According to the Company’s FORM 10-Q for the quarterly period ended June 30, 2005, on or about March 22 through March 26, 2004, two purported class action Complaints were filed against the Company and certain of its officers and directors in the United States District Court for the Eastern District of Pennsylvania. Pursuant to an Order of the Court, these two cases were consolidated into one action captioned: In re Universal Health Services, Inc. Securities Litigation, Case No. CV-04-01233-JP. Subsequently, the plaintiffs filed an Amended Consolidated Class Action Complaint. The Court granted defendants’ motion to dismiss this complaint and thereafter dismissed the action with prejudice when plaintiffs chose not to replead.
The original complaint alleges defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market during the Class Period. Specifically, the complaint alleges that defendants materially misled the investing public, thereby inflating the price of UHS stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements as set forth herein, not false and misleading. These statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its financial performance, earnings momentum, and future business prospects, including: (a) UHS was unable to compete effectively in key markets; (b) UHS hospitals were losing better-paying patients to their competitors and the proportion of uninsured patients, who constitute a greater credit risk, was increasing; (c) due to poor case management, certain UHS hospitals were unable to effectively manage their caseloads and, as a consequence, had experienced an increase in the number of patients who remained hospitalized at UHS facilities beyond the period reimbursable by Medicaid and Medicare and that, therefore, the hospitals were not receiving full payments for the services provided; (d) defendants failed to properly write-off uncollectible receivables, and materially overstated UHS's financial results by maintaining known uncollectible accounts as assets during the Class Period; (e) the Company's allowance for doubtful accounts was insufficient and, as a result, the Company's reported operating income was artificially inflated; and (f) the Company's reported operating income was not a true measure of the Company's operating performance because defendants failed to properly deduct from operating income the appropriate allowance for doubtful accounts.
Further, the complaint alleges that on March 1, 2004, before the markets opened, defendants shocked investors by withdrawing their guidance for 2004 and announcing that earnings per diluted share for the three-month period ending March 31, 2004 could be as much as 25% lower than the $0.84 per diluted share recorded in the same period in the prior year. Defendants attributed the decline in substantial part to UHS's inability to compete effectively in two key markets in Nevada and Texas, erosion of UHS's market share, poor case management resulting in an increase in the length of patient stays beyond the period reimbursable by Medicaid or Medicare, and a pronounced increase in bad debt from uninsured patients. The Company which had already increased its provision for doubtful accounts in the fourth quarter of 2003 to $74.3 million, or 7.8% of revenues, as compared to $58 million, or 6.9% of revenues, during the prior year's fourth quarter, said that bad debt in 2004 was likely to exceed the Company's previously reported expectation of 9.5% of revenues. On this news, the price of UHS shares fell $9.05, or 17%, to $44.88.