UNIVERSAL HEALTH SERVICES, INC.
OUR PATIENTS ALWAYS COME FIRST
2017 ANNUAL REPORT
Universal Health Services, Inc. (UHS)
At UHS, superior quality patient care is our top priority. Our continued growth
and development are testament to the positive impact we have on the patients and
communities we are privileged to serve.
Hospitals and affiliated healthcare facilities continue to be key focal points of the
healthcare delivery system. We focus on strategic growth through expansions, de novo
builds, acquisitions and joint venture partnerships.
OUR MISSION
To provide superior quality healthcare services that:
Patients recommend to family and friends,
Physicians prefer for their patients,
Purchasers select for their clients,
Employees are proud of, and
Investors seek for long-term returns.
2017 Highlights
2.6
MILLION
TOTAL PATIENTS
SERVED
$558
MILLION
INVESTMENT IN
EQUIPMENT, FACILITY
EXPANSIONS AND
RENOVATIONS
ACUTE CARE
300,000
patient admissions
1.3 million
patient days
1.2 million
outpatient visits
33,435 births
5 Accountable
Care Organizations
(ACOs)
BEHAVIORAL
HEALTH
468,000
inpatients served
6.4 million
patient days
24 facilities
offering Patriot
Support Programs
465 inpatient beds
added to existing
facilities
F I N A N C I A L H I G H L I G H T S
Year Ended December 31
2017
2016
Percentage
Increase
2015
Net revenues
$10,409,865,000
$9,766,210,000
7%
$9,043,451,000
Adjusted net income
attributable to UHS (1)
$725,459,000
$720,239,000
Adjusted diluted earnings per share
attributable to UHS (1)
$7.53
$7.32
1%
3%
$692,047,000
$6.87
Year Ended December 31
2017
2016
Patient days
Admissions
Average number of licensed beds
7,694,021
7,255,577
765,212
29,278
730,126
27,763
Percentage
Increase
6%
5%
5%
2015
7,054,125
708,734
27,034
(1) Calculation of Adjusted Net
Income Attributable to UHS
(in thousands except per share amounts)
2017
2016
2015
2014
Amount
Per
Diluted Share
Amount
Per
Diluted Share
Amount
Per
Diluted Share
Amount
Per
Diluted Share
Net income attributable to UHS
Other combined adjustments
$752,303
(26,844)
$7.81
(0.28)
$702,409
17,830
$7.14
0.18
$680,528
11,519
$6.76
0.11
$545,343 $5.42
0.36
36,410
Adjusted net income attributable to UHS $725,459
$7.53
$720,239
$7.32
$692,047
$6.87
$581,753 $5.78
The “Other combined adjustments” neutralize the effect of items in each year that are nonrecurring or non-operational in nature including items such as: the cost incurred and
incentive income recorded in connection with the implementation of electronic health records applications; adjustments to our reserves relating to prior years for self-insured
professional & general liability and workers’ compensation claims; gains and losses on sales of assets and businesses; reserves for settlements and legal judgments, and; other
amounts that may be reflected in a given year that relate to prior years. Since “adjusted net income attributable to UHS” is not computed in accordance with generally accepted
accounting principles (“GAAP”), investors are encouraged to use GAAP measures when evaluating our financial performance. To obtain a complete understanding of our financial
performance the information provided above should be examined in connection with our consolidated financial statements and notes thereto, as contained in this report.
Net revenues
(in millions)
0
1
4
0
1
$
,
6
6
7
9
$
,
,
3
4
0
9
5 $
0
2
8
$
,
Adjusted net income per
diluted share attributable
to UHS (1)
Hospital patient days
(in thousands)
.
2
3
7
7 $
8
6
$
.
3
5
7
$
.
4
9
6
7
,
6
5
2
7
,
4
5
0
7
,
6
8
6
6
,
.
8
7
5
$
14
15
16
17
14
15
16
17
14
15
16
17
2 0 1 7 A N N U A L R E P O R T 3
L E T T E R T O O U R S H A R E H O L D E R S
2017 marked another year of solid performance.
In spite of volatile market conditions, we remained
steadfast, made prudent investments and delivered the
kind of care our patients need and expect of us, each
and every day – across all the markets we serve.
For nearly 40 years, Universal Health Services (NYSE: UHS)
has been recognized as a leader in the healthcare management
industry. National, state and local organizations continue to
honor UHS employees and facilities for achieving high outcome
clinical measures and quality metrics, and for our commitment
to community service.
I am proud that UHS has again been recognized
UHS personnel and facilities also supported areas
as one of the ‘World’s Most Admired Companies’
impacted by national disasters during a record
by Fortune magazine, that we rank #276 on
hurricane season with major storms hitting Texas,
the Fortune 500 list, and that UHS made Forbes’
Florida, Puerto Rico, and other islands in the Gulf
inaugural list of America’s Top 500 Public
of Mexico. Once again, members of the UHS team
Companies. Our consistent recognition is testament
met the challenge of providing care and saving
to the tremendous work done every day by our
lives in very challenging environments.
83,000 employees and their commitment to
exceptional patient care – treating the mental
and physical health of our patients.
With a strong portfolio focusing on physical
health, mental health, an insurance offering, a
physician network, and various related service
offerings – and a partnership strategy that aligns
BEHAVIORAL HEALTH DIVISION –
MORE CARE FOR MORE PATIENTS
Today, we operate nearly 300 behavioral health
facilities in 37 states, the District of Columbia,
Puerto Rico, the U.S. Virgin Islands and the
United Kingdom.
us with other leaders in our markets – we are
During the past year, the Behavioral Health
well-poised for continued growth.
2017 – SERVING PATIENTS IN THE
AFTERMATH OF VIOLENCE
Division continued to expand the delivery of care
nationally and internationally – providing more
services to more patients. The cornerstone of our
growth is our ability to identify and execute on
UHS was in a unique position to respond to the
strategic opportunities.
critical needs of the communities we serve across
the nation. In June, the George Washington
University Hospital delivered aid in the aftermath
of the ambush at the congressional baseball
practice. In early October, our healthcare
professionals at the six Las Vegas area UHS
hospitals provided life-saving care to those injured
during the worst mass shooting in U.S. history.
We responded heroically in treating and caring
for a total of 232 patients who arrived in our
emergency departments.
In the U.K., we received a favorable regulatory
decision from the Competition and Markets
Authority review of the Cambian Adult Services
acquisition. We immediately initiated the process
of fully integrating the newly acquired facilities
under Cygnet Health Care, hereby becoming one
of the largest providers in the U.K. With a total of
108 facilities, including a brand new 56-bed facility
in Coventry, we offer a full spectrum of behavioral
health services and capabilities.
4 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
In the U.S., the Behavioral Health Division
We increased the accessibility and expanded
added 471 inpatient psychiatric beds via
the delivery of emergency care services in a
expansions, acquisition and new construction in
number of our markets with a turnkey design and
2017. Looking ahead to 2018, we are particularly
construction model for Freestanding Emergency
proud of the joint venture partnerships with the
Departments, which are separate entities yet
University of Pennsylvania and with Providence
strategically affiliated with our nearby full-
Health, for which new hospitals are currently
service hospitals.
under construction in Lancaster, Pennsylvania,
and Spokane, Washington, respectively.
POISED FOR CONTINUED SUCCESS
UHS’ leadership team and I are confident that
the company is well-positioned to continue to
deliver superior quality patient care, attract and
retain talented healthcare professionals as an
employer of choice and contribute meaningfully
to our local communities.
By focusing on our core strategies and initiatives,
remaining adaptable and meeting the needs of
our constituents, we look forward to continued
success in 2018 and in the future.
Sincerely,
Alan B. Miller
Chairman of the Board
Chief Executive Officer
Lastly, UHS proudly demonstrates its commitment
to members of the military and their families
through its Patriot Support Program, which
treated 6,500 individuals in 2017. We are very
proud to offer this Program as a national network
of now 24 behavioral treatment centers across
13 states dedicated to treating active military,
veterans and their families to help them cope
with the emotional and psychological effects of
combat and related triggers. They deserve all
that our professionals can offer.
ACUTE CARE DIVISION –
GROWTH AND EXPANSIONS
Our Acute Care results are strong – and our
trajectory is healthy. Of particular note, we led
the industry in our admissions growth, meaning
that more patients and more physicians are
choosing UHS hospitals.
2017 saw expansions in a number of our facilities
and the growth continues. For example, since
the opening of Temecula Valley Hospital in
October of 2013 the growth in patient volume has
been remarkable. As a result, the hospital is now
in the midst of a $40 million expansion project to
include additional operating rooms, cath labs, and
additional radiological imaging systems that will
allow the hospital to continue to meet the growing
demand in the community. This project is expected
to be completed and operational by Q3, 2018.
And in Southern California at Corona Regional
Medical Center, we are investing $38 million to add
15,000 square feet of space, a total of 30 new
treatment beds.
2 0 1 7 A N N U A L R E P O R T 5
AK
WA
OR
ID
MT
WY
NV
CA
UT
CO
AZ
NM
UNIVERSAL
HEALTH SERVICES, INC.
FACILITIES
ACUTE CARE HOSPITALS
AMBULATORY CENTERS
BEHAVIORAL HEALTH
FACILITIES
FREESTANDING EMERGENCY
DEPARTMENTS
URGENT CARE CENTERS
350+
37 STATES
PLUS WASHINGTON, D.C., UNITED KINGDOM,
PUERTO RICO AND U.S. VIRGIN ISLANDS
83,000+
EMPLOYEES
For a full state-by-state list of
facilities, please visit our website:
www.uhsinc.com
UHS is a registered trademark of UHS of Delaware, Inc., the management company for Universal Health
Services, Inc. and a wholly owned subsidiary of Universal Health Services. Universal Health Services, Inc.
is a holding company and operates through its subsidiaries including its management company, UHS of
Delaware, Inc. All healthcare and management operations are conducted by subsidiaries of Universal Health
Services, Inc. Any reference to “UHS or UHS facilities” including any statements, articles or other publications
contained herein which relates to healthcare or management operations is referring to Universal Health
Services’ subsidiaries including UHS of Delaware. Further, the terms “we,” “us,” “our” or “the company” in
such context similarly refer to the operations of Universal Health Services’ subsidiaries including UHS of
Delaware. Any reference to employment at UHS or employees of UHS refers to employment with one of the
subsidiaries of Universal Health Services, Inc., including its management company, UHS of Delaware, Inc.
“UHS Facilities” refers to subsidiaries of Universal Health Services, Inc.
6 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
ND
SD
NE
MN
IA
KS
MO
OK
AR
TX
LA
Acute Care Hospitals
Ambulatory Centers
Behavioral Health Facilities
Freestanding Emergency Departments
Universal Health Services, Inc.
Corporate Headquarters
ME
VT
NH
UNITED
KINGDOM
WI
MI
NY
MA
CT
RI
IN
OH
IL
PA
MD
WV
VA
NC
KY
TN
NJ
DE
DC
SC
GA
MS
AL
FL
PUERTO RICO
U.S. VIRGIN ISLANDS
INDEX
Acute Care Division
8-15
Behavioral Health
Division
16-23
Form 10K
10K: 1-129
Directory of Facilities
10K: 25-33
Corporate Information/
Officers and Senior
Management
130
Board of Directors
2 0 1 7 A N N U A L R E P O R T 7
U H S A C U T E C A R E D I V I S I O N
Vegas Strong: On October 1, The Valley Health System team responded to the deadliest mass
shooting in the country. A majority of the injured were taken to The Valley Health System
emergency rooms and staff rallied to assist in our hospitals and at the shooting location.
8 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
UHS ACUTE CARE
DIVISION
We make patients our first priority
and deliver superior care; we exceed
expectations, improve the patient
experience and save lives.
THE POWER OF UHS PEOPLE
Every day we experience the power and commitment of
our team … our nurses, physicians, clinicians, staff and volunteers.
These are the heroes who serve patients, assisting them on
their care journey and ultimately helping them lead better,
healthier lives.
In 2017, the U.S. experienced several tragic events including
natural disasters such as the devastating weather events
and large-scale violence in Washington, D.C. and Las Vegas
that killed and injured many people. Through it all, our employees
met the challenge, as they always do. Tragic events like these
bring out the character of people and organizations. Our UHS
team stepped up, demonstrating what it means to make
healthcare personal.
In Las Vegas, our team cared for 232 victims – and we are
pleased to report that every patient who came to one of our six
Las Vegas hospitals alive, stayed alive thanks to the dedication,
skill and quick response by our clinical teams and staff.
In Florida, our teams managed through the hurricanes and
provided support to others in need. During the storms, our
staff maintained operations, ensuring safety and continuity of
patient care amid very challenging circumstances.
2 0 1 7 A N N U A L R E P O R T 9
U H S A C U T E C A R E D I V I S I O N
Matt Mika with,
from left, Dr. Libby
Schroeder, his trauma
surgeon; Kristi Boswell,
his girlfriend; and
Ashley Speights
O’Neill, his physical
therapist, at the George
Washington University
Hospital’s annual
Trauma Survivors Day
in November.
Photo credit: Justin
Gilliland for The New
York Times
PATIENT-CENTERED SUPERIOR
CARE AND SERVICE EXCELLENCE:
INTEGRATED DELIVERY NETWORK
IN KEY MARKETS
Our Ambulatory centers offer same-day
medical procedures in an outpatient setting.
Our Independence Physician Management
team works every day to enhance physician
The Acute Care Division operates 26 hospitals
relationships that lead to improved
across the U.S., providing superior care to
outcomes.
In addition, we have key behavioral health
facilities that offer a full range of treatment
and care services that address the mental
health needs of the community.
Prominence Health Plan serves over
40,000 members, providing fully insured
and self-funded commercial insurance, plus
Medicare Advantage coverage. We also have
our CentRX Pharmacy locations providing
bedside delivery of medication and services
to patients.
two million patients annually. With portfolio
expansion and partnerships, we are becoming
much more than a hospital provider but rather
an integrated delivery network.
An example is our integrated delivery
system serving communities in the Las
Vegas region. We have six acute care
facilities that deliver superior care and
outcomes. Of note, in 2017, our newest
facility – Henderson Hospital – completed
its first full year of operation. Further, our
Freestanding Emergency Departments
(also known as FEDs) provide additional,
conveniently located access points for
people when they require immediate
medical attention.
1 0 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
In addition, we offer in-home nursing and
As a hospital company that is transforming
therapy for patients who need access to
to an integrated delivery network, we are a
a full range of medical services including
vital part of an industry that is constantly
wound care, cardiac care and respiratory
advancing toward population health.
care, among many others. Plus, our bariatric
care center provides weight-loss surgery
options and post-care to help people
achieve their personal goals. Finally, we
have our medical office complexes nearby
empowering patients with wellness and
education, and providing well-integrated
and highly efficient care.
This is a powerful depiction of the integrated
delivery network in place in this market,
which is meeting the healthcare needs of
patients in the area. We have varying levels
of integration in other regions across the
U.S. including Florida, Texas and Southern
California.
EXCEPTIONAL AND INNOVATIVE
MEDICAL CARE
In 2017, we were honored to be part
of Jonathan Koch’s compelling story
of devastating illness – and remarkable
recovery. Jonathan received care from our
team at the George Washington University
Hospital for a life-threatening and mysterious
illness. Jonathan’s story, his optimistic
outlook and fighting spirit captured the
attention of all. His determination to live
was remarkable. We are honored to have
cared for him.
Jonathan Koch and his wife
Jennifer thank the staff at the
George Washington University
Hospital in Washington, D.C., for
identifying and treating a rare
and life-threatening immune
disorder, HLH (hemophagocytic
lymphohistiocytosis). Jonathan,
a TV producer from Los
Angeles, credited the team
with saving his life. His story
appeared on ABC’s 20/20
in August.
2 0 1 7 A N N U A L R E P O R T 1 1
U H S A C U T E C A R E D I V I S I O N
At Manatee Memorial Hospital, advanced
Left untreated, the condition would have
cardiac diagnostic and interventional
led to the death of the second twin. We are
capabilities are now available including
very pleased to report that the twins have
Watchman, a Left Atrial Appendage Closure
since been successfully delivered and are
(LAAC) Implant, Transcatheter Aortic Valve
both healthy.
In addition to leading-edge medical
technology, our facilities were also
recognized for superior patient outcomes.
A YEAR OF DYNAMIC GROWTH
AND EXPANSION
2017 proved to be another year of
dynamic growth and expansion for the
Acute Care Division. Adjusted admissions
were up 8 percent; surgeries were up 3
percent; and net revenue was up 7 percent.
These represent industry-leading figures.
Replacement (TAVR), and Mitra Clip, used to
address inoperative mitral valve regurgitation
that occurs as a result of degenerative
changes to the mitral valve. Manatee
Memorial is recognized as the ninth most
active program in the nation.
Fetal surgery is a highly specialized arena
provided in a limited number of hospitals
across the US. In late 2017, a world-
renowned Fetal Medicine Specialist on
Wellington Regional Medical Center’s Medical
Staff successfully performed a procedure
to correct a case of twin-to-twin transfusion
in a mother who traveled from Maryland to
Florida for the procedure.
Delivering exceptional and innovative medical care: In
late 2017, a world-renowned Fetal Medicine Specialist on
staff at Wellington Regional Medical Center successfully
performed a procedure to correct a case of twin-to-twin
transfusion. The twins were successfully delivered in a
Maryland hospital and are making excellent progress.
1 2 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
At Manatee Memorial Hospital in Florida, we
broke ground on our new emergency care
center, which is expected to open in the fall of
2018. The 34,000-square-foot addition
will feature 48 treatment spaces organized
in four nursing clinical care areas.
At Lakewood Ranch Medical Center in Florida,
construction began on a facility expansion to
keep pace with the growth in the local region.
The facility will be adding new operating
rooms, a cardiac catheterization lab and a
new pre- and post-surgical area.
In addition, we significantly expanded and
enhanced the delivery of emergency care
services in Southern California at Corona
Regional Medical Center, investing $38 million
to add 15,000 square feet of space, a total
of 30 treatment beds and a dedicated
CT scanner.
Palmdale Regional Medical Center opened a
27-bed adult rehabilitation unit. This unit is the
only one in the Antelope Valley of Southern
California and serves a population of half a
million people.
South Texas Health System in Edinburg and
South Texas Health System Children’s hospitals
have continued to show double-digit inpatient
growth with a 14.6 percent increase in admits.
This organic growth led to the opening of
a new 26-bed Inpatient Surgical Care Unit
to meet market demand and maximize
bed capacity.
Award-winning care
UHS Hospitals Recognized
in 2017
Temecula Valley Hospital
received three consecutive
“A” ratings from Leapfrog
and was one of 56 hospitals
across the U.S. to receive
this designation for Fall 2017.
St. Mary’s Regional
Medical Center received
a 5-star rating from the
Centers for Medicare
and Medicaid; and was
awarded the “Pioneers in
Quality” recognition by
The Joint Commission.
Spring Valley Hospital
earned The Joint
Commission’s Gold Seal
of Approval for core
certification for Total
Hip and Total Knee
replacement.
Henderson Hospital
earned the Gold Seal of
Approval certification for
Total Hip and Total Knee
replacement.
Cornerstone Regional
Hospital was ranked “High
Performing” by U.S. News
& World Report for Knee
Replacement.
South Texas Health System/
Edinburg Regional Medical
Center was ranked “High
Performing” by U.S. News &
World Report for COPD and
Heart Failure treatment.
2 0 1 7 A N N U A L R E P O R T 1 3
U H S A C U T E C A R E D I V I S I O N
OPERATIONAL EFFICIENCIES
YIELD TANGIBLE RESULTS
Our efficient, productive operations delivered
significant results. We improved Emergency
Department length of stay for the division
by 27 percent; and continued to work on ED
processes to streamline and shorten the time
it takes to move a patient from the ER to an
inpatient bed.
This is exemplified by the work at Temecula
Valley and Spring Valley hospitals where
the facilities worked to improve their bed
assignment to patient placement time by 50
percent and 84 percent, respectively. This
means that ED patients are admitted to their
patient room within 30 minutes of receiving
the bed assignment versus waiting two
hours in an ED holding bed.
Along with improving the patient experience
in the Emergency Department, we continue to
make our Operating Rooms more efficient to
provide a better experience for our surgeons.
Most notably, Aiken Regional Medical Centers
achieved significant, rapid and sustained
improvement in turnover times. They reduced
their turnover time from over 30 minutes and
are now sustaining at 23 minutes.
Process improvement efforts in MRI utilization
at Summerlin Hospital reduced patient wait
time by 50 percent. This approach is being
rolled out to all hospitals.
As depicted in this rendering, the $45 million
renovation of McAllen Medical Center in McAllen,
Texas, will improve the overall patient experience,
including patient rooms, nursing stations and
visitor cafeteria.
Within the South Texas Health System,
McAllen Medical Center has embarked upon
a complete renovation of the facility, with
the intent of improving the patient experience.
The whole facility is getting a face-lift starting
with the exterior, and including the front
entrance, visitor cafeteria, hallways, and
most importantly, patient rooms and nursing
stations. McAllen Medical Center will look
like a new facility when the renovations are
complete in 2019.
UHS operates four Freestanding
Emergency Departments (FEDs) in Weslaco,
Mission, South Laredo, and Amarillo, Texas.
In 2017, we opened a fifth FED in North
At each of our hospitals across the nation,
Edinburg, Texas.
Five additional FEDs are in various stages
of construction and are expected to open
in 2018: Edinburg, Northwest McAllen, and
Alamo in Texas; Henderson in Nevada; and
Westlake in Wellington, Florida.
1 4 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
we are committed to continuous improvement
– improving clinical outcomes, enhancing the
patient experience, streamlining operations
and supporting staff satisfaction.
HENDERSON HOSPITAL:
Making a Difference in the Community
The newest member of the Las Vegas-based Valley Health System is
Henderson Hospital, which completed its first full year of operation
on October 31, 2017. In that time, the hospital team is proud to have
achieved significant milestones.
Total Admissions
(10/31/16 – 12/31/17):
7,100
Total Beds:
130
Emergency Visits:
46,849
Surgeries:
4,444
Inpatients:
2,341
Outpatients:
2,103
Deliveries:
677
Total Number
of Employees:
569
Total Physicians
on Staff:
606
Certifications,
Awards and Honors:
Joint Replacement
Hip Certification –
The Joint Commission
Joint Replacement Knee –
The Joint Commission
Redevelopment Project of the
Year presented by the Henderson
Chamber of Commerce
Gold Winner, Best Place
to Have a Baby – Voted by readers
of the Las Vegas Review-Journal
Bronze Winner, Best Hospital –
Voted by readers of the Las Vegas
Review-Journal
Participant, March of Dimes
39+ Weeks Quality Improvement
and Healthy Babies are
Worth the Wait
“ When
patients talk
about what’s
different at
Henderson
Hospital, we
want them
to say it’s
the way we
take care of
them and
that every
single person
is dedicated
to service
excellence.”
~ SAM KAUFMAN,
CEO/MANAGING
DIRECTOR,
HENDERSON
HOSPITAL
2 0 1 7 A N N U A L R E P O R T 1 5
U H S B E H AV I O R A L H E A LT H D I V I S I O N
1 6 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
UHS BEHAVIORAL
HEALTH DIVISION
As a leader in providing high quality
behavioral health care to patients, we
are proud of the strong clinical outcomes
achieved in 2017. The UHS Behavioral
Health Division provides care that transforms
lives, families and communities.
In 2017, the Behavioral Health Division treated over
600,000 patients globally with compassion, dignity and
respect. We are committed to our mission of providing
high quality treatment programs and services to patients
with special, and sometimes complex, mental health needs.
PATIENTS ARE AT THE CORE OF EVERY
ACTION WE TAKE
2017 was a year of solid results for our Behavioral Health
Division. This success is a direct result of our work to keep the
patient at the very core of every action that we take. Through
a variety of inpatient, partial and outpatient programs, we
provide a broad range of services addressing behavioral health
and substance use needs for adults, adolescents and children.
Through steady expansion of our presence, we bring care
closer to the communities that we are privileged to serve.
At each of our facilities, quality of care and patient satisfaction
continue to be our most important metrics. UHS is one of the
few behavioral health providers voluntarily measuring clinical
outcomes. Looking at a variety of indicators, we are able
to quantify changes in patients’ conditions from admission
to discharge.
2 0 1 7 A N N U A L R E P O R T 1 7
U H S B E H AV I O R A L H E A LT H D I V I S I O N
In CMS’ Inpatient Psychiatric Facility Quality
The Behavioral Health Division has adopted the
Reporting requirements, our facilities are
“Assessing and Managing Suicide Risk” program
compared to approximately 1,500 other
for use in inpatient care and we are training our
psychiatric providers across the country.
nursing and clinical staff across the country.
Our results exceed the national averages
in 8 out of 12 indicators, by a significant
percentage.
The evidence-based resources made available
to the field by the Action Alliance are helping
to educate our community partners on their
We believe that patient satisfaction is a
role in changing the conversation around
key indicator as to the effectiveness of our
suicide and suicide prevention. In addition to
treatment programs. In 2017, our patients
addressing patients’ immediate mental health
rated their overall care as 4.5 out of 5 in
or substance use disorder challenges, we
patient satisfaction surveys. More than 92
create opportunities to further enhance their
percent indicated they felt better following
recovery. As patients move through treatment,
care at one of our facilities, and would refer
their needs continually change which is why
a friend or family member in need of care.
we advocate for a full continuum of services.
As a partner with the National Action Alliance
Residential treatment facilities provide a
for Suicide Prevention, we are proud that
critical level of care, treating patients with
20 of our inpatient psychiatric facilities have
a variety of psychiatric diagnoses and co-
adopted the Zero Suicide principles.
occurring disorders.
One Patient’s Story
“ It’s been a bit over a year, so you may
not remember my visit to Laurel
Ridge… My intent is simply to sincerely
thank you and the staff for your help
and insight as I started taking steps
back toward the path that I wanted to
be on. Here is an example of one of the
many gifts that sobriety has given me.
This was my first solo in an F-18C… I
have my career back; words cannot
describe how good it is to be back flying
in this pointy-nose fighter. So thank
you again, and give my best to everyone
there as well as my sincere gratitude
for the work you folks do for the people
who walk through your doors.”
~ L.T., U.S. Naval Aviator
Former patient of Laurel Ridge Treatment
Center in San Antonio, Texas
1 8 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
To achieve exceptional outcomes,
our residential treatment facilities
continually enhance their therapeutic
environments, clinical programming
and educational services.
We are very proud that 308 young adults
receiving mental health treatment in our
facilities obtained their high school diploma
or General Equivalency Diploma (GED).
This figure represents a 15 percent increase
from the previous academic year. Our
innovative programs offer these young
people an opportunity that will place them
on the road to success.
We continue to expand and enhance
our specialty programs. The UHS Patriot
Support Program serves active duty service
members, veterans and their families who
have given so much so that we can enjoy
the rights, liberties and opportunities our
nation offers.
On the road to success: We are proud of the young
graduates who have completed the required curricula
to earn their high school diploma or GED while at our
residential treatment facilities.
INTEGRATION AND EXPANSION
TO REACH MORE PATIENTS
During 2017, the Behavioral Health Division
It is not uncommon for members of the
continued to grow and expand the delivery
military and their families to struggle with
of care nationally and internationally –
depression, post-traumatic stress disorder
providing more services to more patients.
(PTSD), addiction or other behavioral health
The cornerstone of our growth is our
issues. UHS supports dedicated Military
ability to identify and execute on strategic
Centers of Excellence, Specialized Military
opportunities.
Service Centers and more than 100 other
TRICARE®-certified facilities. During the year,
UHS served over 6,500 service members
through its Patriot Support Programs.
In the U.K., we are in the process of
integrating the newly acquired facilities after
a successful regulatory decision from the
Competition and Markets Authority’s review
of the Cambian Adult Services acquisition.
UHS’ Cygnet Health Care now has a total of
102 facilities, including a new 56-bed de novo
hospital in Coventry. We are now a leading
provider in the U.K., offering a full spectrum
of behavioral health services.
2 0 1 7 A N N U A L R E P O R T 1 9
U H S B E H AV I O R A L H E A LT H D I V I S I O N
On the de novo front, we proudly opened
Coral Shores Behavioral Health in Stuart,
Florida, a new 80-bed acute behavioral health
hospital offering inpatient services for adults
and older adults. Cedar Creek Hospital in St.
Johns, Michigan, was converted from Turning
Point Youth Center Residential Treatment
Center to an inpatient behavioral health
hospital. The momentum will continue in 2018.
The new Fort Lauderdale Behavioral Health
Center – replacing our current hospital – will
be the largest behavioral health facility in
South Florida with 182 beds.
We continue to expand Foundations Recovery
Network (FRN), which is a national leader in
co-occurring disorder treatment for patients
who experience mental health and substance
use issues. FRN consistently and significantly
exceeds historical industry recovery rates as
demonstrated in our research results.
Our programs have earned recognition and
awards for effective client-driven outcomes
that not only preserve the dignity of our
clients, but also improve the quality of
their lives year after year. We are currently
Cedar Creek Hospital in St. Johns, Michigan, was
converted to an inpatient facility and provides
evidence-based treatment serving adolescents
and adults with mental health needs.
In response to the need for more acute
expanding beds and outpatient programming
inpatient psychiatric capacity in the U.S., we
at FRN locations to serve this critical
continued to execute on our growth plan,
patient population.
adding a total of 471 acute psychiatric beds
in new and existing facilities. We embarked
on projects ranging from de novo builds to
improving patient care areas.
Behavioral Health Integration partnerships,
including working with nonprofit systems,
continue to be a key growth strategy for the
Division. We currently have several integration
At Old Vineyard Behavioral Health Services in
projects in different stages of development,
Winston-Salem, North Carolina, we completed
with individual hospitals and health systems
a 60-bed addition of child and adolescent
across the country.
beds, as well as a new trauma recovery
space. Centennial Peaks Hospital in Louisville,
Colorado added 32 beds to meet the needs
of adolescents and high acuity adults.
We are operationalizing exciting joint venture
partnerships including Lancaster General
Health, a member of the University of
Pennsylvania Health System.
2 0 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
We are on schedule to open a new 126-
HonorHealth emergency departments (EDs)
bed behavioral health hospital in Lancaster,
and medical floors. We continue to look for
Pennsylvania in Summer 2018. The facility will
ways to expand this relationship.
provide a wide range of services including the
county’s only unit for adolescents, a unit for
medically complex patients and a dedicated
women’s trauma unit.
