Province Healthcare 10K/A 2002 Annual report (amended)

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1


(Mark One)
x		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2002 or

[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Transition Period from to

Commission File Number 0-23639

PROVINCE HEALTHCARE COMPANY
(Exact Name of Registrant Specified in Its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		62-1710772 (I.R.S. Employer Identification No.)

105 Westwood Place Suite 400 Brentwood, Tennessee (Address of Principal Executive Offices)		37027 (Zip Code)

(615) 370-1377
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12 (b) of the Act:None

Securities registered pursuant to Section 12 (g) of the Act:

Common Stock, $.01 Par Value Per Share
(Title of Class)

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 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.[ ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of the shares of Common Stock of the Registrant held by nonaffiliates on June 28, 2002 (the last business day of the Registrant’s second fiscal quarter) was $1,065,041,547 (based upon the closing price of $22.36 per share as reported on the New York Stock Exchange on such date).

As of March 1, 2003, 48,713,946 shares of the Registrant’s Common Stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated by reference under Part III of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after December 31, 2002.

EXPLANATORY NOTE

This amendment to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 is being filed for the sole purpose of correcting the “Summary of Obligations and Commitments” table found on page 32 of the Form 10-K. The two parentheticals in the table should read “in thousands” instead of “in millions.”

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes, appearing elsewhere in this report.

Overview

We are a healthcare services company focused on acquiring and operating hospitals in attractive non-urban markets in the United States. As of December 31, 2002, we owned or leased 20 general acute care hospitals in 13 states with a total of 2,280 licensed beds, and managed 36 hospitals in 14 states with a total of 2,897 licensed beds.

Impact of Acquisitions and Divestitures

An integral part of our strategy is to acquire non-urban acute care hospitals. Because of the financial impact of our recent acquisitions, it is difficult to make meaningful comparisons between our financial statements for the fiscal periods presented. In addition, because of the relatively small number of owned and leased hospitals, each hospital acquisition can materially affect our overall operating performance. Upon the acquisition of a hospital, we typically take a number of steps to lower operating costs. The impact of such actions may be offset by cost increases to expand services, strengthen medical staff and improve market position. The benefits of these investments and of other activities to improve operating margins generally do not occur immediately. Consequently, the financial performance of a newly-acquired hospital may adversely affect overall operating margins in the near term. As we make additional hospital acquisitions, we expect that this effect will be mitigated by the expanded financial base of existing hospitals and the allocation of corporate overhead among a larger number of hospitals. We also may divest certain hospitals in the future if we determine a hospital no longer fits within our strategy.

Industry Trends

The federal Medicare program accounted for approximately 44.5%, 39.8% and 39.7% of net patient revenue in 2002, 2001 and 2000, respectively. The state Medicaid programs accounted for approximately 12.0%, 10.9% and 9.5% of net patient revenue in 2002, 2001 and 2000, respectively. The payment rates under the Medicare program for inpatients are prospective, based upon the diagnosis of a patient. The Medicare payment rate increases historically have been less than actual inflation.

Both federal and state legislatures are continuing to scrutinize the healthcare industry for the purpose of reducing healthcare costs. While we are unable to predict what, if any, future healthcare-reform legislation may be enacted at the federal or state level, we expect continuing pressure to limit expenditures by governmental healthcare programs. The Balanced Budget Act of 1997 imposed certain limitations on increases in the inpatient Medicare rates paid to acute care hospitals. As required by the Balanced Budget Act of 1997, payments for hospital outpatient, psychiatric sub-acute, home health and rehabilitation sub-acute services have converted to prospective payment systems, instead of payments being based on costs. Most hospital outpatient services are now reimbursed under an outpatient prospective payment system based on a system of Ambulatory Payment Classification. Rehabilitation and psychiatric sub-acute services began transitioning to a prospective payment system in 2002. The Balanced Budget Act of 1997 also includes a managed care option that could direct Medicare patients to managed care organizations. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (“BIPA”) amended the Balanced Budget Act of 1997 by giving hospitals a full market basket increase in fiscal years 2002 and 2003. In addition, BIPA contains provisions delaying scheduled reductions in payment for home health agencies and other provisions designed to lessen the impact on providers of spending reductions contained in the Balanced Budget Act of 1997. Further changes in the Medicare or Medicaid programs and other proposals to limit healthcare spending could have a material adverse effect on the healthcare industry and our company.

