UNIVERSAL HEALTH SERVICES INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our principal business is owning and operating, through our subsidiaries, acute
care hospitals and outpatient facilities and behavioral health care facilities.
As ofSeptember 30, 2022 , we owned and/or operated 359 inpatient facilities and 41 outpatient and other facilities including the following located in 39 U.S states,Washington, D.C. , theUnited Kingdom andPuerto Rico :
Acute care facilities located in the
• 28 inpatient acute care hospitals; • 21 free-standing emergency departments, and; • 7 outpatient centers & 1 surgical hospital.
Behavioral health care facilities (331 inpatient facilities and 12 outpatient
facilities):
Located in the
• 185 inpatient behavioral health care facilities, and; • 10 outpatient behavioral health care facilities.
Located in the
• 143 inpatient behavioral health care facilities, and; • 2 outpatient behavioral health care facilities.
Located in
• 3 inpatient behavioral health care facilities.
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and commercial health insurer accounted for 58% during each of the three-month periods endedSeptember 30, 2022 and 2021, and 57% and 56% during the nine-month periods endedSeptember 30, 2022 and 2021, respectively. Net revenues from our behavioral health care facilities and commercial health insurer accounted for 43% and 42% of our consolidated net revenues during the three-month period endedSeptember 30, 2022 and 2021, respectively, and 43% and 44% during the nine-month periods endedSeptember 30, 2022 and 2021, respectively. Our behavioral health care facilities located in theU.K. generated net revenues of approximately$167 million and$174 million during the three-month periods endedSeptember 30, 2022 and 2021, respectively, and$516 million and$511 million during the nine-month periods endedSeptember 30, 2022 and 2021, respectively. Total assets at ourU.K. behavioral health care facilities were approximately$1.119 billion as ofSeptember 30, 2022 and$1.351 billion as ofDecember 31, 2021 . 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 our Annual Report on Form 10-K for the year endedDecember 31, 2021 , 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 set forth herein in Item 1A. Risk Factors and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2021 and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations- 26
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Forward Looking Statements and Risk Factors, as included herein. 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:
• we are subject to risks associated with public health threats and
epidemics, including the health concerns relating to the COVID-19
pandemic. In
("CDC") confirmed the spread of the disease to
pandemic. The federal government has declared COVID-19 a national
emergency, as many federal and state authorities have implemented
aggressive measures to "flatten the curve" of confirmed individuals
diagnosed with COVID-19 in an attempt to curtail the spread of the virus
and to avoid overwhelming the health care system;
• the impact of the COVID-19 pandemic, which began during the second half of
March, 2020, has had a material effect on our operations and financial
results since that time. The length and extent of the disruptions caused
by the COVID19 pandemic are currently unknown; however, we expect such
disruptions to continue into the future. Since the future volumes and
severity of COVID-19 patients remain highly uncertain and subject to
change, including potential increases in future COVID-19 patient volumes
caused by new variants of the virus, as well as related pressures on
staffing and wage rates, we are not able to fully quantify the impact that
these factors will have on our future financial results. However,
developments related to the COVID-19 pandemic could continue to materially
affect our financial performance. Even after the COVID-19 pandemic has
subsided, we may continue to experience materially adverse impacts on our
financial condition and our results of operations as a result of its
macroeconomic impact, and many of our known risks described in the Risk
Factors sections of our Annual Report on Form 10-K for the year ended
• the nationwide shortage of nurses and other clinical staff and support
personnel has been a significant operating issue facing us and other
healthcare providers. Like others in the healthcare industry, we continue
to experience a shortage of nurses and other clinical staff and support
personnel at our acute care and behavioral health care hospitals in many
geographic areas. In some areas, the labor scarcity is putting a strain on
our resources and staff, which has required us to utilize highercost
temporary labor and pay premiums above standard compensation for essential
workers. This staffing shortage has required us to hire expensive
temporary personnel and/or enhance wages and benefits to recruit and
retain nurses and other clinical staff and support personnel. At certain
facilities, particularly within our behavioral health care segment, we
have been unable to fill all vacant positions and, consequently, have been
required to limit patient volumes. These factors, which had a material
unfavorable impact on our results of operations during the first nine
months of 2022, are expected to continue to have an unfavorable material
impact on our results of operations for the foreseeable future;
• the
Final Rule ("IFR") effective
vaccinations for all applicable staff at all Medicare and Medicaid
certified facilities. Under the IFR, facilities covered by this regulation
must establish a policy ensuring all eligible staff have received the
COVID-19 vaccine prior to providing any care, treatment, or other
services. All eligible staff must have received the necessary shots to be
fully vaccinated. The regulation also provides for exemptions based on
recognized medical conditions or religious beliefs, observances, or
practices. Under the IFR, facilities must develop a similar process or
plan for permitting exemptions in alignment with federal law. If
facilities fail to comply with the IFR by the deadlines established, they
are subject to potential termination from the Medicare and Medicaid
program for non-compliance. We cannot predict at this time the potential
viability or impact of any additional vaccination
requirements. Implementation of these rules could have an impact on
staffing at our facilities for those employees that are not vaccinated in
accordance with IFR requirements, and associated loss of revenues and
increased costs resulting from staffing issues could have a material
adverse effect on our financial results;
• the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"),
a stimulus package signed into law on
billion in grant funding to hospitals and other healthcare providers to be
distributed through thePublic Health and Social Services Emergency Fund (the "PHSSEF"). These funds are not required to be repaid provided the recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using PHSSEF funds to reimburse expenses or losses that other sources are obligated to
reimburse. However, since the expenses and losses will be ultimately
measured over the life of the COVID-19 pandemic, potential retrospective
unfavorable adjustments in future periods, of funds recorded as revenues
in prior periods, could occur. TheU.S. Department of Health and Human Services ("HHS") initially distributed$30 billion of this funding based
on each provider's share of total Medicare fee-for-service reimbursement
in 2019. Subsequently, HHS determined that CARES Act funding (including
the
providers' share of 2018 net patient revenue. We have received payments
from these initial distributions of the PHSSEF as disclosed herein. HHS
has indicated that distributions of the remaining $50 billion will be
targeted primarily to hospitals in COVID-19 high impact
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areas, to rural providers, safety net hospitals and certain Medicaid
providers and to reimburse providers for COVID-19 related treatment of
uninsured patients. We have received payments from these targeted
distributions of the PHSSEF, as disclosed herein. The CARES Act also makes
other forms of financial assistance available to healthcare providers,
including through Medicare and Medicaid payment adjustments and an
expansion of the Medicare Accelerated and Advance Payment Program, which
made available accelerated payments of Medicare funds in order to increase
cash flow to providers. On
reevaluating and temporarily suspending the Medicare Accelerated and
Advance Payment Program in light of the availability of the PHSSEF and the
significant funds available through other programs. We have received
accelerated payments under this program during 2020, and returned early
all of those funds during the first quarter of 2021, as disclosed herein.
The Paycheck Protection Program and Health Care Enhancement Act (the
"PPPHCE Act"), a stimulus package signed into law on April 24, 2020 ,
includes additional emergency appropriations for COVID-19 response,
including
PHSSEF. A third phase of PHSSEF allocations made
for providers
payments. Applicants that had not yet received PHSSEF payments of 2
percent of patient revenue were to receive a payment that, when combined
with prior payments (if any), equals 2 percent of patient care revenue.
Providers that have already received payments of approximately 2 percent
of annual revenue from patient care were potentially eligible for an
additional payment. Recipients will not be required to repay the
government for PHSSEF funds received, provided they comply with HHS
defined terms and conditions. On
Appropriations Act, 2021 ("CAA") was signed into law. The CAA appropriated
an additional
to calculate lost revenues, and permitted parent organizations to allocate
PHSSEF targeted distributions to subsidiary organizations. The CAA also
provides that not less than 85 percent of the unobligated PHSSEF amounts
and any future funds recovered from health care providers should be used
for additional distributions that consider financial losses and changes in
operating expenses in the third or fourth quarters of 2020 and the first
quarter of 2021 that are attributable to the coronavirus. The CAA provided
additional funding for testing, contact tracing and vaccine
administration. Providers receiving payments were required to sign terms
and conditions regarding utilization of the payments. Any provider
receiving funds in excess of
report data elements to HHS detailing utilization of the payments, and we
will be required to file such reports. We, and other providers, will
report healthcare related expenses attributable to COVID-19 that have not
been reimbursed by another source, which may include general and
administrative or healthcare related operating expenses. Funds may also be
applied to lost revenues, represented as a negative change in
year-over-year net patient care operating income. The deadline for using
all
received period; payments received in the first period of
to
received in the fourth period of
expended by
("ARPA"), enacted on
detecting, diagnosing, tracing, and monitoring COVID-19 infections;
establishing community vaccination centers and mobile vaccine units;
promoting, distributing, and tracking COVID-19 vaccines; and reimbursing
rural hospitals and facilities for healthcare-related expenses and lost
revenues attributable to COVID-19. ARPA increased the eligibility for, and
amount of, premium tax credits to purchase health coverage through Patient
Protection and Affordable Care Act, as amended by the Health and Education
Reconciliation Act (collectively, the "Legislation"). Further, ARPA set
the Medicaid program's federal medical assistance percentage ("FMAP") at
100 percent for amounts expended for COVID-19 vaccines and vaccine
administration. ARPA also increases the FMAP by 5 percent for eight
calendar quarters to incentivize states to expand their Medicaid
programs. Finally, ARPA provides subsidies to cover 100 percent of health
insurance premiums under the Consolidated Omnibus Budget Reconciliation
Act through
surrounding the implementation of the CARES Act, the PPPHCE Act, the CAA
and ARPA, and the federal government may consider additional stimulus and
relief efforts, but we are unable to predict whether additional stimulus
measures will be enacted or their impact. There can be no assurance as to
the total amount of financial and other types of assistance we will
receive under the CARES Act, the PPPHCE Act, the CAA and the ARPA, and it
is difficult to predict the impact of such legislation on our operations
or how they will affect operations of our competitors. Moreover, we are
unable to assess the extent to which anticipated negative impacts on us
arising from the COVID-19 pandemic will be offset by amounts or benefits
received or to be received under the CARES Act, the PPPHCE Act, the CAA
and the ARPA;
• 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 been passed into law
that may result in major changes in the health care delivery system on a
national or state level. For example, Congress has reduced to $0 the
penalty for failing to maintain health coverage that was part of the
original Legislation as part of the Tax Cuts and Jobs Act.
has undertaken and is expected to undertake additional executive actions
that will strengthen the Legislation and reverse the policies of the prior
administration. To date, the Biden administration has issued executive
orders implementing a special enrollment period permitting individuals to
enroll in health plans outside of the annual open enrollment period and
reexamining policies that may undermine the Legislation or the Medicaid
program. The Inflation Reduction Act of 2022 ("IRA") was passed on August
16, 2022, which among other things, allows for CMS to negotiate prices for
certain single-
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source drugs reimbursed under Medicare Part B and Part D. The ARPA's
expansion of subsidies to purchase coverage through a Legislation
exchange, which the IRA continued through 2025, is anticipated to increase
exchange enrollment.
final rules (i) enabling the formation of association health plans that
would be exempt from certain Legislation requirements such as the
provision of essential health benefits, (ii) expanding the availability of
short-term, limited duration health insurance, (iii) eliminating
cost-sharing reduction payments to insurers that would otherwise offset
deductibles and other out-of-pocket expenses for health plan enrollees at
or below 250 percent of the federal poverty level, (iv) relaxing
requirements for state innovation waivers that could reduce enrollment in
the individual and small group markets and lead to additional enrollment
in short-term, limited duration insurance and association health plans and
(v) incentivizing the use of health reimbursement arrangements by
employers to permit employees to purchase health insurance in the
individual market. The uncertainty resulting from these Executive Branch
policies may have led to reduced Exchange enrollment in 2018, 2019 and
2020. It is also anticipated that these policies, to the extent that they
remain as implemented, may create additional cost and reimbursement
pressures on hospitals, including ours. In addition, there have been
numerous political and legal efforts to expand, repeal, replace or modify
the Legislation since its enactment, some of which have been successful,
in part, in modifying the Legislation, as well as court challenges to the
constitutionality of the Legislation.
latest such case on
requirement to obtain minimum essential health insurance coverage, or the
individual mandate. The Court dismissed the case without specifically
ruling on the constitutionality of the Legislation. As a result, the
Legislation will continue to remain law, in its entirety, likely for the
foreseeable future. On
recent challenge when a
Braidwood Management v. Becerra, ruled that a requirement that certain
health plans cover services without cost sharing violates the Appointments
Clause of the
prevention medication violates the Religious Freedom Restoration Act. Any
future efforts to challenge, replace or replace the Legislation or expand
or substantially amend its provision is unknown. See below in Sources of
Revenue and Health Care Reform for additional disclosure;
• under the Legislation, hospitals are required to make public a list of
their standard charges, and effective
that this disclosure be in machine-readable format and include charges for
all hospital items and services and average charges for diagnosis-related
groups. On
Transparency Requirements for Hospitals to Make Standard Charges Public."