At the end of 2017, following a competitive
bid process, UHS was selected to acquire
Memorial Behavioral Health, a 109-bed
behavioral health hospital in Gulfport,
We continue to expand our relationship with
Mississippi. The facility has been rebranded
Providence Health and Services. Together,
as Gulfport Behavioral Health System, and
we are building a 100-bed de novo hospital
expands the UHS footprint in the state.
in Spokane, Washington, with inpatient and
outpatient services for children, adolescents,
adults and older adults, which will open in
Fall 2018. Additionally, Providence and UHS
have announced the new Olympia Behavioral
Health Hospital in Lacey, Washington, an
85-bed joint venture de novo hospital
anticipated to open in mid-2019.
On the technology front, UHS has extensive
and successful experience in providing
psychiatric and other clinical professional
services through the use of secure televideo
technology. We have over 160 behavioral
health facilities with active telehealth projects,
including a joint video-physician consultation
project between BHC Alhambra Hospital,
HonorHealth in Phoenix, Arizona, and UHS
Center for Change, and Fremont Hospital
signed an affiliation agreement, making UHS
to work with patients with eating disorders.
their behavioral health partner in that market.
This powerful utilization of HIPAA-compliant
As part of the partnership, we signed an
technology allows us to bring timely and
integration services agreement to provide
effective psychiatric care to our patients.
assessment and consultation services to
“ I had a nurse that was
really great. And she shared
an experience that she had.
And we just connected.”
~ Chelsea Harper, former patient at Lakeside
Behavioral Health System in Memphis, Tennessee.
Chelsea bravely shared her story, explaining what
inspired her take that first step, and how that
fateful moment changed her life for the better.
2 0 1 7 A N N U A L R E P O R T 2 1
U H S B E H AV I O R A L H E A LT H D I V I S I O N
OUR TALENTED WORKFORCE
Our dedicated team of staff and clinicians
are committed to providing compassionate
care to patients every day. In emergency
situations, UHS employees rally to respond.
During the hurricanes across the U.S. and
Puerto Rico, the behavioral health team went
above and beyond, demonstrating resiliency
and devotion to patients.
Our facilities are proud to contribute to their
local communities. Whether we sponsor a local
5K with a regional NAMI affiliate, provide Crisis
Intervention Team training for police officers,
or raise funds for suicide awareness, our
facilities and employees are an integral part
of their local communities.
As UHS works to increase awareness and
change the conversation about mental health
and addiction issues nationally, we remain
committed – on both a local and a national
level – to replace stigma with hope.
EXPANDING
OUR PORTFOLIO
TO REACH MORE
PATIENTS
Gulfport Behavioral
Health System in Gulfport,
Mississippi, offers dedicated
behavioral health treatment
programs for adults,
adolescents and children.
Staff from Cypress Creek Hospital in Houston,
Texas joined a community event raising awareness
for mental health – #IAmStigmaFree. Giving back
to our communities is a passion of our employees,
who dedicate time and talents to make their
hometowns stronger and more vibrant.
2 2 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
UHS acquired Memorial
Behavioral Health, a 109-bed
behavioral health facility and
its two affiliated outpatient
clinics in Gulfport, Mississippi.
The company now owns a total
of five facilities throughout
the state of Mississippi.
Now branded Gulfport
Behavioral Health System, the
facility offers a full continuum
of professional services to
help individuals and their
families address and manage
emotional and behavioral
issues. The facility supports
patients in developing the
skills necessary to live a life of
long-term recovery and health.
Gulfport Behavioral Health
provides inpatient and
partial hospitalization, as
well as individual and family
therapy on an outpatient
basis. This facility was the
first in Mississippi to offer
Transcranial Magnetic
Stimulation (TMS) therapy,
a non-invasive medical
alternative shown to achieve
positive and life-changing
results in patients who do
not benefit from prescription
medications or who cannot
tolerate their side effects.
Additionally, the facility is
working with the local hospital
to integrate behavioral
health services into its acute
care continuum.
“ After a competitive
selection process, UHS
is proud to have been
chosen by Memorial
Hospital at Gulfport
to partner in providing
a full continuum of
high-quality behavioral
health and substance
use treatment programs
to serve the greater Gulf
Coast community.”
~ DEBRA K. OSTEEN, UHS EXECUTIVE
VICE PRESIDENT AND PRESIDENT,
BEHAVIORAL HEALTH DIVISION
2 0 1 7 A N N U A L R E P O R T 2 3
2 4 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
CORPORATE SOCIAL
RESPONSIBILITY
A shared commitment
UHS recognizes the need to protect the natural environment
and the communities in which we operate. Keeping our
surroundings clean and minimizing pollution are of benefit
to all. We are committed to following best practices when
managing our energy usage and consumption, and disposing of
waste. Stewardship continues to play an important role in our
commitment to a clean environment and strong communities.
UNCOMPENSATED CARE
Our commitment to corporate social responsibility is evident
across the company in a number of ways, including the care
that we provide to patients and their families, regardless of their
ability to pay.
UHS Acute Care hospitals have recorded increasing charity care
and uninsured discounts, based on charges at established rates,
for the years ended December 31, 2017, 2016 and 2015:
2017
2016
2015
Amount
%
Amount
%
Amount
%
Charity care
$887,136
50%
$733,585
50%
$506,571
42%
Uninsured discounts
$881,265
50%
$720,205
50%
$696,463
58%
Total uncompensated
care
$1,768,401
100%
$1,453,790
100%
$1,203,034
100%
(dollar amounts in thousands)
Generally, patients treated at our hospitals for non-elective
services, who have gross income less than 400% of the federal
poverty guidelines, are deemed eligible for charity care. The federal
poverty guidelines are established by the federal government
and are based on income and family size.
2 0 1 7 A N N U A L R E P O R T 2 5
Effective January 1, 2016, our hospitals
To be eligible, hospitals must show that they
in certain states in which we operate reduced
perform better than 75% of similar buildings
the charity care eligibility threshold to
nationwide. In addition, a licensed professional
less than the federal poverty guidelines.
must verify that all energy use is accounted
During 2017 and 2016, as compared to 2015,
for accurately, that the building characteristics
this change resulted in an increase in the
have been properly reported and that indoor
charity care component of our total
environment criteria are met.
uncompensated care and a decrease in
the uninsured discount component.
The first two UHS acute care hospitals to
earn ENERGY STAR certification are Aiken
The provision for doubtful accounts at
Regional Medical Centers in Aiken, South
our acute care hospitals was approximately
Carolina, and Manatee Memorial Hospital in
$756 million during 2017, $628 million during
Bradenton, Florida. Six additional hospitals
2016 and $631 million during 2015.
expect to receive ENERGY STAR certification
ENERGY STAR® CERTIFICATION
We focus on making smart long-term
TRANSFORMING TO LED LIGHTING
decisions that strengthen the energy
Our newest acute care facility and the
in the near future.
efficiency of our facilities and the
environment in which the facility is located.
Another important area of focus is energy
management and sustainability. Overall, our
mission is to support hospital growth through
the efficient allocation of capital by adding
new and renovating existing facilities; and to
design and build these facilities to enhance
the patient experience.
ENERGY STAR is a voluntary U.S.
Environmental Protection Agency (EPA)
program that helps businesses protect the
climate through superior energy efficiency.
Buildings that receive the certification have
proven that they save energy, money and
help protect the environment.
sixth member of The Valley Health System,
Henderson Hospital brings experienced
comprehensive care to the community
and has attained an ENERGY STAR rating
of 96 (on a scale of 1 to 100). At this new
facility, we are incorporating 100 percent
LED technology for lighting. Compared to
traditional energy efficient fluorescent lighting,
the new technology will result in a 50 percent
savings for light energy. This will result in an
annual savings of over 700,000 kilowatt-
hours, eliminating over one million pounds of
greenhouse gases and more than $700,000
on the annual electricity bill.
We are in the process of retrofitting all
lighting systems to energy-saving LED lights
at all UHS facilities. We expect to have all
facilities complete by the end of 2020.
2 6 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
Beyond lighting systems, we are also
CULINARY AND NUTRITION
retrofitting several facilities for cooling and
ventilation systems to operate a more energy
efficient hospital. Keeping operating rooms
at very low temperatures requires substantial
energy. At Henderson Hospital, we have
installed dedicated chiller boosters for these
specific areas of the hospital that need cooler
People eat with their eyes first, then their
nose and ultimately with their hearts. Healthy
nutrition for our patients is part of the healing
process. It allows us to make food items
personal, not just for nourishment, but as a
way to demonstrate to patients that we care.
temperatures and maximum efficiency.
As a socially responsible company, UHS has
LEED CERTIFICATION
In continuing the efforts to enhance the
efficient use of energy in the operations
and maintenance of our hospitals and other
medical facilities, as well as to incorporate
environmentally sustainable practices, UHS
earned the first LEED for Existing Buildings
Gold certifications for five of our seven
hospitals located in Nevada.
embarked on key areas of focus to enhance
the patient experience when it comes to
Culinary and Nutrition. Although we have
moved 90 percent of our product guides
away from trans-fat containing foods and
beverages, we are looking to eliminate them
entirely in 2019. Our commitment continues
as we have transitioned away from over 300
high-fructose corn syrup containing foods
and sources, and look to expand the use of
sustainable seafood by another 50 percent
LEED, or Leadership in Energy and
this year.
Environmental Design, is the most widely
used green building rating system in the
world. Hospitals consume natural resources
at an extraordinarily high rate, as they are
occupied 24 hours a day, seven days a week.
With hundreds of millions of square feet of
space in the U.S. alone, there is an enormous
opportunity for the industry to transform the
impact of the built environment. LEED is a
simple and effective program for navigating
complex, often competing building and
environmental issues affecting humans
worldwide and UHS is proud to be part of
this endeavor.
In addition, we are investing in software to
expand how we deliver modified room service
programs for patients at our hospitals. This
allows us to maximize efficiencies, allowing for
cost savings which we can then redirect into
food menus and choices.
We continue our commitment to identifying
and treating patients with malnutrition at our
Acute Care hospitals. Our new screening tools
capture over 76 percent of those patients at
risk, so they can be personally evaluated by
a Registered Dietitian to improve the overall
patient experience, reduce readmissions
and reduce costs.
2 0 1 7 A N N U A L R E P O R T 2 7
At our Behavioral Health facilities we have
focused on partnering with manufacturers
RESPONSIBLE PHARMACEUTICAL
WASTE MANAGEMENT
in supporting nutritional well-being. This
is addressed through not only identifying
malnutrition when present, but also providing
exposure to positive food choices through
a 20 percent increase in the number of salad
bars and the availability of high protein
snacks and fruit juice beverages.
At our Acute Care facilities, we are reducing
patient tray disposables and have introduced
eco-friendly takeout containers in our retail
operations. These alternative options help
us to reduce waste and save on costs.
ENVIRONMENTAL SERVICES
In 2017, we began updating the way we
treat and protect hospital floors at our
acute care facilities. In newly remodeled
areas, we are introducing no-wax floors to
eliminate the need for protectant chemicals.
In areas not under remodel, we are moving
away from using floor waxes and instead
applying environmentally safer floor finishes,
eliminating the need for caustic floor
stripper products.
Partnering with chemical vendors, we
also introduced the use of ‘Green Seal
Certified’ floor care products within our
Acute Care facilities.
Proper disposal of pharmaceutical waste
is an essential component to reducing
the presence of residual medications in
our ecosystem and our groundwater. The
Resource Conservation and Recovery Act
(RCRA) is the public law which provides the
framework for the proper management of
hazardous and non-hazardous solid waste.
Pharmaceuticals are considered hazardous
because they exhibit hazardous or toxic
chemical properties or they may exhibit
characteristics such as being ignitable,
corrosive or reactive. The UHS pharmaceutical
waste management program focuses on
utilizing special disposal containers serving
several purposes specific to the safety
of healthcare practitioners as well as our
ecosystem and environment. These containers
reduce the risk of needle-stick injuries in the
healthcare setting while ensuring regulatory
compliance by separating pharmaceutical
waste based on hazard characteristic.
Appropriately discarding the waste in a
container matched to the appropriate
waste stream provides an added degree of
managing pharmaceutical waste generated at
our hospitals thus protecting our employees,
our communities and the environment.
Partnering with floor equipment vendors,
we introduced floor cleaning equipment for
REPROCESSING AND WASTE
DIVERSION
non-patient areas which electrically charges
Through reprocessing and remanufacturing
water for cleaning purposes, drastically
efforts with our business partners, UHS
reducing the need for chemicals.
2 8 U N I V E R S A L H E A LT H S E R V I C E S , I N C .
is able to decrease its environmental impact
utilizing key programs. In 2017, our Acute
Care Division was able to divert 160,796 pounds
of waste by collecting 495,629 items. UHS
has been participating in reprocessing and
remanufacturing programs for over 10 years.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(cid:1)(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
(cid:2) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-10765
UNIVERSAL HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
UNIVERSAL CORPORATE CENTER
367 South Gulph Road
P.O. Box 61558
King of Prussia, Pennsylvania
(Address of principal executive offices)
23-2077891
(I.R.S. Employer
Identification Number)
19406-0958
(Zip Code)
Registrant’s telephone number, including area code: (610) 768-3300
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Class B Common Stock, $.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class D Common Stock, $.01 par value
(Title of each Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:2) No (cid:1)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (cid:1) No (cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes (cid:1) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
Non-accelerated filer
(cid:1)
(cid:2)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:2)
(cid:2)
(cid:2)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:2) No (cid:1)
The aggregate market value of voting stock held by non-affiliates at June 30, 2017 was $10.6 billion. (For the purpose of this calculation, it was
assumed that Class A, Class C, and Class D Common Stock, which are not traded but are convertible share-for-share into Class B Common Stock, have the
same market value as Class B Common Stock. Also, for purposes of this calculation only, all directors are deemed to be affiliates.)
The number of shares of the registrant’s Class A Common Stock, $.01 par value, Class B Common Stock, $.01 par value, Class C Common Stock,
$.01 par value, and Class D Common Stock, $.01 par value, outstanding as of January 31, 2018, were 6,595,308; 86,990,759; 663,940 and 20,616,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for our 2018 Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 2017 (incorporated by reference under Part III).
Business
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4
Properties
Legal Proceedings
Mine Safety Disclosure
UNIVERSAL HEALTH SERVICES, INC.
2017 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 5
Item 6
Item 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 10
Item 11
Item 12
Item 13
Item 14
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Item 16
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
SIGNATURES
1
12
24
24
33
36
37
40
41
76
77
77
77
78
79
79
79
79
79
80
84
85
This Annual Report on Form 10-K is for the year ended December 31, 2017. This Annual Report modifies and supersedes
documents filed prior to this Annual Report. Information that we file with the Securities and Exchange Commission (the “SEC”) in
the future will automatically update and supersede information contained in this Annual Report.
In this Annual Report, “we,” “us,” “our” “UHS” and the “Company” refer to Universal Health Services, Inc. and its
subsidiaries. UHS is a registered trademark of UHS of Delaware, Inc., the management company for, and a wholly-owned subsidiary
of Universal Health Services, Inc. Universal Health Services, Inc. is a holding company and operates through its subsidiaries including
its management company, UHS of Delaware, Inc. All healthcare and management operations are conducted by subsidiaries of
Universal Health Services, Inc. To the extent any reference to “UHS” or “UHS facilities” in this report including letters, narratives or
other forms contained herein relates to our healthcare or management operations it is referring to Universal Health Services, Inc.’s
subsidiaries including UHS of Delaware, Inc. Further, the terms “we,” “us,” “our” or the “Company” in such context similarly refer to
the operations of Universal Health Services Inc.’s subsidiaries including UHS of Delaware, Inc. Any reference to employees or
employment contained herein refers to employment with or employees of the subsidiaries of Universal Health Services, Inc. including
UHS of Delaware, Inc.
PART I
ITEM 1.
Business
Our principal business is owning and operating, through our subsidiaries, acute care hospitals and outpatient facilities and
behavioral health care facilities.
As of February 28, 2018, we owned and/or operated 326 inpatient facilities and 32 outpatient and other facilities including the
following located in 37 states, Washington, D.C., the United Kingdom, Puerto Rico and the U.S. Virgin Islands:
Acute care facilities located in the U.S.:
(cid:1)
(cid:1)
(cid:1)
26 inpatient acute care hospitals;
4 free-standing emergency departments, and;
4 outpatient surgery/cancer care centers & 1 surgical hospital.
Behavioral health care facilities (300 inpatient facilities and 23 outpatient facilities):
Located in the U.S.:
(cid:1)
(cid:1)
188 inpatient behavioral health care facilities, and;
20 outpatient behavioral health care facilities.
Located in the U.K.:
(cid:1)
(cid:1)
108 inpatient behavioral health care facilities, and;
2 outpatient behavioral health care facilities.
Located in Puerto Rico and the U.S. Virgin Islands:
(cid:1)
(cid:1)
4 inpatient behavioral health care facilities, and;
1 outpatient behavioral health care facility.
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and
commercial health insurer accounted for 53% during 2017, 52% during 2016 and 51% during 2015. Net revenues from our behavioral
health care facilities and commercial health insurer accounted for 47% of our consolidated net revenues during 2017, 48% during
2016 and 49% during 2015.
Our behavioral health care facilities located in the U.K. generated net revenues amounting to approximately $429 million in
2017, $241 million in 2016 and $203 million in 2015. Total assets at our U.K. behavioral health care facilities were approximately
$1.098 billion as of December 31, 2017, $965 million as of December 31, 2016 and $521 million as of December 31, 2015.
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.
2017 and 2018 Acquisitions of Assets and Businesses:
2017 Acquisitions:
During 2017 we spent $23 million to acquire various property assets.
2018 Acquisitions:
In January, 2018, we acquired Gulfport Behavioral Health System, a 109-bed behavioral health care facility located in Gulfport,
Mississippi.
Available Information
We are a Delaware corporation that was organized in 1979. Our principal executive offices are located at Universal Corporate
Center, 367 South Gulph Road, P.O. Box 61558, King of Prussia, PA 19406. Our telephone number is (610) 768-3300.
1
Our website is located at http://www.uhsinc.com. Copies of our annual, quarterly and current reports that we file with the SEC,
and any amendments to those reports, are available free of charge on our website. The information posted on our website is not
incorporated into this Annual Report. Our Board of Directors’ committee charters (Audit Committee, Compensation Committee and
Nominating & Governance Committee), Code of Business Conduct and Corporate Standards applicable to all employees, Code of
Ethics for Senior Financial Officers, Corporate Governance Guidelines and our Code of Conduct, Corporate Compliance Manual and
Compliance Policies and Procedures are available free of charge on our website. Copies of such reports and charters are available in
print to any stockholder who makes a request. Such requests should be made to our Secretary at our King of Prussia, PA corporate
headquarters. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers of
any provision of our Code of Ethics for Senior Financial Officers by promptly posting this information on our website.
In accordance with Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, we submitted our CEO’s
certification to the New York Stock Exchange in 2016. Additionally, contained in Exhibits 31.1 and 31.2 of this Annual Report on
Form 10-K, are our CEO’s and CFO’s certifications regarding the quality of our public disclosures under Section 302 of the Sarbanes-
Oxley Act of 2002.
Our Mission
Our company mission is:
To provide superior quality healthcare services that
PATIENTS recommend to families and friends,
PHYSICIANS prefer for their patients,
PURCHASERS select for their clients,
EMPLOYEES are proud of, and
INVESTORS seek for long-term returns.
To achieve this, we have a commitment to:
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service excellence
continuous improvement in measurable ways
employee development
ethical and fair treatment of all
teamwork
compassion
innovation in service delivery
Business Strategy
We believe community-based hospitals will remain the focal point of the healthcare delivery network and we are committed to a
philosophy of self-determination for both the company and our hospitals.
Acquisition of Additional Hospitals. We selectively seek opportunities to expand our base of operations by acquiring,
constructing or leasing additional hospital facilities. We are committed to a program of rational growth around our core businesses,
while retaining the missions of the hospitals we manage and the communities we serve. Such expansion may provide us with access to
new markets and new healthcare delivery capabilities. We also continue to examine our facilities and consider divestiture of those
facilities that we believe do not have the potential to contribute to our growth or operating strategy.
Improvement of Operations of Existing Hospitals and Services. We also seek to increase the operating revenues and
profitability of owned hospitals by the introduction of new services, improvement of existing services, physician recruitment and the
application of financial and operational controls.
We are involved in continual development activities for the benefit of our existing facilities. From time to time applications are
filed with state health planning agencies to add new services in existing hospitals in states which require certificates of need, or CONs.
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Although we expect that some of these applications will result in the addition of new facilities or services to our operations, no
assurances can be made for ultimate success by us in these efforts.
Quality and Efficiency of Services. Pressures to contain healthcare costs and technological developments allowing more
procedures to be performed on an outpatient basis have led payors to demand a shift to ambulatory or outpatient care wherever
possible. We are responding to this trend by emphasizing the expansion of outpatient services. In addition, in response to cost
containment pressures, we continue to implement programs at our facilities designed to improve financial performance and efficiency
while continuing to provide quality care, including more efficient use of professional and paraprofessional staff, monitoring and
adjusting staffing levels and equipment usage, improving patient management and reporting procedures and implementing more
efficient billing and collection procedures. In addition, we will continue to emphasize innovation in our response to the rapid changes
in regulatory trends and market conditions while fulfilling our commitment to patients, physicians, employees, communities and our
stockholders.
In addition, our aggressive recruiting of highly qualified physicians and developing provider networks help to establish our
facilities as an important source of quality healthcare in their respective communities.
Hospital Utilization
We believe that the most important factors relating to the overall utilization of a hospital include the quality and market position
of the hospital and the number, quality and specialties of physicians providing patient care within the facility. Generally, we believe
that the ability of a hospital to meet the health care needs of its community is determined by its breadth of services, level of
technology, emphasis on quality of care and convenience for patients and physicians. Other factors that affect utilization include
general and local economic conditions, market penetration of managed care programs, the degree of outpatient use, the availability of
reimbursement programs such as Medicare and Medicaid, and demographic changes such as the growth in local populations.
Utilization across the industry also is being affected by improvements in clinical practice, medical technology and pharmacology.
Current industry trends in utilization and occupancy have been significantly affected by changes in reimbursement policies of third
party payors. We are also unable to predict the extent to which these industry trends will continue or accelerate. In addition, our acute
care services business is typically subject to certain seasonal fluctuations, such as higher patient volumes and net patient service
revenues in the first and fourth quarters of the year.
The following table sets forth certain operating statistics for hospitals operated by us for the years indicated. Accordingly,
information related to hospitals acquired during the five-year period has been included from the respective dates of acquisition, and
information related to hospitals divested during the five year period has been included up to the respective dates of divestiture.
Average Licensed Beds:
Acute Care Hospitals
Behavioral Health Centers
Average Available Beds (1):
Acute Care Hospitals
Behavioral Health Centers
Admissions:
Acute Care Hospitals
Behavioral Health Centers
Average Length of Stay (Days):
Acute Care Hospitals
Behavioral Health Centers
Patient Days (2):
Acute Care Hospitals (1)
Behavioral Health Centers
Occupancy Rate-Licensed Beds (3):
Acute Care Hospitals
Behavioral Health Centers
Occupancy Rate-Available Beds (3):
Acute Care Hospitals
Behavioral Health Centers
2017
2016
2015
2014
2013
6,127
23,151
5,934
21,829
5,832
21,202
5,776
20,231
5,652
19,975
5,954
23,068
5,759
21,744
5,656
21,116
5,571
20,131
5,429
19,876
297,390 274,074 261,727 251,165 246,160
467,822 456,052 447,007 426,510 402,088
4.4
13.6
4.6
13.2
4.7
13.1
4.6
12.9
4.5
13.3
1,312,265 1,251,511 1,218,991 1,167,726 1,112,541
6,381,756 6,004,066 5,835,134 5,518,660 5,365,734
59 %
76 %
60 %
76 %
58 %
75 %
59 %
75 %
57 %
75 %
59 %
76 %
55 %
75 %
57 %
75 %
54 %
74 %
56 %
74 %
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(1)
(2)
(3)
“Average Available Beds” is the number of beds which are actually in service at any given time for immediate patient use with
the necessary equipment and staff available for patient care. A hospital may have appropriate licenses for more beds than are in
service for a number of reasons, including lack of demand, incomplete construction, and anticipation of future needs.
“Patient Days” is the sum of all patients for the number of days that hospital care is provided to each patient.
“Occupancy Rate” is calculated by dividing average patient days (total patient days divided by the total number of days in the
period) by the number of average beds, either available or licensed.
Sources of Revenue
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. See Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sources of Revenue for additional
disclosure. Other information related to our revenues, income and other operating information for each reporting segment of our
business is provided in Note 11 to our Consolidated Financial Statements, Segment Reporting.
Regulation and Other Factors
Overview: The healthcare industry is subject to numerous laws, regulations and rules including, among others, those related to
government healthcare participation requirements, various licensure and accreditations, reimbursement for patient services, health
information privacy and security rules, and Medicare and Medicaid fraud and abuse provisions (including, but not limited to, federal
statutes and regulations prohibiting kickbacks and other illegal inducements to potential referral sources, false claims submitted to
federal health care programs and self-referrals by physicians). Providers that are found to have violated any of these laws and
regulations may be excluded from participating in government healthcare programs, subjected to significant fines or penalties and/or
required to repay amounts received from the government for previously billed patient services. Although we believe our policies,
procedures and practices comply with governmental regulations, no assurance can be given that we will not be subjected to additional
governmental inquiries or actions, or that we would not be faced with sanctions, fines or penalties if so subjected. Even if we were to
ultimately prevail, a significant governmental inquiry or action under one of the above laws, regulations or rules could have a material
adverse impact on us.
Licensing, Certification and Accreditation: All of our U.S. hospitals are subject to compliance with various federal, state and
local statutes and regulations in the U.S. and receive periodic inspection by state licensing agencies to review standards of medical
care, equipment and cleanliness. Our hospitals must also comply with the conditions of participation and licensing requirements of
federal, state and local health agencies, as well as the requirements of municipal building codes, health codes and local fire
departments. Various other licenses and permits are also required in order to dispense narcotics, operate pharmacies, handle
radioactive materials and operate certain equipment. Our facilities in the United Kingdom are also subject to various laws and
regulations.
All of our eligible hospitals have been accredited by The Joint Commission. All of our acute care hospitals and most of our
behavioral health centers in the U.S. are certified as providers of Medicare and Medicaid services by the appropriate governmental
authorities.
If any of our facilities were to lose its Joint Commission accreditation or otherwise lose its certification under the Medicare and
Medicaid programs, the facility may be unable to receive reimbursement from the Medicare and Medicaid programs and other payors.
We believe our facilities are in substantial compliance with current applicable federal, state, local and independent review body
regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain
qualified, it may become necessary for us to make changes in our facilities, equipment, personnel and services in the future, which
could have a material adverse impact on operations.
Certificates of Need: Many of the states in which we operate hospitals have enacted certificates of need (“CON”) laws as a
condition prior to hospital capital expenditures, construction, expansion, modernization or initiation of major new services. Failure to
obtain necessary state approval can result in our inability to complete an acquisition, expansion or replacement, the imposition of civil
or, in some cases, criminal sanctions, the inability to receive Medicare or Medicaid reimbursement or the revocation of a facility’s
license, which could harm our business. In addition, significant CON reforms have been proposed in a number of states that would
increase the capital spending thresholds and provide exemptions of various services from review requirements. In the past, we have
not experienced any material adverse effects from those requirements, but we cannot predict the impact of these changes upon our
operations.
Conversion Legislation: Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-
profit hospitals to for-profit entities. These laws generally require prior approval from the attorney general, advance notification and
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community involvement. In addition, attorneys general in states without specific conversion legislation may exercise discretionary
authority over these transactions. Although the level of government involvement varies from state to state, the trend is to provide for
increased governmental review and, in some cases, approval of a transaction in which a not-for-profit entity sells a health care facility
to a for-profit entity. The adoption of new or expanded conversion legislation and the increased review of not-for-profit hospital
conversions may limit our ability to grow through acquisitions of not-for-profit hospitals.
Utilization Review: Federal regulations require that admissions and utilization of facilities by Medicare and Medicaid patients
must be reviewed in order to ensure efficient utilization of facilities and services. The law and regulations require Peer Review
Organizations (“PROs”) to review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of
care provided, the validity of diagnosis related group (“DRG”) classifications and the appropriateness of cases of extraordinary length
of stay. PROs may deny payment for services provided, assess fines and also have the authority to recommend to the Department of
Health and Human Services (“HHS”) that a provider that is in substantial non-compliance with the standards of the PRO be excluded
from participating in the Medicare program. We have contracted with PROs in each state where we do business to perform the
required reviews.
Audits: Most hospitals are subject to federal audits to validate the accuracy of Medicare and Medicaid program submitted
claims. If these audits identify overpayments, we could be required to pay a substantial rebate of prior years’ payments subject to
various administrative appeal rights. The federal government contracts with third-party “recovery audit contractors” (“RACs”) and
“Medicaid integrity contractors” (“MICs”), on a contingent fee basis, to audit the propriety of payments to Medicare and Medicaid
providers. Similarly, Medicare zone program integrity contractors (“ZPICs”) target claims for potential fraud and abuse. Additionally,
Medicare administrative contractors (“MACs”) must ensure they pay the right amount for covered and correctly coded services
rendered to eligible beneficiaries by legitimate providers. The Centers for Medicare and Medicaid Services (“CMS”) announced its
intent to consolidate many of these Medicare and Medicaid program integrity functions into new unified program integrity contractors
(“UPICs”), though it remains unclear what effect, if any, this proposed consolidation may have. We have undergone claims audits
related to our receipt of federal healthcare payments during the last three years, the results of which have not required material
adjustments to our consolidated results of operations. However, potential liability from future federal or state audits could ultimately
exceed established reserves, and any excess could potentially be substantial. Further, Medicare and Medicaid regulations also provide
for withholding Medicare and Medicaid overpayments in certain circumstances, which could adversely affect our cash flow.
Self-Referral and Anti-Kickback Legislation
The Stark Law: The Social Security Act includes a provision commonly known as the “Stark Law.” This law prohibits
physicians from referring Medicare and Medicaid patients to entities with which they or any of their immediate family members have
a financial relationship, unless an exception is met. These types of referrals are known as “self-referrals.” Sanctions for violating the
Stark Law include civil penalties up to $24,253 for each violation, and up to $161,692 for sham arrangements. There are a number of
exceptions to the self-referral prohibition, including an exception for a physician’s ownership interest in an entire hospital as opposed
to an ownership interest in a hospital department unit, service or subpart. However, federal laws and regulations now limit the ability
of hospitals relying on this exception to expand aggregate physician ownership interest or to expand certain hospital facilities. This
regulation also places a number of compliance requirements on physician-owned hospitals related to reporting of ownership interest.
