UNIVERSAL HEALTH SERVICES, INC. History

Company History:

Universal Health Services is a mid-sized, publicly traded hospital management firm. The company operates 28 health-care centers in the United States, including 15 acute-care hospitals and 13 psychiatric facilities. Universal expanded rapidly through the acquisition of hospital properties after it was first founded, and then, burdened by debt, began a period of retrenchment.

Universal Health Services was founded in September 1978 by Alan B. Miller, a businessman with experience in the health-care industry. Although Miller had started his career as an executive at advertising agency Young & Rubicam after a stint in the army, he left that field in 1969 when a former classmate at the Wharton School of Business invited him to join American Medicorp, a hospital management company. Within four years, Miller had become chief executive officer of the company, at the age of 35. Under his leadership, American Medicorp became the second largest hospital management firm in the business, with 56 hospitals, 15,000 employees, and yearly revenues of $550 million. Unwittingly, however, Miller had transformed his employer into a tempting target, and he lost his job when it was purchased in a hostile takeover by Humana, Inc., the largest American hospital chain, in 1978.

Enraged, Miller filed suit against Humana in the wake of the deal, and then picked himself up and started over. The newly unemployed chief executive and six of his former colleagues at Medicorp set out to found yet another hospital chain. The seven executives chipped in three quarters of a million dollars of their own funds, and borrowed $3.2 million from a consortium of venture capital banks to start Universal Health Services, Inc. They based their new venture in King of Prussia, Pennsylvania, a suburb of Philadelphia.

In 1979 the fledgling company made its first acquisition when it purchased Doctors' Hospital, in +Miller bought the hospital because he thought it showed great potential for improvement, and indeed, after just one full year of Universal management, Doctors' Hospital had increased its profits by a multiple of ten, to almost $1.2 million.

To finance additional acquisitions, Universal borrowed more money and issued shares in the company. Since he had seen one successful company yanked out from underneath him when its outstanding shares were bought up by a hostile suitor, Miller structured Universal's stock offering so that the class of stock publicly traded, one of four classes overall, represented nearly four-fifths of the company's equity but less than five percent of its voting power. Voting power remained in the hands of Universal's executives. This allowed Miller to rest assured that control of the company he was working to build would not be taken away from him, but still gave Universal the means to acquire additional acute-care hospitals in Texas and Nevada. In June 1979 the company bought Memorial Hospital in Panama City, California, from Texas International, an equipment manufacturer.

From the start, Universal focused its activities on markets where dramatic growth in population was predicted, reasoning that an ever-increasing number of residents would help to keep hospital beds filled. These markets included the Sunbelt states of California, Nevada, Texas, and Florida, where Universal made its first acquisitions, and which, indeed, experienced population growth of more than two and a half times the national average during Universal's first full decade in operation.

Universal continued its steady pace of acquisitions through the end of 1981, when it looked north to purchase five not-for-profit hospitals from the Stewards Foundation, a Christian organization, at a cost of $40 million. The acquisition was the first time that not-for-profit hospitals had been taken over by a publicly owned management company. The move brought Universal two properties in Chicago, the Belmont Community Hospital and Bethesda Hospital, and three facilities in the state of Washington: the Riverton General Hospital, in Seattle; Auburn General Hospital, in the town of the same name; and Centralia General Hospital, in Centralia. All together, the hospitals contained 600 beds. After Universal implemented a series of changes designed to shorten the length of time the average patient stayed in the hospital, increase the percentage of private-paying patients, and raise the productivity of the hospitals' employees, pretax revenues for the facilities tripled.

In 1983 Universal opened the first hospital that the company had constructed rather than purchased. Sparks Family Hospital, outside Reno, Nevada, was the first new hospital to be opened in the fast-growing area in over 40 years. Eventually, Universal would construct many of its facilities. 'We didn't just acquire companies,' Chairman Miller later told Forbes, 'we built maybe a third of our acutes, a half of our psychiatrics. We aren't in it for the fast play.'

In operating the facilities that it had purchased, Universal implemented a business philosophy that allowed it to reduce costs and increase profits from the hospitals it owned. The company typically improved the facility's technical capabilities, set up more effective purchasing systems, standardized fees for services, and reviewed plans for renovation and expansion. In addition, Universal sought to smooth relations between doctors and the hospital, and with the community as a whole, and it instituted aggressive marketing to seek out the patients it most desired.

