UNIVERSAL HEALTH SERVICES INC annual report, FY2023

Business context and reporting period

Universal Health Services, Inc. (UHS) filed this Form 10-K for the fiscal year ended December 31, 2023; it is not a quarterly filing despite the requested period reference to 2023 Q4. UHS operates acute care hospitals, outpatient facilities, behavioral health facilities and related businesses in the United States, the United Kingdom and Puerto Rico. As of February 27, 2024, UHS owned or operated 360 inpatient facilities and 48 outpatient and other facilities, with approximately 96,700 employees.

Acute care hospitals, outpatient facilities and the commercial health insurer represented 57% of consolidated net revenues in both 2023 and 2022. Behavioral health facilities and the commercial health insurer represented 43% in both years. U.K. behavioral health revenue was approximately $761 million in 2023, compared with $685 million in 2022.

Key financial metrics

Metric	2023	2022	Change
Net revenues	$14.282 billion	$13.399 billion	+6.6%
Income from operations	$1.175 billion	$1.004 billion	+17.1%
Operating margin	8.2%	7.5%	+70 basis points
Income before income taxes	$940 million	$866 million	+8.6%
Net income attributable to UHS	$718 million	$676 million	+6.2%
Net margin attributable to UHS	5.0%	5.0%	Flat
Diluted EPS	$10.23	$9.14	+11.9%
Net cash from operating activities	$1.268 billion	$996 million	+$272 million
Capital expenditures	$743 million	$734 million	+$9 million

Operating improvement reflected higher same-facility revenue, stronger patient volumes and the absence of the approximately $58 million Desert Springs asset impairment recorded in 2022. Interest expense increased to $207 million from $127 million, primarily because the average cost of borrowings rose to approximately 4.8% from 2.8% and average borrowings increased to approximately $4.63 billion from $4.40 billion.

Segment performance

Acute care: All-facility revenue increased 5.7% to $8.081 billion, while income before taxes increased 25.8% to $540 million. Same-facility admissions increased 6.4%, adjusted admissions increased 7.6%, and occupancy based on available beds increased to 67% from 64%. Same-facility income before taxes increased 11.9% to $573 million, or 7.3% of revenue.
Behavioral health: All-facility revenue increased 8.0% to $6.191 billion, while income before taxes increased 10.5% to $1.084 billion. Same-facility admissions increased 3.0%, occupancy based on available beds increased to 72% from 71%, and same-facility income before taxes increased 9.9% to $1.094 billion, or 18.1% of revenue.

Liquidity, debt and capital allocation

Cash and cash equivalents were $119 million at December 31, 2023; cash, cash equivalents and restricted cash totaled $214 million.
Net accounts receivable was $2.238 billion, up from $2.018 billion. Days sales outstanding increased to 57 days from 55 days.
Total debt before unamortized financing costs was $4.930 billion; debt after financing costs was $4.912 billion. Debt represented approximately 44% of total capitalization, compared with 45% in 2022.
The $1.2 billion revolving credit facility had approximately $701 million of available borrowing capacity, net of $496 million of borrowings and $3 million of letters of credit. The tranche A term loan had $2.26 billion outstanding. Both facilities mature in August 2026, subject to scheduled term-loan amortization.
Senior secured notes totaled $2.0 billion: $700 million due in 2026, $800 million due in 2030 and $500 million due in 2032.
UHS was in compliance with all required debt covenants at year-end. Management stated that operating cash flow, cash, available commitments and capital-market access should fund operating, investing and financing needs for the next twelve months, although refinancing and capital-market access remain subject to market conditions.
UHS repurchased approximately 3.86 million shares for $524 million in 2023 and paid $55 million of dividends, or $0.80 per share. Approximately $423 million remained available under the repurchase authorization at year-end.