This rule took effect on
also make public their payor-specific negotiated rates, minimum negotiated
rates, maximum negotiated rates, and cash for all items and services,
including individual items and services and service packages, that could
be provided by a hospital to a patient. Failure to comply with these
requirements may result in daily monetary penalties. On November 2, 2021 ,
CMS released a final rule amending several hospital price transparency
policies and increasing the amount of penalties for noncompliance through
the use of a scaling factor based on hospital bed count;
• as part of the CAA,
limiting patient balance billing in certain circumstances. The CAA
addresses surprise medical bills stemming from emergency services,
out-of-network ancillary providers at in-network facilities, and air
ambulance carriers. The legislation prohibits surprise billing when
out-of-network emergency services or out-of-network services at an
in-network facility are provided, unless informed consent is received. In
these circumstances providers are prohibited from billing the patient for
any amounts that exceed in-network cost-sharing requirements. HHS, the
final rules, which begin to implement the legislation. The rules are
expected to limit our ability to receive payment for services at usually
higher out-of-network rates in certain circumstances and prohibit
out-of-network payments in other circumstances. On
district judge in the
the rule governing aspects of the Independent Dispute Resolution ("IDR")
process. In light of this decision, the government issued a final rule on
qualifying payment amount ("QPA") by the IDR entity and providing
additional factors the IDR entity should consider when choosing between
two competing offers. On
filed a lawsuit challenging the IDR process provided in the updated final
rule and alleging that the final rule unlawfully elevates the QPA above
other factors the IDR entity must consider. The American Hospital
Association and American Medical Association have announced their intent
to join this case as amici supporting the
• possible unfavorable changes in the levels and terms of reimbursement for
our charges by third party payers or government based payers, including
Medicare or Medicaid in
the
• our ability to enter into managed care provider agreements on acceptable
terms and the ability of our competitors to do the same;
• the outcome of known and unknown litigation, government investigations,
false claims act allegations, and liabilities and other claims asserted
against us and other matters as disclosed in Note 6 to the Consolidated
Financial Statements - Commitments and Contingencies and the effects of
adverse publicity relating to such matters;
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• the unfavorable impact on our business of a continued or worsening
deterioration in economic, business and credit market conditions,
including a continuation or worsening of inflationary pressures on our
operating expenses (most particularly labor and supply costs) since our
ability, to pass on to payers, the increased costs associated with
providing healthcare services to our patients (most particularly Medicare
and Medicaid patients) is limited;
• competition from other healthcare providers (including physician owned
facilities) in certain markets;
• 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;
• there is a heightened risk of future cybersecurity threats, including
ransomware attacks targeting healthcare providers. If successful, future
cyberattacks could have a material adverse effect on our business. Any
costs that we incur as a result of a data security incident or breach,
including costs to update our security protocols to mitigate such an
incident or breach could be significant. Any breach or failure in our
operational security systems can result in loss of data or an unauthorized
disclosure of or access to sensitive or confidential member or protected
personal or health information and could result in significant penalties
or fines, litigation, loss of customers, significant damage to our
reputation and business, and other losses. Previously, we had experienced
a cyberattack in September, 2020 that had an adverse effect on our
operating results during the fourth quarter of 2020, before giving effect
to partial recovery of the loss through receipt of commercial insurance
proceeds and collection of previously reserved patient accounts;
• the availability of suitable acquisition and divestiture opportunities and
our ability to successfully integrate and improve our acquisitions since
failure to achieve expected acquisition benefits from certain of our prior
or future acquisitions could result in impairment charges for goodwill and
purchased intangibles;
• the impact of severe weather conditions, including the effects of
hurricanes and climate change;
• as discussed below in Sources of Revenue, we receive revenues from various
state and county-based programs, including Medicaid in all the states in
which we operate. We receive annual Medicaid revenues of approximately
payments in certain states including
therefore particularly sensitive to potential reductions in Medicaid and
other state-based revenue programs as well as regulatory, economic,
environmental and competitive changes in those states. We can provide no
assurance that reductions to revenues earned pursuant to these programs,
and the effect of the COVID-19 pandemic on state budgets, 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;
• our inpatient acute care and behavioral health care facilities may
experience decreasing admission and length of stay trends;
• our financial statements reflect large amounts due from various commercial
and private payers and there can be no assurance that failure of the
payers to remit amounts due to us will not have a material adverse effect
on our future results of operations;
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• the Budget Control Act of 2011 (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
the law established a bipartisan Congressional committee, known as the
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 theNovember 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented onMarch 1, 2013
resulting in Medicare payment reductions of up to 2% per fiscal year with
a uniform percentage reduction across all Medicare programs. The
Bipartisan Budget Act of 2015, enacted on
2% reductions to Medicare reimbursement imposed under the 2011 Act. Recent
legislation has suspended payment reductions through
exchange for extended cuts through 2030. Subsequent legislation extended
the payment reduction suspension through
reduction from then until
thereafter. We cannot predict whetherCongress will restructure the implemented Medicare payment reductions or what other federal budget deficit reduction initiatives may be proposed byCongress going
forward. See below in 2019 Novel Coronavirus Disease Medicare and Medicaid
Payment Related Legislation - Medicare Sequestration Relief, for
additional disclosure related to the favorable effect the legislative
extensions have had on our results of operations during 2020 and 2021;
• uninsured and self-pay patients treated at our acute care facilities
unfavorably impact our ability to satisfactorily and timely collect our
self-pay patient accounts;
• changes in our business strategies or development plans;
• in June, 2016, the
referendum in favor of the exit of the
legislature. On
the Lisbon Treaty, formally starting negotiations regarding its exit from
the
Union reached a post-Brexit trade and cooperation agreement that created
new business and security requirements and preserved the
tariff- and quota-free access to the
trade and cooperation agreement was provisionally applied as of
2021 and entered into force on
impact the business and regulatory environment in the
Union, or other countries. Any of these effects of Brexit, and others we
cannot anticipate, could harm our business, financial condition and
results of operations;
• in 2021, the rate of inflation in
has since risen to levels not experienced in over 40 years. We are
experiencing inflationary pressures, primarily in personnel costs, and we
anticipate impacts on other cost areas within the next twelve months. The
extent of any future impacts from inflation on our business and our
results of operations will be dependent upon how long the elevated
inflation levels persist and the extent to which the rate of inflation
further increases, if at all, neither of which we are able to predict. If
elevated levels of inflation were to persist or if the rate of inflation
were to accelerate, our expenses could increase faster than anticipated
and we may utilize our capital resources sooner than expected. Further,
given the complexities of the reimbursement landscape in which we operate,
our payors may be unwilling or unable to increase reimbursement rates to
compensate for inflationary impacts. Although we have hedged some of our
floating rate indebtedness, the rapid increase in interest rates have
increased our interest expense significantly increasing our expenses and
reducing our free cash flow. As such, the effects of inflation may
adversely impact our results of operations, financial condition and cash
flows;
• we have exposure to fluctuations in foreign currency exchange rates,
primarily the pound sterling. We have international subsidiaries that
operate in the
currencies with certain financial institutions in an effort to minimize
the impact of certain currency exchange rate fluctuations, but these
hedges may be inadequate to protect us from currency exchange rate
fluctuations. To the extent that these hedges are inadequate, our reported
financial results or the way we conduct our business could be adversely
affected. Furthermore, if a financial counterparty to our hedges
experiences financial difficulties or is otherwise unable to honor the
terms of the foreign currency hedge, we may experience material financial
losses, 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.
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Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies or
estimates from those disclosed in our 2021 Annual Report on Form 10-K.
Recent Accounting Standards: For a summary of accounting standards, please see
Note 14 to the Condensed Consolidated Financial Statements, as included herein.
Results of Operations
COVID-19, Clinical Staffing Shortage and Effects of Inflation:
The impact of the COVID-19 pandemic, which began during the second half of March, 2020, has had a material effect on our operations and financial results since that time. The length and extent of the disruptions caused by the COVID19 pandemic are currently unknown; however, we expect such disruptions to continue into the future. Since the future volumes and severity of COVID-19 patients remain highly uncertain and subject to change, including potential increases in future COVID-19 patient volumes caused by new variants of the virus, as well as related pressures on staffing and wage rates, we are not able to fully quantify the impact that these factors will have on our future financial results. However, developments related to the COVID-19 pandemic could continue to materially affect our financial performance. The healthcare industry is labor intensive and salaries, wages and benefits are subject to inflationary pressures, as are supplies expense and other operating expenses. In addition, the nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issue facing us and other healthcare providers. Like others in the healthcare industry, we continue to experience a shortage of nurses and other clinical staff and support personnel at our acute care and behavioral health care hospitals in many geographic areas. In some areas, the labor scarcity is putting a strain on our resources and staff, which has required us to utilize highercost temporary labor and pay premiums above standard compensation for essential workers. This staffing shortage has required us to hire expensive temporary personnel and/or enhance wages and benefits to recruit and retain nurses and other clinical staff and support personnel. At certain facilities, particularly within our behavioral health care segment, we have been unable to fill all vacant positions and, consequently, have been required to limit patient volumes. These factors, which had a material unfavorable impact on our results of operations during the first nine months of 2022, are expected to continue to have an unfavorable material impact on our results of operations for the foreseeable future. Although our ability to pass on increased costs associated with providing healthcare to Medicare and Medicaid patients is limited due to various federal, state and local laws which, in certain circumstances, limit our ability to increase prices, we have begun negotiating increased rates from commercial insurers to defray our increased cost of providing patient care. In addition, we have implemented various productivity enhancement programs and cost reduction initiatives including, but not limited to, the following: team-based patient care initiatives designed to optimize the level of patient care services provided by our licensed nurses/clinicians; efforts to reduce utilization of, and rates paid for, premium pay labor; consolidation of medical supply vendors to increase purchasing discounts; review and reduction of clinical variation in connection with the utilization of medical supplies, and; various other efforts to increase productivity and/or reduce costs including investments in new information technology applications.
Financial results for the 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
(dollar amounts in thousands):
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Three months ended Three months ended
September 30, 2022 September 30, 2021
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 3,336,027 100.0 % $ 3,155,999 100.0 %
Operating charges:
Salaries, wages and benefits 1,677,431 50.3 % 1,556,448 49.3 %
Other operating expenses 837,241 25.1 % 754,072 23.9 %
Supplies expense 366,337 11.0 % 367,834 11.7 %
Depreciation and amortization 145,874 4.4 % 134,462 4.3 %
Lease and rental expense 33,264 1.0 % 28,375 0.9 %
Subtotal-operating expenses 3,060,147 91.7 % 2,841,191 90.0 %
Income from operations 275,880 8.3 % 314,808 10.0 %
Interest expense, net 35,653 1.1 % 21,199 0.7 %
Other (income) expense, net 6,015 0.2 % 6,719 0.2 %
Income before income taxes 234,212 7.0 % 286,890 9.1 %
Provision for income taxes 57,401 1.7 % 67,515 2.1 %
Net income 176,811 5.3 % 219,375 7.0 %
Less: Income (loss) attributable to
noncontrolling interests (6,003 ) (0.2 )% 1,024 0.0 %
Net income attributable to UHS $ 182,814 5.5 % $ 218,351 6.9 %
Net revenues increased by 5.7%, or $180 million , to $3.34 billion during the
three-month period ended September 30, 2022 , as compared to $3.16 billion during
the third quarter of 2021. The net increase was primarily attributable to: (i) a
$126 million or 4.1% increase in net revenues generated from our acute care
hospital services and behavioral health services operated during both periods
(which we refer to as "Same Facility"), and; (ii) $54 million of other combined
net increases.
Income before income taxes (before income attributable to noncontrolling
interests) decreased by
three-month period ended
the third quarter of 2021. The
• a decrease of
in Acute Care Hospital Services;
• an increase of
discussed below in
• a decrease of
increase in our aggregate average outstanding borrowings as well as an
increase in our weighted average cost of borrowings, as discussed below in
Other Operating Results-Interest Expense.
Net income attributable to UHS decreased by
during the three-month period ended
million
• a
• an increase of
noncontrolling interests, and;
• an increase of
income taxes due primarily to the income tax benefit recorded in connection
with the
Financial results for the nine-month periods ended
The following table summarizes our results of operations and is used in the
discussion below for the nine-month periods ended
(dollar amounts in thousands):
33
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Nine months ended Nine months ended
September 30, 2022 September 30, 2021
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 9,952,390 100.0 % $ 9,366,866 100.0 %
Operating charges:
Salaries, wages and benefits 5,061,173 50.9 % 4,542,156 48.5 %
Other operating expenses 2,526,060 25.4 % 2,233,590 23.8 %
Supplies expense 1,092,403 11.0 % 1,052,977 11.2 %
Depreciation and amortization 433,508 4.4 % 399,850 4.3 %
Lease and rental expense 97,075 1.0 % 88,848 0.9 %
Subtotal-operating expenses 9,210,219 92.5 % 8,317,421 88.8 %
Income from operations 742,171 7.5 % 1,049,445 11.2 %
Interest expense, net 83,002 0.8 % 64,455 0.7 %
Other (income) expense, net 15,244 0.2 % (1,575 ) (0.0 )%
Income before income taxes 643,925 6.5 % 986,565 10.5 %
Provision for income taxes 157,312 1.6 % 232,844 2.5 %
Net income 486,613 4.9 % 753,721 8.0 %
Less: Income attributable to
noncontrolling interests (14,176 ) (0.1 )% 1,255 0.0 %
Net income attributable to UHS $ 500,789 5.0 % $ 752,466 8.0 %
Net revenues increased by 6.3%, or $586 million , to $9.95 billion during the
nine-month period ended September 30, 2022 , as compared to $9.37 billion during
the comparable period of 2021. The net increase was primarily attributable to:
(i) a $400 million , or 4.4%, increase in net revenues generated from our acute
care hospital services and behavioral health services, on a Same Facility basis,
and; (ii) $186 million of other combined net increases.
Income before income taxes (before income attributable to noncontrolling
interests) decreased by
nine-month period ended
the comparable period of 2021. The
• a decrease of
in Acute Care Hospital Services;
• a decrease of
discussed below in
• a decrease of
increase in our aggregate average outstanding borrowings as well as an
increase in our weighted average cost of borrowings, as discussed below in
Other Operating Results-Interest Expense, and; •$37 million of other combined net decreases.
Net income attributable to UHS decreased by
million
attributable to:
• a
• an increase of
to noncontrolling interests, and;
• an increase of
income taxes due primarily to the income tax benefit recorded in connection
with the
Increase to self-insured professional and general liability reserves:
Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. As a result of unfavorable trends experienced during 2022 and 2021, our results of operations during the nine-month periods endedSeptember 30, 2022 and 2021 included increases to our reserves for self-insured professional and general liability claims amounting to approximately$16 million and$41 million , respectively. During the nine-month period endedSeptember 30, 2022 , approximately$10 million of the increase to our reserves for self-insured professional and general liability claims is included in our Same Facility basis acute care hospitals services' results, and approximately$6 million is included in our behavioral health services' results. During the nine-month period endedSeptember 30, 2021 , approximately$31 million of the increase to our reserves for self-insured professional and general liability claims is included in our 34
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Same Facility basis acute care hospitals services' results, and approximately
Acute Care Hospital Services
Same Facility Basis Acute Care Hospital Services
We believe that providing our results on a "Same Facility" basis (which is a non-GAAP measure), which includes the operating results for facilities and businesses operated 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 (if applicable) the effect of items that are non-operational in nature including items such as, but not limited to, gains/losses on sales of assets and businesses, impacts of settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets and other amounts that may be reflected in the current or prior year financial statements that relate to prior periods. Our Same Facility basis results reflected on the table below also exclude from net revenues and other operating expenses, provider tax assessments incurred in each period as discussed below Sources of Revenue-Various State Medicaid Supplemental Payment Programs. However, these provider tax assessments are included in net revenues and other operating expenses as reflected in the table below under All Acute Care Hospital Services. The provider tax assessments had no impact on the income before income taxes as reflected on the tables below since the amounts offset between net revenues and other operating expenses. To obtain a complete understanding of our financial performance, the Same Facility results should be examined in connection with our net income as determined in accordance withU.S. GAAP and as presented in the condensed consolidated financial statements and notes thereto as contained in this Quarterly Report on Form 10-Q. The following table summarizes the results of operations for our acute care facilities on a Same Facility basis and is used in the discussion below for the three and nine-month periods endedSeptember 30, 2022 and 2021 (dollar amounts in thousands): Three months ended Three months ended Nine months ended Nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues Net revenues$ 1,813,899 100.0 %$ 1,797,161 100.0 %$ 5,419,224 100.0 %$ 5,182,893 100.0 % Operating charges: Salaries, wages and benefits 791,902 43.7 % 756,524 42.1 % 2,405,034 44.4 % 2,154,354 41.6 % Other operating expenses 474,086 26.1 % 411,348 22.9 % 1,380,670 25.5 % 1,216,665 23.5 % Supplies expense 299,888 16.5 % 316,890 17.6 % 903,092 16.7 % 902,479 17.4 % Depreciation and amortization 88,931 4.9 % 82,811 4.6 % 269,506 5.0 % 246,954 4.8 % Lease and rental expense 18,738 1.0 % 17,508 1.0 % 53,804 1.0 % 55,666 1.1 % Subtotal-operating expenses 1,673,545 92.3 % 1,585,081 88.2 % 5,012,106 92.5 % 4,576,118 88.3 % Income from operations 140,354 7.7 % 212,080 11.8 % 407,118 7.5 % 606,775 11.7 % Interest expense, net 234 0.0 % 255 0.0 % 1,350 0.0 % 749 0.0 % Other (income) expense, net 384 0.0 % 436 0.0 % 806 0.0 % 436 0.0 % Income before income taxes$ 139,736 7.7 %$ 211,389 11.8 %$ 404,962 7.5 %$ 605,590
11.7 %
Three-month periods ended
During the three-month period endedSeptember 30, 2022 , as compared to the comparable prior year quarter, net revenues from our acute care hospital services, on a Same Facility basis, increased by$17 million or 0.9%. Income before income taxes (and before income attributable to noncontrolling interests) decreased by$72 million , or 34%, amounting to$140 million , or 7.7% of net revenues during the third quarter of 2022, as compared to$211 million , or 11.8% of net revenues during the third quarter of 2021. During the three-month period endedSeptember 30, 2022 , net revenue per adjusted admission decreased by 2.5% while net revenue per adjusted patient day increased 4.5%, as compared to the comparable quarter of 2021. During the three-month period endedSeptember 30, 2022 , as compared to the comparable prior year quarter, inpatient admissions to our acute care hospitals decreased by 2.4% while adjusted admissions (adjusted for outpatient activity) increased by 1.9%. Patient days at these facilities decreased by 9.0% and adjusted patient days decreased by 5.0% during the three-month period endedSeptember 30, 2022 , as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 4.9 days and 5.3 days during the three-month periods endedSeptember 30, 2022 and 2021, respectively. The occupancy rate, based on the average available beds at these facilities, was 62% and 71% during the three-month periods endedSeptember 30, 2022 and 2021, respectively. On a Same Facility basis during the three-month period endedSeptember 30, 2022 , as compared to the comparable quarter of 2021, salaries, wages and benefits expense increased$35 million or 4.7%. The increase during the third quarter of 2022, as compared to the third quarter of 2021, was due primarily to higher labor costs due, in part, to the healthcare labor shortage, partially offset by a reduction in higher-cost temporary labor and pay premiums above standard compensation for nurses and other clinicians. 35
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Other operating expenses increased$63 million , or 15.3%, during the third quarter of 2022, as compared to the comparable quarter of 2021. Operating expenses, consisting primarily of medical costs incurred in connection with our commercial health insurer, increased approximately$31 million during the third quarter of 2022 as compared to the comparable quarter of 2021. Excluding the operating expenses incurred in connection with our commercial health insurer, other operating expenses increased$32 million , or 9.6%. Supplies expense decreased$17 million , or 5.4%, during the third quarter of 2022, as compared to the third quarter of 2021. The decrease was due primarily to a decrease in the number of patients with a COVID-19 diagnosis treated at our hospitals,who generally require more intensive medical resources and supplies. During the third quarter of 2022, we experienced a decrease in the number of patients with a COVID-19 diagnosis treated in our acute care hospitals, as compared to the comparable quarter in the prior year. As a percentage of total admissions, patients diagnosed with COVID-19 comprised 14% of our inpatient admissions during the third quarter of 2021, but only 6% of our inpatient admissions during the third quarter of 2022. This decline in COVID-19 patients unfavorably impacted our net revenues due to lower acuity and less incremental government reimbursement associated with COVID-19 patients. While overall surgical volumes tended to recover to pre-pandemic levels during the third quarter of 2022, there was a measurable shift from inpatient surgeries to outpatient surgeries, which further contributed to the lower than expected revenues. Although we were able to continue to reduce the amount of higher-cost temporary labor and pay premiums above standard compensation for nurses and other clinicians at our acute care hospitals, there was insufficient revenue growth to offset the accelerated rate of wage increases and other inflationary pressures.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2022 , as compared to the comparable prior year period, net revenues from our acute care hospital services, on a Same Facility basis, increased by$236 million or 4.6%. Income before income taxes (and before income attributable to noncontrolling interests) decreased by$201 million , or 33%, amounting to$405 million , or 7.5% of net revenues during the first nine months of 2022, as compared to$606 million , or 11.7% of net revenues during the comparable period of 2021. During the nine-month period endedSeptember 30, 2022 , net revenue per adjusted admission increased by 1.0% while net revenue per adjusted patient day increased by 2.6%, as compared to the comparable period of 2021. During the nine-month period endedSeptember 30, 2022 , as compared to the comparable period of 2021, inpatient admissions to our acute care hospitals decreased by 0.3% and adjusted admissions (adjusted for outpatient activity) increased by 2.2%. Patient days at these facilities decreased by 1.8% and adjusted patient days increased by 0.6% during the nine-month period endedSeptember 30, 2022 , as compared to the comparable period of 2021. The average length of inpatient stay at these facilities was 5.1 days during each of the nine-month periods endedSeptember 30, 2022 and 2021. The occupancy rate, based on the average available beds at these facilities, was 64% during the nine-month period endedSeptember 30, 2022 , as compared to 67% during the comparable period of 2021. On a Same Facility basis during the three-month period endedSeptember 30, 2022 , as compared to the comparable quarter of 2021, salaries, wages and benefits expense increased$251 million or 11.6%. The increase during the first nine months of 2022, as compared to the comparable period of 2021, was due primarily to higher labor costs due, in part, to the healthcare labor shortage as well as an increase in patients with COVID19 treated earlier in 2022 at our hospitals which increased the demand for care and pressured our staffing resources requiring us to utilize highercost temporary labor and pay premiums above standard compensation for essential workers. During the second and third quarters of 2022, we experienced a decrease in patients with COVID-19 which resulted in reductions in higher-cost temporary labor and pay premiums, as compared to the first quarter of 2022. Other operating expenses increased$164 million , or 13.5%, during the first nine months of 2022, as compared to the comparable period of 2021. Operating expenses, consisting primarily of medical costs incurred in connection with our commercial health insurer, increased approximately$95 million during the first nine months of 2022, as compared to the comparable period of 2021. Excluding the operating expenses incurred in connection with our commercial health insurer, other operating expenses increased$69 million , or 6.9%. Supplies expense increased only slightly during the first nine months of 2022, as compared to the comparable period of 2021. Offsetting increased cost of supplies experienced during the first nine months of 2022, as compared to the comparable period of 2021, was a decrease in the number of patients with a COVID-19 diagnosis treated at our hospitals,who generally require more intensive medical resources and supplies.
