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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-10765
UNIVERSAL HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2077891
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
UNIVERSAL CORPORATE CENTER
367 South Gulph Road P.O. Box 61558
King of Prussia, Pennsylvania
(Address of principal executive 19406-0958
offices) (Zip Code)
Registrant's telephone number, including area code: (610) 768-3300
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Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which
Class B Common Stock, $.01 par value registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class D Common Stock, $.01 par value
(Title of each Class)
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Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and 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 X No
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. [_]
The number of shares of the registrant's Class A Common Stock, $.01 par value,
Class B Common Stock, $.01 par value, Class C Common Stock, $.01 par value,
and Class D Common Stock, $.01 par value, outstanding as of January 31, 2001,
was 1,924,443, 27,787,574, 193,924, and 22,025, respectively.
The aggregate market value of voting stock held by non-affiliates at January
31, 2001 $2,239,231,586. (For the purpose of this calculation, it was assumed
that Class A, Class C, and Class D Common Stock, which are not traded but are
convertible share-for-share into Class B Common Stock, have the same market
value as Class B Common Stock.)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for its 2001 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 2000 (incorporated by reference
under Part III).
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PART I
ITEM 1. Business
The principal business of Universal Health Services, Inc. (together with its
subsidiaries, the "Company") is owning and operating acute care hospitals,
behavioral health centers, ambulatory surgery centers, radiation oncology
centers and women's centers. Presently, the Company operates 59 hospitals,
consisting of 23 acute care hospitals, 35 behavioral health centers, and a
specialized women's health center in Arkansas, California, Delaware, the
District of Columbia, Florida, Georgia, Illinois, Indiana, Kentucky,
Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Jersey,
Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Texas, Utah
and Washington. The Company, as part of its Ambulatory Treatment Centers
Division, owns outright, or in partnership with physicians, and operates or
manages 25 surgery and radiation oncology centers located in 12 states and the
District of Columbia.
Services provided by the Company's hospitals include general surgery,
internal medicine, obstetrics, emergency room care, radiology, oncology,
diagnostic care, coronary care, pediatric services and behavioral health
services. The Company provides capital resources as well as a variety of
management services to its facilities, including central purchasing,
information services, finance and control systems, facilities planning,
physician recruitment services, administrative personnel management, marketing
and public relations.
The Company selectively seeks opportunities to expand its base of operations
by acquiring, constructing or leasing additional hospital facilities. Such
expansion may provide the Company with access to new markets and new health
care delivery capabilities. The Company also seeks to increase the operating
revenues and profitability of owned hospitals by the introduction of new
services, improvement of existing services, physician recruitment and the
application of financial and operational controls. Pressures to contain health
care costs and technological developments allowing more procedures to be
performed on an outpatient basis have led payors to demand a shift to
ambulatory or outpatient care wherever possible. The Company is responding to
this trend by emphasizing the expansion of outpatient services. In addition,
in response to cost containment pressures, the Company intends to implement
programs designed to improve financial performance and efficiency while
continuing to provide quality care, including more efficient use of
professional and paraprofessional staff, monitoring and adjusting staffing
levels and equipment usage, improving patient management and reporting
procedures and implementing more efficient billing and collection procedures.
The Company also continues to examine its facilities and to dispose of those
facilities which it believes do not have the potential to contribute to the
Company's growth or operating strategy.
The Company is involved in continual development activities. Applications to
state health planning agencies to add new services in existing hospitals are
currently on file in states which require certificates of need (e.g.,
Washington, D.C.). Although the Company expects that some of these
applications will result in the addition of new facilities or services to the
Company's operations, no assurances can be made for ultimate success by the
Company in these efforts.
Recent and Proposed Acquisitions and Development Activities
In 2000, the Company proceeded with its development of new facilities and
consummated a number of acquisitions.
In August 2000, the Company acquired the assets of St. Mary's Mercy
Hospital, a full service hospital located in Enid, Oklahoma.
In August 2000, the Company, with approval from the U.S. Bankruptcy Court
for the District of Delaware, acquired the assets of eleven behavioral health
facilities with over 1,400 licensed beds from Charter Behavioral Health
Systems, LLC and also acquired the real property assets from Crescent Real
Estate Funding VII LP. The businesses and real estate acquired include
Fairmount in Philadelphia, Pennsylvania; Rockford in Wilmington,
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Delaware; Anchor, Talbott, Laurel Heights and Peachford in Atlanta, Georgia;
Ridge in Lexington, Kentucky; Carolina Center in Greenville, South Carolina;
Lakeside in Memphis, Tennessee; Parkwood in Olive Branch, Mississippi; and
Provo Canyon in Provo, Utah. In addition, the real estate of the closed
Charter facility in McAllen, Texas was acquired from Crescent Real Estate.
In September 2000, the Company acquired the assets of Fort Duncan Medical
Center, an acute care hospital in Eagle Pass, Texas. The Company expects to
construct and open a replacement hospital within six years.
During the first quarter of 2001, the Company acquired the assets of: (i)
Rancho Springs Medical Center, a 96-bed acute care hospital in Murrieta,
California; (ii) Pembroke Hospital and Westwood Lodge Hospital, two hospitals
that operate 215 beds and an outpatient clinic in greater Boston providing a
full range of behavioral health treatment services; (iii) the 108-bed San Juan
Capestrano Hospital located in Puerto Rico, and; (iv) the 60-bed McAllen Heart
Hospital in McAllen, Texas.
The Company is building a 371 licensed bed replacement hospital for The
George Washington University Hospital in Washington, D.C. The Company expects
to complete the construction in the second quarter of 2002.
The Company is building a 176 licensed bed replacement hospital for Doctors
Hospital of Laredo in Texas. The Company expects to complete the construction
in the third quarter of 2001.
The Company is expanding Desert Springs Hospital in Las Vegas, Nevada to
increase its licensed capacity from 233 to 349 beds. The Company expects to
complete the expansion in the first quarter of 2001.
The Company commenced a renovation and expansion of Auburn Regional Medical
Center in Auburn, Washington during the third quarter of 2000. The renovated
and expanded facility will include a new operating room, emergency room,
obstetrics department and approximately 40 additional licensed beds. The
Company expects to complete this project in the first quarter of 2001.
Bed Utilization and Occupancy Rates
The following table shows the historical bed utilization and occupancy rates
for the hospitals operated by the Company for the years indicated.
Accordingly, information related to hospitals acquired during the five year
period has been included from the respective dates of acquisition, and
information related to hospitals divested during the five year period has been
included up to the respective dates of divestiture.
2000 1999 1998 1997 1996
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Average Licensed Beds:
Acute Care Hospitals......... 4,980 4,806 4,696 3,389 3,018
Behavioral Health Centers.... 2,612 1,976 1,782 1,777 1,565
Average Available Beds(1):
Acute Care Hospitals......... 4,220 4,099 3,985 2,951 2,641
Behavioral Health Centers.... 2,552 1,961 1,767 1,762 1,540
Admissions:
Acute Care Hospitals......... 214,771 204,538 187,833 128,020 111,244
Behavioral Health Centers.... 49,971 37,810 32,400 28,350 22,295
Average Length of Stay (Days):
Acute Care Hospitals......... 4.7 4.7 4.7 4.8 4.9
Behavioral Health Centers.... 12.2 11.8 11.3 11.9 12.4
Patient Days(2):
Acute Care Hospitals......... 1,017,646 963,842 884,966 616,965 546,237
Behavioral Health Centers.... 608,423 444,632 365,935 336,850 275,667
Occupancy Rate--Licensed
Beds(3):
Acute Care Hospitals......... 56% 55% 52% 50% 49%
Behavioral Health Centers.... 64% 62% 56% 52% 48%
Occupancy Rate--Available
Beds(3):
Acute Care Hospitals......... 66% 64% 61% 57% 57%
Behavioral Health Centers.... 65% 62% 57% 52% 49%
2
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(1) "Average Available Beds" is the number of beds which are actually in
service at any given time for immediate patient use with the necessary
equipment and staff available for patient care. A hospital may have
appropriate licenses for more beds than are in service for a number of
reasons, including lack of demand, incomplete construction, and
anticipation of future needs.
(2) "Patient Days" is the aggregate sum for all patients of the number of days
that hospital care is provided to each patient.
(3) "Occupancy Rate" is calculated by dividing average patient days (total
patient days divided by the total number of days in the period) by the
number of average beds, either available or licensed.
The number of patient days of a hospital is affected by a number of factors,
including the number of physicians using the hospital, changes in the number
of beds, the composition and size of the population of the community in which
the hospital is located, general and local economic conditions, variations in
local medical and surgical practices and the degree of outpatient use of the
hospital services. Current industry trends in utilization and occupancy have
been significantly affected by changes in reimbursement policies of third
party payors. A continuation of such industry trends could have a material
adverse impact upon the Company's future operating performance. The Company
has experienced growth in outpatient utilization over the past several years.
The Company is unable to predict the rate of growth and resulting impact on
the Company's future revenues because it is dependent upon developments in
medical technologies and physician practice patterns, both of which are
outside of the Company's control. The Company is also unable to predict the
extent to which other industry trends will continue or accelerate.
Sources of Revenue
The Company receives payment for services rendered from private insurers,
including managed care plans, the federal government under the Medicare
program, state governments under their respective Medicaid programs and
directly from patients. All of the Company's acute care hospitals and most of
the Company's behavioral health centers are certified as providers of Medicare
and Medicaid services by the appropriate governmental authorities. The
requirements for certification are subject to change, and, in order to remain
qualified for such programs, it may be necessary for the Company to make
changes from time to time in its facilities, equipment, personnel and
services. The costs for recertification are not material as many of the
requirements for recertification are integrated with the Company's internal
quality control processes. If a facility loses certification, it will be
unable to receive payment for patients under the Medicare or Medicaid
programs. Although the Company intends to continue in such programs, there is
no assurance that it will continue to qualify for participation.
The sources of the Company's hospital revenues are charges related to the
services provided by the hospitals and their staffs, such as radiology,
operating rooms, pharmacy, physiotherapy and laboratory procedures, and basic
charges for the hospital room and related services such as general nursing
care, meals, maintenance and housekeeping. Hospital revenues depend upon the
occupancy for inpatient routine services, the extent to which ancillary
services and therapy programs are ordered by physicians and provided to
patients, the volume of outpatient procedures and the charges or negotiated
payment rates for such services. Charges and reimbursement rates for inpatient
routine services vary depending on the type of bed occupied (e.g.,
medical/surgical, intensive care or psychiatric) and the geographic location
of the hospital.
McAllen Medical Center located in McAllen, Texas and Edinburg Regional
Medical Center Located in Edinburg, Texas operate within the same market. On a
combined basis, these two facilities contributed 12% in 2000, and 13% in both
1999 and 1998 of the Company's consolidated net revenues and 21% in 2000, 25%
in 1999 and 23% in 1998 of the Company's consolidated earnings before
depreciation, amortization, interest, income taxes and nonrecurring charges
(after deducting an allocation of corporate overhead)("EBITDA"). During the
first quarter of 1998, the Company contributed substantially all of the
assets, liabilities and operations of Valley Hospital Medical Center and its
newly-constructed Summerlin Hospital Medical Center in exchange for a 72.5%
interest in a series of newly formed limited liability corporations ("LLCs").