There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment
contracts, leases and recruitment agreements that adhere to certain enumerated requirements.
We monitor all aspects of our business and have developed a comprehensive ethics and compliance program that is designed to
meet or exceed applicable federal guidelines and industry standards. Nonetheless, because the law in this area is complex and
constantly evolving, there can be no assurance that federal regulatory authorities will not determine that any of our arrangements with
physicians violate the Stark Law.
Anti-kickback Statute: A provision of the Social Security Act known as the “anti-kickback statute” prohibits healthcare
providers and others from directly or indirectly soliciting, receiving, offering or paying money or other remuneration to other
individuals and entities in return for using, referring, ordering, recommending or arranging for such referrals or orders of services or
other items covered by a federal or state health care program. However, changes to the anti-kickback statute have reduced the intent
required for violation; one is no longer 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 anti-kickback statute contains certain exceptions, and the Office of the Inspector General of the Department of Health and
Human Services (“OIG”) has issued regulations that provide for “safe harbors,” from the federal anti-kickback statute for various
activities. These activities, which must meet certain requirements, include (but are not limited to) the following: investment interests,
space rental, equipment rental, practitioner recruitment, personnel services and management contracts, sale of practice, referral
services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible
amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, freestanding
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surgery centers, donation of technology for electronic health records and referral agreements for specialty services. The fact that
conduct or a business arrangement does not fall within a safe harbor or exception does not automatically render the conduct or
business arrangement illegal under the anti-kickback statute. However, such conduct and business arrangements may lead to increased
scrutiny by government enforcement authorities.
Although we believe that our arrangements with physicians and other referral sources have been structured to comply with
current law and available interpretations, there can be no assurance that all arrangements comply with an available safe harbor or that
regulatory authorities enforcing these laws will determine these financial arrangements do not violate the anti-kickback statute or other
applicable laws. Violations of the anti-kickback statute may be punished by a criminal fine of up to $25,000 for each violation or
imprisonment, however, under 18 U.S.C. Section 3571, this fine may be increased to $250,000 for individuals and $500,000 for
organizations. Civil money penalties may include fines of up to $50,000 per violation and damages of up to three times the total
amount of the remuneration and/or exclusion from participation in Medicare and Medicaid.
Similar State Laws: Many of the states in which we operate have adopted laws that prohibit payments to physicians in
exchange for referrals similar to the anti-kickback statute and the Stark Law, some of which apply regardless of the source of payment
for care. These statutes typically provide criminal and civil penalties as well as loss of licensure. In many instances, the state statutes
provide that any arrangement falling in a federal safe harbor will be immune from scrutiny under the state statutes. However, in most
cases, little precedent exists for the interpretation or enforcement of these state laws.
These laws and regulations are extremely complex and, in many cases, we don’t have the benefit of regulatory or judicial
interpretation. It is possible that different interpretations or enforcement of these laws and regulations could subject our current or past
practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel,
services, capital expenditure programs and operating expenses. A determination that we have violated one or more of these laws, or
the public announcement that we are being investigated for possible violations of one or more of these laws (see Item 3. Legal
Proceedings), could have a material adverse effect on our business, financial condition or results of operations and our business
reputation could suffer significantly. In addition, we cannot predict whether other legislation or regulations at the federal or state level
will be adopted, what form such legislation or regulations may take or what their impact on us may be.
If we are deemed to have failed to comply with the anti-kickback statute, the Stark Law or other applicable laws and regulations,
we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or
more facilities), and exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state health
care programs. The imposition of such penalties could have a material adverse effect on our business, financial condition or results of
operations.
Federal False Claims Act and Similar State Regulations: A current trend affecting the health care industry is the increased
use of the federal False Claims Act, and, in particular, actions being brought by individuals on the government’s behalf under the
False Claims Act’s qui tam, or whistleblower, provisions. Whistleblower provisions allow private individuals to bring actions on
behalf of the government by alleging that the defendant has defrauded the Federal government.
When a defendant is determined by a court of law to have violated the False Claims Act, the defendant may be liable for up to
three times the actual damages sustained by the government, plus mandatory civil penalties of between $11,181 to $22,363 for each
separate false claim. There are many potential bases for liability under the False Claims Act. Liability often arises when an entity
knowingly submits a false claim for reimbursement to the federal government. The Fraud Enforcement and Recovery Act of 2009
(“FERA”) has expanded the number of actions for which liability may attach under the False Claims Act, eliminating requirements
that false claims be presented to federal officials or directly involve federal funds. FERA also clarifies that a false claim violation
occurs upon the knowing retention, as well as the receipt, of overpayments. In addition, recent changes to the anti-kickback statute
have made violations of that law punishable under the civil False Claims Act. Further, a number of states have adopted their own false
claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit on behalf of the state
in state court. Recent changes to the False Claims Act require that federal healthcare program overpayments be returned within 60
days from the date the overpayment was identified, or by the date any corresponding cost report was due, whichever is later. Failure to
return an overpayment within this period may result in additional civil False Claims Act liability.
Other Fraud and Abuse Provisions: The Social Security Act also imposes criminal and civil penalties for submitting false
claims to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered, billing for services
without prescribed documentation, misrepresenting actual services rendered in order to obtain higher reimbursement and cost report
fraud. Like the anti-kickback statute, these provisions are very broad.
Further, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse
laws by adding several criminal provisions for health care fraud offenses that apply to all health benefit programs, whether or not
payments under such programs are paid pursuant to federal programs. HIPAA also introduced enforcement mechanisms to prevent
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fraud and abuse in Medicare. There are civil penalties for prohibited conduct, including, but not limited to billing for medically
unnecessary products or services.
HIPAA Administrative Simplification and Privacy Requirements: The administrative simplification provisions of HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), require the use of uniform
electronic data transmission standards for health care claims and payment transactions submitted or received electronically. These
provisions are intended to encourage electronic commerce in the health care industry. HIPAA also established federal rules protecting
the privacy and security of personal health information. The privacy and security regulations address the use and disclosure of
individual health care information and the rights of patients to understand and control how such information is used and disclosed.
Violations of HIPAA can result in both criminal and civil fines and penalties.
We believe that we are in material compliance with the privacy regulations of HIPAA, as we continue to develop training and
revise procedures to address ongoing compliance. The HIPAA security regulations require health care providers to implement
administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of patient information.
HITECH has since strengthened certain HIPAA rules regarding the use and disclosure of protected health information, extended
certain HIPAA provisions to business associates, and created new security breach notification requirements. HITECH has also
extended the ability to impose civil money penalties on providers not knowing that a HIPAA violation has occurred. We believe that
we have been in substantial compliance with HIPAA and HITECH requirements to date. Recent changes to the HIPAA regulations
may result in greater compliance requirements for healthcare providers, including expanded obligations to report breaches of
unsecured patient data, as well as create new liabilities for the actions of parties acting as business associates on our behalf.
Red Flags Rule: In addition, the Federal Trade Commission (“FTC”) Red Flags Rule requires financial institutions and
businesses maintaining accounts to address the risk of identity theft. The Red Flag Program Clarification Act of 2010, signed on
December 18, 2010, appears to exclude certain healthcare providers from the Red Flags Rule, but permits the FTC or relevant
agencies to designate additional creditors subject to the Red Flags Rule through future rulemaking if the agencies determine that the
person in question maintains accounts subject to foreseeable risk of identity theft. Compliance with any such future rulemaking may
require additional expenditures in the future.
Patient Safety and Quality Improvement Act of 2005: On July 29, 2005, the Patient Safety and Quality Improvement Act of
2005 was enacted, which has the goal of reducing medical errors and increasing patient safety. This legislation establishes a
confidential reporting structure in which providers can voluntarily report “Patient Safety Work Product” (“PSWP”) to “Patient Safety
Organizations” (“PSOs”). Under the system, PSWP is made privileged, confidential and legally protected from disclosure. PSWP does
not include medical, discharge or billing records or any other original patient or provider records but does include information
gathered specifically in connection with the reporting of medical errors and improving patient safety. This legislation does not
preempt state or federal mandatory disclosure laws concerning information that does not constitute PSWP. PSOs are certified by the
Secretary of the HHS for three-year periods and analyze PSWP, provide feedback to providers and may report non-identifiable PSWP
to a database. In addition, PSOs are expected to generate patient safety improvement strategies.
Environmental Regulations: Our healthcare operations generate medical waste that must be disposed of in compliance with
federal, state and local environmental laws, rules and regulations. Infectious waste generators, including hospitals, face substantial
penalties for improper disposal of medical waste, including civil penalties of up to $25,000 per day of noncompliance, criminal
penalties of up to $50,000 per day, imprisonment, and remedial costs. In addition, our operations, as well as our purchases and sales of
facilities are subject to various other environmental laws, rules and regulations. We believe that our disposal of such wastes is in
material compliance with all state and federal laws.
Corporate Practice of Medicine: Several states, including Florida, Nevada, California and Texas, have laws and/or regulations
that prohibit corporations and other entities from employing physicians and practicing medicine for a profit or that prohibit certain
direct and indirect payments or fee-splitting arrangements between health care providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, particular providers for medical products and services. Possible sanctions for
violation of these restrictions include loss of license and civil and criminal penalties. In addition, agreements between the corporation
and the physician may be considered void and unenforceable. These statutes and/or regulations vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies. We do not expect these state corporate practice of
medicine proscriptions to significantly affect our operations. Many states have laws and regulations which prohibit payments for
referral of patients and fee-splitting with physicians. We do not make any such payments or have any such arrangements.
EMTALA: All of our hospitals are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This
federal law generally requires hospitals that are certified providers under Medicare to conduct a medical screening examination of
every person who visits the hospital’s emergency room for treatment and, if the patient is suffering from a medical emergency, to
either stabilize the patient’s condition or transfer the patient to a facility that can better handle the condition. Our obligation to screen
and stabilize emergency medical conditions exists regardless of a patient’s ability to pay for treatment. There are severe penalties
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under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate
treatment in order to first inquire about the patient’s ability to pay. Penalties for violations of EMTALA include civil monetary
penalties and exclusion from participation in the Medicare program. In addition to any liabilities that a hospital may incur under
EMTALA, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another
hospital’s violation of the law can bring a civil suit against the hospital unrelated to the rights granted under that statute.
The federal government broadly interprets EMTALA to cover situations in which patients do not actually present to a hospital’s
emergency room, but present for emergency examination or treatment to the hospital’s campus, generally, or to a hospital-based clinic
that treats emergency medical conditions or are transported in a hospital-owned ambulance, subject to certain exceptions. EMTALA
does not generally apply to patients admitted for inpatient services; however, CMS has recently sought industry comments on the
potential applicability of EMTALA to hospital inpatients and the responsibilities of hospitals with specialized capabilities,
respectively. CMS has not yet issued regulations or guidance in response to that request for comments. The government also has
expressed its intent to investigate and enforce EMTALA violations actively in the future. We believe that we operate in substantial
compliance with EMTALA.
Health Care Industry Investigations: We are subject to claims and suits in the ordinary course of business, including those
arising from care and treatment afforded by our hospitals and are party to various government investigations and litigation. Please see
Item 3. Legal Proceedings included herein for additional disclosure. In addition, currently, and from time to time, some of our
facilities are subjected to inquiries and/or actions and receive notices of potential non-compliance of laws and regulations from various
federal and state agencies. Providers that are found to have violated these laws and regulations may be excluded from participating in
government healthcare programs, subjected to potential licensure, certification, and/or accreditation revocation, subjected to fines or
penalties or required to repay amounts received from the government for previously billed patient services.
We monitor all aspects of our business and have developed a comprehensive ethics and compliance program that is designed to
meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving,
governmental investigation or litigation may result in interpretations that are inconsistent with industry practices, including ours.
Although we believe our policies, procedures and practices comply with governmental regulations, no assurance can be given that we
will not be subjected to inquiries or actions, or that we will not be faced with sanctions, fines or penalties in connection with the
investigations. Even if we were to ultimately prevail, the government’s inquiry and/or action in connection with these matters could
have a material adverse effect on our future operating results.
Our substantial Medicare, Medicaid and other governmental billings may result in heightened scrutiny of our operations. It is
possible that governmental entities could initiate additional investigations or litigation in the future and that such matters could result
in significant penalties as well as adverse publicity. It is also possible that our executives and/or managers could be included as targets
or witnesses in governmental investigations or litigation and/or named as defendants in private litigation.
Revenue Rulings 98-15 and 2004-51: In March 1998 and May 2004, the IRS issued guidance regarding the tax consequences
of joint ventures between for-profit and not-for-profit hospitals. As a result of the tax rulings, the IRS has proposed, and may in the
future propose, to revoke the tax-exempt or public charity status of certain not-for-profit entities which participate in such joint
ventures or to treat joint venture income as unrelated business taxable income to them. The tax rulings have limited development of
joint ventures and any adverse determination by the IRS or the courts regarding the tax-exempt or public charity status of a not-for-
profit partner or the characterization of joint venture income as unrelated business taxable income could further limit joint venture
development with not-for-profit hospitals, and/or require the restructuring of certain existing joint ventures with not-for-profits.
State Rate Review: Some states where we operate hospitals have adopted legislation mandating rate or budget review for
hospitals or have adopted taxes on hospital revenues, assessments or licensure fees to fund indigent health care within the state. In the
aggregate, state rate reviews and indigent tax provisions have not materially, adversely affected our results of operations.
Medical Malpractice Tort Law Reform: Medical malpractice tort law has historically been maintained at the state level. All
states have laws governing medical liability lawsuits. Over half of the states have limits on damages awards. Almost all states have
eliminated joint and several liability in malpractice lawsuits, and many states have established limits on attorney fees. Many states had
bills introduced in their legislative sessions to address medical malpractice tort reform. Proposed solutions include enacting limits on
non-economic damages, malpractice insurance reform, and gathering lawsuit claims data from malpractice insurance companies and
the courts for the purpose of assessing the connection between malpractice settlements and premium rates. Reform legislation has also
been proposed, but not adopted, at the federal level that could preempt additional state legislation in this area.
Compliance Program: Our company-wide compliance program has been in place since 1998. Currently, the program’s
elements include a Code of Conduct, risk area specific policies and procedures, employee education and training, an internal system
for reporting concerns, auditing and monitoring programs, and a means for enforcing the program’s policies.
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Since its initial adoption, the compliance program continues to be expanded and developed to meet the industry’s expectations
and our needs. Specific written policies, procedures, training and educational materials and programs, as well as auditing and
monitoring activities have been prepared and implemented to address the functional and operational aspects of our business. Specific
areas identified through regulatory interpretation and enforcement activities have also been addressed in our program. Claims
preparation and submission, including coding, billing, and cost reports, comprise the bulk of these areas. Financial arrangements with
physicians and other referral sources, including compliance with anti-kickback and Stark laws and emergency department treatment
and transfer requirements are also the focus of policy and training, standardized documentation requirements, and review and audit.
United Kingdom Regulation: Our operations in the United Kingdom are also subject to a high level of regulation relating to
registration and licensing requirements, employee regulation, clinical standards, environmental rules as well as other areas. We are
also subject to a highly regulated business environment, and failure to comply with the various laws and regulations applicable to us
could lead to substantial penalties and other adverse effects on our business.
Employees and Medical Staff
Our facilities located in the U.S. had approximately 76,600 employees as of December 31, 2017, of whom approximately 55,000
were employed full-time. In addition, our facilities located in the U.K. had approximately 6,500 employees as of December 31,
2017. Our hospitals are staffed by licensed physicians who have been admitted to the medical staff of individual hospitals. In a
number of our markets, physicians may have admitting privileges at other hospitals in addition to ours. Within our acute care division,
approximately 240 physicians are employed by physician practice management subsidiaries of ours either directly or through contracts
with affiliated group practices structured as 501A corporations. Members of the medical staffs of our hospitals also serve on the
medical staffs of hospitals not owned by us and may terminate their affiliation with our hospitals at any time. In addition, within our
behavioral health division, approximately 490 psychiatrists are employed by subsidiaries of ours either directly or through contracts
with affiliated group practices structured as 501A corporations. Each of our hospitals is managed on a day-to-day basis by a managing
director employed by a subsidiary of ours. In addition, a Board of Governors, including members of the hospital’s medical staff,
governs the medical, professional and ethical practices at each hospital. We believe that our relations with our employees are
satisfactory.
Approximately 765 of our employees at six of our hospitals are unionized. At Valley Hospital Medical Center, unionized
employees belong to the Culinary Workers and Bartenders Union and the International Union of Operating Engineers. Engineers at
Desert Springs Hospital are represented by the International Union of Operating Engineers. At The George Washington University
Hospital, dietary and housekeeping employees are represented by the Service Employees International Union (“SEIU”). At the
Psychiatric Institute of Washington, clinical, clerical, support and maintenance employees are represented by the Communication
Workers of America (AFL-CIO). Registered Nurses, Licensed Practical Nurses, certain technicians and therapists and some clerical
employees at HRI Hospital in Boston are represented by the SEIU. At Brooke Glen Behavioral Hospital, unionized employees are
represented by the Teamsters and the Northwestern Nurses Association/Pennsylvania Association of Staff Nurses and Allied
Professionals.
Competition
The health care industry is highly competitive. In recent years, competition among healthcare providers for patients has
intensified in the United States due to, among other things, regulatory and technological changes, increasing use of managed care
payment systems, cost containment pressures and a shift toward outpatient treatment. In all of the geographical areas in which we
operate, there are other hospitals that provide services comparable to those offered by our hospitals. In addition, some of our
competitors include hospitals that are owned by tax-supported governmental agencies or by nonprofit corporations and may be
supported by endowments and charitable contributions and exempt from property, sale and income taxes. Such exemptions and
support are not available to us.
In some markets, certain of our competitors may have greater financial resources, be better equipped and offer a broader range
of services than us. Certain hospitals that are located in the areas served by our facilities are specialty or large hospitals that provide
medical, surgical and behavioral health services, facilities and equipment that are not available at our hospitals. The increase in
outpatient treatment and diagnostic facilities, outpatient surgical centers and freestanding ambulatory surgical also increases
competition for us. In addition, some of our hospitals face competition from hospitals or surgery centers that are physician owned.
The number and quality of the physicians on a hospital’s staff are important factors in determining a hospital’s success and
competitive advantage. Typically, physicians are responsible for making hospital admissions decisions and for directing the course of
patient treatment. We believe that physicians refer patients to a hospital primarily on the basis of the patient’s needs, the quality of
other physicians on the medical staff, the location of the hospital and the breadth and scope of services offered at the hospital’s
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facilities. We strive to retain and attract qualified doctors by maintaining high ethical and professional standards and providing
adequate support personnel, technologically advanced equipment and facilities that meet the needs of those physicians.
In addition, we depend on the efforts, abilities, and experience of our medical support personnel, including our nurses,
pharmacists and lab technicians and other health care professionals. We compete with other health care providers in recruiting and
retaining qualified hospital management, nurses and other medical personnel. Our acute care and behavioral health care facilities are
experiencing the effects of a shortage of skilled nursing staff nationwide, which has caused and may continue to cause an increase in
salaries, wages and benefits expense in excess of the inflation rate. In addition, in some markets like California, there are requirements
to maintain specified nurse-staffing levels. To the extent we cannot meet those levels, we may be required to limit the healthcare
services provided in these markets which would have a corresponding adverse effect on our net operating revenues.
Many states in which we operate hospitals have CON laws. The application process for approval of additional covered services,
new facilities, changes in operations and capital expenditures is, therefore, highly competitive in these states. In those states that do
not have CON laws or which set relatively high levels of expenditures before they become reviewable by state authorities, competition
in the form of new services, facilities and capital spending is more prevalent. See “Regulation and Other Factors.”
Our ability to negotiate favorable service contracts with purchasers of group health care services also affects our competitive
position and significantly affects the revenues and operating results of our hospitals. Managed care plans attempt to direct and control
the use of hospital services and to demand that we accept lower rates of payment. In addition, employers and traditional health
insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts
from established charges. In return, hospitals secure commitments for a larger number of potential patients. Generally, hospitals
compete for service contracts with group health care service purchasers on the basis of price, market reputation, geographic location,
quality and range of services, quality of the medical staff and convenience. The importance of obtaining contracts with managed care
organizations varies from market to market depending on the market strength of such organizations.
A key element of our growth strategy is expansion through the acquisition of additional hospitals in select markets. The
competition to acquire hospitals is significant. We face competition for acquisition candidates primarily from other for-profit health
care companies, as well as from not-for-profit entities. Some of our competitors have greater resources than we do. We intend to
selectively seek opportunities to expand our base of operations by adhering to our disciplined program of rational growth, but may not
be successful in accomplishing acquisitions on favorable terms.
Relationship with Universal Health Realty Income Trust
At December 31, 2017, we held approximately 5.7% of the outstanding shares of Universal Health Realty Income Trust (the
“Trust”). We serve as Advisor to the Trust under an annually renewable advisory agreement, which is scheduled to expire on
December 31st of each year, pursuant to the terms of which we conduct the Trust’s day-to-day affairs, provide administrative services
and present investment opportunities. In December, 2017, the advisory agreement was renewed by the Trust for 2018 pursuant to the
same terms in place during each of the last three years. During 2017, 2016 and 2015, the advisory fee was computed at 0.70% of the
Trust’s average invested real estate assets. In addition, certain of our officers and directors are also officers and/or directors of the
Trust. Management believes that it has the ability to exercise significant influence over the Trust, therefore we account for our
investment in the Trust using the equity method of accounting. We earned an advisory fee from the Trust, which is included in net
revenues in the accompanying consolidated statements of income, of approximately $3.6 million during 2017, $3.3 million during
2016 and $2.8 million during 2015.
Our pre-tax share of income from the Trust was $2.6 million during 2017, $1.0 million during 2016 and $1.4 million during
2015, and is included in net revenues in the accompanying consolidated statements of income for each year. Included in our share of
the Trust’s income was approximately $1.7 million in 2017 related to our share of a gain recorded resulting from a property
transaction, as well as insurance proceeds in excess of damaged Trust property. During 2015, our share of the Trust’s income included
$500,000 related to our share of a gain on an exchange transaction recorded by the Trust. We received dividends from the Trust
amounting to $2.1 million during 2017 and $2.0 million during each of 2016 and 2015.
The carrying value of our investment in the Trust was $8.2 million and $7.7 million at December 31, 2017 and 2016,
respectively, and is included in other assets in the accompanying consolidated balance sheets. The market value of our investment in
the Trust was $59.2 million at December 31, 2017 and $51.7 million at December 31, 2016, based on the closing price of the Trust’s
stock on the respective dates.
The Trust commenced operations in 1986 by purchasing certain hospital properties from us and immediately leasing the
properties back to our respective subsidiaries. Most of the leases were entered into at the time the Trust commenced operations and
provided for initial terms of 13 to 15 years with up to six additional 5-year renewal terms. Each hospital lease also provided for
additional or bonus rental, as discussed below. The base rents are paid monthly and the bonus rents are computed and paid on a
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quarterly basis, based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The
leases with those subsidiaries are unconditionally guaranteed by us and are cross-defaulted with one another.
Total rent expense under the operating leases on the three hospital facilities with the Trust during 2017, 2016 and 2015 was
$16.0 million, $15.9 million, and $15.6 million, respectively. Pursuant to the terms of the three hospital leases with the Trust, we have
the option to renew the leases at the lease terms described above by providing notice to the Trust at least 90 days prior to the
termination of the then current term. We also have the right to purchase the respective leased hospitals at the end of the lease terms or
any renewal terms at their appraised fair market value as well as purchase any or all of the three leased hospital properties at the
appraised fair market value upon one month’s notice should a change of control of the Trust occur. In addition, we have rights of first
refusal to: (i) purchase the respective leased facilities during and for 180 days after the lease terms at the same price, terms and
conditions of any third-party offer, or; (ii) renew the lease on the respective leased facility at the end of, and for 180 days after, the
lease term at the same terms and conditions pursuant to any third-party offer.
The table below details the renewal options and terms for each of our three hospital facilities leased from the Trust:
Hospital Name
McAllen Medical Center
Wellington Regional Medical Center
Southwest Healthcare System, Inland Valley Campus
End of Lease Term
Acute Care $ 5,485,000 December, 2021
Acute Care $ 3,030,000 December, 2021
Acute Care $ 2,648,000 December, 2021
Type of
Facility
Annual
Minimum
Rent
Renewal
Term
(years)
10 (a)
10 (b)
10 (b)
(a) We have two 5-year renewal options at existing lease rates (through 2031).
(b) We have two 5-year renewal options at fair market value lease rates (2022 through 2031).
In addition, certain of our subsidiaries are tenants in various medical office buildings and two free-standing emergency
departments (“FEDs”) owned by the Trust or by limited liability companies in which the Trust holds 95% to 100% of the ownership
interest. During the first quarter of 2015, wholly-owned subsidiaries of ours sold to and leased back from the Trust, two newly
constructed FEDs located in Texas which were completed and opened during the first quarter of 2015. In conjunction with these
transactions, ten-year lease agreements with six, five-year renewal options have been executed with the Trust. We have the option to
purchase the properties upon the expiration of the fixed terms and each five-year renewal terms at the fair market value of the
property. The aggregate construction cost/sales proceeds of these facilities was approximately $13 million, and the aggregate rent
expense paid to the Trust at the commencement of the leases was approximately $900,000 annually.
Executive Officers of the Registrant
The executive officers, whose terms will expire at such time as their successors are elected, are as follows:
Name and Age
Alan B. Miller (80)
Marc D. Miller (47)
Steve G. Filton (60)
Debra K. Osteen (62)
Marvin G. Pember (64)
Present Position with the Company
Chairman of the Board and Chief Executive Officer
President and Director
Executive Vice President, Chief Financial Officer and Secretary
Executive Vice President, President of Behavioral Health Care Division
Executive Vice President, President of Acute Care Division
Mr. Alan B. Miller has been Chairman of the Board and Chief Executive Officer since inception and also served as President
from inception until May, 2009. Prior thereto, he was President, Chairman of the Board and Chief Executive Officer of American
Medicorp, Inc. He currently serves as Chairman of the Board, Chief Executive Officer and President of Universal Health Realty
Income Trust. He is the father of Marc D. Miller, our President and Director.
Mr. Marc D. Miller was elected President in May, 2009 and prior thereto served as Senior Vice President and co-head of our
Acute Care Hospitals since 2007. He was elected a Director in May, 2006 and Vice President in 2005. He has served in various
capacities related to our acute care division since 2000. He was elected to the Board of Trustees of Universal Health Realty Income
Trust in December, 2008. In August, 2015, he was appointed to the Board of Directors of Premier, Inc., a publicly traded healthcare
performance improvement alliance. See Note 9 to the Consolidated Financial Statements-Relationship with Universal Health Realty
Income Trust and Other Related Party Transactions for additional disclosure regarding the Company’s group purchasing organization
agreement with Premier, Inc. Marc D. Miller is the son of Alan B. Miller, our Chairman of the Board and Chief Executive Officer.
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Mr. Filton was elected Executive Vice President in 2017 and continues to serve as Chief Financial Officer since his appointment
in 2003. He has also served as Secretary since 1999. He had served as Senior Vice President since 2003, as Vice President and
Controller since 1991, and as Director of Corporate Accounting since 1985.
Ms. Osteen was elected Executive Vice President in 2017 and continues to serve as President of our Behavioral Health Care
Division since her appointment in 2009. She has served as Senior Vice President since 2005, as Vice President since 2000, and in
various capacities related to our Behavioral Health Care Division since 1984.
Mr. Pember was elected Executive Vice President in 2017 and continues to serve as President of our Acute Care Division since
commencement of his employment with us in 2011. He had served as Senior Vice President since 2011. He was formerly employed
for 12 years at Indiana University Health, Inc. (formerly known as Clarian Health Partners, Inc.), a nonprofit hospital system that
operates multiple facilities in Indiana, where he served as Executive Vice President and Chief Financial Officer.
ITEM 1A. Risk Factors
We are subject to numerous known and unknown risks, many of which are described below and elsewhere in this Annual
Report. Any of the events described below could have a material adverse effect on our business, financial condition and results of
operations. Additional risks and uncertainties that we are not aware of, or that we currently deem to be immaterial, could also impact
our business and results of operations.
A significant portion of our revenue is produced by facilities located in Texas, Nevada and California.
Texas: We own 7 inpatient acute care hospitals and 22 inpatient behavioral healthcare facilities as listed in Item 2. Properties.
On a combined basis, these facilities contributed 15% in 2017, 16% in 2016 and 17% in 2015 of our consolidated net revenues. On a
combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 11% in 2017, 7% in 2016 and
11% in 2015, of our income from operations after net income attributable to noncontrolling interest.
Nevada: We own 8 inpatient acute care hospitals and 4 inpatient behavioral healthcare facilities as listed in Item 2. Properties.
On a combined basis, these facilities contributed 17% in 2017, 16% in 2016 and 15% in 2015, of our consolidated net revenues. On a
combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 20% in 2017, 13% in 2016 and
10% in 2015, of our income from operations after net income attributable to noncontrolling interest.
California: We own 5 inpatient acute care hospitals and 8 inpatient behavioral healthcare facilities as listed in Item 2.
Properties. On a combined basis, these facilities contributed 11% in 2017, 11% in 2016 and 11% in 2015, of our consolidated net
revenues. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 13% in 2017,
15% in 2016 and 11% in 2015, of our income from operations after net income attributable to noncontrolling interest.
The significant portion of our revenues and earnings derived from these facilities makes us particularly sensitive to legislative,
regulatory, economic, environmental and competition changes in Texas, Nevada and California. Any material change in the current
payment programs or regulatory, economic, environmental or competitive conditions in these states could have a disproportionate
effect on our overall business results.
Our revenues and results of operations are significantly affected by payments received from the government and other third
party payors.
We derive a significant portion of our revenue from third-party payors, including the Medicare and Medicaid programs.
Changes in these government programs in recent years have resulted in limitations on reimbursement and, in some cases, reduced
levels of reimbursement for healthcare services. Payments from federal and state government programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and
state funding restrictions, all of which could materially increase or decrease program payments, as well as affect the cost of providing
service to patients and the timing of payments to facilities. We are unable to predict the effect of recent and future policy changes on
our operations. In addition, the uncertainty and fiscal pressures placed upon federal and state governments as a result of, among other
things, deterioration in general economic conditions and the funding requirements from the federal healthcare reform legislation, may
affect the availability of taxpayer funds for Medicare and Medicaid programs. In addition, the vast majority of the net revenues
generated at our behavioral health facilities located in the United Kingdom are derived from governmental payors. If the rates paid or
the scope of services covered by governmental payors in the United States or United Kingdom are reduced, there could be a material
adverse effect on our business, financial position and results of operations.
