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 of
outpatient and other facilities including the following located in 39 states,
Acute care facilities located in the
•
27 inpatient acute care hospitals;
•
22 free-standing emergency departments, and;
•
7 outpatient centers & 1 surgical hospital.
Behavioral health care facilities (331 inpatient facilities and 10 outpatient
facilities):
Located in theU.S. :
•
185 inpatient behavioral health care facilities, and;
•
8 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 57% and 58% during the three-month periods ended
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 periods ended
respectively.
Our behavioral health care facilities located in the
of approximately
ended
health care facilities were approximately
and
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 ended
Report and in other reports or documents that we file from time to time with the
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 or 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 ended
Management's Discussion and Analysis of Financial Condition and Results of
Operations-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.
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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
2020
spread of the disease to
Organization
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, including the risks of a global recession or a recession
in one or more of our key markets, the impact they may have on us and our
customers and our assessment of that impact, and any disruptions and
inefficiencies in the supply chain, and many of our known risks described in
Item 1A. Risk Factors section 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 2022, could continue to
have an unfavorable material impact on our results of operations for the
foreseeable future;
•
the
Rule ("IFR") effective
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. While
start the process to end the vaccine requirements for CMS-certified healthcare
facilities, 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
grant funding to hospitals and other healthcare providers to be distributed
through the
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. The
Services
provider's share of total Medicare fee-for-service reimbursement in 2019.
Subsequently, HHS determined that CARES Act funding (including the
already distributed) would be allocated proportional to providers' share of 2018
net patient revenue. We have received payments from these initial distributions
of the PHSSEF as disclosed herein. HHS has
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indicated that distributions of the remaining
primarily to hospitals in COVID-19 high impact 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
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
24, 2020
including
PHSSEF. A third phase of PHSSEF allocations made
providers
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
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
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
date of the payment received period; payments received in the first period of
payments received in the fourth period of
to have been expended by
("ARPA"), enacted on
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
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. On
was signed into law and phases out the enhanced FMAP rate and fully eliminates
the increase on
eligibility redeterminations on
in a large decrease in Medicaid enrollment. 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;
•
HHS had adopted certain reimbursement policies and regulatory flexibilities
favorable to providers during the Public Health Emergency ("PHE") declared in
response to the COVID-19 pandemic. HHS has published guidance indicating its
intent for the PHE to expire on
legislative and regulatory measures allowing for flexibility in delivery of care
and various financial supports for healthcare providers are available only for
the duration of the PHE. Most states have ended their state-level emergency
declarations. The end of the PHE status will result in the
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conclusion of those policies over various designated timeframes. We cannot
predict whether the loss of any such favorable conditions available to providers
during the declared PHE will ultimately have a negative financial impact on us;
•
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,
maintain health coverage that was part of the original Legislation as part of
the Tax Cuts and Jobs Act.
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
negotiate prices for certain single-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.
of 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.
2021
standing to challenge the Legislation's 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
violates the Religious Freedom Restoration Act. The government has appealed the
decision to the
efforts to challenge, replace or replace the Legislation or expand or
substantially amend its provision is unknown. See below in Sources of Revenues
and Health Care Reform for additional disclosure;
•
under the Legislation, hospitals are required to make public a list of their
standard charges, and effective
disclosure be in machine-readable format and include charges for all hospital
items and services and average charges for diagnosis-related groups. On
27, 2019
Hospitals to Make Standard Charges Public." This rule took effect on
2021
negotiated rates, minimum negotiated rates, maximum negotiated rates, and
discounted cash rates, 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
hospital price transparency policies and increasing the amount of penalties for
noncompliance through the use of a scaling factor based on hospital bed count.
On
shortened timeline for coming into compliance when a violation has been
identified and the automatic imposition of a civil monetary penalties in certain
circumstances of noncompliance;
•
as part of the CAA,
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
have issued interim 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
judge in the
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governing aspects of the Independent Dispute Resolution ("IDR") process. In
light of this decision, the government issued a final rule on
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
in the updated final rule and alleging that the final rule unlawfully elevates
the QPA above other factors the IDR entity must consider. On
federal judge vacated parts of the rule, including provisions related to
considerations of the QPA;
•
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
Kingdom
•
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;
•
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 and related expenses
resulting from a shortage of nurses, physicians 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;
•
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
greater, from each of
disproportionate share hospital ("DSH") payments in certain states including
reductions in Medicaid and other state-based revenue programs as well as
regulatory, economic, environmental and competitive changes in those states. On
published a proposed rule that would retroactively modify the Medicaid DSH
hospital payments and Medicaid waiver payments to hospitals for uncompensated
charity care ("UC") for the period to
implemented as proposed, THHSC's financial modeling estimates indicate this
proposed rule would reduce our annual Medicaid DSH and UC payments by
approximately
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
billion
bipartisan Congressional committee, known as the
Deficit Reduction
recommendations aimed at reducing future federal budget deficits by an
additional
an agreement by the
across-the-board cuts to discretionary, national defense and Medicare spending
were implemented on
to 2% per fiscal year with a uniform percentage reduction across all Medicare
programs. The Bipartisan Budget Act of 2015, enacted on
continued the 2% reductions to Medicare reimbursement imposed under the 2011
Act. Recent legislation suspended payment reductions through
in exchange for extended cuts through 2030. Subsequent legislation extended the
payment reduction suspension through
from then until
most recent legislation extended these reductions through 2032. We cannot
predict whether
reductions or what other federal budget deficit reduction initiatives may be
proposed by
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;
•
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
Union
formally starting negotiations regarding its exit from the
2020
cooperation agreement that created new business and security requirements and
preserved the
Union
applied as of
ratification by the
ultimately impact the business and regulatory environment in the
we cannot anticipate, could harm our business, financial condition and results
of operations;
•
in 2021, the rate of inflation in
since risen to levels not experienced in over 40 years. We are experiencing
inflationary pressures, primarily in personnel costs, and we anticipate
continuing 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 payers 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 and our ability to access the capital markets on
favorable terms. 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
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;
•
the impact of a shift of care from inpatient to lower cost outpatient settings
and controls designed to reduce inpatient services on our revenue, and;
•
other factors referenced herein or in our other filings with the
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
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forward-looking statements. Forward-looking statements speak only as of the date
the statements are made. We assume no obligation to publicly update any
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information, except as may be
required by law. All forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by this
cautionary statement.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies or
estimates from those disclosed in our 2022 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 which could materially impact our results of operations.
