UHS

Business Context and Reporting Period

Company: Universal Health Services, Inc. (UHS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2009
Business Overview: UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of March 31, 2009, the company operated 26 acute care hospitals and 101 behavioral health centers across 32 states, Washington D.C., and Puerto Rico.

Key Financial Metrics

Note: Total debt calculated as Current maturities of long-term debt ($8,725) + Long-term debt ($938,844).

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 3% ($34 million) year-over-year. This was driven by a 1% increase in same-facility revenues and $17 million in revenues from a new construction management contract.
• Profitability: Income from continuing operations before income taxes increased 12% ($13 million) to $124 million. Net income attributable to UHS increased 10% ($6 million).
• Expense Management: Salaries, wages, and benefits decreased as a percentage of revenue from 42.4% to 41.2%, attributed to moderated wage increases due to economic conditions and staff reductions. Supplies expense also decreased as a percentage of revenue (14.0% to 13.3%) due to a new group purchasing agreement.
• Segment Performance:
  • Acute Care: Pre-tax income increased 10% to $113 million. Inpatient admissions decreased 1.1%, but revenue per adjusted admission increased 0.9%.
  • Behavioral Health: Pre-tax income increased 10% to $68 million. Inpatient admissions increased 1.1%, while patient days decreased 1.4%.
• Capital Allocation: The company repurchased 437,000 shares of Class B Common Stock for $14.7 million and paid dividends of $0.08 per share.

Guidance, Outlook, Risks, and Contingencies

Outlook and Capital Expenditures

UHS expects to spend approximately $270 million to $320 million on capital expenditures for the remainder of 2009. Projects include the completion of a new hospital in Palmdale, California, and a replacement facility in Denison, Texas. The company intends to finance these through internally generated funds and existing credit facilities.

Risks and Contingencies

• Government Investigations:
  • South Texas Health System: Ongoing civil investigation regarding Medicare/Medicaid compliance. A $25 million reserve was recorded in 2008, with an additional $3 million reserved in Q1 2009. No assurance of settlement amount exists.
  • Virginia Behavioral Health: OIG and state Attorney General investigations into Medicaid documentation. Financial exposure is currently indeterminable.
• Reimbursement Risks:
  • Medicaid: Significant state budget deficits have led to funding reductions in several states. Texas proposed rule changes in May 2009 that could reduce annual Medicaid reimbursement by up to $13 million.
  • Medicare: Proposed 2010 payment rules estimate a 0.8% decrease in overall reimbursement.
• Self-Insurance: The company is self-insured for malpractice up to $10 million per occurrence. Total accrual for professional and general liability claims was $275 million as of March 31, 2009.
• Economic Conditions: Deteriorating economic conditions may increase the number of uninsured patients and impact the ability to collect accounts receivable.

Investor Verification Checklist

• Legal Reserves: Verify the sufficiency of the $28 million total reserve ($25M + $3M) for the South Texas Health System False Claims Act investigation.
• Medicaid Exposure: Assess the potential financial impact of the proposed Texas Medicaid rate reductions (estimated up to $13 million annually) and the uncertainty of state funding in other jurisdictions.
• Uninsured Patient Trends: Monitor the ratio of charity care and provision for doubtful accounts, as the company noted an increase in uninsured patients which could pressure margins.
• Debt Covenants: Confirm continued compliance with the $800 million revolving credit agreement covenants, specifically the maximum debt-to-capitalization and minimum fixed charge coverage ratios.
• Capital Expenditure Funding: Validate the ability to fund the projected $270-$320 million in remaining 2009 capital expenditures given current cash flow and credit market conditions.