A Message to Our Shareholders

It is a tribute to the strength and spirit of the company that we were able to achieve such strong results during a year that presented significant challenges to healthcare services providers nationwide.

Chief among these were the decreases in reimbursement from both the Medicare and Medicaid programs. The Balanced Budget Act of 1997 reduced Medicare payments by more than $200 billion over five years. A reduction of this magnitude obviously has serious implications for hospitals, physicians and, ultimately, the patients we serve. In addition, certain Medicaid programs sharply curtailed payments in several markets.

At the same time, many managed care companies have systematically both denied and delayed payments to hospitals. The situation has become so serious that a number of states have enacted prompt payment legislation directed toward third-party payors.

As a hospital management company, we have also been impacted by the growing number of individuals who lack health insurance coverage, currently estimated to number 40 million Americans. With strong commitments to the communities we serve and with legal obligations to serve all in distress, UHS has traditionally absorbed significant costs in providing care to uninsured individuals.

These trends, along with such factors as outsized increases in the cost of pharmaceutical products, eroded industry profits in 1999. For our company, the effects were evident in the third quarter, when we failed to meet our earnings expectations. By the fourth quarter we had taken prompt action in a number of areas, leading to a rapid recovery.

First, we succeeded in renegotiating a number of managed care agreements to obtain better rates and we converted a capitated contract in Las Vegas to a customary per diem arrangement.

Second, we effectively reduced certain staff expenses, while maintaining high-quality patient care services.

Third, we redoubled our efforts to ensure the accuracy of our billing in order to more rapidly collect all amounts to which we are entitled while remaining in compliance with applicable laws.

Fourth, we strengthened our collection activity to reduce bad debt expenses. For example, the bad debt expense at our Las Vegas hospitals was reduced from 14% of net revenue in the third quarter to 7% in the fourth quarter.

And, fifth, we trimmed our operating expenses in three important areas. We reduced our information services expense by $1 million annually by renegotiating our contract with the major provider of those services. We also reduced supply expenses by implementing newly negotiated contracts for several high-cost medical supply items. And, we reduced certain employee benefit expenses through renegotiation and careful management of insurance programs.

These initiatives, along with the company’s inherent strengths, continue to set UHS apart from other hospital management companies.

Throughout our 21-year history, UHS has delivered consistent earnings growth and built its financial strength. We have never experienced a reorganization, a merger, a spin off, or even a name change. We have a long-standing management team that is experienced and capable. We are particularly pleased to have made a number of senior promotions, all from within, traditionally a sign of management strength and depth. We have a strong reputation for integrity and reliability. And we are geographically diverse, with hospitals and ambulatory treatment facilities from coast to coast, and in Puerto Rico.

In short, UHS is unique within the hospital management industry. And today, that uniqueness provides us with exceptional opportunities for the future.

In the pages ahead, you will learn about our current efforts to build the UHS organization. We are able to pursue this aggressive program because of our strong capital position, our outstanding hospitals and ambulatory treatment facilities, our superior staff, and our reputation for quality.

And while we expect new challenges to arise in the years ahead, we are confident in our ability to meet them.

As we do, we will benefit from the guidance of our strong Board of Directors, including its newest member, Joseph Sabastinelli. He previously served as president of Aetna, Inc. and co-president of U.S. Healthcare, Inc., and currently serves as executive vice president of Scripps Health in San Diego, California.

Above all, we will benefit from the efforts of more than 22,000 UHS professionals, whose dedication to excellence continues to set the standard in the hospital management industry. We are grateful for their contribution.

We are also grateful to our shareholders and our supporters in the investment community for their continued confidence. We will do everything we can to ensure that your confidence is rewarded in the future.