UNIVERSAL HEALTH SERVICES INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Edgar Online, Inc. |
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 ofMarch 31, 2012 , we owned and/or operated 25 acute care hospitals and 196 behavioral health centers located in 36 states,Washington, D.C. ,Puerto Rico and theU.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 andPuerto Rico . During the first quarter of 2012, we adopted theFinancial 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-month periods endedMarch 31, 2012 and 2011. The adoption of this standard had no impact on our financial position or overall results of operations. Net revenues from our acute care hospitals, surgical hospitals, surgery centers and radiation oncology centers accounted for 53% of our consolidated net revenues during each of the three-month periods endedMarch 31, 2012 and 2011. Net revenues from our behavioral health care facilities accounted for 47% of our consolidated net revenues during each of the three-month periods endedMarch 31, 2012 and 2011. 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 theSecurities 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 theSEC including those set forth herein and in our Annual Report on Form 10-K for the year endedDecember 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 orMedicaid ;
• 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 withUnited/Sierra Healthcare inLas Vegas, Nevada ; 25
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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 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, includingMcAllen /Edinburg, Texas , the site of one of our largest acute care facilities andRiverside 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 acquisition of PSI which has substantially increased our level of
indebtedness 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
of
particularly sensitive to reductions inMedicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective 2012 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
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 year ended
three-month period ended
these
reductions to
states for fiscal year 2013), 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; • theDepartment 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
implementation period for these new
payments started in federal fiscal year 2011 and can end as late as 2016 forMedicare and 2021 for the stateMedicaid 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 an EHR application in 2011
and we plan to continue the implementation at each of our acute care
hospitals, on a facility-by-facility basis, during 2012 and 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
revenues 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 theCongressional Budget Office . Among its other provisions, the law established a bipartisan Congressional committee, known as the Joint
tasked with making recommendations aimed at reducing future federal budget
deficits by an additional
was unable to reach an agreement by theNovember 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense andMedicare spending were implemented which, if triggered, would result inMedicare payment 26
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reductions of up to 2% per fiscal year with a uniform percentage reduction
across all
or what other deficit reduction initiatives may be proposed by
• 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 theSecurities 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 endedDecember 31, 2011 . Revenue recognition: We record revenues and related receivables for health care services at the time the services are provided.Medicare andMedicaid revenues represented 39% and 41% of our net patient revenues during the three-month periods endedMarch 31, 2012 and 2011, respectively. Revenues from managed care entities, including health maintenance organizations and managedMedicare andMedicaid programs, accounted for 48% and 46% of our net patient revenues during the three-month periods endedMarch 31, 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$268 million atMarch 31, 2012 and$253 million atDecember 31, 2011 . Our accounts receivable includes$73 million as ofMarch 31, 2012 and$54 million as ofDecember 31, 2011 due fromIllinois , the collection of which continues to be delayed due to budgetary and funding pressures experienced by the state. Although approximately$50 million of the receivables due fromIllinois as ofMarch 31, 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 fromIllinois . Failure to ultimately collect all outstanding amounts due fromIllinois would have an adverse impact on our future consolidated results of operations and cash flows.
Recent Accounting Standards: For a summary of accounting standards, please see Note 13 to the Consolidated Financial Statements, as included herein.
Results of Operations
Three-month periods ended
The following table summarizes our results of operations and is used in the discussion below for the three-month periods ended
00000,000,000 00000,000,000 00000,000,000 00000,000,000 Three months ended Three months ended March 31, 2012 March 31, 2011 % of Net % of Net Amount Revenues Amount Revenues Net revenues before provision for doubtful accounts $ 1,977,003 $ 1,910,528 Less: Provision for doubtful accounts 151,714 153,116 Net revenues 1,825,289 100.0 % 1,757,412 100.0 % Operating charges: Salaries, wages and benefits 889,506 48.7 % 845,864 48.1 % Other operating expenses 359,541 19.7 % 349,446 19.9 % Supplies expense 209,532 11.5 % 207,170 11.8 % Depreciation and amortization 73,820 4.0 % 71,351 4.1 % Lease and rental expense 23,862 1.3 % 23,168 1.3 % Subtotal-operating expenses 1,556,261 85.3 % 1,496,999 85.2 % Income from operations 269,028 14.7 % 260,413 14.8 % Interest expense, net 46,710 2.6 % 56,417 3.2 % Income before income taxes 222,318 12.2 % 203,996 11.6 % Provision for income taxes 79,748 4.4 % 74,009 4.2 % Net income 142,570 7.8 % 129,987 7.4 % Less: Income attributable to noncontrolling interests 13,963 0.8 % 15,794 0.9 % Net income attributable to UHS $ 128,607 7.0 % $ 114,193 6.5 % 27
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Net revenues increased 4% or$68 million to$1.83 billion during the three-month period endedMarch 31, 2012 as compared to$1.76 billion during the comparable quarter of the prior year. The increase was attributable to:
• a
hospitals and behavioral health care facilities owned during both periods
(which we refer to as "same facility");
•
industry-wide settlement related to underpayments of
prospective payments during a number of prior years, entered into with the
Services, and; •$18 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 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).