Quorum Health Group,
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Inc. ("Quorum") holds the remaining 27.5% interest in the LLCs. Quorum
obtained its interest by contributing substantially all of the assets,
liabilities and operations of Desert Springs Hospital and $11 million of net
cash to the LLCs. All three acute care facilities operate within the Las
Vegas, Nevada market. On a combined basis, these three facilities contributed
18% of the Company's consolidated net revenues for the past three years and
14% in 2000, 10% in 1999 and 15% in 1998 of the Company's consolidated EBITDA.
The decrease in the combined operating margins from 1998 to 1999 was primarily
due to: (i) a capitation arrangement in place during 1999, in which the three
facilities assumed a greater share of risk, and; (ii) collection issues
resulting from continued delays in payments from managed care payors. The
capitation agreement has been replaced by a standard per diem contract
commencing in January, 2000.
The following table shows approximate percentages of net patient revenue
derived by the Company's hospitals owned as of December 31, 2000, since their
respective dates of acquisition by the Company from third party sources,
including the additional Medicaid reimbursements received at five of the
Company's acute care facilities located in Texas and one in South Carolina
totaling $28.9 in 2000, $37.0 million in 1999, $36.5 million in 1998, $33.4
million in 1997 and $17.8 million in 1996, and from all other sources during
the five years ended December 31, 2000.
PERCENTAGE OF NET PATIENT REVENUES
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2000 1999 1998 1997 1996
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Third Party Payors:
Medicare................................ 32.3% 33.5% 34.3% 35.6% 35.6%
Medicaid................................ 11.5% 12.6% 11.3% 14.5% 15.3%
Managed Care (HMOs and PPOs)............ 34.5% 31.5% 27.2% 19.1% N/A
Other Sources........................... 21.7% 22.4% 27.2% 30.8% 49.1%
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Total................................... 100% 100% 100% 100% 100%
N/A-Not available
Regulation and Other Factors
Within the statutory framework of the Medicare and Medicaid programs, there
are substantial areas subject to administrative rulings, interpretations and
discretion which may affect payments made under either or both of such
programs and reimbursement is subject to audit and review by third party
payors. Management believes that adequate provision has been made for any
adjustments that might result therefrom.
The Federal government makes payments to participating hospitals under its
Medicare program based on various formulas. The Company's general acute care
hospitals are subject to a prospective payment system ("PPS"). For inpatient
services, PPS pays hospitals a predetermined amount per diagnostic related
group ("DRG") based upon a hospital's location and the patient's diagnosis.
Beginning August 1, 2000, under a new outpatient prospective payment system
("OPPS") mandated by the Balanced Budget Act of 1997, both general acute and
behavioral health hospital's outpatient services are paid a predetermined
amount per Ambulatory Payment Classification ("APC") based upon a hospital's
location and the procedures performed. The Medicare, Medicaid and SCHIP
Balanced Budget Refinement Act of 1999 ("BBRA of 1999") provides for a
"transitional corridor payments" through fiscal year 2003 which provides
financial relief for any hospital that incurs a reduction to its Medicare
outpatient reimbursement under the new OPPS.
Behavioral health facilities, which are excluded from PPS, are cost
reimbursed by the Medicare program, but are subject to a per discharge
ceiling, calculated based on an annual allowable rate of increase over the
hospital's base year amount under the Medicare law and regulations. Capital
related costs are exempt from this limitation. In the Balanced Budget Act of
1997, Congress significantly revised the Medicare payment provisions for PPS-
excluded hospitals, including psychiatric hospitals. Effective for Medicare
cost reporting periods beginning on or after October 1, 1997, different caps
are applied to psychiatric hospitals' target amounts
4
depending whether a hospital was excluded from PPS before or after that date.
Congress also revised the rate-of-increase percentages for PPS-excluded
hospitals and eliminated the new provider PPS-exemption for psychiatric
hospitals. In addition, the Health Care Financing Administration has
implemented requirements applicable to psychiatric hospitals that share a
facility or campus with another hospital. The BBRA of 1999 requires that HCFA
develop an inpatient psychiatric per diem prospective payment system effective
for the federal fiscal year beginning October 1, 2002. This new prospective
system will replace the current inpatient psychiatric payment system described
above.
On August 30, 1991, the Health Care Financing Administration issued final
Medicare regulations establishing a PPS for inpatient hospital capital-related
costs. These regulations apply to hospitals which are reimbursed based upon
the prospective payment system and took effect for cost report years beginning
on or after October 1, 1991. For most of the Company's hospitals, the new
methodology began on January 1, 1992. In 2001, the tenth year of the phase-in,
most UHS hospitals are paid by the Medicare program based on the national
federal capital rate (three hospitals still receive hold harmless payments
which are described below.)
The regulations provide for the use of a 10-year transition period in which
a blend of the old and new capital payment provisions will be utilized. One of
two methodologies will apply during the 10-year transition period: if the
hospital's hospital-specific capital rate exceeds the federal capital rate,
the hospital will be paid on the basis of a "hold harmless" methodology, which
is a blend of a portion of old capital and an amount of new capital and a
prospectively determined national federal capital rate; or, with limited
exceptions, if the hospital-specific rate is below the federal capital rate,
the hospital will receive payments based upon a "fully prospective"
methodology, which is a blend of the hospital's hospital-specific capital rate
and a prospectively determined national federal capital rate. Each hospital's
hospital-specific rate was determined based upon allowable capital costs
incurred during the "base year", which, for most of the Company's hospitals,
is the year ended December 31, 1990. Updated amounts and factors necessary to
determine PPS rates for Medicare hospital inpatient services for operating
costs and capital related costs are published annually. In addition to the
trends described above that continue to have an impact on the operating
results, there are a number of other more general factors affecting the
Company's business. The Balanced Budget Act of 1997 called for the government
to trim the growth of federal spending on Medicare by $115 billion and on
Medicaid by $13 billion over the next five years. The act also called for
reductions in the future rate of increases to payments made to hospitals and
reduced the amount of reimbursement for outpatient services, bad debt expense
and capital costs. Some of these reductions were reversed with the passage on
December 15, 2000 of the Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000, which will increase certain Medicare and Medicaid
provider payments. It is possible that future budgets will contain certain
further reductions or increases in the rate of increase of Medicare and
Medicaid spending.
The Company can provide no assurances that the reductions in the PPS update,
and other changes required by the Balanced Budget Act, will not adversely
affect its operations. However, within certain limits, a hospital can manage
its costs, and, to the extent this is done effectively, a hospital may benefit
from the DRG system. However, many hospital operating costs are incurred in
order to satisfy licensing laws, standards of the Joint Commission on the
Accreditation of Healthcare Organizations and quality of care concerns. In
addition, hospital costs are affected by the level of patient acuity,
occupancy rates and local physician practice patterns, including length of
stay judgments and number and type of tests and procedures ordered. A
hospital's ability to control or influence these factors which affect costs
is, in many cases, limited.
In addition to Federal health reform efforts, several states have adopted or
are considering healthcare reform legislation. Several states are planning to
consider wider use of managed care for their Medicaid populations and
providing coverage for some people who presently are uninsured. The enactment
of Medicaid managed care initiatives is designed to provide low-cost coverage.
The Company currently operates three behavioral health centers with a total of
268 beds in Massachusetts, which has mandated hospital rate-setting. The
Company also
5
operates three hospitals containing an aggregate of 688 beds in Florida that
are subject to a mandated form of rate-setting if increases in hospital
revenues per admission exceed certain target percentages.
In 1991, the Texas legislature authorized the LoneSTAR Health Initiative, a
pilot program in two areas of the state, to establish for Medicaid
beneficiaries a health care delivery system based on managed care principles.
The program is now known as the STAR Program, which is short for State of
Texas Access Reform. Since 1995, the Texas Health and Human Services
Commission, with the help of other Texas agencies such as the Texas Department
of Health, has rolled out STAR Medicaid managed care pilot programs in several
geographic areas of the state. Under the STAR program, the Texas Department of
Health either contracts with health maintenance organizations in each area to
arrange for covered services to Medicaid beneficiaries, or contracts directly
with health care providers and oversees the furnishing of care in the role of
the case manager. Two carve-out pilot programs are the STAR+PLUS program,
which provides long-term care to elderly and disabled Medicaid beneficiaries
in the Harris County service area, and the NorthSTAR program, which furnishes
behavioral health services to Medicaid beneficiaries in the Dallas County
service area. Effective fall 1999, however, the Texas legislature imposed a
moratorium on the implementation of additional pilot programs until the 2001
legislative session. A study on the effectiveness of Medicaid managed care was
issued in November, 2000, and the extent of further implementation of or
changes to Medicaid managed care will likely depend upon the legislature's
response to the study. The Company is unable to predict the effect on the
Company's business of such current or future pilot programs.
Upon meeting certain conditions, and serving a disproportionately high share
of Texas' and South Carolina's low income patients, five of the Company's
facilities located in Texas and one facility located in South Carolina became
eligible and received additional reimbursement from each state's
disproportionate share hospital fund. Included in the Company's financial
results was an aggregate of $28.9 million in 2000, $37.0 million in 1999,
$36.5 million in 1998, $33.4 million in 1997 and $17.8 million in 1996,
received pursuant to the terms of these programs. Failure to renew these
programs, which are scheduled to terminate in the third quarter of 2001, or
further reduction in reimbursements, could have a material adverse effect on
the Company's future results of operation.
The federal self-referral and payment prohibitions (codified in 42 U.S.C.
Section 1395nn, Section 1877 of the Social Security Act) generally forbid,
absent qualifying for one of the exceptions, a physician from making referrals
for the furnishing of any "designated health services," for which payment may
be made under the Medicare or Medicaid programs, to any entity with which the
physician (or an immediate family member) has a "financial relationship." The
legislation was effective January 1, 1992 for clinical laboratory services
("Stark I") and January 1, 1995 for ten other designated health services
("Stark II"). A "financial relationship" under Stark I and II includes any
direct or indirect "compensation arrangement" with an entity for payment of
any remuneration, and any direct or indirect "ownership or investment
interest" in the entity. The legislation contains certain exceptions
including, for example, where the referring physician has an ownership
interest in a hospital as a whole or where the physician is an employee of an
entity to which he or she refers. The Stark I and II self-referral and payment
prohibitions include specific reporting requirements providing that each
entity providing covered items or services must provide the Secretary with
certain information concerning its ownership, investment, and compensation
arrangements. In August 1995, HCFA published a final rule regarding physician
self-referrals for clinical lab services. On January 4, 2001, HCFA published
final rules regarding physician self referrals for the ten other designated
health services. Penalties for violating Stark I and Stark II include denial
of payment for any services rendered by an entity in violation of the
prohibitions, civil money penalties of up to $15,000 for each offense, and
exclusion from the Medicare and Medicaid programs.
