filings.toolsUniversal Health Services 10-K 2011-12-31
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10-K 1 d266350d10k.htm UNIVERSAL HEALTH SERVICES INC--FORM 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2011
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 incorporation or organization) | (I.R.S. Employer Identification Number) | |
| UNIVERSAL CORPORATE CENTER | 19406-0958 | |
| 367 South Gulph Road | (Zip Code) | |
| P.O. Box 61558 King of Prussia, Pennsylvania | ||
| (Address of principal executive offices) |
Registrant’s telephone number, including area code: (610) 768-3300
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Name of each exchange on which registered | |
| Class B Common Stock, $.01 par value | 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)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
| Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of voting stock held by non-affiliates at June 30, 2011 was $4.61 billion. (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. Also, for purposes of this calculation only, all directors, officers subject to Section 16(b) of the Securities Exchange Act of 1934, and 10% stockholders are deemed to be affiliates.)
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, 2012, were 6,625,708, 89,408,941, 664,000 and 33,084, respectively.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for our 2012 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2011 (incorporated by reference under Part III).
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UNIVERSAL HEALTH SERVICES, INC.
2011 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Exhibit Index
This Annual Report on Form 10-K is for the year ended December 31, 2011. This Annual Report modifies and supersedes documents filed prior to this Annual Report. Information that we file with the Securities and Exchange Commission (the “SEC”) in the future will automatically update and supersede information contained in this Annual Report.
In this Annual Report, “we,” “us,” “our” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries. UHS is a registered trademark of UHS of Delaware, Inc., the management company for, and a wholly-owned subsidiary of Universal Health Services, Inc. Universal Health Services, Inc. is a holding company and operates through its subsidiaries including its management company, UHS of Delaware, Inc. All healthcare and management operations are conducted by subsidiaries of Universal Health Services, Inc. To the extent any reference to “UHS” or “UHS facilities” in this report including letters, narratives or other forms contained herein relates to our healthcare or management operations it is referring to Universal Health Services, Inc.’s subsidiaries including UHS of Delaware, Inc. Further, the terms “we,” “us,” “our” or the “Company” in such context similarly refer to the operations of Universal Health Services Inc.’s subsidiaries including UHS of Delaware, Inc. Any reference to employees or employment contained herein refers to employment with or employees of the subsidiaries of Universal Health Services, Inc. including UHS of Delaware, Inc.
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PART I
Item 1. Business
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Our principal business is owning and operating, through our subsidiaries, acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of February 24, 2012, we owned and/or operated 25 acute care hospitals and 198 behavioral health centers located in 36 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. As part of our ambulatory treatment centers division, we manage and/or own outright or in partnerships with physicians, 6 surgical hospitals and surgery and radiation oncology centers located in 4 states and Puerto Rico.
In November, 2010, we acquired Psychiatric Solutions, Inc. (“PSI”). PSI was formerly the largest operator of freestanding inpatient behavioral health care facilities operating a total of 105 inpatient and outpatient facilities in 32 states, Puerto Rico, and the U.S. Virgin Islands.
Net revenues from our acute care hospitals, surgical hospitals, surgery centers and radiation oncology centers accounted for 55% of our consolidated net revenues in 2011, 70% in 2010 and 74% in 2009. Net revenues from our behavioral health care facilities accounted for 45% of our consolidated net revenues during 2011, 30% during 2010 and 25% during 2009. Approximately 1% of our consolidated net revenues in 2009 were recorded in connection with two construction management contracts pursuant to the terms of which we built newly constructed acute care hospitals for an unrelated third party.
Services provided by our hospitals include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. We provide capital resources as well as a variety of management services to our facilities, including central purchasing, information services, finance and control systems, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.
We are a Delaware corporation that was organized in 1979. Our principal executive offices are located at Universal Corporate Center, 367 South Gulph Road, P.O. Box 61558, King of Prussia, PA 19406. Our telephone number is (610) 768-3300.
Available Information
Our website is located at http://www.uhsinc.com. Copies of our annual, quarterly and current reports that we file with the SEC, and any amendments to those reports, are available free of charge on our website. The information posted on our website is not incorporated into this Annual Report. Our Board of Directors’ committee charters (Audit Committee, Compensation Committee and Nominating & Governance Committee), Code of Business Conduct and Corporate Standards applicable to all employees, Code of Ethics for Senior Financial Officers, Corporate Governance Guidelines and our Healthcare Code of Conduct, Corporate Compliance Manual and Compliance Policies and Procedures are available free of charge on our website. Copies of such reports and charters are available in print to any stockholder who makes a request. Such requests should be made to our Secretary at our King of Prussia, PA corporate headquarters. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers of any provision of our Code of Ethics for Senior Financial Officers by promptly posting this information on our website.
In accordance with Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, we submitted our CEO’s certification to the New York Stock Exchange in 2011. Additionally, contained in Exhibits 31.1 and 31.2 of this Annual Report on Form 10-K, are our CEO’s and CFO’s certifications regarding the quality of our public disclosures under Section 302 of the Sarbanes-Oxley Act of 2002.
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Our Mission
Our mission and objective is to provide superior healthcare services that patients recommend to families and friends, physicians prefer for their patients, purchasers select for their clients, employees are proud of, and investors seek for long-term results. To achieve this, we have a commitment to:
| • | service excellence |
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| • | continuous improvement in measurable ways |
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| • | employee development |
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| • | ethical and fair treatment |
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| • | teamwork |
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| • | compassion |
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| • | innovation in service delivery |
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Business Strategy
We believe community-based hospitals will remain the focal point of the healthcare delivery network and we are committed to a philosophy of self-determination for both the company and our hospitals.
Acquisition of Additional Hospitals. We selectively seek opportunities to expand our base of operations by acquiring, constructing or leasing additional hospital facilities. We are committed to a program of rational growth around our core businesses, while retaining the missions of the hospitals we manage and the communities we serve. Such expansion may provide us with access to new markets and new healthcare delivery capabilities. We also continue to examine our facilities and consider divestiture of those facilities that we believe do not have the potential to contribute to our growth or operating strategy.
Improvement of Operations of Existing Hospitals and Services. We also seek 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.
We are involved in continual development activities for the benefit of our existing facilities. Applications to state health planning agencies to add new services in existing hospitals are currently on file in states which require certificates of need, or CONs. Although we expect that some of these applications will result in the addition of new facilities or services to our operations, no assurances can be made for ultimate success by us in these efforts.
Quality and Efficiency of Services. Pressures to contain healthcare 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. We are responding to this trend by emphasizing the expansion of outpatient services. In addition, in response to cost containment pressures, we continue to implement programs at our facilities 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. In addition, we will continue to emphasize innovation in our response to the rapid changes in regulatory trends and market conditions while fulfilling our commitment to patients, physicians, employees, communities and our stockholders.
In addition, our aggressive recruiting of highly qualified physicians and developing provider networks help to establish our facilities as an important source of quality healthcare in their respective communities.
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Acquisition and Divestiture Activity:
Acquisitions:
During 2011, we paid approximately $29 million, excluding the assumption of $17 million of third-party debt, to: (i) acquire the real property of administrative/office buildings located in Pennsylvania, Tennessee and Washington, D.C.; (ii) fund a deposit in connection with execution of a definitive agreement, which is subject to regulatory approvals and
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Item 1A. Risk Factors
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We are subject to numerous known and unknown risks, many of which are described below and elsewhere in this Annual Report. Any of the events described below could have a material adverse effect on our business, financial condition and results of operations. Additional risks and uncertainties that we are not aware of, or that we currently deem to be immaterial, could also impact our business and results of operations.
A significant portion of our revenue is produced by facilities located in Nevada, Texas and California.
Nevada: We own 6 acute care hospitals and 4 behavioral healthcare facilities as listed in Item 2. Properties (we owned two additional behavioral health facilities which were acquired by us from PSI in November, 2010 before the facilities were divested during the third and fourth quarters of 2011 pursuant to our agreement with the Federal Trade Commission, as discussed herein). On a combined basis, these facilities contributed 18% in 2011, 23% in 2010 and 24% in 2009 of our consolidated net revenues. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 11% in 2011, 15% in 2010 and 14% in 2009 of our income from operations after net income attributable to noncontrolling interest.
Texas: We own 8 acute care hospitals and 14 behavioral healthcare facilities as listed in Item 2. Properties. On a combined basis, these facilities contributed 18% in 2011, 19% in 2010 and 20% in 2009 of our consolidated net revenues. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 14% in 2011, 15% in 2010 and 16% in 2009 of our income from operations after net income attributable to noncontrolling interest.
California: We own 4 acute care hospitals and 15 behavioral healthcare facilities as listed in Item 2. Properties. On a combined basis, these facilities contributed 10% of our consolidated net revenues during each of 2011, 2010 and 2009. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 5% in 2011, 4% in 2010 and 5% in 2009 of our income from operations after net income attributable to noncontrolling interest.
The significant portion of our revenues and earnings derived from these facilities makes us particularly sensitive to legislative, regulatory, economic, environmental and competition changes in Nevada, Texas and California. Any material change in the current payment programs or regulatory, economic, environmental or competitive conditions in these states could have a disproportionate effect on our overall business results.
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Our revenues and results of operations are significantly affected by payments received from the government and other third party payors.
We derive a significant portion of our revenue from third-party payors, including the Medicare and Medicaid programs. Changes in these government programs in recent years have resulted in limitations on reimbursement and, in some cases, reduced levels of reimbursement for healthcare services. Payments from federal and state government programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease program payments, as well as affect the cost of providing service to patients and the timing of payments to facilities. We are unable to predict the effect of recent and future policy changes on our operations. In addition, the uncertainty and fiscal pressures placed upon federal and state governments as a result of, among other things, the substantial deterioration in general economic conditions and the funding requirements from the federal healthcare reform legislation, may affect the availability of taxpayer funds for Medicare and Medicaid programs. If the rates paid or the scope of services covered by government payors are reduced, there could be a material adverse effect on our business, financial position and results of operations.
We receive Medicaid revenues in excess of $100 million annually from each of Texas, Pennsylvania, Virginia, Illinois and Washington, D.C., making us particularly sensitive to reductions in Medicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective 2012 state fiscal years) as well as regulatory, economic, environmental and competitive changes in those states. In the states in which we operate, based upon the state budgets for the 2012 fiscal year (which generally began at various times during the second half of 2011), we estimate that, on a blended basis, our aggregate Medicaid rates have been reduced by approximately 3% to 4% (or approximately $45 million to $55 million annually) from the average rates in effect during the states’ 2011 fiscal years (which generally ended during the third quarter of 2011). Our consolidated results of operations for the year ended December 31, 2011 include the pro rata portion of these Medicaid rate reductions. We can provide no assurance that further reductions to Medicaid revenues (which have been proposed in certain states for fiscal year 2013), particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations.
In addition to changes in government reimbursement programs, our ability to negotiate favorable contracts with private payors, including managed care providers, significantly affects the revenues and operating results of our hospitals. Private payors, including managed care providers, increasingly are demanding that we accept lower rates of payment.
We expect continued third-party efforts to aggressively manage reimbursement levels and cost controls. Reductions in reimbursement amounts received from third-party payors could have a material adverse effect on our financial position and our results of operations.
A worsening of the economic and employment conditions in the United States could materially affect our business and future results of operations.
Our patient volumes, revenues and financial results depend significantly on the universe of patients with health insurance, which to a large extent is dependent on the employment status of individuals in our markets. A continuation or worsening of economic conditions may result in a continued increase in the unemployment rate which will likely increase the number of individuals without health insurance. As a result, our facilities may experience a decrease in patient volumes, particularly in less intense, more elective service lines, or a significant increase in services provided to uninsured patients. These factors could have a material unfavorable impact on our future patient volumes, revenues and operating results.
Our patient revenues and payor mix during the last few years were adversely affected by economic conditions, particularly in certain markets, such as Nevada, Texas and California, where a significant portion of our revenues are concentrated and unemployment rates remain high. In our acute care business, we experienced net revenue pressures caused primarily by declining commercial payor utilization and an increase in the number
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of uninsured and underinsured patients treated at our facilities. We can provide no assurance that these trends will not continue. During 2011, our revenues and payor mix within our acute care operations have been volatile making it difficult to predict the results for 2012 or thereafter.
In addition, we recorded approximately $1.92 billion of goodwill as a result of our acquisition of PSI in November, 2010, and, as of December 31, 2011, we had approximately $2.63 billion of goodwill recorded on our consolidated balance sheet. Should the revenues and financial results of our acute care and/or behavioral health care facilities be materially, unfavorably impacted due to, among other things, a worsening of the economic and employment conditions in the United States that could negatively impact our patient volumes and reimbursement rates, a continued rise in the unemployment rate and continued increases in the number of uninsured patients treated at our facilities, we may incur future charges to recognize impairment in the carrying value of our goodwill and other intangible assets, which could have a material adverse effect on our financial results.
Reductions or changes in Medicare funding could have a material adverse effect on our future results of operations.