Income before income taxes (before deduction for income attributable to noncontrolling interests) increased$18 million to$222 million during the three-month period endedMarch 31, 2012 as compared to$204 million during the comparable quarter of the prior year. Included in our income before income taxes during the first quarter of 2012, as compared to the comparable prior year quarter, was the following: a. a decrease of$19 million at our acute care facilities as discussed below
in Acute Care Hospital Services, excluding impact of the items mentioned
in c., and e. below;
b. an increase of
discussed below inBehavioral Health Services , excluding the impact of the items mentioned in d. 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 ofMedicare inpatient prospective payments during a number of prior years, entered into with theUnited States Department of Health and Human Services , the Secretary ofHealth and Human Services , and theCenters for Medicare and Medicaid Services ; d. an increase of$7 million representing the 2011 portion of the net
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 toJuly 1, 2011 ;
e. an aggregate decrease of
Supplemental Security Income ratios utilized for calculating
disproportionate share hospital reimbursements for federal fiscal years
2006 through 2009 (
of receivables related to revenues recorded during 2011 at two of our acute care hospitals located inFlorida resulting from reductions in certain county reimbursements due to reductions in federal matching Inter-Governmental Transfer funds ($4 million unfavorable impact); 28
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f. an increase of
primarily from 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) and average borrowings outstanding, and;
g.
overhead expenses.
Net income attributable to UHS increased$14 million to$129 million during the three-month period endedMarch 31, 2012 as compared to$114 million during the comparable prior year quarter. The increase during the first quarter of 2012, as compared to the comparable prior year quarter, consisted of:
• an increase of
above;
• an increase of
to noncontrolling interests, and;
• a decrease of
income taxes resulting primarily from the income tax provision recorded on
the
before income taxes and the
decrease in the income attributable to noncontrolling interests).
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 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-month periods ended
Three months ended Three months ended March 31, 2012 March 31, 2011 % of Net % of Net Amount Revenues Amount Revenues Net revenues before provision for doubtful accounts $ 1,058,134 $ 1,054,293 Less: Provision for doubtful accounts 128,455 131,751 Net revenues 929,679 100.0 % 922,542 100.0 % Operating charges: Salaries, wages and benefits 407,825 43.9 % 391,960 42.5 % Other operating expenses 185,648 20.0 % 179,571 19.5 % Supplies expense 163,200 17.6 % 161,702 17.5 % Depreciation and amortization 49,183 5.3 % 47,784 5.2 % Lease and rental expense 14,752 1.6 % 13,535 1.5 % Subtotal-operating expenses 820,608 88.3 % 794,552 86.1 % Income from operations 109,071 11.7 % 127,990 13.9 % Interest expense, net 1,178 0.1 % 1,006 0.1 % Income before income taxes 107,893 11.6 % 126,984 13.8 % During the three-month period endedMarch 31, 2012 , as compared to the comparable prior year quarter, net revenues at our acute care hospitals increased$7 million or 1%. Income before income taxes (and before income attributable to noncontrolling interests) decreased$19 million or 15% to$108 million or 11.6% of net revenues during the first quarter of 2012 as compared to$127 million or 13.8% of net revenues during the comparable prior year quarter.
During the three-month period ended
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decreased 2.6% during the first quarter of 2012 and adjusted patient days increased 1.0% during the three-month period endedMarch 31, 2012 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 4.5 days during each of the three-month periods endedMarch 31, 2012 and 2011, respectively. The occupancy rate, based on the average available beds at these facilities, was 57% and 60% during the three-month periods endedMarch 31, 2012 and 2011, respectively. During the three-month period endedMarch 31, 2012 , net revenue per adjusted admission decreased 0.8% and net revenue per adjusted patient day decreased 0.2%, as compared to the comparable quarter of the prior year. The decreases in income from operations and net revenue per adjusted admission and adjusted patient day experienced at our acute care hospitals during the three-month period endedMarch 31, 2012 , as compared to the comparable quarter of the prior year, were largely due to difficult comparisons to the prior year quarter when our acute care net revenues were favorably impacted by positive changes in payor mix and acuity of patients treated at our hospitals and a stabilization of uninsured patient volumes.
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. We provide care to patients who meet certain financial or economic criteria without charge or at amounts substantially less than our established rates. Because we do not pursue collection of amounts that qualify as charity care, they are not reported in net revenues or in accounts receivable, net. Our acute care hospitals provided charity care and uninsured discounts, based on charges at established rates, amounting to$315 million and$223 million during three-month periods endedMarch 31, 2012 and 2011, respectively. The estimated costs of providing the charity services was$52 million and$39 million during the three-month periods endedMarch 31, 2012 and 2011, respectively. The estimated costs 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 gross charity care and uninsured discount amounts. The percentage of cost to gross charges is calculated based on the total operating expenses for our acute care facilities 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 charity care provided could have a material unfavorable impact on our future operating results.
