filings.toolsUniversal Health Services 10-K 2013-12-31
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10-K 1 d649956d10k.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, 2013
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, 2013 was $6.0 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 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, 2014, were 6,595,708; 91,321,038; 664,000 and 29,983, respectively.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for our 2013 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2013 (incorporated by reference under Part III).
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UNIVERSAL HEALTH SERVICES, INC.
2013 FORM 10-K ANNUAL REPORT
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Exhibit Index
This Annual Report on Form 10-K is for the year ended December 31, 2013. 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 27, 2014, we owned and/or operated 24 acute care hospitals and 193 behavioral health centers located in 37 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, 5 surgical hospitals and surgery and radiation oncology centers located in 4 states.
Net revenues from our acute care hospitals, surgical hospitals, surgery centers and radiation oncology centers accounted for 49% of our consolidated net revenues in 2013, 50% in 2012 and 51% in 2011. Net revenues from our behavioral health care facilities accounted for 50% of our consolidated net revenues during each of 2013 and 2012 and 49% during 2011.
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 2013. 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.
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. From time to time applications are filed with state health planning agencies to add new services in existing hospitals 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.
2013 Acquisition and Divestiture Activity:
Acquisitions of Assets and Businesses:
During 2013, we spent $13 million for the purchase of real property located in Pennsylvania, Nevada and Arizona.
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Divestitures:
During 2013, we received $37 million in connection with the divestiture of Peak Behavioral Health Services and certain other assets and real property including three previously closed behavioral health care facilities. We agreed to sell Peak Behavioral Health Services as part of our agreement with the Federal Trade Commission in connection with our acquisition of Ascend Health Corporation in October of 2012. The aggregate pre-tax gain on these divestitures did not have a material impact on our consolidated results of operations during 2013.
Hospital Utilization
We believe that the most important factors relating to the overall utilization of a hospital include the quality and market position of the hosp
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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 16% during each of 2013 and 2012 and 17% in 2011 of our consolidated net revenues. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 6% in 2013, 8% in 2012, and 11% in 2011 of our income from operations after net income attributable to noncontrolling interest.
Texas: We own 7 acute care hospitals and 22 behavioral healthcare facilities as listed in Item 2. Properties. On a combined basis, these facilities contributed 18% of our consolidated net revenues during each of 2013, 2012 and 2011. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 15% in 2013, 12% in 2012, and 14% in 2011 of our income from operations after net income attributable to noncontrolling interest.
California: We own 5 acute care hospitals and 6 behavioral healthcare facilities as listed in Item 2. Properties. On a combined basis, these facilities contributed 9% in 2013 and 10% of our consolidated net revenues during each of 2012 and 2011. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 4% in 2013, 6% in 2012, and 5% in 2011 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.
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 $90 million annually from each of Texas, Pennsylvania, Washington, D.C., Illinois, Virginia and Massachusetts, making us particularly sensitive to reductions in
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Medicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective 2013 state fiscal years) as well as regulatory, economic, environmental and competitive changes in those states. Based upon the state budgets for the 2013 fiscal year (which generally began at various times during the second half of 2012), we estimate that, on a blended basis, our aggregate Medicaid rates were reduced by approximately 1% (or approximately $15 million annually) from the average rates in effect during the states’ 2012 fiscal years (which generally ended during the third quarter of 2012). Based upon the state budgets for the 2014 fiscal year (which will generally began at various times during the second half of 2013), we estimate that, on a blended basis, our aggregate Medicaid rates will remain relatively unchanged from the 2013 fiscal year rates.
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 high 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 of uninsured and underinsured patients treated at our facilities. We can provide no assurance that these trends will not continue. During 2013, our revenues and payor mix within our acute care operations have been volatile making it difficult to predict the results for 2014 or thereafter.
In addition, we recorded approximately $2.37 billion of aggregate goodwill as a result of our acquisition of PSI in November, 2010 and Ascend in October, 2012, and, as of December 31, 2013, we had approximately $3.05 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 January 3, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “2012 Act”). The 2012 Act postponed for two months sequestration cuts mandated under the Budget Control Act of
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- The postponed sequestration cuts include a 2% annual reduction over ten years in Medicare spending to providers. Medicaid is exempt from sequestration. The 2012 Act provides a one-year fix to statutory reductions in physician reimbursement and extends other Medicare provisions. In order to offset the cost of these extensions, the 2012 Act reduces payments to other providers totaling almost $26 billion over ten years. Approximately half of those funds will come from reductions in Medicare reimbursement to hospitals. Although the Bipartisan Budget Act of 2013 has reduced certain sequestration-related budgetary cuts, spending reductions related to the Medicare program remain in place. On December 26, 2013, President Obama signed into law H.J. Res. 59, the Bipartisan Budget Act of 2013, which includes the Pathway for SGR Reform Act of 2013 (“the Act”). In addition, on February 15, 2014, Public Law 113-082 was enacted. The Act and subsequent federal legislation achieves new savings by extending sequestration for mandatory programs – including Medicare – for another three years, through 2024. Please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Sources of Revenue-Medicare, for additional disclosure.
The 2012 Act includes a document and coding (“DCI”) adjustment and a reduction in Medicaid disproportionate share hospital (“DSH”) payments. Expected to save $10.5 billion over 10 years, the DCI adjustment decreases projected Medicare hospital payments for inpatient and overnight care through a downward adjustment in annual base payment increases. These reductions are meant to recoup what Medicare authorities consider to be “overpayments” to hospitals that occurred as a result of the transition to Medicare Severity Diagnosis Related Groups. The reduction in Medicaid DSH payments is expected to save $4.2 billion over 10 years. This provision extends the changes regarding DSH payments established by the Legislation and determines future allotments off of the rebased level.
