Overview
Our principal business is owning and operating, through our subsidiaries, acute
care hospitals, behavioral health centers, surgical hospitals, ambulatory
surgery centers and radiation oncology centers. As of October 31, 2012, we owned
and/or operated 24 acute care hospitals (excluding Auburn Regional Medical
Center that was divested in October, 2012) and 197 behavioral health centers
(including 9 facilities acquired from Ascend Health Corporation in October,
2012) located in 36 states, Washington, D.C., Puerto Rico and the U.S. Virgin
Islands. As part of our ambulatory treatment centers division, we manage and/or
own outright or in partnerships with physicians, 6 surgical hospitals and
surgery and radiation oncology centers located in 4 states and Puerto Rico.
During the first quarter of 2012, we adopted the Financial Accounting Standards
Board's Accounting Standards Update ("ASU") No. 2011-07, "Health Care Entities
(Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision
for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care
Entities," which required certain health care entities to change the
presentation in their statement of operations by reclassifying the provision for
bad debts associated with patient service revenue from an operating expense to a
deduction from patient service revenue (net of contractual allowances and
discounts). As a result, the provision for doubtful accounts for our acute care
and behavioral health care facilities is reflected as a deduction from net
revenues in the accompanying consolidated statements of income for the three and
nine-month periods ended September 30, 2012 and 2011. The adoption of this
standard had no impact on our financial position or overall results of
operations.
As a percentage of our consolidated net revenues, net revenues from our acute
care hospitals, surgical hospitals, surgery centers and radiation oncology
centers accounted for 50% during each of the three-month periods ended
September 30, 2012 and 2011, respectively, and 50% and 51% during the nine-month
periods ended September 30, 2012 and 2011, respectively. Net revenues from our
behavioral health care facilities accounted for 50% during each of the
three-month periods ended September 30, 2012 and 2011, respectively, and 50% and
49% during the nine-month periods ended September 30, 2012 and 2011,
respectively.
Services provided by our hospitals include general and specialty surgery,
internal medicine, obstetrics, emergency room care, radiology, oncology,
diagnostic care, coronary care, pediatric services, pharmacy services and/or
behavioral health services. We provide capital resources as well as a variety of
management services to our facilities, including central purchasing, information
services, finance and control systems, facilities planning, physician
recruitment services, administrative personnel management, marketing and public
relations.
Forward-Looking Statements and Risk Factors
You should carefully review the information contained in this Quarterly Report,
and should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission (the "SEC"). In this Quarterly
Report, we state our beliefs of future events and of our future financial
performance. This Quarterly Report contains "forward-looking statements" that
reflect our current estimates, expectations and projections about our future
results, performance, prospects and opportunities. Forward-looking statements
include, among other things, the information concerning our possible future
results of operations, business and growth strategies, financing plans,
expectations that regulatory developments or other matters will not have a
material adverse effect on our business or financial condition, our competitive
position and the effects of competition, the projected growth of the industry in
which we operate, and the benefits and synergies to be obtained from our
completed and any future acquisitions, and statements of our goals and
objectives, and other similar expressions concerning matters that are not
historical facts. Words such as "may," "will," "should," "could," "would,"
"predicts," "potential," "continue," "expects," "anticipates," "future,"
"intends," "plans," "believes," "estimates," "appears," "projects" and similar
expressions, as well as statements in future tense, identify forward-looking
statements. In evaluating those statements, you should specifically consider
various factors, including the risks related to healthcare industry trends and
those detailed in our filings with the SEC including those set forth herein and
in our Annual Report on Form 10-K for the year ended December 31, 2011 in
Item 1A Risk Factors and in Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward Looking Statements and
Risk Factors. Those factors may cause our actual results to differ materially
from any of our forward-looking statements.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
our good faith belief with respect to future events, and is subject to risks and
uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements. Such factors include, among
other things, the following:
• our ability to comply with the existing laws and government regulations,
and/or changes in laws and government regulations;
• an increasing number of legislative initiatives have recently been passed
into law that may result in major changes in the health care delivery
system on a national or state level. No assurances can be given that the
implementation of these new laws will not have a material adverse effect
on our business, financial condition or results of operations;
• possible unfavorable changes in the levels and terms of reimbursement for
our charges by third party payors or government programs, including
Medicare or Medicaid;
• an increase in the number of uninsured and self-pay patients treated at
our acute care facilities that unfavorably impacts our ability to
satisfactorily and timely collect our self-pay patient accounts;
• our ability to enter into managed care provider agreements on acceptable
terms and the ability of our competitors to do the same, including
contracts with United/Sierra Healthcare in Las Vegas, Nevada;
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• the outcome of known and unknown litigation, government investigations,
false claim act allegations, and liabilities and other claims asserted
against us, including matters as disclosed in Part II Item 1. Legal
Proceedings;
• the potential unfavorable impact on our business of deterioration in
national, regional and local economic and business conditions, including a
continuation or worsening of unfavorable credit market conditions;
• competition from other healthcare providers (including physician owned facilities) in certain markets, including McAllen/Edinburg, Texas, the
site of one of our largest acute care facilities and Riverside County,
California;
• technological and pharmaceutical improvements that increase the cost of
providing, or reduce the demand for healthcare;
• our ability to attract and retain qualified personnel, nurses, physicians
and other healthcare professionals and the impact on our labor expenses
resulting from a shortage of nurses and other healthcare professionals;
• demographic changes;
• our level of indebtedness has increased substantially as a result of our
2010 acquisition of PSI, and increased more as a result of our acquisition
of Ascend Health Corporation in October, 2012 (as discussed herein), which
could, among other things, adversely affect our ability to raise
additional capital to fund operations, limit our ability to react to
changes in the economy or our industry and could potentially prevent us
from meeting our obligations under the agreements related to our
indebtedness;
• our ability to successfully integrate and improve our recent acquisitions
and the availability of suitable acquisitions and divestiture
opportunities;
• we receive Medicaid revenues in excess of $90 million annually from each
of Texas, Pennsylvania, Washington, D.C., Illinois, Massachusetts and
Virginia, making us particularly sensitive to reductions in Medicaid and
other state based revenue programs (which have been implemented in various
forms with respect to our areas of operation in the respective 2013 state
fiscal years) as well as regulatory, economic, environmental and
competitive changes in those states. In the states in which we operate,
based upon the state budgets for the 2012 fiscal year (which generally
began at various times during the second half of 2011), we estimate that,
on a blended basis, our aggregate Medicaid rates have been reduced by
approximately 3% to 4% (or approximately $45 million to $55 million
annually) from the average rates in effect during the states' 2011 fiscal
years (which generally ended during the third quarter of 2011). Our
consolidated results of operations for the three and nine-month periods
ended September 30, 2012 include the pro rata portion of these Medicaid
rate reductions. Based upon the state budgets for the 2013 fiscal year
(which generally begin at various times during the second half of 2012),
we estimate that, on a blended basis, our aggregate Medicaid rates will be
reduced by approximately 1% (or approximately $15 million annually) from
the average rates in effect during the states' 2012 fiscal years (which
generally end during the third quarter of 2012). We can provide no
assurance that further reductions to Medicaid revenues, particularly in
the above-mentioned states, will not have a material adverse effect on our
future results of operations;
• our ability to continue to obtain capital on acceptable terms, including borrowed funds, to fund the future growth of our business;
• some of our acute care facilities continue to experience decreasing
inpatient admission trends;
• our financial statements reflect large amounts due from various commercial
and private payors and there can be no assurance that failure of the
payors to remit amounts due to us will not have a material adverse effect
on our future results of operations;
• the Department of Health and Human Services ("HHS") published final
regulations in July, 2010 implementing the health information technology
("HIT") provisions of the American Recovery and Reinvestment Act (referred
to as the "HITECH Act"). The final regulation defines the "meaningful use"
of Electronic Health Records ("EHR") and establishes the requirements for
the Medicare and Medicaid EHR payment incentive programs. The
implementation period for these new Medicare and Medicaid incentive
payments started in federal fiscal year 2011 and can end as late as 2016
for Medicare and 2021 for the state Medicaid programs. Our acute care hospitals may qualify for these EHR incentive payments upon implementation
of the EHR application assuming they meet the "meaningful use criteria".
Certain of our acute care hospitals implemented EHR applications in 2011
and 2012 and we plan to continue the implementation at each of our acute
care hospitals, on a facility-by-facility basis, until completion which is
expected to occur in mid-2013. However, there can be no assurance that we
(our acute care hospitals) will ultimately qualify for these incentive
payments and, should we qualify, we are unable to quantify the amount of
incentive payments we may receive since the amounts are dependent upon
various factors including the implementation timing at each hospital.
Should we qualify for incentive payments, there may be timing differences
in the recognition of the incentive income and expenses recorded in
connection with the implementation of the EHR application which may cause
material period-to-period changes in our future results of operations.
Hospitals that do not qualify as a meaningful user of EHR by 2015 are
subject to a reduced market basket update to the inpatient prospective
payment system ("IPPS") standardized amount in 2015 and each subsequent
fiscal year. Although we believe that our acute care hospitals will be in
compliance with the EHR standards by 2015, there can be no assurance that
all of our facilities will be in compliance and therefore not subject to
the penalty provision of the HITECH Act;
• in August, 2011, the Budget Control Act of 2011 (the "2011 Act") was
enacted into law. The 2011 Act imposed annual spending limits for most
federal agencies and programs aimed at reducing budget deficits by $917
billion between 2012 and 2021, according to a report released by the
Congressional Budget Office. Among its other provisions, the law
established a bipartisan Congressional committee, known as the JointSelect Committee on Deficit Reduction (the "Joint Committee"), which was
tasked with making recommendations aimed at reducing future federal budget
deficits by an additional $1.5 trillion over 10 years. The Joint Committee
was unable to reach an agreement by the November 23, 2011 deadline and, as
a result, across-the-board cuts to discretionary, national defense and
Medicare spending were implemented which, if triggered, would result in
Medicare payment reductions of up to 2% per fiscal year with a uniform
percentage reduction across all Medicare programs starting in 2013
(approximately $32 million annual reduction to our Medicare net revenues).
We cannot predict whether Congress will attempt to suspend or restructure
the automatic budget cuts or what other deficit reduction initiatives may
be proposed by Congress;
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• as of September 30, 2012 and December 31, 2011, our accounts receivable
includes approximately $76 million and $54 million, respectively, due from
Illinois. Collection of these receivables continues to be delayed due to
state budgetary and funding pressures. Approximately $55 million as of
September 30, 2012, and $41 million as of December 31, 2011, of the
receivables due from Illinois have been outstanding in excess of 60 days,
as of each respective date, and a large portion will likely remain
outstanding for the foreseeable future. Since we expect to eventually
collect all amounts due to us, no related reserves have been established
in our consolidated financial statements. However, we can provide no
assurance that we will eventually collect all amounts due to us fromIllinois. Failure to ultimately collect all outstanding amounts due from
Illinois would have an adverse impact on our future consolidated results
of operations and cash flows.
• the ability to obtain adequate levels of general and professional
liability insurance on current terms;
• changes in our business strategies or development plans;
• fluctuations in the value of our common stock, and;
• other factors referenced herein or in our other filings with the
Securities and Exchange Commission.
Given these uncertainties, risks and assumptions, as outlined above, you are
cautioned not to place undue reliance on such forward-looking statements. Our
actual results and financial condition could differ materially from those
expressed in, or implied by, the forward-looking statements. Forward-looking
statements speak only as of the date the statements are made. We assume no
obligation to publicly update any forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting
forward-looking information, except as may be required by law. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by this cautionary statement.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in our consolidated financial statements and
accompanying notes. We consider our critical accounting policies to be those
that require us to make significant judgments and estimates when we prepare our
consolidated financial statements. For a summary of our significant accounting
policies, please see Note 1 to the Consolidated Financial Statements as included
in our Annual Report on Form 10-K for the year ended December 31, 2011.
Revenue recognition: We record revenues and related receivables for health care
services at the time the services are provided. Medicare and Medicaid revenues
represented 39% of our net patient revenues during each of the three and
nine-month periods ended September 30, 2012 and 41% of net patient revenues
during each of the three and nine-month periods ended September 30, 2011.
Revenues from managed care entities, including health maintenance organizations
and managed Medicare and Medicaid programs, accounted for 50% and 46% of our net
patient revenues during the three-month periods ended September 30, 2012 and
2011, respectively, and 49% and 46% of our net patient revenues during the
nine-month periods ended September 30, 2012 and 2011, respectively.