All Acute Care Hospitals
The following table summarizes the results of operations for our acute care hospitals for the three-month periods endedMarch 31, 2012 and 2011. Included in the financial results below for the three-month period endedMarch 31, 2012 , in addition to our acute care hospitals', same facility basis financial results as discussed above, were the following items. There were no such adjustments required to our same facility acute care results for the three-month period endedMarch 31, 2011 .
•
resulting from an agreement, which was part of an industry-wide settlement
related to underpayments of
number of prior years, entered into with the
theCenters for Medicare and Medicaid Services , and;
• (i) a
Supplemental Security Income ratios utilized for calculating
disproportionate share hospital reimbursements for federal fiscal years 2006
through 2009, and; (ii) a
the write-off of receivables related to revenues recorded during 2011 at two
of our acute care hospitals located in
certain county reimbursements due to reductions in federal matching Inter-Governmental Transfer funds. Three months ended Three months ended March 31, 2012 March 31, 2011 % of Net % of Net Amount Revenues Amount Revenues Net revenues before provision for doubtful accounts $ 1,082,687 $ 1,054,293 Less: Provision for doubtful accounts 128,455 131,751 Net revenues 954,232 100.0 % 922,542 100.0 % Operating charges: Salaries, wages and benefits 407,825 42.7 % 391,960 42.5 % 30
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Table of Contents Other operating expenses 188,246 19.7 % 179,571 19.5 % Supplies expense 163,200 17.1 % 161,702 17.5 % Depreciation and amortization 49,183 5.2 % 47,784 5.2 % Lease and rental expense 14,752 1.5 % 13,535 1.5 % Subtotal-operating expenses 823,206 86.3 % 794,552 86.1 % Income from operations 131,026 13.7 % 127,990 13.9 % Interest expense, net 1,178 0.1 % 1,006 0.1 % Income before income taxes 129,848 13.6 % 126,984 13.8 %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-month periods endedMarch 31, 2012 and 2011 (dollar amounts in thousands):
Same Facility -
Three months ended Three months ended March 31, 2012 March 31, 2011 % of Net % of Net Amount Revenues Amount Revenues Net revenues before provision for doubtful accounts $ 877,839 $ 832,929 Less: Provision for doubtful accounts 23,035 21,013 Net revenues 854,804 100.0 % 811,916 100.0 % Operating charges: Salaries, wages and benefits 428,523 50.1 % 409,268 50.4 % Other operating expenses 152,406 17.8 % 144,410 17.8 % Supplies expense 44,600 5.2 % 43,018 5.3 % Depreciation and amortization 22,636 2.6 % 21,000 2.6 % Lease and rental expense 8,387 1.0 % 8,180 1.0 % Subtotal-operating expenses 656,552 76.8 % 625,876 77.1 % Income from operations 198,252 23.2 % 186,040 22.9 % Interest expense, net 377 0.1 % 531 0.1 % Income before income taxes 197,875 23.1 % 185,509 22.8 % On a same facility basis, during the first quarter of 2012, as compared to the first quarter of 2011, net revenues at our behavioral health care facilities increased 5% or$43 million to$855 million from$812 million . Income before income taxes increased$12 million or 7% to$198 million or 23.1% of net revenues during the three-month period endedMarch 31, 2012 , as compared to$186 million or 22.8% of net revenues during the comparable prior year quarter. On a same facility basis, inpatient admissions and adjusted admissions (adjusted for outpatient activity) to our behavioral health facilities increased 8.6% and 9.2%, respectively, during the three-month period endedMarch 31, 2012 as compared to the comparable quarter of the prior year. Patient days and adjusted patient days increased 2.3% and 2.8%, respectively, during the three-month period endedMarch 31, 2012 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 13.7 days and 14.6 days during the three-month periods endedMarch 31, 2012 and 2011, respectively. The occupancy rate, based on the average available beds at these facilities, was 76% and 75% during the three-month periods endedMarch 31, 2012 and 2011, respectively. During the three-month period endedMarch 31, 2012 , net revenue per adjusted admission decreased 3.6% and net revenue per adjusted patient day increased 2.4%, as compared to the comparable quarter of the prior year.