The hospital industry and some of our hospitals continue to have significant unused capacity. The result is substantial competition for patients and physicians. Inpatient utilization continues to be affected negatively by payor-required pre-admission authorization and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. We expect increased competition and admission constraints to continue in the future. The ability to respond successfully to these trends, as well as spending reductions in governmental healthcare programs, will play a significant role in determining the ability of our hospitals to maintain their current rate of net revenue growth and operating margins.

We expect the industry trend towards the provision of more services on an outpatient basis to continue. This trend is the result of increased focus on managed care and advances in technology.

The billing and collection of accounts receivable by hospitals are complicated by a number of factors, including:

	•		the complexity of the Medicare and Medicaid regulations;

	•		increases in managed care;

	•		hospital personnel turnover;

	•		the dependence of hospitals on physician documentation of medical records; and

	•		the subjective judgment involved.

These factors, or any combination of them, may impact our ability to bill and collect our accounts receivable at the rates we have anticipated, which could negatively affect our future cash flows.

The federal government and a number of states are increasing the resources devoted to investigating allegations of fraud and abuse in the Medicare and Medicaid programs. At the same time, regulatory and law enforcement authorities are taking an increasingly strict view of the requirements imposed on providers by the Social Security Act and Medicare and Medicaid regulations. Although we believe that we are in material compliance with such laws, a determination that we have violated such laws, or even the public announcement that we were being investigated concerning possible violations, could have a material adverse effect on our company.

Our historical financial trend has been impacted favorably by our success in acquiring acute care hospitals. While we believe that the healthcare industry trends described above may create future acquisition opportunities, our future financial growth rates will be impacted by our ability to acquire hospitals and to successfully integrate them into our system.

Results of Operations

The following table presents, for the periods indicated, information expressed as a percentage of net operating revenue. Such information has been derived from our consolidated statements of income included elsewhere in this report. The results of operations for the periods presented include hospitals from their acquisition dates, as previously discussed.


	Year Ended December 31,

	2002			2001			2000

Net operating revenue		100.0	%		100.0	%		100.0	%
Operating expenses(1)		(83.5	)		(81.3	)		(82.1	)

EBITDA(2)		16.5			18.7			17.9
Depreciation and amortization		(4.9	)		(5.7	)		(5.7	)
Interest, net		(3.1	)		(2.3	)		(3.5	)
Minority interest		(0.0	)		(0.0	)		(0.0	)
Gain (Loss) on sale		0.0			(0.0	)		(1.3	)

Income before income taxes		8.5			10.7			7.4
Provision for income taxes		(3.4	)		(4.5	)		(3.2	)

Net income(3)		5.1	%		6.2	%		4.2	%


	Year Ended December 31,

	2002		2001		2000

Revenues	$	704,347	$	530,739	$	469,858
Salaries and benefits		277,843		205,628		180,881
Supplies		87,473		59,341		54,465
Other operating expenses (1)		165,934		117,017		106,790
Provision for doubtful accounts		56,765		49,283		43,604

		588,015		431,269		385,740

EBITDA (2)	$	116,332	$	99,470	$	84,118

(1)		Operating expenses represent expenses before depreciation and amortization, interest expense, minority interest, (gain) loss on sale of assets and income taxes.

(2)		EBITDA represents the sum of income before income taxes, interest, depreciation and amortization and minority interest and gain (loss) on sale of assets. EBITDA is commonly used as an analytical indicator of operating performance within the healthcare industry and also serves as a measure of leverage and debt service capacity. Province management considers EBITDA to be one measure of our ability to service existing debt, sustain potential increases in debt in the future and to satisfy capital requirements. EBITDA, however, is not a measure of financial performance under accounting principles generally accepted in the United States, and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. Because EBITDA is not a measurement determined in accordance with accounting principles generally accepted in the United States and is susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies.

(3)

The Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”),Goodwill and Other Intangible Assets, effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized, but is subject to annual impairment tests, or more frequently if certain indicators arise. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company’s pro forma net income, as a percentage of net revenue, would have been 7.0% and 5.2%, for the years ended December 31, 2001 and 2000, respectively.