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 has strained 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, at times, 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, there have been occasions when we were unable to fill all
vacant positions and, consequently, we were required to limit patient volumes.
This staffing shortage could require us to further enhance wages and benefits to
recruit and retain nurses and other clinical staff and support personnel or
require us to hire expensive temporary personnel. We have also experienced cost
increases related to the procurement of medical supplies as well as certain of
our other operating expenses which we believe resulted from supply chain
disruptions as well as general inflationary pressures. These factors, which had
a material unfavorable impact on our results of operations during 2022, have
been moderating to a certain degree but 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
March 31, 2023 March 31, 2022
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 3,467,518 100.0 % $ 3,292,956 100.0 %
Operating charges:
Salaries, wages and benefits 1,753,335 50.6 % 1,692,270 51.4 %
Other operating expenses 878,951 25.3 % 820,934 24.9 %
Supplies expense 379,989 11.0 % 371,073 11.3 %
Depreciation and amortization 141,621 4.1 % 143,784 4.4 %
Lease and rental expense 34,922 1.0 % 32,038 1.0 %
Subtotal-operating expenses 3,188,818 92.0 % 3,060,099 92.9 %
Income from operations 278,700 8.0 % 232,857 7.1 %
Interest expense, net 50,876 1.5 % 21,673 0.7 %
Other (income) expense, net 13,723 0.4 % 11,201 0.3 %
Income before income taxes 214,101 6.2 % 199,983 6.1 %
Provision for income taxes 51,726 1.5 % 48,962 1.5 %
Net income 162,375 4.7 % 151,021 4.6 %
Less: Income (loss) attributable to
noncontrolling interests (740 ) (0.0 )% (2,892 ) (0.1 )%
Net income attributable to UHS $ 163,115 4.7 % $ 153,913 4.7 %
Net revenues increased by 5.3%, or
three-month period ended
first quarter of 2022. The net increase was primarily attributable to: (i) a
hospital services and behavioral health services operated during both periods
(which we refer to as "Same Facility"), and; (ii)
net decreases including
Hospital Medical Center
as previously disclosed, discontinued all inpatient operations during the first
quarter of 2023.
Income before income taxes (before income attributable to noncontrolling
interests) increased by
three-month period ended
first quarter of 2022. The
•
a decrease of
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, and;
•
Net income attributable to UHS increased by
during the three-month period ended
during the first quarter of 2022. This increase was attributable to:
•
a
•
a decrease of
noncontrolling interests, and;
•
a decrease of
taxes due primarily to the income tax expense recorded in connection with the
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.
30
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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 with
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-month periods ended
Three months ended Three months ended
March 31, 2023 March 31, 2022
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 1,889,080 100.0 % $ 1,824,697 100.0 %
Operating charges:
Salaries, wages and benefits 810,553 42.9 % 811,643 44.5 %
Other operating expenses 492,400 26.1 % 434,470 23.8 %
Supplies expense 316,256 16.7 % 310,082 17.0 %
Depreciation and amortization 86,927 4.6 % 91,764 5.0 %
Lease and rental expense 23,592 1.2 % 20,705 1.1 %
Subtotal-operating expenses 1,729,728 91.6 % 1,668,664 91.4 %
Income from operations 159,352 8.4 % 156,033 8.6 %
Interest expense, net (577 ) (0.0 )% 638 0.0 %
Other (income) expense, net 6,213 0.3 % 201 0.0 %
Income before income taxes $ 153,716 8.1 % $ 155,194 8.5 %
Three-month periods ended
During the three-month period ended
comparable prior year quarter, net revenues from our acute care hospital
services, on a Same Facility basis, increased by
before income taxes (and before income attributable to noncontrolling interests)
decreased by
revenues during the first quarter of 2023, as compared to
of net revenues during the first quarter of 2022.
During the three-month period ended
admission decreased by 7.5% while net revenue per adjusted patient day decreased
1.5%, as compared to the comparable quarter of 2022. During the first quarter of
2023, 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
first quarter of 2022, but only 4% of our inpatient admissions during the first
quarter of 2023. 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 were robust,
increasing by approximately 10% from the first quarter of 2022, there was a
continued shift from inpatient surgeries to outpatient surgeries, which further
contributed to the lower than expected revenues.
During the three-month period ended
comparable prior year quarter, inpatient admissions to our acute care hospitals
increased by 7.2% while adjusted admissions (adjusted for outpatient activity)
increased by 10.5%. Patient days at these facilities increased by 0.6% and
adjusted patient days increased by 3.7% during the three-month period ended
length of inpatient stay at these facilities was 5.1 days and 5.4 days during
the three-month periods ended
occupancy rate, based on the average available beds at these facilities, was 70%
and 69% during the three-month periods ended
respectively.