Provision for Doubtful Accounts: On a consolidated basis, we monitor our total
self-pay receivables to ensure that the total allowance for doubtful accounts
provides adequate coverage based on historical collection experience. Our
accounts receivable are recorded net of allowance for doubtful accounts of $339
million at September 30, 2012 and $253 million at December 31, 2011.
As of September 30, 2012 and December 31, 2011, our accounts receivable includes
approximately $76 million and $54 million, respectively, due from Illinois.
Collection of these receivables continues to be delayed due to state budgetary
and funding pressures. Although approximately $55 million of the receivables due
from Illinois as of September 30, 2012 have been outstanding in excess of 60
days, and a large portion will likely remain outstanding for the foreseeable
future, we expect to eventually collect all amounts due to us and therefore no
related reserves have been established in our consolidated financial statements.
However, we can provide no assurance that we will eventually collect all amounts
due to us from Illinois. Failure to ultimately collect all outstanding amounts
due from Illinois would have an adverse impact on our future consolidated
results of operations and cash flows.
Accounting for Medicare and Medicaid Electronic Health Records Incentive
Payments: In July 2010, the Department of Health and Human Services published
final regulations implementing the health information technology provisions of
the American Recovery and Reinvestment Act. The regulation defines the
"meaningful use" of Electronic Health Records ("EHR") and established the
requirements for the Medicare and Medicaid EHR payment incentive programs. The
implementation period for these new Medicare and Medicaid incentive payments
started in federal fiscal year 2011 and can end as late as 2016 for Medicare and
2021 for the state Medicaid programs. We recognize income related to Medicare
and Medicaid incentive payments using a gain contingency model that is based
upon when our eligible hospitals have demonstrated "meaningful use" of certified
EHR technology for the applicable period and the cost report information for the
full cost report year that will determine the final calculation of the incentive
payment is available.
Medicare EHR incentive payments: Federal regulations require that Medicare EHR
incentive payments be computed based on the Medicare cost report that begins in
the federal fiscal period in which a hospital meets the applicable "meaningful
use" requirements. Since the annual Medicare cost report periods for each of our
acute care hospitals ends on December 31st, we will recognize Medicare EHR
incentive income for each hospital during the fourth quarter of the year in
which the facility meets the "meaningful use" criteria and during the fourth
quarter of each applicable subsequent year.
Medicaid EHR incentive payments: Medicaid EHR incentive payments are determined
based upon prior period cost report information available at the time our
hospitals meet the "meaningful use" criteria. Therefore, the majority of the
Medicaid EHR incentive income recognition occurs in the period in which the
applicable hospitals are deemed to have met initial "meaningful use" criteria.
Upon meeting subsequent fiscal year "meaningful use" criteria, our hospitals may
become entitled to additional Medicaid EHR incentive payments which will be
recognized as incentive income in future periods. Medicaid EHR incentive
payments received prior to our hospitals meeting the "meaningful use" criteria
are included in other current liabilities (as deferred EHR incentive income) in
our consolidated balance sheet.
Recent Accounting Standards: For a summary of accounting standards, please see
Note 13 to the Consolidated Financial Statements, as included herein.
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Results of Operations
Three-month periods ended September 30, 2012 and 2011:
The following table summarizes our results of operations and is used in the
discussion below for the three-month periods ended September 30, 2012 and 2011
(dollar amounts in thousands):
Three months ended Three months ended
September 30, 2012 September 30, 2011
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues before provision for
doubtful accounts $ 1,869,263 $ 1,814,686
Less: Provision for doubtful accounts 188,910 152,011
Net revenues 1,680,353 100.0 % 1,662,675 100.0 %
Operating charges:
Salaries, wages and benefits 838,075 49.9 % 828,606 49.8 %
Other operating expenses 362,687 21.6 % 343,873 20.7 %
Supplies expense 191,747 11.4 % 198,794 12.0 %
EHR incentive income (10,551 ) -0.6 % 0 0.0 %
Depreciation and amortization 77,032 4.6 % 73,170 4.4 %
Lease and rental expense 23,481 1.4 % 22,704 1.4 %
Costs related to extinguishment of
debt 29,170 1.7 % 0 0.0 %
Subtotal-operating expenses 1,511,641 90.0 % 1,467,147 88.2 %
Income from operations 168,712 10.0 % 195,528 11.8 %
Interest expense, net 45,207 2.7 % 48,452 2.9 %
Income before income taxes 123,505 7.3 % 147,076 8.8 %
Provision for income taxes 42,132 2.5 % 52,234 3.1 %
Net income 81,373 4.8 % 94,842 5.7 %
Less: Income attributable to
noncontrolling interests 9,556 0.6 % 9,788 0.6 %
Net income attributable to UHS $ 71,817 4.3 % $ 85,054 5.1 %
Net revenues increased 1% or $18 million to $1.68 billion during the three-month
period ended September 30, 2012 as compared to $1.66 billion during the
comparable quarter of the prior year. The increase was attributable to a $24
million or 2% increase in net revenues generated at our acute care hospitals and
behavioral health care facilities owned during both periods (which we refer to
as "same facility"), partially offset by $6 million of other combined net
decreases in revenues resulting primarily from the divestiture of a behavioral
health care facility in January, 2012 (San Juan Capestrano).
Income before income taxes (before deduction for income attributable to
noncontrolling interests) decreased $24 million to $124 million during the
three-month period ended September 30, 2012 as compared to $147 million during
the comparable quarter of the prior year. Included in our income before income
taxes during the third quarter of 2012, as compared to the comparable prior year
quarter, was the following:
a. a decrease of $11 million at our acute care facilities as discussed below in Acute Care Hospital Services, excluding impact of the implementation of
electronic health records ("EHR") applications at our acute care
hospitals, as mentioned in e. below;
b. an increase of $16 million at our behavioral health care facilities, as
discussed below in Behavioral Health Services, excluding the impact of the
item mentioned in c. below;
c. a decrease of $29 million resulting from the write-off of deferred
financing costs related to the portion of our Term Loan B credit facility
that was extinguished during the third quarter of 2012;
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d. an increase of $3 million due to a decrease in interest expense resulting
primarily from a decrease in our average borrowings outstanding;
e. an increase of $3 million related to the incentive income, net of
expenses, recorded in connection with the implementation of EHR
applications at our acute care hospitals, and;
f. $6 million of other combined net decreases including increased corporate
overhead expenses.
Net income attributable to UHS decreased $13 million to $72 million during the
three-month period ended September 30, 2012 as compared to $85 million during
the comparable prior year quarter. The decrease during the third quarter of
2012, as compared to the comparable prior year quarter, consisted of:
• a decrease of $24 million in income before income taxes, as discussed
above, and;
• an increase of $10 million resulting primarily from a decrease in the provision for income taxes resulting from the income tax benefit recorded
on the $24 million decrease in pre-tax income and a favorable income tax
adjustment of approximately $2 million recorded during the third quarter
of 2012.
Nine-month periods ended September 30, 2012 and 2011:
The following table summarizes our results of operations and is used in the
discussion below for the nine-month periods ended September 30, 2012 and 2011
(dollar amounts in thousands):
Nine months ended Nine months ended
September 30, 2012 September 30, 2011
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues before provision for
doubtful accounts $ 5,718,676 $ 5,553,268
Less: Provision for doubtful accounts 522,203 456,042
Net revenues 5,196,473 100.0 % 5,097,226 100.0 %
Operating charges:
Salaries, wages and benefits 2,565,052 49.4 % 2,492,570 48.9 %
Other operating expenses 1,059,048 20.4 % 1,030,492 20.2 %
Supplies expense 594,924 11.4 % 603,657 11.8 %
EHR incentive income (12,506 ) -0.2 % 0 0.0 %
Depreciation and amortization 221,807 4.3 % 213,828 4.2 %
Lease and rental expense 70,906 1.4 % 68,501 1.3 %
Costs related to extinguishment of
debt 29,170 0.6 % 0 0.0 %
Subtotal-operating expenses 4,528,401 87.1 % 4,409,048 86.5 %
Income from operations 668,072 12.9 % 688,178 13.5 %
Interest expense, net 137,805 2.7 % 154,677 3.0 %
Income before income taxes 530,267 10.2 % 533,501 10.5 %
Provision for income taxes 188,880 3.6 % 192,638 3.8 %
Net income 341,387 6.6 % 340,863 6.7 %
Less: Income attributable to
noncontrolling interests 33,402 0.6 % 37,967 0.7 %
Net income attributable to UHS $ 307,985 5.9 % $ 302,896 5.9 %
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Net revenues increased 2% or $99 million to $5.20 billion during the nine-month
period ended September 30, 2012 as compared to $5.10 billion during the
comparable period of the prior year. The increase was attributable to:
• a $90 million or 2% increase in net revenues generated at our acute care
hospitals and behavioral health care facilities, on a same facility basis;
• $36 million of revenues resulting from an agreement, which was part of an
industry-wide settlement related to underpayments of Medicare inpatient
prospective payments during a number of prior years, entered into during
the first quarter of 2012 with the United States Department of Health and
Human Services, the Secretary of Health and Human Services, and the
Centers for Medicare and Medicaid Services, and;
• $27 million of other combined net decreases in revenues resulting
primarily from the divestiture of a behavioral health care facility in
January, 2012 (San Juan Capestrano) and the temporary closure of a
behavioral health care facility that was closed during the third quarter
of 2011 from flood damage (the facility re-opened in March, 2012),
partially offset by the 2011 portion of Medicaid revenues recorded during
the first nine months of 2012 related to new supplemental revenue programs
initiated in Oklahoma, Ohio and Indiana.
Income before income taxes (before deduction for income attributable to
noncontrolling interests) decreased $3 million to $530 million during the
nine-month period ended September 30, 2012 as compared to $534 million during
the comparable period of the prior year. Included in our income before income
taxes during the first nine months of 2012, as compared to the comparable prior
year period, was the following:
a. a decrease of $44 million at our acute care facilities as discussed below
in Acute Care Hospital Services, excluding the impact of the applicable
items mentioned in c., f. and h. below;
b. an increase of $49 million at our behavioral health care facilities, as
discussed below in Behavioral Health Services, excluding the impact of the
applicable items mentioned in e. and f. below;
c. an increase of $33 million (net of related expenses) resulting from an
agreement, which was part of an industry-wide settlement related to
underpayments of Medicare inpatient prospective payments during a number
of prior years, entered into with the United States Department of Health
and Human Services, the Secretary of Health and Human Services, and the
Centers for Medicare and Medicaid Services;
d. a decrease of $29 million resulting from the write-off of deferred
financing costs related to the portion of our Term Loan B credit facility
that was extinguished during the third quarter of 2012;
e. an increase of $7 million representing the 2011 portion of the netMedicaid supplemental reimbursements earned pursuant to the Oklahoma
Supplemental Hospital Offset Payment Program ("SHOPP") which is expected
to provide annual aggregate net reimbursements of $14 million to our
facilities located in the state during the state's fiscal years of 2012
and 2013, retroactive to July 1, 2011;
f. a net aggregate decrease of $5 million resulting from: (i) the revised
Supplemental Security Income ratios utilized for calculating Medicare
disproportionate share hospital reimbursements for federal fiscal years
2006 through 2009 ($7 million unfavorable impact); (ii) the write-off of
receivables related to revenues recorded during 2011 at two of our acute
care hospitals located in Florida resulting from reductions in certain
county reimbursements due to reductions in federal matching
Inter-Governmental Transfer funds ($4 million unfavorable impact), and;
(iii) the 2011 portion of net Medicaid supplemental revenues recorded
during the first nine months of 2012 related to new programs initiated in
certain states in which we operate behavioral health care facilities ($6
million favorable impact);
g. an increase of $17 million due to a decrease in interest expense resulting
primarily from a decrease in our average outstanding borrowings and a
decrease in our average effective interest rate (due primarily to an amendment to our credit agreement in March of 2011 which, among other
things, provided for reductions in the rates payable for borrowings
outstanding under our Term Loan A, Term Loan B and revolving credit
facility);
h. a decrease of $6 million related to the expenses, net of incentive income,
recorded in connection with the implementation of EHR applications at our
acute care hospitals, and;
i. $25 million of other combined net decreases including increased corporate
overhead expenses.
Net income attributable to UHS increased $5 million to $308 million during the
nine-month period ended September 30, 2012 as compared to $303 million during
the comparable prior year period. The increase during the first nine months of
2012, as compared to the comparable prior year period, consisted of:
• a decrease of $3 million in income before income taxes, as discussed above;
• an increase of $5 million resulting from a decrease in income attributable
to noncontrolling interests, and;
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• an increase of $4 million resulting from a decrease in the provision for
income taxes resulting primarily from a favorable income tax adjustment of
approximately $2 million recorded during the third quarter of 2012.