On August 2, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. The 2011 Act imposed annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by the Congressional Budget Office. The 2011 Act provides for new spending on program integrity initiatives intended to reduce fraud and abuse under the Medicare program. Among its other provisions, the law established a bipartisan Congressional committee, known as the Joint Select Committee on Deficit Reduction (the “Joint Committee”), which was tasked with making recommendations aimed at reducing future federal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented which, if triggered, would result in Medicare payment reductions of up to 2% per fiscal year with a uniform percentage reduction across all Medicare programs starting in 2013. We cannot predict whether Congress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction initiatives may be proposed by Congress.
We are subject to uncertainties regarding health care reform.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the “PPACA”). The Healthcare and Education Reconciliation Act of 2010 (the “Reconciliation Act”), which contains a number of amendments to the PPACA, was signed into law on March 30, 2010. Two primary goals of the PPACA, combined with the Reconciliation Act (collectively referred to as the “Legislation”), are to provide for increased access to coverage for healthcare and to reduce healthcare-related expenses.
Although it is expected that as a result of the Legislation there may be a reduction in uninsured patients, which should reduce our expense from uncollectible accounts receivable, the Legislation makes a number of other changes to Medicare and Medicaid which we believe may have an adverse impact on us. The Legislation revises reimbursement under the Medicare and Medicaid programs to emphasize the efficient delivery of high quality care and contains a number of incentives and penalties under these programs to achieve these goals. The Legislation provides for decreases in the annual market basket update for federal fiscal years 2010 through 2019, a productivity offset to the market basket update beginning October 1, 2011 for Medicare Part B reimbursable items and services and beginning October 1, 2012 for Medicare inpatient hospital services. The Legislation will reduce Medicare and Medicaid disproportionate share payments beginning in 2014, which would adversely impact the reimbursement we receive under these programs. The Legislation implements a value-based purchasing program, which will reward the delivery of efficient care. Conversely, certain facilities will receive reduced reimbursement for failing to meet quality parameters; such hospitals may include those with excessive readmission or hospital-acquired condition rates.
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The various provisions in the Legislation that directly or indirectly affect reimbursement are scheduled to take effect over a number of years. Legislation provisions are likely to be affected by the incomplete nature of implementing regulations or expected forthcoming interpretive guidance, gradual implementation, future legislation, and possible judicial nullification of all or certain provisions of the Legislation. Further Legislation provisions, such as those creating the Medicare Shared Savings Program and the Independent Payment Advisory Board, create certain flexibilities in how healthcare may be reimbursed by federal programs in the future. Thus, we cannot predict the impact of the Legislation on our future reimbursement at this time.
The Legislation also contains provisions aimed at reducing fraud and abuse in healthcare. The Legislation amends several existing laws, including the federal Anti-Kickback Statute and the False Claims Act, making it easier for government agencies and private plaintiffs to prevail in lawsuits brought against healthcare providers. While Congress had previously revised the intent requirement of the Anti-Kickback Statute to provide that a person is not required to “have actual knowledge or specific intent to commit a violation of” the Anti-Kickback Statute in order to be found guilty of violating such law, the Legislation also provides that any claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the federal civil False Claims Act. The Legislation also expands the Recovery Audit Contractor program to Medicaid. These amendments also make it easier for severe fines and penalties to be imposed on healthcare providers that violate applicable laws and regulations.
We have partnered with local physicians in the ownership of certain of our facilities. These investments have been permitted under an exception to the physician self-referral law. The Legislation permits existing physician investments in a hospital to continue under a “grandfather” clause if the arrangement satisfies certain requirements and restrictions, but physicians are prohibited, effective immediately, from increasing the aggregate percentage of their ownership in the hospital. The Legislation also imposes certain compliance and disclosure requirements upon existing physician-owned hospitals and restricts the ability of physician-owned hospitals to expand the capacity of their facilities.
The impact of the Legislation on each of our hospitals may vary. Because Legislation provisions are effective at various times over the next several years, we anticipate that many of the provisions in the Legislation may be subject to further revision or judicial nullification. Moreover, a number of state attorneys general are challenging the legality of certain aspects of the Legislation. Currently, rulings in separate Federal District Courts regarding the constitutionality of the Legislation have been split. These decisions are in the process of being appealed to the United States Supreme Court. We cannot predict the impact the Legislation may have on our business, results of operations, cash flow, capital resources and liquidity, the ultimate outcome of the judicial rulings or whether we will be able to successfully adapt to the changes required by the Legislation.
We are required to treat patients with emergency medical conditions regardless of ability to pay.
In accordance with our internal policies and procedures, as well as the Emergency Medical Treatment and Active Labor Act, or EMTALA, we provide a medical screening examination to any individual who comes to one of our hospitals while in active labor and/or seeking medical treatment (whether or not such individual is eligible for insurance benefits and regardless of ability to pay) to determine if such individual has an emergency medical condition. If it is determined that such person has an emergency medical condition, we provide such further medical examination and treatment as is required to stabilize the patient’s medical condition, within the facility’s capability, or arrange for transfer of such individual to another medical facility in accordance with applicable law and the treating hospital’s written procedures. Our obligations under EMTALA may increase substantially going forward; CMS has recently sought stakeholder comments concerning the potential applicability of EMTALA to hospital inpatients and the responsibilities of hospitals with specialized capabilities, respectively. If the number of indigent and charity care patients with emergency medical conditions we treat increases significantly, or if regulations expanding our obligations to inpatients under EMTALA is proposed and adopted, our results of operations will be harmed.
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If we are not able to provide high quality medical care at a reasonable price, patients may choose to receive their health care from our competitors.
In recent years, the number of quality measures that hospitals are required to report publicly has increased. CMS publishes performance data related to quality measures and data on patient satisfaction surveys that hospitals submit in connection with the Medicare program. Federal law provides for the future expansion of the number of quality measures that must be reported. Additionally, the Legislation requires all hospitals to annually establish, update and make public a list of their standard charges for products and services. If any of our hospitals achieve poor results on the quality measures or patient satisfaction surveys (or results that are lower than our competitors) or if our standard charges are higher than our competitors, our patient volume could decline because patients may elect to use competing hospitals or other health care providers that have better metrics and pricing. This circumstance could harm our business and results of operations.
An increase in uninsured and underinsured patients in our acute care facilities or the deterioration in the collectability of the accounts of such patients could harm our results of operations.
Collection of receivables from third-party payors and patients is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and the portion of the bill that is the patient’s responsibility, which primarily includes co-payments and deductibles. However, we also have substantial receivables due to us as of December 31, 2011 (a significant portion of which is past due) from certain state-based funding programs, most particularly Illinois. We estimate our provisions for doubtful accounts based on general factors such as payor mix, the agings of the receivables, historical collection experience and assessment of probability of future collections. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions that might ultimately affect the collectability of the patient accounts and make adjustments to our allowances as warranted. Significant changes in business office operations, payor mix, economic conditions or trends in federal and state governmental health coverage could affect our collection of accounts receivable, cash flow and results of operations. If we experience unexpected increases in the growth of uninsured and underinsured patients or in bad debt expenses, our results of operations will be harmed.
Our hospitals face competition for patients from other hospitals and health care providers.
The healthcare industry is highly competitive, and competition among hospitals, and other healthcare providers for patients and physicians has intensified in recent years. In all of the geographical areas in which we operate, there are other hospitals that provide services comparable to those offered by our hospitals. Some of our competitors include hospitals that are owned by tax-supported governmental agencies or by nonprofit corporations and may be supported by endowments and charitable contributions and exempt from property, sales and income taxes. Such exemptions and support are not available to us.
In some markets, certain of our competitors may have greater financial resources, be better equipped and offer a broader range of services than we. The number of inpatient facilities, as well as outpatient surgical and diagnostic centers, many of which are fully or partially owned by physicians, in the geographic areas in which we operate has increased significantly. As a result, most of our hospitals operate in an increasingly competitive environment.
If our competitors are better able to attract patients, recruit physicians and other healthcare professionals, expand services or obtain favorable managed care contracts at their facilities, we may experience a decline in patient volume and our business may be harmed.
Our performance depends on our ability to recruit and retain quality physicians.
Typically, physicians are responsible for making hospital admissions decisions and for directing the course of patient treatment. As a result, the success and competitive advantage of our hospitals depends, in part, on the number and quality of the physicians on the medical staffs of our hospitals, the admitting practices of those physicians and our maintenance of good relations with those physicians. Physicians generally are not employees
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of our hospitals, and, in a number of our markets, physicians have admitting privileges at other hospitals in addition to our hospitals. They may terminate their affiliation with us at any time. If we are unable to provide high ethical and professional standards, adequate support personnel and technologically advanced equipment and facilities that meet the needs of those physicians, they may be discouraged from referring patients to our facilities and our results of operations may decline.
It may become difficult for us to attract and retain an adequate number of physicians to practice in certain of the non-urban communities in which our hospitals are located. Our failure to recruit physicians to these communities or the loss of physicians in these communities could make it more difficult to attract patients to our hospitals and thereby may have a material adverse effect on our business, financial condition and results of operations.
Generally, the top ten attending physicians within each of our facilities represent a large share of our inpatient revenues and admissions. The loss of one or more of these physicians, even if temporary, could cause a material reduction in our revenues, which could take significant time to replace given the difficulty and cost associated with recruiting and retaining physicians.
If we do not continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment, our ability to maintain and expand our markets will be adversely affected.
The technology used in medical equipment and related devices is constantly evolving and, as a result, manufacturers and distributors continue to offer new and upgraded products to health care providers. To compete effectively, we must continually assess our equipment needs and upgrade when significant technological advances occur. If our facilities do not stay current with technological advances in the health care industry, patients may seek treatment from other providers and/or physicians may refer their patients to alternate sources, which could adversely affect our results of operations and harm our business.
If we fail to effectively and timely implement electronic health record systems, our operations could be harmed.
As required by HITECH, we are in the process of developing and implementing an incentive payment program for eligible hospitals and health care professionals that adopt and meaningfully use certified electronic health record technology. If our facilities or physicians are unable to meet the requirements for participation in the incentive payment program, we will not be eligible to receive incentive payments that could offset some of the costs of implementing an electronic health record system. Further, beginning in federal fiscal year 2015, eligible hospitals and professionals that fail to demonstrate meaningful use of certified electronic health record technology will be subject to reduced payments from Medicare. Any failure by us to effectively implement an electronic health record system in a timely manner could have an adverse effect on our results of operations.
Our performance depends on our ability to attract and retain qualified nurses and medical support staff and we face competition for staffing that may increase our labor costs and harm our results of operations.
We depend on the efforts, abilities, and experience of our medical support personnel, including our nurses, pharmacists and lab technicians and other healthcare professionals. We compete with other healthcare providers in recruiting and retaining qualified hospital management, nurses and other medical personnel.
The nationwide shortage of nurses and other medical support personnel has been a significant operating issue facing us and other healthcare providers. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other medical support personnel or require us to hire expensive temporary personnel. In addition, in some markets like California, there are requirements to maintain specified nurse-staffing levels. To the extent we cannot meet those levels, we may be required to limit the healthcare services provided in these markets, which would have a corresponding adverse effect on our net operating revenues.
We cannot predict the degree to which we will be affected by the future availability or cost of attracting and retaining talented medical support staff. If our general labor and related expenses increase, we may not be able to
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raise our rates correspondingly. Our failure to either recruit and retain qualified hospital management, nurses and other medical support personnel or control our labor costs could harm our results of operations.
If we fail to comply with extensive laws and government regulations, we could suffer civil or criminal penalties or be required to make significant changes to our operations that could reduce our revenue and profitability.
The healthcare industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things: hospital billing practices and prices for services; relationships with physicians and other referral sources; adequacy of medical care and quality of medical equipment and services; ownership of facilities; qualifications of medical and support personnel; confidentiality, maintenance, privacy and security issues associated with health-related information and patient medical records; the screening, stabilization and transfer of patients who have emergency medical conditions; certification, licensure and accreditation of our facilities; operating policies and procedures, and; construction or expansion of facilities and services.
Among these laws are the federal False Claims Act, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the federal anti-kickback statute and the provision of the Social Security Act commonly known as the “Stark Law.” These laws, and particularly the anti-kickback statute and the Stark Law, impact the relationships that we may have with physicians and other referral sources. We have a variety of financial relationships with physicians who refer patients to our facilities, including employment contracts, leases and professional service agreements. We also provide financial incentives, including minimum revenue guarantees, to recruit physicians into communities served by our hospitals. The Office of the Inspector General of the Department of Health and Human Services, or OIG, has enacted safe harbor regulations that outline practices that are deemed protected from prosecution under the anti-kickback statute. A number of our current arrangements, including financial relationships with physicians and other referral sources, may not qualify for safe harbor protection under the anti-kickback statute. Failure to meet a safe harbor does not mean that the arrangement necessarily violates the anti-kickback statute, but may subject the arrangement to greater scrutiny. We cannot assure that practices that are outside of a safe harbor will not be found to violate the anti-kickback statute. CMS recently published a Medicare self-referral disclosure protocol, which is intended to allow providers to self-disclose actual or potential violations of the Stark law. Because there are only a few judicial decisions interpreting the Stark law, there can be no assurance that our hospitals will not be found in violation of the Stark law or that self-disclosure of a potential violation would result in reduced penalties.