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. It has been projected that the Legislation will result in a net reduction in Medicare and Medicaid payments to hospitals totaling $155 billion over 10 years. 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 and subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions began in October, 2013 with no material adverse impact to the reimbursements we receive expected until 2015 while Medicaid DSH reimbursements would not be adversely impacted until 2016. 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 will include those with excessive readmission or hospital-acquired condition rates.
A 2012 U.S. Supreme Court ruling limited the federal government’s ability to expand health insurance coverage by holding unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the Medicaid expansion program by reducing their existing Medicaid funding. Therefore, states can choose to accept or not to participate without risking the loss of
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federal Medicaid funding. As a result, many states, including Texas, have not expanded their Medicaid programs without the threat of loss of federal funding.
The various provisions in the Legislation that directly or indirectly affect Medicare and Medicaid reimbursement are scheduled to take effect over a number of years. The impact of the Legislation on healthcare providers will be subject to implementing regulations, interpretive guidance and possible future legislation. Certain Legislation provisions, such as those creating the Medicare Shared Savings Program and the Independent Payment Advisory Board, create uncertainty 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 and we can provide no assurance that the Legislation will not have a material adverse effect on our future results of operations.
The Legislation also contained 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 in violation of 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, although final regulations implementing this statutory requirement remain pending. 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 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. We cannot predict the impact the Legislation may have on our business, results of operations, cash flow, capital resources and liquidity, 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 sought stakeholder comments concerning the potential applicability of EMTALA to hospital inpatients and the responsibilities of hospitals with specialized capabilities, respectively, but has yet to issue further guidance in response to that request. If the number of indigent and charity care
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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.
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, 2013 (a significant portion of which is past due) from certain state-based funding programs, most particularly Illinois and Texas as discussed herein. 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.
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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 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.
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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 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.
Increased labor union activity is another factor that could adversely affect our labor costs. Union organizing activities and certain potential changes in federal labor laws and regulations could increase the likelihood of employee unionization in the future, to the extent a greater portion of our employee base unionized, it is possible our labor costs could increase materially.
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, (“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
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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. Additionally, recent changes to HIPAA regulations may result in greater compliance requirements, including obligations to report breaches of unsecured patient data, as well as create new liabilities for the actions of parties acting as business associates 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 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 are subject to occupational health, safety and other similar regulations and failure to comply with such regulations could harm our business and results of operations.
We are subject to a wide variety of federal, state and local occupational health and safety laws and regulations. Regulatory requirements affecting us include, but are not limited to, those covering: (i) air and water quality control; (ii) occupational health and safety (e.g., standards regarding blood-borne pathogens and ergonomics, etc.); (iii) waste management; (iv) the handling of asbestos, polychlorinated biphenyls and radioactive substances; and (v) other hazardous materials. If we fail to comply with those standards, we may be subject to sanctions and penalties that could harm our business and 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. In an effort to resolve one or more of these matters, we may choose to negotiate a settlement. Amounts we pay to settle any of these matters may be material. 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
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alleging that the defendant has defrauded the federal government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of whistleblower lawsuits that have been filed against providers has increased significantly in recent years. Because qui tam lawsuits are filed under seal, we could be named in one or more such lawsuits of which we are not aware. Please see Item 3. Legal Proceedings for disclosure of current related matters.
The failure of certain employers, or the closure of certain facilities, could have a disproportionate impact on our hospitals.
The economies in the non-urban communities in which our hospitals operate are often dependent on a small number of large employers. Those employers often provide income and health insurance for a disproportionately large number of community residents who may depend on our hospitals and other health care facilities for their care. The failure of one or more large employer or the closure or substantial reduction in the number of individuals employed at facilities located in or near the communities where our hospitals operate, could cause affected employees to move elsewhere to seek employment or lose insurance coverage that was otherwise available to them. The occurrence of these events could adversely affect our revenue and results of operations, thereby harming our business.
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 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.
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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 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 subsidiaries, PSI, and its subsidiaries, are subject to pending legal actions, governmental investigations and regulatory actions.
Our subsidiaries, 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
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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.
Our revenues and volume trends may be adversely affected by certain factors over which we have no control.
Our revenues and volume trends are dependent on many factors, including physicians’ clinical decisions and availability, payor programs shifting to a more outpatient-based environment, whether or not certain services are offered, seasonal and severe weather conditions, including the effects of extreme low temperatures, hurricanes and tornados, earthquakes, current local economic and demographic changes. In addition, technological developments and pharmaceutical improvements may reduce the demand for healthcare services or the profitability of the services we offer.
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.
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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.
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. 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.
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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, 2013, 25.7 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 current holders of Class B Common Stock would own a smaller percentage of that class.
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 21, 2013, the shares of Class A and Class C Common Stock constituted 6.9% of the aggregate outstanding shares of our Common Stock, had the right to elect five members of the Board of Directors and constituted 86.2% of our general voting power. As of March 21, 2013, the shares of Class B and Class D Common Stock (excluding shares issuable upon exercise of options) constituted 93.1% of the outstanding shares of our Common Stock, had the right to elect two members of the Board of Directors and constituted 13.8% 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
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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.
Item 1B. Unresolved Staff Comments
| --- | --- |
None.
Item 2. Properties
| --- | --- |
Executive and Administrative Offices
We own office buildings in King of Prussia and Wayne, Pennsylvania, Brentwood, Tennessee and Denton, Texas.