Starting in 1991, the Inspector General of the Department of Health and
Human Services ("HHS") issued regulations which provide for "safe harbors"
from the federal anti-kickback statute; if an arrangement or transaction meets
each of the standards established for a particular safe harbor, the
arrangement will not be subject to challenge by the Inspector General. If an
arrangement does not meet the safe harbor criteria, it will be subject to
scrutiny under its particular facts and circumstances to determine whether it
violates the federal anti-kickback statute which prohibits, in general,
fraudulent and abusive practices, and enforcement action may be
6
taken by the Inspector General. In addition to the investment interests safe
harbor, other safe harbors include space rental, equipment rental, personal
service/management contracts, sales of a physician practice, referral
services, warranties, employees, discounts and group purchasing arrangements,
among others. The criminal sanctions for a conviction under the anti-kickback
statute include imprisonment, fines, or both. Civil sanctions include
exclusion from federal and state health care programs.
The Company does not anticipate that either the Stark provisions or the safe
harbor regulations to the federal anti-kickback statute will have material
adverse effects on its operations.
Regulations related to the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA") are expected to impact the Company and others in the
healthcare industry by:
(i) Establishing standardized code sets for financial and clinical electronic
data interchange ("EDI") transactions to enable more efficient flow of
information. Currently there is no common standard for the transfer of
information between the constituents in healthcare and therefore providers
have had to conform to each standard utilized by every party with which
they interact. The goal of HIPAA is to create one common national standard
for EDI and once the HIPAA regulation takes effect, payors will be
required to accept the national standard employed by providers. The final
regulations establishing electronic data transmission standards that all
healthcare providers must use when submitting or receiving certain
healthcare transactions electronically were published in August, 2000 and
compliance with these regulations is required by October, 2002.
(ii) Mandating the adoption of security standards to preserve the
confidentiality of health information that identifies individuals.
Currently there is no recognized healthcare standard that includes all
the necessary components to protect the data integrity and
confidentiality of a patient's electronically maintained or transmitted
personal health record. The final regulations containing the privacy
standards were released in December, 2000 which require compliance by
February, 2003, however, it is possible that the privacy regulations
could be amended or their implementation delayed.
(iii) Creating unique identifiers for the four constituents in healthcare:
payors, providers, patients and employers. HIPAA will mandate the need
for the unique identifiers for healthcare providers in an effort to ease
the administrative challenge of maintaining and transmitting clinical
data across disparate episodes of patient care.
Non-compliance may result in fines, loss of accreditation and/or threat of
civil litigation. The Company has begun preliminary planning for
implementation of the necessary changes required pursuant to the terms of
HIPAA. However, the Company can not currently estimate the implementation cost
of the HIPAA related modifications and consequently can give no assurances
that issues related to HIPAA will not have a material adverse effect on the
Company's financial condition or results of operations.
Several states, including Florida and Nevada, have passed legislation which
limits physician ownership in medical facilities providing imaging services,
rehabilitation services, laboratory testing, physical therapy and other
services. This legislation is not expected to significantly affect the
Company's operations. Many states have laws and regulations which prohibit
payments for referral of patients and fee-splitting with physicians. The
Company does not make any such payments or have any such arrangements.
All hospitals are subject to compliance with various federal, state and
local statutes and regulations and receive periodic inspection by state
licensing agencies to review standards of medical care, equipment and
cleanliness. The Company's hospitals must comply with the conditions of
participation and licensing requirements of federal, state and local health
agencies, as well as the requirements of municipal building codes, health
codes and local fire departments. In granting and renewing licenses, a
department of health considers, among other things, the physical buildings and
equipment, the qualifications of the administrative personnel and nursing
staff, the quality of care and continuing compliance with the laws and
regulations relating to the operation of the facilities. State licensing of
facilities is a prerequisite to certification under the Medicare and Medicaid
programs. Various other licenses and permits are also required in order to
dispense narcotics, operate pharmacies, handle radioactive materials and
7
operate certain equipment. All the Company's eligible hospitals have been
accredited by the Joint Commission on the Accreditation of Healthcare
Organizations ("JCAHO"). The JCAHO reviews each hospital's accreditation once
every three years. The review period for each state's licensing body varies,
but generally ranges from once a year to once every three years.
The Social Security Act and regulations thereunder contain numerous
provisions which affect the scope of Medicare coverage and the basis for
reimbursement of Medicare providers. Among other things, this law provides
that in states which have executed an agreement with the Secretary of the
Department of Health and Human Services (the "Secretary"), Medicare
reimbursement may be denied with respect to depreciation, interest on borrowed
funds and other expenses in connection with capital expenditures which have
not received prior approval by a designated state health planning agency.
Additionally, many of the states in which the Company's hospitals are located
have enacted legislation requiring certificates of need ("CON") as a condition
prior to hospital capital expenditures, construction, expansion, modernization
or initiation of major new services. Failure to obtain necessary state
approval can result in the inability to complete an acquisition or change of
ownership, the imposition of civil or, in some cases, criminal sanctions, the
inability to receive Medicare or Medicaid reimbursement or the revocation of a
facility's license. The Company has not experienced and does not expect to
experience any material adverse effects from those requirements.
Health planning statutes and regulatory mechanisms are in place in many
states in which the Company operates. These provisions govern the distribution
of healthcare services, the number of new and replacement hospital beds,
administer required state CON laws, contain healthcare costs, and meet the
priorities established therein. Significant CON reforms have been proposed in
a number of states, including increases in the capital spending thresholds and
exemptions of various services from review requirements. The Company is unable
to predict the impact of these changes upon its operations.
Federal regulations provide that admissions and utilization of facilities by
Medicare and Medicaid patients must be reviewed in order to insure efficient
utilization of facilities and services. The law and regulations require Peer
Review Organizations ("PROs") to review the appropriateness of Medicare and
Medicaid patient admissions and discharges, the quality of care provided, the
validity of DRG classifications and the appropriateness of cases of
extraordinary length of stay. PROs may deny payment for services provided,
assess fines and also have the authority to recommend to HHS that a provider
that is in substantial non-compliance with the standards of the PRO be
excluded from participating in the Medicare program. The Company has
contracted with PROs in each state where it does business as to the scope of
such functions.
The Company's healthcare operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. In 1988, Congress passed the Medical Waste Tracking
Act. Infectious waste generators, including hospitals, now face substantial
penalties for improper arrangements regarding disposal of medical waste,
including civil penalties of up to $25,000 per day of noncompliance, criminal
penalties of $150,000 per day, imprisonment, and remedial costs. The
comprehensive legislation establishes programs for medical waste treatment and
disposal in designated states. The legislation also provides for sweeping
inspection authority in the Environmental Protection Agency, including
monitoring and testing. The Company believes that its disposal of such wastes
is in compliance with all state and federal laws.
Medical Staff and Employees
The Company's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. With a few exceptions,
physicians are not employees of the Company's hospitals and members of the
medical staffs of the Company's hospitals also serve on the medical staffs of
hospitals not owned by the Company and may terminate their affiliation with
the Company's hospitals at any time. Each of the Company's hospitals is
managed on a day-to-day basis by a managing director employed by the Company.
In addition, a Board of Governors, including members of the hospital's medical
staff, governs the medical, professional and ethical practices at each
hospital. The Company's facilities had approximately 25,600 employees at
December 31, 2000, of whom 17,920 were employed full-time.
8
Approximately 1,547 of the Company's employees at six of its hospitals are
unionized. At Valley Hospital, unionized employees belong to the Culinary
Workers and Bartenders Union, the International Union of Operating Engineers
and the Service Employees International Union. Registered nurses at Auburn
Regional Medical Center located in Washington state, are represented by the
United Staff Nurses Union, the technical employees are represented by the
United Food and Commercial Workers, and the service employees are represented
by the Service Employees International Union. At The George Washington
University Hospital, unionized employees are represented by the Service
Employees International Union and the Hospital Police Association. Nurses at
Desert Springs Hospital are represented by the Service Employees International
Union. The registered nurses, licensed practical nurses, certain technicians
and therapists, and housekeeping employees at HRI Hospital in Boston are
represented by the Service Employees International Union. Unionized employees
at Hospital San Fransisco in Puerto Rico are represented by the Labor Union of
Nurses and Health Employees. The Company believes that its relations with its
employees are satisfactory.
Competition
In all geographical areas in which the Company operates, there are other
hospitals which provide services comparable to those offered by the Company's
hospitals, some of which are owned by governmental agencies and supported by
tax revenues, and others of which are owned by nonprofit corporations and may
be supported to a large extent by endowments and charitable contributions.
Such support is not available to the Company's hospitals. Certain of the
Company's competitors have greater financial resources, are better equipped
and offer a broader range of services than the Company. Outpatient treatment
and diagnostic facilities, outpatient surgical centers and freestanding
ambulatory surgical centers also impact the healthcare marketplace. In recent
years, competition among healthcare providers for patients has intensified as
hospital occupancy rates in the United States have declined due to, among
other things, regulatory and technological changes, increasing use of managed
care payment systems, cost containment pressures, a shift toward outpatient
treatment and an increasing supply of physicians. The Company's strategies are
designed, and management believes that its facilities are positioned, to be
competitive under these changing circumstances.
Liability Insurance
Effective January 1, 1998, the Company's subsidiaries are covered under
commercial insurance policies which provide for a self-insured retention limit
for professional and general liability claims for most of its subsidiaries up
to $1 million per occurrence, with an average annual aggregate for covered
subsidiaries of $7 million through 2001. These subsidiaries maintain excess
coverage up to $100 million with major insurance carriers. The Company's
remaining facilities are fully insured under commercial policies with excess
coverage up to $100 million maintained with major insurance carriers. At
various times in the past, the cost of professional and general liability
insurance has risen significantly. Therefore, there can be no assurance that
the Company will be able to purchase commercial policies at reasonable
premiums upon the December 31, 2001 expiration of current policies.
Additionally, there can be no assurance that the increased insurance expense
incurred in connection with either commercially or self-insured professional
and general liability policies will not have a material adverse effect on the
Company's future results of operations.
Relations with Universal Health Realty Income Trust
The Company serves as advisor to Universal Health Realty Income Trust
("UHT"), which leases to the Company the real property of 6 hospital
facilities operated by the Company with terms expiring in 2001 through 2006.
These leases contain up to six 5-year renewal options. During 2000, the
Company exercised its option to purchase Meridell Achievement Center from UHT
for cash proceeds of approximately $5.5 million. The Company also sold the
real property of a medical office building to a limited liability company that
is majority-owned by UHT for cash proceeds of approximately $10.5 million.
Tenants in the multi-tenant building include subsidiaries of the Company as
well as unrelated parties. In addition, UHT holds interests in properties
owned by unrelated companies. The Company receives a fee for its advisory
services based on the value of UHT's assets. In addition, certain of the
directors and officers of the Company serve as trustees and officers of UHT.
As of January 31, 2001, the Company owned 8.5% of UHT's outstanding shares and
the Company has an option to purchase UHT shares in the future at fair market
value to enable it to maintain a 5% interest.