All Acute Care Hospitals
The following table summarizes the results of operations for all our acute care operations during the three and nine-month periods endedSeptember 30, 2022 and 2021. These amounts include: (i) our acute care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including, if applicable, the results of recently acquired/opened ancillary facilities and businesses. Dollar amounts below are reflected in thousands. 36
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Three months ended Three months ended Nine months ended Nine months ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues $ 1,919,678 100.0 % $ 1,822,027 100.0 % $ 5,707,510 100.0 % $ 5,271,000 100.0 %
Operating charges:
Salaries, wages and benefits 824,942 43.0 % 757,962 41.6 % 2,497,888 43.8 % 2,157,060 40.9 %
Other operating expenses 535,463 27.9 % 436,475 24.0 % 1,550,044 27.2 % 1,305,544 24.8 %
Supplies expense 311,404 16.2 % 316,950 17.4 % 935,559 16.4 % 902,654 17.1 %
Depreciation and amortization 96,020 5.0 % 83,794 4.6 % 285,558 5.0 % 248,462 4.7 %
Lease and rental expense 21,990 1.1 % 17,518 1.0 % 63,324 1.1 % 55,676 1.1 %
Subtotal-operating expenses 1,789,819 93.2 % 1,612,699 88.5 % 5,332,373 93.4 % 4,669,396 88.6 %
Income from operations 129,859 6.8 % 209,328 11.5 % 375,137 6.6 % 601,604 11.4 %
Interest expense, net 234 0.0 % 255 0.0 % 1,350 0.0 % 749 0.0 %
Other (income) expense, net 384 0.0 % 436 0.0 % 806 0.0 % 436 0.0 %
Income before income taxes $ 129,241 6.7 % $ 208,637 11.5 % $ 372,981 6.5 % $ 600,419 11.4 %
Three-month periods ended
During the three-month period endedSeptember 30, 2022 , as compared to the comparable prior year quarter, net revenues from our acute care hospital services increased by$98 million , or 5.4%, due to: (i) the$17 million , or 0.9% increase in Same Facility revenues, as discussed above, and; (ii)$81 million of other combined increases due to facilities and businesses acquired during the past year, the revenues generated at a newly constructed, 170-bed acute care hospital located inReno, Nevada , that opened in early April, 2022 and an increase in provider tax assessments. Income before income taxes decreased by$79 million , or 38%, to$129 million , or 6.7% of net revenues during the third quarter of 2022, as compared to$209 million , or 11.5% of net revenues during the third quarter of 2021. The$79 million decrease in income before income taxes from our acute care hospital services resulted from the$72 million , or 34%, decrease in income before income taxes at our hospitals, on a Same Facility basis, as discussed above, and$7 million of other combined net decreases related primarily to the start-up losses incurred at the newly constructed hospital located inReno, Nevada , that opened in early April, 2022. During the three-month period endedSeptember 30, 2022 , as compared to the comparable quarter of 2021, salaries, wages and benefits expense increased$67 million or 8.8%. The increase was due to the$35 million , or 4.7%, above-mentioned increase related to our acute care hospital services, on a Same Facility basis, as well as a combined increase of$32 million due to the facilities and businesses acquired/opened during the past year. Other operating expenses increased$99 million , or 22.7%, during the third quarter of 2022, as compared to the comparable quarter of 2021. The increase was due to the$63 million , or 15.3%, above-mentioned increase related to our acute care hospital services, on a Same Facility basis, and a combined increase of$36 million due to the facilities and businesses acquired/opened during the past year as well as an increase in provider tax assessments. Supplies expense decreased$6 million , or 1.7%, during the third quarter of 2022, as compared to the third quarter of 2021. The decrease was due primarily to the$17 million , or 5.4%, above-mentioned decrease related to our acute care hospital services, on a Same Facility basis, partially offset by a combined increase of$11 million due to the facilities and businesses acquired/opened during the past year.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2022 , as compared to the comparable prior year period, net revenues from our acute care hospital services increased by$437 million , or 8.3%, due to: (i) the$236 million , or 4.6% increase in Same Facility revenues, as discussed above, and; (ii)$201 million of other combined increases due to facilities and businesses acquired during the past year, the revenues generated at the newly constructed and recently opened hospital located inReno, Nevada , and an increase in provider tax assessments. Income before income taxes decreased by$227 million , or 38%, to$373 million , or 6.5% of net revenues during the first nine months of 2022, as compared to$600 million , or 11.4% of net revenues during the first nine months of 2021. The$227 million decrease in income before income taxes from our acute care hospital services resulted from the$201 million , or 33%, decrease in income before income taxes at our hospitals, on a Same Facility basis, as discussed above, and$26 million of other combined net decreases related primarily to the start-up losses incurred at the recently opened hospital located inReno, Nevada . During the nine-month period endedSeptember 30, 2022 , as compared to the comparable period of 2021, salaries, wages and benefits expense increased$341 million or 15.8%. The increase was due to the$251 million , or 11.6%, above-mentioned increase related to our acute care hospital services, on a Same Facility basis, as well as a combined increase of$90 million due to the facilities and businesses acquired/opened during the past year. 37
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Other operating expenses increased$245 million , or 18.7%, during the first nine months of 2022, as compared to the comparable period of 2021. The increase was due to the$164 million , or 13.5%, above-mentioned increase related to our acute care hospital services, on a Same Facility basis, and a combined increase of$81 million due to the facilities and businesses acquired/opened during the past year as well as an increase in provider tax assessments. Supplies expense increased$33 million , or 3.6%, during the first nine months of 2022, as compared to the comparable period of 2021. Since supplies expense was relatively unchanged for our acute care hospital services, on a Same Facility basis, the increase was due to the expense incurred at the facilities and businesses acquired/opened during the past year.
Please see Results of Operations - COVID-19, Clinical Staffing Shortage and
Effects of Inflation above for additional disclosure regarding the factors
impacting our operating costs.
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 endedSeptember 30, 2022 and 2021: Uncompensated care: Amounts in millions Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2022 % 2021 % 2022 % 2021 % Charity care $ 192 31 % $ 189 33 % $ 612 36 % $ 535 35 % Uninsured discounts 429 69 % 378 67 % 1,103 64 % 987 65 % Total uncompensated care $ 621 100 % $ 567 100 % $ 1,715 100 % $ 1,522 100 %
Estimated cost of providing uncompensated care:
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 divided by gross patient service revenue for those facilities.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
Amounts in millions 2022 2021 2022 2021
Estimated cost of providing charity
care $ 21 $ 20 $ 66 $ 57
Estimated cost of providing
uninsured discounts related care 46 41 119 107
Estimated cost of providing
uncompensated care $ 67 $ 61 $ 185 $ 164
We believe that providing our results on a Same Facility basis, which includes the operating results for facilities and businesses operated 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 (if applicable) the effect of items that are non-operational in nature including items such as, but not limited to, gains/losses on sales of assets and businesses, impacts of settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets and other amounts that may be reflected in the current or prior year financial statements that relate to prior periods. Our Same Facility basis results reflected on the table below also excludes from net revenues and other operating expenses, provider tax assessments incurred in each period as discussed below Sources of Revenue-Various State Medicaid Supplemental Payment Programs. However, these provider tax assessments are included in net revenues and other operating expenses as reflected in the table below under All Behavioral Health Care Services. The provider tax assessments had no impact on the income before income taxes as reflected on the tables below since the amounts offset between net revenues and other operating expenses. To obtain a complete understanding of our financial performance, the Same Facility results should be examined in connection with our net income as determined in accordance withU.S. GAAP and as presented in the condensed consolidated financial statements and notes thereto as contained in this Quarterly Report on Form 10-Q. The following table summarizes the results of operations for our behavioral health care facilities, on a Same Facility basis, and is used in the discussions below for the three and nine-month periods endedSeptember 30, 2022 and 2021 (dollar amounts in thousands): 38
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Three months ended Three months ended Nine months ended Nine months ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues $ 1,403,013 100.0 % $ 1,294,141 100.0 % $ 4,148,344 100.0 % $ 3,984,260 100.0 %
Operating charges:
Salaries, wages and benefits 774,406 55.2 % 717,807 55.5 % 2,288,386 55.2 % 2,125,205 53.3 %
Other operating expenses 271,295 19.3 % 267,083 20.6 % 811,223 19.6 % 774,583 19.4 %
Supplies expense 55,036 3.9 % 51,111 3.9 % 156,976 3.8 % 150,902 3.8 %
Depreciation and amortization 44,566 3.2 % 46,004 3.6 % 134,451 3.2 % 137,417 3.4 %
Lease and rental expense 10,617 0.8 % 10,012 0.8 % 32,026 0.8 % 30,999 0.8 %
Subtotal-operating expenses 1,155,920 82.4 % 1,092,017 84.4 % 3,423,062 82.5 % 3,219,106 80.8 %
Income from operations 247,093 17.6 % 202,124 15.6 % 725,282 17.5 % 765,154 19.2 %
Interest expense, net 1,151 0.1 % 994 0.1 % 2,757 0.1 % 2,321 0.1 %
Other (income) expense, net (664 ) (0.0 )% 27 0.0 % (1,422 ) (0.0 )% 435 0.0 %
Income before income taxes $ 246,606 17.6 % $ 201,103 15.5 % $ 723,947 17.5 % $ 762,398 19.1 %
Three-month periods ended
During the three-month period endedSeptember 30, 2022 , as compared to the comparable prior year quarter, net revenues from our behavioral health services, on a Same Facility basis, increased by$109 million or 8.4%. Income before income taxes (and before income attributable to noncontrolling interests) increased by$46 million , or 23%, amounting to$247 million or 17.6% of net revenues during the third quarter of 2022, as compared to$201 million or 15.5% of net revenues during the third quarter of 2021. During the three-month period endedSeptember 30, 2022 , net revenue per adjusted admission increased by 4.2% while net revenue per adjusted patient day increased by 5.0%, as compared to the comparable quarter of 2021. During the three-month period endedSeptember 30, 2022 , as compared to the comparable prior year quarter, inpatient admissions to our behavioral health care hospitals increased by 4.3% and adjusted admissions increased by 4.0%. Patient days at these facilities increased by 3.6% and adjusted patient days increased by 3.3% during the three-month period endedSeptember 30, 2022 , as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 13.5 days and 13.6 days during the three-month periods endedSeptember 30, 2022 and 2021, respectively. The occupancy rate, based on the average available beds at these facilities, was 72% and 70% during the three-month periods endedSeptember 30, 2022 and 2021, respectively. On a Same Facility basis during the three-month period endedSeptember 30, 2022 , as compared to the comparable quarter of 2021, salaries, wages and benefits expense increased$57 million or 7.9%. The increase during the third quarter of 2022, as compared to the third quarter of 2021, was due, in part, to increased staffing levels related to the increased patient volumes. As a percentage of net revenues during each quarter, salaries, wages and benefits expense decreased to 55.2% during the third quarter of 2022 as compared to 55.5% during the third quarter of 2021. Other operating expenses increased$4 million , or 1.6%, during the third quarter of 2022, as compared to the comparable quarter of 2021. Supplies expense increased$4 million , or 7.7%, during the third quarter of 2022, as compared to the third quarter of 2021 due, in part, to increased patient volumes.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2022 , as compared to the comparable prior year period, net revenues from our behavioral health services, on a Same Facility basis, increased by$164 million or 4.1%. Income before income taxes (and before income attributable to noncontrolling interests) decreased by$38 million , or 5%, amounting to$724 million or 17.5% of net revenues during the first nine months of 2022 as compared to$762 million or 19.1% of net revenues during the first nine months of 2021. During the nine-month period endedSeptember 30, 2022 , net revenue per adjusted admission increased by 4.2% while net revenue per adjusted patient day increased by 3.9%, as compared to the comparable period of 2021. During the nine-month period endedSeptember 30, 2022 , as compared to the comparable prior year period, inpatient admissions and adjusted admissions to our behavioral health care hospitals each increased by 0.6%. Patient days and adjusted patient days at these facilities each increased by 0.9% during the nine-month period endedSeptember 30, 2022 , as compared to the comparable prior year period. The average length of inpatient stay at these facilities was 13.5 days during each of the nine-month periods endedSeptember 30, 2022 and 2021. The occupancy rate, based on the average available beds at these facilities, was 71% during each of the nine-month periods endedSeptember 30, 2022 and 2021. On a Same Facility basis during the nine-month period endedSeptember 30, 2022 , as compared to the comparable period of 2021, salaries, wages and benefits expense increased$163 million or 7.7%. The increase during the first nine months of 2022, as compared to the comparable period of 2021, was due, in part, to a nationwide shortage of nurses and other clinical staff and support personnel at 39
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our behavioral health care hospitals which pressured our staffing resources and
required us to utilize highercost temporary labor and pay premiums above
standard compensation for essential workers.
