our hospital for any future procedures. Additionally, more than 98% indicated they were satisfied with the physical comfort of our hospital, the patient education we provided and the way in which we allowed family members to be closely involved in their care.

Proven Ability to Develop, Open, and Operate New Hospitals. Since we began constructing our first hospital in 1994, we have successfully developed, opened, and operated 12 hospitals in nine states. Each of our hospitals is accredited by the Joint Commission on the Accreditation of Healthcare Organizations.

Strong Management Team. Our management team has extensive experience in the healthcare industry. Our chief executive officer and chief operating officer each has over 18 years of experience in the healthcare industry. John T. Casey was named MedCath’s president and chief executive officer in September 2003. Prior to joining MedCath, Mr. Casey served in senior executive positions with a number of healthcare companies, including Physician Reliance Network, Inc., that was, prior to its merger with US Oncology, Inc., the largest oncology practice management company in the United States; Intecare, LLC, a company formed for the purpose of developing joint venture partnerships with hospitals and integrated healthcare systems; and American Medical International, which, during Mr. Casey’s tenure there, was the third largest publicly held owner and operator of hospitals in the country. American Medical International merged with National Medical Enterprises to create Tenet Healthcare Corporation (Tenet), where Mr. Casey served as vice-chairman. Charles R. Slaton was named MedCath’s executive vice president and chief operating officer in September 2003. Prior to joining MedCath, Mr. Slaton was a senior manager for nine years at Tenet, where he most recently served as senior vice president, with financial and operational responsibilities for 15 acute and rehabilitation hospitals in Texas. Before joining Tenet, Mr. Slaton was part of an executive management team turnaround of Santa Rosa Memorial Hospital in Santa Rosa, California.

Partner with Highly Regarded Physicians. We partner with cardiologists, cardiovascular surgeons, and many other physicians whom we believe have established reputations for clinical excellence. As a result of our reputation for providing quality cardiovascular care, we are often contacted by physicians interested in exploring the development of a hospital with us in the markets where they practice. Typically, each of our hospitals has approximately 250 to 300 total physicians on the medical staff, of which 15 to 70 are physician investors.

Provide a Differentiated Standard of Care. Our philosophy is to provide patient-focused care, which involves centering care around the patient rather than expecting the patient to adapt to our facilities and staff. We have developed an innovative facility design around the requirements of our patients and invest in leading-edge equipment and technology to achieve a differentiated standard of care and improve their hospital experience. For example, our large, single-patient rooms are capable of addressing most of our patients’ cardiovascular and associated needs during their entire stay. This “universal” room design reduces the need to move patients during their stay. By moving patients less frequently, we believe we improve the quality of care, increase physician and staff efficiency, provide necessary patient services on time and generally avoid unnecessarily long lengths of stay. We monitor the quality of cardiovascular care — that is, the degree to which our services increase the likelihood of desired patient outcomes — by measuring key quality criteria, including mortality rates, patient acuity, average length of stay and patient satisfaction. We operate all of our hospitals under a quality improvement program to provide a comprehensive assessment of the quality of the services we provide.

Achieve Best Practices and Economies of Scale. Our hospital management and physicians have the opportunity to share information regularly and implement best practices, which is facilitated by our standard hospital design and operational similarities. Information is shared through regular meetings of our hospital management teams to enable them to discuss new practices and methodologies such as clinical protocols, supply selection and management, as well as scheduling efficiencies. We also coordinate opportunities for our physicians to discuss — both on an informal basis and at periodic meetings — such matters as clinical protocols, patient management and procedure techniques. These efforts have enabled our hospitals to benefit from the innovations at one hospital and our hospital managers and physicians to become more productive. Additionally, we plan to continue to achieve greater economies of scale in the future through our centralized billing services, creating a

single integrated information system to track hospital-by-hospital performance, implementing centralized inventory control and standardizing our purchasing decisions to generate bulk supply discounts. All of these activities are designed to lead to improved quality of care, enhanced efficiency and increased profitability for our hospitals and our company.

Focus Primarily on Cardiovascular Disease. Each of our majority-owned hospitals is licensed as a general acute care hospital and ten of them are designed and operated with a focus on serving the unique needs of patients suffering from cardiovascular disease. By focusing primarily on a single disease category, our physicians, nurses, medical technicians and other staff members are able to concentrate on and enhance their professional cardiovascular care skills, thereby enabling staff members to schedule patient procedures more efficiently and better serve the needs of cardiovascular patients in the community. We believe our focused approach increases patient, physician and staff satisfaction and enables us to provide quality, cost-effective patient care.

