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, 2009
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, 2009, the company operated 26 acute care hospitals and 103 behavioral health centers across 32 states, Washington D.C., and Puerto Rico.

Key Financial Metrics

Note: Operating cash flow for the three-month period is not explicitly isolated in the provided text, but the six-month figure is $296.6 million.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 3% ($41 million) for the quarter and 3% ($76 million) for the six months compared to the prior year periods. Growth was driven by same-facility increases and a construction management contract.
• Profitability: Net income attributable to UHS increased 49% ($27 million) for the quarter and 28% ($32 million) for the six months.
  • Key Driver: A significant $23 million reduction in professional and general liability self-insurance reserves (related to prior years) boosted income. Excluding this item, operating income still improved due to cost controls.
• Expense Management: Salaries, wages, and benefits decreased as a percentage of revenue (41.6% vs. 41.8% in Q3; 41.4% vs. 42.1% in YTD) due to moderation in wage increases and staff reductions. Other operating expenses also declined as a percentage of revenue.
• Segment Performance:
  • Acute Care: Same-facility revenues increased 3% (Q3) and 2% (YTD). Pre-tax income increased 25% (Q3) and 17% (YTD) excluding the insurance reserve benefit.
  • Behavioral Health: Same-facility revenues increased 4% (Q3) and 3% (YTD). Pre-tax income increased 10% in both periods.

Guidance, Outlook, Risks, and Contingencies

• Capital Expenditures: Management expects to spend approximately $190 million to $210 million on capital expenditures for the remainder of 2009, funding projects including new hospitals in Palmdale, CA, and Denison, TX.
• Liquidity: The company maintains an $800 million revolving credit facility with $444 million available and a $200 million accounts receivable securitization program with $190 million available. Days Sales Outstanding (DSO) improved to 41 days from 50 days in the prior year.
• Legal Proceedings & Contingencies:
  • South Texas Health System: Ongoing DOJ investigation regarding False Claims Act violations. A $25 million reserve was established in 2008, with an additional $3 million reserved in 2009. A $4.3 million discrete tax item was recorded for the non-deductible portion.
  • Virginia Behavioral Health: OIG and state Attorney General investigations into Medicaid documentation. A reserve has been established, though the amount is not material.
  • Insurance Reserves: The company is self-insured for malpractice up to $10 million per occurrence. Total accrual for professional and general liability claims was $256 million as of June 30, 2009.
• Risk Factors: Risks include potential reductions in Medicaid funding due to state budget deficits, changes in Medicare reimbursement rates (estimated 1.1% increase for FY2010), and the impact of general economic conditions on uninsured patient volumes.

Investor Verification Checklist

• Insurance Reserve Adjustments: Verify the sustainability of the $23 million income boost from the reduction in self-insurance reserves and assess the risk of future reserve increases.
• Medicaid Reimbursement: Monitor state budget deficits, particularly in Texas and Nevada, and the potential impact of proposed rate reductions or rebasing on future revenues.
• Legal Settlements: Track the status of the South Texas Health System investigation and the potential for settlement amounts to exceed the current $28 million reserve.
• Uninsured Patient Trends: Review the increasing volume of uninsured patients and the corresponding impact on the provision for doubtful accounts and charity care write-offs.
• Capital Project Completion: Confirm the timeline and cost adherence for major construction projects (Palmdale, Denison, Southwest Healthcare expansion) to ensure they do not strain liquidity.