Other operating expenses increased$37 million , or 4.7%, during the first nine months of 2022, as compared to the comparable period of 2021. Supplies expense increased$6 million , or 4.0%, during the first nine months of 2022, as compared to the comparable period of 2021.
All Behavioral Health Care Facilities
The following table summarizes the results of operations for all our behavioral health care services during the three and nine-month periods endedSeptember 30, 2022 and 2021. These amounts include: (i) our behavioral health care results on a Same Facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including the results of facilities acquired or opened during the past year (if applicable) as well as the results of certain facilities that were closed or restructured during the past year. Dollar amounts below are reflected in thousands. Three months ended Three months ended Nine months ended Nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues Net revenues$ 1,434,828 100.0 %$ 1,328,293 100.0 %$ 4,235,215 100.0 %$ 4,075,127 100.0 % Operating charges: Salaries, wages and benefits 782,909 54.6 % 727,137 54.7 % 2,310,761 54.6 % 2,144,735 52.6 % Other operating expenses 300,406 20.9 % 292,794 22.0 % 898,655 21.2 % 847,780 20.8 % Supplies expense 55,482 3.9 % 51,712 3.9 % 158,315 3.7 % 152,273 3.7 % Depreciation and amortization 46,861 3.3 % 47,205 3.6 % 138,803 3.3 % 140,870 3.5 % Lease and rental expense 11,010 0.8 % 10,421 0.8 % 32,803 0.8 % 31,789 0.8 % Subtotal-operating expenses 1,196,668 83.4 % 1,129,269 85.0 % 3,539,337 83.6 % 3,317,447 81.4 % Income from operations 238,160 16.6 % 199,024 15.0 % 695,878 16.4 % 757,680 18.6 % Interest expense, net 1,375 0.1 % 1,218 0.1 % 4,106 0.1 % 3,564 0.1 % Other (income) expense, net (1,164 ) (0.1 )% 27 0.0 % (1,922 ) (0.0 )% 435 0.0 % Income before income taxes$ 237,949 16.6 %$ 197,779 14.9 %$ 693,694 16.4 %$ 753,681 18.5 %
Three-month periods ended
During the three-month period ended
comparable prior year quarter, net revenues generated from our behavioral health
services increased by
Income before income taxes increased by$40 million , or 20%, to$238 million or 16.6% of net revenues during the third quarter of 2022, as compared to$198 million or 14.9% of net revenues during the third quarter of 2021. The increase in income before income taxes at our behavioral health facilities during the third quarter of 2022, as compared to the third quarter of 2021, was primarily attributable to the$46 million , or 23% increase in income before income taxes experienced at our behavioral health facilities, on a same facility basis, as discussed above, as well as$5 million of other combined net decreases consisting primarily of the startup losses incurred at various facilities opened during the past year. During the three-month period endedSeptember 30, 2022 , as compared to the comparable quarter of 2021, salaries, wages and benefits expense increased$56 million or 7.7%. The increase was due to our behavioral health services, on a Same Facility basis, as discussed above. Other operating expenses increased$8 million , or 2.6%, during the third quarter of 2022, as compared to the comparable quarter of 2021. Supplies expense increased$4 million , or 7.3%, during the third quarter of 2022, as compared to the third quarter of 2021.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2022 , as compared to the comparable prior year period, net revenues generated from our behavioral health services increased by$160 million , or 3.9% due primarily to the above-mentioned$164 million , or 4.1% increase in net revenues on a Same Facility basis. Income before income taxes decreased by$60 million , or 8%, to$694 million or 16.4% of net revenues during the first nine months of 2022, as compared to$754 million or 18.5% of net revenues during the first nine months of 2021. The decrease in income before income taxes at our behavioral health facilities during the first nine months of 2022, as compared to the compared period of 2021, was primarily attributable to the$38 million , or 5% decrease in income before income taxes experienced at our behavioral health facilities, on a Same Facility basis, as discussed above, as well as$22 million of other combined net decreases consisting primarily of the startup losses incurred at various facilities opened during the past year. 40
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During the nine-month period endedSeptember 30, 2022 , as compared to the comparable period of 2021, salaries, wages and benefits expense increased$166 million or 7.7%. The increase was due to our behavioral health services, on a same facility basis, as discussed above. Other operating expenses increased$51 million , or 6.0%, during the first nine months of 2022, as compared to the comparable period of 2021. The increase was due primarily to the$37 million , or 4.7%, above-mentioned increase related to our behavioral health services, on a Same Facility basis. Supplies expense increased$6 million , or 4.0%, during the first nine months of 2022, as compared to the comparable period of 2021.
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. Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary depending on the type of services provided (e.g., medical/surgical, intensive care or behavioral health) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control. The percentage of patient service revenue attributable to outpatient services has generally increased in recent years, primarily as a result of advances in medical technology that allow more services to be provided on an outpatient basis, as well as increased pressure from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to our increased outpatient levels mirrors the general trend occurring in the health care industry and we are unable to predict the rate of growth and resulting impact on our future revenues. Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, and managed care plans, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Indications from recent federal and state legislation are that this trend will continue. Collection of amounts due from individuals is typically more difficult than from governmental or business payers which unfavorably impacts the collectability of our patient accounts. As described below in the section titled 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation, the federal government has enacted multiple pieces of legislation to assist healthcare providers during the COVID-19 world-wide pandemic andU.S. National Emergency declaration. We have outlined those legislative changes related to Medicare and Medicaid payment and their estimated impact on our financial results, where estimates are possible. 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, impacts on state revenue and expenses resulting from the COVID-19 pandemic, economic recovery stimulus packages, responses to natural disasters, and the federal and state budget deficits in general may affect the availability of government funds to provide additional relief in the future. We are unable to predict the effect of future policy changes on our operations. OnMarch 23, 2010 ,President Obama signed into law the Legislation. Two primary goals of the Legislation are to provide for increased access to coverage for healthcare and to reduce healthcare-related expenses. The Legislation revises reimbursement under the Medicare and Medicaid programs to emphasize the efficient delivery of high-quality care and contains a number of incentives and penalties under these programs to achieve these goals. The Legislation provides for decreases in the annual market basket update for federal fiscal years 2010 through 2019, a productivity offset to the market basket update beginningOctober 1, 2011 for Medicare Part B reimbursable items and services and beginningOctober 1, 2012 for Medicare inpatient hospital services. The Legislation and subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions began in October, 2013 while the Medicaid DSH reductions are scheduled to begin in 2024. The Legislation implemented a value-based purchasing program, which will reward the delivery of efficient care. Conversely, certain facilities will receive reduced reimbursement for failing to meet quality parameters; such hospitals will include those with excessive readmission or hospital-acquired condition rates. A 2012U.S. Supreme Court ruling limited the federal government's ability to expand health insurance coverage by holding unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the Medicaid expansion by reducing their existing Medicaid funding. Therefore, states can choose to expand or not to expand their Medicaid program without risking the loss of federal Medicaid funding. As a result, many states, includingTexas , have not expanded their Medicaid programs without the threat of loss of federal funding. CMS has previously granted section 1115 demonstration waivers providing for work and community engagement requirements for certain Medicaid eligible individuals. CMS has also released 41
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guidance to states interested in receiving their Medicaid funding through a block grant mechanism. The Biden administration has signaled its intent to withdraw previously issued section 1115 demonstrations aligned with these policies. However, if implemented, the previously issued section 1115 demonstrations are anticipated to lead to reductions in coverage, and likely increases in uncompensated care, in states where these demonstration waivers are granted. OnDecember 14, 2018 , aTexas Federal District Court deemed the Legislation to be unconstitutional in its entirety. The Court concluded that the Individual Mandate is no longer permissible underCongress's taxing power as a result of the Tax Cut and Jobs Act of 2017 ("TCJA") reducing the individual mandate's tax to$0 (i.e., it no longer produces revenue, which is an essential feature of a tax), rendering the Legislation unconstitutional. The Court also held that because the individual mandate is "essential" to the Legislation and is inseverable from the rest of the law, the entire Legislation is unconstitutional. That ruling was ultimately appealed to theUnited States Supreme Court , which decided in California v. Texas that the plaintiffs in the matter lacked standing to bring their constitutionality claims. The Court did not reach the plaintiffs' merits arguments, which specifically challenged the constitutionality of the Legislation's individual mandate and the entirety of the Legislation itself. As a result, the Legislation will continue to be law, and HHS and its respective agencies will continue to enforce regulations implementing the law. However, onSeptember 7, 2022 , the Legislation faced its most recent challenge when aTexas Federal District Court judge, in the case of Braidwood Management v. Becerra, ruled that a requirement that certain health plans cover services without cost sharing violates the Appointments Clause of theU.S. Constitution and that the coverage of certain HIV prevention medication violates the Religious Freedom Restoration Act. The various provisions in the Legislation that directly or indirectly affect Medicare and Medicaid reimbursement took effect over a number of years. The impact of the Legislation on healthcare providers will be subject to implementing regulations, interpretive guidance and possible future legislation or legal challenges. Certain Legislation provisions, such as that creating the Medicare Shared Savings Program creates uncertainty in how healthcare may be reimbursed by federal programs in the future. Thus, we cannot predict the impact of the Legislation on our future reimbursement at this time and we can provide no assurance that the Legislation will not have a material adverse effect on our future results of operations. The Legislation also contained provisions aimed at reducing fraud and abuse in healthcare. The Legislation amends several existing laws, including the federal Anti-Kickback Statute and the False Claims Act, making it easier for government agencies and private plaintiffs to prevail in lawsuits brought against healthcare providers. WhileCongress had previously revised the intent requirement of the Anti-Kickback Statute to provide that a person is not required to "have actual knowledge or specific intent to commit a violation of" the Anti-Kickback Statute in order to be found in violation of such law, the Legislation also provides that any claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the federal civil False Claims Act. The Legislation also expands the Recovery Audit Contractor program to Medicaid. These amendments also make it easier for severe fines and penalties to be imposed on healthcare providers that violate applicable laws and regulations. We have partnered with local physicians in the ownership of certain of our facilities. These investments have been permitted under an exception to the physician self-referral law. The Legislation permits existing physician investments in a hospital to continue under a "grandfather" clause if the arrangement satisfies certain requirements and restrictions, but physicians are prohibited from increasing the aggregate percentage of their ownership in the hospital. The Legislation also imposes certain compliance and disclosure requirements upon existing physician-owned hospitals and restricts the ability of physician-owned hospitals to expand the capacity of their facilities. As discussed below, should the Legislation be repealed in its entirety, this aspect of the Legislation would also be repealed restoring physician ownership of hospitals and expansion right to its position and practice as it existed prior to the Legislation. The impact of the Legislation on each of our hospitals may vary. Because Legislation provisions are effective at various times over the next several years, we anticipate that many of the provisions in the Legislation may be subject to further revision. Initiatives to repeal the Legislation, in whole or in part, to delay elements of implementation or funding, and to offer amendments or supplements to modify its provisions have been persistent. The ultimate outcomes of legislative attempts to repeal or amend the Legislation and legal challenges to the Legislation are unknown. Legislation has already been enacted that eliminated the individual mandate penalty, effectiveJanuary 1, 2019 , related to the obligation to obtain health insurance that was part of the original Legislation. In addition,Congress previously considered legislation that would, in material part: (i) eliminate the large employer mandate to offer health insurance coverage to full-time employees; (ii) permit insurers to impose a surcharge up to 30 percent on individualswho go uninsured for more than two months and then purchase coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits accordingly to income level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by a state, transition federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would allow such state to define essential health benefits differently from federal standards and that would allow certain commercial health plans to take health status, including pre-existing conditions, into account in setting premiums. In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions.President Biden is expected to undertake executive actions that will strengthen the Legislation and may reverse the policies of the prior administration.The Trump Administration had directed the issuance of final rules (i) enabling the formation of health plans that would be exempt from certain Legislation essential health benefits requirements; (ii) expanding the availability of short-term, limited duration health 42
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insurance; (iii) eliminating cost-sharing reduction payments to insurers that would otherwise offset deductibles and other out-of-pocket expenses for health plan enrollees at or below 250 percent of the federal poverty level; (iv) relaxing requirements for state innovation waivers that could reduce enrollment in the individual and small group markets and lead to additional enrollment in short-term, limited duration insurance and association health plans; and (vi) incentivizing the use of health reimbursement arrangements by employers to permit employees to purchase health insurance in the individual market. The uncertainty resulting from these Executive Branch policies led to reduced Exchange enrollment in 2018, 2019 and 2020. To date, the Biden administration has issued executive orders implementing a special enrollment period permitting individuals to enroll in health plans outside of the annual open enrollment period and reexamining policies that may undermine the ACA or the Medicaid program. The ARPA's expansion of subsidies to purchase coverage through an exchange contributed to increased exchange enrollment in 2021. The IRA's extension of the subsidies through 2025 is expected to increase exchange enrollment in future years. The recent and on-going COVID-19 pandemic and relatedU.S. National Emergency declaration may significantly increase the number of uninsured patients treated at our facilities extending beyond the most recent CBO published estimates due to increased unemployment and loss of group health plan health insurance coverage. It is also anticipated that these policies may create additional cost and reimbursement pressures on hospitals. It remains unclear what portions of the Legislation may remain, or whether any replacement or alternative programs may be created by any future legislation. Any such future repeal or replacement may have significant impact on the reimbursement for healthcare services generally, and may create reimbursement for services competing with the services offered by our hospitals. Accordingly, there can be no assurance that the adoption of any future federal or state healthcare reform legislation will not have a negative financial impact on our hospitals, including their ability to compete with alternative healthcare services funded by such potential legislation, or for our hospitals to receive payment for services. For additional disclosure related to our revenues including a disaggregation of our consolidated net revenues by major source for each of the periods presented herein, please see Note 12 to the Consolidated Financial Statements-Revenue. 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 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 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 August, 2022, CMS published its IPPS 2023 final payment rule which provides for a 4.1% 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 adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall increase in IPPS payments is approximately 4.6.%. Including DSH payments, an increase to the Medicare Outlier threshold and certain other adjustments, we estimate our overall increase from the final IPPS 2023 rule (covering the period ofOctober 1, 2022 throughSeptember 30, 2023 ) will approximate 4.4%. This projected impact from the IPPS 2023 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result of the American Taxpayer Relief Act of 2012 ("ATRA"), as required by the 21st Century Cures Act, but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. In August, 2021, CMS published its IPPS 2022 final payment rule which provides for a 2.7% 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 adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall final increase in IPPS payments is approximately 2.5%. Including DSH payments and certain other adjustments, we estimate our overall increase from the final IPPS 2022 rule (covering the period ofOctober 1, 2021 throughSeptember 30, 2022 ) will approximate 1.5%. This projected impact from 43