Acute Care Hospital Services
Same Facility Basis Acute Care Hospitals
We believe that providing our results on a "Same Facility" basis, which includes
the operating results for facilities owned in both the current year and prior
year periods, is helpful to our investors as a measure of our operating
performance. Our "Same Facility" results also neutralize the impact of the EHR
applications and the effect of items that are non-operational in nature
including items such as, but not limited to, gains on sales of assets and
businesses, impacts of settlements, legal judgments and lawsuits and other
amounts that may be reflected in the current or prior year financial statements
that relate to prior periods.
The following table summarizes the results of operations for our acute care
facilities, on a same facility and all acute care basis, and is used in the
discussion below for the three and nine-month periods ended September 30, 2012
and 2011 (dollar amounts in thousands):
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues before provision
for doubtful accounts $ 994,969 $ 966,119 $ 3,031,053 $ 2,985,515
Less: Provision for doubtful
accounts 166,570 134,344 456,078 398,445
Net revenues 828,399 100.0 % 831,775 100.0 % 2,574,975 100.0 % 2,587,070 100.0 %
Operating charges:
Salaries, wages and benefits 381,266 46.0 % 379,287 45.6 % 1,156,914 44.9 % 1,130,541 43.7 %
Other operating expenses 186,254 22.5 % 177,692 21.4 % 535,470 20.8 % 531,022 20.5 %
Supplies expense 150,097 18.1 % 152,093 18.3 % 464,552 18.0 % 465,166 18.0 %
Depreciation and amortization 47,028 5.7 % 49,068 5.9 % 139,609 5.4 % 142,556 5.5 %
Lease and rental expense 14,313 1.7 % 13,093 1.6 % 43,523 1.7 % 39,539 1.5 %
Subtotal-operating expenses 778,958 94.0 % 771,233 92.7 % 2,340,068 90.9 % 2,308,824 89.2 %
Income from operations 49,441 6.0 % 60,542 7.3 % 234,907 9.1 % 278,246 10.8 %
Interest expense, net 1,129 0.1 % 957 0.1 % 3,511 0.1 % 2,946 0.1 %
Income before income taxes 48,312 5.8 % 59,585 7.2 % 231,396 9.0 % 275,300 10.6 %
Three-month periods ended September 30, 2012 and 2011:
During the three-month period ended September 30, 2012, as compared to the
comparable prior year quarter, net revenues at our acute care hospitals, on a
same facility basis, decreased $3 million or less than 1%. Income before income
taxes (and before income attributable to noncontrolling interests) decreased $11
million or 19% to $48 million or 5.8% of net revenues during the third quarter
of 2012 as compared to $60 million or 7.2% of net revenues during the comparable
prior year quarter.
During the three-month period ended September 30, 2012, as compared to the
comparable prior year quarter, inpatient admissions to our acute care facilities
decreased 2.6% and adjusted admissions (adjusted for outpatient activity)
decreased 1.7%. Patient days at these facilities decreased 2.0% during the third
quarter of 2012 and adjusted patient days decreased 1.7% during the three-month
period ended September 30, 2012 as compared to the comparable prior year
quarter. The average length of inpatient stay at these facilities was 4.4 days
during each of the three-month periods ended September 30, 2012 and 2011,
respectively. The occupancy rate, based on the average available beds at these
facilities, was 54% and 56% during the three-month periods ended September 30,
2012 and 2011, respectively. During the three-month period ended September 30,
2012, net revenue per adjusted admission increased 1.3% and net revenue per
adjusted patient day increased 0.6%, as compared to the comparable quarter of
the prior year.
Nine-month periods ended September 30, 2012 and 2011:
During the nine-month period ended September 30, 2012, as compared to the
comparable prior year period, net revenues at our acute care hospitals, on a
same facility basis, decreased $12 million or approximately 1%. Income before
income taxes (and before income attributable to noncontrolling interests)
decreased $44 million or 16% to $231 million or 9.0% of net revenues during the
first nine months of 2012 as compared to $275 million or 10.6% of net revenues
during the comparable prior year period.
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During the nine-month period ended September 30, 2012, as compared to the
comparable prior year period, inpatient admissions to our acute care facilities
decreased 2.9% and adjusted admissions decreased 0.3%. Patient days at these
facilities decreased 2.4% during the first nine months of 2012 and adjusted
patient days increased 0.3% during the nine-month period ended September 30,
2012 as compared to the comparable prior year period. The average length of
inpatient stay at these facilities was 4.5 days during each of the nine-month
periods ended September 30, 2012 and 2011. The occupancy rate, based on the
average available beds at these facilities, was 57% and 59% during the
nine-month periods ended September 30, 2012 and 2011, respectively. During the
nine-month period ended September 30, 2012, net revenue per adjusted admission
decreased 0.2% and net revenue per adjusted patient day decreased 0.7%, as
compared to the comparable period of the prior year.
The decreases in income from operations, net revenues and net revenue per
adjusted admission and adjusted patient day experienced at our acute care
hospitals during the three and nine-month periods ended September 30, 2012, as
compared to the comparable periods of the prior year, were largely due a decline
in organic revenue growth caused by the continuing trends of weak demand and
deteriorating payor mix
Charity care and uninsured discounts:
A significant portion of the patients treated throughout our portfolio of acute
care hospitals are uninsured patients which, in part, has resulted from an
increase in the number of patients who are employed but do not have health
insurance or who have policies with relatively high deductibles. Patients
treated at our hospitals for non-elective services, who have gross income less
than 400% of the federal poverty guidelines, are deemed eligible for charity
care. The federal poverty guidelines are established by the federal government
and are based on income and family size. Because we do not pursue collection of
amounts that qualify as charity care, they are not reported in our net revenues
or in our accounts receivable, net. We also provide discounts to uninsured
patients (included in "uninsured discounts" amounts below) who do not qualify
for Medicaid or charity care. Because we do not pursue collection of amounts
classified as uninsured discounts, they are not reported in our net revenues or
in our accounts receivable, net. In implementing the discount policy, we first
attempt to qualify uninsured patients for governmental programs, charity care or
any other discount program. If an uninsured patient does not qualify for these
programs, the uninsured discount is applied.
The following tables show the amounts recorded at our acute care hospitals for
charity care and uninsured discounts, based on charges at established rates, for
the three and nine-month periods ended September 30, 2012 and 2011:
Uncompensated care (in millions):
Three Months Three Months
Ended Sept. 30, Ended Sept. 30,
2012 % 2011 %
Charity care $ 185 71 % $ 212 86 %
Uninsured discounts 74 29 % 34 14 %
Total uncompensated care $ 259 100 % $ 246 100 %
Nine Months Nine Months
Ended Sept. 30, Ended Sept. 30,
2012 % 2011 %
Charity care $ 643 77 % $ 591 83 %
Uninsured discounts 197 23 % 117 17 %
Total uncompensated care $ 840 100 % $ 708 100 %
The estimated costs of providing uncompensated care as reflected below were
based on a calculation which multiplied the percentage of operating expenses for
our acute care hospitals to gross charges for those hospitals by the
above-mentioned total uncompensated care amounts. The percentage of cost to
gross charges is calculated based on the total operating expenses for our acute
care facilities (excluding provision for doubtful accounts) divided by gross
patient service revenue for those facilities. An increase in the level of
uninsured patients to our facilities and the resulting adverse trends in the
provision for doubtful accounts and uncompensated care provided could have a
material unfavorable impact on our future operating results.
Estimated cost of providing uncompensated care (in millions):
Three Months Ended Nine Months Ended
Sept. 30, 2012 Sept. 30, 2011 Sept. 30, 2012 Sept. 30, 2011
Estimated cost of providing
charity care $ 32 $ 38 $ 108 $ 105
Estimated cost of providing
uninsured discounts related
care 13 7 33 21
Estimated cost of providing
uncompensated care $ 45 $ 45 $ 141 $ 126
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All Acute Care Hospitals
The following table summarizes the results of operations for our acute care
hospitals for the three and nine-month periods ended September 30, 2012 and
2011.
Three-month periods ended September 30, 2012 and 2011:
Included in the financial results below for the three-month periods ended
September 30, 2012 and 2011, in addition to our acute care hospitals' same
facility basis financial results as discussed above, were certain other items
consisting of the net favorable impact of $3 million recorded during the third
quarter of 2012 related to the incentive income ($11 million) and expenses ($8
million) recorded in connection with the implementation of electronic health
records ("EHR") applications at our acute care hospitals (see HITECH Act in
Sources of Revenue below for additional disclosure), and a net charge of $3
million from other amounts.
Nine-month periods ended September 30, 2012 and 2011:
Included in the financial results below for the nine-month periods ended
September 30, 2012 and 2011, in addition to our acute care hospitals' same
facility basis financial results as discussed above, were the following items:
• a net favorable impact of $33 million ($36 million of net revenues and $3
million of related operating expenses) resulting from an agreement, which was
part of an industry-wide settlement related to underpayments of Medicare
inpatient prospective payments during a number of prior years, entered into
with the United States Department of Health and Human Services, the Secretary
of Health and Human Services, and the Centers for Medicare and Medicaid
Services;
• an aggregate unfavorable impact of $11 million resulting from a $7 million
reduction to net revenues from the revised Supplemental Security Income
ratios utilized for calculating Medicare disproportionate share hospital
reimbursements for federal fiscal years 2006 through 2009 and a $4 million
reduction to net revenues resulting from the write-off of receivables related
to revenues recorded during 2011 at two of our acute care hospitals located
in Florida resulting from reductions in certain county reimbursements due to
reductions in federal matching Inter-Governmental Transfer funds;
• a net charge of $7 million recorded during the first nine months of 2012 related to the incentive income ($13 million) and expenses ($20 million)
recorded in connection with the implementation of EHR applications at our
acute care hospitals, and;
• other combined amounts aggregating to a net charge $7 million during the
nine-month period ended September 30, 2012 and a net charge of $1 million
recorded during the nine-month period ended September 30, 2011.
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues before provision for
doubtful accounts $ 994,969 $ 966,119 $ 3,054,605 $ 2,985,515
Less: Provision for doubtful
accounts 166,570 134,344 456,078 398,445
Net revenues 828,399 100.0 % 831,775 100.0 % 2,598,527 100.0 % 2,587,070 100.0 %
Operating charges:
Salaries, wages and benefits 384,045 46.4 % 379,287 45.6 % 1,167,636 44.9 % 1,130,541 43.7 %
Other operating expenses 188,838 22.8 % 180,250 21.7 % 543,725 20.9 % 531,166 20.5 %
Supplies expense 150,097 18.1 % 152,093 18.3 % 464,552 17.9 % 465,166 18.0 %
Depreciation and amortization 51,603 6.2 % 49,068 5.9 % 147,711 5.7 % 142,556 5.5 %
Lease and rental expense 14,313 1.7 % 13,093 1.6 % 43,523 1.7 % 39,539 1.5 %
EHR incentive income (10,551 ) -1.3 % 0 0.0 % (12,506 ) -0.5 % 0 0.0 %
Subtotal-operating expenses 778,345 94.0 % 773,791 93.0 % 2,354,641 91.4 % 2,308,968 89.3 %
Income from operations 50,054 6.0 % 57,984 7.0 % 243,886 9.4 % 278,102 10.7 %
Interest expense, net 1,129 0.1 % 957 0.1 % 3,511 0.1 % 2,946 0.1 %
Income before income taxes 48,925 5.9 % 57,027 6.9 % 240,375 9.3 % 275,156 10.6 %
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Behavioral Health Services
The following table summarizes the results of operations for our behavioral
health care facilities, on a same facility basis, and is used in the discussion
below for the three and nine-month periods ended September 30, 2012 and 2011
(dollar amounts in thousands):
Same Facility-Behavioral Health
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues before provision
for doubtful accounts $ 856,258 $ 824,579 $ 2,606,091 $ 2,495,450
Less: Provision for doubtful
accounts 21,854 17,430 65,244 56,402
Net revenues 834,404 100.0 % 807,149 100.0 % 2,540,847 100.0 % 2,439,048 100.0 %
Operating charges:
Salaries, wages and benefits 413,637 49.6 % 402,866 49.9 % 1,261,549 49.7 % 1,221,074 50.1 %
Other operating expenses 148,891 17.8 % 145,901 18.1 % 448,568 17.7 % 435,839 17.9 %
Supplies expense 40,061 4.8 % 44,236 5.5 % 125,611 4.9 % 131,201 5.4 %
Depreciation and amortization 23,292 2.8 % 21,341 2.6 % 68,035 2.7 % 63,300 2.6 %
Lease and rental expense 8,345 1.0 % 8,218 1.0 % 25,212 1.0 % 24,742 1.0 %
Subtotal-operating expenses 634,226 76.0 % 622,562 77.1 % 1,928,975 75.9 % 1,876,156 76.9 %
Income from operations 200,178 24.0 % 184,587 22.9 % 611,872 24.1 % 562,892 23.1 %
Interest expense, net 431 0.1 % 377 0.0 % 1,192 0.0 % 1,350 0.1 %
Income before income taxes 199,747 23.9 % 184,210 22.8 % 610,680 24.0 % 561,542 23.0 %
Three-month periods ended September 30, 2012 and 2011:
On a same facility basis, during the third quarter of 2012, as compared to the
third quarter of 2011, net revenues at our behavioral health care facilities
increased 3% or $27 million to $834 million from $807 million. Income before
income taxes increased $16 million or 8% to $200 million or 23.9% of net
revenues during the three-month period ended September 30, 2012, as compared to
$184 million or 22.8% of net revenues during the comparable prior year quarter.