All Behavioral Health Care Facilities
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The following table summarizes the results of operations for our behavioral health care facilities for the three-month periods ended
•
reimbursements earned pursuant to the Oklahoma Supplemental Hospital Offset
Payment Program ("SHOPP") which is expected to provide annual aggregate net
reimbursements of
the state's fiscal years of 2012 and 2013, retroactive to
• The operating results of San Juan Capestrano that was divested in January,
2012, and a behavioral health care facility that was temporarily closed
beginning in the third quarter of 2011 from flood damage (the facility
re-opened in March, 2012). Three months ended Three months ended March 31, 2012 March 31, 2011 % of Net % of Net Amount Revenues Amount Revenues Net revenues before provision for doubtful accounts $ 888,177 $ 850,308 Less: Provision for doubtful accounts 23,304 21,360 Net revenues 864,873 100.0 % 828,948 100.0 % Operating charges: Salaries, wages and benefits 434,083 50.2 % 419,065 50.6 % Other operating expenses 151,433 17.5 % 149,409 18.0 % Supplies expense 44,953 5.2 % 44,090 5.3 % Depreciation and amortization 22,972 2.7 % 21,443 2.6 % Lease and rental expense 8,559 1.0 % 8,609 1.0 % Subtotal-operating expenses 662,000 76.5 % 642,616 77.5 % Income from operations 202,873 23.5 % 186,332 22.5 % Interest expense, net 377 0.1 % 553 0.1 % Income before income taxes 202,496 23.4 % 185,779 22.4 % During the first quarter of 2012, as compared to the comparable prior year quarter, net revenues at our behavioral health care facilities increased 4% or$36 million . Income before income taxes increased$17 million or 9% to$202 million or 23.4% of net revenues during the first quarter of 2012, as compared to$186 million or 22.4% of net revenues during the first quarter of 2011. The increases in net revenues and income before income taxes were primarily attributable to the same facility basis increases, as discussed above.
Sources of Revenue
Overview: We receive payments for services rendered from private insurers, including managed care plans, the federal government under theMedicare program, state governments under their respectiveMedicaid programs and directly from patients. The following tables show the approximate percentages of net patient revenue during the past three years (excludes sources of revenues for all periods presented for divested facilities which are reflected as discontinued operations in our Consolidated Financial Statements) for: (i) our Acute Care and Behavioral Health Care Facilities Combined; (ii) our Acute Care Facilities, and; (iii) our Behavioral Health Care Facilities. Net patient revenue is defined as revenue from all sources after deducting contractual allowances and discounts from established billing rates, which we derived from various sources of payment for the years indicated. The following table shows the approximate percentages of net patient revenue for the three month period endedMarch 31, 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: 32
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Percentage of Net Patient Acute Care and Behavioral Health Facilities Combined Revenues Three Months Ended March 31, 2012 2011 Third Party Payors: Medicare 24 % 24 % Medicaid 15 % 17 % Managed Care (HMO and PPOs) 48 % 46 % Other Sources 13 % 13 % Total 100 % 100 % Percentage of Net Patient Acute Care Facilities Revenues Three Months Ended March 31, 2012 2011 Third Party Payors: Medicare 29 % 30 % Medicaid 7 % 9 % Managed Care (HMO and PPOs) 55 % 51 % Other Sources 9 % 10 % Total 100 % 100 % Percentage of Net Patient Behavioral Health Facilities Revenues Three Months Ended March 31, 2012 2011 Third Party Payors: Medicare 18 % 17 % Medicaid 24 % 26 % Managed Care (HMO and PPOs) 40 % 39 % Other Sources 18 % 18 % Total 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 ofMedicare services by the appropriate governmental authorities. Amounts received under theMedicare 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 theMedicare 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 theMedicare 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'sMedicare 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 fromMedicare 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 onOctober 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 33
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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. 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 April, 2012, CMS published its proposed IPPS 2013 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 mandated adjustments are considered, we estimate our overall increase from the proposed federal fiscal year 2013 rule will approximate 0.8%. The projected impact from this IPPS proposed rule noted above reflects all of the adjustments described in this paragraph. 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 theMedicare 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. OnJanuary 1, 2005 , CMS implemented a new Psychiatric Prospective Payment System ("Psych PPS") for inpatient services furnished by psychiatric hospitals under theMedicare 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 ofJuly 1, 2010 throughJune 30, 2011 . In April, 2011 CMS published its final Psych PPS rule for the fifteen month periodJuly 1, 2011 toSeptember 30, 2012 . The market basket increase for this time period is scheduled to be 2.95%, which includes a 0.25% reduction required by the federal Health Care Reform legislation enacted in 2010. InNovember 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 2012Medicare 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 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 theCongressional Budget Office . Among its other provisions, the law established a bipartisan Congressional committee, known asthe 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 theNovember 23, 2011 34