Federal regulations issued under HIPAA contain provisions that require us to implement and, in the future, may require us to implement additional costly electronic media security systems and to adopt new business practices designed to protect the privacy and security of each of our patient’s health and related financial information. Such privacy and security regulations impose extensive administrative, physical and technical requirements on us, restrict our use and disclosure of certain patient health and financial information, provide patients with rights with respect to their health information and require us to enter into contracts extending many of the privacy and security regulatory requirements to third parties that perform duties on our behalf.
These laws and regulations are extremely complex, and, in many cases, we do not have the benefit of regulatory or judicial interpretation. In the future, it is possible that different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated one or more of these laws (see Item 3-Legal Proceedings), or the public announcement that we are being investigated for possible violations of one or more of these laws, could have a material adverse effect on our business, financial condition or results of operations and our business reputation could suffer significantly. In addition, we cannot predict whether other legislation or regulations at the federal or state level will be adopted, what form such legislation or regulations may take or what their impact on us may be. See Item 1 Business—Self-Referral and Anti-Kickback Legislation.
If we are deemed to have failed to comply with the anti-kickback statute, the Stark Law or other applicable laws and regulations, we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more facilities), and exclusion of one or more facilities from
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participation in the Medicare, Medicaid and other federal and state healthcare programs. The imposition of such penalties could have a material adverse effect on our business, financial condition or results of operations.
We may be subject to liabilities from claims brought against our facilities.
We are subject to medical malpractice lawsuits, product liability lawsuits, class action lawsuits and other legal actions in the ordinary course of business. Some of these actions may involve large claims, as well as significant defense costs. We cannot predict the outcome of these lawsuits or the effect that findings in such lawsuits may have on us. All professional and general liability insurance we purchase is subject to policy limitations. We believe that, based on our past experience and actuarial estimates, our insurance coverage is adequate considering the claims arising from the operations of our hospitals. While we continuously monitor our coverage, our ultimate liability for professional and general liability claims could change materially from our current estimates. If such policy limitations should be partially or fully exhausted in the future, or payments of claims exceed our estimates or are not covered by our insurance, it could have a material adverse effect on our operations.
We may be subject to governmental investigations, regulatory actions and whistleblower lawsuits
The federal False Claims Act permits private parties to bring qui tam, or whistleblower, lawsuits against companies. Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. Because qui tam lawsuits are filed under seal, we could be named in one or more such lawsuits of which we are not aware.
If any of our existing health care facilities lose their accreditation or any of our new facilities fail to receive accreditation, such facilities could become ineligible to receive reimbursement under Medicare or Medicaid.
The construction and operation of healthcare facilities are subject to extensive federal, state and local regulation relating to, among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection. Additionally, such facilities are subject to periodic inspection by government authorities to assure their continued compliance with these various standards.
All of our hospitals are deemed certified, meaning that they are accredited, properly licensed under the relevant state laws and regulations and certified under the Medicare program. The effect of maintaining certified facilities is to allow such facilities to participate in the Medicare and Medicaid programs. We believe that all of our healthcare facilities are in material compliance with applicable federal, state, local and other relevant regulations and standards. However, should any of our healthcare facilities lose their deemed certified status and thereby lose certification under the Medicare or Medicaid programs, such facilities would be unable to receive reimbursement from either of those programs and our business could be materially adversely effected.
Our level of indebtedness that we incurred in connection with the acquisition of PSI could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the agreements relating to our indebtedness.
Our level of indebtedness that we incurred in connection with the acquisition of PSI could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and could potentially prevent us from meeting our obligations under the agreements relating to our indebtedness.
In connection with the consummation of our acquisition of PSI, in addition to previously existing outstanding debt commitments and undertaking a $250 million offering of notes in September, 2010, we obtained a debt financing commitment of $3.45 billion under a senior credit facility consisting of an $800 million revolving credit facility, a $1.05 billion term loan A facility and a $1.6 billion term loan B facility. The senior credit facility became effective upon closing of the acquisition of PSI, which occurred in November, 2010. We also obtained an amended $240 million accounts receivable securitization facility during 2010 (increased from $200 million).
As of December 31, 2011, after giving effect to the use of proceeds from the various debt financing sources mentioned above, and after giving effect to our 2011 consolidated results of operations and cash flows, our total
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debt was $3.65 billion and we had $482 million of unused borrowing capacity under our senior credit and accounts receivable securitization facilities, after taking into account $69 million of outstanding letters of credit and $9 million of outstanding borrowings pursuant to our short-term, on-demand note.
Subject to the limits contained in the credit agreement governing our senior credit facility, the indenture that governs the notes and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Our leverage could result in unfavorable impact on us, including the following:
| • | it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; |
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| • | a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our operations, capital expenditures and future business opportunities; |
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| • | some of our borrowings, including borrowings under the credit facilities, are at variable rates of interest, exposing us to the risk of increased interest rates; |
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| • | it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt, and; |
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| • | we may be vulnerable in a downturn in general economic conditions or in our business, or we may be unable to carry out capital spending that is important to our operations. |
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Our growth strategy depends, in part, on acquisitions, and we may not be able to continue to acquire hospitals that meet our target criteria. We may also have difficulties acquiring hospitals from not-for-profit entities due to regulatory scrutiny.
Acquisitions of hospitals in select markets are a key element of our growth strategy. We face competition for acquisition candidates primarily from other for-profit healthcare companies, as well as from not-for-profit entities. Some of our competitors have greater resources than we do. Also, suitable acquisitions may not be accomplished due to unfavorable terms.
In addition, many states have enacted, or are considering enacting, laws that affect the conversion or sale of not-for-profit hospitals to for-profit entities. These laws generally require prior approval from the state attorney general, advance notification and community involvement. In addition, attorneys general in states without specific conversion legislation may exercise discretionary authority over such transactions. Although the level of government involvement varies from state to state, the trend is to provide for increased governmental review and, in some cases, approval of a transaction in which a not-for-profit entity sells a healthcare facility to a for-profit entity. The adoption of new or expanded conversion legislation, increased review of not-for-profit hospital conversions or our inability to effectively compete against other potential purchasers could make it more difficult for us to acquire additional hospitals, increase our acquisition costs or make it difficult for us to acquire hospitals that meet our target acquisition criteria, any of which could adversely affect our growth strategy and results of operations.
Further, the cost of an acquisition could result in a dilutive effect on our results of operations, depending on various factors, including the amount paid for the acquisition, the acquired hospital’s results of operations, allocation of the purchase price, effects of subsequent legislation and limits on rate increases.
We may fail to improve or integrate the operations of the hospitals we acquire, which could harm our results of operations and adversely affect our growth strategy.
We may be unable to timely and effectively integrate the hospitals that we acquire with our ongoing operations. We may experience delays in implementing operating procedures and systems in newly acquired
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hospitals. Integrating a new hospital could be expensive and time consuming and could disrupt our ongoing business, negatively affect cash flow and distract management and other key personnel. In addition, acquisition activity requires transitions from, and the integration of, operations and, usually, information systems that are used by acquired hospitals. In addition, some of the hospitals we acquire had significantly lower operating margins than the hospitals we operate prior to the time of our acquisition. If we fail to improve the operating margins of the hospitals we acquire, operate such hospitals profitably or effectively integrate the operations of acquired hospitals, our results of operations could be harmed.
If we acquire hospitals with unknown or contingent liabilities, we could become liable for material obligations.
Hospitals that we acquire may have unknown or contingent liabilities, including, but not limited to, liabilities for failure to comply with applicable laws and regulations. Although we typically attempt to exclude significant liabilities from our acquisition transactions and seek indemnification from the sellers of such hospitals for these matters, we could experience difficulty enforcing those obligations or we could incur material liabilities for the past activities of hospitals we acquire. Such liabilities and related legal or other costs and/or resulting damage to a facility’s reputation could harm our business.
Our subsidiary, PSI, and its subsidiaries, are subject to pending legal actions, governmental investigations and regulatory actions.
Our subsidiary, PSI, and its subsidiaries, are subject to pending legal actions, governmental investigations and regulatory actions (see Item 3-Legal Proceedings).
State efforts to regulate the construction or expansion of health care facilities could impair our ability to expand.
Many of the states in which we operate hospitals have enacted Certificates of Need, or CON, laws as a condition prior to hospital capital expenditures, construction, expansion, modernization or initiation of major new services. Our failure to obtain necessary state approval could result in our inability to complete a particular hospital acquisition, expansion or replacement, make a facility ineligible to receive reimbursement under the Medicare or Medicaid programs, result in the revocation of a facility’s license or impose civil or criminal penalties on us, any of which could harm our business.
In addition, significant CON reforms have been proposed in a number of states that would increase the capital spending thresholds and provide exemptions of various services from review requirements. In the past, we have not experienced any material adverse effects from those requirements, but we cannot predict the impact of these changes upon our operations.
Controls designed to reduce inpatient services may reduce our revenues.
Controls imposed by third-party payors designed to reduce admissions and lengths of stay, commonly referred to as “utilization review,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by managed care plans. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required preadmission authorization and utilization review and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Efforts to impose more stringent cost controls are expected to continue. Although we cannot predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on our business, financial position and results of operations.
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Fluctuations in our operating results, quarter to quarter earnings and other factors may result in decreases in the price of our common stock.
The stock markets have experienced volatility that has often been unrelated to operating performance. These broad market fluctuations may adversely affect the trading price of our common stock and, as a result, there may be significant volatility in the market price of our common stock. If we are unable to operate our hospitals as profitably as we have in the past or as our stockholders expect us to in the future, the market price of our common stock will likely decline as stockholders could sell shares of our common stock when it becomes apparent that the market expectations may not be realized.
In addition to our operating results, many economic and seasonal factors outside of our control could have an adverse effect on the price of our common stock and increase fluctuations in our quarterly earnings. These factors include certain of the risks discussed herein, demographic changes, operating results of other hospital companies, changes in our financial estimates or recommendations of securities analysts, speculation in the press or investment community, the possible effects of war, terrorist and other hostilities, adverse weather conditions, the level of seasonal illnesses, managed care contract negotiations and terminations, changes in general conditions in the economy or the financial markets, or other developments affecting the health care industry.
We are subject to significant corporate regulation as a public company and failure to comply with all applicable regulations could subject us to liability or negatively affect our stock price.
As a publicly traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley Act of 2002. While we have developed and instituted a corporate compliance program based on what we believe are the current best practices in corporate governance and continue to update this program in response to newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations. For example, we cannot provide assurance that, in the future, our management will not find a material weakness in connection with its annual review of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also cannot provide assurance that we could correct any such weakness to allow our management to assess the effectiveness of our internal control over financial reporting as of the end of our fiscal year in time to enable our independent registered public accounting firm to state that such assessment will have been fairly stated in our Annual Report on Form 10-K or state that we have maintained effective internal control over financial reporting as of the end of our fiscal year. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If we must disclose any material weakness in our internal control over financial reporting, our stock price could decline.
A cyber security incident could cause a violation of HIPAA, breach of member privacy, or other negative impacts.
A cyber-attack that bypasses our information technology (“IT”) security systems causing an IT security breach, loss of protected health information or other data subject to privacy laws, loss of proprietary business information, or a material disruption of our IT business systems, could have a material adverse impact on our business and result of operations. In addition, our future results of operations, as well as our reputation, could be adversely impacted by theft, destruction, loss, or misappropriation of public health information, other confidential data or proprietary business information.
Different interpretations of accounting principles could have a material adverse effect on our results of operations or financial condition.
Generally accepted accounting principles are complex, continually evolving and may be subject to varied interpretation by us, our independent registered public accounting firm and the SEC. Such varied interpretations could result from differing views related to specific facts and circumstances. Differences in interpretation of generally accepted accounting principles could have a material adverse effect on our financial position or results of operations.
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We continue to see rising costs in construction materials and labor. Such increased costs could have an adverse effect on the cash flow return on investment relating to our capital projects.
The cost of construction materials and labor has significantly increased. As we continue to invest in modern technologies, emergency rooms and operating room expansions, the construction of medical office buildings for physician expansion and reconfiguring the flow of patient care, we spend large amounts of money generated from our operating cash flow or borrowed funds. In addition, we have a commitment with an unrelated third party to build a newly constructed facility with a specified minimum number of beds and services. Although we evaluate the financial feasibility of such projects by determining whether the projected cash flow return on investment exceeds our cost of capital, such returns may not be achieved if the cost of construction continues to rise significantly or the expected patient volumes are not attained.
The deterioration of credit and capital markets may adversely affect our access to sources of funding and we cannot be certain of the availability and terms of capital to fund the growth of our business when needed.
We require substantial capital resources to fund our acquisition growth strategy and our ongoing capital expenditure programs for renovation, expansion, construction and addition of medical equipment and technology. We believe that our capital expenditure program is adequate to expand, improve and equip our existing hospitals. We cannot predict, however, whether financing for our growth plans and capital expenditure programs will be available to us on satisfactory terms when needed, which could harm our business.
To fund all or a portion of our future financing needs, we rely on borrowings from various sources including fixed rate, long-term debt as well as borrowings pursuant to our revolving credit facility and accounts receivable securitization program. If any of the lenders were unable to fulfill their future commitments, our liquidity could be impacted, which could have a material unfavorable impact our results of operations and financial condition.