On a same facility basis, inpatient admissions and adjusted admissions to our
behavioral health facilities increased 2.8% and 2.6%, respectively, during the
three-month period ended September 30, 2012 as compared to the comparable
quarter of the prior year. Patient days and adjusted patient days increased 0.9%
and 0.7%, respectively, during the three-month period ended September 30, 2012
as compared to the comparable prior year quarter. The average length of
inpatient stay at these facilities was 14.1 days and 14.4 days during the
three-month periods ended September 30, 2012 and 2011, respectively. The
occupancy rate, based on the average available beds at these facilities, was 73%
during each of the three-month periods ended September 30, 2012 and 2011. During
the three-month period ended September 30, 2012, net revenue per adjusted
admission increased 0.7% and net revenue per adjusted patient day increased
2.6%, as compared to the comparable quarter of the prior year.
Nine-month periods ended September 30, 2012 and 2011:
On a same facility basis, during the first nine months of 2012, as compared to
the comparable period of 2011, net revenues at our behavioral health care
facilities increased 4% or $102 million to $2.54 billion from $2.44 billion.
Income before income taxes increased $49 million or 9% to $611 million or 24.0%
of net revenues during the nine-month period ended September 30, 2012, as
compared to $562 million or 23.0% of net revenues during the comparable period
of 2011.
On a same facility basis, inpatient admissions and adjusted admissions to our
behavioral health facilities increased 4.8% and 5.0%, respectively, during the
nine-month period ended September 30, 2012 as compared to the comparable period
of 2011. Patient days and adjusted patient days increased 1.0% and 1.2%,
respectively, during the nine-month period ended September 30, 2012 as compared
to the comparable period of 2011. The average length of inpatient stay at these
facilities was 14.0 days and 14.5 days during the nine-month periods ended
September 30, 2012 and 2011, respectively. The occupancy rate, based on the
average available beds at these facilities, was 75% and 74% during each of the
nine-month periods ended September 30, 2012 and 2011. During the nine-month
period ended September 30, 2012, net revenue per adjusted admission decreased
0.7% and net revenue per adjusted patient day increased 2.9%, as compared to the
comparable period of 2011.
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All Behavioral Health Care Facilities
The following table summarizes the results of operations for our behavioral
health care facilities for the three and nine-month periods ended September 30,
2012 and 2011.
Three-month periods ended September 30, 2012 and 2011:
Included in the financial results below for the three-month period ended
September 30, 2012, in addition to our behavioral health care facilities' same
facility basis financial results as discussed above, were various other items
that combined to a net favorable aggregate of approximately $1 million.
Nine-month periods ended September 30, 2012 and 2011:
Included in the financial results below for the nine-month period ended
September 30, 2012, in addition to our behavioral health care facilities' same
facility basis financial results as discussed above, were the following items:
• $7 million of net revenues recorded during the first quarter of 2012
representing the 2011 portion of the net Medicaid supplemental reimbursements
earned pursuant to the Oklahoma Supplemental Hospital Offset Payment Program;
• $7 million of net revenues recorded during the second quarter of 2012
representing the 2011 portion of the net Medicaid supplemental reimbursements
earned primarily from new programs approved in Indiana and Ohio which were
retroactive to July 1, 2011, and;
• an other combined net favorable aggregate of $3 million during the first nine
months of 2012 and an other combined net unfavorable aggregate of $2 million
during the first nine months of 2011.
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues before provision
for doubtful accounts $ 863,995 $ 843,535 $ 2,638,400 $ 2,550,833
Less: Provision for doubtful
accounts 22,326 17,710 66,144 57,497
Net revenues 841,669 100.0 % 825,825 100.0 % 2,572,256 100.0 % 2,493,336 100.0 %
Operating charges:
Salaries, wages and benefits 417,794 49.6 % 414,014 50.1 % 1,276,741 49.6 % 1,252,040 50.2 %
Other operating expenses 149,845 17.8 % 150,752 18.3 % 444,522 17.3 % 454,314 18.2 %
Supplies expense 40,414 4.8 % 45,349 5.5 % 126,686 4.9 % 134,477 5.4 %
Depreciation and amortization 23,809 2.8 % 22,141 2.7 % 69,214 2.7 % 65,241 2.6 %
Lease and rental expense 8,665 1.0 % 8,887 1.1 % 25,731 1.0 % 26,231 1.1 %
Subtotal-operating expenses 640,527 76.1 % 641,143 77.6 % 1,942,894 75.5 % 1,932,303 77.5 %
Income from operations 201,142 23.9 % 184,682 22.4 % 629,362 24.5 % 561,033 22.5 %
Interest expense, net 431 0.1 % 378 0.0 % 1,192 0.0 % 1,352 0.1 %
Income before income taxes 200,711 23.8 % 184,304 22.3 % 628,170 24.4 % 559,681 22.4 %
Sources of Revenue
Overview: We receive payments for services rendered from private insurers,
including managed care plans, the federal government under the Medicare program,
state governments under their respective Medicaid programs and directly from
patients.
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The following table shows the approximate percentages of net patient revenue for
the three and nine-month periods ended September 30, 2012 and 2011 presented:
(i) on a combined basis for both our acute care and behavioral health
facilities; (ii) for our acute care facilities only, and; (iii) for our
behavioral health facilities only:
Percentage of Net Patient Percentage of Net Patient
Acute Care and Behavioral Health Facilities Combined Revenues Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Third Party Payors:
Medicare 24 % 24 % 24 % 24 %
Medicaid 15 % 17 % 15 % 17 %
Managed Care (HMO and PPOs) 50 % 46 % 49 % 46 %
Other Sources 11 % 13 % 12 % 13 %
Total 100 % 100 % 100 % 100 %
Percentage of Net Patient Percentage of Net Patient
Acute Care Facilities Revenues Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Third Party Payors:
Medicare 28 % 28 % 29 % 29 %
Medicaid 7 % 9 % 7 % 9 %
Managed Care (HMO and PPOs) 59 % 52 % 57 % 53 %
Other Sources 6 % 11 % 7 % 9 %
Total 100 % 100 % 100 % 100 %
Percentage of Net Patient Percentage of Net Patient
Behavioral Health Facilities Revenues Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Third Party Payors:
Medicare 21 % 19 % 19 % 18 %
Medicaid 23 % 24 % 23 % 25 %
Managed Care (HMO and PPOs) 40 % 40 % 40 % 39 %
Other Sources 16 % 17 % 18 % 18 %
Total 100 % 100 % 100 % 100 %
Medicare: Medicare is a federal program that provides certain hospital and
medical insurance benefits to persons aged 65 and over, some disabled persons
and persons with end-stage renal disease. All of our acute care hospitals and
many of our behavioral health centers are certified as providers of Medicare
services by the appropriate governmental authorities. Amounts received under the
Medicare program are generally significantly less than a hospital's customary
charges for services provided. Since a substantial portion of our revenues will
come from patients under the Medicare program, our ability to operate our
business successfully in the future will depend in large measure on our ability
to adapt to changes in this program.
Under the Medicare program, for inpatient services, our general acute care
hospitals receive reimbursement under the inpatient prospective payment system
("IPPS"). Under the IPPS, hospitals are paid a predetermined fixed payment
amount for each hospital discharge. The fixed payment amount is based upon each
patient's Medicare severity diagnosis related group ("MS-DRG"). Every MS-DRG is
assigned a payment rate based upon the estimated intensity of hospital resources
necessary to treat the average patient with that particular diagnosis. The
MS-DRG payment rates are based upon historical national average costs and do not
consider the actual costs incurred by a hospital in providing care. This MS-DRG
assignment also affects the predetermined capital rate paid with each MS-DRG.
The MS-DRG and capital payment rates are adjusted annually by the predetermined
geographic adjustment factor for the geographic region in which a particular
hospital is located and are weighted based upon a statistically normal
distribution of severity. While we generally will not receive payment from
Medicare for inpatient services, other than the MS-DRG payment, a hospital may
qualify for an "outlier" payment if a particular patient's treatment costs are
extraordinarily high and exceed a specified threshold.
MS-DRG rates are adjusted by an update factor each federal fiscal year, which
begins on October 1. The index used to adjust the MS-DRG rates, known as the
"hospital market basket index," gives consideration to the inflation experienced
by hospitals in purchasing goods and services. Generally, however, the
percentage increases in the MS-DRG payments have been lower than the projected
increase in the cost of goods and services purchased by hospitals.
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In July, 2010, CMS published its final IPPS 2011 payment rule which provided for
a 2.6% market basket increase to the base Medicare MS-DRG blended rate. When
statutorily mandated budget neutrality factors and annual geographic wage index
updates and the documenting and coding adjustments were considered, our overall
decrease from the federal fiscal year 2011 rule was 1.1%. In addition, as
outlined in the Sources of Revenues and Health Care Reform discussion below, CMS
was also required by federal law to reduce the update factor by 0.25% in federal
fiscal year 2011.
In August, 2011, CMS published its final IPPS 2012 payment rule which provided
for a 3.0% market basket increase to the base Medicare MS-DRG blended rate. When
statutorily mandated budget neutrality factors, annual geographic wage index
updates, documenting and coding adjustments and Health Care Reform productivity
adjustments are considered, we estimate our overall increase from the final
federal fiscal year 2012 rule will approximate 0.6%. CMS also includes a 2.0%
market basket reduction related to prior year documentation and coding
adjustments as well as a 1.1% increase related to the correction of a prior year
wage index budget neutrality adjustment. In addition, as outlined in the Sources
of Revenues and Health Care Reform discussion below, CMS was also required by
federal law to reduce the update factor by 0.10% in federal fiscal year 2012.
The projected impact from this IPPS rule noted above reflects all of the
adjustments described in this paragraph.
In August, 2012, CMS published its final IPPS 2013 payment rule which provided
for a 2.6% market basket increase to the base Medicare MS-DRG blended rate. When
statutorily mandated budget neutrality factors, annual geographic wage index
updates, documenting and coding adjustments and Health Care Reform mandated
adjustments are considered, we estimate our overall increase from the final
federal fiscal year 2013 rule (covering the period of October 1, 2012 through
September 30, 2013) will approximate 1.8%. This projected impact from the IPPS
2013 final rule reflects all of the adjustments described in this paragraph,
however, it excludes the impact of potential reductions related to the Budget
Control Act of 2011, as discussed below.
In September, 2007, the "TMA, Abstinence Education, and QI Programs Extension
Act of 2007" legislation took effect and scaled back cuts in hospital
reimbursement that CMS was set to impose. In federal fiscal years 2010 to 2012,
the new law requires CMS to make adjustments to the Medicare standardized
amounts in these years to reflect the removal of actual aggregate payment
increases or decreases for documentation and coding adjustments that occurred
during federal fiscal years 2008 and 2009 as compared to the initial CMS
estimates. In federal fiscal year 2010, CMS made its initial statutory mandated
adjustment under this legislation and will continue to do so in subsequent
fiscal years to ensure the implementation of MS-DRGs was budget neutral among
all affected hospitals. In July, 2010, the IPPS 2011 proposed payment rule
applied a 2.9% reduction to the 2011 market basket update and indicated another
2.9% reduction would also be applied in 2012 for documenting and coding. In this
same rule, CMS indicated a remaining documenting and coding adjustment of 3.9%
reduction is still required to be made to future IPPS updates. In the 2012 IPPS
final rule, CMS offset 2.0% of this remaining reduction and has proposed to
offset the remaining 1.9% in the IPPS 2013 payment rule described above.