On a Same Facility basis during the three-month period ended
compared to the comparable quarter of 2022, salaries, wages and benefits expense
remained relatively unchanged as the higher labor costs due, in part, to the
healthcare labor shortage and utilization of higher-cost temporary labor and pay
premiums began to abate.
Other operating expenses increased
quarter of 2023, as compared to the comparable quarter of 2022. Operating
expenses, consisting primarily of medical costs incurred in connection with our
commercial health insurer, increased approximately
quarter of 2023 as compared to the comparable quarter of 2022. Excluding the
operating expenses incurred in connection with our commercial health insurer,
other operating expenses increased
increase during the first quarter of 2023, as compared to the first quarter of
2022, was a
Supplies expense increased
2023, as compared to the first quarter of 2022.
All Acute Care Hospitals
31
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The following table summarizes the results of operations for all our acute care
operations during the three-month periods ended
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.
Three months ended Three months ended
March 31, 2023 March 31, 2022
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 1,973,532 100.0 % $ 1,912,316 100.0 %
Operating charges:
Salaries, wages and benefits 843,960 42.8 % 843,906 44.1 %
Other operating expenses 544,300 27.6 % 482,078 25.2 %
Supplies expense 328,060 16.6 % 321,427 16.8 %
Depreciation and amortization 93,326 4.7 % 94,534 4.9 %
Lease and rental expense 24,154 1.2 % 20,852 1.1 %
Subtotal-operating expenses 1,833,800 92.9 % 1,762,797 92.2 %
Income from operations 139,732 7.1 % 149,519 7.8 %
Interest expense, net (577 ) (0.0 )% 638 0.0 %
Other (income) expense, net 7,013 0.4 % 201 0.0 %
Income before income taxes $ 133,296 6.8 % $ 148,680 7.8 %
Three-month periods ended
During the three-month period ended
comparable prior year quarter, net revenues from our acute care hospital
services increased by
increase in Same Facility revenues, as discussed above, and; (ii)
other combined decreases including
Springs, located in
operations during the first quarter of 2023, partially offset by revenues
generated at facilities and businesses opened or acquired during the past year,
including the revenues generated at a new, 170-bed acute care hospital located
in
Income before income taxes decreased by
6.8% of net revenues during the first quarter of 2023, as compared to
million
million
services resulted from the
taxes at our hospitals, on a Same Facility basis, as discussed above, and
million
losses incurred at Desert Springs, which discontinued inpatient operations
during the first quarter of 2023, and the new hospital located in
that opened in early April, 2022.
During the three-month period ended
comparable quarter of 2022, salaries, wages and benefits expense remained
relatively unchanged. Supplies expense increased
first quarter of 2023, as compared to the first quarter of 2022.
Other operating expenses increased
quarter of 2023, as compared to the comparable quarter of 2022. The increase was
due primarily to the
our acute care hospital services, on a Same Facility basis.
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-month periods ended
Uncompensated care:
Amounts in millions Three Months Ended
March 31, March 31,
2023 % 2022 %
Charity care $ 193 32 % $ 215 46 %
Uninsured discounts 418 68 % 255 54 %
Total uncompensated care $ 611 100 % $ 470 100 %
32
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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
March 31, March 31,
Amounts in millions 2023 2022
Estimated cost of providing charity care $ 19 $ 23
Estimated cost of providing uninsured discounts
related care 40 27
Estimated cost of providing uncompensated care $ 59 $ 50
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 with
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-month periods ended
in thousands):
Three months ended Three months ended
March 31, 2023 March 31, 2022
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 1,459,719 100.0 % $ 1,330,812 100.0 %
Operating charges:
Salaries, wages and benefits 805,946 55.2 % 746,160 56.1 %
Other operating expenses 277,369 19.0 % 268,548 20.2 %
Supplies expense 52,330 3.6 % 49,618 3.7 %
Depreciation and amortization 45,001 3.1 % 45,482 3.4 %
Lease and rental expense 10,582 0.7 % 10,261 0.8 %
Subtotal-operating expenses 1,191,228 81.6 % 1,120,069 84.2 %
Income from operations 268,491 18.4 % 210,743 15.8 %
Interest expense, net 1,078 0.1 % 1,227 0.1 %
Other (income) expense, net (576 ) (0.0 )% (115 ) (0.0 )%
Income before income taxes $ 267,989 18.4 % $ 209,631 15.8 %
Three-month periods ended
During the three-month period ended
comparable prior year quarter, net revenues from our behavioral health services,
on a Same Facility basis, increased by
income taxes (and before income attributable to noncontrolling interests)
increased by
revenues during the first quarter of 2023, as compared to
of net revenues during the first quarter of 2022.
During the three-month period ended
admission increased by 2.2% while net revenue per adjusted patient day increased
by 5.0%, as compared to the comparable quarter of 2022. During the three-month
period ended
inpatient admissions and adjusted admissions to our behavioral health care
hospitals each increased by 7.5%. Patient days at these facilities increased by
4.6% and adjusted patient days increased by 4.7% during the three-month period
ended
average length of
33
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inpatient stay at these facilities was 13.1 days and 13.4 days during the
three-month periods ended
rate, based on the average available beds at these facilities, was 73% and 70%
during the three-month periods ended
On a Same Facility basis during the three-month period ended
compared to the comparable quarter of 2022, salaries, wages and benefits expense
increased
compared to the first quarter of 2022, 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 first quarter of 2023 as compared to 56.1% during the first quarter
of 2022.