We currently have ownership interests in and operate 11 hospitals, including our newest hospital near Milwaukee, Wisconsin, which opened in October 2003. We also have two hospitals under development. One is in San Antonio, Texas and the other is in Lafayette, Louisiana.

The following table identifies key characteristics of our 11 hospitals in operation and two hospitals under development, including our ownership percentages as of September 30, 2003.


(1)	Heart Hospital of South Dakota is the only hospital in which we do not have a majority ownership interest. We use the equity method of accounting for this hospital, which means that we include in our consolidated statement of operations only a percentage of the hospital’s reported net income or loss for each reporting period. Heart Hospital of South Dakota is licensed as a specialized hospital under state law.

(2)	These hospitals are under development and are scheduled to open in the month indicated.

(3)	TexSAn Heart Hospital is designed to accommodate 120 inpatient beds and will initially open with 60 licensed beds.

Before designing and constructing our first hospital in 1994, we consulted with our physician partners to analyze the operations, facilities and work flow of existing hospitals and found what we believed to be many inefficiencies in the way cardiovascular care was provided in existing hospitals. Based upon this analysis, we designed a hospital that we believed would enhance physician and staff productivity and allow for the provision of patient-focused care. Using subsequent operating experience and further input from physicians at our other hospitals, we have further refined our basic hospital layout to allow us to combine site selection, facility size and layout, staff and equipment to deliver quality cardiovascular care.

Universal Patient Rooms. Our large, single-patient rooms enable our staff to provide all levels of care required for our patients during their entire hospital stay, including critical care, telemetry and post-surgical care. Each room is equipped as an intensive care unit, which enables us to keep a patient in the same room throughout their recovery. This approach differs from the general acute care hospital model of moving patients, potentially several times, as they recover from surgical procedures.

Centrally Located Inpatient Services. We have centrally located all services required for inpatients, including radiology, laboratory, pharmacy and respiratory therapy, in close proximity to the patient rooms, which are usually all located on a single floor in the hospital. This arrangement reduces scheduling conflicts and patient waiting time. Additionally, this eliminates the need for costly transportation staff to move patients from floor to floor and department to department.

Strategically Placed Nursing Stations. Unlike traditional hospitals with large central nursing stations which serve as many as 30 patients, we have corner configuration nursing stations on our patient floors where each station serves six to eight patients and is located in close proximity to the patient rooms. This design provides for excellent visual monitoring of patients, allows for flexibility in staffing to accommodate the required levels of care, shortens travel distances for nurses, allows for fast response to patient calls and offers proximity to the nursing station for family members.

Efficient Workflow. We have designed and constructed our various procedure areas in close proximity to each other allowing for both patient safety and efficient staff work flow. For example, our cardiac catheterization laboratories are located in close proximity to our operating rooms, outpatient services are located immediately next to procedure areas and emergency services are located off the staff work corridor leading directly to the diagnostic and treatment areas.

Additional Capacity for Critical Cardiac Procedures. We design and construct our hospitals with more operating rooms and cardiac catheterization laboratories than we believe are available in the program of a typical general acute care hospital and we believe this increases physician productivity and patient satisfaction. This feature of our hospitals ensures that the physicians practicing in our hospitals will experience fewer conflicts in scheduling procedures for their patients. In addition, all of our operating rooms are designed primarily for cardiovascular procedures, which allows them to be used more efficiently by physicians and staff.

An important step in developing a new hospital is establishing relationships with physicians providing cardiovascular care that we believe have established reputations for clinical excellence. We regularly receive unsolicited inquiries from groups of physicians interested in partnering with us to take advantage of our hospital development and management expertise and access to capital. We also receive referrals to potential partners from our physician partners in our existing hospitals and from the leaders of physician groups to which we provide cardiovascular care consulting services. Our experience has been that physician groups most interested in partnering with us are those whose members wish to improve their current practice environment. Since these physicians frequently have pre-existing relationships with our existing physician partners in other markets, they can quickly conduct their own informal evaluation to understand the benefits of partnering with us to develop a hospital.

An equally important step in developing a new hospital is performing a detailed market analysis using publicly available data from a number of sources. We use a disciplined, data-driven process, which includes

extensive demographic research, the use of publicly available information from Medicare and other sources and sophisticated modeling of potential operating results for a new hospital. The process includes an analysis of the:


	•	overall market size for cardiovascular care, including the surrounding communities,

	•	projected population growth in the market, particularly for the population group over the age of 55 because they are the primary recipients of cardiovascular care services,

	•	Medicare reimbursement rates, which vary depending upon the wage index for the market,

	•	effect on reimbursement due to payor mix, including managed care penetration of the market,

	•	competitive strengths and weaknesses of each hospital in the market, and

	•	licensing and regulatory requirements, including certificate of need requirements.