9
Executive Officers of the Registrant
The executive officers of the Company, whose terms will expire at such time
as their successors are elected, are as follows:
Name and Age Present Position with the Company
------------ ---------------------------------
Alan B. Miller (63)................... Director, Chairman of the Board,
President and Chief Executive Officer
Kirk E. Gorman (50)................... Senior Vice President and Chief
Financial Officer
Steve G. Filton (43).................. Vice President, Controller and Secretary
Debra Osteen (45)..................... Vice President
Richard C. Wright (53)................ Vice President
Mr. Alan B. Miller has been Chairman of the Board, President and Chief
Executive Officer of the Company since its inception. Prior thereto, he was
President, Chairman of the Board and Chief Executive Officer of American
Medicorp, Inc.
Mr. Gorman was elected Senior Vice President and Chief Financial Officer in
December 1992, and has served as Vice President and Treasurer of the Company
since April 1987. From 1984 until then, he served as Senior Vice President of
Mellon Bank, N.A. Prior thereto, he served as Vice President of Mellon Bank,
N.A.
Mr. Wright was elected Vice President of the Company in May 1986. He has
served in various capacities with the Company since 1978 and currently heads
the Development function.
Mr. Filton has been Vice President and Controller of the Company since
November 1991. Prior thereto he had served as Director of Accounting and
Control. In September 1999, he was elected Secretary of the Company.
Ms. Osteen was elected Vice President of the Company in January 2000,
responsible for the Behavioral Health Division. She has served in various
capacities with the Company since 1984 including responsibility for
approximately one-half of the Behavioral Health Division's facilities.
ITEM 2. Properties
Executive Offices
The Company owns an office building with 68,000 square feet available for
use located on 11 acres of land in King of Prussia, Pennsylvania.
10
Facilities
The following tables set forth the name, location, type of facility and, for
acute care hospitals and behavioral health centers, the number of beds, for
each of the Company's facilities:
Acute Care Hospitals
Number Ownership
Name of Facility Location of Beds Interest
- ---------------- -------- ------- ---------
Aiken Regional Medical
Centers................... Aiken, South Carolina 225 Owned
Auburn Regional Medical
Center.................... Auburn, Washington 149 Owned
Chalmette Medical
Center(5)................. Chalmette, Louisiana 195 Leased
Desert Springs
Hospital(2)............... Las Vegas, Nevada 233 Owned
Doctors' Hospital of
Laredo.................... Laredo, Texas 117 Owned
Doctors' Hospital of
Shreveport(3)............. Shreveport, Louisiana 136 Leased
Edinburg Regional Medical
Center.................... Edinburg, Texas 169 Owned
Fort Duncan Medical
Center.................... Eagle Pass, Texas 77 Owned
The George Washington
University Hospital(4).... Washington, D.C. 501 Owned
Hospital San Francisco..... Rio Piedras, Puerto Rico 160 Owned
Hospital San Pablo......... Bayamon, Puerto Rico 430 Owned
Hospital San Pablo del
Este...................... Fajardo, Puerto Rico 180 Owned
Inland Valley Regional
Medical Center(1)......... Wildomar, California 80 Leased
Manatee Memorial Hospital.. Bradenton, Florida 512 Owned
McAllen Medical
Center(12)................ McAllen, Texas 570 Leased
Northern Nevada Medical
Center(4)................. Sparks, Nevada 100 Owned
Northwest Texas Healthcare
System.................... Amarillo, Texas 357 Owned
River Parishes Hospitals... LaPlace and Chalmette, Louisiana 106 Owned
St. Mary's Regional Medical
Center.................... Enid, Oklahoma 277 Owned
Summerlin Hospital Medical
Center(2)................. Las Vegas, Nevada 166 Owned
Valley Hospital Medical
Center(2)................. Las Vegas, Nevada 417 Owned
Wellington Regional Medical
Center(1)................. West Palm Beach, Florida 120 Leased
Behavioral Health Centers
Number Ownership
Name of Facility Location of Beds Interest
- ---------------- -------- ------- ---------
Anchor Hospital............ Atlanta, Georgia 74 Owned
The Arbour Hospital........ Boston, Massachusetts 118 Owned
The Bridgeway(1)........... North Little Rock, Arkansas 70 Leased
The Carolina Center for
Behavioral Health......... Greer, South Carolina 66 Owned
Clarion Psychiatric
Center.................... Clarion, Pennsylvania 70 Owned
Del Amo Hospital........... Torrance, California 166 Owned
Fairmount Behavioral Health
System.................... Philadelphia, Pennsylvania 169 Owned
Forest View Hospital....... Grand Rapids, Michigan 62 Owned
Fuller Memorial Hospital... South Attleboro, Massachusetts 82 Owned
Glen Oaks Hospital......... Greenville, Texas 54 Owned
Hampton Hospital........... Westhampton, New Jersey 100 Owned
Hartgrove Hospital......... Chicago, Illinois 119 Owned
The Horsham Clinic......... Ambler, Pennsylvania 146 Owned
HRI Hospital............... Brookline, Massachusetts 68 Owned
KeyStone Center(6)......... Wallingford, Pennsylvania 100 Owned
La Amistad Residential
Treatment Center.......... Maitland, Florida 56 Owned
Lakeside Behavioral Health
System.................... Memphis, Tennessee 204 Owned
Laurel Heights Hospital.... Atlanta, Georgia 102 Owned
11
Number Ownership
Name of Facility Location of Beds Interest
- ---------------- -------- ------- ---------
The Meadows Psychiatric Center... Centre Hall, Pennsylvania 101 Owned
Meridell Achievement Center...... Austin, Texas 114 Owned
The Midwest Center for Youth and
Families........................ Kouts, Illinois 50 Owned
Parkwood Behavioral Health
System.......................... Olive Branch, Mississippi 106 Owned
The Pavilion..................... Champaign, Illinois 46 Owned
Peachford Behavioral Health
System of Atlanta............... Atlanta, Georgia 184 Owned
Provo Canyon School.............. Provo, Utah 211 Owned
Ridge Behavioral Health System... Lexington, Kentucky 110 Owned
River Crest Hospital............. San Angelo, Texas 80 Owned
River Oaks Hospital.............. New Orleans, Louisiana 126 Owned
Rockford Center.................. Newark, Delaware 74 Owned
Roxbury(6)....................... Shippensburg, Pennsylvania 75 Owned
Talbott Recovery Campus.......... Atlanta, Georgia -- Owned
Timberlawn Mental Health System.. Dallas, Texas 124 Owned
Turning Point Care Center(6)..... Moultrie, Georgia 59 Owned
Two Rivers Psychiatric Hospital.. Kansas City, Missouri 80 Owned
Ambulatory Surgery Centers
Name of Facility(7) Location
------------------- --------
Arkansas Surgery Center of Fayetteville.......... Fayetteville, Arkansas
Brownsville Surgicare............................ Brownsville, Texas
Goldring Surgical and Diagnostic Center.......... Las Vegas, Nevada
Northwest Texas Surgery Center................... Amarillo, Texas
Outpatient Surgical Center of Ponca City......... Ponca City, Oklahoma
Plaza Surgery Center............................. Las Vegas, Nevada
St. George Surgical Center....................... St. George, Utah
Hope Square Surgery Center....................... Rancho Mirage, California
Surgery Center of Littleton...................... Littleton, Colorado
Surgery Center of Midwest City................... Midwest City, Oklahoma
Surgery Center of Springfield.................... Springfield, Missouri
Surgical Center of New Albany.................... New Albany, Indiana
Radiation Oncology Centers
Name of Facility Location
---------------- --------
Auburn Regional Center for Cancer Care........... Auburn, Washington
Bluegrass Cancer Center.......................... Frankfort, Kentucky
Bowling Green Radiation Therapy(9)............... Bowling Green, Kentucky
Cancer Institute of Nevada(10)................... Las Vegas, Nevada
Carolina Cancer Center........................... Aiken, South Carolina
Danville Radiation Therapy Center................ Danville, Kentucky
Glasgow Radiation Therapy(9)..................... Glasgow, Kentucky
Louisville Radiation Oncology Center(8).......... Louisville, Kentucky
Madison Radiation Therapy(10).................... Madison, Indiana
Southern Indiana Radiation Therapy............... Jeffersonville, Indiana
Radiation Therapy Medical Associates of
Bakersfield(11)................................. Bakersfield, California
12
Specialized Women's Health Centers
Name of Facility Location
---------------- --------
Renaissance Women's Center of Edmond(10).................... Edmond, Oklahoma
- --------
(1) Real property leased from UHT.
(2) Desert Springs Hospital, Summerlin Hospital Medical Center and Valley
Hospital Medical Center are owned by a limited liability company in which
the Company has a 72.5% interest and Quorum's subsidiary, NC-DSH, Inc.,
has a 27.5% interest. All hospitals are managed by the Company.
(3) Real property leased with an option to purchase.
(4) General partnership interest in limited partnership.
(5) Includes Chalmette Medical Center, which is a 118-bed medical/surgical
facility and The Virtue Street Pavilion, a 77-bed facility consisting of
a physical rehabilitation unit, skilled nursing and inpatient behavioral
health services. The real property of both facilities is leased from UHT.
(6) Addictive disease facility.
(7) Each facility, other than Goldring Surgical and Diagnostic Center and
Northwest Texas Surgery Center, is owned in partnership form with the
Company owning general and limited partnership interests in a limited
partnership. The real property is leased from third parties.
(8) Majority interest in a limited liability partnership.
(9) Managed facility, not included in the Company's consolidated financial
statements. A partnership, in which the Company is the general partner,
owns the real property.
(10) Membership interest in limited liability company.
(11) Managed facility, not included in the Company's consolidated financial
statements. A limited liability company, in which the Company is the sole
member, owns the equipment, but the property is leased.
(12) Real property of McAllen Medical Center is leased from UHT. During 2000,
the Company purchased the assets of an 80-bed non-acute care facility
located in McAllen, Texas. Although the real property of the non-acute
facility is not leased from UHT, the license for this facility is
included in McAllen Medical Center's license.
Some of these facilities are subject to mortgages, and substantially all the
equipment located at these facilities is pledged as collateral to secure long-
term debt. The Company owns or leases medical office buildings adjoining
certain of its hospitals.
The Company believes that the leases or liens on the facilities leased or
owned by the Company do not impose any material limitation on the Company's
operations.
The aggregate lease payments on facilities leased by the Company were $22.5
million in 2000, $24.0 million in 1999 and $22.2 million in 1998.
ITEM 3. Legal Proceedings
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's hospitals and is party to various other litigation. However,
management believes the ultimate resolution of these pending proceedings will
not have a material adverse effect on the Company.
During the fourth quarter of 1999, the Company made a decision to close and
divest one of its specialized women's centers, and recorded a $5.3 million
charge to reduce carrying value of the facility to its estimated realizable
value of approximately $9 million, based on an independent appraisal. A jury
verdict unfavorable to
13
the Company was rendered during the fourth quarter of 2000 with respect to
litigation regarding closing of this facility. This unprofitable facility was
closed in February, 2001 and the Company has appealed the jury verdict.
Accordingly, during the fourth quarter of 2000, the Company recognized a
nonrecurring charge of $7.7 million for the amount of the jury verdict and a
reserve for remaining legal costs.
ITEM 4. Submission of Matters to a Vote of Security Holders
Inapplicable. No matter was submitted during the fourth quarter of the
fiscal year ended December 31, 2000 to a vote of security holders.