Other operating expenses increased
of 2023, as compared to the comparable quarter of 2022. Supplies expense
increased
the first quarter of 2022 due, in part, to increased patient volumes.
All Behavioral Health Care Facilities
The following table summarizes the results of operations for all our behavioral
health care services during the three-month periods ended
2022. 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
March 31, 2023 March 31, 2022
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 1,490,489 100.0 % $ 1,366,467 100.0 %
Operating charges:
Salaries, wages and benefits 809,786 54.3 % 753,886 55.2 %
Other operating expenses 305,232 20.5 % 298,467 21.8 %
Supplies expense 52,488 3.5 % 50,178 3.7 %
Depreciation and amortization 45,619 3.1 % 46,079 3.4 %
Lease and rental expense 10,668 0.7 % 10,820 0.8 %
Subtotal-operating expenses 1,223,793 82.1 % 1,159,430 84.8 %
Income from operations 266,696 17.9 % 207,037 15.2 %
Interest expense, net 1,211 0.1 % 1,365 0.1 %
Other (income) expense, net (871 ) (0.1 )% (115 ) (0.0 )%
Income before income taxes $ 266,356 17.9 % $ 205,787 15.1 %
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
17.9% of net revenues during the first quarter of 2023, as compared to
million
in income before income taxes at our behavioral health facilities during the
first quarter of 2023, as compared to the first quarter of 2022, was primarily
attributable to the
experienced at our behavioral health facilities, on a Same Facility basis, as
discussed above.
During the three-month period ended
comparable quarter of 2022, salaries, wages and benefits expense increased
million
Same Facility basis, as discussed above.
Other operating expenses increased
of 2023, as compared to the comparable quarter of 2022. Supplies expense
increased
the first quarter of 2022.
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.
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
34
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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 and
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.
On
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 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 2012
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,
including
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 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.
On
be unconstitutional in its entirety. The Court concluded that the Individual
Mandate is no longer permissible under
the Tax Cut and Jobs Act of 2017 ("TCJA") reducing the individual mandate's tax
to
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 the
Supreme Court
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, on
most 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
35
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violates the Religious Freedom Restoration Act. The government has appealed the
decision to the
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. While
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, effective
related to the obligation to obtain health insurance that was part of the
original Legislation. In addition,
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 individuals
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.
actions that will strengthen the Legislation and may 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 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 related
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.
36
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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 on
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 April, 2023, CMS published its IPPS 2023 proposed payment rule which provides
for a 2.8% 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 3.6%. Including DSH payments, an
increase to the Medicare Outlier threshold and certain other adjustments, we
estimate our overall increase from the proposed IPPS 2024 rule (covering the
period of
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
of
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.
In June, 2019, the
favorable to hospitals impacting prior year Medicare DSH payments (Azar v.
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 aforementioned Supreme 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
The 2011 Act included the imposition of annual spending limits for most federal
agencies and programs aimed at reducing budget deficits by
2012 and 2021, according to a report released by the
Office
Congressional committee, known as
developing recommendations aimed at reducing future federal budget deficits by
an additional
reach an agreement by the
across-the-board cuts to discretionary, national defense and Medicare spending
were implemented on
to 2% per fiscal year. Subsequent legislation has extended this sequestration
through 2032. The CARES Act, as amended,
37
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temporarily suspended or limited the application of this sequestration from
1, 2020
reduction thereafter.
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 April, 2023, CMS published its Psych PPS proposed rule for the federal fiscal
year 2024. Under this proposed rule, payments to our behavioral health care
hospitals and units are estimated to increase by 3.0% compared to federal fiscal
year 2023. This amount includes the effect of the 3.2% net market basket update
which reflects the offset of a 0.2% productivity adjustment.
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.
CMS's calendar year 2018 final OPPS rule, issued on
substantially reduced Medicare Part B reimbursement for 340B Program drugs paid
to hospitals. Beginning
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, the
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. On
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
2020 that were previously reserved in a prior year. These payment reductions
were challenged before the
Association
acquisition costs in 2018 and 2019, its decision to vary reimbursement rates
only for 340B hospitals in those years was unlawful. As a result of the
Court's
sales price plus 6% for 340B Program drugs, consistent with CMS policy for drugs
not acquired through the program. CMS further implemented a 3.09% reduction to
payment rates for non-drug services to achieve budget neutrality for the 340B
Program payment rate change for calendar year 2023. CMS will address the remedy
for 340B drug payments from 2018-2022 in future rulemaking prior to the calendar
year 2024 OPPS proposed rule.
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 the
Supreme Court decision in
applying the default rate, generally average sales price plus 6%, 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
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.
On
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 November, 2019, CMS finalized its Hospital Price Transparency rule that
implements certain requirements under the
Order related to Improving Price and Quality Transparency in
to Put Patients First. Under this final rule, effective
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. On
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.
38
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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
and
payments in certain states including, most significantly,
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, the Supreme 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.
On
in Medicaid, CHIP, and Medicaid/CHIP Managed Care plans. Together, the Access
NPRM and Managed Care NPRM ("Managed Care Rule") include new and updated
proposed requirements for states and managed care plans that would establish
consistent access standards, and a standardized approach to transparently review
and assess Medicaid payment rates across states. The Managed Care rule also
proposes standards to allow enrollees to easily compare plans based on quality
and access to providers through the state's website.