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deadline and, as a result, across-the-board cuts to discretionary, national defense andMedicare spending were implemented which, if triggered, would result inMedicare payment reductions of up to 2% per fiscal year with a uniform percentage reduction across allMedicare programs starting in 2013. We cannot predict whetherCongress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction initiatives may be proposed byCongress . We entered into an agreement in April, 2012 with theUnited States Department of Health and Human Services , the Secretary ofHealth and Human Services , and theCenters for Medicare and Medicaid Services (referred to collectively as "HHS") that is expected to result in an aggregate cash payment to us of approximately$36 million , the majority of which we expect to receive on or aboutJune 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 endedMarch 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 theMedicare 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 calculatingMedicare 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 inFlorida 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 inFlorida , our pre-tax consolidated financial results during the three-month period endedMarch 31, 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: InJuly 2010 , theDepartment 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 theMedicare and Medicaid EHR payment incentive programs. The final rule established an initial set of standards and certification criteria. The implementation period for these newMedicare andMedicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 forMedicare and 2021 for the stateMedicaid programs. StateMedicaid 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. Our acute care facilities have begun implementing an EHR application, on a facility-by-facility basis, beginning in 2011. The implementation is scheduled to be completed in 2013. However, there can be no assurance that we will ultimately qualify for these incentive payments and, should we qualify, the amount of incentive payments received is dependent upon various factors including the implementation timing at each facility. Should we qualify for incentive payments, there may be timing differences in the recognition of the revenues 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. There are no EHR-related revenues included in our consolidated results of operations for the three-month periods endedMarch 31, 2012 and 2011. Although we received an aggregate of approximately$17 million of stateMedicaid , EHR incentive payments as ofMarch 31, 2012 , these payments have been reflected as deferred revenue on our consolidated balance sheet as of that date (included in other current liabilities). These payments will be recorded as revenue in our consolidated statements of income in the periods in which the applicable hospitals are deemed to have met the meaningful use criteria. Also, if our hospitals meet the meaningful use criteria, we may become entitled to additionalMedicaid incentive payments in future periods. 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. Although our results of operations for the three-month periods endedMarch 31, 2012 and 2011 include certain EHR-related expenses, the amounts did not have a material impact on our consolidated financial results.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 stateMedicaid payments are made under a PPS-like system, or under programs that negotiate payment levels with individual hospitals. Amounts received under theMedicaid program are generally significantly less than a hospital's customary charges for services provided. In addition to revenues received pursuant to theMedicare program, we receive a large portion of our revenues either directly fromMedicaid programs or from managed care companies managingMedicaid . All of our acute care hospitals and most of our behavioral health centers are certified as providers ofMedicaid services by the appropriate governmental authorities. 35
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We receiveMedicaid revenues in excess of$100 million annually from each ofTexas, Pennsylvania ,Virginia, Illinois andWashington, D.C. , making us particularly sensitive to reductions inMedicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective 2012 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 aggregateMedicaid 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 months endedMarch 31, 2012 include the pro rata portion of theseMedicaid rate reductions. We can provide no assurance that further reductions toMedicaid revenues (which have been proposed in certain states for fiscal year 2013), 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 ofTexas (Hildalgo,Maverick ,Potter andWebb ) participate in CMS-approved privateMedicaid 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 theMedicaid 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 stateMedicaid program while the indigent care payment is contingent on a transfer of funds from the applicable affiliated hospitals. We received$7 million and$10 million during the three-month periods endedMarch 31, 2012 and 2011, respectively, of aggregate, net UPL and affiliated hospital indigent care payments. For state fiscal year 2012, Texas Medicaid will operate under a CMS-approved Section 1115 five-yearMedicaid waiver demonstration program. During the first five years of this program, theTexas Health and Human Services Commission ("THHSC") will transition away from UPL payments to new waiver incentive payment programs. During the first year of transition, which commenced onOctober 1, 2011 , THHSC will make 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 2011 levels, we believe we would be entitled to aggregate net payments pursuant to these programs of approximately$18 million during the remaining nine months of 2012. 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 stateMedicaid programs. We derive a relatedMedicaid reimbursement benefit from assessed Provider Taxes in the form ofMedicaid claims based payment increases and/or lump sumMedicaid supplemental payments. We earned an aggregate net benefit of approximately$5 million during each of the three-month periods endedMarch 31, 2012 and 2011 fromMedicaid supplemental payments, after assessed Provider Taxes were considered (exclusive of our hospitals located inOklahoma , as discussed below). ExcludingOklahoma , we estimate that our aggregate net benefit from these Provider Tax programs will approximate$16 million during the remaining nine 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 ofOklahoma was granted federal approval by theCenters for Medicare and Medicaid Services ("CMS") for theSupplemental Hospital Offset Payment Program ("SHOPP") which grants theOklahoma Health Care Authority the authority to assess a 2.5% fee on certainOklahoma hospitals and to makeMedicaid supplemental payments to hospitals throughDecember 31, 2014 , retroactive toJuly 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 toJuly 1, 2011 . Our pre-tax consolidated financial results for the three-month period endedMarch 31, 2012 were favorably impacted by approximately$11 million consisting of revenues related to the SHOPP program covering the period ofJuly 1, 2011 throughMarch 31, 2012 . InCalifornia , aMedicaid state plan amendment ("SPA") was submitted to CMS by the state requesting and extension of a prior provider tax and relatedMedicaid supplemental payment program retroactive toJuly 1, 2011 throughDecember 31, 2013 . InIndiana , a similar Medicaid SPA was