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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 | 62 | Owned | |||||||
| Centennial Hills Hospital Medical Center (1) | Las Vegas, Nevada | 177 | Owned | |||||||
| Corona Regional Medical Center | Corona, California | 238 | Owned | |||||||
| Desert Springs Hospital (1) | Las Vegas, Nevada | 293 | Owned | |||||||
| Doctors’ Hospital of Laredo (9) | Laredo, Texas | 183 | 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 | 108 | Owned | |||||||
| Northwest Texas Healthcare System | Amarillo, Texas | 385 | Owned | |||||||
| The Pavilion at Northwest Texas Healthcare System | Amarillo, Texas | 90 | Owned | |||||||
| Palmdale Regional Medical Center | Palmdale, California | 157 | Owned | |||||||
| South Texas Health System (4) | ||||||||||
| Edinburg Regional Medical Center/Children’s Hospital | Edinburg, Texas | 213 | 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 | 132 | Leased | |||||||
| Rancho Springs Campus | Murrieta, California | 120 | Owned | |||||||
| Spring Valley Hospital Medical Center (1) | Las Vegas, Nevada | 237 | Owned | |||||||
| St. Mary’s Regional Medical Center | Enid, Oklahoma | 245 | Owned | |||||||
| Summerlin Hospital Medical Center (1) | Las Vegas, Nevada | 454 | Owned | |||||||
| Temecula Valley Hospital | Temecula, California | 140 | Owned | |||||||
| Texoma Medical Center | Denison, Texas | 228 | Owned | |||||||
| TMC Behavioral Health Center | Denison, Texas | 60 | Owned | |||||||
| Valley Hospital Medical Center (1) | Las Vegas, Nevada | 320 | Owned | |||||||
| Wellington Regional Medical Center (3) | West Palm Beach, Florida | 233 | Leased |
Behavioral Health Care Facilities
| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| Alabama Clinical Schools | Birmingham, Alabama | 80 | Owned | |||||||
| Alhambra Hospital | Rosemead, California | 103 | Owned | |||||||
| Alliance Health Center | Meridian, Mississippi | 214 | Owned | |||||||
| Anchor Hospital | Atlanta, Georgia | 127 | Owned |
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| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| Arbour Counseling Services | Rockland, Massachusetts | — | Owned | |||||||
| The Arbour Hospital | Boston, Massachusetts | 136 | 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 | Maumee, Ohio | 52 | Owned | |||||||
| Atlantic Shores Hospital | Fort Lauderdale, Florida | 72 | Owned | |||||||
| Austin Lakes Hospital | Austin, Texas | 54 | Leased | |||||||
| Austin Oaks Hospitals | Austin, Texas | 80 | Owned | |||||||
| Behavioral Educational Services | Riverdale, Florida | — | Leased | |||||||
| Behavioral Hospital of Bellaire | Houston, Texas | 120 | Leased | |||||||
| Belmont Pines Hospital | Youngstown, Ohio | 102 | Owned | |||||||
| Benchmark Behavioral Health System | Woods Cross, Utah | 84 | Owned | |||||||
| Bloomington Meadows Hospital | Bloomington, Indiana | 78 | Owned | |||||||
| Boulder Creek Academy | Bonners Ferry, Idaho | 100 | Owned | |||||||
| Brentwood Behavioral Health of Mississippi | Flowood, Mississippi | 105 | Owned | |||||||
| Brentwood Hospital | Shreveport, Louisiana | 200 | Owned | |||||||
| The Bridgeway (3) | North Little Rock, Arkansas | 103 | Leased | |||||||
| Brook Hospital—Dupont | Louisville, Kentucky | 88 | Owned | |||||||
| Brook Hospital—KMI | Louisville, Kentucky | 110 | Owned | |||||||
| Brooke Glen Behavioral Hospital | Fort Washington, Pennsylvania | 146 | Owned | |||||||
| Brynn Marr Hospital | Jacksonville, North Carolina | 100 | Owned | |||||||
| Calvary Addiction Recovery Center | Phoenix, Arizona | 50 | Owned | |||||||
| Canyon Ridge Hospital | Chino, California | 106 | Owned | |||||||
| The Carolina Center for Behavioral Health | Greer, South Carolina | 125 | Owned | |||||||
| Cedar Grove Residential Treatment Center | Murfreesboro, Tennessee | 36 | Owned | |||||||
| Cedar Hills Hospital (10) | Beaverton, Oregon | 78 | Owned | |||||||
| Cedar Ridge | Oklahoma City, Oklahoma | 60 | Owned | |||||||
| Cedar Ridge Residential Treatment Center | Oklahoma City, Oklahoma | 56 | Owned | |||||||
| Cedar Springs Behavioral Health | Colorado Springs, Colorado | 110 | Owned | |||||||
| Centennial Peaks | Louisville, Colorado | 72 | Owned | |||||||
| Center for Change | Orem, Utah | 58 | Owned | |||||||
| Central Florida Behavioral Hospital | Orlando, Florida | 126 | Owned | |||||||
| Chicago Children’s Center for Behavioral Health | Chicago, Illinois | 40 | Leased | |||||||
| Clarion Psychiatric Center | Clarion, Pennsylvania | 74 | Owned | |||||||
| Coastal Behavioral Health | Savannah, Georgia | 50 | Owned | |||||||
| Coastal Harbor Treatment Center | Savannah, Georgia | 145 | Owned | |||||||
| Columbus Behavioral Center for Children and Adolescents | Columbus, Indiana | 56 | Owned | |||||||
| Community Cornerstones | Rio Piedras, Puerto Rico | — | Leased | |||||||
| Compass Intervention Center | Memphis, Tennessee | 108 | Owned | |||||||
| Copper Hills Youth Center | West Jordan, Utah | 197 | Owned | |||||||
| Cottonwood Treatment Center | S. Salt Lake City, Utah | 86 | Leased | |||||||
| Crescent Pines | Stockbridge, Georgia | 50 | Owned | |||||||
| Cumberland Hall | Hopkinsville, Kentucky | 97 | Owned | |||||||