Despite the steady growth that these policies brought, Universal found its profitability limited on several fronts. There was an oversupply of acute-care hospital beds in many areas, which pushed earnings down, and also controlled prices through competition. In addition, a significant portion of acute-care hospital revenues was derived from patients whose treatment was paid for by Medicare. With its strict caps on fees and reimbursements, Medicare made it difficult for hospital owners to reap large sums.

In response to these conditions, Universal branched out from its original mission of running acute-care hospitals in May 1983, to the field of psychiatric services. The company began by purchasing Qualicare, which operated 15 psychiatric hospitals, for $120 million. Because psychiatric facilities did not suffer from excess capacity, and were not largely dependant on Medicare payments, their operators could earn larger profits, allowing the business to grow at a faster rate.

Two months after its Qualicare purchase, Universal acquired an additional property in its Sunbelt base when it bought Stevens Park Osteopathic Hospital in Dallas for $7 million. The facility had 117 beds, and the company announced that it would operate the existing hospital only as long as it took to construct an $18 million replacement. With this purchase, the number of hospitals owned by Universal grew to 24.

The company's string of acquisitions continued in 1984, as Universal purchased the Forest View Psychiatric Hospital in Grand Rapids, Michigan, for $8.5 million, and leased Doctor's Hospital, in Shreveport, Louisiana. After divesting itself of the River West Medical Center, a general hospital in Plaquemine, Louisiana, Universal had 30 facilities on its roster, and in March 1984 it reported annual earnings of $9.8 million. Five months later, Universal purchased seven facilities from Humana, for $5.1 million.

By the spring of 1985, Universal's steady growth had made it the sixth-largest hospital management firm in the United States, but the company's aggressive pace of acquisitions had come at the cost of a sizable debt. In August, Universal announced that it would issue an additional two million shares of stock in an effort to reduce its debt.

By September, Universal was operating 20 acute-care hospitals and eight psychiatric facilities. In addition, the company had ten properties under development, including one physical rehabilitation facility, three psychiatric hospitals, and three centers for the treatment of substance abuse. The company's emphasis on the development of psychiatric facilities was explained by Chairman Miller, who told a reporter from the journal Focus, 'Psychiatric facilities are more profitable than acute-care hospitals and offer a better return for investors' money.' In addition, the industry was less heavily regulated by governmental agencies, and boasted a higher rate of private-paying customers.

In November 1985, Universal further rearranged its stock structure in an effort to strengthen its already formidable defenses against an unwanted corporate takeover. One month later, the company made two additional acquisitions, purchasing another Florida health-care facility, Doctors' General Hospital, located in the town of Plantation, and McAllen Medical Center in McAllen, Texas.

By January 1986 Universal's yearly profits had reached $21.7 million. With this domestic base to build on, the company turned its focus to operations overseas, investing $40 million in three hospitals in the United Kingdom. The company built one hospital each in London and the town of Shirley, and a third outside London. Of the 100-bed hospital in London, Chairman Miller said, 'We built arguably the best hospital in London.' In an interview with Forbes, he went on to say, 'We over-equipped it, we over-staffed it, we spent a lot of money.' Universal's United Kingdom facilities were designed to appeal to the growing number of wealthy Britons, who, the company hoped, would opt out of the country's system of socialized medicine, and instead pay handsomely for top-notch private medical care. Expecting that Britain's government, under Margaret Thatcher, would implement measures to encourage private health insurance and allow service in private hospitals, Universal looked forward to large profits from its overseas venture.

Unfortunately, Britain's economy went into a decline, limiting the number of Britons wealthy enough to afford Universal's health services, and the company's United Kingdom hospitals remained unprofitable. In addition, by the end of 1986, Universal's debts had reached $317 million, and its seven-year streak of rising profits had come to an end, as net income fell to $1.7 million, a drop of $20 million from the year before.