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We receive Medicaid revenues in excess of $100 million annually from each of Texas, California, Nevada, Washington,
D.C., Pennsylvania and Illinois, making us particularly sensitive to reductions in Medicaid and other state based revenue programs as
well as regulatory, economic, environmental and competitive changes in those states.
In addition to changes in government reimbursement programs, our ability to negotiate favorable contracts with private payors,
including managed care providers, significantly affects the revenues and operating results of our hospitals. Private payors, including
managed care providers, increasingly are demanding that we accept lower rates of payment.
We expect continued third-party efforts to aggressively manage reimbursement levels and cost controls. Reductions in
reimbursement amounts received from third-party payors could have a material adverse effect on our financial position and our results
of operations.
Reductions or changes in Medicare and Medicaid funding could have a material adverse effect on our future results of
operations.
On January 3, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “2012 Act”). The 2012
Act postponed for two months sequestration cuts mandated under the Budget Control Act of 2011. The postponed sequestration cuts
include a 2% annual reduction over ten years in Medicare spending to providers. Medicaid is exempt from sequestration. In order to
offset the costs of the legislation, the 2012 Act reduces payments to other providers totaling almost $26 billion over ten years.
Approximately half of those funds will come from reductions in Medicare reimbursement to hospitals. Although the Bipartisan Budget
Act of 2013 has reduced certain sequestration-related budgetary cuts, spending reductions related to the Medicare program remain in
place. On December 26, 2013, President Obama signed into law H.J. Res. 59, the Bipartisan Budget Act of 2013, which includes the
Pathway for SGR Reform Act of 2013 (“the Act”). In addition, on February 15, 2014, Public Law 113-082 was enacted. The 2012 Act
and subsequent federal legislation achieves new savings by extending sequestration for mandatory programs—including Medicare—
through 2027. Please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Sources of
Revenue-Medicare, for additional disclosure.
The 2012 Act includes a document and coding (“DCI”) adjustment and a reduction in Medicaid disproportionate share hospital
(“DSH”) payments. Expected to save $10.5 billion over 10 years, the DCI adjustment decreases projected Medicare hospital payments
for inpatient and overnight care through a downward adjustment in annual base payment increases. These reductions are meant to
recoup what Medicare authorities consider to be “overpayments” to hospitals that occurred as a result of the transition to Medicare
Severity Diagnosis Related Groups. The reduction in Medicaid DSH payments was expected to save $4.2 billion over 10 years. This
provision extends the changes regarding DSH payments established by the Legislation and determines future allotments off of the
rebased level. On February 9, 2018, President Trump signed into law H.R. 1892, the Bipartisan Budget Act of 2018, which eliminated
the DSH cuts scheduled for 2018 and 2019 but added additional DSH reductions of $4 billion in 2020 and $8 billion a year between
2021 and 2025.
We are subject to uncertainties regarding health care reform.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the “PPACA”). The
Healthcare and Education Reconciliation Act of 2010 (the “Reconciliation Act”), which contains a number of amendments to the
PPACA, was signed into law on March 30, 2010. Two primary goals of the PPACA, combined with the Reconciliation Act
(collectively referred to as the “Legislation”), are to provide for increased access to coverage for healthcare and to reduce healthcare-
related expenses.
Although it was expected that as a result of the Legislation there would be a reduction in uninsured patients, which would
reduce our expense from uncollectible accounts receivable, the Legislation makes a number of other changes to Medicare and
Medicaid which we believe may have an adverse impact on us. It has been projected that the Legislation will result in a net reduction
in Medicare and Medicaid payments to hospitals totaling $155 billion over 10 years. The Legislation revises reimbursement under the
Medicare and Medicaid programs to emphasize the efficient delivery of high quality care and contains a number of incentives and
penalties under these programs to achieve these goals. The Legislation provides for decreases in the annual market basket update for
federal fiscal years 2010 through 2019, a productivity offset to the market basket update beginning October 1, 2011 for Medicare Part
B reimbursable items and services and beginning October 1, 2012 for Medicare inpatient hospital services. The Legislation and
subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions
began in October, 2013 while the Medicaid DSH reductions are scheduled to begin in 2020. The Legislation implements 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.
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A 2012 U.S. Supreme Court ruling limited the federal government’s ability to expand health insurance coverage by holding
unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid
coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the
Medicaid expansion program by reducing their existing Medicaid funding. Therefore, states can choose to accept or not to participate
without risking the loss of federal Medicaid funding. As a result, many states, including Texas, have not expanded their Medicaid
programs without the threat of loss of federal funding. CMS has granted, and is expected to grant additional, section 1115
demonstration waivers providing for work and community engagement requirements for certain Medicaid eligible individuals. It is
anticipated this will lead to reductions in coverage, and likely increases in uncompensated care, in states where these demonstration
waivers are granted.
The various provisions in the Legislation that directly or indirectly affect Medicare and Medicaid reimbursement are scheduled
to take 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 Congress had previously revised the intent
requirement of the Anti-Kickback Statute to provide that a person is not required to “have actual knowledge or specific intent to
commit a violation of” the Anti-Kickback Statute in order to be found in violation of such law, the Legislation also provides that any
claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil
False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the
federal civil False Claims Act, although final regulations implementing this statutory requirement remain pending. 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 has repealed the individual mandate to
obtain health insurance penalty that was part of the original Legislation. In addition, Congress is considering legislation that would, in
material part: (i) eliminate the large employer mandate to obtain or provide health insurance coverage, respectively; (ii) permit
insurers to impose a surcharge up to 30 percent on individuals who go uninsured for more than two months and then purchase
coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits accordingly to income
level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by
a state, transition federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would
allow such state to define essential health benefits differently from federal standards and that would allow certain commercial health
plans to take health status, including pre-existing conditions, into account in setting premiums.
In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions. In relevant part,
President Trump has already taken executive actions: (i) requiring all federal agencies with authorities and responsibilities under the
Legislation to “exercise all authority and discretion available to them to waiver, defer, grant exemptions from, or delay” parts of the
Legislation that place “unwarranted economic and regulatory burdens” on states, individuals or health care providers; (ii) the issuance
of a proposed rule by the Department of Labor to enable the formation of health plans that would be exempt from certain Legislation
essential health benefits requirements, and; (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. The
uncertainty resulting from these Executive Branch policies has led to reduced Exchange enrollment in 2018 and is expected to further
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worsen the individual and small group market risk pools in future years. It is also anticipated that these and future 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.
We are required to treat patients with emergency medical conditions regardless of ability to pay.
In accordance with our internal policies and procedures, as well as the Emergency Medical Treatment and Active Labor Act, or
EMTALA, we provide a medical screening examination to any individual who comes to one of our hospitals while in active labor
and/or seeking medical treatment (whether or not such individual is eligible for insurance benefits and regardless of ability to pay) to
determine if such individual has an emergency medical condition. If it is determined that such person has an emergency medical
condition, we provide such further medical examination and treatment as is required to stabilize the patient’s medical condition, within
the facility’s capability, or arrange for transfer of such individual to another medical facility in accordance with applicable law and the
treating hospital’s written procedures. Our obligations under EMTALA may increase substantially going forward; CMS has sought
stakeholder comments concerning the potential applicability of EMTALA to hospital inpatients and the responsibilities of hospitals
with specialized capabilities, respectively, but has yet to issue further guidance in response to that request. If the number of indigent
and charity care patients with emergency medical conditions we treat increases significantly, or if regulations expanding our
obligations to inpatients under EMTALA is proposed and adopted, our results of operations will be harmed.
If we are not able to provide high quality medical care at a reasonable price, patients may choose to receive their health care
from our competitors.
In recent years, the number of quality measures that hospitals are required to report publicly has increased. CMS publishes
performance data related to quality measures and data on patient satisfaction surveys that hospitals submit in connection with the
Medicare program. Federal law provides for the future expansion of the number of quality measures that must be reported.
Additionally, the Legislation requires all hospitals to annually establish, update and make public a list of their standard charges for
products and services. If any of our hospitals achieve poor results on the quality measures or patient satisfaction surveys (or results
that are lower than our competitors) or if our standard charges are higher than our competitors, our patient volume could decline
because patients may elect to use competing hospitals or other health care providers that have better metrics and pricing. This
circumstance could harm our business and results of operations.
An increase in uninsured and underinsured patients in our acute care facilities or the deterioration in the collectability of the
accounts of such patients could harm our results of operations.
Collection of receivables from third-party payors and patients is our primary source of cash and is critical to our operating
performance. Our primary collection risks relate to uninsured patients and the portion of the bill that is the patient’s responsibility,
which primarily includes co-payments and deductibles. However, we also have substantial receivables due to us from certain state-
based funding programs. We estimate our provisions for doubtful accounts based on general factors such as payor mix, the agings of
the receivables, historical collection experience and assessment of probability of future collections. We routinely review accounts
receivable balances in conjunction with these factors and other economic conditions that might ultimately affect the collectability of
the patient accounts and make adjustments to our allowances as warranted. Significant changes in business office operations, payor
mix, economic conditions or trends in federal and state governmental health coverage could affect our collection of accounts
receivable, cash flow and results of operations. If we experience unexpected increases in the growth of uninsured and underinsured
patients or in bad debt expenses, our results of operations will be harmed.
Our hospitals face competition for patients from other hospitals and health care providers.
The healthcare industry is highly competitive, and competition among hospitals, and other healthcare providers for patients and
physicians has intensified in recent years. In all of the geographical areas in which we operate, there are other hospitals that provide
services comparable to those offered by our hospitals. Some of our competitors include hospitals that are owned by tax-supported
governmental agencies or by nonprofit corporations and may be supported by endowments and charitable contributions and exempt
from property, sales and income taxes. Such exemptions and support are not available to us.
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In some markets, certain of our competitors may have greater financial resources, be better equipped and offer a broader range
of services than we. The number of inpatient facilities, as well as outpatient surgical and diagnostic centers, many of which are fully or
partially owned by physicians, in the geographic areas in which we operate has increased significantly. As a result, most of our
hospitals operate in an increasingly competitive environment.
We also operate health care facilities in the United Kingdom where the National Health Service (the “NHS”) is the principal
provider of healthcare services. In addition to the NHS, we face competition in the United Kingdom from independent sector
providers and other publicly funded entities for patients.
If our competitors are better able to attract patients, recruit physicians and other healthcare professionals, expand services or
obtain favorable managed care contracts at their facilities, we may experience a decline in patient volume and our business may be
harmed.
Our performance depends on our ability to recruit and retain quality physicians.
Typically, physicians are responsible for making hospital admissions decisions and for directing the course of patient treatment.
As a result, the success and competitive advantage of our hospitals depends, in part, on the number and quality of the physicians on
the medical staffs of our hospitals, the admitting practices of those physicians and our maintenance of good relations with those
physicians. Physicians generally are not employees of our hospitals, and, in a number of our markets, physicians have admitting
privileges at other hospitals in addition to our hospitals. They may terminate their affiliation with us at any time. If we are unable to
provide high ethical and professional standards, adequate support personnel and technologically advanced equipment and facilities
that meet the needs of those physicians, they may be discouraged from referring patients to our facilities and our results of operations
may decline.
It may become difficult for us to attract and retain an adequate number of physicians to practice in certain of the non-urban
communities in which our hospitals are located. Our failure to recruit physicians to these communities or the loss of physicians in
these communities could make it more difficult to attract patients to our hospitals and thereby may have a material adverse effect on
our business, financial condition and results of operations.
Generally, the top ten attending physicians within each of our facilities represent a large share of our inpatient revenues and
admissions. The loss of one or more of these physicians, even if temporary, could cause a material reduction in our revenues, which
could take significant time to replace given the difficulty and cost associated with recruiting and retaining physicians.
If we do not continually enhance our hospitals with the most recent technological advances in diagnostic and surgical
equipment, our ability to maintain and expand our markets will be adversely affected.
The technology used in medical equipment and related devices is constantly evolving and, as a result, manufacturers and
distributors continue to offer new and upgraded products to health care providers. To compete effectively, we must continually assess
our equipment needs and upgrade when significant technological advances occur. If our facilities do not stay current with
technological advances in the health care industry, patients may seek treatment from other providers and/or physicians may refer their
patients to alternate sources, which could adversely affect our results of operations and harm our business.
If we fail to continue to meet the meaningful use criteria related to electronic health record systems (“EHR”), our operations
could be harmed.
Pursuant to HITECH regulations, hospitals that did not qualify as a meaningful user of EHR by 2015 were subject to a reduced
market basket update to the inpatient prospective payment system (“IPPS”) standardized amount in 2015 and each subsequent fiscal
year. We believe that all of our acute care hospitals have met the applicable meaningful use criteria and therefore are not subject to a
reduced market basked update to the IPPS standardized amount. 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.
Our performance depends on our ability to attract and retain qualified nurses and medical support staff and we face
competition for staffing that may increase our labor costs and harm our results of operations.
We depend on the efforts, abilities, and experience of our medical support personnel, including our nurses, pharmacists and lab
technicians and other healthcare professionals. We compete with other healthcare providers in recruiting and retaining qualified
hospital management, nurses and other medical personnel.
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The nationwide shortage of nurses and other medical support personnel has been a significant operating issue facing us and
other healthcare providers. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other medical
support personnel or require us to hire expensive temporary personnel. In addition, in some markets like California, there are
requirements to maintain specified nurse-staffing levels. To the extent we cannot meet those levels, we may be required to limit the
healthcare services provided in these markets, which would have a corresponding adverse effect on our net operating revenues.
We cannot predict the degree to which we will be affected by the future availability or cost of attracting and retaining talented
medical support staff. If our general labor and related expenses increase, we may not be able to raise our rates correspondingly. Our
failure to either recruit and retain qualified hospital management, nurses and other medical support personnel or control our labor costs
could harm our results of operations.
Increased labor union activity is another factor that could adversely affect our labor costs. Union organizing activities and
certain potential changes in federal labor laws and regulations could increase the likelihood of employee unionization in the future, to
the extent a greater portion of our employee base unionized, it is possible our labor costs could increase materially.
If we fail to comply with extensive laws and government regulations, we could suffer civil or criminal penalties or be required to
make significant changes to our operations that could reduce our revenue and profitability.
The healthcare industry is required to comply with extensive and complex laws and regulations at the federal, state and local
government levels relating to, among other things: hospital billing practices and prices for services; relationships with physicians and
other referral sources; adequacy of medical care and quality of medical equipment and services; ownership of facilities; qualifications
of medical and support personnel; confidentiality, maintenance, privacy and security issues associated with health-related information
and patient medical records; the screening, stabilization and transfer of patients who have emergency medical conditions; certification,
licensure and accreditation of our facilities; operating policies and procedures, and; construction or expansion of facilities and
services.
Among these laws are the federal False Claims Act, the Health Insurance Portability and Accountability Act of 1996,
(“HIPAA”), the federal anti-kickback statute and the provision of the Social Security Act commonly known as the “Stark Law.” These
laws, and particularly the anti-kickback statute and the Stark Law, impact the relationships that we may have with physicians and
other referral sources. We have a variety of financial relationships with physicians who refer patients to our facilities, including
employment contracts, leases and professional service agreements. We also provide financial incentives, including minimum revenue
guarantees, to recruit physicians into communities served by our hospitals. The Office of the Inspector General of the Department of
Health and Human Services, or OIG, has enacted safe harbor regulations that outline practices that are deemed protected from
prosecution under the anti-kickback statute. A number of our current arrangements, including financial relationships with physicians
and other referral sources, may not qualify for safe harbor protection under the anti-kickback statute. Failure to meet a safe harbor
does not mean that the arrangement necessarily violates the anti-kickback statute, but may subject the arrangement to greater scrutiny.
We cannot assure that practices that are outside of a safe harbor will not be found to violate the anti-kickback statute. CMS published
a Medicare self-referral disclosure protocol, which is intended to allow providers to self-disclose actual or potential violations of the
Stark law. Because there are only a few judicial decisions interpreting the Stark law, there can be no assurance that our hospitals will
not be found in violation of the Stark Law or that self-disclosure of a potential violation would result in reduced penalties.
Federal regulations issued under HIPAA contain provisions that require us to implement and, in the future, may require us to
implement additional costly electronic media security systems and to adopt new business practices designed to protect the privacy and
security of each of our patient’s health and related financial information. Such privacy and security regulations impose extensive
administrative, physical and technical requirements on us, restrict our use and disclosure of certain patient health and financial
information, provide patients with rights with respect to their health information and require us to enter into contracts extending many
of the privacy and security regulatory requirements to third parties that perform duties on our behalf. Additionally, recent changes to
HIPAA regulations may result in greater compliance requirements, including obligations to report breaches of unsecured patient data,
as well as create new liabilities for the actions of parties acting as business associates on our behalf.
These laws and regulations are extremely complex, and, in many cases, we do not have the benefit of regulatory or judicial
interpretation. In the future, it is possible that different interpretations or enforcement of these laws and regulations could subject our
current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment,
personnel, services, capital expenditure programs and operating expenses. A determination that we have violated one or more of these
laws (see Item 3—Legal Proceedings), or the public announcement that we are being investigated for possible violations of one or
more of these laws, could have a material adverse effect on our business, financial condition or results of operations and our business
reputation could suffer significantly. In addition, we cannot predict whether other legislation or regulations at the federal or state level
will be adopted, what form such legislation or regulations may take or what their impact on us may be. See Item 1 Business—Self-
Referral and Anti-Kickback Legislation.
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If we are deemed to have failed to comply with the anti-kickback statute, the Stark Law or other applicable laws and regulations,
we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or
more facilities), and exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state
healthcare programs. The imposition of such penalties could have a material adverse effect on our business, financial condition or
results of operations.
We also operate health care facilities in the United Kingdom and have operations and commercial relationships with companies
in other foreign jurisdictions and, as a result, are subject to certain U.S. and foreign laws applicable to businesses generally, including
anti-corruption laws. The Foreign Corrupt Practices Act regulates U.S. companies in their dealings with foreign officials, prohibiting
bribes and similar practices, and requires that they maintain records that fairly and accurately reflect transactions and appropriate
internal accounting controls. In addition, the United Kingdom Bribery Act has wide jurisdiction over certain activities that affect the
United Kingdom.
Our operations in the United Kingdom are also subject to a high level of regulation relating to registration and licensing
requirements employee regulation, clinical standards, environmental rules as well as other areas. We are also subject to a highly
regulated business environment, and failure to comply with the various laws and regulations, applicable to us could lead to substantial
penalties, and other adverse effects on our business.
We are subject to occupational health, safety and other similar regulations and failure to comply with such regulations could
harm our business and results of operations.
We are subject to a wide variety of federal, state and local occupational health and safety laws and regulations. Regulatory
requirements affecting us include, but are not limited to, those covering: (i) air and water quality control; (ii) occupational health and
safety (e.g., standards regarding blood-borne pathogens and ergonomics, etc.); (iii) waste management; (iv) the handling of asbestos,
polychlorinated biphenyls and radioactive substances; and (v) other hazardous materials. If we fail to comply with those standards, we
may be subject to sanctions and penalties that could harm our business and results of operations.
We may be subject to liabilities from claims brought against our facilities.
We are subject to medical malpractice lawsuits, product liability lawsuits, class action lawsuits and other legal actions in the
ordinary course of business. Some of these actions may involve large claims, as well as significant defense costs. We cannot predict
the outcome of these lawsuits or the effect that findings in such lawsuits may have on us. In an effort to resolve one or more of these
matters, we may choose to negotiate a settlement. Amounts we pay to settle any of these matters may be material. All professional and
general liability insurance we purchase is subject to policy limitations. We believe that, based on our past experience and actuarial
estimates, our insurance coverage is adequate considering the claims arising from the operations of our hospitals. While we
continuously monitor our coverage, our ultimate liability for professional and general liability claims could change materially from
our current estimates. If such policy limitations should be partially or fully exhausted in the future, or payments of claims exceed our
estimates or are not covered by our insurance, it could have a material adverse effect on our operations.
We may be subject to governmental investigations, regulatory actions and whistleblower lawsuits.
The federal False Claims Act permits private parties to bring qui tam, or whistleblower, lawsuits against companies.
Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has
defrauded the federal government. These private parties are entitled to share in any amounts recovered by the government, and, as a
result, the number of whistleblower lawsuits that have been filed against providers has increased significantly in recent years. Because
qui tam lawsuits are filed under seal, we could be named in one or more such lawsuits of which we are not aware. Please see
Item 3. Legal Proceedings for disclosure of current related matters.
The failure of certain employers, or the closure of certain facilities, could have a disproportionate impact on our hospitals.
The economies in the communities in which our hospitals operate are often dependent on a small number of large employers.
Those employers often provide income and health insurance for a disproportionately large number of community residents who may
depend on our hospitals and other health care facilities for their care. The failure of one or more large employer or the closure or
substantial reduction in the number of individuals employed at facilities located in or near the communities where our hospitals
operate, could cause affected employees to move elsewhere to seek employment or lose insurance coverage that was otherwise
available to them. The occurrence of these events could adversely affect our revenue and results of operations, thereby harming our
business.
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If any of our existing health care facilities lose their accreditation or any of our new facilities fail to receive accreditation, such
facilities could become ineligible to receive reimbursement under Medicare or Medicaid.
The construction and operation of healthcare facilities are subject to extensive federal, state and local regulation relating to,
among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-
setting and compliance with building codes and environmental protection. Additionally, such facilities are subject to periodic
inspection by government authorities to assure their continued compliance with these various standards.
All of our hospitals are deemed certified, meaning that they are accredited, properly licensed under the relevant state laws and
regulations and certified under the Medicare program. The effect of maintaining certified facilities is to allow such facilities to
participate in the Medicare and Medicaid programs. We believe that all of our healthcare facilities are in material compliance with
applicable federal, state, local and other relevant regulations and standards. However, should any of our healthcare facilities lose their
deemed certified status and thereby lose certification under the Medicare or Medicaid programs, such facilities would be unable to
receive reimbursement from either of those programs and our business could be materially adversely effected.
Our growth strategy depends, in part, on acquisitions, and we may not be able to continue to acquire hospitals that meet our
target criteria. We may also have difficulties acquiring hospitals from not-for-profit entities due to regulatory scrutiny.
Acquisitions of hospitals in select markets are a key element of our growth strategy. We face competition for acquisition
candidates primarily from other for-profit healthcare companies, as well as from not-for-profit entities. Some of our competitors have
greater resources than we do. Also, suitable acquisitions may not be accomplished due to unfavorable terms.
In addition, many states have enacted, or are considering enacting, laws that affect the conversion or sale of not-for-profit
hospitals to for-profit entities. These laws generally require prior approval from the state attorney general, advance notification and
community involvement. In addition, attorneys general in states without specific conversion legislation may exercise discretionary
authority over such transactions. Although the level of government involvement varies from state to state, the trend is to provide for
increased governmental review and, in some cases, approval of a transaction in which a not-for-profit entity sells a healthcare facility
to a for-profit entity. The adoption of new or expanded conversion legislation, increased review of not-for-profit hospital conversions
or our inability to effectively compete against other potential purchasers could make it more difficult for us to acquire additional
hospitals, increase our acquisition costs or make it difficult for us to acquire hospitals that meet our target acquisition criteria, any of
which could adversely affect our growth strategy and results of operations.
Further, the cost of an acquisition could result in a dilutive effect on our results of operations, depending on various factors,
including the amount paid for the acquisition, the acquired hospital’s results of operations, allocation of the purchase price, effects of
subsequent legislation and limits on rate increases.
We may fail to improve or integrate the operations of the hospitals we acquire, which could harm our results of operations and
adversely affect our growth strategy.
We may be unable to timely and effectively integrate the hospitals that we acquire with our ongoing operations. We may
experience delays in implementing operating procedures and systems in newly acquired hospitals. Integrating a new hospital could be
expensive and time consuming and could disrupt our ongoing business, negatively affect cash flow and distract management and other
key personnel. In addition, acquisition activity requires transitions from, and the integration of, operations and, usually, information
systems that are used by acquired hospitals. In addition, some of the hospitals we acquire had significantly lower operating margins
than the hospitals we operate prior to the time of our acquisition. If we fail to improve the operating margins of the hospitals we
acquire, operate such hospitals profitably or effectively integrate the operations of acquired hospitals, our results of operations could
be harmed.
The trend toward value-based purchasing may negatively impact our revenues.
We believe that value-based purchasing initiatives of both governmental and private payers tying financial incentives to quality
and efficiency of care will increasingly affect the results of operations of our hospitals and other healthcare facilities and may
negatively impact our revenues if we are unable to meet expected quality standards. The Affordable Care Act contains a number of
provisions intended to promote value-based purchasing in federal healthcare programs. Medicare now requires providers to report
certain quality measures in order to receive full reimbursement increases for inpatient and outpatient procedures that were previously
awarded automatically. In addition, hospitals that meet or exceed certain quality performance standards will receive increased
reimbursement payments, and hospitals that have “excess readmissions” for specified conditions will receive reduced reimbursement.
Furthermore, Medicare no longer pays hospitals additional amounts for the treatment of certain hospital-acquired conditions unless the
conditions were present at admission. Beginning in federal fiscal year 2015, hospitals that rank in the worst 25% of all hospitals
nationally for hospital acquired conditions in the previous year were subject to reduced Medicare reimbursements. The ACA also
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prohibits the use of federal funds under the Medicaid program to reimburse providers for treating certain provider-preventable
conditions.
There is a trend among private payers toward value-based purchasing of healthcare services, as well. Many large commercial
payers require hospitals to report quality data, and several of these payers will not reimburse hospitals for certain preventable adverse
events. We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures,
to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this
trend will affect our results of operations, but it could negatively impact our revenues if we are unable to meet quality standards
established by both governmental and private payers.
If we acquire hospitals with unknown or contingent liabilities, we could become liable for material obligations.
Hospitals that we acquire may have unknown or contingent liabilities, including, but not limited to, liabilities for failure to
comply with applicable laws and regulations. Although we typically attempt to exclude significant liabilities from our acquisition
transactions and seek indemnification from the sellers of such hospitals for these matters, we could experience difficulty enforcing
those obligations or we could incur material liabilities for the past activities of hospitals we acquire. Such liabilities and related legal
or other costs and/or resulting damage to a facility’s reputation could harm our business.
We are subject to pending legal actions, purported stockholder class actions, governmental investigations and regulatory
actions.
We, our subsidiaries, PSI, and its subsidiaries, are subject to pending legal actions, governmental investigations and regulatory
actions (see Item 3-Legal Proceedings).
Defending ourselves against the allegations in the lawsuits and governmental investigations, or similar matters and any related
publicity, could potentially entail significant costs and could require significant attention from our management. We are unable to
predict the outcome of these matters or to reasonably estimate the amount or range of any such loss; however, these lawsuits could
have a material adverse effect on our business, financial condition, results of operations and/or cash flows.
We are and may become subject to other loss contingencies, both known and unknown, which may relate to past, present and
future facts, events, circumstances and occurrences. Should an unfavorable outcome occur in some or all of our legal proceedings or
other loss contingencies, or if successful claims and other actions are brought against us in the future, there could be a material adverse
impact on our financial position, results of operations and liquidity.
In particular, government investigations, as well as qui tam lawsuits, may lead to material fines, penalties, damages payments or
other sanctions, including exclusion from government healthcare programs. Settlements of lawsuits involving Medicare and Medicaid
issues routinely require both monetary payments and corporate integrity agreements, each of which could have a material adverse
effect on our business, financial condition, results of operations and/or cash flows.
State efforts to regulate the construction or expansion of health care facilities could impair our ability to expand.
Many of the states in which we operate hospitals have enacted Certificates of Need, or (“CON”), laws as a condition prior to
hospital capital expenditures, construction, expansion, modernization or initiation of major new services. Our failure to obtain
necessary state approval could result in our inability to complete a particular hospital acquisition, expansion or replacement, make a
facility ineligible to receive reimbursement under the Medicare or Medicaid programs, result in the revocation of a facility’s license or
impose civil or criminal penalties on us, any of which could harm our business.
In addition, significant CON reforms have been proposed in a number of states that would increase the capital spending
thresholds and provide exemptions of various services from review requirements. In the past, we have not experienced any material
adverse effects from those requirements, but we cannot predict the impact of these changes upon our operations.
Controls designed to reduce inpatient services may reduce our revenues.
Controls imposed by third-party payors designed to reduce admissions and lengths of stay, commonly referred to as “utilization
review,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and
course of treatment of a patient by managed care plans. Inpatient utilization, average lengths of stay and occupancy rates continue to
be negatively affected by payor-required preadmission authorization and utilization review and by payor pressure to maximize
outpatient and alternative healthcare delivery services for less acutely ill patients. Efforts to impose more stringent cost controls are
expected to continue. Although we cannot predict the effect these changes will have on our operations, significant limits on the scope
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of services reimbursed and on reimbursement rates and fees could have a material adverse effect on our business, financial position
and results of operations.
Our revenues and volume trends may be adversely affected by certain factors over which we have no control.
Our revenues and volume trends are dependent on many factors, including physicians’ clinical decisions and availability, payor
programs shifting to a more outpatient-based environment, whether or not certain services are offered, seasonal and severe weather
conditions, including the effects of extreme low temperatures, hurricanes and tornados, earthquakes, current local economic and
demographic changes. In addition, technological developments and pharmaceutical improvements may reduce the demand for
healthcare services or the profitability of the services we offer.
A pandemic, epidemic or outbreak of a contagious disease in the markets in which we operate or that otherwise impacts our
facilities could adversely impact our business.
If a pandemic or other public health crisis were to affect our markets, our business could be adversely affected. Such a crisis
could diminish the public trust in healthcare facilities, especially hospitals that fail to accurately or timely diagnose, or that are treating
(or have treated) patients affected by contagious diseases. If any of our facilities were involved in treating patients for such a
contagious disease, other patients might cancel elective procedures or fail to seek needed care at our facilities. Further, a pandemic
might adversely impact our business by causing a temporary shutdown or diversion of patients, by disrupting or delaying production
and delivery of materials and products in the supply chain or by causing staffing shortages in our facilities. Although we have disaster
plans in place and operate pursuant to infectious disease protocols, the potential impact of a pandemic, epidemic or outbreak of a
contagious disease with respect to our markets or our facilities is difficult to predict and could adversely impact our business.
A worsening of the economic and employment conditions in the United States could materially affect our business and future
results of operations.