14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
See Item 6, Selected Financial Data
ITEM 6. Selected Financial Data
Year Ended December 31
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Summary of Operations
(in thousands)
Net revenues........... $2,242,444 $2,042,380 $1,874,487 $1,442,677 $1,174,158
Net income............. $ 93,362 $ 77,775 $ 79,558 $ 67,276 $ 50,671
Net margin............. 4.2% 3.8% 4.2% 4.7% 4.3%
Return on average
equity................ 13.7% 12.1% 13.1% 13.5% 13.0%
Financial Data (in
thousands)
Cash provided by
operating activities.. $ 182,454 $ 175,557 $ 151,684 $ 174,170 $ 145,991
Capital expenditures
(1)................... $ 115,751 $ 68,695 $ 96,808 $ 132,258 $ 107,630
Total assets........... $1,742,377 $1,497,973 $1,448,095 $1,085,349 $ 965,795
Long-term borrowings... $ 548,064 $ 419,203 $ 418,188 $ 272,466 $ 275,634
Common stockholders'
equity................ $ 716,574 $ 641,611 $ 627,007 $ 526,607 $ 452,980
Percentage of total
debt to total
capitalization........ 43% 40% 40% 35% 38%
Operating Data--Acute
Care Hospitals
Average licensed beds.. 4,980 4,806 4,696 3,389 3,018
Average available
beds.................. 4,220 4,099 3,985 2,951 2,641
Hospital admissions.... 214,771 204,538 187,833 128,020 111,244
Average length of
patient stay.......... 4.7 4.7 4.7 4.8 4.9
Patient days........... 1,017,646 963,842 884,966 616,965 546,237
Occupancy rate for
licensed beds......... 56% 55% 52% 50% 49%
Occupancy rate for
available beds........ 66% 64% 61% 57% 57%
Operating Data--
Behavioral Health
Facilities
Average licensed beds.. 2,612 1,976 1,782 1,777 1,565
Average available
beds.................. 2,552 1,961 1,767 1,762 1,540
Hospital admissions.... 49,971 37,810 32,400 28,350 22,295
Average length of
patient stay.......... 12.2 11.8 11.3 11.9 12.4
Patient days........... 608,423 444,632 365,935 336,850 275,667
Occupancy rate for
licensed beds......... 64% 62% 56% 52% 48%
Occupancy rate for
available beds........ 65% 62% 57% 52% 49%
Per Share Data
Net income--basic (2).. $ 3.10 $ 2.48 $ 2.45 $ 2.08 $ 1.69
Net income--diluted
(2)................... $ 3.01 $ 2.43 $ 2.39 $ 2.03 $ 1.65
Other Information (in
thousands)
Weighted average number
of shares
outstanding--basic
(2)................... 30,110 31,417 32,511 32,321 30,054
Weighted average number
of shares and share
equivalents
outstanding--diluted
(2)................... 32,410 31,990 33,293 33,098 30,798
Common Stock Performance
Market price of common stock
High--Low, by quarter (3)
1st....................... 49 -36 1/2 53 - 37 7/8 58 1/8 -47 1/16 34 5/8 -27 7/8 26 7/8-21 11/16
2nd....................... 70 1/16-49 54 7/8 -39 1/2 59 5/8 - 53 40 1/2 -31 5/8 30 1/8-24 3/8
3rd....................... 85 5/8 -63 13/16 47 3/8 -23 11/16 58 1/2 -38 3/4 47 1/16-39 1/16 27 1/4-22 3/4
4th....................... 111 3/4-77 1/4 36 1/2 - 24 54 5/16-40 7/16 50 3/8 -40 11/16 29 1/4-24 1/2
- --------
(1) Amount includes non-cash capital lease obligations.
(2) In April 1996, the Company declared a two-for-one stock split in the form
of a 100% stock dividend which was paid in May 1996. All classes of common
stock participated on a pro rata basis. The weighted average number of
common shares and equivalents and earnings per common and common
equivalent share for all years presented have been adjusted to reflect the
two-for-one stock split.
(3) These prices are the high and low closing sales prices of the Company's
Class B Common Stock as reported by the New Yok Stock Exchange (all
periods have been adjusted to reflect the two-for-one stock split in the
form of a 100% stock dividend paid in May 1996). Class A, C and D common
stock are convertible on a share-for-share basis into Class B Common
Stock.
15
Number of shareholders of record as of January 31, 2001, were as follows:
- ------------------------------
Class A Common............ 6
Class B Common............ 528
Class C Common............ 5
Class D Common............ 213
- ------------------------------
ITEM 7. Management's Discussion And Analysis Of Operations And Financial
Condition
Forward-Looking Statements
The matters discussed in this report as well as the news releases issued
from time to time by the Company include certain statements containing the
words "believes", "anticipates", "intends", "expects" and words of similar
import, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, the following: that the
majority of the Company's revenues are produced by a small number of its total
facilities; possible changes in the levels and terms of reimbursement by
government programs, including Medicare or Medicaid or other third party
payors; industry capacity; demographic changes; existing laws and government
regulations and changes in or failure to comply with laws and governmental
regulations; the ability to enter into managed care provider agreements on
acceptable terms; liability and other claims asserted against the Company;
competition; the loss of significant customers; technological and
pharmaceutical improvements that increase the cost of providing, or reduce the
demand for healthcare; the ability to attract and retain qualified personnel,
including physicians; the ability of the Company to successfully integrate its
recent acquisitions; the Company's ability to finance growth on favorable
terms; and, other factors referenced in the Company's 2000 Form 10-K or
herein. Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. The Company disclaims
any obligation to update any such factors or to publicly announce the result
of any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
Results of Operations
Net revenues increased 10% to $2.2 billion in 2000 as compared to 1999 and
9% to $2.0 billion in 1999 as compared to 1998. The $200 million increase in
net revenues during 2000 as compared to 1999 was due primarily to: (i) a $104
million or 5% increase in net revenues generated at acute care and behavioral
health care facilities owned during both years, and; (ii) $88 million of net
revenues generated at two acute care and twelve behavioral health care
facilities acquired during the third quarter of 2000. The $168 million
increase in net revenues during 1999 as compared to 1998 was due primarily to:
(i) a $75 million or 4% increase in net revenues generated at acute and
behavioral health care facilities owned in both 1999 and 1998 (excluding a
favorable $3 million prior year net revenue adjustment recorded in the second
quarter of 1999 resulting from an adjustment to contractual allowances
recorded in a prior year), and; (ii) $43 million of net revenues generated at
three behavioral health facilities and an acute care facility which were
acquired during the second quarter of 1999 (net of revenues generated at
facility exchanged for the acute care facility).
Earnings before interest, income taxes, depreciation, amortization, lease
and rental expense, minority interests in earnings of consolidated entities
and nonrecurring charges of $7.7 million recorded in 2000 and $5.3 million
recorded in 1999 ("EBITDAR") (see other Operating Results) increased 13% to
$359 million in 2000 from $319 million in 1999. In 1999, EBITDAR increased 2%
to $319 million from $311 million in 1998. Overall operating margins (EBITDAR)
were 16.0% in 2000, 15.6% in 1999 and 16.6% in 1998. The factors causing the
fluctuations in the Company's overall operating margins during the last three
years are discussed below.
16
Acute Care Services
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized women's health centers accounted for 84%, 86% and 87%
of consolidated net revenues in 2000, 1999 and 1998, respectively. Net
revenues at the Company's acute care facilities owned in both 2000 and 1999
increased 5% in 2000 as compared to 1999 as admissions and patient days each
increased 3% in 2000 as compared to 1999. Also contributing to the increase in
net revenues at these facilities was an increase in prices charged to private
payors including health maintenance organizations and preferred provider
organizations. Net revenues at the Company's acute care facilities owned in
both 1999 and 1998 increased 4% in 1999 as compared to 1998 due primarily to a
5% increase in admissions and a 6% increase in patient days. The average
length of stay at these facilities remained unchanged at 4.7 days during 2000,
1999 and 1998.
The Company's facilities have experienced an increase in inpatient acuity
and intensity of services as less intensive services shift from an inpatient
basis to an outpatient basis due to technological and pharmaceutical
improvements and continued pressures by payors, including Medicare, Medicaid
and managed care companies to reduce admissions and lengths of stay. To
accommodate the increased utilization of outpatient services, the Company has
expanded or redesigned several of its outpatient facilities and services.
Gross outpatient revenues at the Company's acute care facilities owned during
the last three years increased 13% in 2000 as compared to 1999 and 11% in 1999
as compared to 1998, and comprised 26% of the Company's acute care gross
patient revenue in each of the last three years. Despite the increase in
patient volume at the Company's facilities, inpatient utilization continues to
be negatively affected by payor-required, pre-admission authorization and by
payor pressure to maximize outpatient and alternative healthcare delivery
services for less acutely ill patients. Additionally, the hospital industry in
the United States, including the Company's acute care facilities, continue to
have significant unused capacity which has created substantial competition for
patients. The Company expects the increased competition, admission constraints
and payor pressures to continue.
The increase in net revenue was negatively affected by lower payments from
the government under the Medicare program as a result of the Balanced Budget
Act of 1997 ("BBA-97") and discounts to insurance and managed care companies
(see General Trends for additional disclosure). The Company anticipates that
the percentage of its revenue from managed care business will continue to
increase in the future. The Company generally receives lower payments per
patient from managed care payors than it does from traditional indemnity
insurers.
At the Company's acute care facilities, operating expenses (salaries, wages
and benefits, other operating expenses, supplies and provision for doubtful
accounts) as a percentage of net revenues were 81.4% in 2000, 81.6% in 1999
and 79.9% in 1998. Operating margins (EBITDAR) at these facilities were 18.6%
in 2000, 18.4% in 1999 and 20.1% in 1998. The operating margins at the
Company's acute care facilities improved to 18.6% in 2000 from 18.4% in 1999
despite an increase in the provision for doubtful accounts. As a result of
increased efforts to control costs, salaries, wages and benefits, other
operating expenses and supplies as a percentage of net revenues all decreased
in 2000 as compared to 1999. However, these decreases were almost entirely
offset by an increase in the provision for doubtful accounts caused primarily
by: (i) an increase in self-pay patients which generally result in a larger
portion of uncollectable accounts; (ii) collection delays and difficulties
with managed care payors, and; (iii) an increase in gross patient charges
instituted during the year which increases the provision for doubtful accounts
when accounts become uncollectable. During 1999, the Company's acute care
division experienced earnings pressure due to government reimbursement
reductions, continued increases in the provision for doubtful accounts and
weakened operating performance at facilities in Las Vegas, Nevada and
Amarillo, Texas. On a combined basis, the Company's three acute care
facilities in Las Vegas and the acute care facility in Amarillo contributed
32% of the Company's acute care net revenue in both 1999 and 1998 and had
operating margins of 15.7% in 1999 and 20.9% in 1998. Excluding the Las Vegas
and Amarillo facilities, on a combined basis, the Company's other acute care
facilities had operating margins of 19.6% in 1999 and 19.7% in 1998. The
decrease in the combined operating margins of the Las Vegas facilities in 1999
as compared to 1998 was due primarily to a capitation agreement entered into
in 1999 with a managed care provider, and collection issues resulting from
continued delays in payments from managed care payors. The capitation contract
for the
17
Company's three Las Vegas facilities was replaced by a standard per diem
contract commencing in January, 2000. The operating margins at the Company's
facility in Amarillo have been negatively impacted by reductions in Medicaid
disproportionate share payments stemming from BBA-97 and program redesigns by
Texas, reduced levels of business in a few high margin services and higher
than anticipated indigent care costs.