submitted to CMS by the state requesting retroactive approval of the program toJuly 1, 2011 with the program operating throughJune 30, 2013 . If these SPAs are approved by CMS, we estimate that we may be entitled to net annual reimbursement which would have a favorable impact on our future results of operations. In July, 2011 in accordance with the state 2012-2013 General Appropriations Act (the "Act"), theTexas Health and Human Services Commission ("THHSC") published a proposed rule that changes the reimbursement methodology for inpatient services by establishing a statewide base standard dollar amount ("SDA") rate along with certain hospital specific SDA rate adjustments for geographic location, trauma level designation and teaching hospital status. The new SDA payment methodology became effectiveSeptember 1, 2011 . Similarly, THHSC also incorporated changes in conformance with the Act which results in reductions to various categories ofMedicaid hospital outpatient services. The expected reduction to our annualMedicaid inpatient reimbursement resulting from the proposed inpatient SDA payment methodology has been factored into the fiscal year 2012Medicaid reductions (3% to 4%), as mentioned above. 36
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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 managedMedicare (referred to asMedicare Part C orMedicare Advantage ) andMedicaid 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 forMedicaid 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 forMedicaid 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 aMedicaid utilization rate of at least one standard deviation above the meanMedicaid 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 theMedicaid program, to date the net impact has not been materially adverse. Upon meeting certain conditions and serving a disproportionately high share ofTexas' andSouth Carolina's low income patients, five of our facilities located inTexas and one facility located inSouth Carolina received additional reimbursement from each state's DSH fund. TheTexas andSouth Carolina programs have been renewed for each state's 2012 fiscal years (covering the period ofOctober 1, 2011 throughSeptember 30, 2012 for each state). In connection with these DSH programs, included in our financial results was an aggregate of$10 million and$12 million during the three-month periods endedMarch 31, 2012 and 2011, respectively. In April, 2012, the THHSC published a proposed rule that would change theTexas Medicaid Disproportionate Share Hospital ("Texas Medicaid DSH") methodology, which, if implemented, could reduce reimbursements to us effectiveJuly 1, 2012 . Although we can provide no assurance as to the ultimate outcome of this rule, or its ultimate impact on our consolidated financial results, if this proposed rule is implemented as currently drafted, our future Texas Medicaid DSH reimbursements could be reduced by approximately$16 million annually, beginningJuly 1, 2012 . As ofMarch 31, 2012 , we have approximately$20 million of receivables recorded in connection with Texas Medicaid DSH reimbursements covering the period of October, 2011 through March, 2012,$8 million of which was paid to us in April, 2012. Although at this time we expect to fully collect the remainder of the Texas Medicaid DSH receivables, as previously disclosed, since receipt of the Texas Medicaid DSH reimbursements is contingent on certain public hospitals inTexas making Inter-Governmental Transfers to the state, we can provide no assurance that we will ultimately collect all of the estimated amounts due to us. Assuming that the South Carolina DSH program is renewed for the state's 2013 fiscal year at amounts similar to the 2012 fiscal year program, and assuming the Texas DSH program is renewed for the state's 2013 fiscal year at an reduced annual rate as contemplated in the above-mentioned proposed rule (resulting in a$16 million annual reduction effectiveJuly 1, 2012 ), we estimate our aggregate reimbursements pursuant to these programs to be approximately$28 million during the remaining nine months of 2012. 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. 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 ofMedicare andMedicaid 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 aMedicare 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 37
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changes to health insurance coverage for U.S. citizens as well as material revisions to the federal
Immediate Medicare Reductions:
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 toMedicare Advantage payments, effective in 2011.
Future Medicare Reductions:
Future changes to the
• AMedicare shared savings program (effective 2012) • A hospital readmissions reduction program (effective 2012) • A national pilot program on payment bundling (effective 2013) • A value-based purchasing program for hospitals (effective 2012)
• Reduction to
(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) Although the above-mentionedMedicare market basket reductions implemented in 2010 did not have a material impact on our results of operations to date, we are unable to estimate the future impact of the other legislative changes as outlined above. In addition to statutory and regulatory changes to theMedicare and each of the stateMedicaid 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 theMedicare andMedicaid 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.
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 month periods endedMarch 31, 2012 and 2011.
Interest Expense:
Interest expense was$47 million and$56 million during the three-month periods endedMarch 31, 2012 and 2011, respectively. Below is a schedule of our interest expense for the three month periods endedMarch 31, 2012 and 2011 (amounts in thousands): Three Months Three Months Ended EndedMarch 31 ,March 31, 2012 2011
Revolving credit & demand notes $ 1,640 $ 2,169 $200 million, 6.75% Senior Notes due 2011 (a.) - 3,378 $400 million, 7.125% Senior Notes due 2016 (b.) 7,124 7,124 38
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Table of Contents Three Months Three Months Ended Ended March 31, March 31, 2012 2011 $250 million, 7.00% Senior Notes due 2018 4,375 4,375 Term loan facility A 5,794 8,756 Term loan facility B 14,113 20,371 Accounts receivable securitization program 687 665 Subtotal-revolving credit, demand notes, Senior Notes, term loan facilities and accounts receivable securitization program 33,733
46,838
Interest rate swap expense, net 5,158 1,405 Amortization of financing fees 7,277 6,545 Other combined interest expense 1,576 1,673 Capitalized interest on major construction and other projects (1,005 ) - Interest income (29 ) (44 ) Interest expense, net $ 46,710 $ 56,417
(a.) The
agreement.