| Cumberland Hospital | New Kent, Virginia | 130 | Owned | |||||||
| Cypress Creek Hospital | Houston, Texas | 96 | Owned | |||||||
| Del Amo Hospital | Torrance, California | 166 | Owned | |||||||
| Diamond Grove Center | Louisville, Mississippi | 55 | Owned |
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| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| Dover Behavioral Health | Dover, Delaware | 73 | Owned | |||||||
| Emerald Coast Behavioral Hospital | Panama City, Florida | 90 | Owned | |||||||
| Fairmount Behavioral Health System | Philadelphia, Pennsylvania | 239 | Owned | |||||||
| Fairfax Hospital | Kirkland, Washington | 157 | Owned | |||||||
| First Home Care (VA) | Portsmouth, Virginia | — | Leased | |||||||
| First Hospital Panamericano—Cidra | Cidra, Puerto Rico | 165 | Owned | |||||||
| First Hospital Panamericano—San Juan | San Juan, Puerto Rico | 45 | Owned | |||||||
| First Hospital Panamericano—Ponce | Ponce, Puerto Rico | 30 | Owned | |||||||
| Forest View Hospital | Grand Rapids, Michigan | 82 | Owned | |||||||
| Fort Lauderdale Hospital | Fort Lauderdale, Florida | 100 | Leased | |||||||
| Foundations Behavioral Health | Doylestown, Pennsylvania | 118 | Leased | |||||||
| Foundations for Living | Mansfield, Ohio | 84 | Owned | |||||||
| Fox Run Hospital | St. Clairsville, Ohio | 100 | Owned | |||||||
| Fremont Hospital | Fremont, California | 96 | Owned | |||||||
| Friends Hospital | Philadelphia, Pennsylvania | 219 | Owned | |||||||
| Garfield Park Hospital | Chicago, Illinois | 88 | Owned | |||||||
| Glen Oaks Hospital | Greenville, Texas | 54 | Owned | |||||||
| Good Samaritan Counseling Center | Anchorage, Alaska | — | Owned | |||||||
| Gulf Coast Youth Services | Fort Walton Beach, Florida | 24 | Owned | |||||||
| Hampton Behavioral Health Center | Westhampton, New Jersey | 110 | Owned | |||||||
| Harbour Point (Pines) | Portsmouth, Virginia | 186 | Owned | |||||||
| Hartgrove Hospital | Chicago, Illinois | 150 | Owned | |||||||
| Havenwyck Hospital | Auburn Hills, Michigan | 251 | Owned | |||||||
| Heartland Behavioral Health Services | Nevada, Missouri | 155 | Owned | |||||||
| Hermitage Hall | Nashville, Tennessee | 112 | Owned | |||||||
| Heritage Oaks Hospital | Sacramento, California | 125 | Owned | |||||||
| Hickory Trail Hospital | DeSoto, Texas | 86 | Owned | |||||||
| Highlands Behavioral Health System | Highlands Ranch, Colorado | 86 | Owned | |||||||
| High Point Treatment Center | Cooper City, Florida | 60 | Owned | |||||||
| Hill Crest Behavioral Health Services | Birmingham, Alabama | 205 | Owned | |||||||
| Holly Hill Hospital | Raleigh, North Carolina | 168 | Owned | |||||||
| The Horsham Clinic | Ambler, Pennsylvania | 206 | Owned | |||||||
| Hughes Center | Danville, Virginia | 56 | Owned | |||||||
| Intermountain Hospital | Boise, Idaho | 155 | Owned | |||||||
| Kempsville Center of Behavioral Health | Norfolk, Virginia | 82 | Owned | |||||||
| KeyStone Center | Wallingford, Pennsylvania | 145 | Owned | |||||||
| Kingwood Pines Hospital | Kingwood, Texas | 116 | Owned | |||||||
| La Amistad Behavioral Health Services | Maitland, Florida | 80 | Owned | |||||||
| Lake Bridge Behavioral Health | Macon, Georgia | 155 | Owned | |||||||
| Lakeside Behavioral Health System | Memphis, Tennessee | 311 | Owned | |||||||
| Laurel Heights Hospital | Atlanta, Georgia | 122 | Owned | |||||||
| Laurel Oaks Behavioral Health Center | Dothan, Alabama | 118 | Owned | |||||||
| Laurel Ridge Treatment Center | San Antonio, Texas | 250 | Owned | |||||||
| Liberty Point Behavioral Health | Stauton, Virginia | 50 | Owned | |||||||
| Lighthouse Care Center of Augusta | Augusta, Georgia | 106 | Owned | |||||||
| Lighthouse Care Center of Conway | Conway, South Carolina | 140 | Owned | |||||||
| Lincoln Prairie Behavioral Health Center | Springfield, Illinois | 88 | Owned | |||||||
| Lincoln Trail Behavioral Health System | Radcliff, Kentucky | 140 | Owned | |||||||
| Mayhill Hospital | Denton, Texas | 59 | Leased |
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| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| McDowell Center for Children | Dyersburg, Tennessee | 32 | Owned | |||||||
| The Meadows Psychiatric Center | Centre Hall, Pennsylvania | 107 | Owned | |||||||
| Meridell Achievement Center | Austin, Texas | 134 | Owned | |||||||
| Mesilla Valley Hospital | Las Cruces, New Mexico | 120 | Owned | |||||||
| Michiana Behavioral Health Center | Plymouth, Indiana | 80 | Owned | |||||||
| Midwest Center for Youth and Families | Kouts, Indiana | 74 | Owned | |||||||
| Millwood Hospital | Arlington, Texas | 122 | Leased | |||||||
| Mountain Youth Academy | Mountain City, Tennessee | 68 | Owned | |||||||
| Natchez Trace Youth Academy | Waverly, Tennessee | 90 | Owned | |||||||
| NDA Behavioral Health System | Mount Dora, Florida | 132 | Owned | |||||||
| Newport News Behavioral Health Center | Newport News, Virginia | 108 | Owned | |||||||
| North Spring Behavioral Healthcare | 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 | Crestview, Florida | 144 | Leased | |||||||
| Old Vineyard Behavioral Health | Winston-Salem, North Carolina | 104 | Owned | |||||||