Hospital revenues are received primarily from Medicare, Medicaid and commercial insurance. The percentage of revenues received from the Medicare program is expected to increase with the general aging of the population. The payment rates under the Medicare program for inpatients are based on a prospective payment system, based upon the diagnosis of a patient. While these rates are indexed for inflation annually, the increases historically have been less than actual inflation. In addition, states, insurance companies and employers are actively negotiating the amounts paid to hospitals as opposed to paying standard hospital rates. The trend toward managed care, including health maintenance organizations, preferred provider organizations and various other forms of managed care, may affect our hospitals’ ability to maintain their current rate of net operating revenue growth.

We continuously monitor the cost/benefit relationship of services provided at our hospitals, and make decisions related to adding new services or discontinuing existing services.

Net patient service revenue is reported net of contractual adjustments and policy discounts. The adjustments principally result from differences between our hospitals’ customary charges and payment rates under the Medicare, Medicaid and other third-party payor programs. Customary charges generally have increased at a faster rate than the rate of increase for Medicare and Medicaid payments. Operating expenses of our hospitals primarily consist of salaries, wages and benefits, purchased services, supplies, provision for doubtful accounts, rentals and leases, and other operating expenses, principally consisting of utilities, insurance, property taxes, travel, physician recruiting, telephone, advertising, repairs and maintenance.

Other revenue is comprised of fees from management and professional consulting services provided to third-party hospitals pursuant to management contracts and consulting arrangements, reimbursable expenses and miscellaneous other revenue items. Management and professional services revenue plus reimbursable expenses total less than 3% of our consolidated net operating revenue for the year ended December 31, 2002. Operating expenses for the management and professional services business primarily consist of salaries, wages and benefits and reimbursable expenses.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net operating revenue increased to $704.3 million in 2002 from $530.7 million in 2001, an increase of $173.6 million, or 32.7%. Cost report settlements and the filing of cost reports had a minimal effect on net revenue in 2002, and resulted in a positive revenue adjustment of $0.6 million, or 0.1% of net operating revenue, in 2001. Net patient service revenue generated by the 17 hospitals owned during both periods increased $3.1 million. Price increases for these hospitals were offset by a slight decrease in inpatient admissions (less than 1%) and a decline in surgeries of 6.2%. The decline in admissions and surgeries were attributable to the departure of 51 physicians at the hospitals during 2002. Total net patient service revenue increased 33.8% during 2002, primarily related to the hospitals acquired in the fourth quarter of 2001 and during 2002.

Our 2002 operations were adversely affected by the loss of physicians. During 2002, we lost 51 physicians who were major contributors, with the majority leaving in the last six months of the year. We define a “major contributor” as a physician generating $200,000 or more in revenues annually. All of these physicians left for reasons unrelated to hospital operations. We recruited 82 physicians in 2002, 59% of whom only started their practices in the third and fourth quarters of the year. Therefore, the new practices were unable to generate sufficient volume to replace the lost revenues generated by the departing physicians. As the new physicians’ practices move along the timeline toward full, mature practices, lost revenues will be replaced. Of the 82 recruited physicians, 76 are admitting physicians. Based on historic practice patterns of physicians recruited to our hospitals, to date, these physician practices are tracking in line with historic trends and our expectations.

Our 2002 operations were adversely impacted by increased competition from ambulatory surgery centers in two of our markets. We have been proactive in the only other markets large enough to support full service ambulatory surgery centers that currently do not have these services, by either pursuing a certificate of need for a full service ambulatory surgery center ourselves, or working with physicians in the market to address the community need for outpatient surgery services.

Operating expenses increased to $588.0 million, or 83.5% of net operating revenue, in 2002 from $431.3 million, or 81.3% of net operating revenue, in 2001. The increase in operating expenses of hospitals owned during both periods resulted primarily from new services and increased physician recruiting. The consolidated provision for doubtful accounts decreased to 8.1% of net operating revenue in 2002 from 9.3% of net operating revenue in 2001, primarily related to improvement in days in accounts receivable and increased up-front cash collections. The majority of the increase in total operating expenses was attributable to the acquisition of additional hospitals in the fourth quarter of 2001 and in 2002.