(b.) In June, 2008, we issued an additional
"Notes") which formed a single series with the original
Notes issued in June, 2006 (see Note 4-Long Term Debt). Other than their
date of issuance and initial price to the public, the terms of the Notes
issued in June, 2008 are identical to, and trade interchangeably with, the
Notes which were originally issued in June, 2006. The proceeds from this
issuance were used to repay outstanding borrowings.
Interest expense decreased$10 million during the three-month period endedMarch 31, 2012 , as compared to the comparable quarter of 2011. The decreased interest expense was due primarily to decreases 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) and average borrowings outstanding.
Discontinued Operations
In connection with the receipt of antitrust clearance from theFederal Trade Commission ("FTC") in connection with our acquisition of PSI in November, 2010, we agreed to divest three former PSI facilities as well as one of our legacy behavioral health facilities inPuerto Rico . Pursuant to the terms of our agreement with the FTC, we divested:
• in July, 2011, the
located inNew Castle, Delaware ;
• in December, 2011, the
(21-bed), both of which are located inLas Vegas, Nevada , and; • in January, 2012, the Hospital San Juan Capestrano, a 108-bed facility
located in
The operating results for the three former PSI facilities located inDelaware andNevada are reflected as discontinued operations during the first quarter of 2011. 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 the Hospital San Juan Capestrano were reflected as "held for sale" on our Consolidated Balance Sheet as ofDecember 31, 2011 . The following table shows the results of operations for the former PSI facilities located inDelaware andNevada , on a combined basis, which were reflected as discontinued operations during the first quarter of 2011 (amounts in thousands): Three Months Ended March 31, 2011 Net revenues $ 10,260 Income from discontinued operations, before income tax expense 2,331 Income tax expense (899 ) Income from discontinued operations, net of income tax expense $ 1,432 39
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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-month periods ended
Three Months Ended March 31, 2012 2011 Provision for income taxes $ 79,748 $ 74,009 Income before income taxes 222,318 203,996 Effective tax rate 35.9 % 36.3 % 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-month periods endedMarch 31, 2012 and 2011 (dollar amounts in thousands): Three Months Ended March 31, 2012 2011 Provision for income taxes $ 79,748 $ 74,009 Income before income taxes 222,318 203,996 Less: Net income attributable to noncontrolling interests (13,963 )
(15,794 )
Income before income taxes, less net income attributable to noncontrolling interests 208,355 188,202 Effective tax rate 38.3 % 39.3 %
The decrease in the effective tax rates during the three-month period ended
Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was
• a favorable change of
depreciation and amortization expense and stock-based compensation;
• a
• a
primarily to the timing of accrued compensation payments, and; •$8 million of other combined net unfavorable changes. Days sales outstanding ("DSO"): Our DSO are calculated by dividing our net revenue by the number of days in the three-month periods. The result is divided into the accounts receivable balance atMarch 31st of each year to obtain the DSO. Our DSO were 56 days atMarch 31, 2012 and 48 days atMarch 31, 2011 . Our net accounts receivable balance as ofMarch 31, 2012 increased approximately$147 million over the balance as ofDecember 31, 2011 (excluding the impact of the divestiture of a behavioral health facility during the first quarter of 2012). The increase was due primarily to: (i)$36 million of revenues recorded during the first quarter of 2012 resulting from the above-mentioned agreement entered into with the United 40
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States Department of Health and Human Services , the Secretary ofHealth and Human Services , and theCenters for Medicare and Medicaid Services related toMedicare inpatient prospective payment system underpayments during a number of prior years; (ii) increased revenues experienced by our behavioral health care facilities during the first quarter of 2012 as a result of increases in adjusted patient days and revenue per adjusted day; (iii) an increase in other receivables including state-based revenue program receivables in certain states, most particularlyIllinois , as discussed below, and; (iv) an increase in receivables recorded in connection with Texas Medicaid DSH reimbursements ($20 million outstanding covering the period of October, 2011 through March, 2012,$8 million of which was paid to us in April, 2012). As ofMarch 31, 2012 andDecember 31, 2011 , our accounts receivable includes approximately$73 million and$54 million , respectively, due fromIllinois . Collection of these receivables continues to be delayed due to state budgetary and funding pressures. Approximately$50 million as ofMarch 31, 2012 , and$41 million as ofDecember 31, 2011 , of the receivables due fromIllinois 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 fromIllinois would have an adverse impact on our future consolidated results of operations and cash flows.
Net cash used in investing activities
During the first three months of 2012, we used
• spent$93 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
located inTemecula, California which is scheduled to be completed and opened in mid-2013;
• spent
electronic health records application; • received$53 million in connection with the divestiture of the Hospital
San Juan Capestrano and the divestiture of the real property of a previously closed behavioral health care facility, and;
• received
termination of an agreement to purchase an acute care hospital located in
During the first three months of 2011, we used
• spent$57 million to finance capital expenditures including capital expenditures for equipment, renovations and new projects at various existing facilities;
• spent
electronic health records application, and;
• received
care facility.
