UHS

Business Context and Reporting Period

Company: Universal Health Services, Inc. (UHS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2008
Business Overview: UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of June 30, 2008, the company operated 27 acute care hospitals and 112 behavioral health centers across 32 states, Washington D.C., and Puerto Rico.

Key Financial Metrics

Note: Debt figures represent Long-term debt ($1,050,491) plus Current maturities of long-term debt ($2,814) as of June 30, 2008.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 8% ($100 million) for the quarter and 8% ($200 million) for the six-month period compared to the prior year. Growth was driven by an 8% increase in "same facility" revenues and contributions from newly opened or acquired facilities, including Centennial Hills Hospital in Las Vegas.
• Profitability: Net income increased 4% ($2 million) for the quarter and 14% ($14 million) for the six-month period. Income before taxes rose $4 million (quarter) and $23 million (six months).
• Expense Trends: The provision for doubtful accounts increased significantly, rising from $103 million to $123 million (quarter) and $202 million to $244 million (six months), reflecting an increase in uninsured patients.
• Segment Performance:
  • Acute Care: Same-facility income before taxes increased 42% (quarter) and 35% (six months) due to higher commercial insurance coverage and operating efficiencies.
  • Behavioral Health: Same-facility income before taxes increased 10% (quarter) and 13% (six months), driven by an 8.5% increase in inpatient admissions.
• One-Time Items: The prior year (2007) results included a $16 million pre-tax reduction to reserves for professional and general liability self-insured claims, which favorably impacted 2007 earnings and makes year-over-year comparisons less favorable for 2008.

Guidance, Outlook, Risks, and Contingencies

• Capital Expenditures: Management expects to spend approximately $170 million to $195 million on capital expenditures for the remainder of 2008, funding projects including a new hospital in Palmdale, California, and expansions in California.
• Debt and Liquidity: In June 2008, the company issued an additional $150 million in senior notes (7.125% coupon, maturing 2016) to repay borrowings under its revolving credit facility and securitization program. As of June 30, 2008, $468 million remained available under the $800 million credit facility and $40 million under the $200 million securitization program.
• Legal Proceedings: The company is under ongoing civil investigation by the U.S. Department of Justice and the Office of Inspector General regarding its South Texas Health System affiliates. The investigation concerns potential violations of Medicare/Medicaid rules regarding physician employment and patient referrals. The DOJ has stated it will not pursue criminal prosecution against UHS or its affiliates at this time, but the civil investigation continues. Management cannot estimate potential financial exposure.
• Insurance and Reimbursement Risks:
  • Self-Insurance: Effective Jan 1, 2008, subsidiaries became self-insured for malpractice up to $10 million per occurrence. Total accrual for professional and general liability claims was $268 million as of June 30, 2008.
  • Medicaid: A $9 million reserve was established in 2007 for potential recoupment of Texas Medicaid supplemental payments deemed ineligible for federal matching dollars. In April 2008, CMS confirmed the ineligibility, and funds will be recouped by the state.
  • Medicare: The company anticipates a 3.7% to 4.2% increase in Medicare payments for fiscal year 2009.
• Stock Repurchases: The company repurchased 1.8 million shares of Class B Common Stock for $89.8 million during the first six months of 2008.

Investor Verification Checklist

• Uninsured Patient Trends: Verify the sustainability of revenue growth given the rising provision for doubtful accounts and charity care ($143 million per quarter).
• South Texas Investigation: Monitor updates on the DOJ civil investigation regarding physician referrals and potential financial penalties or repayment requirements.
• Medicaid Funding Stability: Assess the impact of the confirmed $9 million Texas Medicaid recoupment and the status of the Texas Medicaid Reform Waiver proposal.
• Capital Project Execution: Track the completion and financial performance of the new Centennial Hills Hospital (opened Q1 2008) and the Palmdale, California facility (scheduled for 2009).
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the fixed charge coverage ratio, given the increased debt load from the June 2008 note issuance.