Material changes versus the prior comparable period

Revenue growth was led by same-facility acute care revenue growth of 7.6% and same-facility behavioral health revenue growth of 8.0%.
Patient utilization improved: acute care same-facility occupancy rose to 67% from 64%, while behavioral health occupancy rose to 72% from 71%.
Acute care physician-related expenses increased $127 million, or 26.6%, on a same-facility basis, particularly in emergency medicine and anesthesiology.
Labor shortages, premium pay and inflationary pressures moderated from 2022 levels but continued to affect costs. Behavioral health salaries, wages and benefits increased 8.3% on a same-facility basis.
Desert Springs Hospital discontinued inpatient operations during the first quarter of 2023 after the $58 million impairment charge in 2022. UHS expects to continue emergency department services at the site while developing a new freestanding emergency department.
COVID-related support declined materially: 2023 included approximately $6 million of Medicare COVID-19 add-on revenue and no COVID uninsured-program revenue, compared with approximately $30 million and $22 million, respectively, in 2022. The public health emergency and related favorable payment provisions ended on May 11, 2023.
UHS recorded $25 million of additional professional and general liability reserves in 2023, compared with $16 million in 2022, partially offset by a $10 million favorable workers’ compensation reserve adjustment.

Outlook, management commentary and risks

No formal consolidated earnings or revenue guidance is provided in the filing. UHS expects 2024 capital expenditures of approximately $850 million to $1.0 billion, funded through internally generated funds and, if necessary, additional financing.

Management expects continued pressure from hospital-based physician costs, inflation, staffing shortages, supplies and higher borrowing rates.
UHS estimates aggregate net benefit from supplemental Medicaid provider-tax programs of $754 million in 2024, compared with $556 million in 2023. Including DSH and other programs, estimated net benefit from total supplemental Medicaid programs is $809 million in 2024 versus $629 million in 2023. These estimates depend on annual approvals, utilization, eligibility and regulatory compliance.
A new Nevada Medicaid state-directed payment program is estimated to provide approximately $158 million of net reimbursements in 2024, but continuation after 2024 is not assured.
Texas CHIRP program modifications beginning in state fiscal year 2025 may reduce payments if the performance-based component is smaller or facilities do not meet required quality metrics.
Medicaid eligibility redeterminations, the phaseout of enhanced federal Medicaid matching funds and potential Medicaid DSH reductions remain important reimbursement risks.
UHS is highly exposed to government and managed-care reimbursement, with material Medicaid revenue concentrations in Texas, California, Nevada, Illinois, Pennsylvania, Washington, D.C., Kentucky, Florida, Massachusetts and Virginia.
On February 22, 2024, a cyber incident at Change Healthcare disrupted certain billing, claims and collections processes used by UHS or its counterparties. UHS had not determined that the event was reasonably likely to materially affect cash flows, financial condition or results of operations as of the filing date.
UHS reported approximately $3.9 billion of goodwill and no goodwill impairment from its October 1, 2023 assessment. Future operating deterioration could result in impairment charges.
Professional and general liability reserves totaled $431 million at year-end, and workers’ compensation reserves totaled $130 million. The ultimate costs may differ materially from current estimates.
UHS had $189 million of standby letters of credit and surety bonds, $915 million of operating lease obligations, $99 million of construction commitments and $327 million of purchase and other obligations.
UHS is developing and will operate an acute care hospital and related facilities in Washington, D.C. Construction is expected to be completed in 2025. The District is funding the projected $439 million construction cost; UHS had incurred approximately $210 million as of year-end and committed to at least $75 million of related healthcare infrastructure spending over approximately twelve years.

Most important facts for an investor to verify

Reconcile revenue and earnings growth with the effect of supplemental Medicaid payments, payer mix, denials and nonrecurring items.
Monitor the sustainability and annual regulatory approvals of Medicaid supplemental, DSH, CHIRP and Nevada state-directed payment programs.
Assess refinancing and interest-rate exposure ahead of the 2026 maturity of the revolving facility and tranche A term loan; a 1% change in variable rates would affect pretax income by approximately $27 million.
Evaluate whether physician-related expenses, labor costs and inflation continue to pressure acute care and behavioral health margins.
Review accounts receivable growth, the increase in days sales outstanding and the assumptions used to estimate contractual and implicit price concessions.
Track professional liability reserve development, Pennsylvania Medicaid DSH repayment claims and other governmental investigations or litigation.
Assess the financial and operational impact of the Change Healthcare disruption and UHS’s broader cybersecurity exposure.
Consider the effect of share repurchases, concentrated voting control by Class A and Class C shareholders, and related-party arrangements with Universal Health Realty Income Trust.