EBITDA was $116.3 million, or 16.5% of net operating revenue, in 2002, compared to $99.5 million, or 18.7% of net operating revenue, in 2001.

Depreciation and amortization expense increased to $34.2 million, or 4.9% of net operating revenue, in 2002 from $30.2 million, or 5.7% of net operating revenue in 2001. The increase in depreciation and amortization resulted primarily from the acquisition of additional hospitals in 2002 and 2001, and capital expenditures at hospitals owned during both periods, offset by non-amortization of goodwill in 2002, which had an impact of approximately $4.4 million. Interest expense increased to $22.0 million in 2002 from $12.1 million in 2001, an increase of $9.9 million or 81.6%. This was a result of increased borrowings to finance the acquisition of additional hospitals in the fourth quarter of 2001 and in 2002, and interest on the $172.0 million, 4 1/2% Convertible Subordinated Notes issued in October 2001.

Income before provision for income taxes was $60.2 million for the year ended December 31, 2002, compared to $56.7 million in 2001, an increase of $3.5 million or 6.2%.

Our provision for income taxes was $24.1 million for the year ended December 31, 2002, compared to $23.8 million in 2001. These provisions reflect effective income tax rates of 40.0% in 2002 and 42.0% in 2001. See Note 8 of the notes to our consolidated financial statements for information regarding differences between effective tax rates and statutory rates.

Net income was $36.1 million, or 5.1% of net operating revenue, in 2002, compared to $32.9 million, or 6.2% of net operating revenue, in 2001.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net operating revenue increased from $469.9 million in 2000 to $530.7 million in 2001, an increase of $60.9 million or 13.0%. We divested two hospitals in the fourth quarter of 2000, which prevents meaningful total revenue comparisons. Net patient service revenue generated by hospitals owned during both periods increased $57.9 million, or 14.7%, resulting from inpatient and outpatient volume increases, new services and price increases. Cost report settlements and the filing of cost reports resulted in negative revenue adjustments of $0.7 million, or 0.1% of net operating revenue, in 2000, and a positive revenue adjustment of $0.6 million, or 0.1% of net revenues in 2001. The remaining increase was primarily attributable to the acquisitions of additional hospitals in 2000 and 2001.

Operating expenses increased from $385.7 million, or 82.1% of net operating revenue, in 2000 to $431.3 million, or 81.3% of net operating revenue in 2001. The increase in operating expenses of hospitals owned during both periods resulted primarily from new services, volume increases, changes in case mix and increased recruiting expenses.

EBITDA increased from $84.1 million, or 17.9% of net operating revenue, in 2000 to $99.5 million, or 18.7% of net operating revenue, in 2001, primarily as a result of improved operations at hospitals owned during both periods.

Depreciation and amortization expense increased from $26.6 million, or 5.7% of net operating revenue, in 2000, to $30.2 million, or 5.7% of net operating revenue in 2001. The increase in depreciation and amortization resulted primarily from capital expenditures and the acquisitions in 2001, and a full year of expense for acquisitions made in 2000.

Interest expense as a percent of net operating revenue decreased from 3.5% in 2000 to 2.3% in 2001. Proceeds from the sale of convertible notes in November and December 2000 and in October 2001 were used to reduce the higher rate of indebtedness under the revolving credit facility.

Income before provision for income taxes was $56.7 million in 2001, compared to $34.7 million in 2000, an increase of $22.0 million or 63.4%. The increase resulted primarily from improved operations at hospitals owned during both periods.

Provision for income taxes was $23.8 million in 2001, compared to $14.7 million in 2000. These provisions reflect effective income tax rates of 42.0% in 2001 compared to 42.5% in 2000. See Note 8 of the notes to our consolidated financial statements for information regarding differences between effective tax rates and statutory rates.

Net income was $32.9 million, or 6.2% of net operating revenue, in 2001, compared to $19.9 million, or 4.2% of net operating revenue in 2000.