The United States Congress recently passed and President Bush signed into law the Medicare Modernization Act, which imposes an 18-month moratorium on the development of new physician-owned “specialty hospitals,” as such hospitals are defined in the statute, and in regulations we expect to be issued by the Department of Health and Human Services. Although the Medicare Modernization Act will not affect our ability to open the two hospitals we have under development, it is expected to prohibit our hospital development activities as currently configured through June 8, 2005, the expiration date of the moratorium. See “— Regulation — Fraud and Abuse Laws — Physician self-referral law.”

We have participated in the development of or have acquired interests in, and provide management and professional services to facilities where physicians diagnose and treat cardiovascular disease and manage hospital-based cardiac catheterization laboratories. We also own and operate a fleet of mobile cardiac catheterization laboratories serving hospital networks and maintain a number of mobile and modular cardiac catheterization laboratories in a rental fleet that we lease on a short-term basis. These diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories are equipped to allow the physicians using them to employ a range of diagnostic and treatment options for patients suffering from cardiovascular disease.

Managed Diagnostic and Therapeutic Facilities. We currently own and/or manage the operations of 23 cardiac diagnostic and therapeutic facilities. The following table provides information about these facilities.


(1)	Our management agreement with each of these facilities includes an option for us to extend the initial term at increments ranging from one to 10 years, through an aggregate of up to an additional 40 years for some of the facilities.

(2)	The management agreement with each of these facilities includes an early termination provision upon notice.

(3)	The ownership interest refers to our ownership in the entities that have entered into, and provided services to, the facilities under management services agreements or professional services agreements.

We also owned and managed the operations of Gaston Cardiology Services, LLC during fiscal 2003. Effective May 2003, we received notification from our hospital partner of its intent to exercise its option to require the dissolution of Gaston Cardiology Services, LLC, and to terminate all agreements with the hospital, Gaston Cardiology Services, LLC and us. The effective date of the dissolution and the termination of the agreements was November 2003.

Our management services generally include providing all non-physician personnel required to delivering patient care and the administrative, management and support functions required in the operation of the facility. The physicians who supervise or perform diagnostic and therapeutic procedures at these facilities have complete control over the delivery of cardiovascular healthcare services. The management agreements for each of these centers generally have an extended initial term and several renewal options ranging from one to ten years each. The physicians and hospitals with which we have contracts to operate these centers may terminate the agreements under certain circumstances. We may terminate most of these agreements for cause or upon the occurrence of specified material adverse changes in the business of the centers. We intend to develop with hospitals and physician groups, or acquire contracts to manage, additional diagnostic and therapeutic facilities in the future.

Interim Mobile Catheterization Labs. We maintain a rental fleet of mobile and modular cardiac catheterization laboratories. We lease these laboratories on a short-term basis to hospitals while they are either adding capacity to their existing facilities or replacing or upgrading their equipment. We also lease these laboratories to hospitals that experience a higher demand for cardiac catheterization procedures during a particular season of the year and choose not to expand their own facilities to meet peak period demand. Our rental and modular laboratories are manufactured by leading original equipment manufacturers and have advanced technology and enable cardiologists to perform both diagnostic and interventional therapeutic procedures. Each of our rental units is generally in service for at least nine months of the year. These units allow us to be responsive to immediate demand and create flexibility in our operations.

Mobile Catheterization Laboratories Serving Hospital Networks. We also provide mobile catheterization services to hospital networks. Mobile laboratories serving hospital networks are moved, usually on a daily basis, from one hospital to another in a particular hospital network or geographic area. Each mobile laboratory is fully equipped and operated by our medical technicians and nurses, which provides a hospital or physician group with a turnkey catheterization laboratory. Our mobile laboratories permit a group of hospitals located in geographic proximity to one another, each with limited cardiovascular patient volume, to offer cardiovascular services through shared access to equipment and personnel. This also allows hospitals and physicians to offer cardiovascular care services while avoiding the substantial capital expenditures and operating expenses needed to purchase and operate the equipment required to perform these services. We currently have contracts with 19 hospitals for our mobile laboratories. These hospitals pay for the use of our mobile laboratories on a fixed fee-per-procedure basis and reimburse us for most of the costs incurred in performing procedures. In most instances, the hospitals are obligated to pay a minimum monthly amount regardless of the number of procedures performed in the mobile laboratories while they are located at the hospital.