| Palmetto Lowcountry Behavioral Health | North Charleston, South Carolina | 112 | Owned | |||||||
| Palmetto Pee Dee Behavioral Health | Florence, South Carolina | 59 | Leased | |||||||
| Palmetto Summerville | Summerville, South Carolina | 60 | Leased | |||||||
| Palm Shores Behavioral Health Center | Bradenton, Florida | 64 | Owned | |||||||
| Parkwood Behavioral Health System | Olive Branch, Mississippi | 128 | Owned | |||||||
| The Pavilion | Champaign, Illinois | 103 | Owned | |||||||
| Peachford Behavioral Health System of Atlanta | Atlanta, Georgia | 246 | Owned | |||||||
| Pembroke Hospital | Pembroke, Massachusetts | 115 | Owned | |||||||
| Pinnacle Pointe Hospital | Little Rock, Arkansas | 124 | Owned | |||||||
| Poplar Springs Hospital | Petersburg, Virginia | 208 | Owned | |||||||
| Prairie St John’s | Fargo, North Dakota | 139 | Owned | |||||||
| Pride Institute | Eden Prairie, Minnesota | 42 | Owned | |||||||
| Provo Canyon School | Provo, Utah | 274 | Owned | |||||||
| Provo Canyon Behavioral Hospital | Orem, Utah | 80 | Owned | |||||||
| The Recovery Center | Wichita Falls, Texas | 34 | 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 | Forest Park, Illinois | 210 | Owned | |||||||
| River Oaks Hospital | New Orleans, Louisiana | 126 | Owned | |||||||
| River Park Hospital | Huntington, West Virginia | 187 | Owned | |||||||
| River Point Behavioral Health | Jacksonville, Florida | 99 | Owned | |||||||
| Rockford Center | Newark, Delaware | 118 | Owned | |||||||
| Rock River Residential Center | Rockford, Illinois | 59 | Owned | |||||||
| Rolling Hills Hospital | Franklin, Tennessee | 80 | Owned | |||||||
| Roxbury | Shippensburg, Pennsylvania | 112 | Owned | |||||||
| Salt Lake Behavioral Health | Salt Lake City, Utah | 118 | Leased | |||||||
| San Marcos Treatment Center | San Marcos, Texas | 265 | Owned |
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| Name of Facility | Location | Number of Beds | Real Property Ownership Interest | |||||||
| SandyPines Hospital | Tequesta, Florida | 130 | Owned | |||||||
| Schick Shadel Hospital | Burin, Washington | 60 | Owned | |||||||
| Shadow Mountain Behavioral Health System | Tulsa, Oklahoma | 215 | Owned | |||||||
| Sierra Vista Hospital | Sacramento, California | 120 | Owned | |||||||
| St. Louis Behavioral Medicine Institute | St. Louis, Missouri | — | Owned | |||||||
| St. Simons by the Sea | 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 | Streamwood, Illinois | 162 | Owned | |||||||
| Summit Oaks Hospital | Summit, New Jersey | 126 | Owned | |||||||
| SummitRidge | Lawrenceville, Georgia | 86 | Owned | |||||||
| Talbott Recovery Campus | Atlanta, Georgia | — | Owned | |||||||
| Texas NeuroRehab Center | Austin, Texas | 151 | Owned | |||||||
| Three Rivers Behavioral Health | West Columbia, South Carolina | 118 | Owned | |||||||
| Three Rivers Residential Treatment-Midlands Campus | 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 | Orlando, Florida | 112 | Owned | |||||||
| University Behavioral Health of Denton | Denton, Texas | 104 | Owned | |||||||
| University Behavioral Health of El Paso | El Paso, Texas | 163 | Owned | |||||||
| Upper East TN Juvenile Detention Facility | Johnson City, Tennessee | 10 | Owned | |||||||
| Valle Vista Hospital | Greenwood, Indiana | 102 | Owned | |||||||
| Valley Hospital | Phoenix, Arizona | 122 | Owned | |||||||
| Vines Hospital | Ocala, Florida | 98 | Owned | |||||||
| Virgin Islands Behavioral Services | St. Croix, Virgin Islands | 30 | Owned | |||||||
| Virginia Beach Psychiatric Center | Virginia Beach, Virginia | 100 | Owned | |||||||
| Wekiva Springs | Jacksonville, Florida | 68 | Owned | |||||||
| Wellstone Regional Hospital | Jeffersonville, Indiana | 100 | Owned | |||||||
| West Hills Hospital | Reno, Nevada | 95 | Owned | |||||||
| West Oaks Hospital | Houston, Texas | 160 | Owned | |||||||
| Westwood Lodge Hospital | Westwood, Massachusetts | 133 | Owned | |||||||
| Willow Springs Center | Reno, Nevada | 116 | Owned | |||||||
| Windmoor Healthcare | Clearwater, Florida | 120 | Owned | |||||||
| Windsor—Laurelwood Center | Willoughby, Ohio | 160 | Leased | |||||||
| Wyoming Behavioral Institute | Casper, Wyoming | 130 | Owned |
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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 | ||||
| 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/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) | Land of this facility is leased. |
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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 $60 million in 2013, $53 million in 2012 and $55 million in 2011.
Item 3. Legal Proceedings
| --- | --- |
We are subject to claims and suits in the ordinary course of business, including those arising from care and treatment afforded by our hospitals and are party to litigation, as outlined below.
Office of Inspector General (“OIG”) and Other Government Investigations
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 2010 at several of our acute care facilities. The DOJ alleges that ICDs were implanted and billed by our facilities in contravention of a National Coverage 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.