Liquidity and Capital Resources

Capital Resources

Total long-term obligations, less current maturities, increased to $461.6 million at December 31, 2002, from $330.8 million at December 31, 2001. The increase resulted primarily from the borrowings to finance the two hospitals acquired in the second quarter of 2002.

In November 2001, we reduced the size of our credit facility to $250.0 million, which includes $40.3 million for capital leases and a $209.7 million revolving line of credit. At December 31, 2002, we had outstanding letters of credit of $4.3 million, $94.0 million outstanding and $111.4 million available under our revolving line of credit.

The loans under the credit facility bear interest, at our option, at the adjusted base rate or at the adjusted LIBOR rate. The interest rate ranged from 3.69% to 5.75% during 2002. We pay a commitment fee, which varies from one-half to three-eighths of one percent of the unused portion, depending on compliance with certain financial ratios. The principal amount outstanding under the revolving credit agreement may be prepaid at any time before the maturity date of May 31, 2005.

The credit facility contains limitations on our ability to incur additional indebtedness (including contingent obligations), sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, and pay dividends. The credit facility also requires that we maintain a specified net worth and meet or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under the credit facility is secured by substantially all assets of our company. We are in compliance with all covenants or other requirements set forth in our credit agreements or indentures.

Interest rate swap agreements are used to manage our interest rate exposure under our credit facility. In 1998, we entered into an interest rate swap agreement that effectively converted for a five-year period $45.0 million of floating-rate borrowings to fixed-rate borrowings at 5.625%. In September 2002, we amended the swap

agreement and secured a 4.45% fixed interest rate and extended the term of the agreement to September 30, 2005. All other terms and conditions of the swap agreement remain unchanged.

Cash Flows — Year Ended December 31, 2002 Compared to Year Ended December 31,
2001

Working capital decreased to $105.3 million at December 31, 2002, from $136.2 million at December 31, 2001, resulting primarily from decreased cash, used for the acquisition of Memorial Hospital of Martinsville and Henry County in 2002. The ratio of current assets to current liabilities was 2.7 to 1.0 at December 31, 2002. Our cash flows from operating activities increased by $53.6 million to $92.1 million in 2002 from $38.4 million in 2001. This primarily related to improvements in our cash collection cycle and an increase in deferred taxes. The use of our cash in investing activities increased to $217.5 million in 2002 from $169.8 million in 2001, resulting primarily from smaller outlays of cash for acquisition of property, plant and equipment and increased use of cash for hospital acquisitions in 2002, compared to 2001. Our cash flows provided by financing activities decreased to $100.5 million in 2002 from $170.8 million in 2001, resulting from a decrease in net borrowings.

Cash Flows — Year Ended December 31, 2001 Compared to Year Ended December 31,
2000

Working capital increased to $136.2 million at December 31, 2001 from $63.4 million at December 31, 2000, resulting primarily from increased business volumes, growth in accounts receivable from acquired hospitals, and effective management of our working capital. Our cash flows from operating activities increased by $5.7 million from $32.7 million provided in 2000 to $38.4 million provided in 2001. Offsetting our improved profitability was a large increase in accounts receivable, both at hospitals owned during both periods, resulting from volume increases, new services and price increases, and a build-up of accounts receivable at newly-acquired hospitals. The use of our cash in investing activities increased from $40.7 million in 2000 to $169.8 million in 2001, reflecting more acquisitions during 2001. Our cash flows provided by financing activities increased $162.8 million from $8.0 million in 2000, to $170.8 million in 2001, primarily because of increased borrowings related to acquisitions and the sale of convertible notes.

Capital Expenditures

Capital expenditures, excluding acquisitions, in 2002, 2001 and 2000, were $46.4 million, $72.2 million, and $44.0 million, respectively, inclusive of construction projects. Capital expenditures for our owned hospitals may vary from year to year depending on facility improvements and service enhancements undertaken by the hospitals. We expect to make total capital expenditures in 2003 of approximately $55.0 million, exclusive of any acquisitions of businesses. Planned capital expenditures for 2003 consist principally of capital improvements and revenue-generating capital expenditures to owned and leased hospitals. We expect to fund these expenditures through cash provided by operating activities and borrowings under our revolving credit facility.