The following is a brief description of the major cardiovascular procedures physicians perform at our hospitals and other facilities.

Cardiac Catheterization: Percutaneous intravascular insertion of a catheter into any chamber of the heart or great vessels for diagnosis, assessment of abnormalities, interventional treatment, and evaluation of the effects of pathology on the heart and great vessels.


	•	Atherectomy: A technique using a cutting device to remove plaque from an artery. This technique can be used for coronary and non-coronary arteries.

	•	Angioplasty: A method of treating narrowing of a vessel using a balloon catheter to dilate the narrowed vessel. If the procedure is performed on a coronary vessel, it is commonly referred to as a percutaneous transluminal coronary angioplasty, or PTCA.

	•	Percutaneous Balloon Angioplasty: The insertion of one or more balloons across a stenotic heart valve.

Stent: A small expandable wire tube, usually stainless steel, with a self-expanding mesh introduced into an artery. It is used to prevent lumen closure, or restenosis. Stents can be placed in coronary arteries as well as renal, aortic and other peripheral arteries. A drug-eluting stent is coated with a drug that is intended to prevent the stent from reclogging with scar tissue within six to nine months after a procedure.

Brachytherapy: A radiation therapy using implants of radioactive material placed inside a coronary stent with restenosis.

Electrophysiology Study: A diagnostic study of the electrical system of the heart. Procedures include the following:


	•	Cardiac Ablation: Removal of a part, pathway or function by surgery, chemical destruction, electrocautery, or radio frequency.

	•	Pacemaker Implant: An electrical device that can substitute for a defective natural pacemaker and control the beating of the heart by a series of rhythmic electrical discharges.

	•	Automatic Internal Cardiac Defibrillator: Cardioverter implanted in patients at high risk for sudden death from ventricular arrhythmias.

	•	Cardiac Assist Devices: A mechanical device placed inside of a person’s chest where it helps the heart pump oxygen rich blood throughout the body.

Coronary Artery Bypass Graft Surgery: A surgical establishment of a shunt that permits blood to travel from the aorta to a branch of the coronary artery at a point past the obstruction.

Valve Replacement Surgery: Valve replacement is an open-heart surgical procedure involving the replacement of valves that regulate the flow of blood between chambers in the heart, which have become narrowed or ineffective due to the build-up of calcium or scar tissue or the presence of some other physical damage.

Cardiac Magnetic Resonance Imaging: This test uses a powerful magnet to produce highly detailed, accurate and reproducible images of the heart and surrounding structures as well as the blood vessels in the body without the need for contrast agents.

Echocardiogram with Color Flow Doppler, or Ultrasound Test: This test produces real time images of the interior of the heart muscle and valves, which are used to accurately evaluate heart valve and muscle problems and measure heart muscle damage.

Nuclear Treadmill Exercise Test, or Nuclear Angiogram: This test, which involves the injection of a low level radioactive tracer isotope into the patient’s bloodstream during exercise on a motorized treadmill, frequently is used to screen patients who may need cardiac catheterization and to evaluate the results in patients who have undergone angioplasty or cardiac surgery.

Standard Treadmill Exercise Test: This test, which involves a patient exercising on a motorized treadmill while the electrical activity of the patient’s heart is measured, frequently is used to screen for heart disease.

Ultrafast Computerized Tomography: This test detects the buildup of calcified plaque in coronary arteries before the patient experiences any symptoms.

We provide business consulting and management services to primarily cardiovascular physician group practices nationwide. Services provided include primarily business process reengineering, strategic planning and ancillary development. The physicians in the practices who supervise or provide healthcare services have complete control over the delivery of healthcare services.

As of September 30, 2003, we employed 4,124 persons, including 3,002 full-time and 1,122 part-time employees. None of our employees is a party to a collective bargaining agreement, and we consider our relationship with our employees to be good. There currently is a nationwide shortage of nurses and other medical support personnel, which makes recruiting and retaining these employees difficult. We provide competitive wages and benefits and offer our employees a professional work environment that we believe helps us recruit and retain the staff we need to operate our hospitals and other facilities.