On January 1, 2005, CMS implemented a new Psychiatric Prospective Payment System
("Psych PPS") for inpatient services furnished by psychiatric hospitals under
the Medicare program. This system replaced the cost-based reimbursement
guidelines with a per diem Psych PPS with adjustments to account for certain
facility and patient characteristics. The Psych PPS also contained provisions
for outlier payments and an adjustment to a psychiatric hospital's base payment
if it maintains a full-service emergency department. According to the April,
2010 CMS notice, the market basket increase was 2.4% for the period of July 1,
2010 through June 30, 2011. In April, 2011 CMS published its final Psych PPS
rule for the fifteen month period July 1, 2011 to September 30, 2012. The market
basket increase for this time period is 2.95%, which includes a 0.25% reduction
required by the federal Health Care Reform legislation enacted in 2010. In
August, 2012 CMS published the federal year 2013 Psych PPS rate notice. The
market basket increase for this period is 2.7% less required Health Care Reform
legislation reductions totaling 0.8% for a net market basket increase of 1.9%.
In November 2010, CMS published its annual final Medicare Outpatient Prospective
Payment System ("OPPS") rule for 2011. The final market basket increase to the
OPPS base rate is 2.46%. In addition, as outlined in the Sources of Revenues and
Health Care Reform discussion below, CMS is also required by federal law to
reduce the update factor by 0.25% in federal fiscal year 2011. When other
statutorily required adjustments and hospital patient service mix are
considered, the overall Medicare OPPS payment increase for 2011 is estimated to
be 3.2%.
In November, 2011, CMS published its annual final Medicare OPPS rule for 2012.
The market basket increase to the OPPS base rate is 3.0%. In addition, as
outlined in the Sources of Revenues and Health Care Reform discussion below, CMS
is also required by federal law to reduce the update factor by 0.1% in federal
fiscal year 2012 and to reduce the annual update by a productivity adjustment
which is 1.1%. In the final rule, CMS is also implementing a significant
decrease in the 2012 Medicare rates for both hospital-based and community mental
health center (CMHC) partial hospitalization programs. When other statutorily
required adjustments, hospital patient service mix and the aforementioned
partial hospitalization rates are considered, our overall Medicare OPPS payment
decrease for 2012 is estimated to be 0.7%. Excluding the behavioral health
division partial hospitalization rate impact, our Medicare OPPS payment increase
for 2012 is estimated to be 2.1%.
In November, 2012, CMS published its annual final Medicare OPPS rule for 2013.
The market basket increase to the OPPS base rate is 2.6%. In addition, as
outlined in the Sources of Revenues and Health Care Reform discussion below, CMS
is also required by federal law to reduce the update factor by 0.1% in federal
fiscal year 2013 and to reduce the annual update by a productivity adjustment
which is 0.7%. In the final rule, CMS is also implementing a significant
increase in the 2013 Medicare rates for both hospital-based and community mental
health center partial hospitalization programs. When other statutorily required
adjustments, hospital patient service mix and the aforementioned partial
hospitalization rates are considered, our overall Medicare OPPS payment increase
for 2013 is estimated to be 3.5%. Excluding the behavioral health division
partial hospitalization rate impact, our Medicare OPPS payment increase for 2013
is estimated to be 1.7%.
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In August, 2011, the Budget Control Act of 2011 (the "2011 Act") was enacted
into law. Included in this law are the imposition of annual spending limits for
most federal agencies and programs aimed at reducing budget deficits by $917
billion between 2012 and 2021, according to a report released by the
Congressional Budget Office. Among its other provisions, the law established a
bipartisan Congressional committee, known as the Joint Committee, which was
responsible for developing recommendations aimed at reducing future federal
budget deficits by an additional $1.5 trillion over 10 years. The Joint
Committee was unable to reach an agreement by the November 23, 2011 deadline
and, as a result, across-the-board cuts to discretionary, national defense and
Medicare spending were implemented which, if triggered, would result in Medicare
payment reductions of up to 2% per fiscal year with a uniform percentage
reduction across all Medicare programs starting in 2013 (approximately $32
million annual reduction to our Medicare net revenues). We cannot predict
whether Congress will attempt to suspend or restructure the automatic budget
cuts or what other deficit reduction initiatives may be proposed by Congress.
We entered into an agreement in April, 2012 with the United States Department of
Health and Human Services, the Secretary of Health and Human Services, and the
Centers for Medicare and Medicaid Services (referred to collectively as "HHS")
that resulted in an aggregate cash payment to us of approximately $36 million,
the majority of which was received by June 30, 2012. After reductions for
estimated related expenses and the portion attributable to third-party
non-controlling ownership interests, this settlement favorably impacted our
pre-tax consolidated financial results during the three-month period ended
March 31, 2012 by approximately $30 million. This agreement was part of an
industry-wide settlement with HHS related to litigation that was pending for
several years contending that acute care hospitals in the U.S. were underpaid
from the Medicare inpatient prospective payment system during a number of prior
years. The underpayments resulted from calculations related to rural floor
budget neutrality adjustments that were implemented in connection with the
Balanced Budget Act of 1997.
During March, 2012, CMS issued new Supplemental Security Income ("SSI") ratios
utilized for calculating Medicare Disproportionate Share Hospital reimbursements
("Medicare DSH") for federal fiscal years 2006 through 2009. As a result of
these new SSI ratios, acute care hospitals are required to recalculate their
Medicare DSH for the affected years and record adjustments for differences in
estimated reimbursements. In addition, two of our acute care hospitals located
in Florida were notified that the respective counties in which they operate were
no longer funding the hospitals with certain reimbursements resulting from
reductions in federal matching Inter-Governmental Transfer funds. As a result of
the unfavorable adjustments required from the revised SSI ratios, and the
write-off of receivables from certain counties located in Florida, our pre-tax
consolidated financial results during the nine-month period ended September 30,
2012 were unfavorably impacted by an aggregate of approximately $8 million (net
of the portion attributable to third-party non-controlling ownership interests).
HITECH Act: In July 2010, the Department of Health and Human Services ("HHS")
published final regulations implementing the health information technology
("HIT") provisions of the American Recovery and Reinvestment Act (referred to as
the "HITECH Act"). The final regulation defines the "meaningful use" of
Electronic Health Records ("EHR") and establishes the requirements for the
Medicare and Medicaid EHR payment incentive programs. The final rule established
an initial set of standards and certification criteria. The implementation
period for these new Medicare and Medicaid incentive payments started in federal
fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state
Medicaid programs. State Medicaid program participation in this federally funded
incentive program is voluntary but we expect that all of the states in which our
eligible hospitals operate will ultimately choose to participate. Our acute care
hospitals may qualify for these EHR incentive payments upon implementation of
the EHR application assuming they meet the "meaningful use" criteria. The
government's ultimate goal is to promote more effective (quality) and efficient
healthcare delivery through the use of technology to reduce the total cost of
healthcare for all Americans and utilizing the cost savings to expand access to
the healthcare system.
During 2011, we began implementing EHR applications at certain of our acute care
hospitals and will continue to do so, on a hospital-by-hospital basis, until
completion which is scheduled to occur by the end of June, 2013. As of
September 30, 2012, EHR applications have been implemented at eleven of our
acute care hospitals, the majority of which occurred during the second and third
quarters of 2012. Our acute care hospitals will be eligible for Medicare and
Medicaid EHR incentive payments upon implementation of the EHR application,
assuming they meet the "meaningful use" criteria. Eight hospitals met the
"meaningful use" criteria during the first nine months of 2012 and we anticipate
that one additional hospital will qualify by the end of 2012.
Our consolidated results of operations for the three-month period ended
September 30, 2012 includes a favorable pre-tax impact of approximately $2
million consisting of approximately $11 million of EHR incentive income less
approximately $3 million of salaries, wages, benefits and other operating
expenses, approximately $5 million of depreciation and amortization expense and
approximately $1 million of income attributable to noncontrolling interests. Our
consolidated results of operations for the nine-month period ended September 30,
2012 includes an unfavorable pre-tax impact of approximately $6 million
consisting of approximately $12 million of EHR incentive income less
approximately $11 million of salaries, wages, benefits and other operating
expenses, approximately $8 million of depreciation and amortization expense and
approximately $1 million of loss attributable to noncontrolling interests. The
EHR incentive income recorded during the second and third quarters of 2012
consists of state Medicaid EHR incentive payments attributable to our acute care
hospitals that met the "meaningful use" criteria during those periods.
We previously classified approximately $2 million of EHR incentive income as net
revenues in our condensed consolidated statements of income for the three and
six months ended June 30, 2012. That amount has been reclassified and is now
included in the line item "EHR incentive income" in our condensed consolidated
statements of income for the nine months ended September 30, 2012.
We have received an aggregate of approximately $21 million of state Medicaid,
EHR incentive payments as of September 30, 2012. These payments, which are/were
reflected as deferred EHR incentive income on our consolidated balance sheet
(included in other current liabilities), will be/were recorded as EHR incentive
income in our consolidated statements of income in the periods in which the
applicable hospitals are deemed to have met the "meaningful use" criteria. Upon
meeting the "meaningful use" criteria, our hospitals may become entitled to
additional Medicaid incentive payments in future periods.
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Federal regulations require that Medicare EHR incentive payments be computed
based on the Medicare cost report that begins in the federal fiscal period in
which a hospital meets the applicable "meaningful use" requirements. Since the
annual Medicare cost report periods for each of our acute care hospitals ends on
December 31st, we will recognize Medicare EHR incentive income for each hospital
during the fourth quarter of the year in which the facility meets the
"meaningful use" criteria and during the fourth quarter of each applicable
subsequent year.
Hospitals that do not qualify as a meaningful user of EHR by 2015 are subject to
a reduced market basket update to the IPPS standardized amount in 2015 and each
subsequent fiscal year. Although we believe that our acute care hospitals will
be in compliance with the EHR standards by 2015, there can be no assurance that
all of our facilities will be in compliance and therefore not subject to the
penalty provision of the HITECH Act.
Medicaid: Medicaid is a joint federal-state funded health care benefit program
that is administered by the states to provide benefits to qualifying individuals
who are unable to afford care. Most state Medicaid payments are made under a
PPS-like system, or under programs that negotiate payment levels with individual
hospitals. Amounts received under the Medicaid program are generally
significantly less than a hospital's customary charges for services provided. In
addition to revenues received pursuant to the Medicare program, we receive a
large portion of our revenues either directly from Medicaid programs or from
managed care companies managing Medicaid. All of our acute care hospitals and
most of our behavioral health centers are certified as providers of Medicaid
services by the appropriate governmental authorities.
We receive Medicaid revenues in excess of $90 million annually from each of
Texas, Pennsylvania, Washington, D.C., Illinois, Massachusetts and Virginia,
making us particularly sensitive to reductions in Medicaid and other state based
revenue programs (which have been implemented in various forms with respect to
our areas of operation in the respective 2013 state fiscal years) as well as
regulatory, economic, environmental and competitive changes in those states. In
the states in which we operate, based upon the state budgets for the 2012 fiscal
year (which generally began at various times during the second half of 2011), we
estimate that, on a blended basis, our aggregate Medicaid rates have been
reduced by approximately 3% to 4% (or approximately $45 million to $55 million
annually) from the average rates in effect during the states' 2011 fiscal years
(which generally ended during the third quarter of 2011). Our consolidated
results of operations for the three and nine-month periods ended September 30,
2012 include the pro rata portion of these Medicaid rate reductions. Based upon
the state budgets for the 2013 fiscal year (which generally begin at various
times during the second half of 2012), we estimate that, on a blended basis, our
aggregate Medicaid rates will be reduced by approximately 1% (or approximately
$15 million annually) from the average rates in effect during the states' 2012
fiscal years (which generally end during the third quarter of 2012). We can
provide no assurance that further reductions to Medicaid revenues, particularly
in the above-mentioned states, will not have a material adverse effect on our
future results of operations.