At the Company's acute care facilities owned in both 2000 and 1999,
operating expenses (salaries, wages and benefits, other operating expenses,
supplies and provision for doubtful accounts) as a percentage of net revenues
were 81.6% in 2000 and 81.8% in 1999. Operating margins at the Company's acute
care facilities
owned in both 2000 and 1999 were 18.4% in 2000 as compared to 18.2% in 1999.
Salaries, wages and benefits, other operating expenses and supplies as a
percentage of net revenues all decreased in 2000 as compared to 1999 at the
Company's acute care facilities owned in both years. However, these decreases
in expenses as a percentage of net revenues were almost entirely offset by an
increase in the provision for doubtful accounts, as mentioned above.
Operating expenses (salaries, wages and benefits, other operating expenses,
supplies and provision for doubtful accounts) at the Company's facilities
owned in both 1999 and 1998 were 81.4% of net revenues in 1999 and 79.9% in
1998. Operating margins at the Company's acute care facilities owned in both
1999 and 1998 were 18.6% in 1999 as compared to 20.1% in 1998. The decrease in
the same facility operating margins in 1999 as compared to 1998 was due
primarily to the decreased operating performance at the Company's acute care
facilities in Las Vegas, Nevada and Amarillo, Texas, as discussed above.
Excluding the facilities in Las Vegas and Amarillo, the operating margins at
the Company's other acute care facilities owned in both years increased to
20.1% in 1999 as compared to 19.7% in 1998.
Behavioral Health Services
Net revenues from the Company's behavioral health care facilities accounted
for 16%, 13% and 12% of consolidated net revenues in 2000, 1999 and 1998,
respectively. The increase in 2000 as compared to 1999 and 1998 was due
primarily to the purchase of twelve behavioral health facilities acquired
during the third quarter of 2000. Net revenues at the Company's behavioral
health care facilities owned in both 2000 and 1999 increased 5% in 2000 as
compared to 1999. Admissions and patient days at these facilities increased 4%
and 3%, respectively, in 2000 as compared to 1999 and the average length of
stay decreased to 11.7 days in 2000 as compared to 11.8 days in 1999. Net
revenues at the Company's behavioral health care facilities owned in both 1999
and 1998 increased 3% in 1999 as compared to 1998. Admissions and patient days
at these facilities increased 5% and 7%, respectively, in 1999 as compared to
1998 and the average length of stay increased to 11.5 days in 1999 as compared
to 11.3 days in 1998.
There has been continued practice changes in the delivery of behavioral
health care services and continued cost containment pressures from payors,
including managed care companies which encourage alternatives to inpatient
treatment. Additionally, providers participating in managed care programs
agree to provide services to patients for a discount from established rates
which generally results in pricing concessions by the providers and lower
margins. However, during the last two years, there has been significant
downsizing in the behavioral health care industry which has created an
opportunity for the Company to increase its managed care rates. Generally, the
Company expects the admission constraints and payor pressure to continue,
however, the Company believes these pressures may not be as severe in future
periods.
Operating expenses (salaries, wages and benefits, other operating expenses,
supplies and provision for doubtful accounts) as a percentage of net revenues
at the Company's behavioral health care facilities were 81.8% in 2000, 83.4%
in 1999 and 83.5% in 1998. The Company's behavioral health care division
generated operating margins (EBITDAR) of 18.2% in 2000, 16.6% in 1999 and
16.5% in 1998. On a same facility basis, operating expenses (salaries, wages
and benefits, other operating expenses, supplies and provision for doubtful
accounts) as a percentage of net revenues at the Company's behavioral health
care facilities owned in both 2000 and 1999 were 81.4% in 2000 and 83.4% in
1999. Operating margins at the Company's behavioral health care facilities
owned in both 2000 and 1999 were 18.6% in 2000 and 16.6% in 1999. Operating
expenses at the Company's
18
behavioral health care facilities owned in both 1999 and 1998 were 83.7% in
1999 and 83.5% in 1998. Operating margins at the Company's behavioral health
care facilities owned in both 1999 and 1998 were 16.3% in 1999 and 16.5% in
1998. In an effort to maintain and potentially further improve the operating
margins at its behavioral health care facilities, management of the Company
continues to implement cost controls and price increases and has also
increased its focus on receivables management.
Other Operating Results
During the fourth quarter of 1999, the Company decided to close and divest
one of its specialized women's health centers and as a result, the Company
recorded a $5.3 million nonrecurring charge to reduce the carrying
value of the facility to its estimated realizable value of approximately $9
million, based on an independent appraisal. A jury verdict unfavorable to the
Company was rendered during the fourth quarter of 2000 with respect to
litigation regarding the closing of this facility. This unprofitable facility
was closed in February, 2001 and the Company has appealed the jury verdict.
Accordingly, during the fourth quarter of 2000, the Company recognized a
nonrecurring charge of $7.7 million to reflect the amount of the jury verdict
and a reserve for remaining legal costs.
The effective tax rate was 36.1% in 2000, 36.7% in 1999 and 35.3% in 1998.
The increase in the effective tax rate during 1999 as compared to 1998 was due
to a reduction in the tax benefits related to the financing of employee
benefit programs.
General Trends
A significant portion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 44%, 46% and 46%
of the Company's net patient revenues during 2000, 1999 and 1998,
respectively. The Medicare program reimburses the Company's hospitals
primarily based on established rates by a diagnosis related group for acute
care hospitals and by cost based formula for behavioral health facilities.
Historically, rates paid under Medicare's prospective payment system ("PPS")
for inpatient services have increased, however, these increases have been less
than cost increases. Pursuant to the terms of BBA-97, there were no increases
in the rates paid to hospitals for inpatient care through September 30, 1998
and reimbursement for bad debt expense and capital costs as well as other
items were reduced. Inpatient operating payment rates increased 0.5% for the
period of October 1, 1998 through September 30, 1999, however, the modest rate
increase was less than inflation and was more than offset by the negative
impact of converting reimbursement on skilled nursing facility patients from a
cost based reimbursement to a prospective payment system and from lower DRG
payments on certain patient transfers mandated by BBA-97. Inpatient operating
payment rates were increased 1.1% for the period of October 1, 1999 through
September 30, 2000, however, the modest increase was less than inflation and
was more than offset by the negative impact of increasing the qualification
threshold for additional payments for treating costly inpatient cases
(outliers). Payments for Medicare outpatient services historically have been
paid based on costs, subject to certain adjustments and limits. BBA-97
requires that payment for those services be converted to PPS, which was
implemented on August 1, 2000. The implementation of outpatient PPS has not
had a material impact on the Company's results of operations.
During the fourth quarter of 2000, Congress passed the Medicare, Medicaid
and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA") which,
among other things, increased Medicare and Medicaid payments to health care
providers by $35 billion over 5 years with approximately $12 billion of this
amount targeted for hospitals and $11 billion for managed care payors. These
increased reimbursements to hospitals pursuant to the terms of BIPA will
commence in April, 2001 and for the period of April 1, 2001 through September
30, 2001, the additional reimbursements will be remitted to hospitals at twice
the scheduled amounts. BBA-97 established the annual update for Medicare at
market basket minus 1.1% in both fiscal years 2001 (October 1, 2000 through
September 30, 2001) and 2002 and BIPA revised the update at the full market
basket in fiscal year 2001 and market basket minus .55% in fiscal years 2002
and 2003. Additionally, BBA-97 reduced reimbursement to hospitals for Medicare
bad debts to 55% and BIPA increased the reimbursement to 70%, with
19
an effective date for the Company of January 1, 2001. The Company estimates
that the implementation of BIPA will result in an increase in net revenues and
pretax income of approximately $5 million to $10 million during 2001.
The healthcare industry is subject to numerous laws and regulations which
include, among other things, matters such as government healthcare
participation requirements, various licensure and accreditations,
reimbursement for patient services, and Medicare and Medicaid fraud and abuse.
Government action has increased with respect to investigations and/or
allegations concerning possible violations of fraud and abuse and false claims
statutes and/or regulations by healthcare providers. Providers that are found
to have violated these laws and regulations may be excluded from participating
in government healthcare programs, subjected to fines or penalties or required
to repay amounts received from government for previously billed patient
services. While management of the Company believes its policies, procedures
and practices comply with governmental regulations, no assurance can be given
that the Company will not be subjected to governmental inquiries or actions.
In Texas, a law has been passed which mandates that the state senate apply
for a waiver from current Medicaid regulations to allow the state to require
that certain Medicaid participants be serviced through managed care providers.
The Company is unable to predict whether Texas will be granted such a waiver
or the effect on the Company's business of such a waiver. Upon meeting certain
conditions, and serving a disproportionately high share of Texas' and South
Carolina's low income patients, five of the Company's facilities located in
Texas and one facility located in South Carolina became eligible and received
additional reimbursement from each state's disproportionate share hospital
fund. Beginning in the third quarter of 1999, as a result of reductions
stemming from BBA-97 and program redesigns by the two states, the Company's
Medicaid disproportionate share reimbursements were reduced by approximately
$11 million annually, on a prospective basis. Beginning in the third quarter
of 2000, the Medicaid disproportionate share reimbursements have been reduced
by an additional $5.6 million annually, on a prospective basis. The Company
has appealed the reductions related to the Texas program, however, the amounts
included in the results of operations during the third and fourth quarters of
2000 were recorded as if the Company is unsuccessful in its appeal. Included
in the Company's financial results was an aggregate of $28.9 million in 2000
(including reimbursements received at two acute care hospitals located in
Texas acquired during the second quarter of 1999 and the third quarter of
2000), $37.0 million in 1999 and $36.5 million in 1998 received pursuant to
the terms of these programs. Failure to renew these programs, which are
scheduled to terminate in the third quarter of 2001, or further reductions in
reimbursements, could have a material adverse effect on the Company's future
results of operations.
Pressures to control health care costs and a shift away from traditional
Medicare to Medicare managed care plans have resulted in an increase in the
number of patients whose health care coverage is provided under managed care
plans. Approximately 35% in 2000, 32% in 1999 and 27% in 1998, of the
Company's net patient revenues were generated from managed care companies,
which includes health maintenance organizations and preferred provider
organizations. In general, the Company expects the percentage of its business
from managed care programs to continue to grow. The consequent growth in
managed care networks and the resulting impact of these networks on the
operating results of the Company's facilities vary among the markets in which
the Company operates. Typically, the Company receives lower payments per
patient from managed care payors than it does from traditional indemnity
insurers, however during 2000, the Company secured price increases from many
of its commercial payors including managed care companies.
