How much did the government settlements affect HCA's 2002 results?

HCA recorded a $603 million pretax ($418 million after-tax, or $0.82 per share) charge in Q4 2002 for the DOJ Understanding covering physician-relations, cost-report and wound-care claims. It also accrued $35 million for relators' legal fees and $17.5 million for state Medicaid claims. In 2001 it booked a $262 million pretax charge for the CMS cost-report understanding. Both charges are excluded from management's underlying pretax income growth figure of 18.3%.

Is HCA's revenue growth coming from volume or pricing?

Mostly pricing. Revenue per equivalent admission rose 8.6% on a reported basis (8.8% same-facility), while equivalent admissions grew only 1.2% (2.6% same-facility). Management attributes the price gains to renegotiated managed care contracts, shifts from Medicare managed care to traditional Medicare, and shifts within managed care from HMO to PPO products. The filing notes no assurance these increases will continue.

What is the outlook for HCA's cash flow and capital spending?

Operating cash flow was $2.750 billion in 2002. Planned capital expenditures are about $2.0 billion in both 2003 and 2004, and $2.7 billion more is needed to complete projects under construction over the next five years. The $933 million government settlement accrual will be paid in cash. Management expects available sources of capital, including the $1.75 billion revolver (with $1.4 billion available at year-end and $1.5 billion at February 28, 2003), to be adequate.

What regulatory changes could hurt HCA's revenue?

A March 2003 CMS proposed rule would change how Medicare outlier payments are calculated, using tentative rather than final cost reports and hospital-specific cost-to-charge ratios, with possible retroactive recoupment. HCA recorded $284 million of outlier revenue in 2002 (1.4% of total revenue), and monthly outlier revenue could fall by up to $12 million if the rule is finalized as proposed. Separately, planned charity-care changes would reduce net revenue but also reduce bad debt expense, and remain subject to CMS approval.

What are the biggest unresolved risks for shareholders?

The main risks are: (1) the CMS and DOJ understandings are not yet final and need court approval; (2) several qui tam actions in which the government did not intervene are not covered by the DOJ deal; (3) an SEC formal investigation covering anti-fraud, insider trading and reporting controls remains open; (4) shareholder class and derivative suits, including the Morse and McCall matters, continue; (5) the IRS is contesting about $319 million in additional taxes and interest; and (6) the insurance subsidiary may need additional capital if its investment portfolio declines further.

HCA 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 28, 2003. Cited figures are marked; the original filing is the authoritative source.

HCA Inc. (HCA) closed fiscal 2002 with revenues of $19.729 billion^a, up 9.9% from $17.953 billion in 2001, driven mainly by rate gains: revenue per equivalent admission rose 8.6% while equivalent admissions grew only 1.2%.

Reported net income fell 6.0% to $833 million^b ($1.59 diluted EPS) from $886 million ($1.65 diluted EPS in 2001), and the year was dominated by a $603 million pretax ($418 million after-tax) charge to settle the Department of Justice physician-relations, cost-report and wound-care matters, plus a $168 million other-than-temporary impairment on insurance-subsidiary equity holdings. Excluding the government settlement charges taken in 2002 and 2001, management reports pretax income rose 18.3% to $2.058 billion. The balance sheet strengthened: stockholders' equity rose to $5.702 billion from $4.762 billion, long-term debt including current maturities fell to $6.943 billion from $7.360 billion, and operating cash flow more than doubled to $2.750 billion, aided by the absence of the $840 million 2001 government payment.

Management is planning about $2.0 billion^c of capital expenditures in each of 2003 and 2004, and has agreed to acquire the 14-hospital Health Midwest system for $1.125 billion. The key investor risks are the unresolved government matters and pending reimbursement changes. The DOJ and CMS understandings still require court and regulatory approval, several qui tam cases remain outside the DOJ deal, and an SEC formal investigation continues.

A proposed CMS outlier-payment rule could cut monthly outlier revenue by up to $12 million^d. HCA also announced charity-care changes expected to reduce 2002 net revenue by roughly $325 million to $375 million, offset by a similar drop in bad debt expense, and the provision for doubtful accounts rose to 8.0% of revenue.

02—Key points

Key Highlights

Revenue grew 9.9% to $19.729 billion, but growth came mostly from price: revenue per equivalent admission rose 8.6% versus 1.2% growth in equivalent admissions.
Net income fell 6.0% to $833 million; diluted EPS was $1.59, down from $1.65, after a $603 million pretax government settlement charge and a $168 million investment impairment.
Excluding 2002 and 2001 government settlement charges, pretax income rose 18.3% to $2.058 billion, per management.
Operating cash flow nearly doubled to $2.750 billion (from $1.413 billion), helped by the absence of the $840 million 2001 government payment.
Long-term debt fell to $6.943 billion from $7.360 billion, and stockholders' equity rose 19.7% to $5.702 billion.
Pending legal exposure remains large: the DOJ and CMS understandings require court and regulatory approval, several qui tam cases are outside the DOJ deal, and an SEC formal investigation is ongoing.
Reimbursement risk is rising: a proposed CMS outlier rule could reduce monthly outlier revenue by up to $12 million, and charity-care policy changes will reduce reported revenue by an estimated $325 million to $375 million (2002 pro forma).

03—Questions

Frequently Asked Questions

How much did the government settlements affect HCA's 2002 results?
HCA recorded a $603 million pretax ($418 million after-tax, or $0.82 per share) charge in Q4 2002 for the DOJ Understanding covering physician-relations, cost-report and wound-care claims. It also accrued $35 million for relators' legal fees and $17.5 million for state Medicaid claims. In 2001 it booked a $262 million pretax charge for the CMS cost-report understanding. Both charges are excluded from management's underlying pretax income growth figure of 18.3%.
Is HCA's revenue growth coming from volume or pricing?
Mostly pricing. Revenue per equivalent admission rose 8.6% on a reported basis (8.8% same-facility), while equivalent admissions grew only 1.2% (2.6% same-facility). Management attributes the price gains to renegotiated managed care contracts, shifts from Medicare managed care to traditional Medicare, and shifts within managed care from HMO to PPO products. The filing notes no assurance these increases will continue.
What is the outlook for HCA's cash flow and capital spending?
Operating cash flow was $2.750 billion in 2002. Planned capital expenditures are about $2.0 billion in both 2003 and 2004, and $2.7 billion more is needed to complete projects under construction over the next five years. The $933 million government settlement accrual will be paid in cash. Management expects available sources of capital, including the $1.75 billion revolver (with $1.4 billion available at year-end and $1.5 billion at February 28, 2003), to be adequate.
What regulatory changes could hurt HCA's revenue?
A March 2003 CMS proposed rule would change how Medicare outlier payments are calculated, using tentative rather than final cost reports and hospital-specific cost-to-charge ratios, with possible retroactive recoupment. HCA recorded $284 million of outlier revenue in 2002 (1.4% of total revenue), and monthly outlier revenue could fall by up to $12 million if the rule is finalized as proposed. Separately, planned charity-care changes would reduce net revenue but also reduce bad debt expense, and remain subject to CMS approval.
What are the biggest unresolved risks for shareholders?
The main risks are: (1) the CMS and DOJ understandings are not yet final and need court approval; (2) several qui tam actions in which the government did not intervene are not covered by the DOJ deal; (3) an SEC formal investigation covering anti-fraud, insider trading and reporting controls remains open; (4) shareholder class and derivative suits, including the Morse and McCall matters, continue; (5) the IRS is contesting about $319 million in additional taxes and interest; and (6) the insurance subsidiary may need additional capital if its investment portfolio declines further.

04—Continue

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