Certain of our acute care hospitals located in various counties of Texas
(Hidalgo, Maverick, Potter and Webb) participate in CMS-approved private
Medicaid supplemental payment ("UPL") programs. These hospitals also have
affiliation agreements with third-party hospitals to provide free hospital and
physician care to qualifying indigent residents of these counties. Our hospitals
receive both UPL payments from the Medicaid program and indigent care payments
from third-party, affiliated hospitals. The UPL payments are contingent on the
county or hospital district making an Inter-Governmental Transfer ("IGT") to the
state Medicaid program while the indigent care payment is contingent on a
transfer of funds from the applicable affiliated hospitals. We recorded net UPL
and affiliated hospital indigent care revenues of $6 million and $7 million
during the three-month periods ended September 30, 2012 and 2011, respectively,
$18 million and $25 million during the nine-month periods ended September 30,
2012 and 2011, respectively. For state fiscal year 2013, Texas Medicaid will
continue to operate under a CMS-approved Section 1115 five-year Medicaid waiver
demonstration program. During the first five years of this program that started
in state fiscal year 2012, the Texas Health and Human Services Commission
("THHSC") transitioned away from UPL payments to new waiver incentive payment
programs. During the first year of transition, which commenced on October 1,
2011, THHSC made payments to Medicaid UPL recipient providers that received
payments during the state's prior fiscal year. During transition years two
through five, THHSC will make incentive payments under the program after certain
qualifying criteria are met by hospitals. If the applicable hospital district or
county makes IGTs consistent with 2012 levels, we believe we would be entitled
to aggregate net revenues earned pursuant to these programs of approximately $25
million during the state fiscal year state 2013 which ends September 30, 2013.
We incur health-care related taxes ("Provider Taxes") imposed by states in the
form of a licensing fee, assessment or other mandatory payment which are related
to: (i) healthcare items or services; (ii) the provision of, or the authority to
provide, the health care items of services, or; (iii) the payment for the health
care items or services. Such Provider Taxes are subject to various federal
regulations that limit the scope and amount of the taxes that can be levied by
states in order to secure federal matching dollars as part of their respective
state Medicaid programs. We derive a related Medicaid reimbursement benefit from
assessed Provider Taxes in the form of Medicaid claims based payment increases
and/or lump sum Medicaid supplemental payments. We earned an aggregate net
benefit of approximately $5 million and $6 million during the three-month
periods ended September 30, 2012 and 2011, respectively, and $15 million and $15
million during the nine-month periods ended September 30, 2012 and 2011,
respectively, from Medicaid supplemental payments, after assessed Provider Taxes
were considered (exclusive of our hospitals located in Oklahoma, Indiana and
Ohio, as discussed below). Excluding Oklahoma, Indiana and Ohio, we estimate
that our aggregate net benefit from these Provider Tax programs will approximate
$5 million during the remaining three months of 2012. The aggregate net benefit
is earned from multiple states and therefore no particular state's portion is
individually material to our consolidated financial statements. However,
Provider Taxes are governed by both federal and state laws and are subject to
future legislative changes that, if reduced from current rates in several
states, could have a material adverse impact on our consolidated future results
of operations.
In January, 2012, the state of Oklahoma was granted federal approval by the
Centers for Medicare and Medicaid Services ("CMS") for the Supplemental Hospital
Offset Payment Program ("SHOPP") which grants the Oklahoma Health Care Authority
the authority to assess a 2.5%
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fee on certain Oklahoma hospitals and to make Medicaid supplemental payments to
hospitals through December 31, 2014, retroactive to July 1, 2011. The state
finalized the initial supplemental payment program amounts in March, 2012.
Pursuant to the terms and conditions of the SHOPP program during the state's
fiscal years of 2012 and 2013, we estimate that we are entitled to annual net
reimbursements of approximately $14 million, retroactive to July 1, 2011. Our
pre-tax consolidated financial results for the three and nine-month periods
ended September 30, 2012 were favorably impacted by approximately $3 million and
$17 million, respectively, consisting of revenues related to the SHOPP program
covering the period of July 1, 2011 through September 30, 2012.
In addition, during the second quarter of 2012, new supplemental Medicaid
programs were initiated in Indiana and Ohio in which we operate behavioral
health care facilities. Our pre-tax consolidated financial results for the three
and nine-month periods ended September 30, 2012 were favorably impacted by
approximately $2 million and $12 million, respectively, recorded in connection
with these programs which were retroactive to July, 2011.
In California, a Medicaid state plan amendment ("SPA") was submitted to CMS by
the state requesting and extension of a prior provider tax and related Medicaid
supplemental payment program retroactive to July 1, 2011 through December 31,
2013. In June, 2012, CMS approved a portion of the SPA which did not have a
material impact on our consolidated financial statements for the three and
nine-month periods ended September 30, 2012. Approval of the additional SPA
component related to Medicaid managed care supplemental payments would have a
favorable impact on our future results of operations.
Managed Care: A significant portion of our net patient revenues are generated
from managed care companies, which include health maintenance organizations,
preferred provider organizations and managed Medicare (referred to as Medicare
Part C or Medicare Advantage) and Medicaid programs. In general, we expect the
percentage of our business from managed care programs to continue to grow. The
consequent growth in managed care networks and the resulting impact of these
networks on the operating results of our facilities vary among the markets in
which we operate. Typically, we receive lower payments per patient from managed
care payors than we do from traditional indemnity insurers, however, during the
past few years we have secured price increases from many of our commercial
payors including managed care companies.
Commercial Insurance: Our hospitals also provide services to individuals covered
by private health care insurance. Private insurance carriers typically make
direct payments to hospitals or, in some cases, reimburse their policy holders,
based upon the particular hospital's established charges and the particular
coverage provided in the insurance policy. Private insurance reimbursement
varies among payors and states and is generally based on contracts negotiated
between the hospital and the payor.
Commercial insurers are continuing efforts to limit the payments for hospital
services by adopting discounted payment mechanisms, including predetermined
payment or DRG-based payment systems, for more inpatient and outpatient
services. To the extent that such efforts are successful and reduce the
insurers' reimbursement to hospitals and the costs of providing services to
their beneficiaries, such reduced levels of reimbursement may have a negative
impact on the operating results of our hospitals.
Other Sources: Our hospitals provide services to individuals that do not have
any form of health care coverage. Such patients are evaluated, at the time of
service or shortly thereafter, for their ability to pay based upon federal and
state poverty guidelines, qualifications for Medicaid or other state assistance
programs, as well as our local hospitals' indigent and charity care policy.
Patients without health care coverage who do not qualify for Medicaid or
indigent care write-offs are offered substantial discounts in an effort to
settle their outstanding account balances.
State Medicaid Disproportionate Share Hospital Payments: Hospitals that have an
unusually large number of low-income patients (i.e., those with a Medicaid
utilization rate of at least one standard deviation above the mean Medicaid
utilization, or having a low income patient utilization rate exceeding 25%) are
eligible to receive a disproportionate share hospital ("DSH") adjustment.
Congress established a national limit on DSH adjustments. Although this
legislation and the resulting state broad-based provider taxes have affected the
payments we receive under the Medicaid program, to date the net impact has not
been materially adverse.
Upon meeting certain conditions and serving a disproportionately high share of
Texas' and South Carolina's low income patients, five of our facilities located
in Texas and one facility located in South Carolina received additional
reimbursement from each state's DSH fund. In connection with these DSH programs,
included in our financial results was an aggregate of $13 million and $11
million during the three-month periods ended September 30, 2012 and 2011,
respectively, and $36 million and $34 million during each of the nine-month
periods ended September 30, 2012 and 2011.
In August, 2012, the THHSC published a final rule that changes the Texas
Medicaid Disproportionate Share Hospital ("Texas Medicaid DSH") payment
methodology which resulted in a reduction of our DSH reimbursement for SFY 2012
that was consistent with our expectations and as reflected in our consolidated
financial statements as of September 30, 2012. As previously disclosed, the
receipt of the Texas Medicaid DSH reimbursements is contingent on certain public
hospitals in Texas making Inter-Governmental Transfers ("IGTs") to THHSC. The
remaining SFY2012 IGTs were provided to THHSC by the public hospitals prior to
September 30, 2012 but we cannot make any assurance that future Texas Medicaid
DSH IGTs will be made.
The South Carolina and Texas DSH programs were renewed for the state's 2013 DSH
fiscal year (covering the period of October 1, 2012 through September 30, 2013)
at amounts that are expected to be similar to the 2012 fiscal year program
amounts, assuming the Texas DSH program is funded by the public hospitals for
the state's 2013 DSH fiscal year. Failure to renew these DSH programs beyond
their scheduled termination dates, failure of the public hospitals to provide
the necessary IGTs for the states' share of the DSH programs, failure of our
hospitals that currently receive DSH payments to qualify for future DSH funds
under these programs, or reductions in reimbursements, could have a material
adverse effect on our future results of operations.
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Sources of Revenues and Health Care Reform: Given increasing budget deficits,
the federal government and many states are currently considering additional ways
to limit increases in levels of Medicare and Medicaid funding, which could also
adversely affect future payments received by our hospitals. In addition, the
uncertainty and fiscal pressures placed upon the federal government as a result
of, among other things, the War on Terrorism, economic recovery stimulus
packages, responses to natural disasters, the expansion of a Medicare drug
benefit and the federal budget deficit in general may affect the availability of
federal funds to provide additional relief in the future. We are unable to
predict the effect of future policy changes on our operations.
In March, 2010, the Health Care and Education Reconciliation Act of 2010 (H.R.
4872, P.L. 111-152) (the "Reconciliation Act"), and the Patient Protection and
Affordable Care Act (P.L. 111-148), (the "Affordable Care Act"), were enacted
into law and created significant changes to health insurance coverage for U.S.
citizens as well as material revisions to the federal Medicare and state
Medicaid programs. Medicare, Medicaid and other health care industry changes
which are scheduled to be implemented at various times during this decade are
noted below.
Medicare Revisions:
The Reconciliation Act reduced the market basket update for inpatient and
outpatient hospitals and inpatient behavioral health facilities by 0.25% in each
of 2010 and 2011 and by 0.10% in 2012 and 2013. Further, the Affordable Care Act
implemented certain reforms to Medicare Advantage payments, effective in 2011.
Implemented Medicare Revisions:
• A Medicare shared savings program (effective 2012)
• A hospital readmissions reduction program (effective 2012)
• A value-based purchasing program for hospitals (effective 2012)
Future Medicare Revisions:
• A national pilot program on payment bundling (effective 2013)
• Reduction to Medicare disproportionate share hospital ("DSH") payments
(effective 2014)
Medicaid Revisions:
• Expanded Medicaid eligibility and related special federal payments
(effective 2014)
• Reduction to Medicaid DSH (effective 2014)
Health Insurance Revisions:
• Large employer insurance reforms (effective 2014)
• Individual insurance mandate and related federal subsidies (effective 2014)
• Federally mandated insurance coverage reforms (2010 and forward)
The above-mentioned Medicare market basket revisions implemented in 2010 did not
have a material impact on our results of operations to date. The Medicare shared
savings, hospital readmissions reduction and value-based purchasing programs
that will become effective in 2012 are not expected to have a material impact on
results of operations. We are unable to estimate the future impact of the other
remaining legislative changes as outlined above.
In addition to statutory and regulatory changes to the Medicare and each of the
state Medicaid programs, our operations and reimbursement may be affected by
administrative rulings, new or novel interpretations and determinations of
existing laws and regulations, post-payment audits, requirements for utilization
review and new governmental funding restrictions, all of which may materially
increase or decrease program payments as well as affect the cost of providing
services and the timing of payments to our facilities. The final determination
of amounts we receive under the Medicare and Medicaid programs often takes many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical reimbursement provisions. We
believe that we have made adequate provisions for such potential adjustments.
Nevertheless, until final adjustments are made, certain issues remain unresolved
and previously determined allowances could become either inadequate or more than
ultimately required.
Finally, we expect continued third-party efforts to aggressively manage
reimbursement levels and cost controls. Reductions in reimbursement amounts
received from third-party payors could have a material adverse effect on our
financial position and our results of operations.
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Other Operating Results
The combined net revenues and income before income taxes generated at our
surgical hospitals, ambulatory surgery centers and radiation oncology centers
was not material to our results of operations during each of the three and
nine-month periods ended September 30, 2012 and 2011.
Interest Expense:
Interest expense was $45 million and $48 million during the three-month periods
ended September 30, 2012 and 2011, respectively, and $138 million and $155
million during the nine-month periods ended September 30, 2012 and 2011,
respectively. Below is a schedule of our interest expense for the three and nine
month periods ended September 30, 2012 and 2011 (amounts in thousands):
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2012 2011 2012 2011
Revolving credit & demand notes
(b.) $ 1,182 $
1,214 $ 4,362 $ 5,251
$200 million, 6.75% Senior Notes
due 2011 (a.)