Effective January 1, 1998, the Company's subsidiaries are covered under
commercial insurance policies which provide for a self-insured retention limit
for professional and general liability claims for most of its subsidiaries up
to $1 million per occurrence, with an average annual aggregate for covered
subsidiaries of $7 million through 2001. These subsidiaries maintain excess
coverage up to $100 million with major insurance carriers. The Company's
remaining facilities are fully insured under commercial policies with excess
coverage up to $100 million maintained with major insurance carriers. At
various times in the past, the cost of professional and general liability
insurance has risen significantly. Therefore, there can be no assurance that
the Company will be able to purchase commercial policies at reasonable
premiums upon the December 31, 2001 expiration of
20
current policies. Additionally, there can be no assurance that the increased
insurance expense incurred in connection with either commercially or self-
insured professional and general liability policies will not have a material
adverse effect on the Company's future results of operations.
Health Insurance Portability and Accountability Act of 1996
Regulations related to the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA") are expected to impact the Company and others in the
healthcare industry by:
(i) Establishing standardized code sets for financial and clinical electronic
data interchange ("EDI") transactions to enable more efficient flow of
information. Currently there is no common standard for the transfer of
information between the constituents in healthcare and therefore providers
have had to conform to each standard utilized by every party with which
they interact. The goal of HIPAA is to create one common national standard
for EDI and once the HIPAA regulation takes effect, payors will be
required to accept the national standard employed by providers. The final
regulations establishing electronic data transmission standards that all
healthcare providers must use when submitting or receiving certain
healthcare transactions electronically were published in August, 2000 and
compliance with these regulations is required by October, 2002.
(ii) Mandating the adoption of security standards to preserve the
confidentiality of health information that identifies individuals.
Currently there is no recognized healthcare standard that includes all
the necessary components to protect the data integrity and
confidentiality of a patient's electronically maintained or transmitted
personal health record. The final regulations containing the privacy
standards were released in December, 2000 which require compliance by
February, 2003, however, it is possible that the privacy regulations
could be amended or their implementation delayed.
(iii) Creating unique identifiers for the four constituents in healthcare:
payors, providers, patients and employers. HIPAA will mandate the need
for the unique identifiers for healthcare providers in an effort to ease
the administrative challenge of maintaining and transmitting clinical
data across disparate episodes of patient care.
Non-compliance may result in fines, loss of accreditation and/or threat of
civil litigation. The Company has begun preliminary planning for
implementation of the necessary changes required pursuant to the terms of
HIPAA. However, the Company can not currently estimate the implementation cost
of the HIPAA related modifications and consequently can give no assurances
that issues related to HIPAA will not have a material adverse effect on the
Company's financial condition or results of operations.
Market Risks Associated with Financial Instruments
The Company's interest expense is sensitive to changes in the general level
of domestic interest rates. To mitigate the impact of fluctuations in domestic
interest rates, a portion of the Company's debt is fixed rate accomplished by
either borrowing on a long-term basis at fixed rates or by entering into
interest rate swap transactions. The interest rate swap agreements are
contracts that require the Company to pay fixed and receive floating interest
rates over the life of the agreements. The floating-rates are based on LIBOR
and the fixed-rate is determined at the time the swap agreement was
consummated. The Company also has two additional five year interest rate swaps
aimed at hedging the Company's $135 million Senior Notes. Both swaps are for a
notional amount of $135 million. The Company pays a fixed rate of 6.76% and
receives three month LIBOR on one of the swaps and pays 3 month LIBOR plus a
spread and receives a fixed rate of 8.75% plus an additional fixed rate of
.465% on the other. The counterparty has the right to cancel the swap in which
the Company pays 3 month LIBOR at any time during the swap term with thirty
days notice except for the fixed payment of .465%, which is non-cancelable.
The interest rate swap agreements do not constitute positions independent of
the underlying exposures. The Company does not hold or issue derivative
instruments for trading purposes and is not a party to any instruments with
leverage features. The Company is exposed to credit losses in the event of
nonperformance by the counterparties to its financial instruments. The
counterparties are creditworthy financial
21
institutions, rated AA or better by Moody's Investor Services and the Company
anticipates that the counterparties will be able to fully satisfy their
obligations under the contracts. For the years ended December 31, 2000, 1999
and 1998, the Company received weighted average rates of 7.2%, 5.5% and 5.7%,
respectively, and paid a weighted average rate on its interest rate swap
agreements of 7.5% in 2000 and 5.8% in both 1999 and 1998.
The table below presents information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including long-term debt and interest rate swaps as
of December 31, 2000. For debt obligations, the table presents principal cash
flows and related weighted-average interest rates by contractual maturity
dates. For interest rate swap agreements, the table presents notional amounts
by maturity date and weighted average interest rates based on rates in effect
at December 31, 2000. The fair values of long-term debt and interest rate
swaps were determined based on market prices quoted at December 31, 2000, for
the same or similar debt issues.
Maturity Date, Fiscal Year Ending December 31
----------------------------------------------------------------
There-
2001 2002 2003 2004 2005 after Total
---- -------- ---- ---- ---------- -------- ---------
(Dollars in thousands)
Long-term debt:
Fixed rate--Fair $689 $ 1,011 $587 $349 $ 136,042 $398,446(a) $ 537,124
value................
Fixed rate--Carrying $689 $ 1,011 $587 $349 $ 134,696 $255,265 $ 392,597
value................
Average interest rates.. 8.2% 7.7% 8.0% 7.9% 8.7% 5.0%
Variable rate long-term
debt................... $137,955 $ 18,200 $ 156,155
Interest rate swaps:
Pay fixed/receive
variable notional
amounts.............. $ 135,000 $ 135,000
Average pay rate...... 6.76%
Average receive rate.. 3 month
LIBOR
Pay variable/receive
fixed notional
amounts.............. $ (135,000)(b) $(135,000)
Average pay rate...... 3 Month
LIBOR
& spread
Average receive rate.. 8.75%+.465%
Pay fixed/receive
variable notional
amounts.............. $ 75,000 $ 75,000
Average pay rate...... 6.70%
Average receive rate.. 3 Month
LIBOR
- --------
(a) The fair value of the Company's 5% discounted Convertible Debentures
("Debentures") at December 31, 2000 is $398.4 million, however, the
Company has the right to redeem the Debentures any time on or after June
23, 2006 at a price equal to the issue price of the Debentures plus
accrued original issue discount and accrued cash interest to the date of
redemption. On June 23, 2006 the amount necessary to redeem all Debentures
would be $319.0 million. If the Debentures could be redeemed at the same
basis at December 31, 2000 the redemption amount would be $255 million.
The holders of the Debentures may convert the Debentures to the Company's
Class B stock at any time. If all Debentures were converted, the result
would be the issuance of 3.3 million shares of the Company's Class B
stock.
(b) Counter party has the right to cancel at any time within 30 days notice,
excluding .465% fixed rate payment.
22
Effects of Inflation and Seasonality
Although inflation has not had a material impact on the Company's results of
operations over the last three years, the healthcare industry is very labor
intensive and salaries and benefits are subject to inflationary pressures as
are rising supply costs which tend to escalate as vendors pass on the rising
costs through price increases. The Company's acute care and behavioral health
care facilities are experiencing the effects of the tight labor market,
including a shortage of nurses, which may cause an increase in the Company's
future salaries, wages and benefits expense in excess of the inflation rate.
Although the Company cannot predict its ability to continue to cover future
cost increases, management believes that through adherence to cost containment
policies, labor management and reasonable price increases, the effects of
inflation on future operating margins should be manageable. However, the
Company's ability to pass on these increased costs associated with providing
healthcare to Medicare and Medicaid patients is limited due to various
federal, state and local laws which have been enacted that, in certain cases,
limit the Company's ability to increase prices. In addition, as a result of
increasing regulatory and competitive pressures and a continuing industry wide
shift of patients into managed care plans, the Company's ability to maintain
margins through price increases to non-Medicare patients is limited.
The Company's business is seasonal, with higher patient volumes and net
patient service revenue in the first and fourth quarters of the Company's
year. This seasonality occurs because, generally, more people become ill
during the winter months, which results in significant increases in the number
of patients treated in the Company's hospitals during those months.
Liquidity and Capital Resources
Net cash provided by operating activities was $182 million in 2000, $176
million in 1999 and $152 million in 1998. Included in the $6 million increase
in 2000 as compared to 1999 was: (i) a favorable $35 million change
due to an increase in net income plus the addback of depreciation and
amortization expense, minority interest in earnings of consolidated entities,
accretion of discount on Convertible Debentures and other non-cash charges;
(ii) a favorable $25 million change due to the timing of net income tax
payments; (iii) an unfavorable $24 million change due to an increase in the
combined working capital balances as of December 31, 2000 at twelve behavioral
health care facilities and one acute care facility purchased during the third
quarter of 2000 (working capital for these facilities was not included in the
purchase transactions), and; (iv) $30 million of other unfavorable working
capital changes. The unfavorable change in other working capital accounts was
due primarily to a decrease in the pre-funding of employee benefit programs
effective December 31, 1999. The $25 million reduction in income taxes paid
was due to an anticipation of higher tax benefits from employee stock option
exercises and the decreases in accrued taxes attributable to the prior year's
overpayment.
The $24 million increase in 1999 as compared to 1998 was primarily
attributable to: (i) a $41 million favorable change in other working capital
accounts caused primarily by favorable timing of accounts payable
disbursements in 1999 as compared to 1998 and a $17 million decrease in the
pre-funding of employee benefit programs, and; (ii) an $18 million unfavorable
change in accounts receivable, partially resulting from delays in payments by
managed care payors.
During 2000, the Company spent $141 million to acquire the assets and
operations of twelve behavioral health care facilities and two acute care
hospitals and $12 million to acquire a minority ownership interest in an e-
commerce marketplace for the purchase and sale of health care supplies,
equipment and services to the healthcare industry. During 1999, the Company
acquired three behavioral health facilities for a combined purchase price of
$27 million in cash plus contingent consideration of up to $3 million. Also
during 1999, the Company acquired the assets and operations of Doctor's
Hospital of Laredo in exchange for the assets and operations of its Victoria
Regional Medical Center. In connection with this transaction, the Company also
spent approximately $5 million to purchase additional land in Laredo, Texas on
which it is constructing a replacement hospital scheduled to be completed and
opened in the third quarter of 2001. During 1998, the Company acquired three
acute care hospitals located in Puerto Rico for a combined purchase price of
$187 million. Also during 1998, the Company contributed substantially all of
the assets, liabilities and operations of its Valley Hospital
23
Medical Center and Summerlin Hospital Medical Center, in exchange for a 72.5%
interest in limited liability companies ("LLCs"). Quorum Health Group, Inc.
("Quorum") holds the remaining 27.5% interest in the LLCs. Quorum obtained its
interest by contributing substantially all of the assets, liabilities and
operations of Desert Springs Hospital, and $11 million of net cash. The assets
and liabilities contributed by the Company were recorded by the LLCs at
carryover value. The LLCs applied purchase accounting to the assets and
liabilities provided by Quorum and recorded them at fair market value. As a
result of this partial sale transaction, the Company recorded a pre-tax gain
of $55.1 million ($34.7 million after-tax) that was recorded as a capital
contribution to the Company. This merger did not have a material impact on the
1998 results of operations. Also during 1998, the Company spent $2 million to
purchase the property of a radiation therapy center located in California.
