Why did HCA's earnings more than double in 2003?

Net income rose to $1.332 billion from $833 million, largely because 2002 included a $603 million pretax charge for the government settlement and a $168 million investment impairment. Revenue growth of 10.5%, driven by rate increases and the Kansas City acquisition, also contributed. Excluding these one-time items, the improvement was more modest.

How serious is the rise in uninsured and self-pay bad debt?

The provision for doubtful accounts reached 10.1% of revenues in 2003, up from 8.0%, and the fourth-quarter rate was 11.4%. Management expects it not to decline from 2003 levels in 2004. Because patient-responsibility amounts are growing and collections are weakening, this is a key margin risk. Charity care policy changes will reduce both revenue and the provision in future periods, but the net impact on margins remains uncertain.

Is HCA's balance sheet and cash flow under pressure?

Debt rose to $8.7 billion and the debt-to-capital ratio increased to 55.8% from 52.4%. Operating cash flow declined to $2.166 billion because of settlement payments, though it remains a substantial source of funds. Capital expenditures of about $1.8 billion are planned for 2004, and management believes liquidity from operations, its $1.75 billion credit facility, and debt markets is sufficient.

What regulatory and legal risks remain after the 2003 settlements?

The company is still subject to a December 1997 SEC formal investigation and a Corporate Integrity Agreement through 2008. It is contesting IRS claims of about $381 million and the IRS has opened an examination of 2001–2002 returns. Medicare rules are also changing, including outlier payment reductions of up to $12 million per month and proposed psychiatric and rehabilitation payment changes. Future violations could bring substantial penalties.

HCA 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.

HCA Inc. closed 2003 with a strong earnings rebound but continued pressure on volumes and collections.

Revenues rose 10.5% to $21.8 billion^a, driven by a 7.6% same-facility revenue increase (rate-driven, with flat same-facility equivalent admissions) and the April 2003 acquisition of eleven Kansas City hospitals (Health Midwest), which contributed $698 million. Reported net income more than doubled to $1.332 billion, or $2.61 per diluted share, versus $833 million ($1.59) in 2002. However, 2002 results were depressed by a $603 million pretax government settlement charge, so the year-over-year comparison flatters the underlying trend.

Operating cash flow fell to $2.166 billion^b from $2.750 billion, largely because of roughly $942 million in government settlement payments made during 2003. The main concern for investors is the deterioration in patient collections. The provision for doubtful accounts rose to 10.1% of revenues from 8.0% in 2002, an incremental cost of about $462 million, as uninsured and patient-due accounts grew.

Management expects this to remain a significant challenge in 2004 and does not anticipate the provision declining as a share of revenue. Same-facility admissions grew only 0.6% and same-facility outpatient surgeries fell 3.0%, reflecting softer economic conditions and competition from physician-owned specialty hospitals. Charity discounts also rose $242 million^c, and Medicare outlier revenue is expected to fall by up to $12 million per month after the CMS rule changes.

The company remains heavily leveraged, with long-term debt rising to $8.7 billion^d, and it is increasing its dividend from $0.02 to $0.13 per quarter. It has also completed the resolution of its major government investigations, which reduces a significant overhang. Capital spending is planned at about $1.8 billion in 2004, and the company faces ongoing IRS disputes totaling about $381 million plus an open examination of 2001–2002 returns.

02—Key points

Key Highlights

Revenue grew 10.5% to $21.808 billion, with same-facility revenue up 7.6%, mostly from rate increases since same-facility equivalent admissions were flat.
Diluted EPS rose to $2.61 from $1.59, but the comparison benefits from a $603 million pretax government settlement charge recorded in 2002.
Provision for doubtful accounts increased to 10.1% of revenue from 8.0%, an incremental cost of about $462 million, and management expects this pressure to continue in 2004.
Operating cash flow declined to $2.166 billion from $2.750 billion, reflecting roughly $942 million of government settlement payments during 2003.
Same-facility admissions rose only 0.6% and same-facility outpatient surgeries fell 3.0%, signaling weakening volumes.
Long-term debt increased to $8.707 billion, and the quarterly dividend is being raised from $0.02 to $0.13 per share.
The major federal and state government investigations were concluded during 2003, though an SEC formal investigation, IRS disputes of about $381 million, and a CIA running through 2008 remain open.

03—Questions

Frequently Asked Questions

Why did HCA's earnings more than double in 2003?
Net income rose to $1.332 billion from $833 million, largely because 2002 included a $603 million pretax charge for the government settlement and a $168 million investment impairment. Revenue growth of 10.5%, driven by rate increases and the Kansas City acquisition, also contributed. Excluding these one-time items, the improvement was more modest.
How serious is the rise in uninsured and self-pay bad debt?
The provision for doubtful accounts reached 10.1% of revenues in 2003, up from 8.0%, and the fourth-quarter rate was 11.4%. Management expects it not to decline from 2003 levels in 2004. Because patient-responsibility amounts are growing and collections are weakening, this is a key margin risk. Charity care policy changes will reduce both revenue and the provision in future periods, but the net impact on margins remains uncertain.
Is HCA's balance sheet and cash flow under pressure?
Debt rose to $8.7 billion and the debt-to-capital ratio increased to 55.8% from 52.4%. Operating cash flow declined to $2.166 billion because of settlement payments, though it remains a substantial source of funds. Capital expenditures of about $1.8 billion are planned for 2004, and management believes liquidity from operations, its $1.75 billion credit facility, and debt markets is sufficient.
What regulatory and legal risks remain after the 2003 settlements?
The company is still subject to a December 1997 SEC formal investigation and a Corporate Integrity Agreement through 2008. It is contesting IRS claims of about $381 million and the IRS has opened an examination of 2001–2002 returns. Medicare rules are also changing, including outlier payment reductions of up to $12 million per month and proposed psychiatric and rehabilitation payment changes. Future violations could bring substantial penalties.

04—Continue

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