- 3,378 - 10,133
$400 million, 7.125% Senior Notes
due 2016 7,124 7,124 21,372 21,372
$250 million, 7.00% Senior Notes
due 2018 4,375 4,375 13,125 13,125
Term Loan A (b.) 5,564 6,041 16,934 21,521
Term Loan B (b.) 13,234 14,997 41,059 50,241
Term Loan A2 (b.) 644 0 644 0
Accounts receivable
securitization program 590 674 1,984 2,015
Subtotal-revolving credit, demand
notes, Senior Notes, term loan
facilities and accounts
receivable securitization program 32,713 37,803 99,480 123,658
Interest rate swap expense, net 5,398 2,248 15,841 5,851
Amortization of financing fees 7,087 7,236 21,653 13,781
Other combined interest expense 1,573 1,387 4,759 11,746
Capitalized interest on major
construction and other projects (1,543 ) (178 ) (3,858 ) (229 )
Interest income (21 ) (44 ) (70 ) (130 )
Interest expense, net $ 45,207 $ 48,452 $ 137,805 $ 154,677
(a.) The $200 million, 6.75% Senior Notes matured and were paid in full on
November 15, 2011 utilizing borrowings pursuant to our revolving credit
agreement.
(b.) In September, 2012, we entered into a Second Amendment to our credit
agreement, dated as of November 15, 2010, as amended on March 15, 2011. The
Second Amendment provides for a new $900 million Term Loan-A ("Term Loan
A-2") with a final maturity date of August 15, 2016 and extends the maturity
date on the majority of the existing revolving credit facility and Term
Loan-A by nine months to mature on August 15, 2016. The Second Amendment
also provides for increased flexibility for refinancing and certain other
modifications but substantially all other terms of the Credit Agreement as
previously amended, including interest rates, remain unchanged. We used $700
million of the proceeds from the new Term Loan A-2 to extinguish a portion
of our higher priced, existing Term Loan-B facility. The remainder of the
new Term Loan A-2 was used to pay transaction related fees and expenses and
to repay other floating rate debt.
Interest expense decreased $3 million during the three-month period ended
September 30, 2012, as compared to the comparable quarter of 2011. The decreased
interest expense during the third quarter of 2012, as compared to the comparable
quarter of 2011, was due primarily to: (i) a $5 million decrease in interest
expense due primarily to a decrease in our average outstanding borrowings and a
decrease in our average effective borrowing rate (due primarily to the repayment
of the $200 million, 6.75% Senior Notes in November, 2011 utilizing borrowings
pursuant to our revolving credit agreement which are borrowed at a lower
interest rate and, as mentioned in (b) above, the extinguishment of $700 million
of borrowings pursuant to our Term Loan B with proceeds from the new Term Loan
A-2 which are borrowed at a lower interest rate); (ii) a $1 million decrease in
interest expense due to an increase interest being capitalized on major
construction and other projects, partially offset by; (iii) a $3 million
increase in interest expense due to an increase in our net interest rate swap
expense.
Interest expense decreased $17 million during the nine-month period ended
September 30, 2012, as compared to the comparable period of 2011. The decreased
interest expense during the first nine months of 2012, as compared to the
comparable period of 2011, was due primarily to: (i) a $24 million decrease in
interest expense due primarily to a decrease in our average outstanding
borrowings and a decrease in our average effective borrowing rate (due primarily
to the repayment of the $200 million, 6.75% Senior Notes in November, 2011
utilizing borrowings pursuant to our revolving credit agreement which are
borrowed at a lower interest rate and, as
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mentioned in (b) above, the extinguishment during the third quarter of 2012 of
$700 million of borrowings pursuant to our Term Loan B with proceeds from the
new Term Loan A-2 which are borrowed at a lower interest rate); (ii) a $4
million decrease in interest expense due to an increase interest being
capitalized on major construction and other projects, partially offset by;
(iii) a $10 million increase in interest expense due to an increase in our net
interest rate swap expense.
Discontinued Operations
In October of 2012, we completed the divestiture of Auburn Regional Medical
Center ("Auburn"), a 159-bed acute care hospital located in Auburn, Washington,
for total cash proceeds of approximately $93 million including estimated working
capital. This divestiture is expected to result in a substantial pre-tax gain
which will be recorded in our consolidated financial statements during the
fourth quarter of 2012.
In connection with the receipt of antitrust clearance from the Federal Trade
Commission ("FTC") in connection with our acquisition of Ascend Health
Corporation in October of 2012, we have agreed to certain conditions, including
the divestiture, within approximately six months, of Peak Behavioral Health
Services ("Peak"), a 104-bed behavioral health care facility located in Santa
Teresa, New Mexico. The revenues of Peak were approximately $14 million during
each of the nine-month period ended September 30, 2012, and the twelve-month
period ended December 31, 2011.
In connection with the receipt of antitrust clearance from the Federal Trade
Commission ("FTC") in connection with our acquisition of PSI in November, 2010,
we agreed to divest three former PSI facilities (Meadowood Behavioral Health
System, Montevista Hospital and Red Rock Hospital) as well as one of our legacy
behavioral health facilities in Puerto Rico (San Juan Capestrano). Pursuant to
the terms of our agreement with the FTC, we divested:
• in July, 2011, the Meadowood Behavioral Health System, a 58-bed facility
located in New Castle, Delaware;
• in December, 2011, the Montevista Hospital (101-bed) and Red Rock Hospital
(21-bed), both of which are located in Las Vegas, Nevada, and;
• in January, 2012, the Hospital San Juan Capestrano, a 108-bed facility located in Rio Piedras, Puerto Rico.
The operating results for Auburn, Peak and the three former PSI facilities
located in Delaware and Nevada are reflected as discontinued operations during
our period of ownership for each of the periods presented herein. Since the
aggregate income from discontinued operations before income tax expense for
these facilities is not material to our consolidated financial statements, it is
included as a reduction to other operating expenses. The aggregate pre-tax net
gain on the divestiture of San Juan Capestrano in January, 2012 did not have a
material impact on our consolidated results of operations during the first
quarter of 2012. Assets and liabilities for Auburn and Peak are reflected as
"held for sale" on our Consolidated Balance Sheet as of September 30, 2012, and
the assets and liabilities for the Hospital San Juan Capestrano were reflected
as "held for sale" on our Consolidated Balance Sheet as of December 31, 2011.
The following table shows the results of operations for Auburn and Peak and the
former PSI facilities located in Delaware and Nevada, on a combined basis, which
were reflected as discontinued operations during our period of ownership for
each of the periods presented herein (amounts in thousands):
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2012 2011 2012 2011
Net revenues $ 29,372 $ 36,685 $ 92,706 $ 121,011
(Loss) income from
discontinued operations,
before income taxes (1,231 ) 819 (697 ) 6,532
Income tax benefit (expense) 472 (310 ) 267 (2,473 )
(Loss) income from
discontinued operations, net
of income taxes ($ 759 ) $ 509 ($ 430 ) $ 4,059
Provision for Income Taxes and Effective Tax Rates:
The effective tax rates, as calculated by dividing the provision for income
taxes by income before income taxes, were as follows for the three and
nine-month periods ended September 30, 2012 and 2011 (dollar amounts in
thousands):
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2012 2011 2012 2011
Provision for income taxes $ 42,132 $ 52,234 $ 188,880 $ 192,638
Income before income taxes 123,505 147,076 530,267 533,501
Effective tax rate 34.1 % 35.5 % 35.6 % 36.1 %
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Outside owners hold various noncontrolling, minority ownership interests in
seven of our acute care facilities and one behavioral health care facility. Each
of these facilities are owned and operated by limited liability companies
("LLC") or limited partnerships ("LP"). As a result, since there is no income
tax liability incurred at the LLC/LP level (since it passes through to the
members/partners), the net income attributable to noncontrolling interests does
not include any income tax provision/benefit. When computing the provision for
income taxes, as reflected on our consolidated statements of income, the net
income attributable to noncontrolling interests is deducted from income before
income taxes since it represents the third-party members'/partners' share of the
income generated by the joint-venture entities. In addition to providing the
effective tax rates, as indicated above (as calculated from dividing the
provision for income taxes by the income before income taxes as reflected on the
consolidated statements of income), we believe it is helpful to our investors
that we also provide our effective tax rate as calculated after giving effect to
the portion of our pre-tax income that is attributable to the third-party
members/partners.
The effective tax rates, as calculated by dividing the provision for income
taxes by the difference in income before income taxes, minus net income
attributable to noncontrolling interests, were as follows for each of the three
and nine-month periods ended September 30, 2012 and 2011 (dollar amounts in
thousands):
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2012 2011 2012 2011
Provision for income taxes $ 42,132 $ 52,234 $ 188,880 $ 192,638
Income before income taxes 123,505 147,076 530,267 533,501
Less: Net income attributable to
noncontrolling interests (9,556 ) (9,788 ) (33,402 ) (37,967 )
Income before income taxes and
after net income attributable to
noncontrolling interests 113,949 137,288 496,865 495,534
Effective tax rate 37.0 % 38.0 % 38.0 % 38.9 %
The decrease in the effective tax rates during the three-month period ended
September 30, 2012, as compared to the comparable quarter of 2011, was primarily
attributable to a favorable income tax adjustment of approximately $2 million
recorded during the third quarter of 2012. The decrease in the effective tax
rate during the nine-month period ended September 30, 2012, as compared to the
comparable period of 2011, was primarily attributable to a decrease in our
blended effective state income tax rate and a favorable income tax adjustment of
approximately $2 million recorded during the third quarter of 2012.
Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was $535 million during the nine-month
period ended September 30, 2012 and $563 million during the comparable period of
2011. The net decrease of $27 million was primarily attributable to the
following:
• a favorable change of $39 million due to an increase in net income
plus/minus depreciation and amortization expense, stock-based compensation
expense, write-off of deferred charges related to extinguished debt and
gains/losses on sales of assets and businesses;
• a $103 million unfavorable change in accrued and deferred income taxes due primarily to the income tax payments during the first nine months of 2011
being favorably impacted/reduced by an income tax overpayment relating to
2010 and a postponement of third quarter 2011 federal estimated income tax
payments granted by the Internal Revenue Service to certain taxpayers
located in areas that were impacted by flooding during the third quarter
of 2011;
• a $31 million favorable change in other working capital accounts due
primarily to the timing of accounts payable and accrued compensation
payments;
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• a $17 million favorable change in accounts receivable;
• a $17 million unfavorable change accrued insurance expense, net of
payments made in settlement of self-insurance claims, and;
• $6 million of other combined net favorable changes.
Days sales outstanding ("DSO"): Our DSO are calculated by dividing our net
revenue by the number of days in the nine-month periods. The result is divided
into the accounts receivable balance at September 30th of each year to obtain
the DSO. Our DSO were 55 days at September 30, 2012 and 50 days at September 30,
2011.
Contributing to the increase in our DSO as of September 30, 2012, as compared to
September 30, 2011, was an increase in receivables from the state of Illinois.
As of September 30, 2012 and December 31, 2011, our accounts receivable includes
approximately $76 million and $54 million, respectively, due from Illinois.
Collection of these receivables continues to be delayed due to state budgetary
and funding pressures. Approximately $55 million as of September 30, 2012, and
$41 million as of December 31, 2011, of the receivables due from Illinois have
been outstanding in excess of 60 days, as of each respective date, and a large
portion will likely remain outstanding for the foreseeable future. Since we
expect to eventually collect all amounts due to us, no related reserves have
been established in our consolidated financial statements. However, we can
provide no assurance that we will eventually collect all amounts due to us from
Illinois. Failure to ultimately collect all outstanding amounts due from
Illinois would have an adverse impact on our future consolidated results of
operations and cash flows.
Net cash used in investing activities
During the first nine months of 2012, we used $286 million of net cash in
investing activities as follows:
• spent $282 million to finance capital expenditures including capital
expenditures for equipment, renovations and new projects at various
existing facilities, including the construction costs related to the newly
constructed Temecula Valley Hospital, a 140-bed acute care facility
located in Temecula, California which is scheduled to be completed and
opened in mid-2013 and additional/renovated capacity at certain of our
behavioral health facilities;
• spent $42 million in connection with the purchase and implementation of an
electronic health records application;
• received $56 million in connection with the divestiture of the Hospital San Juan Capestrano and the divestiture of the real property of two
non-operating behavioral health care facilities;
• spent $25 million in connection with the acquisition of physician
practices and various real property, and;
• received $7 million from a deposit returned to us in connection with the termination of an agreement to purchase an acute care hospital located in
Texas (see Note 8 to the Consolidated Financial Statements).