Importantly, the Managed Care Rule proposes several new requirements related to
Medicaid State Directed Payments. These proposed changes would include:
•
A broader requirement that states ensure each provider receiving a state
directed payment attest that it does not participate in any arrangement that
holds taxpayers harmless for the cost of a tax in violation of federal
requirements.
•
Requiring that provider payment levels for inpatient and outpatient hospital
services not exceed the average commercial rate.
•
Removing unnecessary regulatory barriers to help states use state directed
payments to implement value-based payment arrangements.
The Managed Care proposed rule, if implemented, could have a significant impact
on the means by which states finance the non-federal share of their Medicaid
programs. Under the proposal, CMS would have the ability to strike down common
financing arrangements such as a provider taxes. These changes could have
detrimental impacts on state Medicaid programs. If finalized as proposed, the
rule could potentially force states to raise taxes or cut their Medicaid
budgets. In subsequent years, it could have an unfavorable impact on Medicaid
beneficiaries by likely limiting access to providers and requiring states to
consider reductions to their Medicaid programs.
As disclosed herein, we receive a significant amount of Medicaid and Medicaid
managed care revenue from both base payments and supplemental payments. Although
we are unable to estimate the impact of the Managed Care Rule on our future
results of operations, if implemented as proposed, Managed Care Rule related
changes could have a material adverse impact on our future results of
operations.
39
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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.
Texas Uncompensated Care/Upper Payment Limit Payments:
Certain of our acute care hospitals located in various counties of
(
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.
On
2018
pools with modifications and new state specific reporting deadlines that if not
met by the
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 THHSC in accordance with Medicare cost report Worksheet S-10
principles. In
amount of
2019
30, 2027
UC pool will be resized again in 2027 for DYs 17 through 19 (
Waiver ten year expedited renewal approval that was effective through
30, 2030
to CMS which reflects the same terms and conditions agreed to by CMS on
15, 2021
22, 2022
1115 Waiver approved as extended and governed by the special terms and
conditions that CMS approved on
Effective
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. The
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. In
approval of an increase to UHRIP pool for the state's 2021 fiscal year to
billion
On
periods on or after
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
retroactive to
CHIRP program is reflected in the State Medicaid Supplemental Payment Program
Table below including approximately
which were recorded during the first quarter of 2022, attributable to the period
On
for the rate period effective
During 2022, certain of our acute care hospitals located in
aggregate of
to the period
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 also
anticipate that these hospitals may be entitled to a comparable amount of
aggregate QIF revenue during 2023.
On
Program: Hospital Augmented Reimbursement Program ("HARP") to be effective
providers
Incentive Payment program described below. The program will provide additional
funding to hospitals to help offset the cost hospitals incur while providing
Medicaid services. THHSC financial model released concurrent with the
publication of the final rule indicates net potential incremental Medicaid
reimbursements to us of approximately
consideration of any potential adverse impact on future Medicaid DSH or Medicaid
UC payments. This program remains subject to CMS approval.
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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. No revenues were recorded by us during either of the three-month
periods ended
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-month periods endedMarch 31, 2023 and 2022. 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 March 31, March 31, 2023 2022 Texas UC/UPL: Revenues$ 41 $ 66 Provider Taxes (15 ) (29 ) Net benefit$ 26 $ 37 Texas DSRIP: Revenues $ 0 $ 0 Provider Taxes 0 0 Net benefit $ 0 $ 0 Various other state programs: Revenues$ 121 $ 104 Provider Taxes (42 ) (42 ) Net benefit$ 79 $ 62
Total all Provider Tax programs:
Revenues$ 161 $ 170 Provider Taxes (57 ) (71 ) Net benefit$ 104 $ 99
We estimate that our aggregate net benefit from the
state Medicaid supplemental payment programs will approximate
of Provider Taxes of
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 2022 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 Consolidated Appropriations Act of 2023 ("CAA of 2023") provided for the
transitional reduction of the 6.2% enhanced FMAP during 2023 to 5.0% during the
second quarter, 2.5% during the third quarter and 1.5% during the fourth quarter
of 2023. The impact of the enhanced FMAP Medicaid supplemental and DSH payments
are reflected in our financial results for the three-month periods ended
31, 2023
this provision at this time as our financial impact is contingent on unknown
state action during future eligible federal fiscal quarters.
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.
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.
41
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Upon meeting certain conditions and serving a disproportionately high share of
in
reimbursement from each state's DSH fund. The
programs were renewed for each state's 2023 DSH fiscal year (covering the period
of
In connection with these DSH programs, included in our financial results was an
aggregate of approximately
periods ended
payment methodology changes in
expect the aggregate reimbursements to our hospitals pursuant to the
However, on
retroactively modify both the Medicaid DSH and Medicaid UC payment methodologies
for the period of
proposed, THHSC financial modeling estimates indicate this proposed rule would
reduce our annual Medicaid DSH and Medicaid UC payments by approximately
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 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 in
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 in
approximately 65% and 41%, respectively, from 2022 DSH payment levels.