In July, 2012, one of our subsidiaries, Peachford Behavioral Health System of Atlanta located in Atlanta, Georgia, received a subpoena from the OIG for the Department of Health and Human Services requesting various
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documents. We have provided all requested documents. During the fourth quarter of 2013, we were notified that the governmental agencies investigating this matter had declined to proceed.
In February, 2013, the OIG served a subpoena requesting various documents from January, 2008 to the date of the subpoena directed at Universal Health Services, Inc. (“UHS”) concerning it and UHS of Delaware, Inc., and several UHS owned facilities including: Keys of Carolina, Old Vineyard Behavioral Health, The Meadows Psychiatric Center, Streamwood Behavioral Health, Hartgrove Hospital, Rock River Academy and Residential Treatment Center, Roxbury Treatment Center, Harbor Point Behavioral Health Center, f/k/a, The Pines Residential Treatment Center, including the Crawford, Brighton and Kempsville campuses, Wekiva Springs Center and River Point Behavioral Health. Prior to receiving this subpoena: (i) the Keys of Carolina and Old Vineyard received notification during the second half of 2012 from the United States Department of Justice of its intent to proceed with an investigation following requests for documents for the period of January, 2007 to October, 2012 from the North Carolina state Attorney General’s Office; (ii) Harbor Point Behavioral Health Center received a subpoena in December, 2012 from the Attorney General of the Commonwealth of Virginia requesting various documents from July, 2006 to the date of the subpoena, and; (iii) The Meadows Psychiatric Center received a subpoena from the OIG in February, 2013 requesting certain documents from 2008 to the date of the subpoena. Unrelated to these matters, the Keys of Carolina was closed and the real property was sold in January, 2013. In April, 2013, the OIG served facility specific subpoenas on Wekiva Springs Center and River Point Behavioral Health requesting various documents from January, 2005 to the date of the subpoena. In June, 2013, the OIG served a subpoena on Coastal Harbor Health System in Savannah, Georgia requesting documents from January, 2009 to the date of the subpoena. In July, 2013, another subpoena was issued to Wekiva Springs Center and River Point Behavioral Health requesting additional records. We have been advised by the DOJ’s Criminal Frauds Section that they have received a referral from the DOJ Civil Division and have opened an investigation of River Point Behavioral Health and Wekiva Springs Center. In February, 2014, we were notified that the investigation conducted by the Criminal Frauds Section has been expanded to include the National Deaf Academy. At present, we are uncertain as to the focus, scope or extent of the investigations, liability of the facilities and/or potential financial exposure, if any, in connection with these matters.
Matters Relating to PSI:
The following matters pertain to PSI or former PSI facilities (owned by subsidiaries of Psychiatric Solutions, Inc.) which were in existence prior to the acquisition of PSI and for which we have assumed the defense as a result of our acquisition 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 sheets as of December 31, 2013 and 2012, 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 and related legal fees in connection with 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 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, which have been collected and delivered 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.
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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. 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.
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. We had previously agreed to a settlement of this matter which was approved by Virginia state officials during the first quarter of 2014. The aggregate refund of Medicaid payments made to those facilities, as requested by DMAS, and the settlement amount is 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.
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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.
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, 2013 and 2012:
| 2013 | 2012 | |||||||
| High-Low Sales Price | High-Low Sales Price | |||||||
| Quarter: | ||||||||
| 1st | $ | 64.38-$49.69 | $ | 44.78-$36.82 | ||||
| 2nd | $ | 71.20-$60.12 | $ | 43.72-$37.30 | ||||
| 3rd | $ | 74.99-$63.83 | $ | 45.75-$38.25 | ||||
| 4th | $ | 83.12-$75.67 | $ | 49.46-$41.31 |
The number of stockholders of record as of January 31, 2014 were as follows:
| Class A Common | 16 | |||
| Class B Common | 286 | |||
| Class C Common | 3 | |||
| Class D Common | 119 |
Stock Repurchase Programs
During the period of October 1, 2013 through December 31, 2013, we repurchased the following shares:
| 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 | ||||||||||||||||||||
| October, 2013 | — | 8,011 | N/A | 0 | N/A | N/A | 767,702 | |||||||||||||||||||
| November, 2013 | — | 27,434 | N/A | 0 | N/A | N/A | 767,702 | |||||||||||||||||||
| December, 2013 | — | 27,012 | N/A | 0 | N/A | N/A | 767,702 | |||||||||||||||||||
| Total October through December | — | 62,457 | N/A | 0 | N/A | N/A | ||||||||||||||||||||
| (a) | Substantially all the shares repurchased during the fourth quarter of 2013 related to income tax withholding obligations resulting from the exercise of stock options. No shares were repurchased pursuant to our publicly announced stock repurchase program. |
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Dividends
During the two years ending December 31, 2013, dividends per share were declared and paid as follows (the fourth quarter of 2012 dividend paid includes a special dividend of $0.40 per share):
| 2013 | 2012 | |||||||
| First quarter | $ | .05 | $ | .05 | ||||
| Second quarter | $ | .05 | $ | .05 | ||||
| Third quarter | $ | .05 | $ | .05 | ||||
| Fourth quarter | $ | .05 | $ | .45 | ||||
| Total | $ | .20 | $ | .60 | ||||
Equity Compensation
Refer to Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this report for information regarding securities authorized for issuance under our equity compensation plans.
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, 2013. The graph assumes an investment of $100 made in our common stock and each Index as of January 1, 2009 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, Inc., LifePoint Hospitals, Inc., Tenet Healthcare Corporation and HCA Holdings, Inc. (included from March, 2011 at which time the company’s stock began publicly trading).