In addition, global capital markets have experienced volatility that has tightened access to capital markets and other sources of funding. In the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity.
We depend heavily on key management personnel and the departure of one or more of our key executives or a significant portion of our local hospital management personnel could harm our business.
The expertise and efforts of our senior executives and key members of our local hospital management personnel are critical to the success of our business. The loss of the services of one or more of our senior executives or of a significant portion of our local hospital management personnel could significantly undermine our management expertise and our ability to provide efficient, quality healthcare services at our facilities, which could harm our business.
The number of outstanding shares of our Class B Common Stock is subject to potential increases or decreases.
At December 31, 2011, 31.2 million shares of Class B Common Stock were reserved for issuance upon conversion of shares of Class A, C and D Common Stock outstanding, for issuance upon exercise of options to purchase Class B Common Stock and for issuance of stock under other incentive plans. Class A, C and D Common Stock are convertible on a share for share basis into Class B Common Stock. To the extent that these shares were converted into or exercised for shares of Class B Common Stock, the number of shares of Class B Common Stock available for trading in the public market place would increase substantially and the holders of Class B Common Stock would own a smaller percentage of that class.
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In addition, from time-to-time our Board of Directors approve stock repurchase programs authorizing us to purchase shares of our Class B Common Stock on the open market at prevailing market prices or in negotiated transactions off the market. Such repurchases decrease the number of outstanding shares of our Class B Common Stock. Conversely, as a potential means of generating additional funds to operate and expand our business, we may from time-to-time issue equity through the sale of stock which would increase the number of outstanding shares of our Class B Common Stock. Based upon factors such as, but not limited to, the market price of our stock, interest rate on borrowings and uses or potential uses for cash, repurchase or issuance of our stock could have a dilutive effect on our future basic and diluted earnings per share.
The right to elect the majority of our Board of Directors and the majority of the general shareholder voting power resides with the holders of Class A and C Common Stock, the majority of which is owned by Alan B. Miller, our Chief Executive Officer and Chairman of our Board of Directors.
Our Restated Certificate of Incorporation provides that, with respect to the election of directors, holders of Class A Common Stock vote as a class with the holders of Class C Common Stock, and holders of Class B Common Stock vote as a class with holders of Class D Common Stock, with holders of all classes of our Common Stock entitled to one vote per share.
As of March 31, 2011, the shares of Class A and Class C Common Stock constituted 7.5% of the aggregate outstanding shares of our Common Stock, had the right to elect six members of the Board of Directors and constituted 87.2% of our general voting power. As of March 31, 2011, the shares of Class B and Class D Common Stock (excluding shares issuable upon exercise of options) constituted 92.5% of the outstanding shares of our Common Stock, had the right to elect two members of the Board of Directors and constituted 12.8% of our general voting power.
As to matters other than the election of directors, our Restated Certificate of Incorporation provides that holders of Class A, Class B, Class C and Class D Common Stock all vote together as a single class, except as otherwise provided by law.
Each share of Class A Common Stock entitles the holder thereof to one vote; each share of Class B Common Stock entitles the holder thereof to one-tenth of a vote; each share of Class C Common Stock entitles the holder thereof to 100 votes (provided the holder of Class C Common Stock holds a number of shares of Class A Common Stock equal to ten times the number of shares of Class C Common Stock that holder holds); and each share of Class D Common Stock entitles the holder thereof to ten votes (provided the holder of Class D Common Stock holds a number of shares of Class B Common Stock equal to ten times the number of shares of Class D Common Stock that holder holds).
In the event a holder of Class C or Class D Common Stock holds a number of shares of Class A or Class B Common Stock, respectively, less than ten times the number of shares of Class C or Class D Common Stock that holder holds, then that holder will be entitled to only one vote for every share of Class C Common Stock, or one-tenth of a vote for every share of Class D Common Stock, which that holder holds in excess of one-tenth the number of shares of Class A or Class B Common Stock, respectively, held by that holder. The Board of Directors, in its discretion, may require beneficial owners to provide satisfactory evidence that such owner holds ten times as many shares of Class A or Class B Common Stock as Class C or Class D Common Stock, respectively, if such facts are not apparent from our stock records.
Since a substantial majority of the Class A shares and Class C shares are controlled by Mr. Alan B. Miller and members of his family who are also directors and officers of our company, and they can elect a majority of our company’s directors and effect or reject most actions requiring approval by stockholders without the vote of any other stockholders, there are potential conflicts of interest in overseeing the management of our company.
In addition, because this concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to our businesses, our business and prospects and the trading price of our securities could be adversely affected.
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Item 1B. Unresolved Staff Comments
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None.
Item 2. Properties
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Executive and Administrative Offices
We own office buildings in King of Prussia and Wayne, Pennsylvania and Brentwood, Tennessee.
Facilities
The following tables set forth the name, location, type of facility and, for acute care hospitals and behavioral health care facilities, the number of licensed beds:
Acute Care Hospitals
| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| Aiken Regional Medical Centers | Aiken, South Carolina | 183 | Owned | |||||||
| Aurora Pavilion | Aiken, South Carolina | 59 | Owned | |||||||
| Auburn Regional Medical Center | Auburn, Washington | 159 | Owned | |||||||
| Centennial Hills Hospital Medical Center (1) | Las Vegas, Nevada | 171 | Owned | |||||||
| Corona Regional Medical Center | Corona, California | 240 | Owned | |||||||
| Desert Springs Hospital (1) | Las Vegas, Nevada | 293 | Owned | |||||||
| Doctors’ Hospital of Laredo (9) | Laredo, Texas | 180 | Owned | |||||||
| Fort Duncan Regional Medical Center | Eagle Pass, Texas | 101 | Owned | |||||||
| The George Washington University Hospital (2) | Washington, D.C. | 371 | Owned | |||||||
| Lakewood Ranch Medical Center | Bradenton, Florida | 120 | Owned | |||||||
| Manatee Memorial Hospital | Bradenton, Florida | 319 | Owned | |||||||
| Northern Nevada Medical Center | Sparks, Nevada | 100 | Owned | |||||||
| Northwest Texas Healthcare System | Amarillo, Texas | 404 | Owned | |||||||
| The Pavilion at Northwest Texas Healthcare System | Amarillo, Texas | 85 | Owned | |||||||
| Palmdale Regional Medical Center | Palmdale, California | 157 | Owned | |||||||
| South Texas Health System (4) | ||||||||||
| Edinburg Regional Medical Center | Edinburg, Texas | 127 | Owned | |||||||
| Edinburg Children’s Hospital | Edinburg, Texas | 86 | Owned | |||||||
| McAllen Medical Center (3) | McAllen, Texas | 441 | Leased | |||||||
| McAllen Heart Hospital | McAllen, Texas | 60 | Owned | |||||||
| South Texas Behavioral Health Center | McAllen, Texas | 134 | Owned | |||||||
| Southwest Healthcare System | ||||||||||
| Inland Valley Campus (3) | Wildomar, California | 130 | Leased | |||||||
| Rancho Springs Campus | Murrieta, California | 122 | Owned | |||||||
| Spring Valley Hospital Medical Center (1) | Las Vegas, Nevada | 231 | Owned | |||||||
| St. Mary’s Regional Medical Center | Enid, Oklahoma | 245 | Owned | |||||||
| Summerlin Hospital Medical Center (1) | Las Vegas, Nevada | 454 | Owned | |||||||
| Texoma Medical Center | Denison, Texas | 191 | Owned | |||||||
| TMC Behavioral Health Center | Denison, Texas | 60 | Owned | |||||||
| Valley Hospital Medical Center (1) | Las Vegas, Nevada | 404 | Owned | |||||||
| Wellington Regional Medical Center (3) | West Palm Beach, Florida | 158 | Leased |
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Behavioral Health Care Facilities
| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| Alabama Clinical Schools | Birmingham, Alabama | 80 | Owned | |||||||
| Alhambra Hospital (10) | Rosemead, California | 103 | Owned | |||||||
| Alliance Health Center (10) | Meridian, Mississippi | 214 | Owned | |||||||
| Anchor Hospital | Atlanta, Georgia | 111 | Owned | |||||||
| Arbour Counseling Services | Rockland, Massachusetts | — | Owned | |||||||
| The Arbour Hospital | Boston, Massachusetts | 118 | Owned | |||||||
| Arbour Senior Care | Rockland, Massachusetts | — | Owned | |||||||
| Arbour-Fuller Hospital | South Attleboro, Massachusetts | 103 | Owned | |||||||
| Arbour-HRI Hospital | Brookline, Massachusetts | 68 | Owned | |||||||
| Arrowhead Behavioral Health (10) | Maumee, Ohio | 52 | Owned | |||||||
| Atlantic Shores Hospital (10) | Fort Lauderdale, Florida | 72 | Owned | |||||||
| Austin Lakes Hospital (10) | Austin, Texas | 54 | Leased | |||||||
| Behavioral Educational Services (10) | Riverdale, Florida | — | Leased | |||||||
| Belmont Pines Hospital (10) | Youngstown, Ohio | 102 | Owned | |||||||
| Benchmark Behavioral Health System (10) | Woods Cross, Utah | 84 | Owned | |||||||
| Bloomington Meadows Hospital (10) | Bloomington, Indiana | 78 | Owned | |||||||
| Blue Mountain Academy | Grand Terrace, California | — | Owned | |||||||
| Boulder Creek Academy | Bonners Ferry, Idaho | 100 | Owned | |||||||
| Brentwood Behavioral Health of Mississippi (10) | Flowood, Mississippi | 105 | Owned | |||||||
| Brentwood Hospital (10) | Shreveport, Louisiana | 200 | Owned | |||||||
| The Bridgeway (3) | North Little Rock, Arkansas | 103 | Leased | |||||||
| Bristol Youth Academy | Bristol, Florida | 60 | Owned | |||||||
| Brook Hospital—Dupont (10) | Louisville, Kentucky | 86 | Owned | |||||||
| Brook Hospital—KMI (10) | Louisville, Kentucky | 106 | Owned | |||||||
| Brooke Glen Behavioral Hospital (10) | Fort Washington, Pennsylvania | 146 | Owned | |||||||
| Brynn Marr Hospital (10) | Jacksonville, North Carolina | 100 | Owned | |||||||
| Calvary Addiction Recovery Center (10) | Phoenix, Arizona | 50 | Owned | |||||||
| Canyon Ridge Hospital (10) | Chino, California | 106 | Owned | |||||||
| The Carolina Center for Behavioral Health | Greer, South Carolina | 112 | Owned | |||||||
| Cedar Grove Residential Treatment Center | Murfreesboro, Tennessee | 36 | Owned | |||||||
| Cedar Ridge | Oklahoma City, Oklahoma | 60 | Owned | |||||||
| Cedar Ridge Residential Treatment Center | Oklahoma City, Oklahoma | 56 | Owned | |||||||
| Cedar Springs Behavioral Health (10) | Colorado Springs, Colorado | 110 | Owned | |||||||
| Centennial Peaks | Louisville, Colorado | 72 | Owned | |||||||
| Center for Change | Orem, Utah | 58 | Owned | |||||||
| Central Florida Behavioral Hospital | Orlando, FL | 120 | Owned | |||||||
| Chicago Children’s Center for Behavioral Health (10) | Chicago, Illinois | 40 | Leased | |||||||
| Clarion Psychiatric Center | Clarion, Pennsylvania | 74 | Owned | |||||||
| Coastal Harbor Behavioral Health | Savannah, Georgia | 50 | Owned | |||||||
| Coastal Harbor Treatment Center | Savannah, Georgia | 132 | Owned | |||||||
| Columbus Behavioral Center for Children and Adolescents | Columbus, Indiana | 56 | Owned | |||||||
| Community Behavioral Health | Memphis, Tennessee | 50 | Leased | |||||||
| Community Cornerstones (10) | Rio Piedras, Puerto Rico | — | Leased | |||||||
| Compass Intervention Center | Memphis, Tennessee | 108 | Owned | |||||||
| Copper Hills Youth Center (10) | West Jordan, Utah | 197 | Owned | |||||||
| Cottonwood Treatment Center | S. Salt Lake City, Utah | 86 | Leased |
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| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| Creekside Academy | Sacramento, California | — | Leased | |||||||
| Crescent Pines | Stockbridge, Georgia | 50 | Owned | |||||||
| Cumberland Hall (10) | Hopkinsville, Kentucky | 97 | Owned | |||||||
| Cumberland Hospital (10) | New Kent, Virginia | 130 | Owned | |||||||
| Cypress Creek Hospital (10) | Houston, Texas | 96 | Owned | |||||||
| Del Amo Hospital | Torrance, California | 166 | Owned | |||||||
| Desert Valley Hope Academy | Hemet, California | — | Owned | |||||||
| Diamond Grove Center (10) | Louisville, Mississippi | 55 | Owned | |||||||
| Dover Behavioral Health | Dover, Delaware | 57 | Owned | |||||||
| Emerald Coast Behavioral Hospital (10) | Panama City, Florida | 90 | Owned | |||||||
| Fairmount Behavioral Health System | Philadelphia, Pennsylvania | 239 | Owned | |||||||
| Fairfax Hospital (10) | Kirkland, Washington | 157 | Owned | |||||||
| First Home Care (VA) (10) | Portsmouth, Virginia | — | Leased | |||||||
| First Hospital Panamericano—Cidra (10) | Cidra, Puerto Rico | 165 | Owned | |||||||
| First Hospital Panamericano—San Juan (10) | San Juan, Puerto Rico | 45 | Owned | |||||||