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the IPPS 2022 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result of the ATRA, as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. In June, 2019, theSupreme Court of the United States issued a decision favorable to hospitals impacting prior year Medicare DSH payments (Azar v.Allina Health Services , No. 17-1484 (U.S. Jun. 3, 2019 )). In Allina, the hospitals challenged the Medicare DSH adjustments for federal fiscal year 2012, specifically challenging CMS's decision to include inpatient hospital days attributable to Medicare Part C enrollee patients in the numerator and denominator of the Medicare/SSI fraction used to calculate a hospital's DSH payments. This ruling addresses CMS's attempts to impose the policy espoused in its vacated 2004 rulemaking to a fiscal year in the 2004-2013 time period without using notice-and-comment rulemaking. This decision should require CMS to recalculate hospitals' DSH Medicare/SSI fractions, with Medicare Part C days excluded, for at least federal fiscal year 2012, but likely federal fiscal years 2005 through 2013. In August, 2020, CMS issued a rule that proposed to retroactively negate the effects of the aforementionedSupreme Court decision, which rule has yet to be finalized. Although we can provide no assurance that we will ultimately receive additional funds, we estimate that the favorable impact of this court ruling on certain prior year hospital Medicare DSH payments could range between$18 million to$28 million in the aggregate. The 2011 Act included 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 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented onMarch 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year. Recent legislation suspended payment reductions throughDecember 31, 2021 , in exchange for extended cuts through 2030. In December, 2021, the suspended 2% payment reduction was extended untilJune 30, 2022 and partially suspended at a 1% payment reduction for an additional three-month period that ended onJune 30, 2022 . Inpatient services furnished by psychiatric hospitals under the Medicare program are paid under a Psychiatric Prospective Payment System ("Psych PPS"). Medicare payments to psychiatric hospitals are based on a prospective per diem rate with adjustments to account for certain facility and patient characteristics. The Psych PPS also contains provisions for outlier payments and an adjustment to a psychiatric hospital's base payment if it maintains a full-service emergency department. In July, 2022, CMS published its Psych PPS final rule for the federal fiscal year 2023. Under this final rule, payments to our behavioral health care hospitals and units are estimated to increase by 3.8% compared to federal fiscal year 2022. This amount includes the effect of the 4.1% net market basket update which reflects the offset of a 0.3% productivity adjustment. In July, 2021, CMS published its Psych PPS final rule for the federal fiscal year 2022. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 2.2% compared to federal fiscal year 2021. This amount includes the effect of the 2.0% net market basket update which reflects the offset of a 0.7% productivity adjustment. CMS's calendar year 2018 final OPPS rule, issued onNovember 13, 2017 , substantially reduced Medicare Part B reimbursement for 340B Program drugs paid to hospitals. BeginningJanuary 1, 2018 , CMS reimbursement for certain separately payable drugs or biologicals that are acquired through the 340B Program by a hospital paid under the OPPS (and not excepted from the payment adjustment policy) is the average sales price of the drug or biological minus 22.5 percent, an effective reduction of 26.89% in payments for 340B program drugs. In December, 2018, theU.S. District Court for the District of Columbia ruled that HHS did not have statutory authority to implement the 2018 Medicare OPPS rate reduction related to hospitals that qualify for drug discounts under the federal 340B Program and granted a permanent injunction against the payment reduction. OnJuly 31, 2020 , theU.S. Court of Appeals for the D.C. Circuit reversed the District Court and held that HHS's decision to lower drug reimbursement rates for 340B hospitals rests on a reasonable interpretation of the Medicare statute. As a result, we recognized$8 million of revenues during 2020 that were previously reserved in a prior year. These payment reductions were challenged before theU.S. Supreme Court , which held inAmerican Hospital Association v. Becerra that because HHS did not conduct a survey of hospitals' acquisition costs in 2018 and 2019, its decision to vary reimbursement rates only for 340B hospitals in those years was unlawful. The matter has been remanded for further consideration, and so the final result of such lawsuit cannot be fully predicted at this time. In November, 2022, CMS issued its OPPS final rule for 2023. The hospital market basket increase is 4.1% and the productivity adjustment reduction is -0.3% for a net market basket increase of 3.8%. The final rule provides that in light of theSupreme Court decision inAmerican Hospital Association v. Becerra, CMS is applying the default rate, generally average sales price plus 6 percent, to 340B acquired drugs and biologicals for 2023. CMS stated they will address the remedy for 340B drug payments from 2018-2022 in future rulemaking prior to the CY 2024 OPPS/ASC proposed rule. During the 2018-2022 time period, we recorded an aggregate of approximately$45 million to$50 million of Medicare revenues related to the prior 340B payment policy. When other statutorily required adjustments and hospital patient service mix are considered as well as impact of the aforementioned 340B Program policy change, we estimate that our overall Medicare OPPS update for 2023 will aggregate to a net increase of 0.9% which includes a 0.3% increase to behavioral health division partial hospitalization rates. 44
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OnNovember 2, 2021 , CMS issued its OPPS final rule for 2022. The hospital market basket increase is 2.7% and the productivity adjustment reduction is -0.7% for a net market basket increase of 2.0%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2022 will aggregate to a net increase of 2.4% which includes a 3.0% increase to behavioral health division partial hospitalization rates. In December, 2020, CMS published its OPPS final rule for 2021. The hospital market basket increase is 2.4% and there is no productivity adjustment reduction to the 2021 OPPS market basket. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2021 will aggregate to a net increase of 3.3% which includes a 9.2% increase to behavioral health division partial hospitalization rates. In November, 2019, CMS finalized its Hospital Price Transparency rule that implements certain requirements under theJune 24, 2019 Presidential Executive Order related to Improving Price and Quality Transparency inAmerican Healthcare to Put Patients First. Under this final rule, effectiveJanuary 1, 2021 , CMS will require: (1) hospitals make public their standard changes (both gross charges and payer-specific negotiated charges) for all items and services online in a machine-readable format, and; (2) hospitals to make public standard charge data for a limited set of "shoppable services" the hospital provides in a form and manner that is more consumer friendly. OnNovember 2, 2021 , CMS released a final rule increasing the monetary penalty that CMS can impose on hospitals that fail to comply with the price transparency requirements. We believe that our hospitals are in full compliance with the applicable federal regulations. Medicaid: Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide benefits to qualifying individuals. 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 revenues from various state and county-based programs, including Medicaid in all the states in which we operate. We receive annual Medicaid revenues of approximately$100 million , or greater, from each ofTexas ,California ,Nevada ,Illinois ,Pennsylvania ,Washington, D.C. ,Kentucky ,Florida andMassachusetts . We also receive Medicaid disproportionate share hospital payments in certain states includingTexas andSouth Carolina . We are therefore particularly sensitive to potential reductions in Medicaid and other state-based revenue programs as well as regulatory, economic, environmental and competitive changes in those states. We can provide no assurance that reductions to revenues earned pursuant to these programs, particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations. The Legislation substantially increases the federally and state-funded Medicaid insurance program, and authorizes states to establish federally subsidized non-Medicaid health plans for low-income residents not eligible for Medicaid starting in 2014. However, theSupreme Court has struck down portions of the Legislation requiring states to expand their Medicaid programs in exchange for increased federal funding. Accordingly, many states in which we operate have not expanded Medicaid coverage to individuals at 133% of the federal poverty level. Facilities in states not opting to expand Medicaid coverage under the Legislation may be additionally penalized by corresponding reductions to Medicaid disproportionate share hospital payments beginning in fiscal year 2024, as discussed below. 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. In January, 2020, CMS announced a new opportunity to support states with greater flexibility to improve the health of their Medicaid populations. The new 1115 Waiver Block Grant Type Demonstration program, titled Healthy Adult Opportunity ("HAO"), emphasizes the concept of value-based care while granting states extensive flexibility to administer and design their programs within a defined budget. CMS believes this state opportunity will enhance the Medicaid program's integrity through its focus on accountability for results and quality improvement, making the Medicaid program stronger for states and beneficiaries. The Biden administration has signaled its intent to withdraw the HAO demonstration. Accordingly, we are unable to predict whether the HAO demonstration will impact our future results of operations.
Various State Medicaid Supplemental Payment Programs:
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 or 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 funds as part of their respective
state Medicaid programs. As outlined below, 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.
Included in these Provider Tax programs are reimbursements received in
connection with the Texas Uncompensated Care/Upper Payment Limit program
("UC/UPL") and Texas Delivery System Reform Incentive Payments program
("DSRIP"). Additional disclosure related to the Texas UC/UPL and DSRIP programs
is provided below.
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Texas Uncompensated Care/Upper Payment Limit Payments:
Certain of our acute care hospitals located in various counties ofTexas (Grayson ,Hidalgo ,Maverick ,Potter andWebb ) participate in Medicaid supplemental payment Section 1115 Waiver indigent care programs. Section 1115 Waiver Uncompensated Care ("UC") payments replace the former Upper Payment Limit ("UPL") payments. 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 supplemental payments from the Medicaid program and indigent care payments from third-party, affiliated hospitals. The supplemental 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. However, the county or hospital district is prohibited from entering into an agreement to condition any IGT on the amount of any private hospital's indigent care obligation. OnDecember 21, 2017 , CMS approved the 1115 Waiver for the periodJanuary 1, 2018 toSeptember 30, 2022 . The Waiver continued to include UC and DSRIP payment pools with modifications and new state specific reporting deadlines that if not met by THHSC will result in material decreases in the size of the UC and DSRIP pools. For UC during the initial two years of this renewal, the UC program will remain relatively the same in size and allocation methodology. For year three of this waiver renewal, the federal fiscal year ("FFY") 2020, and through FFY 2022, the size and distribution of the UC pool will be determined based on charity care costs reported to HHSC in accordance with Medicare cost report Worksheet S-10 principles. InSeptember 2019 , CMS approved the annual UC pool size in the amount of$3.9 billion for demonstration years ("DYs") 9, 10 and 11 (October 1, 2019 toSeptember 30, 2022 ). InJune 2022 , HHSC announced that CMS approved theUC Pool size for Demonstration Years 12 through 16 (October 1, 2022 toSeptember 30, 2027 ) for the current 1115 Waiver which will be$4.51 billion per year. The UC pool will be resized again in 2027 for DYs 17 through 19 (October 1, 2027 toSeptember 30, 2030 ). OnApril 16, 2021 , CMS rescinded itsJanuary 15, 2021 , 1115 Waiver ten year expedited renewal approval that was effective throughSeptember 30, 2030 . In July, 2021, HHSC submitted another 1115 Waiver renewal application to CMS which reflects the same terms and conditions agreed to by CMS onJanuary 15, 2021 , in order to receive an extension beyondSeptember 30, 2022 . OnApril 22, 2022 , CMS withdrew its rescission of the 1115 Waiver and now considers the 1115 Waiver approved as extended and governed by the special terms and conditions that CMS approved onJanuary 15, 2021 . EffectiveApril 1, 2018 , certain of our acute care hospitals located inTexas began to receive Medicaid managed care rate enhancements under the Uniform Hospital Rate Increase Program ("UHRIP"). The non-federal share component of these UHRIP rate enhancements are financed by Provider Taxes. TheTexas 1115 Waiver rules require UHRIP rate enhancements be considered in the Texas UC payment methodology which results in a reduction to our UC payments. The UC amounts reported in the State Medicaid Supplemental Payment Program Table below reflect the impact of this new UHRIP program. InJuly 2020 , THHSC announced CMS approval of an increase to UHRIP pool for the state's 2021 fiscal year to$2.7 billion from its prior funding level of$1.6 billion . OnMarch 26, 2021 , HHSC published a final rule that will apply to program periods on or afterSeptember 1, 2021 , and UHRIP will be re-named the Comprehensive Hospital Increase Reimbursement Program ("CHIRP"). CHIRP will be comprised of a UHRIP component and an Average Commercial Incentive Award component. CHIRP has a pool size of$4.7 billion . OnMarch 25, 2022 , CMS approved the CHIRP program retroactive toSeptember 1, 2021 throughAugust 31, 2022 . The impact of the CHIRP program is reflected in the State Medicaid Supplemental Payment Program Table below including approximately$12 million of estimated CHIRP revenues which were recorded during the first quarter of 2022, attributable to the periodSeptember 1, 2021 throughDecember 31, 2021 , net of associated provider taxes. OnAugust 1, 2022 , CMS approved the CHIRP program, with a pool of$5.2 billion , for the rate period effectiveSeptember 1, 2022 toAugust 31, 2023 . During the three and nine-month periods endedSeptember 30, 2022 , certain of our acute care hospitals located inTexas recorded an aggregate of$25 million inQuality Incentive Fund ("QIF") payments, applicable to the periodSeptember 1, 2020 toAugust 31, 2021 in connection with the state's UHRIP program. This revenue was earned pursuant to contract terms with various Medicaid managed care plans which requires the annual payout of QIF funds when a managed care service delivery area's actual claims-based UHRIP payments are less than targeted UHRIP payments for a specific rate year. We anticipate that these hospitals may be entitled to an additional$5 million of QIF revenue during the fourth quarter of 2022, increasing the 2022 aggregate to approximately$30 million . We also anticipate that these hospitals may be entitled to a comparable amount of aggregate QIF revenue during 2023. OnJanuary 11, 2021 , HHSC announced that CMS approved the pre-print modification that HHSC submitted for UHRIP periodMarch 1, 2021 throughAugust 31, 2021 . CMS approved rate changes that will now increase rates for private Institutions of Mental Disease ("IMD") for services provided to patients under age 21 or patients 65 years of age or older. Subsequent CMS UHRIP and CHIRP program approvals continue to include IMD's eligible patient population. The impact of these programs are included in the Medicaid Supplemental Payment Programs table below. OnSeptember 24, 2021 , HHSC finalized New Fee-for-Service Supplemental Payment Program: Hospital Augmented Reimbursement Program ("HARP") to be effectiveOctober 1, 2021 . The HARP program continues the financial transition for providerswho have historically participated in the Delivery System Reform Incentive Payment program described below. The program will provide additional funding to hospitals to help offset the cost hospitals incur while providing Medicaid services. 46
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HHSC financial model released concurrent with the publication of the final rule
indicates net potential incremental Medicaid reimbursements to us of
approximately
adverse impact on future Medicaid DSH or Medicaid UC payments. This program
remains subject to CMS approval.
Texas Delivery System Reform Incentive Payments:
In addition, the Texas Medicaid Section 1115 Waiver included a DSRIP pool to incentivize hospitals and other providers to transform their service delivery practices to improve quality, health status, patient experience, coordination, and cost-effectiveness. DSRIP pool payments are incentive payments to hospitals and other providers that develop programs or strategies to enhance access to health care, increase the quality of care, the cost-effectiveness of care provided and the health of the patients and families served. In FFY 2022, DSRIP funding under the waiver is eliminated except for certain carryover DSRIP projects. In connection with this DSRIP program, our results of operations included revenues of approximately$18 million and$30 million recorded during the nine-month periods endedSeptember 30, 2022 and 2021, respectively, all of which was recorded during the second quarter of each year.
