UHS

Universal Health Services Inc. - 10-Q Summary (Q3 2008)

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2008. Universal Health Services, Inc. (UHS) owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of the reporting date, the company operated 27 acute care hospitals and 105 behavioral health centers across 32 states, Washington D.C., and Puerto Rico.

Key Financial Metrics

Note: Total Debt includes current maturities ($8.3M) and long-term debt ($935.5M). Debt-to-total capitalization was 38% as of September 30, 2008.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 7% in Q3 and 8% YTD compared to the prior year. Growth was driven by a 4% increase in same-facility revenues and contributions from new facilities, specifically Centennial Hills Hospital in Las Vegas (opened Q1 2008) and recent behavioral health acquisitions.
• Profitability: Net income rose 28% in Q3 and 17% YTD. Income before taxes increased $15 million in Q3 and $38 million YTD.
• Segment Performance:
  • Acute Care: Same-facility revenues increased 3% in Q3 and 6% YTD. However, same-facility income before taxes decreased 4% in Q3 due to increased uncompensated care expenses, though it increased 24% YTD due to operating efficiencies.
  • Behavioral Health: Same-facility revenues increased 10% in Q3 and 9% YTD. Income before taxes increased 20% in Q3 and 15% YTD, driven by higher inpatient admissions (up 8.5% in Q3) and improved margins.
• Expense Trends: The provision for doubtful accounts increased to 10.0% of revenues in Q3 2008 (from 9.3% in Q3 2007) due to a rise in uninsured patients. Salaries and wages remained stable as a percentage of revenue (42.7% in Q3 2008 vs. 43.2% in Q3 2007).
• Capital Structure: In June 2008, the company issued an additional $150 million in senior notes. The company also repurchased $104.4 million of its own stock during the first nine months of 2008.

Guidance, Outlook, Risks, and Contingencies

• Capital Expenditures: Management expects to spend approximately $80 million to $90 million on capital expenditures for the remainder of 2008, funding projects including a new hospital in Palmdale, California, and expansions in California.
• Legal Proceedings & Investigations:
  • South Texas Health System: The DOJ is not pursuing criminal action against UHS, but a civil investigation regarding Medicare/Medicaid compliance and physician referrals continues. Settlement negotiations are ongoing.
  • Two Rivers Psychiatric Hospital: CMS attempted to terminate the facility's Medicare participation due to compliance issues. A temporary restraining order has been issued preventing termination while an administrative appeal and settlement discussions proceed.
  • Virginia Facilities: OIG and state Attorney General subpoenas are active regarding Medicaid documentation at Marion Youth Center, Mountain Youth Academy, and Keystone Newport News.
• Insurance & Liability: The company is self-insured for malpractice up to $10 million per occurrence. Total accruals for professional and general liability claims were $274 million as of September 30, 2008. Property insurance deductibles for named windstorms are 5% of declared value.
• Reimbursement Risks: The company faces potential revenue reductions from proposed changes to Tricare outpatient payment methodologies and ongoing uncertainty regarding Medicaid funding levels and Medicare payment updates.

Investor Verification Checklist

• Uncompensated Care Impact: Verify the trend in the provision for doubtful accounts and charity care, which increased significantly in Q3 2008 and could pressure future margins.
• Legal Exposure: Monitor the status of the South Texas Health System civil investigation and the Two Rivers Psychiatric Hospital Medicare termination appeal for potential financial settlements or operational disruptions.
• Liquidity Position: Review the cash balance of $7.8 million against the $80-$90 million expected capital expenditure spend for Q4 2008 to assess reliance on credit facilities.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the fixed charge coverage ratio, given the high level of debt relative to equity.
• Medicaid Funding: Assess the risk of reduced Medicaid reimbursements, particularly in Texas, where a significant portion of revenue is derived, including supplemental payment programs.