| First Hospital Panamericano—Ponce (10) | Ponce, Puerto Rico | 30 | Owned | |||||||
| Forest View Hospital | Grand Rapids, Michigan | 82 | Owned | |||||||
| Fort Lauderdale Hospital (10) | Fort Lauderdale, Florida | 100 | Leased | |||||||
| Foundations Behavioral Health | Doylestown, Pennsylvania | 118 | Leased | |||||||
| Foundations for Living | Mansfield, Ohio | 84 | Owned | |||||||
| Fox Run Hospital (10) | St. Clairsville, Ohio | 100 | Owned | |||||||
| Fremont Hospital (10) | Fremont, California | 96 | Owned | |||||||
| Friends Hospital (10) | Philadelphia, Pennsylvania | 219 | Owned | |||||||
| Glen Oaks Hospital | Greenville, Texas | 54 | Owned | |||||||
| Good Samaritan Counseling Center | Anchorage, Alaska | — | Owned | |||||||
| Gulf Coast Treatment Center (10) | Fort Walton Beach, Florida | 144 | Owned | |||||||
| Gulf Coast Youth Academy (10) | Fort Walton Beach, Florida | 24 | Owned | |||||||
| Hampton Behavioral Health Center | Westhampton, New Jersey | 110 | Owned | |||||||
| Harbour Point (Pines) (10) | Portsmouth, Virginia | 186 | Owned | |||||||
| Hartgrove Hospital | Chicago, Illinois | 150 | Owned | |||||||
| Havenwyck Hospital (10) | Auburn Hills, Michigan | 278 | Owned | |||||||
| Heartland Behavioral Health Services (10) | Nevada, Missouri | 159 | Owned | |||||||
| Hermitage Hall | Nashville, Tennessee | 112 | Owned | |||||||
| Heritage Oaks Hospital (10) | Sacramento, California | 125 | Owned | |||||||
| Hickory Trail Hospital (10) | DeSoto, Texas | 86 | Owned | |||||||
| Highlands Behavioral Health System | Highlands Ranch, Colorado | 86 | Owned | |||||||
| High Point Treatment Center (10) | Cooper City, Florida | 60 | Owned | |||||||
| Hill Crest Behavioral Health Services (10) | Birmingham, Alabama | 205 | Owned | |||||||
| Holly Hill Hospital (10) | Raleigh, North Carolina | 152 | Owned | |||||||
| The Horsham Clinic | Ambler, Pennsylvania | 206 | Owned | |||||||
| Hughes Center (10) | Danville, Virginia | 56 | Owned | |||||||
| Intermountain Hospital (10) | Boise, Idaho | 155 | Owned | |||||||
| Jefferson Trail Treatment Center for Children (10) | Charlottesville, Virginia | 50 | Leased | |||||||
| John Costigan Center (Streamwood RTC) (10) | Streamwood, Illinois | 73 | Owned | |||||||
| Kempsville Center of Behavioral Health (10) | Norfolk, Virginia | 82 | Owned | |||||||
| Keys of Carolina | Charlotte, North Carolina | 60 | Owned | |||||||
| KeyStone Center | Wallingford, Pennsylvania | 140 | Owned | |||||||
| Kingwood Pines Hospital (10) | Kingwood, Texas | 116 | Owned |
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| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| La Amistad Behavioral Health Services | Maitland, Florida | 80 | Owned | |||||||
| Lakeside Behavioral Health System | Memphis, Tennessee | 291 | Owned | |||||||
| Laurel Heights Hospital | Atlanta, Georgia | 122 | Owned | |||||||
| Laurel Oaks Behavioral Health Center (10) | Dothan, Alabama | 118 | Owned | |||||||
| Laurel Ridge Treatment Center (10) | San Antonio, Texas | 250 | Owned | |||||||
| Liberty Point Behavioral Health (10) | Stauton, Virginia | 50 | Owned | |||||||
| Lighthouse Care Center of Augusta (10) | Augusta, Georgia | 106 | Owned | |||||||
| Lighthouse Care Center of Conway (10) | Conway, South Carolina | 112 | Owned | |||||||
| Lincoln Prairie Behavioral Health Center (10) | Springfield, Illinois | 88 | Owned | |||||||
| Lincoln Trail Behavioral Health System | Radcliff, Kentucky | 140 | Owned | |||||||
| Macon Behavioral Health System (10) | Macon, Georgia | 155 | Owned | |||||||
| Manatee Palms Group Homes (10) | Bradenton, Florida | 60 | Owned | |||||||
| Manatee Palms Youth Services (10) | Bradenton, Florida | 60 | Owned | |||||||
| McDowell Center for Children | Dyersburg, Tennessee | 32 | Owned | |||||||
| The Meadows Psychiatric Center | Centre Hall, Pennsylvania | 101 | Owned | |||||||
| Meridell Achievement Center | Austin, Texas | 134 | Owned | |||||||
| Mesilla Valley Hospital (10) | Las Cruces, New Mexico | 120 | Owned | |||||||
| Michiana Behavioral Health Center (10) | Plymouth, Indiana | 80 | Owned | |||||||
| Midwest Center for Youth and Families | Kouts, Indiana | 74 | Owned | |||||||
| Millwood Hospital (10) | Arlington, Texas | 122 | Leased | |||||||
| Mission Bell Academy (Riverside NPS) | Riverside, California | — | Owned | |||||||
| Mojave Ridge Academy (Victorville NPS) | Victorville, California | — | Leased | |||||||
| Mountain Youth Academy | Mountain City, Tennessee | 60 | Owned | |||||||
| Natchez Trace Youth Academy | Waverly, Tennessee | 90 | Owned | |||||||
| National Deaf Academy | Mount Dora, Florida | 132 | Owned | |||||||
| Newport News Behavioral Health Center | Newport News, Virginia | 108 | Owned | |||||||
| North Spring Behavioral Healthcare (10) | Leesburg, Virginia | 77 | Leased | |||||||
| North Star Hospital | Anchorage, Alaska | 74 | Owned | |||||||
| North Star Bragaw | Anchorage, Alaska | 36 | Owned | |||||||
| North Star DeBarr Residential Treatment Center | Anchorage, Alaska | 60 | Owned | |||||||
| North Star Palmer Residential Treatment Center | Palmer, Alaska | 30 | Owned | |||||||
| Northwest Academy | Bonners Perry, Idaho | 120 | Owned | |||||||
| Oak Plains Academy | Ashland City, Tennessee | 90 | Owned | |||||||
| Okaloosa Youth Academy (10) | Crestview, Florida | 254 | Leased | |||||||
| Old Vineyard Behavioral Health | Winston-Salem, North Carolina | 104 | Owned | |||||||
| Palmetto Lowcountry Behavioral Health (10) | North Charleston, South Carolina | 112 | Owned | |||||||
| Palmetto Pee Dee Behavioral Health (10) | Florence, South Carolina | 59 | Leased | |||||||
| Palmetto Summerville (10) | Summerville, South Carolina | 60 | Leased | |||||||
| Parkwood Behavioral Health System | Olive Branch, Mississippi | 128 | Owned | |||||||
| The Pavilion | Champaign, Illinois | 77 | Owned | |||||||
| Peachford Behavioral Health System of Atlanta | Atlanta, Georgia | 246 | Owned | |||||||
| Peak Behavioral Health Services (10) | Santa Teresa, New Mexico | 104 | Owned | |||||||
| Pembroke Hospital | Pembroke, Massachusetts | 115 | Owned | |||||||
| Pinnacle Pointe Hospital (10) | Little Rock, Arkansas | 124 | Owned | |||||||
| Poplar Springs Hospital (10) | Petersburg, Virginia | 199 | Owned | |||||||
| Prairie St John’s (10) | Fargo, North Dakota | 131 | Owned | |||||||
| Pride Institute (10) | Eden Prairie, Minnesota | 42 | Owned | |||||||
| Provo Canyon School | Provo, Utah | 80 | Owned | |||||||
| Provo Canyon Behavioral Hospital | Orem, Utah | 274 | Owned |
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| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| Rancho Academy of Learning (Rancho Cucamonga NPS) | Rancho Cucamonga, California | — | Owned | |||||||
| Rancho San Diego Academy (Steele Canyon NPS) | El Cajon, California | — | Leased | |||||||
| The Ridge Behavioral Health System | Lexington, Kentucky | 110 | Owned | |||||||
| Rivendell Behavioral Health Services of Arkansas | Benton, Arkansas | 77 | Owned | |||||||
| Rivendell Behavioral Health Services of Kentucky | Bowling Green, Kentucky | 125 | Owned | |||||||
| River Crest Hospital | San Angelo, Texas | 80 | Owned | |||||||
| Riveredge Hospital (10) | Forest Park, Illinois | 210 | Owned | |||||||
| River Oaks Hospital | New Orleans, Louisiana | 126 | Owned | |||||||
| River Park Hospital (10) | Huntington, West Virginia | 187 | Owned | |||||||
| River Point Behavioral Health (10) | Jacksonville, Florida | 99 | Owned | |||||||
| Rockford Center | Newark, Delaware | 118 | Owned | |||||||
| Rock River Residential Center (10) | Rockford, Illinois | 59 | Owned | |||||||
| Rolling Hills Hospital (10) | Franklin, Tennessee | 80 | Owned | |||||||
| Roxbury | Shippensburg, Pennsylvania | 112 | Owned | |||||||
| San Marcos Treatment Center (10) | San Marcos, Texas | 265 | Owned | |||||||
| Sandy Pines Hospital (10) | Tequesta, Florida | 88 | Owned | |||||||
| Shadow Mountain Behavioral Health System (10) | Tulsa, Oklahoma | 209 | Owned | |||||||
| Sierra Vista Hospital (10) | Sacramento, California | 120 | Owned | |||||||
| Somerset Educational Services (10) | Riverside, California | — | Owned | |||||||
| St. Louis Behavioral Medicine Institute | St. Louis, Missouri | — | Owned | |||||||
| St. Simons by the Sea (10) | St. Simons, Georgia | 101 | Owned | |||||||
| Spring Mountain Sahara | Las Vegas, Nevada | 30 | Owned | |||||||
| Spring Mountain Treatment Center | Las Vegas, Nevada | 82 | Owned | |||||||
| Springwoods | Fayetteville, Arkansas | 80 | Owned | |||||||
| Stonington Institute | North Stonington, Connecticut | 73 | Owned | |||||||
| Streamwood Behavioral Health (10) | Streamwood, Illinois | 162 | Owned | |||||||
| Summit Oaks Hospital (10) | Summit, New Jersey | 126 | Owned | |||||||
| SummitRidge | Lawrenceville, Georgia | 76 | Owned | |||||||
| Talbott Recovery Campus | Atlanta, Georgia | — | Owned | |||||||
| Texas NeuroRehab Center (10) | Austin, Texas | 151 | Owned | |||||||
| Three Rivers Behavioral Health (10) | West Columbia, South Carolina | 118 | Owned | |||||||
| Three Rivers Residential Treatment-Midlands Campus (10) | West Columbia, South Carolina | 59 | Owned | |||||||
| Timberlawn Mental Health System | Dallas, Texas | 144 | Owned | |||||||
| Turning Point Hospital | Moultrie, Georgia | 59 | Owned | |||||||
| Turning Point Youth Center | St. Johns, Michigan | 60 | Owned | |||||||
| Two Rivers Psychiatric Hospital | Kansas City, Missouri | 105 | Owned | |||||||
| University Behavioral Center (10) | Orlando, Florida | 112 | Owned | |||||||
| Upper East TN Juvenile Detention Facility | Johnson City, Tennessee | 10 | Owned | |||||||
| Valle Vista Hospital (10) | Greenwood, Indiana | 102 | Owned | |||||||
| Vines Hospital (10) | Ocala, Florida | 98 | Owned | |||||||
| Virgin Islands Behavioral Services (10) | St. Croix, Virgin Islands | 30 | Owned | |||||||
| Virginia Beach Psychiatric Center (10) | Virginia Beach, Virginia | 100 | Owned | |||||||
| Wekiva Springs (10) | Jacksonville, Florida | 68 | Owned | |||||||
| Wellstone Regional Hospital (10) | Jeffersonville, Indiana | 100 | Owned | |||||||
| West Hills Hospital (10) | Reno, Nevada | 95 | Owned | |||||||
| West Oaks Hospital (10) | Houston, Texas | 160 | Owned |
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| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| Westwood Lodge Hospital | Westwood, Massachusetts | 133 | Owned | |||||||
| Willow Springs Center (10) | Reno, Nevada | 116 | Owned | |||||||
| Windmoor Healthcare (10) | Clearwater, Florida | 120 | Owned | |||||||
| Windsor—Laurelwood Center (10) | Willoughby, Ohio | 160 | Leased | |||||||
| Wyoming Behavioral Institute | Casper, Wyoming | 90 | Owned |
Surgical Hospitals, Ambulatory Surgery Centers and Radiation Oncology Centers
| Name of Facility | Location | Real Property Ownership Interest | ||||
| Cancer Care Institute of Carolina | Aiken, South Carolina | Owned | ||||
| Cornerstone Regional Hospital (5) | Edinburg, Texas | Leased | ||||
| OJOS/Eye Surgery Specialists of Puerto Rico (6) | Santurce, Puerto Rico | Leased | ||||
| Northwest Texas Surgery Center (6) | Amarillo, Texas | Leased | ||||
| Palms Westside Clinic ASC (8) | Royal Palm Beach, Florida | Leased | ||||
| Temecula Valley Day Surgery and Pain Therapy Center (7) | Murrieta, California | Leased |
| (1) | Desert Springs Hospital, Summerlin Hospital Medical Center, Valley Hospital Medical Center, Spring Valley Hospital Medical Center and Centennial Hills Hospital Medical Center are owned by limited liability companies (“LLCs”) in which we hold controlling, majority ownership interests of approximately 72%. The remaining minority ownership interests in these facilities are held by unaffiliated third-parties. All hospitals are managed by us. |
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| (2) | We hold an 80% ownership interest in this facility through a general partnership interest in a limited partnership. The remaining 20% ownership interest is held by an unaffiliated third-party. |
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| (3) | Real property leased from Universal Health Realty Income Trust. |
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| (4) | In October, 2007, the licenses for Edinburg Regional Medical Center, Edinburg Children’s Hospital, McAllen Medical Center, McAllen Heart Hospital and South Texas Behavioral Health Center were consolidated under one license operating as the South Texas Health System. |
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| (5) | We manage and own a noncontrolling interest of approximately 50% in the entity that operates this facility. |
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| (6) | We own a majority interest in an LLC that owns and operates this center. |
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| (7) | We own minority interests in an LLC that owns and operates this center which is managed by a third-party. |
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| (8) | We own a noncontrolling ownership interest of approximately 50% in the entity that operates this facility that is managed by a third-party. |
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| (9) | We hold an 89% ownership interest in this facility through both general and limited partnership interests. The remaining 11% ownership interest is held by unaffiliated third parties. |
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| (10) | These facilities were acquired by us in November, 2010 in connection with our acquisition of PSI. |
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We own or lease medical office buildings adjoining some of our hospitals. We believe that the leases on the facilities, medical office buildings and other real estate leased or owned by us do not impose any material limitation on our operations. The aggregate lease payments on facilities leased by us were $55 million in 2011, $45 million in 2010 and $41 million in 2009.