Summary of Amounts Related To The Above-Mentioned Various State Medicaid
Supplemental Payment Programs:
The following table summarizes the revenues, Provider Taxes and net benefit related to each of the above-mentioned Medicaid supplemental programs for the three and nine-month periods endedSeptember 30, 2022 and 2021. The Provider Taxes are recorded in other operating expenses on the Condensed Consolidated Statements of Income as included herein. (amounts in millions) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2022 2021 2022 2021 Texas UC/UPL: Revenues $ 87 $ 40 $ 213 $ 107 Provider Taxes (30 ) (12 ) (76 ) (31 ) Net benefit $ 57 $ 28 $ 137 $ 76 Texas DSRIP: Revenues $ 0 $ 0 $ 27 $ 44 Provider Taxes 0 0 (9 ) (14 ) Net benefit $ 0 $ 0 $ 18 $ 30 Various other state programs: Revenues $ 112 $ 83 $ 329 $ 317 Provider Taxes (41 ) (36 ) (119 ) (111 ) Net benefit $ 71 $ 47 $ 210 $ 206 Total all Provider Tax programs: Revenues $ 199 $ 123 $ 569 $ 468 Provider Taxes (71 ) (48 ) (204 ) (156 ) Net benefit $ 128 $ 75 $ 365 $ 312 We estimate that our aggregate net benefit from theTexas and various other state Medicaid supplemental payment programs will approximate$491 million (net of Provider Taxes of$289 million ) during the year endingDecember 31, 2022 . These amounts are based upon various terms and conditions that are out of our control including, but not limited to, the states'/CMS's continued approval of the programs and the applicable hospital district or county making IGTs consistent with 2021 levels. Future changes to these terms and conditions could materially reduce our net benefit derived from the programs which could have a material adverse impact on our future consolidated results of operations. In addition, 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 future consolidated results of operations. As described below in 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation, a 6.2% increase to the Medicaid Federal Matching Assistance Percentage ("FMAP") is included in the Families First Coronavirus Response Act. The impact of the enhanced FMAP Medicaid supplemental and DSH payments are reflected in our financial results for the three and nine-month periods endedSeptember 30, 2022 and 2021. We are unable to estimate the prospective financial impact of this provision at this time as our financial impact is contingent on unknown state action during future eligible federal fiscal quarters. 47
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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 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 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. TheSouth Carolina and Texas DSH programs were renewed for each state's 2023 DSH fiscal year (covering the period ofOctober 1, 2022 throughSeptember 30, 2023 ). In connection with these DSH programs, included in our financial results was an aggregate of approximately$17 million and$12 million during the three-month periods endedSeptember 30, 2022 and 2021, respectively, and approximately$41 million and$35 million during the nine-month periods endedSeptember 30, 2022 and 2021, respectively. We expect the aggregate reimbursements to our hospitals pursuant to theTexas andSouth Carolina 2022 fiscal year programs to be approximately$54 million . The Legislation and subsequent federal legislation provides for a significant reduction in Medicaid disproportionate share payments beginning in federal fiscal year 2024 (see above in Sources of Revenues and Health Care Reform-Medicaid Revisions for additional disclosure related to the delay of these DSH reductions). HHS is to determine the amount of Medicaid DSH payment cuts imposed on each state based on a defined methodology. As Medicaid DSH payments to states will be cut, consequently, payments to Medicaid-participating providers, including our hospitals inTexas andSouth Carolina , will be reduced in the coming years. Based on the CMS final rule published in September, 2019, beginning in fiscal year 2024 (as amended by the CARES Act and the CAA), annual Medicaid DSH payments inSouth Carolina andTexas could be reduced by approximately 65% and 41%, respectively, from 2021 DSH payment levels. Our behavioral health care facilities inTexas have been receiving Medicaid DSH payments since FFY 2016. As with all Medicaid DSH payments, hospitals are subject to state audits that typically occur up to three years after their receipt. DSH payments are subject to a federal Hospital Specific Limit ("HSL") and are not fully known until the DSH audit results are concluded. In general, freestanding psychiatric hospitals tend to provide significantly less charity care than acute care hospitals and therefore are at more risk for retroactive recoupment of prior year DSH payments in excess of their respective HSL. In light of the retroactive HSL audit risk for freestanding psychiatric hospitals, we have established DSH reserves for our facilities that have been receiving funds since FFY 2016. These DSH reserves are also impacted by the resolution of federal DSH litigation related toChildren's Hospital Association of Texas v. Azar ("CHAT") where the calculation of HSL was being challenged. In August, 2019,DC Circuit Court of Appeals issued a unanimous decision in CHAT and reversed the judgment of the district court in favor of CMS and ordered that CMS's "2017 Rule" (regarding Medicaid DSH Payments-Treatment of Third Party Payers in Calculating Uncompensated Care Costs) be reinstated. CMS has not issued any additional guidance post the ruling. InApril 2020 , the plaintiffs in the case have petitioned theSupreme Court of the United States to hear their case. Additionally, there have been separate legal challenges on this same issue in the Fifth and Eight Circuits. OnNovember 4, 2019 , in Missouri Hosp. Ass'n v. Azar, theUnited States Court of Appeals for the Eighth Circuit issued an opinion upholding the 2017 Rule. OnApril 20, 2020 , inBaptist Memorial Hospital v. Azar, theUnited States Court of Appeals of the Fifth Circuit issued a decision also upholding the 2017 Rule. In light of these court decisions, we continue to maintain reserves in the financial statements for cumulative Medicaid DSH and UC reimbursements related to our behavioral health hospitals located inTexas that amounted to$37 million as ofSeptember 30, 2022 and$40 million as ofDecember 31, 2021 . Nevada SPA: InNevada , CMS approved a state plan amendment ("SPA") in August, 2014 that implemented a hospital supplemental payment program retroactive toJanuary 1, 2014 . This SPA has been approved for additional state fiscal years including the 2022 fiscal year covering the period ofJuly 1, 2021 throughJune 30, 2022 . CMS approval for the 2023 fiscal year, which is still pending, is expected to occur. In connection with this program, included in our financial results was approximately$5 million during each of the three-month period endedSeptember 30, 2022 and 2021, and approximately$16 million during each of the nine-month periods endedSeptember 30, 2022 and 2021. We estimate that our reimbursements pursuant to this program will approximate$21 million during the year endedDecember 31, 2022 .
California SPA:
InCalifornia , CMS issued formal approval of the 2017-19 Hospital Fee Program in December, 2017 retroactive toJanuary 1, 2017 throughSeptember 30, 2019 . In September, 2019, the state submitted a request to renew the Hospital Fee Program for the periodJuly 1, 2019 toDecember 31, 2021 . OnFebruary 25, 2020 , CMS approved this renewed program. These approvals include the Medicaid inpatient and outpatient fee-for-service supplemental payments and the overall provider tax structure but did not yet include the 48
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approval of the managed care rate setting payment component for certain rate periods (see table below). The managed care payment component consists of two categories of payments, "pass-through" payments and "directed" payments. The pass-through payments are similar in nature to the prior Hospital Fee Program payment method whereas the directed payment method will be based on actual concurrent hospital Medicaid managed care in-network patient volume.
California Hospital Fee Program CMS Approval Status:
Hospital Fee Program CMS Methodology CMS Rate Setting Approval
Component Approval Status Status
Fee For Service Approved through Approved through December
Payment December 31, 2022 31, 2021; Paid through
December 31, 2021
Managed Approved through Approved through June 30,
Care-Pass-Through December 31, 2022 2019; Paid in advance of
Payment approval through December
31, 2021
Managed Care-Directed Approved through Approved through June 30,
Payment December 31, 2022 2019; Paid in advance of
approval through December
30, 2020
In connection with the existing program, included in our financial results was
approximately $10 million and $11 million during the three-month periods ended
September 30, 2022 and 2021, respectively, and $38 million and $35 million
during the nine-month periods ended September 30, 2022 and 2021, respectively.
We estimate that our reimbursements pursuant to this program will approximate
$50 million during the year ended December 31, 2022 . The aggregate impact of the
California supplemental payment program, as outlined above, is included in the
above State Medicaid Supplemental Payment Program table.
Kentucky Hospital Rate Increase Program ("HRIP"):
In early 2021, CMS approved the Kentucky Medicaid Managed Care Hospital Rate
Increase Program ("HRIP") for SFY 2021, which covered the period of July 1, 2020
through June 30, 2021 . In December 2021 , CMS approved the HRIP program period
for the period July 1, 2021 to December 31, 2021 . Included in our financial
results was approximately $18 million and $8 million during the three-month
periods ended September 30, 2022 and 2021, respectively, and approximately $47
million and $65 million during the nine-month periods ended September 30, 2022
and 2021, respectively.
Programs such as HRIP require an annual state submission and approval by CMS. In
December, 2021, CMS approved the program for the period of January 1, 2022
through December 31, 2022 at rates similar to the prior year. We estimate that
our reimbursements pursuant to HRIP will approximate $59 million during the year
ended December 31, 2022 .
Florida Medicaid Managed Care Directed Payment Program ("DPP"):
During the fourth quarter of 2021, we recorded approximately$23 million of increased reimbursement resulting from the Medicaid managed care directed payment program for the 2021 rate period (covering the period ofOctober 1, 2020 toSeptember 30, 2021 ). Various DPP related legislative and regulatory approvals result in the retroactive payment of the increased reimbursement after the applicable rate year has ended. The payment methodology and amount of the 2022 DPP (covering the period ofOctober 1, 2021 toSeptember 30, 2022 ) is expected to be comparable to the 2021 DPP. As a result, if CMS and other legislative and regulatory approvals occur in connection with the 2022 DPP, we estimate that our reimbursements pursuant to the 2022 DPP will approximate$32 million , net of Provider Taxes, during the year endedDecember 31, 2022 , all of which we expect to record during the fourth quarter. This amount reflects additional Medicaid managed regions in the state participating in the program during the 2022 DPP year.
Oklahoma Transition to Managed Care and Implementation of a Medicaid Managed
Care DPP
In May, 2022,Oklahoma enacted legislation (SB 1337 and SB 1396) that directs theOklahoma Health Care Authority to: (i) transition its Medicaid program from a fee for service payment model to a managed care payment model by no later thanOctober 1, 2023 , and: (ii) concurrently implement a Medicaid managed care DPP using a managed care gap of ninety percent (90%) average commercial rates. Although we estimate that the DPP as enacted may have a favorable impact on our future results of operations, we are unable to quantify the ultimate impact since implementation of this legislation is subject to various administrative and regulatory steps including the awarding of managed care contracts as well as CMS' approval of the DPP.
Risk Factors Related To State Supplemental Medicaid Payments:
As outlined above, we receive substantial reimbursement from multiple states in connection with various supplemental Medicaid payment programs. The states include, but are not limited to,Texas ,Kentucky ,California ,Illinois ,Indiana andNevada . Failure to renew these 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 supplemental Medicaid revenues to qualify for future funds under these programs, or reductions in reimbursements, could have a material adverse effect on our future results of operations. 49
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In April, 2016, CMS published its final Medicaid Managed Care Rule which
explicitly permits but phases out the use of pass-through payments (including
supplemental payments) by Medicaid Managed Care Organizations ("MCO") to
hospitals over ten years but allows for a transition of the pass-through
payments into value-based payment structures, delivery system reform initiatives
or payments tied to services under a MCO contract. Since we are unable to
determine the financial impact of this aspect of the final rule, we can provide
no assurance that the final rule will not have a material adverse effect on our
future results of operations. In November, 2020, CMS issued a final rule
permitting pass-through supplemental provider payments during a time-limited
period when states transition populations or services from fee-for-service
Medicaid to managed care.
HITECH Act: In July 2010 , 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 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 all of the states in
which our eligible hospitals operate have chosen to participate. Our acute care
hospitals qualified 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.
All of our acute care hospitals have met the applicable meaningful use
criteria. However, under the HITECH Act, hospitals must continue to meet the
applicable meaningful use criteria in each fiscal year or they will be subject
to a market basket update reduction in a subsequent fiscal year. Failure of our
acute care hospitals to continue to meet the applicable meaningful use criteria
would have an adverse effect on our future net revenues and results of
operations.
In the 2019 IPPS final rule, CMS overhauled the Medicare and Medicaid EHR
Incentive Program to focus on interoperability, improve flexibility, relieve
burden and place emphasis on measures that require the electronic exchange of
health information between providers and patients. We can provide no assurance
that the changes will not have a material adverse effect 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 payers than we do from traditional indemnity insurers, however, during the
past few years we have secured price increases from many of our commercial
payers 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 payers and states and is generally based on contracts negotiated
between the hospital and the payer.
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.
Surprise Billing Interim Final Rule: On September 30, 2021 , the Department of
Labor , and the Department of the Treasury , along with the Office of Personnel
Management ("OPM"), released an interim final rule with comment period, entitled
"Requirements Related to Surprise Billing; Part II." This rule is related to
Title I (the "No Surprises Act") of Division BB of the Consolidated
Appropriations Act, 2021, and establishes new protections from surprise billing
and excessive cost sharing for consumers receiving health care items/services.
It implements additional protections against surprise medical bills under the No
Surprises Act, including provisions related to the independent dispute
resolution process, good faith estimates for uninsured (or self-pay)
individuals, the patient-provider dispute resolution process, and expanded
rights to external review. On February 28, 2022 , a district judge in the Eastern
District of Texas invalidated portions of the rule governing aspects of the
Independent Dispute Resolution ("IDR") process. In light of this decision, the
government issued a final rule on August 19, 2022 eliminating the rebuttable
presumption in favor of the qualifying payment amount ("QPA") by the IDR entity
and providing additional factors the IDR entity should consider when choosing
between two competing offers. On September 22, 2022 , the Texas Medical
Association filed a lawsuit challenging the IDR process provided in the updated
final rule and alleging that the final rule unlawfully elevates the QPA above
other factors the IDR entity must consider. The American Hospital Association
and American Medical Association have announced their intent to join this case
as amici supporting the Texas Medical Association . We do not expect the interim
final rule or the August 19, 2022 final rule to have a material impact on our
results of operations.
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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 coveragewho do not qualify for Medicaid or indigent care write-offs are offered substantial discounts in an effort to settle their outstanding account balances. Health Care Reform: Listed below are the Medicare, Medicaid and other health care industry changes which have been, or are scheduled to be, implemented as a result of the Legislation.
Implemented Medicare Reductions and Reforms:
• The Legislation reduced the market basket update for inpatient and outpatient
hospitals and inpatient behavioral health facilities by 0.25% in each of 2010 and
2011, by 0.10% in each of 2012 and 2013, 0.30% in 2014, 0.20% in each of 2015 and
2016 and 0.75% in each of 2017, 2018 and 2019.
• The Legislation implemented certain reforms to Medicare Advantage payments,
effective in 2011. • A Medicare shared savings program, effective in 2012. • A hospital readmissions reduction program, effective in 2012. • A value-based purchasing program for hospitals, effective in 2012. • A national pilot program on payment bundling, effective in 2013.
• Reduction to Medicare DSH payments, effective in 2014, as discussed above.
Medicaid Revisions:
• Expanded Medicaid eligibility and related special federal payments,
effective in 2014.
• The Legislation (as amended by subsequent federal legislation) requires annual
aggregate reductions in federal DSH funding from FFY 2024 through FFY 2027.
Medicaid DSH reductions have been delayed several times. Commencing in federal
fiscal year 2024, and continuing through 2027, DSH payments will be reduced by
$8 billion annually.
Health Insurance Revisions:
• Large employer insurance reforms, effective in 2015.
• Individual insurance mandate and related federal subsidies, effective in 2014.
As noted above in Health Care Reform, the Tax Cuts and Jobs Act enacted into
law in December, 2017 eliminated the individual insurance federal mandate
penalty beginning
• Federally mandated insurance coverage reforms, effective in 2010 and forward.
The Legislation seeks to increase competition among private health insurers by providing for transparent federal and state insurance exchanges. The Legislation also prohibits private insurers from adjusting insurance premiums based on health status, gender, or other specified factors. We cannot provide assurance that these provisions will not adversely affect the ability of private insurers to pay for services provided to insured patients, or that these changes will not have a negative material impact on our results of operations going forward.
Value-Based Purchasing:
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not reimburse hospitals for certain preventable adverse events. The Legislation required HHS to implement a value-based purchasing program for inpatient hospital services which became effective onOctober 1, 2012 . The Legislation requires HHS to reduce inpatient hospital payments for all discharges by 2% in FFY 2017 and subsequent years. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions. As part of the FFY 2022 51
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IPPS final rule and FFY 2023 final rule, as discussed above, and as a result of the on-going COVID-19 pandemic, CMS has implemented a budget neutral payment policy to fully offset the 2% VBP withhold during each of FFY 2022 and FFY 2023.
Hospital Acquired Conditions:
The Legislation prohibits the use of federal funds under the Medicaid program to
reimburse providers for medical assistance provided to treat hospital acquired
conditions ("HAC"). Beginning in FFY 2015, hospitals that fall into the top 25%
of national risk-adjusted HAC rates for all hospitals in the previous year will
receive a 1% reduction in their total Medicare payments. As part of the FFY 2023
final rule discussed above, and as a result of the on-going COVID-19 pandemic,
CMS will suppress all six measures in the HAC Reduction Program for the FY 2023
program year and eliminate the HAC reduction program's one percent payment
penalty.
Readmission Reduction Program:
In the Legislation,Congress also mandated implementation of the hospital readmission reduction program ("HRRP"). Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard. The HRRP currently assesses penalties on hospitals having excess readmission rates for heart failure, myocardial infarction, pneumonia, acute exacerbation of chronic obstructive pulmonary disease (COPD) and elective total hip arthroplasty (THA) and/or total knee arthroplasty (TKA), excluding planned readmissions, when compared to expected rates. In the fiscal year 2015 IPPS final rule, CMS added readmissions for coronary artery bypass graft (CABG) surgical procedures beginning in fiscal year 2017. To account for excess readmissions, an applicable hospital's base operating DRG payment amount is adjusted for each discharge occurring during the fiscal year. Readmissions payment adjustment factors can be no more than a 3 percent reduction. As part of the FFY 2023 IPPS final rule discussed above, CMS will modify all of the condition-specific readmission measures to include an adjustment for patient history of COVID-19 for FFY 2024.
Accountable Care Organizations:
The Legislation requires HHS to establish a Medicare Shared Savings Program that
promotes accountability and coordination of care through the creation of
accountable care organizations ("ACOs"). The ACO program allows providers
(including hospitals), physicians and other designated professionals and
suppliers to voluntarily work together to invest in infrastructure and redesign
delivery processes to achieve high quality and efficient delivery of services.