Capital expenditures were $114 million in 2000, $68 million in 1999 and $97
million in 1998. Included in the 2000 capital expenditures, was approximately
$39 million related to construction of replacement acute care hospitals or
major construction projects at existing acute care facilities. Capital
expenditures for capital equipment, renovations and new projects at existing
hospitals and completion of major construction projects in progress at
December 31, 2000 may total approximately $236 million in 2001. The Company
believes that its capital expenditure program is adequate to expand, improve
and equip its existing hospitals.
During 2000, the Company received net cash proceeds of $16 million resulting
from the divestiture of the real property of a behavioral health care facility
located in Florida, a medical office building located in Nevada, and its
ownership interests in a specialized women's health center and two physician
practices located in Oklahoma. During 1999, the Company received cash proceeds
of $16 million generated primarily from the sale of the real property of two
medical office buildings. Included in the $16 million of cash proceeds
received from merger, sale or disposition of assets in 1998 was $11 million of
cash received from Quorum related to the partial sale transaction mentioned
above. The net gain/loss resulting from these transactions did not have a
material impact on the 2000, 1999 or 1998 results of operations
During 1998 and 1999, the Company's Board of Directors approved stock
purchase programs authorizing the Company to purchase up to six million shares
of its outstanding Class B Common Stock on the open market at prevailing
market prices or in negotiated transactions off the market. Pursuant to the
terms of these programs, the Company purchased 580,500 shares at an average
purchase price of $42.90 per share ($24.9 million in the aggregate) during
1998, 2,028,379 shares at an average purchase price of $35.10 per share ($71.2
million in the aggregate) during 1999 and 1,204,000 shares at an average
purchase price of $29.89 per share ($36.0 million in the aggregate) during
2000. Since inception of the stock purchase program in 1998 through December
31, 2000, the Company purchased a total of 3,812,879 shares at an average
purchase price of $34.65 per share ($132.1 million in the aggregate).
During the second quarter of 2000, the Company issued discounted convertible
debentures that are due in 2020 ("Debentures"). The Debentures, which had an
aggregate issue price of $250 million or $587 million aggregate principal
amount at maturity, were issued at a price of $425.90 per $1,000 principal
amount of Debenture. The Debentures will pay cash interest on the principal
amount at the rate of 0.426% per annum, resulting in a yield to maturity of
5.0%. The Debentures will be convertible at the option of the holders thereof
into 5.6024 shares of the Company's Common Stock per $1,000 face amount of
Debenture (equivalent at issuance to $76.02 per share of common stock). The
securities were not registered or required to be registered under the
Securities Act of 1933 (the "Securities Act") and were sold in the United
States in a private placement under Rule 144A under the Securities Act, and
were not offered or sold in the United States absent registration or an
applicable exemption from registration requirements. Pursuant to an agreement
with the holders of the Debentures, the Debentures and the underlying Class B
Common Stock were registered for resale under the Securities Act. The Company
used the net proceeds generated from the Debenture issuance to repay debt
which was reborrowed to finance previously disclosed acquisitions, (see Note 2
to the Consolidated Financial Statements) and for other general corporate
purposes.
As of December 31, 2000, the Company had $355 million of unused borrowing
capacity under the terms of its $400 million revolving credit agreement which
matures in July 2002 and provides for interest at the
24
Company's option at the prime rate, certificate of deposit plus 3/8% to 5/8%,
Euro-dollar plus 1/4% to 1/2% or a money market rate. A facility fee ranging
from 1/8% to 3/8% is required on the total commitment. The margins over the
certificate of deposit, the Euro-dollar rates and the facility fee are based
upon the Company's leverage ratio.
As of December 31, 2000, the Company had no unused borrowing capacity under
the terms of its $100 million, annually renewable, commercial paper program. A
large portion of the Company's accounts receivable are pledged as collateral
to secure this program. This annually renewable program, which began in 1993,
is scheduled to expire or be renewed on October 30th of each year. The
commercial paper program has been renewed for the period of October 31, 2000
through October 30, 2001.
Total debt as a percentage of total capitalization was 43% at December 31,
2000 and 40% at December 31, 1999 and 1998. The increase during 2000 as
compared to 1999 was due primarily to the 2000 purchase transactions, capital
additions and stock purchases, as mentioned above, which were essentially
financed with net cash provided by operating activities and borrowings
generated from the issuance of the Debentures.
As of December 31, 2000, the Company had a five year interest rate swap
having a notional principal amount of $135 million whereby the Company pays a
floating rate and the counter-party pays the Company a fixed rate of 8.75%.
The counter-party has the right to cancel the swap at any time during the swap
term with thirty days notice. Simultaneously, the Company entered into a fixed
rate swap having a notional principal amount of $135 million whereby the
Company pays a fixed rate of 6.76% and receives a floating rate from the
counter-party. In addition, the Company previously entered into forward
starting interest rate swaps to fix the rate of interest on a total notional
principal amount of $75 million. The forward start date on the interest rate
swaps was August, 2000 with an original maturity date of August, 2010, which
was reduced during 2000 to August, 2005. The average fixed rate of the $75
million of interest rate swaps, including the Company's current borrowing
spread of .35%, is 7.05%. As of December 31, 1999 the Company had two interest
rate swap agreements that fixed the rate of interest on a notional principal
amount of $50 million for a period of three years. These interest rate swaps
expired on January 4, 2000. The average fixed rate obtained through these
interest rate swaps was 6.20% including the Company's borrowing spread of
.425%
The effective interest rate on the Company's revolving credit, demand notes
and commercial paper program, including the interest rate swap expense and
income incurred on existing and now expired interest rate swaps, was 7.1%,
6.2% and 6.4% during 2000, 1999 and 1998, respectively. Additional interest
expense and interest income recorded as a result of the Company's hedging
activity was income of $414,000 in 2000 and expense of $202,000 and $75,000 in
1999 and 1998, respectively. The Company is exposed to credit loss in the
event of non-performance by the counter-party to the interest rate swap
agreements. All of the counterparties are creditworthy financial institutions
rated AA or better by Moody's Investor Service and the Company does not
anticipate non-performance. The estimated fair value of the cost to the
Company to terminate the interest rate swap obligations at December 31, 2000
was approximately $4.3 million.
The Company expects to finance all capital expenditures and acquisitions
with internally generated funds, borrowed funds and issuance of securities.
Additional borrowed funds may be obtained either through refinancing the
existing revolving credit agreement, the commercial paper facility or the
issuance of long-term securities.
ITEM 7.a. Qualitative and Quantitative Disclosures About Market Risk
See Item 7. Management's Discussion and Analysis of Operations and Financial
Condition--Market Risks Associated with Financial Instruments
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Common Stockholders' Equity, and
Consolidated Statements of Cash Flows, together with the report of Arthur
Andersen LLP, independent public accountants, are included elsewhere herein.
Reference is made to the "Index to Financial Statements and Financial
Statement Schedule."
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
25
PART III
ITEM 10. Directors and Executive Officers of the Registrant
There is hereby incorporated by reference the information to appear under
the caption "Election of Directors" in the Company's Proxy Statement, to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 2000. See also "Executive Officers of the Registrant" appearing
in Part I hereof.
ITEM 11. Executive Compensation
There is hereby incorporated by reference the information to appear under
the caption "Executive Compensation" in the Company's Proxy Statement to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 2000.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
There is hereby incorporated by reference the information to appear under
the caption "Security Ownership of Certain Beneficial Owners and Management"
in the Company's Proxy Statement, to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2000.
ITEM 13. Certain Relationships and Related Transactions
There is hereby incorporated by reference the information to appear under
the caption "Certain Relationships and Related Transactions" in the Company's
Proxy Statement, to be filed with the Securities and Exchange Commission
within 120 days after December 31, 2000.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Financial Statement Schedule.
See Index to Financial Statements and Financial Statement Schedule on page
30.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Company's Restated Certificate of Incorporation, and Amendments thereto,
previously filed as Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, are incorporated herein by reference.
3.2 Bylaws of Registrant as amended, previously filed as Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987,
is incorporated herein by reference.
4.1 Authorizing Resolution adopted by the Pricing Committee of Universal
Health Services, Inc. on August 1, 1995, related to $135 million principal
amount of 8 3/4% Senior Notes due 2005, previously filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, is incorporated herein by reference.
4.2 Indenture dated as of July 15, 1995, between Universal Health Services,
Inc. and PNC Bank, National Association, Trustee, previously filed as Exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995, is incorporated herein by reference.
10.1 Restated Employment Agreement, dated as of July 14, 1992, by and
between Registrant and Alan B. Miller, previously filed as Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
is incorporated herein by reference.
26
10.2 Advisory Agreement, dated as of December 24, 1986, between Universal
Health Realty Income Trust and UHS of Delaware, Inc., previously filed as
Exhibit 10.2 to Registrant's Current Report on Form 8-K dated December 24,
1986, is incorporated herein by reference.
10.3 Agreement, effective January 1, 2001, to renew Advisory Agreement,
dated as of December 24, 1986, between Universal Health Realty Income Trust
and UHS of Delaware, Inc.
10.4 Form of Leases, including Form of Master Lease Document for Leases,
between certain subsidiaries of the Registrant and Universal Health Realty
Income Trust, filed as Exhibit 10.3 to Amendment No. 3 of the Registration
Statement on Form S-11 and Form S-2 of Registrant and Universal Health Realty
Income Trust (Registration No. 33-7872), is incorporated herein by reference.
10.5 Share Option Agreement, dated as of December 24, 1986, between
Universal Health Realty Income Trust and Registrant, previously filed as
Exhibit 10.4 to Registrant's Current Report on Form 8-K dated December 24,
1986, is incorporated herein by reference.
10.6 Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leases
and Contract of Acquisition, dated December 24, 1986, issued by Registrant in
favor of Universal Health Realty Income Trust, previously filed as Exhibit
10.5 to Registrant's Current Report on Form 8-K dated December 24, 1986, is
incorporated herein by reference.
10.7 1990 Employees' Restricted Stock Purchase Plan, previously filed as
Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990, is incorporated herein by reference.
10.8 1992 Stock Bonus Plan, previously filed as Exhibit 10.25 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991,
is incorporated herein by reference.
10.9 Sale and Servicing Agreement dated as of November 16, 1993 between
Certain Hospitals and UHS Receivables Corp., previously filed as Exhibit 10.16
to Registrant's Annual Report on Form 10-K for the year ended December 31,
1993, is incorporated herein by reference.
10.10 Amendment No. 2 dated as of August 31, 1998, to Sale and Servicing
Agreements dated as of various dates between each hospital company and UHS
Receivables Corp., previously filed as Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, is incorporated
herein by reference.
10.11 Servicing Agreement dated as of November 16, 1993, among UHS
Receivables Corp., UHS of Delaware, Inc. and Continental Bank, National
Association, previously filed as Exhibit 10.17 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, is incorporated herein by
reference.
10.12 Pooling Agreement date