If pre-determined operating levels are achieved, we have agreed to build replacement facilities for Eunice Community Medical Center, currently expected to cost approximately $20.0 million, and Glades General Hospital, currently expected to cost approximately $25.0 million. We do not know whether and when each hospital will achieve its individual pre-determined operating levels, but we believe it will take approximately 36 months to complete construction from such date. In connection with certain acquisitions we have made, we have committed and may commit in the future to make specified capital expenditures.

Based upon our current level of operations and anticipated growth, we believe that cash generated from operations and amounts available under our credit facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under our credit facility, or otherwise, to enable us to grow our business, service our indebtedness, including the credit facility and our convertible subordinated notes, or make anticipated capital expenditures. One element of our business strategy is expansion through the acquisition of hospitals in existing and new markets. The completion of acquisitions may result in the incurrence of, or assumption by us, of additional indebtedness. Our future operating performance, ability to service or refinance the convertible subordinated notes and ability to service and extend or refinance the credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

The following table reflects a summary of obligations and commitments outstanding as of December 31, 2002.


	Payments due by period

	Less than
	1 year		1-2 years		3-4 years		Thereafter		Total

	(In thousands)
Contractual Cash Obligations:
Long-term debt	$	694	$	245,206	$	—	$	172,500	$	418,400
Capital lease obligations		1,315		41,742		997		2,518		46,572
Operating leases		6,690		9,677		6,344		10,863		33,574

Subtotal	$	8,699	$	296,625	$	7,341	$	185,881	$	498,546


	Amount of commitment expiration per period

	Less than
	1 year		1-2 years		3-4 years		Thereafter		Total

	(In thousands)
Other Commitments:
Letters of credit	$	4,300	$	—	$	—	$	—	$	4,300

Total obligations and commitments	$	12,999	$	296,625	$	7,341	$	185,881	$	502,846

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates.

Allowance for Doubtful Accounts

Our ability to collect outstanding receivables from third-party payors is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts or patient accounts for which a balance remains after primary insurance has paid. We estimate the allowance for doubtful accounts primarily based upon the age of the accounts since patient discharge date. The allowance for doubtful accounts increased, as a percentage of accounts receivable net of contractual adjustments, to 36.7% in 2002 from 31.1% in 2001. We continually monitor our accounts receivable balances and utilize cash collections data and other analytical tools to support the basis for our estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations, or deterioration in aging accounts receivable could result in a significant increase in this allowance.

Allowance for Contractual Discounts

The percentage of our patient service revenue derived from Medicare and Medicaid patients continues to be high. For the year ended December 31, 2002, Medicare and Medicaid combined was 56.6% of net revenue,

compared to 50.7% in 2001. The Medicare and Medicaid contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our hospitals, and cost settlement provisions requiring complex calculations and assumptions subject to interpretation. We use an exhibit system to estimate the allowance for contractual discounts on a payor-specific basis, given our interpretation of the applicable regulations or contract terms. We have invested significant human resources and information systems to improve the estimation process; however, the services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from our estimates. Additionally, updated regulations and contract negotiations occur frequently, necessitating our continual review and assessment of the estimation process.

General and Professional Liability Reserves

We purchased a professional liability claims made reporting policy effective January 1, 2002. This coverage is subject to a $750,000 deductible per occurrence for general and professional liability and an additional $2.0 million self-insured retention for professional and general liability. The policy provides coverage up to $51.0 million for claims incurred during the annual policy term. We maintain a reserve for the anticipated claims within these deductible and self-insured retentions. As of January 1, 2003, we increased our self-insurance retention to $5.0 million. This increase in retention amount increases our exposure for claims occurring prior to December 31, 2002, and reported in 2003. In 2001 we maintained insurance for individual malpractice claims exceeding $50,000 per medical incident, subject to an annual maximum of $500,000 for claims occurring and reported in 2001. We estimate our self-insured retention portion of the malpractice risks using historical claims data, demographic factors, severity factors and other actuarial assumptions. The estimated accrual for malpractice claims could be significantly affected should current and future occurrences differ from historical claims trends. The estimation process is also complicated by the relatively short period of time in which we have owned some of our healthcare facilities, as occurrence data under previous ownership may not necessarily reflect occurrence data under our ownership. While management monitors current claims closely and considers outcomes when estimating our insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates.

