HCA

HCA Healthcare, Inc. - 10-Q Summary (Period Ended June 30, 2003)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for HCA Inc., a holding company owning and operating hospitals and related health care entities. The report covers the quarterly and six-month periods ended June 30, 2003. As of June 30, 2003, HCA affiliates owned and operated 184 hospitals and 76 freestanding surgery centers across 23 U.S. states, England, and Switzerland. The company operates through two primary geographic groups: Eastern and Western, plus a Corporate and other segment.

Key Financial Metrics

Note: Total Debt calculated as Long-term debt ($7,568M) plus Long-term debt due within one year ($808M) as of June 30, 2003.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 11.5% for the quarter and 9.9% for the six months compared to the prior year, driven primarily by an 8.6% increase in revenue per equivalent admission and the acquisition of the Health Midwest system in Kansas City.
• Profitability Decline: Net income decreased 31.4% for the quarter and 3.6% for the six months. Income before taxes dropped 32.9% for the quarter.
• Provision for Doubtful Accounts: This expense increased significantly to $577 million for the quarter (10.6% of revenue) from $371 million (7.6% of revenue) in the prior year. This was due to a $106 million increase in the allowance for doubtful accounts based on a "hindsight analysis" showing deteriorating collectability of uninsured accounts.
• Impairment Charges: A non-cash, pretax charge of $130 million was recorded in Q2 2003 for the discontinuation of a new patient accounts receivable management system development. This compares to a $19 million charge in Q2 2002.
• Acquisitions: HCA acquired 11 hospitals in Kansas City in April 2003 for a net cash payment of $884 million. These facilities contributed $232 million in revenue in Q2 2003.

Guidance, Outlook, and Risks

• Government Settlements: HCA resolved significant government investigations. In June 2003, it paid $250 million to CMS. In July 2003, it paid $641 million to the DOJ and $17.7 million to state Medicaid agencies. These payments resolved claims related to physician relations, cost reports, and wound care. The company no longer has an obligation to maintain letters of credit with the DOJ.
• Charity Care Policy: HCA implemented a revised charity care policy for patients with income at or below 200% of the Federal poverty level. Full implementation of sliding scale discounts (up to 400% poverty level) is expected in late 2003. Management estimates this will reduce annual earnings before taxes by approximately $25 million and net revenues by $325-$375 million.
• Capital Expenditures: Planned capital expenditures for 2004 were reduced from $2.1 billion to $1.8-$1.9 billion. The company expects to fund these through internally generated cash and debt markets.
• Stock Repurchases: HCA announced a $1.5 billion share repurchase authorization in April 2003. During Q2 2003, it repurchased 10.2 million shares for $328 million under this new program and completed a prior 12 million share program.
• Risks: Key risks include the outcome of pending SEC investigations, potential changes in Medicare/Medicaid reimbursement (specifically outlier payments), the collectibility of uninsured accounts, and the successful integration of the Health Midwest acquisition.

Investor Verification Checklist

• Allowance for Doubtful Accounts: Verify the sustainability of the $106 million increase in the allowance and the impact of the new charity care policy on future bad debt provisions.
• Government Settlement Finality: Confirm that the July 2003 DOJ and CMS payments fully resolve the long-standing federal investigations and that no significant qui tam cases remain active.
• Medicare Outlier Payments: Assess the potential revenue impact of the CMS regulation changes reducing the outlier payment threshold to $31,000 for the 2004 fiscal year.
• Health Midwest Integration: Monitor the financial performance and integration progress of the 11 Kansas City hospitals acquired in April 2003.
• ERP Implementation: Track the progress and cost of the Enterprise Resource Planning (ERP) system implementation, which is estimated to cost $330 million total.