Business Context and Reporting Period
Company: Universal Health Services, Inc. (UHS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. As of February 2009, the company operated 26 acute care hospitals and 101 behavioral health centers across 32 states, Washington D.C., and Puerto Rico. Revenue is derived primarily from acute care (74%) and behavioral health (25%) services.
Key Financial Metrics
| Metric | 2008 | 2007 | 2006 |
|---|---|---|---|
| Net Revenues | $5,022.4 million | $4,683.2 million | $4,124.7 million |
| Net Income | $199.4 million | $170.4 million | $259.5 million |
| Net Margin | 4.0% | 3.6% | 6.3% |
| Operating Cash Flow | $463.1 million | $348.5 million | $169.2 million |
| Capital Expenditures | $354.5 million | $339.8 million | $341.1 million |
| Total Assets | $3,742.5 million | $3,608.7 million | $3,277.0 million |
| Long-Term Debt | $990.7 million | $1,008.8 million | $821.4 million |
| Debt to Capitalization | 39% | 40% | 37% |
| Dividends per Share | $0.32 | $0.32 | $0.32 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 7% ($339 million) in 2008 compared to 2007. This was driven by a 6% increase in same-facility revenues and $114 million from new facilities (including Centennial Hills Hospital in Las Vegas) and acquisitions.
- Profitability: Net income increased 17% ($29 million) to $199.4 million. Income before taxes rose $41 million, aided by a $10 million reduction in liability expenses from PHICO estate liquidation proceeds and a $7 million after-tax gain on the sale of a Pennsylvania hospital.
- Legal Reserves: The company recorded a $25 million pre-tax charge in 2008 to establish a reserve for a government investigation regarding its South Texas Health System affiliates (False Claims Act). This partially offset operating income gains.
- Acquisitions and Divestitures: UHS spent $23 million on acquisitions (including a behavioral health facility in Georgia) and received $82 million from divestitures, primarily the sale of Central Montgomery Medical Center in Pennsylvania.
- Stock Repurchases: The company repurchased 3.27 million shares of Class B Common Stock for $149.4 million in 2008.
Guidance, Outlook, Risks, and Contingencies
- Capital Expenditure Outlook: Management expects to spend approximately $350 million to $400 million on capital expenditures in 2009, including the completion of major construction projects in Palmdale, California, and Denison, Texas.
- Regulatory and Legal Risks:
- South Texas Investigation: Ongoing DOJ investigation into physician employment and referral practices. A $25 million reserve was established, but the ultimate settlement amount is uncertain.
- Virginia Facilities: Ongoing OIG and state Attorney General investigations into Medicaid documentation at three Virginia behavioral health facilities. Financial exposure is currently indeterminable.
- Two Rivers Psychiatric Hospital: CMS attempted to terminate Medicare participation; a settlement was reached in December 2008 requiring a six-month monitoring period. Future termination remains a risk if compliance is not maintained.
- Reimbursement Risks: Significant revenue concentration in Texas and Nevada (22% from Las Vegas facilities). The company faces risks from Medicaid funding reductions in states with budget deficits and potential changes in Medicare reimbursement rates (e.g., severity-adjusted DRGs).
- Competition: Intense competition in the McAllen/Edinburg, Texas market from a physician-owned hospital is expected to continue eroding patient volumes and margins.
- Liquidity: The company maintains an $800 million revolving credit facility with $434 million available as of year-end 2008. It also has a $200 million accounts receivable securitization program with $130 million available.
Key Facts for Investor Verification
- Legal Exposure: Verify the status of the $25 million reserve for the South Texas Health System investigation and the potential for additional liabilities from the Virginia Medicaid investigations.
- Reimbursement Trends: Monitor Medicaid funding levels in Texas, Nevada, and Florida, and the impact of the new Medicare severity-adjusted DRG system on acute care margins.
- Construction Commitments: Confirm the timeline and cost overruns for the Palmdale Regional Medical Center and the Denison, Texas replacement facility, which represent significant capital commitments.
- Uninsured Patient Mix: Track the provision for doubtful accounts, which increased to 9.5% of revenues in 2008, reflecting a growing number of uninsured patients.
- Self-Insurance Reserves: Review the $272 million accrual for professional and general liability claims, noting the uncertainty in ultimate payout amounts.