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COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
(The Company, S&P 500 and Peer Group)
| Company Name / Index | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||||
| Universal Health Services | $ | 100.00 | $ | 163.32 | $ | 233.81 | $ | 210.19 | $ | 264.94 | $ | 446.59 | ||||||||||||
| S&P 500 Index | $ | 100.00 | $ | 126.46 | $ | 145.51 | $ | 148.59 | $ | 172.37 | $ | 228.19 | ||||||||||||
| Peer Group | $ | 100.00 | $ | 263.75 | $ | 307.80 | $ | 219.38 | $ | 345.96 | $ | 509.53 |
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Item 6. Selected Financial Data
| --- | --- |
The following table contains our selected financial data for, or as of the end of, each of the five years ended December 31, 2013. 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 | ||||||||||||||||||||
| 2013 | 2012 (4) | 2011 | 2010 (5) | 2009 | ||||||||||||||||
| Summary of Operations (in thousands) | ||||||||||||||||||||
| Net revenues | $ | 7,283,822 | $ | 6,961,400 | $ | 6,760,222 | $ | 4,900,147 | $ | 4,585,329 | ||||||||||
| Income from continuing operations before income taxes | $ | 869,332 | $ | 763,663 | $ | 696,336 | $ | 428,097 | $ | 474,722 | ||||||||||
| Net income attributable to UHS | $ | 510,733 | $ | 443,446 | $ | 398,167 | $ | 230,183 | $ | 260,373 | ||||||||||
| Net margin | 7.0 | % | 6.4 | % | 5.9 | % | 4.7 | % | 5.7 | % | ||||||||||
| Return on average equity | 16.8 | % | 17.2 | % | 18.1 | % | 12.1 | % | 15.4 | % | ||||||||||
| Financial Data (in thousands) | ||||||||||||||||||||
| Cash provided by operating activities | $ | 884,241 | $ | 799,231 | $ | 710,683 | $ | 501,344 | $ | 541,262 | ||||||||||
| Capital expenditures, net (1) | $ | 358,493 | $ | 363,192 | $ | 285,682 | $ | 239,274 | $ | 379,748 | ||||||||||
| Total assets | $ | 8,311,723 | $ | 8,200,843 | $ | 7,665,245 | $ | 7,527,936 | $ | 3,964,463 | ||||||||||
| Long-term borrowings | $ | 3,209,762 | $ | 3,727,431 | $ | 3,651,428 | $ | 3,912,102 | $ | 956,429 | ||||||||||
| UHS’s common stockholders’ equity | $ | 3,249,979 | $ | 2,713,345 | $ | 2,296,352 | $ | 1,978,772 | $ | 1,751,071 | ||||||||||
| Percentage of total debt to total capitalization | 50 | % | 58 | % | 61 | % | 66 | % | 35 | % | ||||||||||
| Operating Data—Acute Care Hospitals (2) | ||||||||||||||||||||
| Average licensed beds | 5,652 | 5,563 | 5,567 | 5,530 | 5,334 | |||||||||||||||
| Average available beds | 5,429 | 5,338 | 5,265 | 5,224 | 5,001 | |||||||||||||||
| Inpatient admissions | 246,160 | 245,234 | 250,278 | 255,522 | 256,821 | |||||||||||||||
| Average length of patient stay | 4.5 | 4.5 | 4.5 | 4.4 | 4.4 | |||||||||||||||
| Patient days | 1,112,541 | 1,095,790 | 1,114,807 | 1,116,643 | 1,130,531 | |||||||||||||||
| Occupancy rate for licensed beds | 54 | % | 54 | % | 55 | % | 55 | % | 58 | % | ||||||||||
| Occupancy rate for available beds | 56 | % | 56 | % | 58 | % | 59 | % | 62 | % | ||||||||||
| Operating Data—Behavioral Health Facilities (2) | ||||||||||||||||||||
| Average licensed beds | 19,940 | 19,258 | 19,178 | 9,415 | 7,921 | |||||||||||||||
| Average available beds | 19,841 | 19,178 | 19,160 | 9,397 | 7,901 | |||||||||||||||
| Inpatient admissions | 401,565 | 373,437 | 351,086 | 166,310 | 136,639 | |||||||||||||||
| Average length of patient stay | 13.3 | 14.0 | 14.6 | 15.1 | 15.4 | |||||||||||||||
| Patient days | 5,354,334 | 5,212,800 | 5,130,245 | 2,503,770 | 2,105,625 | |||||||||||||||
| Occupancy rate for licensed beds | 74 | % | 74 | % | 73 | % | 73 | % | 73 | % | ||||||||||
| Occupancy rate for available beds | 74 | % | 74 | % | 73 | % | 73 | % | 73 | % | ||||||||||
| Per Share Data (3) | ||||||||||||||||||||
| Income from continuing operations attributable to UHS—basic | $ | 5.21 | $ | 4.57 | $ | 4.09 | $ | 2.37 | $ | 2.65 | ||||||||||
| Income from continuing operations attributable to UHS—diluted | $ | 5.14 | $ | 4.53 | $ | 4.04 | $ | 2.34 | $ | 2.64 | ||||||||||
| Net income attributable to UHS—basic | $ | 5.21 | $ | 4.57 | $ | 4.09 | $ | 2.37 | $ | 2.65 | ||||||||||
| Net income attributable to UHS—diluted | $ | 5.14 | $ | 4.53 | $ | 4.04 | $ | 2.34 | $ | 2.64 | ||||||||||
| Dividends declared | $ | 0.20 | $ | 0.60 | $ | 0.20 | $ | 0.20 | $ | 0.17 | ||||||||||
| Other Information (3) (in thousands) | ||||||||||||||||||||
| Weighted average number of shares outstanding—basic | 98,033 | 96,821 | 97,199 | 96,786 | 97,794 | |||||||||||||||
| Weighted average number of shares and share equivalents outstanding—diluted | 99,361 | 97,711 | 98,537 | 97,973 | 98,275 |
| (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 Ascend on October 10, 2012 from the date of acquisition through December 31, 2012. |
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| (5) | 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 27, 2014, we owned and/or operated 24 acute care hospitals and 193 behavioral health centers located in 37 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, 5 surgical hospitals and surgery and radiation oncology centers located in 4 states. In October, 2012, we acquired Ascend Health Corporation (“Ascend”). Ascend was the largest private behavioral health provider with 9 owned or leased freestanding inpatient facilities located in 5 states.