In response to this growing fiscal crisis, in 1987 Universal's Chairman Miller adopted a novel financial solution. In order to reduce the company's debt, he placed ten of Universal's hospital properties in a real estate investment trust, the Universal's Health Realty Income Trust. Shares in this trust were then given to Universal's creditors and traded on the New York Stock Exchange, where almost 10 percent of the shares were purchased by the Bass family of Texas. After its reorganization, Universal had one third less equity and $75 million less debts. However, the company had also saddled itself with $13 million a year in rental payments on the properties it had previously owned. As a result of this move, Universal's profits rose during 1987 to $11.8 million, but still did not attain their previous levels.

In the late 1980s, Universal entered a period of retrenchment and solidification of its holdings, following its rapid, debt-generating growth in the earlier part of the decade. The company moved to sell off hospitals whose profits did not meet expected levels, generate cash from its operations, and reduce its debts overall. As part of this process, in 1988 Universal sold its Centralia Hospital, in Centralia, Washington, to a religious order for $9.5 million. Streamlining its operations, Universal sold its share in a health maintenance organization in Nevada it had entered into as a joint venture, in June 1988.

In place of these facilities, Universal picked up property in the more lucrative psychiatric treatment field in 1988, when it bought La Amistad, a 43-bed psychiatric hospital in Florida, for $3.7 million. Revenues from the company's psychiatric treatment centers had been rising since 1987, and would soon come to represent a third of Universal's profits, despite the fact that they made up less than a sixth of its gross revenues.

Also at that time, Universal received additional attention from the Bass family when it purchased a 6.2 percent stake in the company. At the end of 1988 the company reported earnings down from the year before, to $6.4 million. This did not deter a group including the Bass family from increasing its holdings of Universal to 8.8 percent the next fall. In May 1990 the group again increased their stake, to 10.3 percent, and in July, it was raised to 11.4 percent, which the Bass family characterized as a simple investment.

In the spring of 1990, Universal continued its policy of purchasing psychiatric treatment centers, as it agreed to acquire the assets of the Ridgeview Institute, in Rhode Island, the company's 15th such facility, and entered into negotiations for a 16th. 'We still don't have an oversupply of psychiatric hospital beds,' Miller told Forbes magazine, explaining his acquisitions philosophy. 'There are opportunities to build if you do it very selectively.'

Also in 1990 Universal inaugurated a quality management department in an effort to make its existing properties more profitable. These efforts started to pay off as the company's gross revenues topped $1 billion for the first time at the end of that year, and profits almost doubled from the year before, to $11.6 million.

In February 1991, Universal's bottom line got a further boost when the company received a generous offer for its hospitals in Britain. Although Chairman Miller had continued to predict their imminent profitability, the facilities had never turned a profit, and had, in fact, constituted a significant drain on the company's earnings as they racked up losses of $5 million a year. Universal had been unsuccessfully trying to sell the hospitals for some time, and its earnings outlook was bolstered by the $51.1 million offer for the properties from Compass Group, plc, one of Great Britain's largest hospital management firms.

Two months later, Universal moved to heighten its public profile when it voted to list its stock on the New York Stock Exchange, a more prominent marketplace than the American Stock Exchange, which it had previously used. The company also made a tentative foray into the managed-care industry, with a pilot program at one of its Florida hospitals, and purchased a 166-bed psychiatric hospital in a suburb of Los Angeles, Torrance, California, that was home to a leading treatment center for sexual addiction. These moves helped Universal to rack up profits of $20.3 million in 1991, its fourth consecutive year of improved profits.

As it pursued its goal of withdrawal from markets with an oversupply of hospital beds, Universal had divested itself of seven medical facilities since 1987, leaving 15 acute-care hospitals and 13 psychiatric hospitals in the company's portfolio at the end of 1991. With a renewed emphasis on its core areas of expertise and a healthy respect for the dangers of debt, Universal Health Services appears to be prepared to meet the challenges of business in the years to come.

Principal Subsidiaries: UHS of Delaware, Inc.

Further Reading:

• Hazelton, Lynnette, 'Simple Formula Leads to Universal Success,' Focus, September 25, 1985.
• Cook, James, 'Once Burned ...,' Forbes, April 16, 1990.
• George, John, 'UHS's Success Builds Upon Learned Lessons,' Philadelphia Business Journal, May 27, 1991.

Source: International Directory of Company Histories, Vol. 6. St. James Press, 1992.

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