Net cash provided by/used in financing activities
During the first three months of 2012, we used
• spent
pursuant to our Term Loan A (
revolving credit ($22 million ) facilities;
• spent
interests in majority owned businesses; • spent$2 million to repurchase shares of our Class B Common Stock; • spent$5 million to pay quarterly cash dividends of$.05 per share, and;
• generated
Stock pursuant to the terms of employee stock purchase plans.
During the first three months of 2011, we used
• spent
pursuant to our Term Loan A and Term Loan B credit facilities;
• generated
pursuant to our revolving credit facility and accounts receivable securitization program;
• spent
our credit agreement (which includes our revolving credit agreement, Term
Loan A and Term Loan B facilities) which was completed in March, 2011;
• spent
interests in majority owned businesses; • spent$3 million to repurchase shares of our Class B Common Stock; • spent$5 million to pay quarterly cash dividends of$.05 per share, and; 41
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• generated
Stock pursuant to the terms of employee stock purchase plans.
Expected Capital Expenditures During the Remainder of 2012:
During the remaining nine months of 2012, we expect to spend approximately$260 million to $285 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
OnNovember 15, 2010 , we entered into a credit agreement (the "Credit Agreement") with various financial institutions. The Credit Agreement is a senior secured facility which provided an initial aggregate commitment amount of$3.45 billion , comprised of a new$800 million revolving credit facility, a$1.05 billion Term Loan A facility and a$1.6 billion Term Loan B facility. Prior to the effectiveness of the Credit Agreement Amendment in March, 2011 (as discussed below), we prepaid the principal amount and permanently reduced the Term Loan B commitment by$125 million . During the first quarter of 2012, we made scheduled principal payments of$35 million on the Term Loan A and$13 million on the Term Loan B. The revolving credit facility and the Term Loan A mature onNovember 15, 2015 and the Term Loan B matures onNovember 15, 2016 . 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. OnMarch 15, 2011 , we entered into a first amendment to the Credit Agreement (the "Amendment") which became effective immediately and provides, among other things, for a reduction in the interest rates payable in connection with borrowings under the Credit Agreement. Upon the effectiveness of the Amendment, 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 facilities and 2.75% under the Term Loan B facility. Upon the effectiveness of the Amendment, the minimum Eurodollar rate for the Term Loan B facility was reduced from 1.50% to 1.00%. In connection with the Amendment, we paid a fee of 1.00% of the amounts outstanding under the Term Loan B in accordance with the terms of the 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 toOctober 25, 2013 . 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. AtMarch 31, 2012 , we had$240 million of outstanding borrowings and no additional capacity pursuant to the terms of our accounts receivable securitization program. As ofMarch 31, 2012 , we had$9 million 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. As ofMarch 31, 2012 , we had an aggregate of$509 million of available borrowing capacity pursuant to the terms of our Credit Agreement and Securitization, net of$219 million of outstanding borrowings,$63 million of outstanding letters of credit and$9 million of outstanding borrowings under a short-term, on-demand credit facility. OnSeptember 29, 2010 , we issued$250 million of 7.00% senior unsecured notes (the "Unsecured Notes") which are scheduled to mature onOctober 1, 2018 . The Unsecured Notes were registered in April, 2011. Interest on the Unsecured Notes is payable semiannually in arrears onApril 1st andOctober 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 toOctober 1, 2014 . They are also redeemable in whole or in part at a price of: (i) 103.5% on or afterOctober 1, 2014 ; (ii) 101.75% on or afterOctober 1, 2015 , and; (iii) 100% on or afterOctober 1, 2016 . These Unsecured Notes are guaranteed by a group 42
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of subsidiaries (each of which is a 100% directly owned subsidiary ofUniversal Health Services, Inc. ) which fully and unconditionally guarantee the Unsecured Notes on a joint and several basis, subject to certain customary automatic release provisions. OnJune 30, 2006 , we issued$250 million of senior notes which have a 7.125% coupon rate and mature onJune 30, 2016 (the "7.125% Notes"). Interest on the 7.125% Notes is payable semiannually in arrears onJune 30th andDecember 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 onNovember 15, 2010 , and in accordance with the Indenture datedJanuary 20, 2000 governing the rights of our existing notes, we entered into a supplemental indenture pursuant to which our 7.125% Notes (due in 2015) 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 ofMarch 31, 2012 . The carrying amount and fair value of our debt was$3.58 billion and$3.65 billion atMarch 31, 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 60% at
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) the issuance of equity; (ii) borrowings under our existing revolving credit facility or through refinancing the existing revolving credit agreement, and/or; (iii) the issuance of other long-term debt. 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.
Off-Balance Sheet Arrangements
During the three months endedMarch 31, 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 endedDecember 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 ofMarch 31, 2012 , we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled$83 million consisting of: (i)$66 million related to our self-insurance programs, and; (ii)$17 million of other debt and public utility guarantees.
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