Workers’ Compensation Reserves

Workers’ compensation claims are insured with a large deductible with stop loss limits of $250,000 per accident and a $6.6 million and $3.0 million minimum cap on total losses for the 2002 and 2001 years, respectively. Our arrangement with the insurance provider allows us to prepay the expected amounts of annual workers’ compensation claims, which is based upon claims experience. The claims processor tracks payments for the policy year. At the end of the policy year, the claims processor compares the total amount prepaid by us to the actual amount paid by the claims processor. This comparison ultimately will result in a receivable from or a payable to the claims processor.

We are fully insured in the commercial marketplace for workers’ compensation claims prior to January 1, 1999. We utilize loss run reports provided by the claims administrator to determine the appropriate range of loss reserves for the 1999 and subsequent years. Our accruals are calculated to cover the risk from both reported claims and claims that have been incurred but not yet reported.

Medical Claims Reserves

We maintain self-insured medical and dental plans for employees. Claims are accrued under these plans as the incidents that give rise to them occur. We use a third-party administrator to process all such claims. Unpaid claim accruals are based on the estimated ultimate cost of settlement, including claim settlement expenses, in accordance with an average lag time and past experience. We have entered into a reinsurance agreement with an independent insurance company to limit our losses on claims. Under the terms of this agreement, the insurance company will reimburse us a maximum of $800,000 on any individual claim. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from our estimates, given changes in the healthcare cost structure or adverse experience.

Goodwill and Long-Lived Assets, Including Impairment

Our consolidated financial statements primarily include the following types of long-lived assets: property, plant and equipment, goodwill and other intangible assets. Property, plant and equipment purchased in the normal course of business are recorded at the cost of the purchase and a useful life is assigned based upon the nature of the asset in comparison to our company’s policy. We also, in connection with our acquisition of businesses, acquire property, plant and equipment, goodwill and other intangible assets. We use outside firms to perform a valuation of these acquired assets for the purpose of allocating the purchase price of the acquisition. As a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets(SFAS No. 142), we have obtained valuation reports to identify property, plant and equipment, as well as any intangible assets purchased in our acquisitions. Based on the valuation reports completed to date, the only identifiable intangible assets valued have been non-compete agreements and licenses and accreditations, which have had minimal associated value; the remainder was goodwill. In accordance with the new standard, we have not recognized amortization of goodwill during the 2002 year.

Impairment of goodwill is governed by SFAS No. 142. In accordance with the adoption of SFAS No. 142, we completed our transitional impairment test prior to June 30, 2002 as of the beginning of 2002. The results of our review indicated that no impairment was present related to the adoption of this accounting standard. Additionally, we completed our annual impairment test as of October 1, 2002. Our annual impairment test is based upon a combination of market capitalization and projected EBITDA run-rate (adjusted for a multiple of earnings) for the consolidated Company. The results of this annual impairment test indicated no impairment has occurred.

Impairment of long-lived assets other than goodwill are governed by SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. We adopted this statement effective January 1, 2002. The adoption of this statement did not have an impact on our results of operations or financial condition for the 2002 year.

Inflation

The healthcare industry is labor intensive. Wages and other expenses increase, especially during periods of inflation and labor shortages. In addition, suppliers pass along to us rising costs in the form of higher prices. We generally have been able to offset increases in operating costs by increasing charges for services, expanding services, and implementing cost control measures to curb increases in operating costs and expenses. In light of cost containment measures imposed by government agencies and private insurance companies, we do not know whether we will be able to offset or control future cost increases, or be able to pass on the increased costs associated with providing healthcare services to patients with government or managed care payors, unless such payors correspondingly increase reimbursement rates.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		Province Healthcare Company

		By:		/s/ Martin S. Rash
				Martin S. Rash Chairman of the Board and Chief Executive Officer

PROVINCE HEALTHCARE COMPANY

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Martin S. Rash, certify that:

1. I have reviewed this annual report on Form 10-K/A of the Registrant, Province Healthcare Company;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4. The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant, and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and

6. The Registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: March 27, 2003		/s/ Martin S. Rash

		Martin S. Rash Chief Executive Officer