Our behavioral health care facilities in
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 to
Azar ("CHAT") where the calculation of HSL was being challenged. In August,
2019,
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. In
the case have petitioned the
case. Additionally, there have been separate legal challenges on this same issue
in the Fifth and Eight Circuits. On
Azar, the
opinion upholding the 2017 Rule. On
v. Azar, the
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 in
million
Nevada SPA and SDP:
State Plan Amendment ("SPA")
CMS initially approved an SPA in
approved for additional state fiscal years, including the 2023 fiscal year
covering the period of
In connection with this program, included in our financial results for the
three-month periods ended
and
this program will approximate
2023
State Directed Payment Program ("SDP")
On
held a public workshop that outlined a new provider fee on private hospitals
located in
certain categories of services eligible for the new payment programs. Final
approval of each of these Medicaid supplemental payment programs is subject to
various state and federal actions. If ultimately approved, DHCFP intends to have
both components implemented retroactively to
DHCFP indicated the new Medicaid supplemental payments will include two
components as follows:
•
Medicaid fee for service upper payment limit component.
42
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o
We anticipate state and federal approval of the fee for service upper payment
limit component to occur during 2023. If approved, we estimate that our
aggregate net reimbursements pursuant to this program (net of related provider
taxes) will approximate
(which we expect to record during the fourth quarter of 2023).
•
Medicaid managed care component.
o
We cannot predict whether or not the managed care component will ultimately
receive state and federal approval. If approved, we cannot predict the timing or
amount of aggregate net reimbursements, which could be material, that we may
receive in connection with this program.
California SPA:
In
programs consisting of three components Fee For Service Payment, Managed
Care-Pass-Through Payment and Managed Care-Directed Payment. The non-federal
share for these programs are financed by a statewide provider tax.
The Directed Payment method will be based on actual concurrent hospital Medicaid
managed care in-network patient volume whereas the other programs are based on
prior year Medicaid utilization. The CMS program approval status is outlined in
the table below.
California Hospital Fee Program CMS Approval Status:
Hospital Fee Program CMS Methodology Approval CMS Rate Setting Approval
Component Status Status
Fee For Service Payment Approved through Approved through
December 31, 2022 2021; Paid through September
30, 2022
Managed Care-Pass-Through Approved through Approved through December 31,
Payment December 31, 2022 2020; Paid in advance of
approval through December 31,
2021
Managed Care-Directed Approved through Approved through December 31,
Payment December 31, 2022 2020; Paid in advance of
approval through June 30, 2021
In connection with the existing program, included in our financial results was
approximately
pursuant to this program will approximate
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"). Included in our financial results during the
three-month periods ended
and
Programs such as HRIP require an annual state submission and approval by CMS. In
February, 2023,, CMS approved the program for the period of
through
that our reimbursements pursuant to HRIP will approximate
year ended
Florida Medicaid Managed Care Directed Payment Program ("DPP"):
The Florida DPP provides for an additional payment for Medicaid managed care
contracted services. The DPP requires various related legislative and regulatory
approvals each year. We did not record any revenues in connection with this
program during the three-month periods ended
that our reimbursements pursuant to this DPP will approximate
the year ended
Oklahoma Transition to Managed Care and Implementation of a Medicaid Managed
Care DPP
In May, 2022,
the
program from a fee for service payment model to a managed care payment model by
no later than
managed care DPP using a managed care gap of ninety percent (90%) average
commercial rates. In December, 2022, the OHCA delayed the implementation date of
the Medicaid managed care change and related DPP until
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.
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Illinois Medicaid Supplemental Payment Programs
The Illinois Medicaid Supplemental Payment Programs are comprised of three
components: (1) Medicaid managed care directed payment program; (2) Medicaid
managed care pass-through program, and; (3) Medicaid fee for service
supplemental payment program. The results of this program are included in the
above State Medicaid Supplemental Payment Program table. These programs require
various related legislative and regulatory approvals each year.
In connection with this program, included in our financial results during the
three-month periods ended
and
these supplemental payment programs will approximate
ended
Idaho Medicaid Upper Payment Limit ("UPL") Program
During the first quarter of 2023,
the period
the amount of the UPL pool size. As a result of this UPL program change, we
recorded approximately
three-month period ended
related to the prior year. We anticipate that future UPL program payments will
be made at comparable levels. We estimate that our revenues pursuant to this UPL
program will approximate
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,
and
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.
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
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.
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
44
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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
Labor
Management
"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
District
Independent Dispute Resolution ("IDR") process. In light of this decision, the
government issued a final rule on
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
Association
final rule and alleging that the final rule unlawfully elevates the QPA above
other factors the IDR entity must consider. The
and
as amici supporting the
instructed certified IDR entities to hold all payment determinations until
further guidance is issued by the departments of Health & Human Services, Labor,
and
vacated the federal government's revised IDR process for determining payment for
out-of-network services under the No Surprises Act. Certified IDR entities have
also been instructed to recall any payment determinations issued after
6, 2023
rule to have a material impact on our results of operations.
Other Sources: Our hospitals provide services to individuals that do not have
any form of health care coverage. Such patients are evaluated, at the time of
service or shortly thereafter, for their ability to pay based upon federal and
state poverty guidelines, qualifications for Medicaid or other state assistance
programs, as well as our local hospitals' indigent and charity care policy.
Patients without health care coverage
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.
Medicaid Federal DSH Allotment:
Although the implementation has been delayed several times, the Legislation (as
amended by subsequent federal legislation) requires annual aggregate reductions
in federal Medicaid DSH allotment from FFY 2024 through FFY 2027. Commencing in
federal fiscal year 2024, and continuing through 2027, DSH payments are
scheduled to be reduced by
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 on
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 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
45
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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,
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
general, requires ACO participants to take on additional risk associated with
participation in the program. On
rule with comment in response to the COVID-19 national emergency permitting ACOs
with current agreement periods expiring on
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, on
emergency was declared. The declaration empowered the HHS Secretary to waive
certain Medicare, Medicaid and
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
states and
signed into law on
the 6.2% enhanced FMAP during 2023 to 5.0% during the second quarter, 2.5%
during the third quarter and 1.5% during the fourth quarter of 2023.
