UHS

Business Context and Reporting Period

Company: Universal Health Services, Inc. (UHS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: UHS owns and operates acute care hospitals, behavioral health centers, ambulatory surgery centers, and radiation oncology centers. As of March 1, 2004, the company operated 48 acute care hospitals and 44 behavioral health centers across 22 U.S. states, Washington D.C., Puerto Rico, and France. The company also manages 16 surgery and radiation oncology centers.

Key Financial Metrics (Year Ended Dec 31, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 12% to $3.64 billion, driven by a 7% increase in same-facility revenues ($228 million), $91 million from new acquisitions/openings, and $61 million from other factors (including reclassifications and favorable exchange rates).
• Profitability: Net income rose 14% to $199 million. Operating income increased 12% to $578 million, with operating margins improving slightly to 15.9% due to lower pharmacy costs from outsourcing and reduced purchased services.
• Acquisitions: The company spent $281 million on acquisitions in 2003, including facilities in Alaska, France, California, and Louisiana. Significant deposits of $230 million were made for acquisitions effective January 1, 2004.
• Unusual Items:
  • Gain: $14.6 million pre-tax gain on sales of assets and businesses.
  • Recovery: $8.9 million pre-tax recovery of provision for judgment/closure costs following a favorable Texas Supreme Court decision.
  • Impairment: $13.7 million pre-tax charge for asset impairment related to a pediatric hospital in Puerto Rico.
• Dividends: Initiated quarterly cash dividends in Q4 2003 ($0.08 per share).

Guidance, Outlook, Risks, and Contingencies

Outlook and Guidance:

• Management announced in March 2004 that earnings per diluted share for Q1 2004 could be up to 25% lower than the same quarter in 2003.
• Expected declines are attributed to decreasing inpatient admissions, negative shifts in payor mix, and rising levels of uninsured/self-pay patients.

Key Risks and Contingencies:

• Reimbursement: Significant reliance on Medicare and Medicaid (41% of net patient revenues). Risks include unfavorable changes in reimbursement rates and potential reductions in Disproportionate Share Hospital (DSH) funds in Texas and South Carolina.
• Insurance: Due to unfavorable commercial insurance trends, subsidiaries are self-insured for malpractice up to $25 million per occurrence. Total reserves for professional and general liability claims were $190.8 million ($147.7 million net) as of Dec 31, 2003.
• Regulatory: Compliance with HIPAA, Stark Law, and anti-kickback statutes. Potential for fines or exclusion from government programs if violations occur.
• Market Conditions: Decreasing inpatient admission trends and increased competition from physician-owned facilities.

Investor Verification Checklist

• DSH Funding Status: Verify the renewal status and payment levels of Disproportionate Share Hospital (DSH) programs in Texas and South Carolina, which contributed $27.8 million in 2003.
• Uninsured Patient Trends: Monitor the ratio of uninsured/self-pay patients and the resulting impact on the provision for doubtful accounts (7.2% of revenues in 2003).
• Liability Reserves: Review the adequacy of the $190.8 million reserve for professional and general liability claims, given the company's self-insured status.
• Acquisition Integration: Assess the financial performance and integration of 2003 acquisitions, particularly the French facilities and the new Las Vegas hospital.
• Q1 2004 Earnings: Validate the management's warning of a potential 25% decline in Q1 2004 earnings against actual results.