We do not employ any practicing physicians at any of our hospitals or other facilities, except in one instance, where one of our hospitals employs a physician for an outlying clinic. Our hospitals are staffed by licensed physicians who have been admitted to the medical staffs of individual hospitals. Any licensed physician — not just our physician partners — may apply to be admitted to the medical staff of any of our hospitals, but admission to the staff must be approved by the hospital’


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended September 30, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware		56-2248952
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


		Page

PART I
Item 1.	Business		1
Item 2.	Properties		24
Item 3.	Legal Proceedings		24
Item 4.	Submission of Matters to a Vote of Security Holders		24
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters		25
Item 6.	Selected Financial Data		26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		55
Item 8.	Financial Statements and Supplementary Data		56
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		89
Item 9A.	Controls and Procedures		89
PART III
Item 10.	Directors and Executive Officers of the Registrant		90
Item 11.	Executive Compensation		90
Item 12.	Security Ownership of Certain Beneficial Owners and Management		90
Item 13.	Certain Relationships and Related Transactions		90
Item 14.	Principal Accounting Fees and Services		90
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		90
Signatures			96


				Opening Date
		MedCath		(Scheduled		Licensed			Cath		Operating
Hospital	Location	Ownership		Opening Date)		Beds			Labs		Rooms

Arkansas Heart Hospital	Little Rock, AR		70.3%		Mar. 1997		84			6		3
Tucson Heart Hospital	Tucson, AZ		58.8%		Oct. 1997		60			4		3
Arizona Heart Hospital	Phoenix, AZ		70.6%		Jun. 1998		59			4		3
Heart Hospital of Austin	Austin, TX		70.9%		Jan. 1999		58			4		3
Dayton Heart Hospital	Dayton, OH		66.5%		Sep. 1999		47			4		3
Bakersfield Heart Hospital	Bakersfield, CA		53.3%		Oct. 1999		47			4		3
Heart Hospital of New Mexico	Albuquerque, NM		72.0%		Oct. 1999		55			4		3
Heart Hospital of South Dakota(1)	Sioux Falls, SD		33.3%		Mar. 2001		55			3		3
Harlingen Medical Center	Harlingen, TX		51.1%		Oct. 2002		112			2		8
Louisiana Heart Hospital	St. Tammany Parish, LA		51.1%		Feb. 2003		58			3		4
The Heart Hospital of Milwaukee	Glendale, WI		60.3%		Oct. 2003		32			3		3
TexSAn Heart Hospital(2)	San Antonio, TX		51.0%		(Jan. 2004)		60	(3)		4		4
Heart Hospital of Lafayette(2)	Lafayette, LA		55.8%		(Mar. 2004)		32			2		2


					MedCath
					Management
					Commencement		Termination or
		MedCath			(Expected		Next Renewal
Facility/Entity	Location	Ownership			Opening) Date		Date

Managed Ventures:
Cardiac Testing Centers, PA	Summit and Springfield, NJ		100%	(3)		1992		Jun. 2022
Sun City Cardiac Center, Inc.(1)	Sun City, AZ		65.0%	(3)		1992		Oct. 2032
Heart Institute of Northern Arizona, LLC(1)	Kingman, AZ		100%	(3)		1994		Dec. 2034
Angleton Danbury Medical Center(1)(2)	Angleton, TX		100%	(3)		1999		Jan. 2004
Mercy Medical Center(1)	Springfield, OH		16.7%	(3)		1999		Jun. 2004
Falmouth Hospital(1)	Falmouth, MA		100%	(3)		2002		Aug. 2006
Johnston Memorial Hospital	Smithfield, NC		100%	(3)		2002		Aug. 2005
Metuchen Nuclear Cardiology Assoc., PA(1)	Metuchen, NJ		100%	(3)		2002		Jan. 2032
Anna Jacques Hospital(1)	Newburyport, MA		100%	(3)		2003		Jul. 2007
Matagorda County Hospital(1)	Bay City, TX		100%	(3)		2003		May 2005
Reedsburg Area Medical Center(1)	Reedsburg, WI		100%	(3)		2003		Jul. 2004
Watauga Medical Center(1)	Boone, NC		100%	(3)		2003		Jun. 2006
Washington Cardiovascular Institute, LLC	Rockville, MD		100%	(3)		(Jan. 2004)		Mar. 2006
Professional Services Agreements:
Greater Philadelphia Cardiology Assoc., Inc.	Philadelphia, PA		100%	(3)		2002		Jun. 2012
Virginia Nuclear Cardiology(1)	Falls Church and Woodbridge, VA		100%	(3)		2003		Dec. 2008
PMA Nuclear Center(1)	Newburyport and Haverhill, MA		100%	(3)		2003		Nov. 2008


Item 1.	*Business*


	*Non-Invasive Procedures*