The program is intended to produce savings as a result of improved quality and
operational efficiency. ACOs that achieve quality performance standards
established by HHS will be eligible to share in a portion of the amounts saved
by the Medicare program. CMS is also developing and implementing more advanced
ACO payment models that require ACOs to assume greater risk for attributed
beneficiaries. On December 21, 2018 , CMS published a final rule that, in
general, requires ACO participants to take on additional risk associated with
participation in the program. On April 30, 2020 , CMS issued an interim final
rule with comment in response to the COVID-19 national emergency permitting ACOs
with current agreement periods expiring on December 31, 2020 the option to
extend their existing agreement period by one year, and permitting certain ACOs
to retain their participation level through 2021. It remains unclear to what
extent providers will pursue federal ACO status or whether the required
investment would be warranted by increased payment.
2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation
In response to the growing threat of COVID-19, onMarch 13, 2020 a national emergency was declared. The declaration empowered the HHS Secretary to waive certain Medicare, Medicaid andChildren's Health Insurance Program ("CHIP") program requirements and Medicare conditions of participation under Section 1135 of the Social Security Act. Having been granted this authority by HHS, CMS issued a broad range of blanket waivers, which eased certain requirements for impacted providers, including:
• Waivers and Flexibilities for Hospitals and other Healthcare Facilities
including those for physical environment requirements and certain
Emergency Medical Treatment & Labor Act provisions
• Provider Enrollment Flexibilities
• Flexibility and Relief for State Medicaid Programs including those
under section 1135 Waivers
• Suspension of Certain Enforcement Activities
In addition to the national emergency declaration,
Presidents Trump and Biden have signed various forms of legislation intended to
support state and local authority responses to COVID-19 as well as provide
fiscal support to businesses, individuals, financial markets, hospitals and
other healthcare providers.
Some of the financial support included in the various legislative actions
include:
• Medicaid FMAP Enhancement
• The FMAP was increased by 6.2% retroactive to the federal fiscal
quarter beginning January 1, 2020 and each subsequent federal fiscal
quarter for all states and U.S. territories during the declared public
health emergency, in accordance with specified conditions.
• Public Health Emergency Declaration
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• The HHS Secretary renewed the public health emergency ("PHE") effective
October 13, 2022 for ninety (90) days. As a result, states would be
eligible for the enhanced FMAP through the end of federal fiscal
quarter ending March 31, 2023 should the PHE not be rescinded by the
Secretary before the end of the ninety day period.
• Creation of a
("PHSSEF")
• Makes grants available to hospitals and other healthcare providers to
cover unreimbursed healthcare related expenses or lost revenues
attributable to the public health emergency resulting from the
coronavirus.
• During 2021, we received approximately $189 million in PHSSEF grants
from the federal government as provided for by the CARES Act. As
previously disclosed, we returned these funds to HHS during the second
quarter of 2021. Since our intent was to return these funds, our
financial results for the year ended December 31, 2021 include no
impact from the receipt of these federal funds. Reimbursements
recorded
pursuant the PHSSEF and other various state and local
governmental
stimulus programs did not have a significant impact on our financial
results during the nine-month period ended September 30, 2022 . Our
results of operations for the nine-month period ended September 30,
2021 included approximately $13 million of reimbursements
recorded in
connection with these programs.
• During the year ended
million of funds from various governmental stimulus programs,
most
notably the PHSSEF as provided for by the CARES Act. As
mentioned
above, included financial results for the year ended December
31, 2020
was approximately $413 million of revenues recognized in
connection
with funds received from these federal, state and local
governmental
stimulus programs.
• All PHSSEF receipts are subject to meeting the applicable terms and conditions of the
various distribution programs as of September 30, 2021 . The
Consolidated Appropriations
Act, 2021 (H.R. 133) enacted on December 27, 2020 includes
language that provides
specific instructions on: (1) the redistribution of PHSSEF
grant payments by a parent
company among its subsidiaries, and; (2) the calculation of
lost revenue in a PHSSEF
grant entitlement determination. The HHS terms and conditions
for all grant recipients
and specific fund distributions are located at
https://www.hhs.gov/coronavirus/cares-act-provider-relief-fund/for-providers/index.html
• Reimburse hospitals at Medicare rates for uncompensated COVID-19 care for
the uninsured
• Our financial results included revenues recorded in connection with
this COVID-19 uninsured program amounting to approximately $4
million
and $19 million during the three-month periods ended September
30, 2022
and 2021, respectively, and $22 million and $50 million during
the
nine-month periods ended September 30, 2022 and 2021,
respectively.
Revenue for the eligible patient encounters is recorded in the period
in which the encounter is deemed eligible for this program net of any
normal accounting reserves.
• Effective March 22, 2022 , HHS announced that the HRSA COVID-19
Uninsured Program and Coverage Assistance Fund is no longer accepting
claims due to insufficient funding.
• Medicare Sequestration Relief
• Suspension of the 2% Medicare sequestration offset for Medicare
services provided from May 1, 2020 through December 31, 2021 by
various
legislative extensions. In December, 2021, the suspended 2%
payment
reduction was extended until March 31, 2022 and partially
suspended at
a 1% payment reduction for an additional three-month period that ended
on June 30, 2022 .
• Our financial results included revenues recorded in connection with
this Medicare sequestration relief program amounting to $0 and $11
million during the three-month periods ended September 30, 2022 and
2021, respectively, and $17 million and $34 million during the
nine-month periods ended September 30, 2022 and 2021,
respectively.
• Medicare add-on for inpatient hospital COVID-19 patients
• Increases the payment that would otherwise be made to a hospital for
treating a Medicare patient admitted with COVID-19 by twenty percent
(20%) for the duration of the COVID-19 public health emergency.
• Our financial results included revenues recorded in connection with
this COVID-19 Medicare add-on program amounting to approximately $7
million and $8 million during the three-month periods ended September
30, 2022 and 2021, respectively, and approximately $25 million and $27
million during the nine-month periods ended September 30, 2022 and
2021, respectively. These payments were intended to offset the
increased expenses associated with the treatment of Medicare COVID-19
patients.
• Expansion of the Medicare Accelerated and Advance Payment Program ("MAAPP")
• In March, 2021, we fully repaid the $695 million of Medicare
Accelerated payments received during 2020.
In addition to statutory and regulatory changes to the Medicare program 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
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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 payers could have a material adverse effect on our
financial position and our results.
Other Operating Results
Interest Expense:
As reflected on the schedule below, interest expense was
million
respectively, and
ended
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
Revolving credit & demand notes (a.) $ 1,440 $ 502 $ 7,752 $ 1,502
Tranche A term loan facility (a.)
22,177 6,460 37,710 20,576 Tranche B term loan facility (a.) - 1,352 - 5,941$400 million , 5.00% Senior Notes due 2026 (b.) - 4,000 - 14,000$800 million , 2.65% Senior Notes due 2030 (c.) 5,356 5,356 16,069 16,113$700 million , 1.65% Senior Notes due 2026 (d.) 2,931 1,205 8,794 1,205$500 million , 2.65% Senior Notes due 2032 (e.) 3,345 1,376 10,035 1,376 Accounts receivable securitization program (f.) 10 10 30 777 Subtotal-revolving credit, demand notes, Senior Notes, term loan facilities and accounts receivable securitization program 35,259 20,261 80,390 61,490 Amortization of financing fees 1,259 1,087 3,481 3,205 Other combined interest expense 1,441 1,322 5,052 4,197 Capitalized interest on major projects (2,199 ) (1,305 ) (5,738 ) (2,957 ) Interest income (107 ) (166 ) (183 ) (1,480 ) Interest expense, net$ 35,653 $
21,199
(a.) In June, 2022 we entered into the ninth amendment to our credit agreement
dated
among other things, added a new incremental tranche A term loan facility
in the aggregate principal amount of
entered into an eighth amendment which modified the definition of
"Adjusted LIBO Rate". In August, 2021 we entered into a seventh amendment
to our Credit Agreement which provided for the amendment and restatement
of the previously existing credit facility including, among other things,
the following: (i) a
facility that is scheduled to mature in August, 2026 (
borrowings outstanding as of
loan facility with
the ninth amendment in June, 2022), and; (iii) repayment of a portion of
the previously outstanding tranche A term loan facility borrowings ($150 million ) and all of the tranche B term loan facility borrowings ($488 million ). Repayment of the$638 million of previously outstanding borrowings under the tranche A and tranche B term loan facilities were
funded utilizing a portion of the proceeds generated from the August,
2021 issuance of the$700 million , 1.65% Senior Notes due in 2026, and the$500 million , 2.65%, Senior Notes due in 2032. (b.) In September, 2021 we redeemed the entire$400 million aggregate
principal amount of our previously outstanding 5.00% Senior Secured Notes
that were scheduled to mature in 2026 at a cash redemption price equal to
the sum of 102.50% of the aggregate principal amount. This redemption was
funded utilizing a portion of the proceeds generated from the August,
2021 issuance of the$700 million , 1.65% Senior Notes due in 2026, and the$500 million , 2.65% Senior Notes due in 2032, as discussed in (d.) and (e.) below.
(c.) In September, 2020 we completed the offering of
principal amount of 2.65% Senior Notes due in 2030.
54
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(d.) In August, 2021 we completed the offering of
principal amount of 1.65% Senior Notes due in 2026.
(e.) In August, 2021 we completed the offering of
principal amount of 2.65% Senior Notes due in 2032.
(f.) Our accounts receivable securitization program was amended in April, 2021
to reduce the borrowing commitment to$20 million (from$450 million previously), amended in April, 2022 to extend the maturity date to July
22, 2022, amended in July, 2022 to extend the maturity date to September,
2022, and amended in September, 2022 to extend the maturity date to
December, 2022. There are no outstanding borrowings as of
2022.
Interest expense increased approximately$14 million during the three-month period endedSeptember 30, 2022 , as compared to the three-month period endedSeptember 30, 2021 , due primarily to a net$15 million increase in aggregate interest expense on our revolving credit, demand notes, senior notes, term loan facilities and accounts receivable securitization program. The increase resulted from: (i) an increase in the aggregate average outstanding borrowings ($4.46 billion during the three months endedSeptember 30, 2022 as compared to$3.70 billion during the three months endedSeptember 30, 2021 ), and; (ii) an increase in the weighted average cost of borrowings pursuant to these facilities (3.08% and 2.13% during the three-month periods endedSeptember 30, 2022 and 2021, respectively). The weighted average effective interest rate pursuant to these facilities, including amortization of deferred financing costs, original issue discount and designated interest rate swap expense/income, was 3.21% and 2.26% during the three-month periods endedSeptember 30, 2022 and 2021, respectively. Interest expense increased approximately$19 million during the nine-month period endedSeptember 30, 2022 , as compared to the nine-month period endedSeptember 30, 2021 , primarily due to a net$19 million increase on our revolving credit, demand notes, senior notes, term loan facilities and accounts receivable securitization program. The increase resulted from: (i) an increase in the aggregate average outstanding borrowings ($4.37 billion during the nine months endedSeptember 30, 2022 as compared to$3.69 billion during the nine months endedSeptember 30, 2021 ), and; (ii) an increase in the weighted average cost of borrowings pursuant to these facilities (2.41% and 2.19% during the nine-month periods endedSeptember 30, 2022 and 2021, respectively). The weighted average effective interest rates pursuant to these facilities, including amortization of deferred financing costs, original issue discount and designated interest rate swap expense/income, were 2.53% and 2.31% during the nine-month periods endedSeptember 30, 2022 and 2021, respectively.
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
thousands):
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
Provision for income taxes $ 57,401 $ 67,515 $ 157,312 $ 232,844
Income before income taxes 234,212 286,890 643,925 986,565
Effective tax rate 24.5 % 23.5 % 24.4 % 23.6 %
The provision for income taxes decreased $10 million during the three-month
period ended September 30, 2022 , as compared to the third quarter of 2021, due
primarily to the income tax benefit recorded in connection with the $46 million
decrease in pre-tax income.
The provision for income taxes decreased $76 million during the nine-month
period ended September 30, 2022 , as compared to the comparable period of 2021,
due primarily to the income tax benefit recorded in connection with the $327
million decrease in pre-tax income.
55
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Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was$699 million during the nine-month period endedSeptember 30, 2022 and$562 million during the first nine months of 2021. The net increase of$137 million was attributable to the following:
• a favorable change of
accelerated payments which were received during 2020 and repaid during the
first quarter of 2021;
• an unfavorable change of
income plus depreciation and amortization expense, stock-based compensation
expense, gain/loss on sale of assets and businesses, costs related to
extinguishment of debt and provision for asset impairment;
• an unfavorable change of
due primarily to the timing of disbursements for accrued compensation;
• an unfavorable change of
to the timing of receipt of certain supplemental reimbursements and the
opening of new facilities, and;
• $40 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 52 days and 51 days at September 30, 2022 and 2021,
respectively.
Net cash used in investing activities
During the first nine months of 2022, we used
investing activities as follows:
•
for equipment, renovations and new projects at various existing facilities;
•
exchange contracts that hedge our investment in the
in exchange rates; •$19 million spent on the acquisition of businesses and property, and; •$12 million received from the sales of assets and businesses.
During the first nine months of 2021, we used
investing activities as follows:
•
for equipment, renovations and new projects at various existing facilities;
•$39 million spent on acquisition of business and property;
•
•
technology applications (consists primarily of refunded costs previously
paid), and;
•
exchange contracts that hedge our investment in the
in exchange rates.
Net cash used in financing activities
During the first nine months of 2022, we used
financing activities as follows:
• generated
which commenced in June, 2022;
• spent
connection with: (i) open market purchases pursuant to our stock repurchase
program (
to stock-based compensation programs (
• spent
related to our revolving credit facility; (ii)$36 million related to our tranche A term loan facility, and; (iii)$5 million related to other debt facilities;
• spent
from minority members, net of sales, consisting primarily of our purchase of
Hospital (we now own 100% of the hospital);
56
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• spent$44 million to pay quarterly cash dividends of$.20 per share;
• generated
Stock pursuant to the terms of employee stock purchase plans;
• spent
interests in majority owned businesses, and; • spent$3 million to pay financing costs.
During the first nine months of 2021, we used
financing activities as follows:
• spent
related to our tranche A term loan facility; (ii)
our previously outstanding tranche B term loan facility; (iii)
related to the early redemption of our previously outstanding
5.00% senior secured notes which were scheduled to mature in June, 2026;
(iv)
program, and; (v)
• generated
billion related to our tranche A term loan facility; (ii)
of discount) related to the August, 2021 issuance of
senior secured notes due in September, 2026; (iii)
discount) related to the August, 2021 issuance of
secured notes due in January, 2032, and; (iv) received$14 million of proceeds related to other debt facilities;
• spent
connection with: (i) open market purchases pursuant to our stock repurchase
program (
to stock-based compensation programs ($19 million ); • spent$50 million to pay quarterly cash dividends of$.20 per share;
• spent
financing transactions;
• received
minority members;
• generated
Stock pursuant to the terms of employee stock purchase plans, and;
• spent
interests in majority owned businesses.
Expected capital expenditures during remainder of 2022
During the full year of 2022, we expect to spend approximately$760 million to$810 million on capital expenditures which includes expenditures for capital equipment, construction of new facilities, and renovations and expansions at existing hospitals. During the first nine months of 2022, we spent approximately$570 million on capital expenditures. During the remaining three months of 2022, we expect to spend approximately$190 million to$240 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
In June, 2022 we entered into a ninth amendment to our credit agreement dated as ofNovember 15, 2010 , as amended and restated as of September, 2012, August, 2014, October, 2018, August, 2021, and September, 2021, among UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders, andJPMorgan Chase Bank, N.A ., as administrative agent, (the "Credit Agreement"). The ninth amendment provided for, among other things, the following: (i) a new incremental tranche A term loan facility in the aggregate principal amount of$700 million which is scheduled to mature onAugust 24, 2026 , and; (ii) replaces the option to make Eurodollar borrowings (which bear interest by reference to the LIBOR Rate) with Term Benchmark Loans, which will bear interest by reference to the Secured Overnight Financing Rate ("SOFR"). The net proceeds generated from the incremental tranche A term loan facility were used to repay a portion of the borrowings that were previously outstanding under our revolving credit facility.
In September, 2021 we entered into an eighth amendment to our Credit Agreement
which modified the definition of "Adjusted LIBO Rate".