During the first nine months of 2011, we used $208 million of net cash in
investing activities as follows:
• spent $195 million to finance capital expenditures including capital
expenditures for equipment, renovations and new projects at various
existing facilities;
• spent $9 million to acquire administrative office buildings located in
Pennsylvania and Tennesse;
• spent $28 million in connection with the purchase and implementation of an
electronic health records application, and;
• received $24 million of proceeds for the sale of the real property of a
closed acute care facility, sale of our ownership interest in an
outpatient surgery center and sale of MeadowWood Behavioral Health System
located in Delaware.
Net cash provided by/used in financing activities
During the first nine months of 2012, we used $264 million of net cash in
financing activities as follows:
• spent $1.13 billion on net repayments of debt due primarily to repayments
pursuant to our: (i) Term Loan A ($36 million), Term Loan B ($713
million), revolving credit ($196 million), accounts receivable
securitization ($180 million) and other debt facilities ($3 million);
• generated $906 million of proceeds from: (i) $900 million of borrowings
pursuant to our new Term Loan A2 facility, as discussed below, and;
(ii) $6 million of borrowings pursuant to a short-term, on-demand
facility;
• spent $14 million to pay profit distributions related to noncontrolling
interests in majority owned businesses;
• spent $10 million to repurchase shares of our Class B Common Stock;
• spent $15 million to pay quarterly cash dividends of $.05 per share;
• spent $8 million in financing costs in connection with the amendment to
our credit facility (which includes our existing revolving credit
agreement, Term Loan A and Term Loan B facilities and our new Term Loan A2
facility) which was completed during in March, 2012, as discussed below,
and;
• generated $4 million from the issuance of shares of our Class B Common
Stock pursuant to the terms of employee stock purchase plans.
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During the first nine months of 2011, we used $345 million of net cash in
financing activities as follows:
• spent $267 million on net repayments of debt due primarily to repayments
pursuant to our Term Loan A ($20 million), Term Loan B ($137 million) and
revolving credit ($95 million) facilities;
• generated $36 million of cash from additional borrowings pursuant to our
accounts receivable securitization program;
• spent $24 million on financing costs in connection with an amendment to
our credit agreement (which includes our revolving credit agreement, Term
Loan A and Term Loan B facilities) which was completed in March, 2011;
• spent $34 million to pay profit distributions related to noncontrolling
interests in majority owned businesses;
• spent $45 million to repurchase 1.14 million shares of our Class B Common Stock;
• spent $15 million to pay quarterly cash dividends of $.05 per share, and;
• generated $4 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock purchase plans.
Agreement to Acquire Ascend Health Corporation:
In October, 2012, we completed the acquisition of Ascend Health Corporation
("Ascend") for $500 million in cash. Prior to the acquisition, Ascend was the
largest private psychiatric hospital provider with 9 owned or leased
freestanding psychiatric inpatient facilities located in 5 states including
Texas, Arizona, Utah, Oregon and Washington.
Expected Capital Expenditures During the Remainder of 2012:
During the remaining three months of 2012, we expect to spend approximately $85
million to $95 million on capital expenditures. We believe that our capital
expenditure program is adequate to expand, improve and equip our existing
hospitals. We expect to finance all capital expenditures and acquisitions with
internally generated funds and/or additional funds, as discussed below.
Capital Resources
Credit Facilities and Outstanding Debt Securities
On September 21, 2012, we entered into a second amendment to our credit
agreement, dated as of November 15, 2010, as amended on March 15, 2011, with
several banks and other financial institutions ("Credit Agreement"). The second
amendment, which was effective on September 21, 2012, provides for a new $900
million Term Loan-A ("Term Loan A2") with a final maturity date of August 15,
2016 and extended the maturity date on approximately $777 million of our
existing $800 million revolving credit facility, and $943 million of our
existing Term Loan-A facility, by nine months to mature on August 15, 2016.
Approximately $23 million of our revolving credit facility commitment and $45
million of our existing Term Loan-A was not extended and is scheduled to mature
on November 15, 2015. The second amendment also provides for increased
flexibility for refinancing and certain other modifications but substantially
all other terms of the Credit Agreement, dated as of November 15, 2010 and as
previously amended in March, 2011, including interest rates, remain unchanged.
On September 21, 2012, we used $700 million of the proceeds from the new Term
Loan-A2 to extinguish a portion of our higher priced, existing Term Loan-B
facility. Current pricing under the new Term Loan-A2 is 100 basis points lower
than the Term Loan-B facility and does not include a LIBOR floor whereas the
Term Loan-B facility has a 1% LIBOR floor. The remainder of the new Term Loan-A2
was used to pay transaction related fees and expenses and to repay other
floating rate debt. During the third quarter of 2012, in connection with the
extinguishment of a portion of our Term Loan-B facility, we recorded a pre-tax
charge of $29 million to write-off the related portion of the Term Loan-B
deferred financing costs.
The Credit Agreement, as amended on September 21, 2012, is a senior secured
facility which provides for an aggregate commitment amount of $3.43 billion,
comprised of a $800 million revolving credit facility, a $988 million Term
Loan-A facility, a $746 million Term Loan-B facility and a $900 million Term
Loan-A2 facility. The revolving credit facility includes a $125 million
sub-limit for letters of credit. The Credit Agreement is secured by
substantially all of the assets of the Company and our material subsidiaries and
guaranteed by our material subsidiaries.
Borrowings under the Credit Agreement bear interest at the ABR rate which is
defined as the rate per annum equal to, at our election (1) the greatest of
(a) the lender's prime rate, (b) the weighted average of the federal funds rate,
plus 0.5% and (c) one month Eurodollar rate plus 1%, in each case, plus an
applicable margin based upon our consolidated leverage ratio at the end of each
quarter ranging from 0.50% to 1.25% for revolving credit and Term Loan-A
borrowings and 1.75% to 2.00% for Term Loan B borrowings or (2) the one, two,
three or six month Eurodollar rate (at our election), plus an applicable margin
based upon our consolidated leverage ratio at the end of each quarter ranging
from 1.50% to 2.25% for revolving credit and Term Loan-A borrowings and ranging
from 2.75% to 3.00% for Term Loan-B borrowings. The current applicable margins
are 0.75% for ABR-based loans, 1.75% for Eurodollar-based loans under the
revolving credit and Term Loan-A and Term Loan-A2 facilities and 2.75% under the
Term Loan-B facility. The minimum Eurodollar rate for the Term Loan-B facility
is 1.00%.
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As of September 30, 2012, we had $678 million of available borrowing capacity
pursuant to the terms of our $800 million revolving credit facility, net of $59
million of outstanding borrowings (including borrowings outstanding pursuant to
a short-term, on-demand credit facility) and $63 million of outstanding letters
of credit. As of September 30, 2012, we had $15 million of outstanding
borrowings under a short-term, on-demand credit facility. Outstanding borrowings
pursuant to this facility are classified as long-term debt on our Consolidated
Balance Sheet since we have the intent and ability to refinance through
available borrowings under the terms of our Credit Agreement.
In October, 2010, we amended our accounts receivable securitization program
("Securitization") with a group of conduit lenders and liquidity banks. We
increased the size of the Securitization to $240 million (the "Commitments"),
from $200 million, and extended the maturity date to October 25, 2013. In May,
2012, we further increased the size of the securitization by $35 million to $275
million. Substantially all of the patient-related accounts receivable of our
acute care hospitals ("Receivables") serve as collateral for the outstanding
borrowings. The interest rate on the borrowings is based on the commercial paper
rate plus a spread of 0.475% and there is a facility fee of 0.375% required on
102% on the Commitments. We have accounted for this Securitization as
borrowings. We maintain effective control over the Receivables since, pursuant
to the terms of the Securitization, the Receivables are sold from certain of our
subsidiaries to special purpose entities that are wholly-owned by us. The
Receivables, however, are owned by the special purpose entities, can be used
only to satisfy the debts of the wholly-owned special purpose entities, and thus
are not available to us except through our ownership interest in the special
purpose entities. The wholly-owned special purpose entities use the Receivables
to collateralize the loans obtained from the group of third-party conduit
lenders and liquidity banks. The group of third-party conduit lenders and
liquidity banks do not have recourse to us beyond the assets of the wholly-owned
special purpose entities that securitize the loans. At September 30, 2012, we
had $60 million of outstanding borrowings and $215 million of additional
capacity pursuant to the terms of our accounts receivable securitization
program.
On September 29, 2010, we issued $250 million of 7.00% senior unsecured notes
(the "Unsecured Notes") which are scheduled to mature on October 1, 2018. The
Unsecured Notes were registered in April, 2011. Interest on the Unsecured Notes
is payable semiannually in arrears on April 1st and October 1st of each year.
The Unsecured Notes can be redeemed in whole at anytime subject to a make-whole
call at treasury rate plus 50 basis points prior to October 1, 2014. They are
also redeemable in whole or in part at a price of: (i) 103.5% on or after
October 1, 2014; (ii) 101.75% on or after October 1, 2015, and; (iii) 100% on or
after October 1, 2016. These Unsecured Notes are guaranteed by a group of
subsidiaries (each of which is a 100% directly owned subsidiary of Universal
Health Services, Inc.) which fully and unconditionally guarantee the Unsecured
Notes on a joint and several basis, subject to certain customary automatic
release provisions.
On June 30, 2006, we issued $250 million of senior notes which have a 7.125%
coupon rate and mature on June 30, 2016 (the "7.125% Notes"). Interest on the
7.125% Notes is payable semiannually in arrears on June 30th and December 30th
of each year. In June, 2008, we issued an additional $150 million of 7.125%
Notes which formed a single series with the original 7.125% Notes issued in
June, 2006. Other than their date of issuance and initial price to the public,
the terms of the 7.125% Notes issued in June, 2008 are identical to and trade
interchangeably with, the 7.125% Notes which were originally issued in June,
2006.
In connection with the entering into of the Credit Agreement on November 15,
2010, and in accordance with the Indenture dated January 20, 2000 governing the
rights of our existing notes, we entered into a supplemental indenture pursuant
to which our 7.125% Notes (due in 2016) were equally and ratably secured with
the lenders under the Credit Agreement with respect to the collateral for so
long as the lenders under the Credit Agreement are so secured.
Our Credit Agreement includes a material adverse change clause that must be
represented at each draw. The Credit Agreement contains covenants that include a
limitation on sales of assets, mergers, change of ownership, liens and
indebtedness, transactions with affiliates and dividends; and requires
compliance with financial covenants including maximum leverage and minimum
interest coverage ratios. We are in compliance with all required covenants as of
September 30, 2012.
The carrying amount and fair value of our debt was $3.44 billion and $3.53
billion at September 30, 2012, respectively. The fair value of our debt was
computed based upon quotes received from financial institutions and we consider
these to be "level 2" in the fair value hierarchy as outlined in the
authoritative guidance for disclosures in connection with debt instruments.
Our total debt as a percentage of total capitalization was 57% at September 30,
2012 and 61% at December 31, 2011.
We expect to finance all capital expenditures and acquisitions, pay dividends
and potentially repurchase shares of our common stock utilizing internally
generated and additional funds. Additional funds may be obtained through:
(i) borrowings under our existing revolving credit facility and/or our accounts
receivable securitization program or through refinancing the existing
agreement/program; (ii) the issuance of other long-term debt, and/or; (iii) the
issuance of equity. In the event we need to access the capital markets or other
sources of financing, there can be no assurance that we will be able to obtain
financing on acceptable terms or within an acceptable time. Our inability to
obtain financing on terms acceptable to us could have a material unfavorable
impact on our results of operations, financial condition and liquidity.
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Off-Balance Sheet Arrangements
During the three months ended September 30, 2012, there have been no material
changes in the off-balance sheet arrangements consisting of operating leases and
standby letters of credit and surety bonds. Reference is made to Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Contractual Obligations and Off-Balance Sheet Arrangements, in our
Annual Report on Form 10-K for the year ended December 31, 2011.
We have various obligations under operating leases or master leases for real
property and under operating leases for equipment. The real property master
leases are leases for buildings on or near hospital property for which we
guarantee a certain level of rental income. We sublease space in these buildings
and any amounts received from these subleases are offset against the expense. In
addition, we lease four hospital facilities from Universal Health Realty Income
Trust with terms scheduled to expire in 2014 and 2016. These leases contain up
to four, 5-year renewal options.
As of September 30, 2012, we were party to certain off balance sheet
arrangements consisting of standby letters of credit and surety bonds which
totaled $81 million consisting of: (i) $66 million related to our self-insurance
programs, and; (ii) $15 million of other debt and public utility guarantees.