During the first quarter of 2012, we adopted the Financial Accounting Standards Board’s Accounting Standards Update (“ASU”) No. 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which required certain health care entities to change the presentation in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). As a result, the provision for doubtful accounts for our acute care and behavioral health care facilities is reflected as a deduction from net revenues in the accompanying consolidated statements of income for 2013, 2012 and 2011. The adoption of this standard had no impact on our financial position or overall results of operations.
Net revenues from our acute care hospitals, surgical hospitals, surgery centers and radiation oncology centers accounted for 49% of our consolidated net revenues in 2013, 50% in 2012 and 51% in 2011. Net revenues from our behavioral health care facilities accounted for 50% of our consolidated net revenues during 2013, 50% during 2012 and 49% during 2011.
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. In evaluating those statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those set forth herein in Item 1A Risk Factors.
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
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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 ability to successfully integrate and improve our recent acquisitions and the availability of suitable acquisitions and divestiture opportunities; |
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| | • | | as discussed below in Sources of Revenue, we receive revenues from various state and county based programs, including Medicaid in all the states in which we operate, (we receive Medicaid revenues in excess of $90 million annually from each of Texas, Pennsylvania, Washington, D.C., Illinois, Virginia and Massachusetts); CMS-approved Medicaid supplemental programs in certain states including Oklahoma, California and Arkansas, and; state Medicaid disproportionate share hospital payments in certain states including Texas and South Carolina. We are therefore particularly sensitive to potential red
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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 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 2013 and 2012 and determined the hedges to be highly effective. We also determined that any portion of the hedges deemed to be ineffective was de minimis 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, 2013, 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 our counterparties. We do not hold or issue derivative financial instruments for trading purposes.
During 2011, we 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. The three-month LIBOR never reached 7.00% during the term of the cap, which expired in December, 2013, and therefore no payment was made to us.
We also entered into six forward starting interest rate swaps in 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 $75 million, $25 million and $100 million became effective in December, 2011 and have corresponding fixed rates of 1.32%, 1.96% and 2.50%. The $75 million and $25 million interest rate swaps matured in December, 2012 and December, 2013, respectively, and the $100 million interest rate swap is scheduled to mature in December, 2014.
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During 2010, we entered into four forward starting interest rate swaps 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%.
During the fourth quarter of 2007, we entered into two interest rate swaps whereby we paid a fixed rate on a total notional principal amount of $150 million and received three-month LIBOR. Each of the two interest rate swaps, which are now expired, had an initial notional principal amount of $75 million. The fixed rate payable on one of the interest rate swaps was 4.87% and it matured in October, 2011. The fixed rate payable on the other interest rate swap, on which the notional principal amount reduced to $50 million in October, 2010, was 4.76% and it matured in October, 2012.
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 2” 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 $24 million at December 31, 2013, of which $19 million is included in other current liabilities and $5 million is included in other noncurrent liabilities on the accompanying balance sheet. At December 31, 2012, the fair value of our interest rate swaps was a liability of $41 million, substantially all of which is included in other noncurrent liabilities on the accompanying balance sheet.
The table below presents information about our long-term financial instruments that are sensitive to changes in interest rates as of December 31, 2013. 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)
| 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | Total | ||||||||||||||||||||||
| Long-term debt: | ||||||||||||||||||||||||||||
| Fixed rate: | ||||||||||||||||||||||||||||
| Debt | $ | 1,909 | $ | 18,003 | $ | 401,720 | $ | 1,798 | $ | 251,893 | $ | 12,241 | $ | 687,564 | ||||||||||||||
| Average interest rates | 7.0 | % | 7.0 | % | 7.0 | % | 6.9 | % | 6.9 | % | 6.1 | % | 6.8 | % | ||||||||||||||
| Variable rate: | ||||||||||||||||||||||||||||
| Debt | $ | 97,403 | $ | 121,258 | $ | 2,402,849 | $ | 2,621,510 | ||||||||||||||||||||
| Average interest rates | 1.8 | % | 1.8 | % | 1.8 | % | 1.8 | % | ||||||||||||||||||||
| Interest rate swaps: | ||||||||||||||||||||||||||||
| Notional amount | $ | 100,000 | $ | 825,000 | $ | 925,000 | ||||||||||||||||||||||
| Average interest rates | 2.5 | % | 2.3 | % | 2.3 | % |
As calculated based upon our variable rate debt outstanding as of December 31, 2013 that is subject to interest rate fluctuations, each 1% change in interest rates would impact our pre-tax income by approximately $17 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.”
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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None.
Item 9A. Controls and Procedures.
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As of December 31, 2013, 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 2013 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 (1992), 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, 2013, based on criteria in Internal Control—Integrated Framework (1992), issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 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, 2013. 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, 2013.
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” and “Executive Compensation” in our Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2013.
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, 2013.
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, 2013.
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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.
2.2 Agreement and Plan of Merger dated as of June 3, 2012, by and among Universal Health Services, Inc., Lola Transaction Corporation, Ascend Health Corporation and Stockholders’ Representatives, previously filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated June 6, 2012, 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.
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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.
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 July 24, 2013, 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 July 26, 2013, 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 6, 2013, 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 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.
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10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12* 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.
10.13* Second Amended and Restated 2001 Employees’ Restr
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