Our patient volumes, revenues and financial results depend significantly on the universe of patients with health insurance, which
to a large extent is dependent on the employment status of individuals in our markets. Worsening of economic conditions may result in
a higher unemployment rate which may increase the number of individuals without health insurance. As a result, our facilities may
experience a decrease in patient volumes, particularly in less intense, more elective service lines, or an increase in services provided to
uninsured patients. These factors could have a material unfavorable impact on our future patient volumes, revenues and operating
results.
In addition, as of December 31, 2017, we had approximately $3.8 billion of goodwill recorded on our consolidated balance
sheet. Should the revenues and financial results of our acute care and/or behavioral health care facilities be materially, unfavorably
impacted due to, among other things, a worsening of the economic and employment conditions in the United States that could
negatively impact our patient volumes and reimbursement rates, a continued rise in the unemployment rate and continued increases in
the number of uninsured patients treated at our facilities, we may incur future charges to recognize impairment in the carrying value of
our goodwill and other intangible assets, which could have a material adverse effect on our financial results.
Legal uncertainty or a worsening of the economic conditions in the United Kingdom could materially affect our business and
future results of operations.
On June 23, 2016, the United Kingdom affirmatively voted in a non-binding referendum in favor of the exit of the United
Kingdom from the European Union (the “Brexit”) and it has been approved by vote of the British legislature. On March 29, 2017, the
United Kingdom triggered Article 50 of the Lisbon Treaty formally starting negotiations regarding its exit from the European Union.
The United Kingdom has two years from that date to complete these negotiations. The future relationship between the United
Kingdom and the European Union remains uncertain, including the terms of trade between the United Kingdom and the European
Union. The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets
either during a transitional period or more permanently. Brexit could lead to legal and regulatory uncertainty as the United Kingdom
determines which European Union laws to replace or replicate.
The announcement of Brexit also created (and the actual exit of the United Kingdom from the European Union may create
future) economic uncertainty, both in the United Kingdom and globally. The actual exit of the United Kingdom from the European
Union could cause disruptions to and create uncertainty surrounding our business. Any of these effects of Brexit (and the
announcement thereof), and others we cannot anticipate, could harm our business, financial condition or results of operations.
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Fluctuations in our operating results, quarter to quarter earnings and other factors may result in decreases in the price of our
common stock.
The stock markets have experienced volatility that has often been unrelated to operating performance. These broad market
fluctuations may adversely affect the trading price of our common stock and, as a result, there may be significant volatility in the
market price of our common stock. If we are unable to operate our hospitals as profitably as we have in the past or as our stockholders
expect us to in the future, the market price of our common stock will likely decline as stockholders could sell shares of our common
stock when it becomes apparent that the market expectations may not be realized.
In addition to our operating results, many economic and seasonal factors outside of our control could have an adverse effect on
the price of our common stock and increase fluctuations in our quarterly earnings. These factors include certain of the risks discussed
herein, demographic changes, operating results of other hospital companies, changes in our financial estimates or recommendations of
securities analysts, speculation in the press or investment community, the possible effects of war, terrorist and other hostilities, adverse
weather conditions, the level of seasonal illnesses, managed care contract negotiations and terminations, changes in general conditions
in the economy or the financial markets, or other developments affecting the health care industry.
Our financial results may be adversely affected by fluctuations in foreign currency exchange rates.
We are exposed to currency exchange risk with respect to the U.S. Dollar in relation to the Pound sterling, because a portion of
our revenue and expenses are denominated in Pounds. We monitor changes in our exposure to exchange rate risk. While we may elect
to enter into hedging arrangements to protect our business against certain currency fluctuations, these hedging arrangements do not
provide comprehensive protection, and our results of operations could be adversely affected by foreign exchange fluctuations.
We are subject to significant corporate regulation as a public company and failure to comply with all applicable regulations
could subject us to liability or negatively affect our stock price.
As a publicly traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley Act of 2002.
While we have developed and instituted a corporate compliance program based on what we believe are the current best practices in
corporate governance and continue to update this program in response to newly implemented or changing regulatory requirements, we
cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations. For example, we
cannot provide assurance that, in the future, our management will not find a material weakness in connection with its annual review of
our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also cannot provide assurance that
we could correct any such weakness to allow our management to assess the effectiveness of our internal control over financial
reporting as of the end of our fiscal year in time to enable our independent registered public accounting firm to state that such
assessment will have been fairly stated in our Annual Report on Form 10-K or state that we have maintained effective internal control
over financial reporting as of the end of our fiscal year. If we fail to comply with any of these regulations, we could be subject to a
range of regulatory actions, fines or other sanctions or litigation. If we must disclose any material weakness in our internal control
over financial reporting, our stock price could decline.
A cyber security incident could cause a violation of HIPAA, breach of member privacy, or other negative impacts.
We rely extensively on our information technology (“IT”) systems to manage clinical and financial data, communicate with our
patients, payors, vendors and other third parties and summarize and analyze operating results. In addition, we have made significant
investments in technology to adopt and utilize electronic health records and to become meaningful users of health information
technology pursuant to the American Recovery and Reinvestment Act of 2009. A cyber-attack that bypasses our IT security systems
causing an IT security breach, loss of protected health information or other data subject to privacy laws, loss of proprietary business
information, or a material disruption of our IT business systems, could have a material adverse impact on our business and result of
operations. In addition, our future results of operations, as well as our reputation, could be adversely impacted by theft, destruction,
loss, or misappropriation of public health information, other confidential data or proprietary business information.
Different interpretations of accounting principles could have a material adverse effect on our results of operations or financial
condition.
Generally accepted accounting principles are complex, continually evolving and may be subject to varied interpretation by us,
our independent registered public accounting firm and the SEC. Such varied interpretations could result from differing views related
to specific facts and circumstances. Differences in interpretation of generally accepted accounting principles could have a material
adverse effect on our financial position or results of operations.
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We continue to see rising costs in construction materials and labor. Such increased costs could have an adverse effect on the
cash flow return on investment relating to our capital projects.
The cost of construction materials and labor has significantly increased. As we continue to invest in modern technologies,
emergency rooms and operating room expansions, the construction of medical office buildings for physician expansion and
reconfiguring the flow of patient care, we spend large amounts of money generated from our operating cash flow or borrowed funds.
Although we evaluate the financial feasibility of such projects by determining whether the projected cash flow return on investment
exceeds our cost of capital, such returns may not be achieved if the cost of construction continues to rise significantly or the expected
patient volumes are not attained.
The deterioration of credit and capital markets may adversely affect our access to sources of funding and we cannot be certain
of the availability and terms of capital to fund the growth of our business when needed.
We require substantial capital resources to fund our acquisition growth strategy and our ongoing capital expenditure programs
for renovation, expansion, construction and addition of medical equipment and technology. We believe that our capital expenditure
program is adequate to expand, improve and equip our existing hospitals. We cannot predict, however, whether financing for our
growth plans and capital expenditure programs will be available to us on satisfactory terms when needed, which could harm our
business.
To fund all or a portion of our future financing needs, we rely on borrowings from various sources including fixed rate, long-
term debt as well as borrowings pursuant to our revolving credit facility and accounts receivable securitization program. If any of the
lenders were unable to fulfill their future commitments, our liquidity could be impacted, which could have a material unfavorable
impact our results of operations and financial condition.
In addition, global capital markets have experienced volatility that has tightened access to capital markets and other sources of
funding. 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.
We depend heavily on key management personnel and the departure of one or more of our key executives or a significant
portion of our local hospital management personnel could harm our business.
The expertise and efforts of our senior executives and key members of our local hospital management personnel are critical to
the success of our business. The loss of the services of one or more of our senior executives or of a significant portion of our local
hospital management personnel could significantly undermine our management expertise and our ability to provide efficient, quality
healthcare services at our facilities, which could harm our business.
The number of outstanding shares of our Class B Common Stock is subject to potential increases or decreases.
At December 31, 2017, 26.1 million shares of Class B Common Stock were reserved for issuance upon conversion of shares of
Class A, C and D Common Stock outstanding, for issuance upon exercise of options to purchase Class B Common Stock and for
issuance of stock under other incentive plans. Class A, C and D Common Stock are convertible on a share for share basis into Class B
Common Stock. To the extent that these shares were converted into or exercised for shares of Class B Common Stock, the number of
shares of Class B Common Stock available for trading in the public market place would increase substantially and the current holders
of Class B Common Stock would own a smaller percentage of that class.
In addition, from time-to-time our Board of Directors approve stock repurchase programs authorizing us to purchase shares of
our Class B Common Stock on the open market at prevailing market prices or in negotiated transactions off the market. Such
repurchases decrease the number of outstanding shares of our Class B Common Stock. Conversely, as a potential means of generating
additional funds to operate and expand our business, we may from time-to-time issue equity through the sale of stock which would
increase the number of outstanding shares of our Class B Common Stock. Based upon factors such as, but not limited to, the market
price of our stock, interest rate on borrowings and uses or potential uses for cash, repurchase or issuance of our stock could have a
dilutive effect on our future basic and diluted earnings per share.
23
The right to elect the majority of our Board of Directors and the majority of the general shareholder voting power resides with
the holders of Class A and C Common Stock, the majority of which is owned by Alan B. Miller, our Chief Executive Officer and
Chairman of our Board of Directors.
Our Restated Certificate of Incorporation provides that, with respect to the election of directors, holders of Class A Common
Stock vote as a class with the holders of Class C Common Stock, and holders of Class B Common Stock vote as a class with holders
of Class D Common Stock, with holders of all classes of our Common Stock entitled to one vote per share.
As of March 21, 2017, the shares of Class A and Class C Common Stock constituted 7.5% of the aggregate outstanding shares
of our Common Stock, had the right to elect five members of the Board of Directors and constituted 86.5% of our general voting
power as of that date. As of March 21, 2017, the shares of Class B and Class D Common Stock (excluding shares issuable upon
exercise of options) constituted 92.5% of the outstanding shares of our Common Stock, had the right to elect two members of the
Board of Directors and constituted 13.5% of our general voting power as of that date.
As to matters other than the election of directors, our Restated Certificate of Incorporation provides that holders of Class A,
Class B, Class C and Class D Common Stock all vote together as a single class, except as otherwise provided by law.
Each share of Class A Common Stock entitles the holder thereof to one vote; each share of Class B Common Stock entitles the
holder thereof to one-tenth of a vote; each share of Class C Common Stock entitles the holder thereof to 100 votes (provided the
holder of Class C Common Stock holds a number of shares of Class A Common Stock equal to ten times the number of shares of
Class C Common Stock that holder holds); and each share of Class D Common Stock entitles the holder thereof to ten votes (provided
the holder of Class D Common Stock holds a number of shares of Class B Common Stock equal to ten times the number of shares of
Class D Common Stock that holder holds).
In the event a holder of Class C or Class D Common Stock holds a number of shares of Class A or Class B Common Stock,
respectively, less than ten times the number of shares of Class C or Class D Common Stock that holder holds, then that holder will be
entitled to only one vote for every share of Class C Common Stock, or one-tenth of a vote for every share of Class D Common Stock,
which that holder holds in excess of one-tenth the number of shares of Class A or Class B Common Stock, respectively, held by that
holder. The Board of Directors, in its discretion, may require beneficial owners to provide satisfactory evidence that such owner holds
ten times as many shares of Class A or Class B Common Stock as Class C or Class D Common Stock, respectively, if such facts are
not apparent from our stock records.
Since a substantial majority of the Class A shares and Class C shares are controlled by Mr. Alan B. Miller and members of his
family, one of whom (Marc D. Miller) is also a director and officer of our company, and they can elect a majority of our company’s
directors and effect or reject most actions requiring approval by stockholders without the vote of any other stockholders, there are
potential conflicts of interest in overseeing the management of our company.
In addition, because this concentrated control could discourage others from initiating any potential merger, takeover or other
change of control transaction that may otherwise be beneficial to our businesses, our business and prospects and the trading price of
our securities could be adversely affected.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2.
Properties
Executive and Administrative Offices and Commercial Health Insurer
We own various office buildings in King of Prussia and Wayne, Pennsylvania, Brentwood, Tennessee, Denton, Texas and Reno,
Nevada.
24
Facilities
The following tables set forth the name, location, type of facility and, for acute care hospitals and behavioral health care
facilities, the number of licensed beds:
Acute Care Hospitals
Name of Facility
Aiken Regional Medical Centers .............................................................. Aiken, South Carolina
Aurora Pavilion ............................................................................... Aiken, South Carolina
Location
Centennial Hills Hospital Medical Center ................................................ Las Vegas, Nevada
Corona Regional Medical Center .............................................................. Corona, California
Desert Springs Hospital ............................................................................ Las Vegas, Nevada
Desert View Hospital ................................................................................ Pahrump, Nevada
Doctors’ Hospital of Laredo (7) ................................................................ Laredo, Texas
Doctor’s Hospital ER South ............................................................. Laredo, Texas
Fort Duncan Regional Medical Center ..................................................... Eagle Pass, Texas
The George Washington University Hospital (1) ..................................... Washington, D.C.
Henderson Hospital .................................................................................. Henderson, Nevada
Lakewood Ranch Medical Center ............................................................. Bradenton, Florida
Manatee Memorial Hospital ..................................................................... Bradenton, Florida
Northern Nevada Medical Center ............................................................. Sparks, Nevada
Northwest Texas Healthcare System ........................................................ Amarillo, Texas
The Pavilion at Northwest Texas Healthcare System ...................... Amarillo, Texas
NWTH FED .................................................................................... Amarillo, Texas
Palmdale Regional Medical Center ........................................................... Palmdale, California
South Texas Health System (3)
Edinburg Regional Medical Center/Children’s Hospital ................. Edinburg, Texas
McAllen Medical Center (2) ........................................................... McAllen, Texas
McAllen Heart Hospital .................................................................. McAllen, Texas
South Texas Behavioral Health Center ........................................... McAllen, Texas
STHS ER at Mission ....................................................................... Mission, Texas
STHS ER at Weslaco ...................................................................... Weslaco, Texas
Southwest Healthcare System
Inland Valley Campus (2) ............................................................... Wildomar, California
Rancho Springs Campus ................................................................. Murrieta, California
Spring Valley Hospital Medical Center .................................................... Las Vegas, Nevada
St. Mary’s Regional Medical Center ......................................................... Enid, Oklahoma
Summerlin Hospital Medical Center ......................................................... Las Vegas, Nevada
Temecula Valley Hospital ......................................................................... Temecula, California
Texoma Medical Center ............................................................................ Denison, Texas
TMC Behavioral Health Center ....................................................... Denison, Texas
Valley Hospital Medical Center ................................................................ Las Vegas, Nevada
Wellington Regional Medical Center (2) .................................................. West Palm Beach, Florida
United States:
Inpatient Behavioral Health Care Facilities
Name of Facility
Alabama Clinical Schools ....................................................................... Birmingham, Alabama
Alhambra Hospital .................................................................................. Rosemead, California
Alliance Health Center ............................................................................ Meridian, Mississippi
Location
25
Number
of
Beds
Real
Property
Ownership
Interest
197
62
250
238
293
25
183
—
101
385
130
120
295
108
405
90
—
184
235
441
60
134
—
—
130
120
292
229
454
140
266
60
301
233
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Leased
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Number
of
Beds
80
109
214
Real
Property
Ownership
Interest
Owned
Owned
Owned
United States:
Location
Name of Facility
The Arbour Hospital .............................................................................. Boston, Massachusetts
Arbour-Fuller Hospital........................................................................... South Attleboro, Massachusetts
Arbour-HRI Hospital ............................................................................. Brookline, Massachusetts
Arrowhead Behavioral Health ................................................................ Maumee, Ohio
Austin Lakes Hospital ............................................................................. Austin, Texas
Austin Oaks Hospitals............................................................................. Austin, Texas
Behavioral Hospital of Bellaire.............................................................. Houston, Texas
Belmont Pines Hospital........................................................................... Youngstown, Ohio
Benchmark Behavioral Health System ................................................... Woods Cross, Utah
Black Bear Treatment Center .................................................................. Sautee, Georgia
Bloomington Meadows Hospital ............................................................ Bloomington, Indiana
Boulder Creek Academy ......................................................................... Bonners Ferry, Idaho
Brentwood Behavioral Health of Mississippi ......................................... Flowood, Mississippi
Brentwood Hospital ................................................................................ Shreveport, Louisiana
The Bridgeway ........................................................................................ North Little Rock, Arkansas
Brook Hospital—Dupont ........................................................................ Louisville, Kentucky
Brook Hospital—KMI ............................................................................ Louisville, Kentucky
Brooke Glen Behavioral Hospital ........................................................... Fort Washington, Pennsylvania
Brynn Marr Hospital ............................................................................... Jacksonville, North Carolina
Calvary Addiction Recovery Center ....................................................... Phoenix, Arizona
The Canyon at Peace Park ...................................................................... Malibu, California
Canyon Ridge Hospital .......................................................................... Chino, California
The Carolina Center for Behavioral Health ............................................ Greer, South Carolina
Cedar Creek ............................................................................................ St. Johns, Michigan
Cedar Grove Residential Treatment Center ............................................ Murfreesboro, Tennessee
Cedar Hills Hospital (8) .......................................................................... Beaverton, Oregon
Cedar Ridge ............................................................................................ Oklahoma City, Oklahoma
Cedar Ridge Residential Treatment Center ............................................. Oklahoma City, Oklahoma
Cedar Ridge Bethany .............................................................................. Bethany, Oklahoma
Cedar Springs Behavioral Health ............................................................ Colorado Springs, Colorado
Centennial Peaks (8) ............................................................................... Louisville, Colorado
Center for Change ................................................................................... Orem, Utah
Central Florida Behavioral Hospital ....................................................... Orlando, Florida
Chicago Children’s Center for Behavioral Health .................................. Chicago, Illinois
Chris Kyle Patriots Hospital ................................................................... Anchorage, Alaska
Clarion Psychiatric Center ...................................................................... Clarion, Pennsylvania
Coastal Behavioral Health ...................................................................... Savannah, Georgia
Coastal Harbor Treatment Center ........................................................... Savannah, Georgia
Columbus Behavioral Center for Children and Adolescents .................. Columbus, Indiana
Compass Intervention Center .................................................................. Memphis, Tennessee
Copper Hills Youth Center ..................................................................... West Jordan, Utah
Coral Shores ........................................................................................... Stuart, Florida
Cumberland Hall ..................................................................................... Hopkinsville, Kentucky
Cumberland Hospital .............................................................................. New Kent, Virginia
Cypress Creek Hospital........................................................................... Houston, Texas
Del Amo Hospital ................................................................................... Torrance, California
Diamond Grove Center ........................................................................... Louisville, Mississippi
Dover Behavioral Health ........................................................................ Dover, Delaware
El Paso Behavioral Health System .......................................................... El Paso, Texas
Emerald Coast Behavioral Hospital ........................................................ Panama City, Florida
Fairmount Behavioral Health System ..................................................... Philadelphia, Pennsylvania
26
Number
of
Beds
Real
Property
Ownership
Interest
136
102
62
48
58
80
124
102
94
115
78
105
121
200
127
88
110
146
102
68
16
106
130
34
40
94
60
56
56
110
104
58
126
40
36
76
50
145
57
108
197
80
97
118
128
166
55
88
163
86
239
Owned
Owned
Owned
Owned
Leased
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
United States:
Name of Facility
Fairfax
Location
Number
of
Beds
Real
Property
Ownership
Interest
Fairfax Hospital ............................................................................... Kirkland, Washington
Fairfax Hospital—Everett ............................................................... Everett, Washington
Fairfax Hospital—Monroe .............................................................. Monroe, Washington
Forest View Hospital .............................................................................. Grand Rapids, Michigan
Fort Lauderdale Hospital ........................................................................ Fort Lauderdale, Florida
Foundations Behavioral Health ............................................................... Doylestown, Pennsylvania
Foundations for Living ........................................................................... Mansfield, Ohio
Fox Run Hospital .................................................................................... St. Clairsville, Ohio
Fremont Hospital .................................................................................... Fremont, California
Friends Hospital ...................................................................................... Philadelphia, Pennsylvania
Garfield Park Hospital ............................................................................ Chicago, Illinois
Garland Behavioral Health ..................................................................... Garland, Texas
Glen Oaks Hospital ................................................................................. Greenville, Texas
Gulf Coast Youth Services ...................................................................... Fort Walton Beach, Florida
Gulfport Behavioral Health System ........................................................ Gulfport, Mississippi
Hampton Behavioral Health Center ........................................................ Westhampton, New Jersey
Harbour Point (Pines) ............................................................................. Portsmouth, Virginia
Hartgrove Hospital .................................................................................. Chicago, Illinois
Havenwyck Hospital ............................................................................... Auburn Hills, Michigan
Heartland Behavioral Health Services .................................................... Nevada, Missouri
Hermitage Hall ........................................................................................ Nashville, Tennessee
Heritage Oaks Hospital ........................................................................... Sacramento, California
Hickory Trail Hospital ............................................................................ DeSoto, Texas
Highlands Behavioral Health System .................................................... Highlands Ranch, Colorado
Hill Crest Behavioral Health Services .................................................... Birmingham, Alabama
Holly Hill Hospital .................................................................................. Raleigh, North Carolina
The Horsham Clinic ................................................................................ Ambler, Pennsylvania
Hughes Center......................................................................................... Danville, Virginia
Intermountain Hospital ........................................................................... Boise, Idaho
Kempsville Center of Behavioral Health ................................................ Norfolk, Virginia
KeyStone Center ..................................................................................... Wallingford, Pennsylvania
Kingwood Pines Hospital ....................................................................... Kingwood, Texas
La Amistad Behavioral Health Services ................................................. Maitland, Florida
Lakeside Behavioral Health System ....................................................... Memphis, Tennessee
Laurel Heights Hospital .......................................................................... Atlanta, Georgia
Laurel Oaks Behavioral Health Center ................................................... Dothan, Alabama
Laurel Ridge Treatment Center............................................................... San Antonio, Texas
Liberty Point Behavioral Health ............................................................. Stauton, Virginia
Lighthouse Care Center of Augusta ........................................................ Augusta, Georgia
Lighthouse Care Center of Conway ........................................................ Conway, South Carolina
Lincoln Prairie Behavioral Health Center ............................................... Springfield, Illinois
Lincoln Trail Behavioral Health System................................................. Radcliff, Kentucky
Mayhill Hospital ..................................................................................... Denton, Texas
McDowell Center for Children ............................................................... Dyersburg, Tennessee
The Meadows Psychiatric Center ........................................................... Centre Hall, Pennsylvania
Meridell Achievement Center ................................................................. Austin, Texas
Mesilla Valley Hospital .......................................................................... Las Cruces, New Mexico
Michael’s House ..................................................................................... Palm Springs, California
Michiana Behavioral Health Center ........................................................ Plymouth, Indiana
Midwest Center for Youth and Families ................................................. Kouts, Indiana
27
157
30
34
108
100
108
84
100
148
219
88
72
54
24
109
120
186
160
243
151
100
125
86
86
219
228
206
56
155
82
153
116
85
345
108
124
250
56
115
87
97
140
59
32
117
134
120
87
80
74
Owned
Leased
Leased
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
United States:
Location
Name of Facility
Millwood Hospital .................................................................................. Arlington, Texas
Mountain Youth Academy ...................................................................... Mountain City, Tennessee
Natchez Trace Youth Academy .............................................................. Waverly, Tennessee
Newport News Behavioral Health Center ............................................... Newport News, Virginia
North Spring Behavioral Healthcare ....................................................... Leesburg, Virginia
North Star Hospital ................................................................................. Anchorage, Alaska
North Star Bragaw .................................................................................. Anchorage, Alaska
North Star DeBarr Residential Treatment Center ................................... Anchorage, Alaska
North Star Palmer Residential Treatment Center .................................... Palmer, Alaska
Northwest Academy................................................................................ Bonners Perry, Idaho
Oak Plains Academy ............................................................................... Ashland City, Tennessee
The Oaks Treatment Center .................................................................... Memphis, Tennessee
Okaloosa Youth Academy ...................................................................... Crestview, Florida
Old Vineyard Behavioral Health............................................................. Winston-Salem, North Carolina
Palmetto Lowcountry Behavioral Health ................................................ North Charleston, South Carolina
Palmetto Pee Dee Behavioral Health ...................................................... Florence, South Carolina
Palmetto Summerville ............................................................................. Summerville, South Carolina
Palm Shores Behavioral Health Center ................................................... Bradenton, Florida
Palo Verde Behavioral Health................................................................. Tucson, Arizona
Parkwood Behavioral Health System...................................................... Olive Branch, Mississippi
The Pavilion ............................................................................................ Champaign, Illinois
Peachford Behavioral Health System of Atlanta..................................... Atlanta, Georgia
Pembroke Hospital .................................................................................... Pembroke, Massachusetts
Pinnacle Pointe Hospital ......................................................................... Little Rock, Arkansas
Poplar Springs Hospital .......................................................................... Petersburg, Virginia
Prairie St John’s ...................................................................................... Fargo, North Dakota
Pride Institute .......................................................................................... Eden Prairie, Minnesota
Provo Canyon School ............................................................................. Provo, Utah
Provo Canyon Behavioral Hospital ......................................................... Orem, Utah
Psychiatric Institute of Washington ........................................................ Washington, D.C.