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Item 3. Legal Proceedings
| --- | --- |
U.S. v. Marion and UHS:
In November, 2009, the United States Department of Justice (“DOJ”) and the Virginia Attorney General intervened in a qui tam case that had been filed by former employees of Marion Youth Center under seal in 2007 against Universal Health Services, Inc. (“UHS”), and Keystone Marion, LLC (“Marion”) and Keystone Education and Youth Services, LLC (“Keystone”). The intervention by the DOJ followed the issuance of a series of subpoenas from the Office of the Inspector General for the Department of Health and Human Services seeking documents related to the treatment of Medicaid beneficiaries at Marion. The amended complaint filed by the DOJ and Virginia Attorney General alleged causes of action pursuant to the federal and state false claims acts and the Virginia fraud statute. The former employees filed a separate amended complaint alleging employment and retaliation claims as well as false claim act violations. During the third quarter of 2011, we reached an agreement in principle to settle all of the claims. We have established a reserve in connection with this matter which did not have a material impact on our results of operations for any of the periods presented herein. Should we be unable to finalize a definitive settlement agreement in this matter, we will continue to defend ourselves vigorously against the government’s and the former employees’ allegations. There can be no assurance that we will prevail should this matter be litigated.
Martin v. UHS of Delaware:
UHS of Delaware, Inc., a wholly-owned subsidiary of ours, has been named as defendants in a state False Claim Act case in Sacramento County Superior Court. Plaintiffs are a former student and employees of the Elmira School who claim that the UHS schools in California unlawfully retained public education funding from the state of California for the operation of these schools but failed to meet state requirements pertaining to the operation of non-public schools. We deny liability and intend to defend this case vigorously. We have established a reserve in connection with this matter which did not have a material impact on our consolidated financial statements.
Department of Justice ICD Investigation:
In September, 2010, we, along with many other companies in the healthcare industry, received a letter from the United States Department of Justice (“DOJ”) advising of a False Claim Act investigation being conducted in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) from 2003 to the present at several of our acute care facilities. The DOJ alleges that ICDs were implanted and billed by our facilities in contravention of a National Claims Determination regarding these devices. We have established a reserve in connection with this matter which did not have a material impact on our consolidated financial statements.
Two Rivers Psychiatric Hospital:
On April 11, 2011, the Centers for Medicare and Medicaid Services (“CMS”) issued notice of its decision terminating Two Rivers Psychiatric Hospital (“Two Rivers”) in Kansas City, Missouri from participation in the Medicare and Medicaid program. The termination notice was issued as a result of surveys conducted which allegedly found Two Rivers to be out of compliance with the conditions of participation required for participation in the Medicare program and for Two Rivers’ alleged failure to alleviate an “immediate jeopardy” situation. Two Rivers filed an administrative appeal with the U.S. Department of Health and Human Services, Departmental Appeal Board, Civil Remedies Division, seeking review and reversal of that decision. In addition, Two Rivers filed a complaint in the U.S. District Court for the Western District of Missouri seeking a temporary restraining order and preliminary injunction against CMS rescinding the termination action. On April 22, 2011, the District Court issued a temporary restraining order abating the termination action pending a preliminary injunction hearing or an agreement with CMS. On May 17, 2011, Two Rivers and CMS entered into a settlement agreement which resulted in the rescission of the termination notice and actions by CMS. Pursuant to the terms of the agreement, Two Rivers was required to submit an acceptable plan of correction relative to the immediate jeopardy citation and engage independent experts in various disciplines to analyze and develop implementation plans for Two Rivers to meet the applicable Medicare conditions of participation. Both of these actions have
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occurred. CMS will conduct an initial survey of Two Rivers, expected to occur in early 2012, to determine if the Medicare conditions of participation have been met. During the term of this agreement, Two Rivers remains eligible to receive reimbursements for services rendered to Medicare and Medicaid beneficiaries. Two Rivers remains fully committed to providing high-quality healthcare to their patients and the community it serves. We therefore intend to work expeditiously and collaboratively with CMS in an effort to resolve these matters. We can provide no assurance that Two Rivers will not ultimately lose its Medicare certification. The operating results of Two Rivers did not have a material impact on our consolidated results of operations or financial condition for the years ended December 31, 2011 or 2010.
Matters Relating to PSI:
The following matters pertain to PSI or former PSI facilities (owned by subsidiaries of Psychiatric Solutions, Inc.) for which we have assumed the defense as a result of our acquisition of PSI which was completed in November, 2010:
Garden City Employees’ Retirement System v. PSI:
This is a purported shareholder class action lawsuit filed in the United States District Court for the Middle District of Tennessee against PSI and the former directors in 2009 alleging violations of federal securities laws. We intend to defend the case vigorously. Should we be deemed liable in this matter, we believe we would be entitled to commercial insurance recoveries for amounts paid by us, subject to certain limitations and deductibles. Included in our consolidated balance sheet as of December 31, 2011, is an estimated reserve (current liability) and corresponding commercial insurance recovery (current asset) which did not have a material impact on our financial statements. Although we believe the commercial insurance recoveries are adequate to satisfy potential liability in this matter, we can provide no assurance that the ultimate liability will not exceed the commercial insurance recoveries which would make us liable for the excess.
Department of Justice Investigation of Sierra Vista:
In 2009, Sierra Vista Hospital in Sacramento, California learned of an investigation by the U.S. Department of Justice (“DOJ”) relating to Medicare services provided by the facility. The DOJ ultimately notified the facility that with respect to partial hospitalization and outpatient services, the DOJ believed that the medical record documentation did not adequately support the claims submitted for reimbursement by Medicare. We reached a tentative financial settlement with the DOJ which is subject to the negotiation of a definitive settlement agreement. As part of that agreement, the facility will be subject to a corporate integrity agreement. The reserve established in connection with this matter did not have a material impact on our consolidated financial statements.
Department of Justice Investigation of Friends Hospital:
In October, 2010, Friends Hospital in Philadelphia, Pennsylvania, received a subpoena from the DOJ requesting certain documents from the facility. The requested documents have been collected and provided to the DOJ for review and examination. Another subpoena was issued to the facility in July 2011 requesting additional documents. Those documents are being collected and will be provided to the DOJ. At present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or potential financial exposure, if any, in connection with this matter.
Department of Justice Investigation of Riveredge Hospital:
In 2008, Riveredge Hospital in Chicago, Illinois received a subpoena from the DOJ requesting certain information from the facility. Additional requests for documents were also received from the DOJ in 2009 and 2010. The requested documents have been provided to the DOJ and we continue to cooperate with the DOJ with respect to this investigation. At present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or potential financial exposure, if any, in connection with this matter.
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Virginia Department of Medical Assistance Services Recoupment Claims:
The Virginia Department of Medical Assistance Services (“DMAS”) has conducted audits at seven former PSI Residential Treatment Centers operated in the Commonwealth of Virginia to confirm compliance with provider rules under the state’s Medicaid Provider Services Manual (“Manual”). As a result of those audits, DMAS claims the facilities failed to comply with the requirements of the Manual and has requested repayment of Medicaid payments to those facilities. PSI had previously filed appeals to repayment demands at each facility which are currently pending. The aggregate refund of Medicaid payments made to those facilities, as requested by DMAS, and the corresponding reserve established on our Consolidated Balance Sheet as of December 31, 2011 and December 31, 2010, was not material to our consolidated financial position or results of operations.
General:
The healthcare industry is subject to numerous laws and regulations which include, among other things, matters such as government healthcare participation requirements, various licensure, certifications, 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. Currently, and from time to time, some of our facilities are subjected to inquiries and/or actions and receive notices of potential non-compliance of laws and regulations from various federal and state agencies. Providers that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to potential licensure, certification, and/or accreditation revocation, subjected to fines or penalties or required to repay amounts received from the government for previously billed patient services. We monitor all aspects of our business and have developed a comprehensive ethics and compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving, governmental investigation or litigation may result in interpretations that are inconsistent with industry practices, including ours. Although we believe our policies, procedures and practices comply with governmental regulations, there is no assurance that we will not be faced with sanctions, fines or penalties in connection with such inquiries or actions, including with respect to the investigations and other matters discussed herein. Even if we were to ultimately prevail, such inquiries and/or actions could have a material adverse effect on us.
The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties, or; (vii) there is a wide range of potential outcomes. It is possible that the outcome of these matters could have a material adverse impact on our future results of operations, financial position, cash flows and, potentially, our reputation.
In addition, various suits and claims arising against us in the ordinary course of business are pending. In the opinion of management, the outcome of such claims and litigation will not materially affect our consolidated financial position or results of operations.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
| --- | --- |
Our Class B Common Stock is traded on the New York Stock Exchange. Shares of our Class A, Class C and Class D Common Stock are not traded in any public market, but are each convertible into shares of our Class B Common Stock on a share-for-share basis. In November, 2009, we declared a two-for-one stock split in the form of a 100% stock dividend which was paid on December 15, 2009 to shareholders of record as of December 1, 2009. All classes of common stock participated on a pro rata basis and, as required, all references to share quantities and share prices for all periods presented have been adjusted to reflect the two-for-one stock split.