In August, 2021 we entered into a seventh amendment to our Credit Agreement
which, among other things, provided for the following:
o a
scheduled to mature on
million over the
this facility had
of available borrowing capacity, net of
credit;
57
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o a
increased by
amendment. The seventh amendment also provided for repayment of
of borrowings outstanding pursuant to the previous tranche A term loan
facility, and;
o repayment of approximately $488 million of outstanding borrowings and
termination of the previous tranche B term loan facility.
The terms of the tranche A term loan facility, as amended, which had $2.353
billion of outstanding borrowings as of September 30, 2022 , provides for
installment payments of $15.0 million per quarter during the period of
September, 2022 through September, 2023, and $30.0 million per quarter during
the period of December, 2023 through June, 2026. The unpaid principal balance at
June 30, 2026 is payable on the August 24, 2026 scheduled maturity date of the
Credit Agreement.
Revolving credit and tranche A term loan borrowings under the Credit Agreement
bear interest at our election at either (1) the ABR rate which is defined as the
rate per annum equal to 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 SOFR
rate plus 1%, in each case, plus an applicable margin based upon our
consolidated leverage ratio at the end of each quarter ranging from 0.25% to
0.625%, or (2) the one, three or six month SOFR rate plus 0.1% (at our
election), plus an applicable margin based upon our consolidated leverage ratio
at the end of each quarter ranging from 1.25% to 1.625%. As of September 30,
2022 , the applicable margins were 0.50% for ABR-based loans and 1.50% for
SOFR-based loans under the revolving credit and term loan A facilities. The
revolving credit facility includes a $125 million sub-limit for letters of
credit. The Credit Agreement is secured by certain assets of the Company and our
material subsidiaries (which generally excludes asset classes such as
substantially all of the patient-related accounts receivable of our acute care
hospitals, and certain real estate assets and assets held in joint-ventures with
third parties) and is guaranteed by our material subsidiaries.
The Credit Agreement includes a material adverse change clause that must be
represented at each draw. The Credit Agreement also contains covenants that
include a limitation on sales of assets, mergers, change of ownership, liens,
indebtedness, transactions with affiliates, dividends and stock repurchases; and
requires compliance with financial covenants including maximum leverage. We were
in compliance with all required covenants as of September 30, 2022 and December
31, 2021 .
On August 24, 2021 , we completed the following via private offerings to
qualified institutional buyers under Rule 144A and to non-U.S. persons outside
the United States in reliance on Regulation S under the Securities Act of 1933,
as amended:
o Issued
notes due on
o Issued
notes due on
In April, 2021 our accounts receivable securitization program ("Securitization")
was amended (the eighth amendment) to: (i) reduce the aggregate borrowing
commitments to $20 million (from $450 million previously); (ii) slightly reduce
the borrowing rates and commitment fee, and; (iii) extend the maturity date to
April 25, 2022 . In April, 2022, the Securitization was amended (the ninth
amendment) to extend the maturity date to July 22, 2022 . In July, 2022, the
Securitization was amended (the tenth amendment) to extend the maturity date to
September 20, 2022 . In September, 2022, the Securitization was amended (the
eleventh amendment) to extend the maturity date to December 20, 2022 .
Substantially all other material terms and conditions remained unchanged. There
were no borrowings outstanding pursuant to the Securitization as of September
30, 2022 .
On September 13, 2021 , we redeemed $400 million of aggregate principal amount of
5.00% senior secured notes, that were scheduled to mature on June 1, 2026 , at
102.50% of the aggregate principal, or $410 million .
As of
from the following senior secured notes:
o
September, 2026 ("2026 Notes") which were issued on
o
October, 2030 ("2030 Notes") which were issued on
o
in January, 2032 ("2032 Notes") which were issued on
On
amount of our previously outstanding 4.75% senior secured notes, which were
scheduled to mature in August, 2022, at 100% of the aggregate principal amount.
Interest on the 2026 Notes is payable onMarch 1st andSeptember 1st until the maturity date ofSeptember 1, 2026 . Interest on the 2030 Notes payable onApril 15th andOctober 15th , until the maturity date ofOctober 15, 2030 . Interest on the 2032 Notes is payable onJanuary 15th andJuly 15th until the maturity date ofJanuary 15, 2032 . The 2026 Notes, 2030 Notes and 2032 Notes (collectively "The Notes") were offered only to qualified institutional buyers under Rule 144A and to non-U.S. persons outsidethe United States in reliance on Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). The Notes have not been registered under the Securities Act and may not be offered or sold inthe United States absent registration or an applicable exemption from registration requirements. 58
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The Notes are guaranteed (the "Guarantees") on a senior secured basis by all of our existing and future direct and indirect wholly-owned subsidiaries (the "Subsidiary Guarantors") that guarantee our Credit Agreement, or other first lien obligations or any junior lien obligations. The Notes and the Guarantees are secured by first-priority liens, subject to permitted liens, on certain of the Company's and the Subsidiary Guarantors' assets now owned or acquired in the future by the Company or the Subsidiary Guarantors (other than real property, accounts receivable sold pursuant to the Company's Existing Receivables Facility (as defined in the Indentures pursuant to which The Notes were issued (the "Indentures")), and certain other excluded assets). The Company's obligations with respect to The Notes, the obligations of the Subsidiary Guarantors under the Guarantees, and the performance of all of the Company's and the Subsidiary Guarantors' other obligations under the Indentures, are secured equally and ratably with the Company's and the Subsidiary Guarantors' obligations under the Credit Agreement and The Notes by a perfected first-priority security interest, subject to permitted liens, in the collateral owned by the Company and its Subsidiary Guarantors, whether now owned or hereafter acquired. However, the liens on the collateral securing The Notes and the Guarantees will be released if: (i) The Notes have investment grade ratings; (ii) no default has occurred and is continuing, and; (iii) the liens on the collateral securing all first lien obligations (including the Credit Agreement and The Notes) and any junior lien obligations are released or the collateral under the Credit Agreement, any other first lien obligations and any junior lien obligations is released or no longer required to be pledged. The liens on any collateral securing The Notes and the Guarantees will also be released if the liens on that collateral securing the Credit Agreement, other first lien obligations and any junior lien obligations are released. In connection with the issuance of The Notes, the Company, the Subsidiary Guarantors and the representatives of the several initial purchasers, entered into Registration Rights Agreements (the "Registration Rights Agreements"), whereby the Company and the Subsidiary Guarantors have agreed, at their expense, to use commercially reasonable best efforts to: (i) cause to be filed a registration statement enabling the holders to exchange The Notes and the Guarantees for registered senior secured notes issued by the Company and guaranteed by the then Subsidiary Guarantors under the Indentures (the "Exchange Securities "), containing terms identical to those of The Notes (except that theExchange Securities will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with the Registration Rights Agreements); (ii) cause the registration statement to become effective; (iii) complete the exchange offer not later than 60 days after such effective date and in any event on or prior to a target registration date ofMarch 21, 2023 in the case of the 2030 Notes andFebruary 24, 2024 in the case of the 2026 and 2032 Notes, and; (iv) file a shelf registration statement for the resale of The Notes if the exchange offers cannot be effected within the time periods listed above. The interest rate on The Notes will increase and additional interest thereon will be payable if the Company does not comply with its obligations under the Registration Rights Agreements. OnNovember 4, 2022 , as required under the terms of the Credit Agreement, we added certain additional subsidiary guarantors of our obligations under the Credit Agreement. As a result, and as required under the terms of the Indentures, we, together with the Subsidiary Guarantors,U.S. Bank Trust Company, National Association , as trustee, andJPMorgan Chase Bank, N.A ., as collateral agent, entered into: • a supplemental indenture (the "2020 Supplemental Indenture") to the Indenture, dated as ofSeptember 21, 2020 (as amended, supplemented and otherwise modified from time to time prior to the date hereof, the "2020 Indenture"), governing our 2030 Notes; and
• a supplemental indenture (the "2021 Supplemental Indenture" and, together
with the 2020 Supplemental Indenture, the "Supplemental Indentures") to
that certain Indenture, dated as of August 24, 2021 (as amended,
supplemented and otherwise modified from time to time prior to the date
hereof, the "2021 Indenture" and, together with the 2020 Indenture, the
"Indentures"), governing our 2026 Notes and 2032 Notes.
The Supplemental Indentures added additional Subsidiary Guarantors as guarantors
under the Indentures as required under the terms of the Indentures.
The foregoing description of the Supplemental Indentures is a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the Supplemental Indentures, which are filed as Exhibits 4.1 and 4.2 to this Report and are incorporated herein by reference. As discussed in Note 2 to the Consolidated Financial Statements-Relationship with Universal Health Realty Income Trust and Other Related Party Transactions, onDecember 31, 2021 , we (through wholly-owned subsidiaries of ours) entered into an asset purchase and sale agreement with Universal Health Realty Income Trust (the "Trust"). Pursuant to the terms of the agreement, which was amended during the first quarter of 2022, we, among other things, transferred to the Trust, the real estate assets ofAiken Regional Medical Center ("Aiken") andCanyon Creek Behavioral Health ("Canyon Creek"). In connection with this transaction,Aiken and Canyon Creek (as lessees), entered into a master lease and individual property leases, as amended, (with the Trust as lessor), for initial lease terms on each property of approximately twelve years, ending onDecember 31, 2033 . As a result of our purchase option within theAiken and Canyon Creek lease agreements, this asset purchase and sale transaction is accounted for as a failed sale leaseback in accordance withU.S. GAAP and we have accounted for the transaction as a financing arrangement. Our lease payments payable to the Trust are recorded to interest expense and as a reduction of the outstanding financial liability, and the amount allocated to interest expense is determined based upon our incremental borrowing rate and the outstanding financial liability. In connection with this 59
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transaction, our Consolidated Balance Sheets at
31, 2021
approximately
AtSeptember 30, 2022 , the carrying value and fair value of our debt were approximately$4.7 billion and$4.3 billion , respectively. AtDecember 31, 2021 , the carrying value and fair value of our debt were each approximately$4.2 billion . The fair value of our debt was computed based upon quotes received from financial institutions. 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 approximately 45% at
We expect to finance all capital expenditures and acquisitions and 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, which had$1.007 billion of available borrowing capacity as ofSeptember 30, 2022 , or through refinancing the existing Credit Agreement; (ii) the issuance of other short-term and/or long-term debt, and/or; (iii) the issuance of equity. We believe that our operating cash flows, cash and cash equivalents, available commitments under existing agreements, as well as access to the capital markets, provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months. However, 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.
Supplemental Guarantor Financial Information
As of
from The Notes:
•$700 million aggregate principal amount of the 2026 Notes; •$800 million aggregate principal amount of the 2030 Notes, and; •$500 million of aggregate principal amount of the 2032 Notes. The Notes are fully and unconditionally guaranteed pursuant to the Guarantees on a senior secured basis by the Subsidiary Guarantors. The Notes and the Guarantees are secured by first-priority liens, subject to permitted liens, on certain of the Company's and the Subsidiary Guarantors' assets now owned or acquired in the future by the Company or the Subsidiary Guarantors (other than real property, accounts receivable sold pursuant to the Company's existing receivables facility (as defined in the Indentures pursuant to which The Notes were issued ), and certain other excluded assets). The Company's obligations with respect to The Notes, the obligations of the Subsidiary Guarantors under the Guarantees, and the performance of all of the Company's and the Subsidiary Guarantors' other obligations under the Indentures, are secured equally and ratably with the Company's and the Subsidiary Guarantors' obligations under the Credit Agreement and The Notes by a perfected first-priority security interest, subject to permitted liens, in the collateral owned by the Company and its Subsidiary Guarantors, whether now owned or hereafter acquired. However, the liens on the collateral securing The Notes and the Guarantees will be released if: (i) The Notes have investment grade ratings; (ii) no default has occurred and is continuing, and; (iii) the liens on the collateral securing all first lien obligations (including the Credit Agreement and The Notes) and any junior lien obligations are released or the collateral under the Credit Agreement, any other first lien obligations and any junior lien obligations is released or no longer required to be pledged. The liens on any collateral securing The Notes and the Guarantees will also be released if the liens on that collateral securing the Credit Agreement, other first lien obligations and any junior lien obligations are released. The Notes will be structurally subordinated to all obligations of our existing and future subsidiaries that are not and do not become Subsidiary Guarantors of The Notes. No appraisal of the value of the collateral has been made, and the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. Consequently, liquidating the collateral securing The Notes may not produce proceeds in an amount sufficient to pay any amounts due on The Notes. We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although our Credit Agreement contains restrictions on the incurrence of additional indebtedness and our Credit Agreement and The Notes contain restrictions on our ability to incur liens to secure additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, if we incur any additional indebtedness secured by liens that rank equally with The Notes, subject to collateral arrangements, the holders of that debt will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company. This may have the effect of reducing the amount of proceeds paid to holders of The Notes. Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of The Notes and the incurrence of the Guarantees. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, The Notes or the Guarantees (or the grant of collateral securing any such obligations) could be voided as a fraudulent transfer or conveyance if we or any of the Subsidiary Guarantors, as applicable, (a) issued The Notes or incurred the Guarantees with the intent of hindering, delaying or defrauding creditors or (b) under certain circumstances received less than reasonably equivalent value or fair consideration in return for either issuing The Notes or incurring the Guarantees. 60
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Basis of Presentation
The following tables include summarized financial information ofUniversal Health Services, Inc. and the other obligors in respect of debt issued byUniversal Health Services, Inc. The summarized financial information of each obligor group is presented on a combined basis with balances and transactions within the obligor group eliminated. Investments in and the equity in earnings of non-guarantor subsidiaries, which would otherwise be consolidated in accordance with GAAP, are excluded from the below summarized financial information pursuant to SEC Regulation S-X Rule 13-01. The summarized balance sheet information for the consolidated obligor group of debt issued byUniversal Health Services, Inc. is presented in the table below: September 30, (in thousands) 2022 December 31, 2021 Current assets$ 2,012,942 $ 1,865,568 Noncurrent assets (1)$ 8,720,431 $ 8,695,985 Current liabilities$ 1,735,242 $ 1,818,415 Noncurrent liabilities$ 6,576,774 $ 6,164,650 Due to non-guarantors $ 955,780 $ 940,852
(1) Includes goodwill of
The summarized results of operations information for the consolidated obligor group of debt issued byUniversal Health Services, Inc. is presented in the table below: Nine Months Ended Twelve Months Ended (in thousands) September 30, 2022 December 31, 2021 Net revenues $ 8,091,788 $ 10,310,332 Operating charges 7,377,037 9,044,261 Interest expense, net 83,248 149,394 Other (income) expense, net 14,464 (14,513 ) Net income $ 469,771 $ 878,065
Affiliates Whose Securities Collateralize the Senior Secured Notes
The Notes and the Guarantees are secured by, among other things, pledges of the capital stock of our subsidiaries held by us or by our secured Guarantors, in each case other than certain excluded assets and subject to permitted liens. Such collateral securities are secured equally and ratably with our and the Guarantors' obligations under our Credit Agreement. For a list of our subsidiaries the capital stock of which has been pledged to secure The Notes, see Exhibit 22.1 to this Report. Upon the occurrence and during the continuance of an event of default under the indentures governing The Notes, subject to the terms of the Security Agreement relating to The Notes provide for (among other available remedies) the foreclosure upon and sale of the Collateral (including the pledged stock) and the distribution of the net proceeds of any such sale to the holders of The Notes, the lenders under the Credit Agreement and the holders of any other permitted first priority secured obligations on a pro rata basis, subject to any prior liens on the collateral. No appraisal of the value of the collateral securities has been made, and the value of the collateral securities in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. Consequently, liquidating the collateral securities securing The Notes may not produce proceeds in an amount sufficient to pay any amounts due on The Notes. The security agreement relating to The Notes provides that the representative of the lenders under our Credit Agreement will initially control actions with respect to that collateral and, consequently, exercise of any right, remedy or power with respect to enforcing interests in or realizing upon such collateral will initially be at the direction of the representative of the lenders.
No trading market exists for the capital stock pledged as collateral.
The assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in the consolidated financial information ofUniversal Health Services, Inc.
Off-Balance Sheet Arrangements
During the three months endedSeptember 30, 2022 there have been no material changes in the off-balance sheet arrangements consisting of standby letters of credit and surety bonds. As ofSeptember 30, 2022 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled$169 million consisting of: (i)$159 million related to our self-insurance programs, and; (ii)$10 million of other debt and public utility guarantees. 61
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