Quail Run Behavioral Health .................................................................. Phoenix, Arizona
The Recovery Center .............................................................................. Wichita Falls, Texas
The Ridge Behavioral Health System ..................................................... Lexington, Kentucky
Rivendell Behavioral Health Services of Arkansas ................................ Benton, Arkansas
Rivendell Behavioral Health Services of Kentucky ................................ Bowling Green, Kentucky
River Crest Hospital ................................................................................ San Angelo, Texas
Riveredge Hospital ................................................................................. Forest Park, Illinois
River Oaks Hospital ................................................................................ New Orleans, Louisiana
River Park Hospital ................................................................................. Huntington, West Virginia
River Point Behavioral Health ................................................................ Jacksonville, Florida
Rockford Center ...................................................................................... Newark, Delaware
Rolling Hills Hospital ............................................................................. Franklin, Tennessee
Roxbury .................................................................................................. Shippensburg, Pennsylvania
Salt Lake Behavioral Health ................................................................... Salt Lake City, Utah
San Marcos Treatment Center................................................................. San Marcos, Texas
Sandy Pines Hospital .............................................................................. Tequesta, Florida
Schick Shadel Hospital ........................................................................... Burin, Washington
Shadow Mountain Behavioral Health System ........................................ Tulsa, Oklahoma
Sierra Vista Hospital .............................................................................. Sacramento, California
Southern Crescent Behavioral Health
Anchor Hospital .............................................................................. Atlanta, Georgia
28
Number
of
Beds
Real
Property
Ownership
Interest
128
90
115
132
103
74
30
30
30
102
90
71
75
164
108
59
64
64
84
148
106
246
120
124
208
158
42
274
80
130
102
34
110
80
125
80
210
126
187
84
128
130
112
118
265
140
60
249
171
122
Leased
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Leased
Leased
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
United States:
Name of Facility
Location
Number
of
Beds
Real
Property
Ownership
Interest
Crescent Pines ................................................................................. Stockbridge, Georgia
St. Simons by the Sea............................................................................. St. Simons, Georgia
Skywood Recovery ................................................................................. Augusta, Michigan
Spring Mountain Sahara ......................................................................... Las Vegas, Nevada
Spring Mountain Treatment Center ........................................................ Las Vegas, Nevada
Springwoods ........................................................................................... Fayetteville, Arkansas
Stonington Institute ................................................................................. North Stonington, Connecticut
Streamwood Behavioral Health .............................................................. Streamwood, Illinois
Summit Oaks Hospital ............................................................................ Summit, New Jersey
SummitRidge .......................................................................................... Lawrenceville, Georgia
Suncoast Behavioral Health Center ........................................................ Bradenton, Florida
Texas NeuroRehab Center ..................................................................... Austin, Texas
Three Rivers Behavioral Health .............................................................. West Columbia, South Carolina
Three Rivers Residential Treatment-Midlands Campus ......................... West Columbia, South Carolina
Turning Point Hospital ........................................................................... Moultrie, Georgia
Two Rivers Psychiatric Hospital ............................................................ Kansas City, Missouri
University Behavioral Center.................................................................. Orlando, Florida
University Behavioral Health of Denton................................................. Denton, Texas
Valle Vista Hospital ................................................................................ Greenwood, Indiana
Valley Hospital ....................................................................................... Phoenix, Arizona
The Vines Hospital ................................................................................. Ocala, Florida
Virginia Beach Psychiatric Center .......................................................... Virginia Beach, Virginia
Wekiva Springs ....................................................................................... Jacksonville, Florida
Wellstone Regional Hospital .................................................................. Jeffersonville, Indiana
West Hills Hospital ................................................................................. Reno, Nevada
West Oaks Hospital ................................................................................ Houston, Texas
Willow Springs Center ............................................................................ Reno, Nevada
Windmoor Healthcare ............................................................................. Clearwater, Florida
Windsor—Laurelwood Center ................................................................ Willoughby, Ohio
Wyoming Behavioral Institute ................................................................ Casper, Wyoming
United Kingdom:
Name of Facility
Location
Acer Clinic (9) ........................................................................................ Chestherfield, UK
Acer Clinic 2 (9) .................................................................................... Chestherfield, UK
Amberwood Lodge (9) ............................................................................ Dorset, UK
Ashfield House (9) .................................................................................. Huddersfield, UK
Aspen House (9) ..................................................................................... South Yorkshire, UK
Aspen Lodge (9) .................................................................................... Rotherham, UK
Beacon Lower (9) .................................................................................. Bradford, UK
Beacon Upper (9) ................................................................................... Bradford, UK
Beckly House (9) .................................................................................... Halifax, UK
Bury Hospital .......................................................................................... Bury, UK
Broughton House (9)............................................................................... Lincolnshire, UK
Broughton Lodge (9)............................................................................... Cheshire, UK
Cambian Alders (9) ................................................................................ Gloucester, UK
Cambian Ansel Clinic (9) ....................................................................... Nottingham, UK
Cambian Appletree (9) ............................................................................ Durham, UK
Cambian Beeches (9) .............................................................................. Nottinghamshire, UK
29
50
101
100
30
110
80
68
178
126
96
60
151
122
64
69
105
112
104
132
122
98
100
120
100
95
160
116
144
159
129
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Number
of
Beds
Real
Property
Ownership
Interest
14
14
9
6
20
16
8
8
12
167
34
20
20
24
26
12
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
United Kingdom:
Name of Facility
Location
Cambian Birches (9) ............................................................................... Notts, UK
Cambian Cedars (9) ................................................................................ Birmingham, UK
Cambian Churchill (9) ............................................................................ London, UK
Cambian Conifers (9) .............................................................................. Derby, UK
Cambian Elms (9) ................................................................................... Birmingham, UK
Cambian Grange (9) ................................................................................ Nottinghamshire, UK
Cambian Heathers (9) ............................................................................. West Bromwich, UK
Cambian Lodge (9) ................................................................................. Nottinghamshire, UK
Cambian Manor (9) ................................................................................. Central Drive, UK
Cambian Nightingale (9) ......................................................................... Dorset, UK
Cambian Oaks (9) ................................................................................... Barnsley, UK
Cambian Pines (9) .................................................................................. Woodhouse, UK
Cambian Views (9) ................................................................................. Matlock, UK
Cambian Woodside (9) ........................................................................... Bradford, UK
CAS Brunel (9) ...................................................................................... Henbury, UK
Chaseways .............................................................................................. Sawbridgeworth, UK
Cherry Court (9) ...................................................................................... Essex, UK
Coventry ................................................................................................. Coventry, UK
Cygnet Hospital—Beckton ..................................................................... Beckton, UK
Cygnet Hospital—Bierley ....................................................................... Bierley, UK
Cygnet Wing—Blackheath ..................................................................... Blackheath, UK
Cygnet Lodge—Brighouse ..................................................................... Brighouse, UK
Cygnet Hospital—Derby ........................................................................ Derby, UK
Cygnet Hospital—Ealing ........................................................................ Ealing, UK
Cygnet Hospital—Godden Green ........................................................... Godden Green, UK
Cygnet Hospital—Harrogate................................................................... Harrogate, UK
Cygnet Hospital—Harrow ...................................................................... Harrow, UK
Cygnet Hospital—Kewstoke .................................................................. Kewstoke, UK
Cygnet Lodge—Lewisham ..................................................................... Lewisham, UK
Cygnet Hospital—Stevenage .................................................................. Stevenage, UK
Cygnet Hospital—Taunton ..................................................................... Taunton, UK
Cygnet Lodge – Kenton .......................................................................... Westlands, UK
Cygnet Hospital—Wyke ......................................................................... Wyke, UK
Cygnet Lodge – Woking ........................................................................ Knaphill, UK
Delfryn House (9) ................................................................................... Flintshire, UK
Delfryn Lodge (9) ................................................................................... Flintshire, UK
Dene Brook (9) ....................................................................................... Dalton Parva, UK
Devon Lodge (9) ..................................................................................... Southampton, UK
Eleni House (9) ....................................................................................... Essex, UK
Elm Court (9) .......................................................................................... Essex, UK
Elston House (9) ..................................................................................... Nottinghamshire, UK
Fairways (9) ............................................................................................ Suffolk, UK
Farm Lodge ............................................................................................. Rainham, UK
The Fields (9) .......................................................................................... Sheffield, UK
The Fountains (9) .................................................................................... Blackburn, UK
The Gables (9) ........................................................................................ Essex, UK
Gledcliffe Road (9) ................................................................................. Huddersfield, UK
Gledholt (9) ............................................................................................. Huddersfield, UK
Hawkstone (9) ......................................................................................... Utley, UK
Kirkside House (9) .................................................................................. Leeds, UK
Kirkside Lodge (9) .................................................................................. Leeds, UK
30
Number
of
Beds
Real
Property
Ownership
Interest
6
24
57
7
10
8
20
8
20
10
36
7
10
9
32
6
11
56
62
63
32
25
50
26
39
36
61
72
17
88
46
15
56
29
28
24
13
12
8
10
8
8
5
54
32
7
6
9
10
7
8
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
United Kingdom:
Name of Facility
Location
Langdale House (9) ................................................................................. Huddersfield, UK
Langdale Coach House (9) ...................................................................... Huddersfield, UK
Larch Court (9) ....................................................................................... Essex, UK
Laurel Court (9) ...................................................................................... Essex, UK
The Limes (9).......................................................................................... Nottinghamshire, UK
Limes Houses (9) .................................................................................... Nottinghamshire, UK
Longfield House (9) ................................................................................ Bradford, UK
Lowry House (9) ..................................................................................... Hyde, UK
Meadows Mews (9) ................................................................................ Tipton, UK
Norcott House (9) ................................................................................... Liversedge, UK
Norcott Lodge (9) ................................................................................... Liversedge, UK
Oak Court (9) .......................................................................................... Essex, UK
Oakhurst Lodge (9) ................................................................................. Hampshire, UK
The Outwood (9) ..................................................................................... Leeds, UK
Oxley Lodge (9) ...................................................................................... Huddersfield, UK
Oxley Woodhouse (9) ............................................................................. Huddersfield, UK
Portland Road 45 (9) .............................................................................. Edgbaston, UK
Raglan House (9) .................................................................................... West Midlands, UK
Redwood Court (9) ................................................................................. Essex, UK
Rhyd Alyn (9) ......................................................................................... Flintshire, UK
Sedgley House (9) ................................................................................... Wolverhampton, UK
Sedgley Lodge (9) ................................................................................... Wolverhampton, UK
Shear Meadow (9) .................................................................................. Hemel Hempstead, UK
Sheffield Hospital ................................................................................... Sheffield, UK
Sherwood House (9) ............................................................................... Mansfield, UK
Sherwood Lodge (9) ............................................................................... Mansfield, UK
Sherwood Lodge Step Down (9) ............................................................. Mansfield, UK
The Squirrels (9) ..................................................................................... Hampshire, UK
St. Augustine's (9) ................................................................................... Stoke on Trent, UK
St. Teilo House (9) .................................................................................. Gwent, UK
Storthfields (9) ........................................................................................ Derby, UK
Sycamore Court (9) ................................................................................. Essex, UK
The Sycamores (9) .................................................................................. Derbyshire, UK
Tabley Nursing Home—Tabley .............................................................. Tabley, UK
Thornfield House (9)............................................................................... Bradford, UK
Tupwood Gate Nursing Home ................................................................ Caterham, UK
Victoria House (9) .................................................................................. Durham, UK
Vincent Court (9) .................................................................................... Lancashire, UK
Walkern Lodge (9) ................................................................................. Stevenage, UK
Woking Hospital ..................................................................................... Woking, UK
Woodcross Street (9)............................................................................... Wolverhampton, UK
Number
of
Beds
Real
Property
Ownership
Interest
8
3
4
11
18
6
9
12
10
11
9
12
8
10
4
13
4
25
9
6
20
14
4
55
30
18
8
9
32
23
22
6
6
51
7
30
32
5
4
57
8
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
31
Puerto Rico and Virgin Islands:
Name of Facility
First Hospital Panamericano—Cidra ........................................................ Cidra, Puerto Rico
First Hospital Panamericano—San Juan ................................................... San Juan, Puerto Rico
First Hospital Panamericano—Ponce ....................................................... Ponce, Puerto Rico
Virgin Islands Behavioral Services ........................................................... St. Croix, Virgin Islands
Location
Outpatient Behavioral Health Care Facilities
United States:
Number
of
Beds
165
45
30
30
Real
Property
Ownership
Interest
Owned
Owned
Owned
Owned
Location
Name of Facility
Arbour Counseling Services .............................................................................................. Rockland, Massachusetts
Arbour Senior Care ............................................................................................................ Rockland, Massachusetts
Behavioral Educational Services ....................................................................................... Riverdale, Florida
The Canyon at Santa Monica ............................................................................................. Santa Monica, California
First Home Care (PA) ....................................................................................................... Philadelphia, PA
First Home Care (VA) ....................................................................................................... Portsmouth, Virginia
Foundations Atlanta ........................................................................................................... Atlanta, Georgia
Foundations Chicago ......................................................................................................... Chicago, Illinois
Foundations Detroit ........................................................................................................... Bingham Farms, Michigan
Foundations Los Angeles ................................................................................................... Los Angeles, California
Foundations Memphis ........................................................................................................ Memphis, Tennessee
Foundations Nashville ....................................................................................................... Nashville, Tennessee
Foundations Roswell .......................................................................................................... Roswell, Georgia
Foundations San Diego ...................................................................................................... San Diego, California
Foundations San Francisco ................................................................................................ San Francisco, California
Good Samaritan Counseling Center ................................................................................... Anchorage, Alaska
Michael’s House Outpatient .............................................................................................. Palm Springs, California
The Point ............................................................................................................................ Arkansas
St. Louis Behavioral Medicine Institute............................................................................. St. Louis, Missouri
Talbott Recovery ................................................................................................................ Atlanta, Georgia
United Kingdom:
Name of Facility
Location
Long Eaton Day Services (9) ............................................................................................. Nottingham, UK
Sheffield Day Services (9) ................................................................................................. Sheffield, UK
Puerto Rico and Virgin Islands:
Name of Facility
Community Cornerstones .................................................................................................. Rio Piedras, Puerto Rico
Location
Surgical Hospitals, Ambulatory Surgery Centers and Radiation Oncology Centers
32
Real
Property
Ownership
Interest
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Owned
Owned
Real
Property
Ownership
Interest
Owned
Owned
Real
Property
Ownership
Interest
Leased
Name of Facility
Cancer Care Institute of Carolina ....................................................................................... Aiken, South Carolina
Cornerstone Regional Hospital (4) .................................................................................... Edinburg, Texas
Palms Westside Clinic ASC (6) ......................................................................................... Royal Palm Beach, Florida
Quail Surgical and Pain Management Center .................................................................... Reno, Nevada
Temecula Valley Day Surgery and Pain Therapy Center (5) ............................................. Murrieta, California
Location
Real
Property
Ownership
Interest
Owned
Leased
Leased
Leased
Leased
(1) We hold an 80% ownership interest in this facility through a general partnership interest in a limited partnership. The remaining
20% ownership interest is held by an unaffiliated third-party which leases the property to the partnership for nominal rent. The
term of the partnership is scheduled to expire in July, 2047, and we have five, five-year extension options. The term of the lease
is coterminous with the partnership term with a fair market value rental of the property during the extension term.
(2) Real property leased from Universal Health Realty Income Trust.
(3) Edinburg Regional Medical Center/Children’s Hospital, McAllen Medical Center, McAllen Heart Hospital, South Texas
Behavioral Health Center, STHS ER at Mission and STHS ER at Weslaco are consolidated under one license operating as the
South Texas Health System.
(4) We manage and own a noncontrolling interest of approximately 50% in the entity that operates this facility.
(5) We own minority interests in an LLC that owns and operates this center which is managed by us.
(6) We own a noncontrolling ownership interest of approximately 50% in the entity that operates this facility that is managed by a
third-party.
(7) We hold an 89% ownership interest in this facility through both general and limited partnership interests. The remaining 11%
ownership interest is held by unaffiliated third parties.
(8) Land of this facility is leased.
(9) These facilities were acquired in late December, 2016, upon our completion of the acquisition of Cambian Group, PLC’s adult
services’ division (the “Cambian Adult Services”). At the time of acquisition, the Cambian Adult Services consisted of 79
inpatient and 2 outpatient behavioral health facilities located in the U.K. The Competition and Markets Authority (“CMA”) in
the U.K. reviewed our acquisition of the Cambian Adult Services. In April, 2017, the CMA notified us that they identified
potential competition concerns in certain markets and announced its decision to refer our acquisition of Cambian Group, PLC’s
Adult Services division for a Phase 2 investigation. In October, 2017, the CMA provided the final ruling regarding the Phase 2
investigation requiring us to divest a facility which was subsequently designated to be The Limes, an 18-bed facility which
generates less than $1 million in annual income before income taxes.
We own or lease medical office buildings adjoining some of our hospitals. We believe that the leases on the facilities, medical
office buildings and other real estate leased or owned by us do not impose any material limitation on our operations. The aggregate
lease payments on facilities leased by us were $80 million in 2017, $74 million in 2016 and $69 million in 2015.
ITEM 3.
Legal Proceedings
We operate in a highly regulated and litigious industry which subjects us to various claims and lawsuits in the ordinary course
of business as well as regulatory proceedings and government investigations. These claims or suits include claims for damages for
personal injuries, medical malpractice, commercial/contractual disputes, wrongful restriction of, or interference with, physicians’ staff
privileges, and employment related claims. In addition, health care companies are subject to investigations and/or actions by various
state and federal governmental agencies or those bringing claims on their behalf. Government action has increased with respect to
investigations and/or allegations against healthcare providers concerning possible violations of fraud and abuse and false claims
statutes as well as compliance with clinical and operational regulations. Currently, and from time to time, we and some of our facilities
are subjected to inquiries in the form of subpoenas, Civil Investigative Demands, audits and other document requests from various
federal and state agencies. These inquiries can lead to notices and/or actions including repayment obligations from state and federal
government agencies associated with potential non-compliance with laws and regulations. Further, the federal False Claim Act allows
private individuals to bring lawsuits (qui tam actions) against healthcare providers that submit claims for payments to the government.
Various states have also adopted similar statutes. When such a claim is filed, the government will investigate the matter and decide if
they are going to intervene in the pending case. These qui tam lawsuits are placed under seal by the court to comply with the False
Claims Act’s requirements. If the government chooses not to intervene, the private individual(s) can proceed independently on behalf
of the government. Health care providers that are found to violate the False Claims Act may be subject to substantial monetary
fines/penalties as well as face potential exclusion from participating in government health care programs or be required to comply
with Corporate Integrity Agreements as a condition of a settlement of a False Claim Act matter. In September 2014, the Criminal
Division of the Department of Justice (“DOJ”) announced that all qui tam cases will be shared with their Division to determine if a
parallel criminal investigation should be opened. The DOJ has also announced an intention to pursue civil and criminal actions against
individuals within a company as well as the corporate entity or entities. In addition, health care facilities are subject to monitoring by
33
state and federal surveyors to ensure compliance with program Conditions of Participation. In the event a facility is found to be out of
compliance with a Condition of Participation and unable to remedy the alleged deficiency(s), the facility faces termination from the
Medicare and Medicaid programs or compliance with a System Improvement Agreement to remedy deficiencies and ensure
compliance.
The laws and regulations governing the healthcare industry are complex covering, among other things, government healthcare
participation requirements, licensure, certification and accreditation, privacy of patient information, reimbursement for patient services
as well as fraud and abuse compliance. These laws and regulations are constantly evolving and expanding. Further, the Affordable
Care Act has added additional obligations on healthcare providers to report and refund overpayments by government healthcare
programs and authorizes the suspension of Medicare and Medicaid payments “pending an investigation of a credible allegation of
fraud.” We monitor our business and have developed an ethics and compliance program with respect to these complex laws, rules and
regulations. Although we believe our policies, procedures and practices comply with government regulations, there is no assurance
that we will not be faced with the sanctions referenced above which include fines, penalties and/or substantial damages, repayment
obligations, payment suspensions, licensure revocation, and expulsion from government healthcare programs. Even if we were to
ultimately prevail in any action brought against us or our facilities or in responding to any inquiry, such action or inquiry could have a
material adverse effect on us.
Certain legal matters are described below:
Government Investigations:
UHS Behavioral Health
In February, 2013, the Office of Inspector General for the United States Department of Health and Human Services (“OIG”)
served a subpoena requesting various documents from January, 2008 to the date of the subpoena directed at Universal Health Services,
Inc. (“UHS”) concerning it and UHS of Delaware, Inc., and certain UHS owned behavioral health facilities including: Keys of
Carolina, Old Vineyard Behavioral Health, The Meadows Psychiatric Center, Streamwood Behavioral Health, Hartgrove Hospital,
Rock River Academy and Residential Treatment Center, Roxbury Treatment Center, Harbor Point Behavioral Health Center, f/k/a The
Pines Residential Treatment Center, including the Crawford, Brighton and Kempsville campuses, Wekiva Springs Center and River
Point Behavioral Health. Prior to receipt of this subpoena, some of these facilities had received independent subpoenas from state or
federal agencies. Subsequent to the February 2013 subpoenas, some of the facilities above have received additional, specific
subpoenas or other document and information requests. In addition to the OIG, the DOJ and various U.S. Attorneys’ and state
Attorneys’ General Offices are also involved in this matter. Since February 2013, additional facilities have also received subpoenas
and/or document and information requests or we have been notified are included in the omnibus investigation. Those facilities
include: National Deaf Academy, Arbour-HRI Hospital, Behavioral Hospital of Bellaire, St. Simons By the Sea, Turning Point Care
Center, Salt Lake Behavioral Health, Central Florida Behavioral Hospital, University Behavioral Center, Arbour Hospital, Arbour-
Fuller Hospital, Pembroke Hospital, Westwood Lodge, Coastal Harbor Health System, Shadow Mountain Behavioral Health, Cedar
Hills Hospital, Mayhill Hospital, Southern Crescent Behavioral Health (Anchor Hospital and Crescent Pines campuses), Valley
Hospital (AZ), Peachford Behavioral Health System of Atlanta, University Behavioral Health of Denton, and El Paso Behavioral
Health System.
In October, 2013, we were advised that the DOJ’s Criminal Frauds Section had opened an investigation of River Point
Behavioral Health and Wekiva Springs Center. Since that time, we have been notified that the Criminal Frauds section has opened
investigations of National Deaf Academy, Hartgrove Hospital and UHS as a corporate entity. In April 2017, the DOJ’s Criminal
Division issued a subpoena requesting documentation from Shadow Mountain Behavioral Health. In August 2017, Kempsville Center
of Behavioral Health (a part of Harbor Point Behavioral Health previously identified above) received a subpoena requesting
documentation.
In April, 2014, the Centers for Medicare and Medicaid Services (“CMS”) instituted a Medicare payment suspension at River
Point Behavioral Health in accordance with federal regulations regarding suspension of payments during certain investigations. The
Florida Agency for Health Care Administration (“AHCA”) subsequently issued a Medicaid payment suspension for the facility. River
Point Behavioral Health submitted a rebuttal statement disputing the basis of the suspension and requesting revocation of the
suspension. Notwithstanding, CMS continued the payment suspension. River Point Behavioral Health provided additional information
to CMS in an effort to obtain relief from the payment suspension but the Medicare suspension remains in effect. In June 2017, AHCA
advised that while they were maintaining the suspension for dual eligible and cross-over Medicare beneficiaries, the Medicaid
payment suspension was lifted effective June 27, 2017. We cannot predict if and/or when the facility’s remaining suspended payments
will resume in total. From inception through December 31, 2017, the aggregate funds withheld from us in connection with the River
Point Behavioral Health payment suspension amounted to approximately $10 million. Although the operating results of River Point
Behavioral Health did not have a material impact on our consolidated results of operations during 2017, 2016 or 2015, the payment
suspension has had a material adverse effect on the facility’s results of operations and financial condition.
The DOJ has advised us that the civil aspect of the coordinated investigation referenced above is a False Claims Act
investigation focused on billings submitted to government payers in relation to services provided at those facilities. Based upon our
initial discussions with the DOJ, our financial statements as of December 31, 2017 include a $22 million reserve established in
34
connection with the civil aspects of these matters. However, changes in the reserve may be required in future periods as discussions
continue and additional information becomes available. We cannot predict the ultimate resolution of these matters and therefore can
provide no assurance that final amounts paid in settlement or otherwise, if any, or associated costs, will not differ materially from our
established reserve.
Litigation:
U.S. ex rel Escobar v. Universal Health Services, Inc. et.al.
This is a False Claims Act case filed against Universal Health Services, Inc., UHS of Delaware, Inc. and HRI Clinics, Inc.
d/b/a Arbour Counseling Services in U.S. District Court for the District of Massachusetts. This qui tam action primarily alleges that
Arbour Counseling Services failed to appropriately supervise certain clinical providers in contravention of regulatory requirements
and the submission of claims to Medicaid were subsequently improper. Relators make other claims of improper billing to Medicaid
associated with alleged failures of Arbour Counseling to comply with state regulations. The U.S. Attorney’s Office and the
Massachusetts Attorney General’s Office initially declined to intervene. UHS filed a motion to dismiss and the trial court originally
granted the motion dismissing the case. The First Circuit Court of Appeals (“First Circuit”) reversed the trial court’s dismissal of the
case. The United States Supreme Court subsequently vacated the First Circuit’s opinion and remanded the case for further
consideration under the new legal standards established by the Supreme Court for False Claims Act cases. During the 4th quarter of
2016, the First Circuit issued a revised opinion upholding their reversal of the trial court’s dismissal. The case was then remanded to
the trial court for further proceedings. In January 2017, the U.S. Attorney’s Office and Massachusetts Attorney General’s Office
advised of the potential for intervention in the case. The Massachusetts Attorney General’s Office subsequently filed its motion to
intervene which was granted and, in April 2017, filed their Complaint in Intervention. We are defending this case vigorously. At this
time, we are uncertain as to potential liability or financial exposure, if any, which may be associated with this matter.
Shareholder Class Action
In December 2016 a purported shareholder class action lawsuit was filed in U.S. District Court for the Central District of
California against UHS, and certain UHS officers alleging violations of the federal securities laws. Plaintiff alleges that defendants
violated federal securities laws relating to the disclosures made in public filings associated with practices at our behavioral health
facilities. The case was originally filed as Heed v. Universal Health Services, Inc. et. al. (Case No. 2:16-CV-09499-PSG-JC). The
court subsequently appointed Teamsters Local 456 Pension Fund and Teamsters Local 456 Annuity Fund to serve as lead plaintiffs.
The case has been transferred to the U.S. District Court for the Eastern District of Pennsylvania and the style of the case has been
changed to Teamsters Local 456 Pension Fund, et. al. v. Universal Health Services, Inc. et. al. (Case No. 2:17-CV-02817-LS). In
September, 2017, Teamsters Local 456 Pension Fund filed an amended complaint. In December 2017, we filed a motion to dismiss the
amended complaint. We deny liability and intend to defend ourselves vigorously. At this time, we are uncertain as to potential liability
or financial exposure, if any, which may be associated with this matter.
Shareholder Derivative Cases
In March 2017, a shareholder derivative suit was filed by plaintiff David Heed in the Court of Common Pleas of Philadelphia
County. A notice of removal to the United States District Court for the Eastern District of Pennsylvania was filed (Case No. 2:17-cv-
01476-LS). Plaintiff filed a motion to remand. In December 2017, the Court denied plaintiff’s motion to remand and has retained the
case in federal court. The suit alleges breaches of fiduciary duties and other allegedly wrongful conduct by the members of the Board
of Directors and certain officers of Universal Health Services, Inc. relating to practices at our behavioral health facilities. UHS has
been named as a nominal defendant in the case. In May, June and July 2017, additional shareholder derivative suits were filed in the
United States District Court for the Eastern District of Pennsylvania. The plaintiffs in those cases are: Central Laborers’ Pension Fund
(Case No. 17-cv-02187-LS); Firemen’s Retirement System of St. Louis (Case No. 17—cv-02317-LS); Waterford Township Police &
Fire Retirement System (Case No. 17-cv-02595-LS); and Amalgamated Bank Longview Funds (Case No. 17-cv-03404-LS). The
Fireman’s Retirement System case has since been voluntarily dismissed. In addition, a shareholder derivative case was filed in
Chancery Court in Delaware by the Delaware County Employees’ Retirement Fund (Case No. 2017-0475-JTL). In December 2017,
the Chancery Court stayed this case pending resolution of other contemporaneous matters. These additional cases make substantially
similar allegations and claims based upon alleged violations of federal securities laws as well common law causes of action against the
individual defendants. All of these additional cases have also named all members of the UHS Board of Directors as well as certain
officers of the Company. The defendants deny liability and intend to defend these cases vigorously. At this time, we are uncertain as
to potential liability or financial exposure, if any, which may be associated with these matters.
Chowdary v. Universal Health Services, Inc., et. al.
This is a lawsuit filed in 1999 in state court in Hidalgo County, Texas by a physician and his professional associations
alleging tortious interference with contractual relationships and retaliation against McAllen Medical Center in McAllen, Texas as well
as Universal Health Services, Inc. The state court has entered a summary judgment order awarding plaintiff $3.85 million in damages.
With prejudgment interest, the total amount of the order amounts to approximately $9 million, for which a reserve is included in our
financial statements as of December 31, 2017. A trial on punitive damages, emotional distress and attorneys’ fees remains to be
conducted if the summary judgment order is not vacated. The case has been removed to federal court. Plaintiffs filed a motion to
35
remand. In February 2018, the federal court denied plaintiffs’ motion to remand and retained the case in federal court. Plaintiffs have
filed a writ of mandamus with the 5th Circuit Court of Appeals seeking to overturn the federal court’s decision denying remand. We
have filed a motion for reconsideration of state court’s summary judgment order in the federal court proceeding.
Disproportionate Share Hospital Payment Matter:
In late September, 2015, many hospitals in Pennsylvania, including seven of our behavioral health care hospitals located in
the state, received letters from the Pennsylvania Department of Human Services (the “Department”) demanding repayment of
allegedly excess Medicaid Disproportionate Share Hospital payments (“DSH”) for the federal fiscal year 2011 (“FFY2011”)
amounting to approximately $4 million in the aggregate. Since that time, we have received similar requests for repayment for alleged
DSH overpayments for FFYs 2012 and 2013 aggregating to approximately $11 million. We filed administrative appeals for all of our
facilities contesting the recoupment efforts for FFYs 2011 through 2013 as we believe the Department’s calculation methodology is
inaccurate and conflicts with applicable federal and state laws and regulations. The Department has agreed to postpone the
recoupment of the state’s share of the DSH payments until all hospital appeals are resolved but started recoupment of the federal
share. The Department will likely make similar repayment demand for FFY 2014. Due to a change in the Pennsylvania Medicaid
State Plan and implementation of a CMS-approved Medicaid Section 1115 Waiver, we do not believe the methodology applied by the
Department to FFYs 2011 through 2013 is applicable to reimbursements received for Medicaid services provided after January 1,
2015 by our behavioral health care facilities located in Pennsylvania. We can provide no assurance that we will ultimately be
successful in our legal and administrative appeals related to the Department’s repayment demands. If our legal and administrative
appeals are unsuccessful, our future consolidated results of operations and financial condition could be adversely impacted by these
repayments.
Matters Relating to Psychiatric Solutions, Inc. (“PSI”):
The following matters pertain to PSI or former PSI facilities (owned by subsidiaries of PSI) which were in existence prior to
the acquisition of PSI and for which we have assumed the defense as a result of our acquisition which was completed in November,
2010:
Department of Justice Investigation of Riveredge Hospital
In 2008, Riveredge Hospital in Chicago, Illinois received a subpoena from the DOJ requesting certain information from the
facility. Additional requests for documents were also received from the DOJ in 2009 and 2010. The requested documents have been
provided to the DOJ. All documents requested and produced pertained to the operations of the facility while under PSI’s ownership
prior to our acquisition. At present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or
potential financial exposure, if any, in connection with this matter.
Department of Justice Investigation of Friends Hospital
In October, 2010, Friends Hospital in Philadelphia, Pennsylvania, received a subpoena from the DOJ requesting certain
documents from the facility. The requested documents were collected and provided to the DOJ for review and examination. Another
subpoena was issued to the facility in July, 2011 requesting additional documents, which have also been delivered to the DOJ. All
documents requested and produced pertained to the operations of the facility while under PSI’s ownership prior to our acquisition. At
present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or potential financial
exposure, if any, in connection with this matter.
Other Matters:
Various other suits, claims and investigations, including government subpoenas, arising against, or issued to, us are pending
and additional such matters may arise in the future. Management will consider additional disclosure from time to time to the extent it
believes such matters may be or become material. The outcome of any current or future litigation or governmental or internal
investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting penalties, fines
or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such
contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time
regarding the matters described above or that are otherwise pending because the inherently unpredictable nature of legal proceedings
may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or
indeterminate; (ii) discovery is not complete; (iii) the matter is in its early stages; (iv) the matters present legal uncertainties; (v) there
are significant facts in dispute; (vi) there are a large number of parties, or; (vii) there is a wide range of potential outcomes. It is
possible that the outcome of these matters could have a material adverse impact on our future results of operations, financial position,
cash flows and, potentially, our reputation.
ITEM 4. Mine Safety Disclosures
Not applicable.
36
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class B Common Stock is traded on the New York Stock Exchange. Shares of our Class A, Class C and Class D Common
Stock are not traded in any public market, but are each convertible into shares of our Class B Common Stock on a share-for-share
basis.
The table below sets forth, for the quarters indicated, the high and low reported closing sales prices per share reported on the
New York Stock Exchange for our Class B Common Stock for the years ended December 31, 2017 and 2016:
Quarter:
1st
2nd
3rd
4th
2017
High-Low Sales
Price
2016
High-Low Sales
Price
$126.65-$106.71 $125.33-$101.65
$125.07-$112.33 $138.74-$121.74
$125.00-$105.37 $138.28-$118.82
$115.06-$95.77 $128.06-$101.55
The number of stockholders of record as of January 31, 2017, were as follows:
Class A Common
Class B Common
Class C Common
Class D Common
16
222
3
102
Stock Repurchase Programs
In July, 2014, our Board of Directors authorized a stock repurchase program whereby, from time to time as conditions allow, we
may spend up to $400 million to purchase shares of our Class B Common Stock on the open market at prevailing market prices or in
negotiated private transactions. In February, 2016, our Board of Directors authorized a $400 million increase to our stock repurchase
program, which increased the aggregate authorization to $800 million from the previous $400 million mentioned above. In
November, 2017, our Board of Directors authorized an additional $400 million increase to our stock repurchase program, which
increased the aggregate authorization to $1.2 billion from the previous $800 million authorization approved in 2016 and 2014 as
mentioned above. There is no expiration date for our stock repurchase programs. As reflected below, during the three-month period
ended December 31, 2017, we have repurchased approximately 1.0 million shares at an aggregate cost of approximately $100.8
million pursuant to the terms of our stock repurchase program. In addition, 193,806 shares were repurchased in connection with
income tax withholding obligations resulting from the exercise of stock options and the vesting of restricted stock grants.
During the period of October 1, 2017 through December 31, 2017, we repurchased the following shares:
October, 2017
November, 2017
December, 2017
Total October through
December
Additional
Dollars
Authorized
For
Repurchase
(in
thousands)
—
Total
number
of
shares
cancelled
63,009 —
$ 400,000 877,923 —
Total
number of
shares
purchased
— 255,869 4,666 $
Average
price paid
per share
for forfeited
restricted
shares
Total
Number
of shares
purchased
as part of
publicly
announced
programs
Average
price paid
per share
for shares
purchased
as part of
publicly
announced
program
Aggregate
purchase
price paid
(in thousands)
Maximum
number of
dollars that
may yet be
purchased
under the
program
(in
thousands)
N/A
60,000 $ 102.27 $
N/A 778,482 $ 99.10 $
0.01 164,513 $ 106.36 $
6,136 $
77,147 $
17,498 $
58,305
381,158
363,660
$ 400,000 1,196,801 4,666 $
0.01 1,002,995 $ 100.48 $
100,781
37
Dividends
During the two years ending December 31, 2017, dividends per share were declared and paid as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
Total
2017
2016
$
$
$
$
$
.10 $
.10 $
.10 $
.10 $
.40 $
.10
.10
.10
.10
.40
Our Credit Agreement contains covenants that include limitations on, among other things, dividends and stock repurchases (see
below in Capital Resources-Credit Facilities and Outstanding Debt Securities).