The table below sets forth, for the quarters indicated, the high and low reported closing sales prices per share reported on the New York Stock Exchange for our Class B Common Stock for the years ended December 31, 2011 and 2010:
| 2011 | 2010 | |||||||
| High-Low Sales Price | High-Low Sales Price | |||||||
| Quarter: | ||||||||
| 1st | $ | 49.41-$42.06 | $ | 36.59-$25.75 | ||||
| 2nd | $ | 56.41-$46.13 | $ | 43.36-$34.86 | ||||
| 3rd | $ | 54.64-$34.00 | $ | 39.15-$31.06 | ||||
| 4th | $ | 42.90-$31.91 | $ | 43.74-$37.21 |
The number of stockholders of record as of January 31, 2012 were as follows:
| Class A Common | 20 | |||
| Class B Common | 315 | |||
| Class C Common | 3 | |||
| Class D Common | 130 |
Stock Repurchase Programs
In various prior years, our Board of Directors has approved stock repurchase programs authorizing us to purchase shares of our outstanding Class B Common Stock on the open market at prevailing market prices or in negotiated transactions off the market. There is no expiration date for our stock repurchase programs. The most recent approval occurred during 2007 at which time our Board of Directors authorized the purchase of up to 10 million shares, a portion of which (as reflected below) remains available for purchase as of December 31, 2011. The following schedule provides information related to our stock repurchase programs for each of the three years ended December 31, 2011:
| Additional Shares Authorized For Repurchase | Total number of shares purchased(a) | Average price paid per share for forfeited restricted shares | Total number of shares purchased as part of publicly announced programs | Average price paid per share for shares purchased as part of publicly announced program | Aggregate purchase price paid (in thousands) | Maximum number of shares that may yet be purchased under the program | ||||||||||||||||||||||
| Balance as of January 1, 2009 | 4,713,548 | |||||||||||||||||||||||||||
| 2009 | — | 2,574,209 | $ | 0.01 | 2,561,209 | $ | 24.71 | $ | 63,288 | 2,152,339 | ||||||||||||||||||
| 2010 | — | 301,933 | $ | 0.01 | 293,933 | $ | 39.22 | $ | 11,528 | 1,858,406 | ||||||||||||||||||
| 2011 | — | 1,602,286 | $ | 0.01 | 1,602,286 | $ | 37.75 | $ | 60,482 | 256,120 | ||||||||||||||||||
| Total for three year period ended December 31, 2011 | — | 4,478,428 | $ | 0.01 | 4,457,428 | $ | 30.35 | $ | 135,298 | |||||||||||||||||||
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| (a) | During 2010 and 2009, there were 8,000 and 13,000, respectively, of restricted shares that were forfeited by former employees pursuant to the terms of our restricted stock purchase plan which are included in the total number of shares purchased. No such forfeitures occurred during 2011. |
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During the period of October 1, 2011 through December 31, 2011, we repurchased the following shares:
| Additional Shares Authorized For Repurchase | Total number of shares purchased | Average price paid per share for forfeited restricted shares | Total Number of shares purchased as part of publicly announced programs | Average price paid per share for shares purchased as part of publicly announced program | Aggregate purchase price paid (in thousands) | Maximum number of shares that may yet be purchased under the program | ||||||||||||||||||||
| October, 2011 | — | 423,919 | N/A | 423,919 | $ | 34.16 | $ | 14,482 | 293,264 | |||||||||||||||||
| November, 2011 | — | 16,029 | N/A | 16,029 | $ | 38.99 | $ | 625 | 277,235 | |||||||||||||||||
| December, 2011 | — | 21,115 | N/A | 21,115 | $ | 39.88 | $ | 842 | 256,120 | |||||||||||||||||
| Total October through December | — | 461,063 | N/A | 461,063 | $ | 34.59 | $ | 15,949 | ||||||||||||||||||
Dividends
During the two years ending December 31, 2011, dividends per share were declared and paid as follows:
| 2011 | 2010 | |||||||
| First quarter | $ | .05 | $ | .05 | ||||
| Second quarter | $ | .05 | $ | .05 | ||||
| Third quarter | $ | .05 | $ | .05 | ||||
| Fourth quarter | $ | .05 | $ | .05 | ||||
| Total | $ | .20 | $ | .20 | ||||
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Stock Price Performance Graph
The following graph compares the cumulative total stockholder return on our common stock with the cumulative total return on the stock included in the Standard & Poor’s 500 Index and a Peer Group Index during the five year period ended December 31, 2011. The graph assumes an investment of $100 made in our common stock and each Index as of January 1, 2007 and has been weighted based on market capitalization. Note that our common stock price performance shown below should not be viewed as being indicative of future performance.
Companies in the peer group, which consist of companies in the S&P 500 Index or S&P MidCap 400 Index (in which we are also included), are as follows: Community Health Systems, Inc., Health Management Associates, LifePoint Hospitals, Inc., Tenet Healthcare Corporation and HCA Holdings, Inc. (included from March, 2011 at which time the company’s stock began publicly trading).
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
(The Company, S&P 500 and Peer Group)
| Company Name / Index | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||||
| Universal Health Services, Inc | $ | 100.00 | $ | 92.90 | $ | 68.59 | $ | 112.03 | $ | 160.38 | $ | 144.17 | ||||||||||||
| S&P 500 Index | $ | 100.00 | $ | 105.49 | $ | 66.46 | $ | 84.05 | $ | 96.71 | $ | 98.76 | ||||||||||||
| Peer Group | $ | 100.00 | $ | 75.30 | $ | 30.58 | $ | 80.66 | $ | 94.13 | $ | 67.09 |
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Item 6. Selected Financial Data
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The following table contains our selected financial data for, or as of the end of, each of the five years ended December 31, 2011. You should read this table in conjunction with the consolidated financial statements and related notes included elsewhere in this report and in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| Year Ended December 31 | ||||||||||||||||||||
| 2011 | 2010 (4) | 2009 | 2008 | 2007 | ||||||||||||||||
| Summary of Operations (in thousands) | ||||||||||||||||||||
| Net revenues | $ | 7,500,198 | $ | 5,568,185 | $ | 5,202,379 | $ | 5,022,417 | $ | 4,683,150 | ||||||||||
| Income from continuing operations before income taxes | $ | 696,336 | $ | 428,097 | $ | 474,722 | $ | 357,012 | $ | 318,628 | ||||||||||
| Net income attributable to UHS | $ | 398,167 | $ | 230,183 | $ | 260,373 | $ | 199,377 | $ | 170,387 | ||||||||||
| Net margin | 5.3 | % | 4.1 | % | 5.0 | % | 4.0 | % | 3.6 | % | ||||||||||
| Return on average equity | 18.1 | % | 12.1 | % | 15.4 | % | 13.0 | % | 11.3 | % | ||||||||||
| Financial Data (in thousands) | ||||||||||||||||||||
| Cash provided by operating activities | $ | 718,251 | $ | 501,344 | $ | 541,262 | $ | 494,187 | $ | 381,446 | ||||||||||
| Capital expenditures, net (1) | $ | 285,682 | $ | 239,274 | $ | 379,748 | $ | 354,537 | $ | 339,813 | ||||||||||
| Total assets | $ | 7,665,245 | $ | 7,527,936 | $ | 3,964,463 | $ | 3,742,462 | $ | 3,608,657 | ||||||||||
| Long-term borrowings | $ | 3,651,428 | $ | 3,912,102 | $ | 956,429 | $ | 990,661 | $ | 1,008,786 | ||||||||||
| UHS’s common stockholders’ equity | $ | 2,296,352 | $ | 1,978,772 | $ | 1,751,071 | $ | 1,543,850 | $ | 1,517,199 | ||||||||||
| Percentage of total debt to total capitalization | 61 | % | 66 | % | 35 | % | 39 | % | 40 | % | ||||||||||
| Operating Data—Acute Care Hospitals (2) | ||||||||||||||||||||
| Average licensed beds | 5,726 | 5,689 | 5,484 | 5,452 | 5,292 | |||||||||||||||
| Average available beds | 5,424 | 5,383 | 5,128 | 5,145 | 4,985 | |||||||||||||||
| Inpatient admissions | 258,754 | 264,470 | 265,244 | 263,536 | 256,681 | |||||||||||||||
| Average length of patient stay | 4.4 | 4.4 | 4.4 | 4.5 | 4.5 | |||||||||||||||
| Patient days | 1,151,183 | 1,155,984 | 1,166,704 | 1,182,894 | 1,149,399 | |||||||||||||||
| Occupancy rate for licensed beds | 55 | % | 56 | % | 58 | % | 59 | % | 60 | % | ||||||||||
| Occupancy rate for available beds | 58 | % | 59 | % | 62 | % | 63 | % | 63 | % | ||||||||||
| Operating Data—Behavioral Health Facilities | ||||||||||||||||||||
| Average licensed beds | 19,280 | 9,427 | 7,921 | 7,658 | 7,348 | |||||||||||||||
| Average available beds | 19,262 | 9,409 | 7,901 | 7,629 | 7,315 | |||||||||||||||
| Inpatient admissions | 352,208 | 166,434 | 136,639 | 129,553 | 119,730 | |||||||||||||||
| Average length of patient stay | 14.6 | 15.1 | 15.4 | 16.1 | 16.8 | |||||||||||||||
| Patient days | 5,157,454 | 2,507,046 | 2,105,625 | 2,085,114 | 2,007,119 | |||||||||||||||
| Occupancy rate for licensed beds | 73 | % | 73 | % | 73 | % | 74 | % | 75 | % | ||||||||||
| Occupancy rate for available beds | 73 | % | 73 | % | 73 | % | 75 | % | 75 | % | ||||||||||
| Per Share Data (3) | ||||||||||||||||||||
| Income from continuing operations attributable to UHS—basic | $ | 4.09 | $ | 2.37 | $ | 2.65 | $ | 1.90 | $ | 1.59 | ||||||||||
| Income from continuing operations attributable to UHS—diluted | $ | 4.04 | $ | 2.34 | $ | 2.64 | $ | 1.90 | $ | 1.59 | ||||||||||
| Net income attributable to UHS—basic | $ | 4.09 | $ | 2.37 | $ | 2.65 | $ | 1.96 | $ | 1.59 | ||||||||||
| Net income attributable to UHS—diluted | $ | 4.04 | $ | 2.34 | $ | 2.64 | $ | 1.96 | $ | 1.59 | ||||||||||
| Dividends declared | $ | 0.20 | $ | 0.20 | $ | 0.17 | $ | 0.16 | $ | 0.16 | ||||||||||
| Other Information (3) (in thousands) | ||||||||||||||||||||
| Weighted average number of shares outstanding—basic | 97,199 | 96,786 | 97,794 | 101,222 | 106,762 | |||||||||||||||
| Weighted average number of shares and share equivalents outstanding—diluted | 98,537 | 97,973 | 98,275 | 101,418 | 106,878 |
| (1) | Amounts exclude non-cash capital lease obligations, if any. |
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| (2) | Excludes statistical information related to divested facilities and facilities held for sale. |
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| (3) | All periods have been adjusted to reflect the two-for-one stock split in the form of a 100% stock dividend paid in December, 2009. |
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| (4) | Includes data for the facilities acquired from PSI on November 15, 2010 from the date of acquisition through December 31, 2010, excluding the data for the 3 former PSI facilities that were divested by us during the third and fourth quarters of 2011 and reflected as discontinued operations, as discussed herein. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Overview
Our principal business is owning and operating, through our subsidiaries, acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of February 24, 2012, we owned and/or operated 25 acute care hospitals and 198 behavioral health centers located in 36 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. As part of our ambulatory treatment centers division, we manage and/or own outright or in partnerships with physicians, 6 surgical hospitals and surgery and radiation oncology centers located in 4 states and Puerto Rico.
In November, 2010, we acquired Psychiatric Solutions, Inc. (“PSI”). PSI was formerly the largest operator of freestanding inpatient behavioral health care facilities operating a total of 105 inpatient and outpatient facilities in 32 states, Puerto Rico, and the U.S. Virgin Islands.
Net revenues from our acute care hospitals, surgical hospitals, surgery centers and radiation oncology centers accounted for 55% of our consolidated net revenues in 2011, 70% in 2010 and 74% in 2009. Net revenues from our behavioral health care facilities accounted for 45% of our consolidated net revenues during 2011, 30% during 2010 and 25% during 2009. Approximately 1% of our consolidated net revenues in 2009 were recorded in connection with two construction management contracts pursuant to the terms of which we built newly constructed acute care hospitals for an unrelated third party.
Services provided by our hospitals include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. We provide capital resources as well as a variety of management services to our facilities, including central purchasing, information services, finance and control systems, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.
Forward-Looking Statements and Risk Factors
This Annual Report contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among other things, the following:
| • | our ability to comply with the existing laws and government regulations, and/or changes in laws and government regulations; |
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| • | an increasing number of legislative initiatives have recently been passed into law that may result in major changes in the health care delivery system on a national or state level. No assurances can be given that the implementation of these new laws will not have a material adverse effect on our business, financial condition or results of operations; |
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| • | possible unfavorable changes in the levels and terms of reimbursement for our charges by third party payors or government programs, including Medicare or Medicaid; |
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| • | an increase in the number of uninsured and self-pay patients treated at our acute care facilities that unfavorably impacts our ability to satisfactorily and timely collect our self-pay patient accounts; |
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| • | our ability to enter into managed care provider agreements on acceptable terms and the ability of our competitors to do the same, including contracts with United/Sierra Healthcare in Las Vegas, Nevada; |
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| • | the outcome of known and unknown litigation, government investigations, false claim act allegations, and liabilities and other claims asserted against us, including matters as disclosed in Item 3. Legal Proceedings; |
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| • | the potential unfavorable impact on our business of deterioration in national, regional and local economic and business conditions, including a continuation or worsening of unfavorable credit market conditions; |
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| • | competition from other healthcare providers (including physician owned facilities) in certain markets, including McAllen/Edinburg, Texas, the site of one of our largest acute care facilities and Riverside County, California; |
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| • | technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for healthcare; |
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| • | our ability to attract and retain qualified personnel, nurses, physicians and other healthcare professionals and the impact on our labor expenses resulting from a shortage of nurses and other healthcare professionals; |
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| • | demographic changes; |
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| • | our acquisition of PSI which has substantially increased our level of indebtedness which could, among other things, adversely affect our ability to raise additional capital to fund operations, limit our ability to react to changes in the economy or our industry and could potentially prevent us from meeting our obligations under the agreements related to our indebtedness; |
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| • | our ability to successfully integrate and improve our recent acquisitions and the availability of suitable acquisitions and divestiture opportunities; |
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| | • | | we receive Medicaid revenues in excess of $100 million annually from each of Texas, Pennsylvania, Virginia, Illinois and Washington, D.C., making us particularly sensitive to reductions in Medicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective 2012 state fiscal years) as well as regulatory, economic, environmental and competitive changes in those states. In the states in which we operate, based upon the state budgets for the 2012 fiscal year (which generally began at various times during the second half of 2011), we estimate that, on a blended basis, our aggregate Medicaid rates have been reduced by approximately 3% to 4% (or approximately $45 million to $55 million annually) from the average rates in effect during the states’ 2011 fiscal years (which generally ended during the third quarter of 2011). Our consolidated results of operations for the year ended December 31, 2011 include the pro rata portion of
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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We manage our ratio of fixed and floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this risk in a cost-effective manner, we, from time to time, enter into interest rate swap agreements in which we agree to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts. We account for our derivative and hedging activities using the Financial Accounting Standard Board’s (“FASB”) guidance which requires all derivative instruments, including certain derivative instruments embedded in other contracts, to be carried at fair value on the balance sheet. For derivative transactions designated as hedges, we formally document all relationships between the hedging instrument and the related hedged item, as well as its risk-management objective and strategy for undertaking each hedge transaction.
Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges
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are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in accumulated other comprehensive income (“AOCI”) within shareholders’ equity. Amounts are reclassified from AOCI to the income statement in the period or periods the hedged transaction affects earnings. We use interest rate derivatives in our cash flow hedge transactions. Such derivatives are designed to be highly effective in offsetting changes in the cash flows related to the hedged liability. For derivative instruments designated as cash flow hedges, the ineffective portion of the change in expected cash flows of the hedged item are recognized currently in the income statement.
For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future.
The fair value of interest rate swap agreements approximates the amount at which they could be settled, based on estimates obtained from the counterparties. We assess the effectiveness of our hedge instruments on a quarterly basis. We performed periodic assessments of the cash flow hedge instruments during 2011 and 2010 and determined the hedges to be highly effective. We also determined that no portion of the hedges is ineffective and therefore there was no material effect on our consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose us to credit risk in the event of nonperformance. However, at December 31, 2011, each swap agreement entered into by us was in a net liability position which would require us to make the net settlement payments to the counterparties. We do not anticipate nonperformance by those counterparties. We do not hold or issue derivative financial instruments for trading purposes.
During the first quarter of 2011, we entered into an interest rate cap on a total notional amount of $275 million whereby we paid a premium of $30,000 in exchange for the counterparty agreeing to pay the difference between 2.25% and three-month LIBOR if the three-month LIBOR rate rises above 2.25% during the term of the cap, which expired in December, 2011. The three-month LIBOR never reached 2.25% during the term of the cap. Therefore, no payment was made to us. We also entered into a forward starting interest rate cap on a total notional amount of $450 million from December, 2011 to December, 2012 reducing to $400 million from December, 2012 to December, 2013 whereby we paid a premium of $740,000 in exchange for the counterparty agreeing to pay the difference between 7.00% and three-month LIBOR if the three-month LIBOR rate rises above 7.00% during the term of the cap. If the three-month LIBOR does not reach 7.00% during the term of the cap, no payment is made to us.
We also entered into six additional forward starting interest rate swaps in the first quarter of 2011 whereby we pay a fixed rate on a total notional amount of $425 million and receive three-month LIBOR. Three of these swaps with a total notional amount of $225 million became effective in March, 2011 and will mature in May, 2015. The average fixed rate payable on these swaps is 1.91%. The three remaining interest rate swaps with total notional amounts of $100 million, $25 million and $75 million became effective in December, 2011 and have fixed rates of 2.50%, 1.96% and 1.32%, and maturity dates in December, 2014, December, 2013 and December, 2012, respectively.
During the fourth quarter of 2010, we entered into three interest rate caps on a total notional amount of $1 billion whereby we paid a premium of $240,000 in exchange for the counterparties agreeing to pay the difference between 2.25% and three-month LIBOR if the three-month LIBOR rate rises above 2.25% during the term of the caps. All of these caps expired in December, 2011. The three-month LIBOR rate never rose above 2.25% during the term of the caps. Therefore, no payments were made to us. We also entered into four forward starting interest rate swaps in the fourth quarter of 2010 whereby we pay a fixed rate on a total notional amount of $600 million and receive three-month LIBOR. Each of the four swaps became effective in December, 2011 and will mature in May, 2015. The average fixed rate payable on these swaps is 2.38%.
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During the fourth quarter of 2007, we entered into two interest rate swaps whereby we pay a fixed rate on a total notional principal amount of $150 million and receive three-month LIBOR. Each of the two interest rate swaps had an initial notional principal amount of $75 million. The notional amount of the first interest rate swap reduced to $50 million in October, 2010.The fixed rate payable is 4.76% and it matures in October, 2012. The fixed rate payable on the second interest rate swap was 4.87% and it matured in October, 2011.
We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate swaps is based primarily on quotes from banks. We consider those inputs to be “level 3” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with derivative instruments and hedging activities. The fair value of our interest rate swaps was a liability of $48 million at December 31, 2011, of which $4 million is included in other current liabilities and $44 million is included in other noncurrent liabilities on the accompanying balance sheet. The fair value of our interest rate swaps was a liability of $10 million at December 31, 2010, of which $2 million is included in other current liabilities and $8 million is included in other noncurrent liabilities.
The table below presents information about our long-term financial instruments that are sensitive to changes in interest rates as of December 31, 2011. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by contractual maturity dates.
Maturity Date, Fiscal Year Ending December 31
(Dollars in thousands)
| 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | ||||||||||||||||||||||
| Long-term debt: | ||||||||||||||||||||||||||||
| Fixed rate: | ||||||||||||||||||||||||||||
| Debt | $ | 2,056 | $ | 2,110 | $ | 1,487 | $ | 17,538 | $ | 401,193 | $ | 274,042 | $ | 698,426 | ||||||||||||||
| Average interest rates | 7.0 | % | 7.0 | % | 7.0 | % | 7.0 | % | 7.1 | % | 6.9 | % | 7.0 | % | ||||||||||||||
| Variable rate: | ||||||||||||||||||||||||||||
| Debt | $ | 423 | $ | 240,528 | $ | 2,483 | $ | 1,272,547 | $ | 1,439,500 | $ | — | $ | 2,955,481 | ||||||||||||||
| Average interest rates | 2.9 | % | 2.9 | % | 3.1 | % | 3.1 | % | 3.8 | % | — | 3.4 | % | |||||||||||||||
| Interest rate swaps: | ||||||||||||||||||||||||||||
| Notional amount | $ | 150,000 | $ | 2 5,000 | $ | 100,000 | $ | 825,000 | $ | 1,100,000 | ||||||||||||||||||
| Average interest rates | 3.0 | % | 2.0 | % | 2.5 | % | 2.3 | % | 2.4 | % | ||||||||||||||||||
| Interest rate caps: | ||||||||||||||||||||||||||||
| Notional amount | $ | 450,000 | $ | 450,000 | ||||||||||||||||||||||||
| Average interest rates | 7.00 | % | 7.00 | % |
As calculated based upon our variable rate debt outstanding as of December 31, 2011 that is subject to interest rate fluctuations, each 1% change in interest rates would impact our pre-tax income by approximately $30 million.
Item 8. Financial Statements and Supplementary Data
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Our Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows, together with the reports of PricewaterhouseCoopers LLP, independent registered public accounting firm, 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
Item 9A. Controls and Procedures.
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As of December 31, 2011, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on this evaluation, the CEO and CFO have concluded that our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management on a timely basis in order to comply with our disclosure obligations under the Securities Exchange Act of 1934, as amended, and the SEC rules thereunder.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting or in other factors during the fourth quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria on Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2011, based on criteria in Internal Control—Integrated Framework, issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm as stated in its report which appears herein.
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
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There is hereby incorporated by reference the information to appear under the captions “Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in our Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2011. See also “Executive Officers of the Registrant” appearing in Item 1 hereof.
Item 11. Executive Compensation
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There is hereby incorporated by reference the information to appear under the caption “Executive Compensation” in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2011.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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There is hereby incorporated by reference the information to appear under the caption “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2011.
Item 13. Certain Relationships and Related Transactions, and Director Independence
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There is hereby incorporated by reference the information to appear under the captions “Certain Relationships and Related Transactions” and “Corporate Governance” in our Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2011.
Item 14. Principal Accountant Fees and Services.
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There is hereby incorporated by reference the information to appear under the caption “Relationship with Independent Auditors” in our Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2011.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
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(a) Documents filed as part of this report:
(1) Financial Statements:
See “Index to Financial Statements and Financial Statement Schedule.”
(2) Financial Statement Schedules:
See “Index to Financial Statements and Financial Statement Schedule.”
(3) Exhibits:
2.1 Agreement and Plan of Merger dated as of May 16, 2010, among Universal Health Services, Inc., Psychiatric Solutions, Inc. and Olympus Acquisition Corp., previously filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated May 18, 2010, is incorporated herein by reference.
3.1 Registrant’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.
3.3 Amendment to the Registrant’s Restated Certificate of Incorporation previously filed as Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated July 3, 2001 is incorporated herein by reference.
4.1 Form of Indenture dated January 20, 2000, between Universal Health Services, Inc. and J.P. Morgan Trust Company, National Association (as successor to Bank One Trust Company, N.A.), Trustee previously filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-3/A (File No. 333-85781), dated February 1, 2000, is incorporated herein by reference.
4.2 Supplemental Indenture between Universal Health Services, Inc. and J.P. Morgan Trust Company, National Association, dated as of June 20, 2006, previously filed as Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (File No. 333-135277) dated June 23, 2006, is incorporated herein by reference.
4.3 Form of Debt Security, previously filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-3 (File No. 333-135277) dated June 23, 2006, is incorporated herein by reference.
4.4 Form of 7.125% Notes due 2016, previously filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 30, 2006, is incorporated herein by reference.
4.5 Officer’s Certificate relating to the 7.125% Notes due 2016, previously filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 30, 2006, is incorporated herein by reference.
4.6 Form of Note, previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 30, 2008, is incorporated herein by reference.
4.7 Officers’ Certificate, previously filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated May 30, 2008, is incorporated herein by reference.
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4.8 Indenture, dated as of September 29, 2010, between UHS Escrow Corporation and Union Bank, N.A., as Trustee, previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated October 5, 2010, is incorporated herein by reference.
4.9 Form of 7% Senior Note due 2018, contained in Indenture filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated October 5, 2010, is incorporated herein by reference.
4.10 Supplemental Indenture, dated as of November 15, 2010, to the Indenture, dated September 29, 2010, between UHS Escrow Corporation and Union Bank, N.A., as Trustee, relating to the $250,000,000 aggregate principal amount of the Escrow Issuer’s 7% Senior Notes due 2018, previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 17, 2010, is incorporated herein by reference.
4.11 Second Supplemental Indenture, dated as of November 15, 2010, to the Indenture, dated January 20, 2000, between Universal Health Services, Inc. and the Bank of New York Mellon Trust company, N.A., as Trustee, previously filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated November 17, 2010, is incorporated herein by reference.
10.1* Employment Agreement, dated as of December 27, 2007, by and between Universal Health Services, Inc. and Alan B. Miller, previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated December 27, 2007, is incorporated herein by reference.
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, dated December 9, 2011, 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 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.
10.6* Universal Health Services, Inc. Executive Retirement Income Plan dated January 1, 1993, previously filed as Exhibit 10.7 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference.
10.7* 2002 Executive Incentive Plan, previously filed as Exhibit 10.17 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference.
10.8 Asset Purchase Agreement dated as of February 6, 1996, among Amarillo Hospital District, UHS of Amarillo, Inc. and Universal Health Services, Inc., previously filed as Exhibit 10.28 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference.
10.9 Agreement of Limited Partnership of District Hospital Partners, L.P. (a District of Columbia limited partnership) by and among UHS of D.C., Inc. and The George Washington University, previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarters ended March 30, 1997, and June 30, 1997, is incorporated herein by reference.
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10.10 Contribution Agreement between The George Washington University (a congressionally chartered institution in the District of Columbia) and District Hospital Partners, L.P. (a District of Columbia limited partnership), previously filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by reference.
10.11 Valley/Desert Contribution Agreement dated January 30, 1998, by and among Valley Hospital Medical Center, Inc. and NC-DSH, Inc. previously filed as Exhibit 10.30 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference.
10.12 Summerlin Contribution Agreement dated January 30, 1998, by and among Summerlin Hospital Medical Center, L.P. and NC-DSH, Inc., previously filed as Exhibit 10.31 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference.
10.13* Amended and Restated Universal Health Services, Inc. Supplemental Deferred Compensation Plan dated as of January 1, 2002, previously filed as Exhibit 10.29 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference.
10.14* Second Amended and Restated 2001 Employees’ Restricted Stock Purchase Plan, previously filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated May 22, 2008, is incorpo
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