•
Effective
renewals, post-enrollment verifications, and redeterminations over a 12-month
period for all individuals
1, 2023
of the enhanced FMAP during the PHE. This Medicaid enrollment related activity
is likely to reduce Medicaid beneficiary enrollment. In the states
46
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in which we operate, we cannot predict the extent to which disenrolled Medicaid
beneficiaries will be able to replace their Medicaid coverage with
employer-based insurance coverage or via coverage obtained through the ACA
Health Insurance Exchange. We are therefore unable to estimate the impact of
this Medicaid enrollment activity on our results of operations.
Public Health Emergency Declaration
•
The HHS Secretary renewed the PHE effective
result, certain Medicare payment provisions contingent on the PHE are extended
including the twenty percent (20%) Medicare add-on for inpatient hospital
COVID-19 patients noted below. However, HHS has published guidance indicating
its intent for the PHE to expire on
loss of any such favorable payment provisions available to providers during the
declared PHE will ultimately have a negative financial impact on us.
Reimburse hospitals at Medicare rates for uncompensated COVID-19 care for the
uninsured
•
Our financial results for the quarter ended
uninsured program. No revenue was recorded in the quarter ended
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
and Coverage Assistance Fund
funding.
Medicare Sequestration Relief
•
Suspension of the 2% Medicare sequestration offset for Medicare services
provided from
extensions. In December, 2021, the suspended 2% payment reduction was extended
until
additional three-month period that ended on
full 2% Medicare payment reduction thereafter.
•
Our financial results for the three-month period ended
include any revenues related to the Medicare Sequestration Relief. Our financial
results for the three-month period ended
relief program.
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 for the quarters ended
approximately
connection with the COVID-19 Medicare add-on program. These payments were
intended to offset the increased expenses associated with the treatment of
Medicare COVID-19 patients.
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 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.
47
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Other Operating Results
Interest Expense:
As reflected on the schedule below, interest expense was
million
respectively (amounts in thousands):
Three Months Three Months
Ended Ended
March 31, March 31,
2023 2022
Revolving credit & demand notes (a.) $ 5,627 $ 2,335
Tranche A term loan facility (a.) 36,062 6,026
$800 million , 2.65% Senior Notes due 2030 (b.) 5,356 5,356
$700 million , 1.65% Senior Notes due 2026 (c.) 2,932 2,932
$500 million , 2.65% Senior Notes due 2032 (d.) 3,345 3,345
Accounts receivable securitization program (e.) - 10
Subtotal-revolving credit, demand notes, Senior Notes,
term loan facilities and accounts receivable
securitization program 53,322 20,004 Amortization of financing fees 1,258 1,105 Other combined interest expense 435 1,905 Capitalized interest on major projects (4,009 ) (1,328 ) Interest income (130 ) (13 ) Interest expense, net$ 50,876 $ 21,673 (a.)
As of
provided for the following:
•
a
mature in August, 2026 (which, as of
aggregate available borrowing capacity net of
borrowings and
•
a tranche A term loan facility with
of
amendment in June, 2022).
(b.)
In September, 2020 we completed the offering of
amount of 2.65% Senior Notes due in 2030.
(c.)
In August, 2021 we completed the offering of
amount of 1.65% Senior Notes due in 2026.
(d.)
In August, 2021 we completed the offering of
amount of 2.65% Senior Notes due in 2032.
(e.)
The accounts receivable securitization program expired on its maturity date in
December, 2022 and was not renewed or replaced.
Interest expense increased approximately
three-month period ended
ended
increase in aggregate interest expense on our revolving credit, demand notes,
senior notes, term loan facilities and accounts receivable securitization
program (as applicable), resulting from an increase in our aggregate average
cost of borrowings pursuant to these facilities (4.6% during 2023 as compared to
1.9% during 2022), as well as an increase in the aggregate average outstanding
borrowings pursuant to these facilities (
to
decrease in other combined interest expenses, including a
capitalized interest on major projects . The average effective interest rates,
including amortization of deferred financing costs and original issue discount,
on borrowings outstanding under our revolving credit, demand notes, senior
notes, term loan A facility and accounts receivable securitization program (as
applicable), which amounted to approximately
during the first quarters of 2023 and 2022, respectively, were 4.7% and 2.0%
during the three-month periods ended
Provision for Income Taxes and Effective Tax Rates:
The effective tax rates, as calculated by dividing the provision for income
taxes by income before income taxes, were as follows for the three-month periods
ended
48
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Three months ended
March 31, March 31,
2023 2022
Provision for income taxes $ 51,726 $ 48,962
Income before income taxes 214,101 199,983
Effective tax rate 24.2 % 24.5 %
The provision for income taxes increased
period ended
primarily to the income tax expense recorded in connection with the
increase in pre-tax income.
Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was
three-month period ended
months of 2022. The net decrease of
following:
•
an unfavorable change of
primarily to the timing of disbursements for accrued compensation and accounts
payable;
•
a favorable change of
commercial premiums paid and payments made in settlement of self-insured claims;
•
a favorable change of
depreciation and amortization expense, stock-based compensation expense and
gain/loss on sale of assets and businesses, and;
•
Days sales outstanding ("DSO"): Our DSO are calculated by dividing our net
revenue by the number of days in the three-month periods. The result is divided
into the accounts receivable balance at
DSO. Our DSO were 53 days and 48 days at
The increase in our DSO at
due, in part, to an increase in receivables at the new acute care hospital
located in
Net cash used in investing activities
During the first three months of 2023, we used
investing activities as follows:
•
equipment, renovations and new projects at various existing facilities;
•
contracts that hedge our investment in the
rates, and;
•
During the first three months of 2022, we used
investing activities as follows:
•
equipment, renovations and new projects at various existing facilities;
•
contracts that hedge our investment in the
rates, and;
•
Net cash used in financing activities
During the first three months of 2023, we used
financing activities as follows:
•
spent
with: (i) open market purchases pursuant to our stock repurchase program (
million
compensation programs (
•
spent
to our tranche A term loan facility, and; (ii)
facilities;
•
spent
•
generated
facility;
49
--------------------------------------------------------------------------------
•
spent
in majority owned businesses, and;
•
generated
pursuant to the terms of employee stock purchase plans.
During the first three months of 2022, we used
financing activities as follows:
•
spent
connection with: (i) open market purchases pursuant to our stock repurchase
program (
stock-based compensation programs (
•
generated
facility;
•
spent
to our tranche A term loan facility, and; (ii)
facilities;
•
spent
•
spent
in majority owned businesses;
•
generated
pursuant to the terms of employee stock purchase plans, and;
•
spent
minority members.
Expected capital expenditures during remainder of 2023
During the full year of 2023, we expect to spend approximately
equipment, construction of new facilities, and renovations and expansions at
existing hospitals. During the first three months of 2023, we spent
approximately
months of 2023, we expect to spend approximately
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 of
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, and
(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
(which bear interest by reference to the LIBO 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.
As of
•
a
mature in August, 2026 (which, as of
aggregate available borrowing capacity net of
borrowings and
•
a tranche A term loan facility with
of
amendment in June, 2022).
The tranche A term loan facility provides for installment payments of
million
2023, and
June, 2026. The unpaid principal balance at
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
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
Credit Agreement is secured by certain assets of the Company and our material
subsidiaries (which generally excludes asset classes
50
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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
2022
On
qualified institutional buyers under Rule 144A and to non-
as amended:
•
Issued
due on
•
Issued
due on
On
5.00% senior secured notes, that were scheduled to mature on
102.50% of the aggregate principal, or
As of
the following senior secured notes:
•
September, 2026 ("2026 Notes") which were issued on
•
October, 2030 ("2030 Notes") which were issued on
•
January, 2032 ("2032 Notes") which were issued on
Interest on the 2026 Notes is payable on
maturity date of
Interest on the 2032 Notes is payable on
maturity date of
The 2026 Notes, 2030 Notes and 2032 Notes (collectively "The Notes") were
initially issued only to qualified institutional buyers under Rule 144A and to
non-
Securities Act of 1933, as amended (the "Securities Act"). In December, 2022, we
completed a registered exchange offer in which virtually all previously
outstanding Notes were exchanged for identical Notes that were registered under
the Securities Act, and thereby became freely transferable (subject to certain
restrictions applicable to affiliates and broker dealers). Notes originally
issued under Rule 144A or Regulation S that were not exchanged in the exchange
offer remain outstanding and may not be offered or sold in
absent registration under the Securities Act or an applicable exemption from
registration requirements thereunder.
The Notes are guaranteed (the "Guarantees") on a senior secured basis by all of
our existing and future direct and indirect 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 Indenture pursuant to which The Notes were issued (the
"Indenture")), 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 Indenture, 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.
On its December, 2022 maturity date, our
securitization program expired and was not renewed or replaced.
As discussed in Note 2 to the Consolidated Financial Statements-Relationship
with Universal Health Realty Income Trust and Other Related Party Transactions,
on
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 of
transaction,
51
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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 on
of our purchase option within the
asset purchase and sale transaction is accounted for as a failed sale leaseback
in accordance with
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 transaction, our Consolidated Balance Sheets at
2023
debt, of approximately
At
approximately
the carrying value and fair value of our debt were approximately
and
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 44% 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
of available borrowing capacity as of
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
The 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.
52
--------------------------------------------------------------------------------
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.
Basis of Presentation
The following tables include summarized financial information of
Health Services, Inc.
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 by
(in thousands) March 31, 2023 December 31, 2022 Current assets $ 2,077,032 $ 2,062,900 Noncurrent assets (1) 8,787,435 8,773,036 Current liabilities 1,626,494 1,686,005 Noncurrent liabilities 5,610,263 5,587,141 Due to non-guarantors 926,531 942,731
(1) Includes goodwill of
31, 2022
The summarized results of operations information for the consolidated obligor group of debt issued byUniversal Health Services, Inc. is presented in the table below: Three Months Ended Twelve Months Ended (in thousands) March 31, 2023 December 31, 2022 Net revenues $ 2,819,290 $ 10,853,259 Operating charges 2,545,238 9,947,778 Interest expense, net 52,127 193,486 Other (income) expense, net 12,691 7,487 Net income $ 150,615 $ 532,047
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 of
53
--------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
During the three months ended
in the off-balance sheet arrangements consisting of standby letters of credit
and surety bonds.
As of
consisting of standby letters of credit and surety bonds which totaled
million
and; (ii)
Brighthouse Financial Announces First Quarter 2023 Results
BWX TECHNOLOGIES, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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