Equity Compensation
Refer to Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this
report for information regarding securities authorized for issuance under our equity compensation plans.
Stock Price Performance Graph
The following graph compares the cumulative total stockholder return on our common stock with the cumulative total return on
the stock included in the Standard & Poor’s 500 Index and a Peer Group Index during the five year period ended December 31, 2017.
The graph assumes an investment of $100 made in our common stock and each Index as of January 1, 2013 and has been weighted
based on market capitalization. Note that our common stock price performance shown below should not be viewed as being indicative
of future performance.
Companies in the peer group, which consist of companies in the S&P 500 Index or S&P MidCap 400 Index are as follows:
Community Health Systems, Inc., Health Management Associates, Inc. (included until January, 2014 when it was acquired by
Community Health Systems, Inc.), LifePoint Health, Inc., Tenet Healthcare Corporation, Acadia Healthcare Company, Inc. and HCA
Healthcare, Inc.
38
Company Name / Index
Universal Health Services, Inc.
S&P 500 Index
Peer Group
2012 Base
$
$
$
100.00 $
100.00 $
100.00 $
2013
168.56 $
132.39 $
149.80 $
2014
231.48 $
150.51 $
211.11 $
2015
249.41 $
152.59 $
179.26 $
2016
222.77 $
170.84 $
161.61 $
2017
238.21
208.14
183.46
39
ITEM 6.
Selected Financial Data
The following table contains our selected financial data for, or as of the end of, each of the five years ended December 31, 2017.
You should read this table in conjunction with the consolidated financial statements and related notes included elsewhere in this report
and in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
2017
2016
2015
2014
2013
Year Ended December 31,
Summary of Operations (in thousands)
Net revenues
Income before income taxes
Net income attributable to UHS
Net margin
Return on average equity
Financial Data (in thousands)
Cash provided by operating activities
Capital expenditures, net (1)
Total assets
Current maturities of long-term debt
Long-term debt
UHS’s common stockholders’ equity
Percentage of total debt to total capitalization
Operating Data—Acute Care Hospitals (2)
Average licensed beds
Average available beds
Inpatient admissions
Average length of patient stay
Patient days
Occupancy rate for licensed beds
Occupancy rate for available beds
Operating Data—Behavioral Health Facilities (2)
Average licensed beds
Average available beds
Inpatient admissions
Average length of patient stay
Patient days
Occupancy rate for licensed beds
Occupancy rate for available beds
Per Share Data
Net income attributable to UHS—basic
Net income attributable to UHS—diluted
Dividends declared
Other Information (in thousands)
Weighted average number of shares
outstanding—basic
Weighted average number of shares and share
equivalents outstanding—diluted
$ 10,409,865 $ 9,766,210 $ 9,043,451 $ 8,205,088 $ 7,367,873
$ 1,135,009 $ 1,156,358 $ 1,145,901 $ 929,667 $ 869,332
702,409 $ 680,528 $ 545,343 $ 510,733
$
7.2 %
16.0 %
7.5 %
16.6 %
6.6 %
15.3 %
6.9 %
16.8 %
752,303 $
7.2 %
15.5 %
557,506 $
$ 1,182,581 $ 1,333,693 $ 1,068,262 $ 1,069,788 $ 904,362
$
519,939 $ 379,321 $ 391,150 $ 358,493
$ 10,761,828 $ 10,317,802 $ 9,615,444 $ 8,974,443 $ 8,311,723
99,312
$
$ 3,494,390 $ 4,030,230 $ 3,368,634 $ 3,210,215 $ 3,209,762
$ 4,989,514 $ 4,533,220 $ 4,249,647 $ 3,735,946 $ 3,249,979
545,619 $
105,895 $
68,319 $
62,722 $
45 %
48 %
45 %
47 %
51 %
5,934
5,759
6,127
5,954
297,390
4.4
5,652
5,429
274,074 261,727 251,165 246,160
4.5
1,312,265 1,251,511 1,218,969 1,167,726 1,112,541
5,832
5,656
5,776
5,571
4.6
4.7
4.6
59 %
60 %
58 %
59 %
57 %
59 %
55 %
57 %
54 %
56 %
21,829
21,744
23,151
23,068
467,822
13.6
19,940
19,841
456,052 447,007 426,510 401,565
13.3
6,381,756 6,004,066 5,835,134 5,518,660 5,354,334
20,231
20,131
21,202
21,116
13.2
13.1
12.9
76 %
76 %
7.86 $
7.81 $
0.40 $
$
$
$
75 %
75 %
75 %
76 %
75 %
75 %
74 %
74 %
7.22 $
7.14 $
0.40 $
6.89 $
6.76 $
0.40 $
5.52 $
5.42 $
0.30 $
5.21
5.14
0.20
95,652
97,208
98,797
98,826
98,033
96,325
98,380 100,694 100,544
99,361
(1) Amounts exclude non-cash capital lease obligations, if any.
(2) Excludes statistical information related to divested facilities.
40
ITEM 7. 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 February 28, 2018, we owned and/or operated 326 inpatient facilities and 32 outpatient and other facilities including the
following located in 37 states, Washington, D.C., the United Kingdom, Puerto Rico and the U.S. Virgin Islands:
Acute care facilities located in the U.S.:
(cid:1)
(cid:1)
(cid:1)
26 inpatient acute care hospitals;
4 free-standing emergency departments, and;
4 outpatient surgery/cancer care centers & 1 surgical hospital.
Behavioral health care facilities (300 inpatient facilities and 23 outpatient facilities):
Located in the U.S.:
(cid:1)
(cid:1)
188 inpatient behavioral health care facilities, and;
20 outpatient behavioral health care facilities.
Located in the U.K.:
(cid:1)
(cid:1)
108 inpatient behavioral health care facilities, and;
2 outpatient behavioral health care facilities.
Located in Puerto Rico and the U.S. Virgin Islands:
(cid:1)
(cid:1)
4 inpatient behavioral health care facilities, and;
1 outpatient behavioral health care facility.
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and
commercial health insurer accounted for 53% during 2017, 52% during 2016 and 51% during 2015. Net revenues from our behavioral
health care facilities and commercial health insurer accounted for 47% of our consolidated net revenues during 2017, 48% during
2016 and 49% during 2015.
Our behavioral health care facilities located in the U.K. generated net revenues amounting to approximately $429 million in
2017, $241 million in 2016 and $203 million in 2015. Total assets at our U.K. behavioral health care facilities were approximately
$1.098 billion as of December 31, 2017, $965 million as of December 31, 2016 and $521 million as of December 31, 2015.
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 Annual Report, and should particularly consider any risk factors
that we set forth in this Annual Report and in other reports or documents that we file from time to time with the Securities and
Exchange Commission (the “SEC”). In this Annual Report, we state our beliefs of future events and of our future financial
performance. This Annual Report contains “forward-looking statements” that reflect our current estimates, expectations and
projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other
things, the information concerning our possible future results of operations, business and growth strategies, financing plans,
expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial
condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the
benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and
other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,”
“predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,”
“projects” and similar expressions, as well as statements in future tense, identify forward-looking statements. In evaluating those
statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those set forth
herein in Item 1A. Risk Factors.
41
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:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
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. No assurances can be given that the implementation of these laws will not
have a material adverse effect on our business, financial condition or results of operations. See below in Sources of
Revenue and Health Care Reform for additional disclosure;
possible unfavorable changes in the levels and terms of reimbursement for our charges by third party payors or
government based payors, including Medicare or Medicaid in the United States, and government based payors in the
United Kingdom;
our ability to enter into managed care provider agreements on acceptable terms and the ability of our competitors to do the
same, including contracts with United/Sierra Healthcare in Las Vegas, Nevada;
the outcome of known and unknown litigation, government investigations, false claim act allegations, and liabilities and
other claims asserted against us and other matters as disclosed in Item 3. Legal Proceedings;
the potential unfavorable impact on our business of deterioration in national, regional and local economic and business
conditions, including a worsening of unfavorable credit market conditions;
competition from other healthcare providers (including physician owned facilities) in certain markets;
technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for healthcare;
our ability to attract and retain qualified personnel, nurses, physicians and other healthcare professionals and the impact
on our labor expenses resulting from a shortage of nurses and other healthcare professionals;
demographic changes;
our ability to successfully integrate and improve our recent acquisitions and the availability of suitable acquisitions and
divestiture opportunities;
the impact of severe weather conditions, including the effects of hurricanes;
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 Medicaid revenues in excess of $100 million annually from
each of Texas, California, Nevada, Washington, D.C., Pennsylvania and Illinois); CMS-approved Medicaid supplemental
programs in certain states including Texas, Mississippi, Illinois, Oklahoma, Nevada, Arkansas, California and Indiana,
and; state Medicaid disproportionate share hospital payments in certain states including Texas and South Carolina. We are
therefore particularly sensitive to potential reductions in Medicaid and other state based revenue programs as well as
regulatory, economic, environmental and competitive changes in those states. We can provide no assurance that
reductions to revenues earned pursuant to these programs, particularly in the above-mentioned states, will not have a
material adverse effect on our future results of operations;
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 payors and there can be no
assurance that failure of the payors to remit amounts due to us will not have a material adverse effect on our future results
of operations;
42
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
in August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. The 2011 Act imposed annual
spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012
and 2021, according to a report released by the Congressional Budget Office. Among its other provisions, the law
established a bipartisan Congressional committee, known as the Joint Select Committee on Deficit Reduction (the “Joint
Committee”), which was tasked with making recommendations aimed at reducing future federal budget deficits by an
additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011
deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were
implemented on March 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year (annual reduction of
approximately $36 million to our Medicare net revenues) with a uniform percentage reduction across all Medicare
programs. The Bipartisan Budget Act of 2015, enacted on November 2, 2015, continued the 2% reductions to Medicare
reimbursement imposed under the 2011 Act. We cannot predict whether Congress will restructure the implemented
Medicare payment reductions or what other federal budget deficit reduction initiatives may be proposed by Congress
going forward;
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;
fluctuations in the value of our common stock, and;
other factors referenced herein or in our other filings with the Securities and Exchange Commission.
Given these uncertainties, risks and assumptions, as outlined above, you are cautioned not to place undue reliance on such
forward-looking statements. Our actual results and financial condition could differ materially from those expressed in, or implied by,
the forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We assume no
obligation to publicly update any forward-looking statements to reflect actual results, changes in assumptions or changes in other
factors affecting forward-looking information, except as may be required by law. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying
notes.
A summary of our significant accounting policies is outlined in Note 1 to the financial statements. We consider our critical
accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements,
including the following:
Revenue Recognition: We record revenues and related receivables for health care services at the time the services are
provided. Medicare and Medicaid revenues represented 30% of our net patient revenues during 2017, 32% during 2016 and 34%
during 2015. Revenues from managed care entities, including health maintenance organizations and managed Medicare and Medicaid
programs accounted for 56% of our net patient revenues during each of 2017 and 2016 and 54% during 2015.
We report net patient service revenue at the estimated net realizable amounts from patients and third-party payors and others for
services rendered. We have agreements with third-party payors that provide for payments to us at amounts different from our
established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges
and per diem payments. Estimates of contractual allowances under managed care plans are based upon the payment terms specified in
the related contractual agreements. We closely monitor our historical collection rates, as well as changes in applicable laws, rules and
regulations and contract terms, to assure that provisions are made using the most accurate information available. However, due to the
complexities involved in these estimations, actual payments from payors may be different from the amounts we estimate and record.
We estimate our Medicare and Medicaid revenues using the latest available financial information, patient utilization data,
government provided data and in accordance with applicable Medicare and Medicaid payment rules and regulations. The laws and
regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation and as a result, there
is at least a reasonable possibility that recorded estimates will change by material amounts in the near term. Certain types of payments
by the Medicare program and state Medicaid programs (e.g. Medicare Disproportionate Share Hospital, Medicare Allowable Bad
Debts and Inpatient Psychiatric Services) are subject to retroactive adjustment in future periods as a result of administrative review
and audit and our estimates may vary from the final settlements. Such amounts are included in accounts receivable, net, on our
Consolidated Balance Sheets. The funding of both federal Medicare and state Medicaid programs are subject to legislative and
43
regulatory changes. As such, we cannot provide any assurance that future legislation and regulations, if enacted, will not have a
material impact on our future Medicare and Medicaid reimbursements. Adjustments related to the final settlement of these
retrospectively determined amounts did not materially impact our results in 2017, 2016 or 2015. If it were to occur, each 1%
adjustment to our estimated net Medicare revenues that are subject to retrospective review and settlement as of December 31, 2017,
would change our after-tax net income by approximately $1 million.
We provide care to patients who meet certain financial or economic criteria without charge or at amounts substantially less than
our established rates. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in
net revenues or in accounts receivable, net. See additional disclosure below in Charity Care, Uninsured Discounts and Provision for
Doubtful Accounts for our estimated uncompensated care provided and estimated cost of providing uncompensated care.
Charity Care, Uninsured Discounts and Provision for Doubtful Accounts: Collection of receivables from third-party payers
and patients is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured
patients and the portion of the bill which is the patient’s responsibility, primarily co-payments and deductibles. We estimate our
provisions for doubtful accounts based on general factors such as payer mix, the agings of the receivables and historical collection
experience. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions which
might ultimately affect the collectability of the patient accounts and make adjustments to our allowances as warranted. At our acute
care hospitals, third party liability accounts are pursued until all payment and adjustments are posted to the patient account. For those
accounts with a patient balance after third party liability is finalized or accounts for uninsured patients, the patient receives statements
and collection letters. Our hospitals establish a partial reserve for self-pay accounts in the allowance for doubtful accounts for both
unbilled balances and those that have been billed and are under 90 days old. All self-pay accounts are fully reserved at 90 days from
the date of discharge. Third party liability accounts are fully reserved in the allowance for doubtful accounts when the balance ages
past 180 days from the date of discharge. Patients that express an inability to pay are reviewed for potential sources of financial
assistance including our charity care policy. If the patient is deemed unwilling to pay, the account is written-off as bad debt and
transferred to an outside collection agency for additional collection effort.
Historically, a significant portion of the patients treated throughout our portfolio of acute care hospitals are uninsured patients
which, in part, has resulted from patients who are employed but do not have health insurance or who have policies with relatively high
deductibles. Generally, patients treated at our hospitals for non-elective services, who have gross income less than 400% of the federal
poverty guidelines, are deemed eligible for charity care. The federal poverty guidelines are established by the federal government and
are based on income and family size. Effective January 1, 2016, our hospitals in certain states in which we operate reduced the charity
care eligibility threshold to less than the federal poverty guidelines. Because we do not pursue collection of amounts that qualify as
charity care, they are not reported in our net revenues or in our accounts receivable, net.
A portion of the accounts receivable at our acute care facilities are comprised of Medicaid accounts that are pending approval
from third-party payers but we also have smaller amounts due from other miscellaneous payers such as county indigent programs in
certain states. Our patient registration process includes an interview of the patient or the patient’s responsible party at the time of
registration. At that time, an insurance eligibility determination is made and an insurance plan code is assigned. There are various pre-
established insurance profiles in our patient accounting system which determine the expected insurance reimbursement for each
patient based on the insurance plan code assigned and the services rendered. Certain patients may be classified as Medicaid pending at
registration based upon a screening evaluation if we are unable to definitively determine if they are currently Medicaid eligible. When
a patient is registered as Medicaid eligible or Medicaid pending, our patient accounting system records net revenues for services
provided to that patient based upon the established Medicaid reimbursement rates, subject to the ultimate disposition of the patient’s
Medicaid eligibility. When the patient’s ultimate eligibility is determined, reclassifications may occur which impacts the reported
amounts in future periods for the provision for doubtful accounts and other accounts such as Medicaid pending. Although the patient’s
ultimate eligibility determination may result in amounts being reclassified among these accounts from period to period, these
reclassifications did not have a material impact on our results of operations in 2017, 2016 or 2015 since our facilities make estimates
at each financial reporting period to reserve for amounts that are deemed to be uncollectible.
We also provide discounts to uninsured patients (included in “uninsured discounts” amounts below) who do not qualify for
Medicaid or charity care. Because we do not pursue collection of amounts classified as uninsured discounts, they are not reported in
our net revenues or in our net accounts receivable. In implementing the discount policy, we first attempt to qualify uninsured patients
for governmental programs, charity care or any other discount program. If an uninsured patient does not qualify for these programs,
the uninsured discount is applied. Our accounts receivable are recorded net of allowance for doubtful accounts of $480 million and
$410 million at December 31, 2017 and 2016, respectively.
44
Approximately 87% during 2017 and 85% during 2016 of our consolidated provision for doubtful accounts, was incurred by our
acute care hospitals. Shown below is our payor mix concentrations and related aging of our billed accounts receivable, net of
contractual allowances, for our acute care hospitals as of December 31, 2017 and 2016:
As of December 31, 2017:
Payor
Medicare
Medicaid
Commercial insurance and other
Private pay
Total
As of December 31, 2016:
Payor
Medicare
Medicaid
Commercial insurance and other
Private pay
Total
Days
61-120
121-180
over 180
$
0-60
86,024 $
15,951
373,386
136,473
5,884 $
5,746
120,497
86,375
$ 611,834 $ 218,502 $
5,632
1,776 $
7,108
2,858
135,917
60,637
29,399
63,664
94,670 $ 212,321
Days
61-120
121-180
over 180
$
0-60
71,213 $
15,659
336,346
114,382
4,519 $
6,654
117,919
67,316
$ 537,600 $ 196,408 $
1,385 $
4,225
4,256
8,966
62,806
164,143
26,881
16,689
85,136 $ 204,215
Self-Insured/Other Insurance Risks: We provide for self-insured risks including general and professional liability claims,
workers’ compensation claims and healthcare and dental claims. Our estimated liability for self-insured professional and general
liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents,
estimates of losses for these claims based on recent and historical settlement amounts, estimate of incurred but not reported claims
based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. All relevant
information, including our own historical experience is used in estimating the expected amount of claims. While we continuously
monitor these factors, our ultimate liability for professional and general liability claims could change materially from our current
estimates due to inherent uncertainties involved in making this estimate. Our estimated self-insured reserves are reviewed and
changed, if necessary, at each reporting date and changes are recognized currently as additional expense or as a reduction of expense.
In addition, we also: (i) own commercial health insurers headquartered in Reno, Nevada, and Puerto Rico and; (ii) maintain self-
insured employee benefits programs for employee healthcare and dental claims. The ultimate costs related to these
programs/operations include expenses for claims incurred and paid in addition to an accrual for the estimated expenses incurred in
connection with claims incurred but not yet reported. Given our significant insurance-related exposure, there can be no assurance that
a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results
of operations.
See Note 8 to the Consolidated Financial Statements-Commitments and Contingencies, for additional disclosure related to our
professional and general liability, workers’ compensation liability and property insurance.
Long-Lived Assets: We review our long-lived assets, including intangible assets, for impairment whenever events or
circumstances indicate that the carrying value of these assets may not be recoverable. The assessment of possible impairment is based
on our ability to recover the carrying value of our asset based on our estimate of its undiscounted future cash flow. If the analysis
indicates that the carrying value is not recoverable from future cash flows, the asset is written down to its estimated fair value and an
impairment loss is recognized. Fair values are determined based on estimated future cash flows using appropriate discount rates.
Goodwill and Intangible Assets: Goodwill and indefinite-lived intangible assets are reviewed for impairment at the reporting
unit level on an annual basis or sooner if the indicators of impairment arise. Our judgments regarding the existence of impairment
indicators are based on market conditions and operational performance of each reporting unit. We have designated October 1st as our
annual impairment assessment date and performed an impairment assessment as of October 1, 2017 which indicated no impairment of
goodwill or indefinite-lived intangible assets. There were also no impairments during 2016 or 2015. During 2015, we changed our
annual goodwill and indefinite-lived intangibles testing date from September 1st to October 1st. Management believes that this
voluntary change in accounting method is preferable as it aligns the annual impairment testing date with our annual budgeting
process. The 2015 change in annual testing date did not delay, accelerate or avoid an impairment charge. Future changes in the
45
estimates used to conduct the impairment review, including profitability and market value projections, could indicate impairment in
future periods potentially resulting in a write-off of a portion or all of our goodwill or indefinite-lived intangible assets.
Income Taxes: Deferred tax assets and liabilities are recognized for the amount of taxes payable or deductible in future years as
a result of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. We believe
that future income will enable us to realize our deferred tax assets net of recorded valuation allowances relating to state and foreign net
operating loss carry-forwards.
On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to
as the Tax Cuts and Jobs Act of 2017 (the “TCJA-17”). The TCJA-17 makes broad and complex changes to the U.S. tax code,
including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to
pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income
taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of
controlled foreign corporations through the implementation of a territorial tax system; and (5) creating a new limitation on deductible
interest expense. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in
situations when a registrant has not obtained, prepared, or analyzed (including computations) all of the information needed in order to
complete the accounting for certain income tax effects of the TCJA-17. To the extent that a company’s accounting for certain income
tax effects of the TCJA-17 is incomplete, a reasonable estimate should be recorded as a provisional amount in the financial statements.
We were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete. We recorded the
following provisional adjustments:
Reduction of U.S. federal corporate tax rate: The TCJA-17 reduces the corporate tax rate to 21 percent, effective January 1,
2018. Deferred income taxes are based on the estimated future tax effects of differences between the financial statement carrying
amounts and the tax bases of assets and liabilities under the provisions of the enacted laws. For certain of our deferred tax assets and
deferred tax liabilities, we have recorded a provisional decrease of $97 million and $127 million, respectively, with a corresponding
net adjustment to deferred tax benefit of $30 million for the year ended December 31, 2017. While we are able to make a reasonable
estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the TCJA-17, including, but
not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal
temporary differences.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously
untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the
Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as
the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax and
recorded a provisional Transition Tax obligation of $11.3 million. However, we are continuing to gather additional information to
more precisely compute the amount of the Transition Tax.
Valuation allowances: We must assess whether valuation allowance analyses are affected by various aspects of the TCJA-17
(e.g., deemed repatriation of deferred foreign income). Since, as discussed herein, we have recorded provisional amounts related to
certain portions of the TCJA-17, any corresponding determination of the need for or change in valuation allowances is also
provisional.
The accounting for the above provisional amounts is expected to be complete when our 2017 U.S. Corporate Income Tax return
is filed in 2018.
The decrease in our effective tax rate for the year ended December 31, 2017, as compared to 2016 and 2015, is due to the tax
benefit resulting from our January 1, 2017 adoption of ASU 2016-09, the net favorable impact of the enactment of the TCJA-17 as
discussed above, and the tax effects of our foreign operations in connection with our acquisition of Cambian Group, PLC’s adult
services division (acquired in late December, 2016). We expect our 2018 effective tax rate to be significantly lower than our current
year effective tax rate, excluding the impacts of the new federal tax reform legislation, attributable to the reduction of the federal
corporate income tax rate included in the TCJA-17.
We operate in multiple jurisdictions with varying tax laws. We are subject to audits by any of these taxing authorities. Our tax
returns have been examined by the Internal Revenue Service (“IRS”) through the year ended December 31, 2006. We believe that
adequate accruals have been provided for federal, foreign and state taxes.
See Provision for Income Taxes and Effective Tax Rates below for discussion of our effective tax rates during each of the last
three years.
46
Recent Accounting Pronouncements: For a summary of recent accounting pronouncements, please see Note 1 to the
Consolidated Financial Statements-Accounting Standards as included in this Report on Form 10-K for the year ended December 31,
2017.
Results of Operations
The following table summarizes our results of operations, and is used in the discussion below, for the years ended December 31,
2017, 2016 and 2015 (dollar amounts in thousands):
Net revenues before provision for doubtful
accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Electronic health records incentive income
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
Provision for income taxes
Net income
Less: Net income attributable to
noncontrolling interests
Net income attributable to UHS
2017
Year Ended December 31,
2016
2015
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Amount
% of Net
Revenues
$ 11,278,942
869,077
10,409,865
$ 10,507,788
741,578
100.0 % 9,766,210
$ 9,784,724
741,273
100.0 % 9,043,451
100.0 %
4,980,637
2,493,062
1,105,096
447,765
103,127
0
9,129,687
1,280,178
145,169
1,135,009
363,697
771,312
4.3 %
1.0 %
0.0 %
47.8 % 4,585,530
23.9 % 2,359,339
10.6 % 1,031,337
416,608
97,324
(5,339 )
87.7 % 8,484,799
12.3 % 1,281,411
125,053
1.4 %
10.9 % 1,156,358
409,187
3.5 %
747,171
7.4 %
47.0 % 4,212,387
24.2 % 2,119,805
10.6 % 974,088
4.3 % 398,618
94,973
1.0 %
-0.1 %
(15,815 )
86.9 % 7,784,056
13.1 % 1,259,395
1.3 % 113,494
11.8 % 1,145,901
4.2 % 395,203
7.7 % 750,698
19,009
752,303
$
0.2 %
7.2 % $
44,762
702,409
0.5 %
70,170
7.2 % $ 680,528
46.6 %
23.4 %
10.8 %
4.4 %
1.1 %
-0.2 %
86.1 %
13.9 %
1.3 %
12.7 %
4.4 %
8.3 %
0.8 %
7.5 %
Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016:
Net revenues increased 6.6% or $644 million to $10.41 billion during 2017 as compared to $9.77 billion during 2016. The
increase was primarily attributable to:
(cid:1)
(cid:1)
a $313 million or 3.3% increase in net revenues generated from our acute care and behavioral health care operations
owned during both periods (which we refer to as “same facility”), and;
$331 million of other combined revenue consisting primarily of the revenues generated at the facilities acquired in
December, 2016 in connection with our acquisition of Cambian Adult Services, and the revenues generated at Henderson
Hospital, a newly constructed acute care hospital that was completed and opened during the fourth quarter of 2016.
Income before income taxes (before deduction for income attributable to noncontrolling interests) decreased $21 million to
$1.14 billion during 2017 as compared to $1.16 billion during 2016. The net decrease in our income before income taxes during 2017,
as compared to 2016, was due to the following:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
an increase of $84 million as discussed below in Acute Care Hospital Services;
a decrease of $62 million as discussed below in Behavioral Health Services;
a decrease of $20 million resulting from an increase in interest expense, as discussed below in Other Operating Results,
and;
$23 million of other combined net decreases, including an aggregate of approximately $20 million recording during 2017
in connection certain matters as discussed in Item 3 – Legal Proceedings.
47
Net income attributable to UHS increased $50 million to $752 million during 2017 as compared to $702 million during 2016.
The increase consisted of:
(cid:1)
a decrease of $21 million in income before income taxes, as discussed above;
(cid:1)
(cid:1)
an increase of $26 million resulting from a decrease in the income attributable to noncontrolling interests due primarily to
the May, 2016, purchase of the minority ownership interests held by a third-party in six acute care hospitals located in Las
Vegas, Nevada, and;
an increase of $45 million resulting from a decrease in the provision for income taxes resulting from:
o
o
o
o
a decrease of $30 million due to a reduction in our net deferred income tax liability resulting from a lower
federal income tax rate beginning January 1, 2018 pursuant to the Tax Cuts and Jobs Act of 2017;
an increase of $11 million due to the repatriation tax incurred pursuant to the Tax Cuts and Jobs Act of 2017 (in
connection with our behavioral health care facilities located in the U.K.);
a decrease of $22 million resulting from our January 1, 2017 adoption of ASU 2016-09, as discussed herein;
a decrease caused by lower effective rates applicable to the income generated during 2017 in connection with
our acquisition of Cambian Group, PLC’s adult services division.
Year Ended December 31, 2016 as compared to the Year Ended December 31, 2015:
Net revenues increased 8% or $723 million to $9.77 billion during 2016 as compared to $9.04 billion during 2015. The increase
was primarily attributable to:
(cid:1)
(cid:1)
a $542 million or 6% increase in net revenues generated from our acute care and behavioral health care operations owned
during both periods, and;
other combined net increase of $181 million consisting primarily of the revenues generated at 4 behavioral health care
hospitals acquired in the U.K. in connection with our acquisition of Alpha Hospital Holdings Limited (“Alpha”) during
the third quarter of 2015, and 4 inpatient facilities and 8 outpatient centers acquired during the fourth quarter of 2015 as
result of our acquisition of Foundations Recovery Network, LLC (“Foundations”).
Income before income taxes (before deduction for income attributable to noncontrolling interests) increased $10 million to
$1.16 billion during 2016 as compared to $1.15 billion during 2015. The net increase in our income before income taxes during 2016,
as compared to 2015, was due to the following:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
an increase of $38 million as discussed below in Acute Care Hospital Services;
an increase of $9 million as discussed below in Behavioral Health Services;
a decrease of $12 million resulting from an increase in interest expense due primarily to increased aggregate average
outstanding borrowings, and;
$25 million of other combined net decreases.
Net income attributable to UHS increased $22 million to $702 million during 2016 as compared to $681 million during 2015.
The increase consisted of:
(cid:1)
(cid:1)
(cid:1)
an increase of $10 million in income before income taxes, as discussed above;
an increase of $26 million resulting from a decrease in the income attributable to noncontrolling interests which was due
primarily to our May, 2016, purchase of the minority ownership interests held by a third-party in six acute care hospitals
located in Las Vegas, Nevada, and;
a decrease of $14 million resulting from an increase in the provision for income taxes recorded on the $36 million increase
in pre-tax income ($10 million increase in income before income taxes plus the $26 million increase in income resulting
from a decrease in the income attributable to noncontrolling interests).
48
Acute Care Hospital Services
Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016:
Acute Care Hospital Services-Same Facility Basis
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 impact of the EHR applications, 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 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 tables 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 GAAP and as presented in the condensed
consolidated financial statements and notes thereto as contained in this Annual Report on Form 10-K.
The following table summarizes the results of operations for our acute care hospital services on a same facility basis and is used
in the discussions below for the years ended December 31, 2017 and 2016 (dollar amounts in thousands):
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
% of Net
Revenues
Amount
$ 5,983,425
728,438
5,254,987
Amount
$ 5,649,163
627,827
100.0 % 5,021,336
% of Net
Revenues
2,187,390
1,225,494
886,829
252,365
55,915
4,607,993
646,994
2,683
644,311
$
41.6 % 2,083,357
23.3 % 1,215,144
836,399
16.9 %
237,658
4.8 %
52,582
1.1 %
87.7 % 4,425,140
596,196
12.3 %
0.1 %
3,277
592,919
12.3 % $
100.0 %
41.5 %
24.2 %
16.7 %
4.7 %
1.0 %
88.1 %
11.9 %
0.1 %
11.8 %
On a same facility basis during 2017, as compared to 2016, net revenues from our acute care services increased $234 million or
4.7%. Income before income taxes increased $51 million or 9% to $644 million or 12.3% of net revenues during 2017 as compared to
$593 million or 11.8% of net revenues during 2016.
Inpatient admissions to our acute care hospitals owned during both years increased 6.2% during 2017, as compared to 2016,
while patient days increased 3.4%. Adjusted admissions (adjusted for outpatient activity) increased 5.5% and adjusted patient days
increased 2.8% during 2017, as compared to 2016. The average length of inpatient stay at these facilities was 4.4 days during 2017
and 4.6 days during 2016. The occupancy rate, based on the average available beds at these facilities, was 61% during 2017 and 60%
during 2016. On a same facility basis, net revenue per adjusted admission at these facilities decreased 0.3% during 2017, as compared
to 2016, and net revenue per adjusted patient day increased 2.4% during 2017, as compared to 2016.
All Acute Care Hospital Services
The following table summarizes the results of operations for all our acute care operations during 2017 and 2016. These amounts
include: (i) our acute care results on a same facility basis, as indicated above; (ii) the impact of the implementation of EHR
applications at our acute care hospitals; (iii) the impact of provider tax assessments which increased net revenues and other operating
expenses but had no impact on income before income taxes, and; (iv) certain other amounts including the results of a 25-bed acute
care hospital located in Pahrump, Nevada that was acquired in August, 2016, the results of a newly constructed, 130-bed acute care
hospital located in Henderson, Nevada that was completed and opened during the fourth quarter of 2016 and the favorable impact of
49
Medicaid settlements relating to prior years that is included in our results of operations during 2017. Dollar amounts below are
reflected in thousands.
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Electronic health records incentive income
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
% of Net
Revenues
Amount
$ 6,240,302
755,619
5,484,683
Amount
$ 5,740,777
627,827
100.0 % 5,112,950
% of Net
Revenues
2,241,527
1,350,741
905,165
285,501
57,208
0
4,840,142
644,541
2,684
641,857
$
40.9 % 2,086,986
24.6 % 1,308,293
836,481
16.5 %
273,176
5.2 %
52,604
1.0 %
0.0 %
(5,339 )
88.2 % 4,552,201
560,749
11.8 %
0.0 %
3,277
557,472
11.7 % $
100.0 %
40.8 %
25.6 %
16.4 %
5.3 %
1.0 %
-0.1 %
89.0 %
11.0 %
0.1 %
10.9 %
During 2017, as compared to 2016, net revenues generated from our acute care hospital services increased $372 million or 7.3%
to $5.48 billion due primarily to: (i) a $234 million, or 4.7%, increase same facility revenues, as discussed above, and; (ii) other
combined net increase of $138 million due primarily to the net revenues generated at the two above-mentioned acute care hospitals
located in Nevada that were acquired or opened during 2016.
Income before income taxes increased $84 million to $642 million or 11.7% of net revenues during 2017 as compared to $557
million or 10.9% of net revenues during 2016.
Included in these results are the following:
(cid:1)
(cid:1)
(cid:1)
the $51 million increase in income before income taxes from our acute care hospital services, on a same facility basis, as
discussed above;
a net increase of $6 million resulting from: (i) the income recorded in connection with Medicaid settlements relating to
prior years ($15 million), partially offset by; (ii) increased professional and general liability expense recorded during 2017
related to prior years, based upon a reserve analysis ($9 million), and;
other combined net increase of $27 million consisting primarily of the income generated at the two above-mentioned
acute care hospitals located in Nevada that were acquired or opened during 2016.
Uncompensated care (charity care and uninsured discounts):
The following table shows the amounts recorded at our acute care hospitals for charity care and uninsured discounts, based on
charges at established rates, for the years ended December 31, 2017, 2016 and 2015:
2017
(dollar amounts in thousands)
2016
2015
Charity care
Uninsured discounts
Total uncompensated care
%
%
%
Amount
$ 887,136
881,265
$ 1,768,401
Amount
50 % $ 733,585
50 % 720,205
100 % $ 1,453,790
Amount
50 % $ 506,571
50 % 696,463
100 % $ 1,203,034
42 %
58 %
100 %
Generally, patients treated at our hospitals for non-elective services, who have gross income less than 400% of the federal
poverty guidelines, are deemed eligible for charity care. The federal poverty guidelines are established by the federal government and
are based on income and family size. Effective January 1, 2016, our hospitals in certain states in which we operate reduced the charity
care eligibility threshold to less than the federal poverty guidelines. During 2017 and 2016, as compared to 2015, this change resulted
in an increase in the charity care component of our total uncompensated care and a decrease in the uninsured discount component.
50
The provision for doubtful accounts at our acute care hospitals was approximately $756 million during 2017, $628 million
during 2016 and $631 million during 2015.
The 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. Amounts included in the provision for doubtful accounts, as mentioned above, are not included in the
calculation of estimated costs of providing uncompensated care. 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.
Estimated cost of providing charity care
$
Estimated cost of providing uninsured discounts related care
$
Estimated cost of providing uncompensated care
2017
120,208 $
119,412
239,620 $
(amounts in thousands)
2016
107,887 $
105,920
213,807 $
2015
77,557
106,630
184,187
Year Ended December 31, 2016 as compared to the Year Ended December 31, 2015:
Acute Care Hospital Services-Same Facility Basis
The following table summarizes the results of operations for our acute care hospital services on a same facility basis and is used
in the discussions below for the years ended December 31, 2016 and 2015 (dollar amounts in thousands):
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
Year Ended
December 31, 2016
% of Net
Revenues
Year Ended
December 31, 2015
Amount
% of Net
Revenues
Amount
$ 5,611,838
625,170
4,986,668
2,064,928
1,208,037
832,158
233,430
51,336
4,389,889
596,779
3,275
$ 593,504
$ 5,187,677
631,013
100.0 % 4,556,664
41.4 % 1,895,040
24.2 % 1,058,673
780,019
16.7 %
229,517
4.7 %
50,121
1.0 %
88.0 % 4,013,370
543,294
12.0 %
0.1 %
4,214
11.9 % $ 539,080
100.0 %
41.6 %
23.2 %
17.1 %
5.0 %
1.1 %
88.1 %
11.9 %
0.1 %
11.8 %
On a same facility basis during 2016, as compared to 2015, net revenues from our acute care services increased $430 million or
9.4%. Income before income taxes increased $54 million or 10% to $594 million or 11.9% of net revenues during 2016 as compared
to $539 million or 11.8% of net revenues during 2015.
Inpatient admissions to our acute care hospitals owned during both years increased 4.3% during 2016, as compared to 2015,
while patient days increased 2.4%. Adjusted admissions (adjusted for outpatient activity) increased 5.2% and adjusted patient days
increased 3.3% during 2016, as compared to 2015. The average length of inpatient stay at these facilities was 4.6 days during 2016
and 4.7 days during 2015. The occupancy rate, based on the average available beds at these facilities, was 60% during 2016 and 59%
during 2015. On a same facility basis, net revenue per adjusted admission at these facilities increased 2.7% during 2016, as compared
to 2015, and net revenue per adjusted patient day increased 4.6% during 2016, as compared to 2015.
All Acute Care Hospital Services
The following table summarizes the results of operations for all our acute care operations during 2016 and 2015. These amounts
include: (i) our acute care results on a same facility basis, as indicated above; (ii) the impact of the implementation of EHR
applications at our acute care hospitals; (iii) the impact of provider tax assessments which increased net revenues and other operating
expenses but had no impact on income before income taxes, and; (iv) certain other amounts including the results of a 25-bed acute
care hospital located in Pahrump, Nevada that was acquired in August, 2016 and the results of a newly constructed, 130-bed acute care
51
hospital located in Henderson, Nevada that was completed and opened during the fourth quarter of 2016. Dollar amounts below are
reflected in thousands.
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Electronic health records incentive income
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
Year Ended
December 31, 2016
% of Net
Revenues
Year Ended
December 31, 2015
Amount
% of Net
Revenues
Amount
$ 5,740,777
627,827
5,112,950
2,086,986
1,308,293
836,481
273,176
52,604
(5,339 )
4,552,201
560,749
3,277
$ 557,472
$ 5,263,577
631,013
100.0 % 4,632,564
40.8 % 1,896,002
25.6 % 1,131,481
780,019
16.4 %
266,912
5.3 %
50,121
1.0 %
-0.1 %
(15,815 )
89.0 % 4,108,720
523,844
11.0 %
0.1 %
4,214
10.9 % $ 519,630
100.0 %
40.9 %
24.4 %
16.8 %
5.8 %
1.1 %
-0.3 %
88.7 %
11.3 %
0.1 %
11.2 %
During 2016, as compared to 2015, net revenues generated from our acute care hospital services increased $480 million or
10.4% to $5.11 billion due primarily to: (i) a $430 million, or 9.4%, increase same facility revenues, as discussed above, and; (ii) other
combined net increase of $50 million due primarily to the net revenues generated at the two above-mentioned acute care hospitals
located in Nevada that were acquired or opened during 2016, and an increase in provider tax assessments.
Income before income taxes increased $37 million to $557 million or 10.9% of net revenues during 2016 as compared to $520
million or 11.2% of net revenues during 2015.
Included in these results are the following:
(cid:1)
(cid:1)
(cid:1)
the $54 million increase in income before income taxes from our acute care hospital services, on a same facility basis, as
discussed above;
a net decrease of $9 million related to the incentive income ($5 million in 2016 and $16 million in 2015), net of related
depreciation and amortization expense ($35 million in 2016 and $37 million in 2015), recorded in connection with the
implementation of EHR applications at our acute care hospitals, and;
a net other combined decrease of $8 million consisting primarily of the operating losses incurred at the newly constructed,
130-bed acute care hospital located in Henderson, Nevada, that was completed and opened during the fourth quarter of
2016.
52
Behavioral Health Care Services
Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016
Behavioral Health Care Services-Same Facility Basis
Our Same Facility basis results (which is a non-GAAP measure), which include the operating results for facilities and
businesses operated in both the current year and prior year period, 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 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 tables 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 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 GAAP and as presented in the condensed consolidated financial
statements and notes thereto as contained in this Annual Report on Form 10-K.
The following table summarizes the results of operations for our behavioral health care services, on a same facility basis, and is
used in the discussions below for the years ended December 31, 2017 and 2016 (dollar amounts in thousands):
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
Year Ended
December 31, 2017
% of Net
Revenues
Year Ended
December 31, 2016
Amount
% of Net
Revenues
Amount
$ 4,743,340
111,277
4,632,063
2,361,545
921,991
195,291
136,000
44,259
3,659,086
972,977
2,006
$ 970,971
$ 4,666,633
113,455
100.0 % 4,553,178
51.0 % 2,257,512
885,574
19.9 %
193,901
4.2 %
131,231
2.9 %
44,975
1.0 %
79.0 % 3,513,193
21.0 % 1,039,985
1,728
0.0 %
21.0 % $ 1,038,257
100.0 %
49.6 %
19.4 %
4.3 %
2.9 %
1.0 %
77.2 %
22.8 %
0.0 %
22.8 %
On a same facility basis during 2017, as compared to 2016, net revenues generated from our behavioral health care services
increased $79 million or 1.7% to $4.63 billion during 2017 as compared to $4.55 billion during 2016. Income before income taxes
decreased $67 million or 7% to $971 million or 21.0% of net revenues during 2017 as compared to $1.04 billion or 22.8% of net
revenues during 2016.
Inpatient admissions to our behavioral health care facilities owned during both years increased 2.5% during 2017, as compared
to 2016, while patient days increased 0.3%. Adjusted admissions increased 2.4% and adjusted patient days increased 0.2% during
2017, as compared to 2016. The average length of inpatient stay at these facilities were 12.8 days and 13.1 days during 2017 and 2016,
respectively. The occupancy rate, based on the average available beds at these facilities, were 75% and 76% during 2017 and 2016,
respectively. On a same facility basis, net revenue per adjusted admission at these facilities decreased 0.4% during 2017, as compared
to 2016, and net revenue per adjusted patient day increased 1.9% during 2017, as compared to 2016.
In certain markets in which we operate, the ability of our behavioral health facilities to fully meet the demand for their services
has been unfavorably impacted by a shortage of clinicians which includes psychiatrists, nurses and mental health technicians which
has, at times, caused the closure of a portion of available bed capacity. As a result, we have instituted certain initiatives at the
impacted facilities designed to enhance recruitment and retention of clinical staff. Although we believe the impact on these facilities
is temporary, we can provide no assurance that these factors will not continue to unfavorably impact our patient volumes.
All Behavioral Health Care Services
The following table summarizes the results of operations for all our behavioral health care services during 2017 and 2016. These
amounts include: (i) our behavioral health care results on a same facility basis, as indicated above; (ii) the impact of provider tax
53
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 including the behavioral health
care facilities acquired in the U.K. in connection with our acquisition of Cambian Group, PLC’s adult services division which was
acquired in late December, 2016. Dollar amounts below are reflected in thousands.
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
Year Ended
December 31, 2017
% of Net
Revenues
Year Ended
December 31, 2016
Amount
% of Net
Revenues
Amount
$ 5,020,177
113,458
4,906,719
2,496,236
1,042,056
199,936
152,067
45,445
3,935,740
970,979
2,005
$ 968,974
$ 4,758,761
113,754
100.0 % 4,645,007
50.9 % 2,271,967
965,873
21.2 %
194,872
4.1 %
134,487
3.1 %
45,346
0.9 %
80.2 % 3,612,545
19.8 % 1,032,462
0.0 %
1,728
19.7 % $ 1,030,734
100.0 %
48.9 %
20.8 %
4.2 %
2.9 %
1.0 %
77.8 %
22.2 %
0.0 %
22.2 %
During 2017, as compared to 2016, net revenues generated from our behavioral health care services increased 5.6% or $262
million to $4.91 billion during 2017 as compared to $4.65 billion during 2016. The increase in net revenues was attributable to: (i) $79
million or 1.7% increase in same facility revenues, as discussed above, and; (ii) $183 million of other combined net increases
consisting primarily of the revenues generated at the facilities acquired in the U.K. in late December, 2016 in connection with our
acquisition of Cambian Group, PLC’s Adult Services division.
Income before income taxes decreased $62 million or 6% to $969 million or 19.7% of net revenues during 2017 as compared to
$1.03 billion or 22.2% of net revenues during 2016. The decrease in income before income taxes at our behavioral health facilities was
attributable to:
(cid:1)
(cid:1)
(cid:1)
a $67 million decrease at our behavioral health facilities on a same facility basis, as discussed above;
a $13 million decrease due to the following which were recorded during 2017: (i) a prior year Medicaid disproportionate
shares hospital revenue adjustment related to a certain state ($7 million), and; (ii) increased professional and general
liability expense related to prior years, based upon a reserve analysis ($6 million), and;
other combined net increase of $18 million consisting primarily of the income generated during 2017 at the facilities
acquired in the Cambian Group, PLC’s adult services division transaction in December, 2016, partially offset by other
unfavorable changes.
54
Year Ended December 31, 2016 as compared to the Year Ended December 31, 2015
Behavioral Health Care Services-Same Facility Basis
The following table summarizes the results of operations for our behavioral health care services, on a same facility basis, and is
used in the discussions below for the years ended December 31, 2016 and 2015 (dollar amounts in thousands):
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
Year Ended
December 31, 2016
% of Net
Revenues
Year Ended
December 31, 2015
Amount
% of Net
Revenues
Amount
$ 4,537,418
112,061
4,425,357
2,187,896
854,174
189,245
127,060
41,584
3,399,959
1,025,398
1,753
$ 1,023,645
$ 4,422,803
109,734
100.0 % 4,313,069
49.4 % 2,084,152
838,732
19.3 %
191,001
4.3 %
121,524
2.9 %
42,513
0.9 %
76.8 % 3,277,922
23.2 % 1,035,147
0.0 %
1,854
23.1 % $ 1,033,293
100.0 %
48.3 %
19.4 %
4.4 %
2.8 %
1.0 %
76.0 %
24.0 %
0.0 %
24.0 %
On a same facility basis during 2016, as compared to 2015, net revenues generated from our behavioral health care services
increased $112 million or 2.6% to $4.43 billion during 2016 as compared to $4.31 billion during 2015. Income before income taxes
decreased $10 million or 1% to $1.02 billion or 23.1% of net revenues during 2016 as compared to $1.03 billion or 24.0% of net
revenues during 2015.
Inpatient admissions to our behavioral health care facilities owned during both years increased 1.3% during 2016, as compared
to 2015, while patient days increased 1.2%. Adjusted admissions increased 1.0% and adjusted patient days increased 0.9% during
2016, as compared to 2015. The average length of inpatient stay at these facilities was 13.0 days during each of 2016 and 2015. The
occupancy rate, based on the average available beds at these facilities, was 76% during each of 2016 and 2015. On a same facility
basis, net revenue per adjusted admission at these facilities increased 1.4% during 2016, as compared to 2015, and net revenue per
adjusted patient day increased 1.5% during 2016, as compared to 2015.
All Behavioral Health Care Services
The following table summarizes the results of operations for all our behavioral health care services during 2016 and 2015 which
includes our behavioral health results on a same facility basis, the impact of the facilities acquired or opened within the previous
twelve months, and the impact of provider tax assessments which increased net revenues and other operating expenses but had no
impact on income before income taxes (dollar amounts in thousands):
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Subtotal-operating expenses
Income from operations
Interest expense, net
Income before income taxes
Year Ended
December 31, 2016
% of Net
Revenues
Year Ended
December 31, 2015
Amount
% of Net
Revenues
Amount
$ 4,758,761
113,754
4,645,007
2,271,967
965,873
194,872
134,487
45,346
3,612,545
1,032,462
1,728
$ 1,030,734
55
$ 4,510,477
110,142
100.0 % 4,400,335
48.9 % 2,105,206
910,741
20.8 %
192,387
4.2 %
124,205
2.9 %
44,119
1.0 %
77.8 % 3,376,658
22.2 % 1,023,677
0.0 %
1,854
22.2 % $ 1,021,823
100.0 %
47.8 %
20.7 %
4.4 %
2.8 %
1.0 %
76.7 %
23.3 %
0.0 %
23.2 %
During 2016, as compared to 2015, net revenues generated from our behavioral health care services increased 5.6% or $245
million to $4.65 billion during 2016 as compared to $4.40 billion during 2015. The increase in net revenues was attributable to: (i)
$112 million or 2.6% increase in same facility revenues, as discussed above, and; (ii) $133 million of other combined increases
consisting primarily of the revenues generated at the facilities acquired in the Alpha and Foundations transactions.
Income before income taxes increased $9 million or 1% to $1.03 billion or 22.2% of net revenues during 2016 as compared to
$1.02 billion or 23.2% of net revenues during 2015. The increase in income before income taxes at our behavioral health facilities was
attributable to:
(cid:1)
(cid:1)
a $10 million decrease at our behavioral health facilities on a same facility basis, as discussed above, and;
a combined net increase of $19 million related primarily to the income generated at the facilities acquired in the Alpha and
Foundations transactions.
Sources of Revenue
Overview: We receive payments for services rendered from private insurers, including managed care plans, the federal
government under the Medicare program, state governments under their respective Medicaid programs and directly from patients.
Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services and therapy programs ordered by
physicians and provided to patients, the volume of outpatient procedures and the charges or negotiated payment rates for such
services. Charges and reimbursement rates for inpatient routine services vary depending on the type of services provided (e.g.,
medical/surgical, intensive care or behavioral health) and the geographic location of the hospital. Inpatient occupancy levels fluctuate
for various reasons, many of which are beyond our control. The percentage of patient service revenue attributable to outpatient
services has generally increased in recent years, primarily as a result of advances in medical technology that allow more services to be
provided on an outpatient basis, as well as increased pressure from Medicare, Medicaid and private insurers to reduce hospital stays
and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to our
increased outpatient levels mirrors the general trend occurring in the health care industry and we are unable to predict the rate of
growth and resulting impact on our future revenues.
Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such
services under Medicare, Medicaid, some private insurance plans, and managed care plans, but are responsible for services not
covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles
and co-insurance has generally been increasing each year. Indications from recent federal and state legislation are that this trend will
continue. Collection of amounts due from individuals is typically more difficult than from governmental or business payers which
unfavorably impacts the collectability of our patient accounts.
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, economic recovery stimulus packages, responses to natural disasters, and the federal budget deficit in
general may affect the availability of federal funds to provide additional relief in the future. We are unable to predict the effect of
future policy changes on our operations.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the “PPACA”). The
Healthcare and Education Reconciliation Act of 2010 (the “Reconciliation Act”), which contains a number of amendments to the
PPACA, was signed into law on March 30, 2010. Two primary goals of the PPACA, combined with the Reconciliation Act
(collectively referred to as the “Legislation”), are to provide for increased access to coverage for healthcare and to reduce healthcare-
related expenses.
Although it is expected that as a result of the Legislation there may be a reduction in uninsured patients, which should reduce
our expense from uncollectible accounts receivable, the Legislation makes a number of other changes to Medicare and Medicaid
which we believe may have an adverse impact on us. It has been projected that the Legislation will result in a net reduction in
Medicare and Medicaid payments to hospitals totaling $155 billion over 10 years. The Legislation revises reimbursement under the
Medicare and Medicaid programs to emphasize the efficient delivery of high quality care and contains a number of incentives and
penalties under these programs to achieve these goals. The Legislation provides for decreases in the annual market basket update for
federal fiscal years 2010 through 2019, a productivity offset to the market basket update beginning October 1, 2011 for Medicare Part
B reimbursable items and services and beginning October 1, 2012 for Medicare inpatient hospital services. The Legislation and
subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions
began in October, 2013 while the Medicaid DSH reductions are scheduled to begin in 2020. The Legislation implements a value-based
56
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 U.S. Supreme Court ruling limited the federal government’s ability to expand health insurance coverage by holding
unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid
coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the
Medicaid expansion program by reducing their existing Medicaid funding. Therefore, states can choose to accept or not to participate
without risking the loss of federal Medicaid funding. As a result, many states, including Texas, have not expanded their Medicaid
programs without the threat of loss of federal funding. CMS has granted, and is expected to grant additional, section 1115
demonstration waivers providing for work and community engagement requirements for certain Medicaid eligible individuals. It is
anticipated this will lead to reductions in coverage, and likely increases in uncompensated care, in states where these demonstration
waivers are granted.
The various provisions in the Legislation that directly or indirectly affect Medicare and Medicaid reimbursement are scheduled
to take 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 Congress had previously revised the intent
requirement of the Anti-Kickback Statute to provide that a person is not required to “have actual knowledge or specific intent to
commit a violation of” the Anti-Kickback Statute in order to be found in violation of such law, the Legislation also provides that any
claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil
False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the
federal civil False Claims Act, although final regulations implementing this statutory requirement remain pending. 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 has repealed the individual mandate to
obtain health insurance penalty that was part of the original Legislation. In addition, Congress is considering legislation that would, in
material part: (i) eliminate the large employer mandate to obtain or provide health insurance coverage, respectively; (ii) permit
insurers to impose a surcharge up to 30 percent on individuals who go uninsured for more than two months and then purchase
coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits accordingly to income
level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by
a state, transition federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would
allow such state to define essential health benefits differently from federal standards and that would allow certain commercial health
plans to take health status, including pre-existing conditions, into account in setting premiums.
In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions. In relevant part,
President Trump has already taken executive actions: (i) requiring all federal agencies with authorities and responsibilities under the
Legislation to “exercise all authority and discretion available to them to waiver, defer, grant exemptions from, or delay” parts of the
Legislation that place “unwarranted economic and regulatory burdens” on states, individuals or health care providers; (ii) the issuance
of a proposed rule by the Department of Labor to enable the formation of health plans that would be exempt from certain Legislation
57
essential health benefits requirements, and; (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. The
uncertainty resulting from these Executive Branch policies has led to reduced Exchange enrollment in 2018 and is expected to further
worsen the individual and small group market risk pools in future years. It is also anticipated that these and future 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.
The following tables show the approximate percentages of net patient revenue during the past three years for: (i) our Acute Care
and Behavioral Health Care Facilities Combined; (ii) our Acute Care Facilities, and; (iii) our Behavioral Health Care Facilities. Net
patient revenue is defined as revenue from all sources after deducting contractual allowances and discounts from established billing
rates, which we derived from various sources of payment for the years indicated.
Acute Care and Behavioral Health Care Facilities Combined
Third Party Payors:
Medicare
Medicaid
Managed Care (HMO and PPOs)
Other Sources
Total
Acute Care Facilities
Third Party Payors:
Medicare
Medicaid
Managed Care (HMO and PPOs)
Other Sources
Total
Behavioral Health Care Facilities
Third Party Payors:
Medicare
Medicaid
Managed Care (HMO and PPOs)
Other Sources
Total
Percentage of Net
Patient Revenues
2016
2015
2017
19 %
11 %
56 %
14 %
100 %
20 %
12 %
56 %
12 %
100 %
21 %
13 %
54 %
12 %
100 %
Percentage of Net
Patient Revenues
2016
2015
2017
25 %
7 %
64 %
4 %
100 %
25 %
7 %
63 %
5 %
100 %
26 %
7 %
64 %
3 %
100 %
Percentage of Net
Patient Revenues
2016
2015
2017
13 %
15 %
48 %
24 %
100 %
15 %
16 %
48 %
21 %
100 %
16 %
19 %
45 %
20 %
100 %
Medicare: Medicare is a federal program that provides certain hospital and medical insurance benefits to persons aged 65 and
over, some disabled persons and persons with end-stage renal disease. All of our acute care hospitals and many of our behavioral
health centers are certified as providers of Medicare services by the appropriate governmental authorities. Amounts received under the
Medicare program are generally significantly less than a hospital’s customary charges for services provided. Since a substantial
portion of our revenues will come from patients under the Medicare program, our ability to operate our business successfully in the
future will depend in large measure on our ability to adapt to changes in this program.
Under the Medicare program, for inpatient services, our general acute care hospitals receive reimbursement under the inpatient
prospective payment system (“IPPS”). Under the IPPS, hospitals are paid a predetermined fixed payment amount for each hospital
discharge. The fixed payment amount is based upon each patient’s Medicare severity diagnosis related group (“MS-DRG”). Every
58
MS-DRG is assigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient
with that particular diagnosis. The MS-DRG payment rates are based upon historical national average costs and do not consider the
actual costs incurred by a hospital in providing care. This MS-DRG assignment also affects the predetermined capital rate paid with
each MS-DRG. The MS-DRG and capital payment rates are adjusted annually by the predetermined geographic adjustment factor for
the geographic region in which a particular hospital is located and are weighted based upon a statistically normal distribution of
severity. While we generally will not receive payment from Medicare for inpatient services, other than the MS-DRG payment, a
hospital may qualify for an “outlier” payment if a particular patient’s treatment costs are extraordinarily high and exceed a specified
threshold. MS-DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The index used to
adjust the MS-DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals
in purchasing goods and services. Generally, however, the percentage increases in the MS-DRG payments have been lower than the
projected increase in the cost of goods and services purchased by hospitals.
In August, 2017, CMS published its IPPS 2018 final payment rule which provides for a 2.9% market basket increase to the base
Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates,
documenting and coding adjustments and Health Care Reform mandated adjustments are considered, without consideration for the
decreases related to the required Medicare Disproportionate Share Hospital (“DSH”) payment changes and increase to the Medicare
Outlier threshold, the overall increase in IPPS payments would approximate 2.3%. Including the estimated decrease to our DSH
payments (approximating 0.1%) and certain other adjustments, we estimate our overall increase from the final IPPS 2018 rule
(covering the period of October 1, 2017 through September 30, 2018) will approximate 1.8%. This projected impact from the IPPS
2018 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, as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the Budget
Control Act of 2011, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. CMS will also begin
using uncompensated care data from the 2014 hospital cost report Worksheet S-10, one-third weighting as part of the proxy
methodology to allocate approximately $7 billion in the DSH Uncompensated Care Pool. This final rule change will result in wide
variations among all hospitals nationwide in the distribution of these DSH funds compared to previous years. As a result of this final
change by CMS, we could incur a material decrease in our DSH payments in federal fiscal year 2019 and forward if CMS increases
the weighting of the Worksheet S-10 data in the DSH Pool allocation methodology.
In August, 2016, CMS published its IPPS 2017 final payment rule which provides for a 2.7% market basket increase to the base
Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates,
documenting and coding adjustments and Health Care Reform mandated adjustments are considered, without consideration for the
decreases related to the required DSH payment changes and increase to the Medicare Outlier threshold, the overall increase in IPPS
payments would approximate 0.95%. Including the estimated decreases to our DSH payments (approximating -0.8%) and certain other
adjustments, we estimate our overall decrease from the final IPPS 2017 rule (covering the period of October 1, 2016 through
September 30, 2017) would approximate -0.2%. This projected impact from the IPPS 2017 final rule includes both the impact of the
American Taxpayer Relief Act of 2012 documentation and coding adjustment and the required changes to the DSH payments related
to the traditional Medicare fee for service, however, it excludes the impact of the sequestration reductions related to the Budget
Control Act of 2011, and Bipartisan Budget Act of 2015, as discussed below.
In July, 2015, CMS published its IPPS 2016 final payment rule which provided for a 2.4% market basket increase to the base
Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates,
documenting and coding adjustments and Health Care Reform mandated adjustments are considered, without consideration for the
decreases related to the required Medicare DSH payment changes and decrease to the Medicare Outlier threshold, the overall increase
in IPPS payments approximated 1.1%. Including the decreases to our Medicare DSH payments (approximating 1.6%) and certain
other adjustments, our overall decrease from the final IPPS 2016 rule (covering the period of October 1, 2015 through September 30,
2016) was approximately -0.1%. The impact from the IPPS 2016 final rule includes both the impact of the American Taxpayer Relief
Act of 2012 documentation and coding adjustment and the required changes to the DSH payments related to the traditional Medicare
fee for service, however, it excludes the impact of the sequestration reductions related to the Budget Control Act of 2011, and
Bipartisan Budget Act of 2015, as discussed below.
In August, 2013, CMS published its final IPPS 2014 payment rule which expanded CMS’s policy under which it defines
inpatient admissions to include the use of an objective time of care standard. Specifically, it would require Medicare’s external review
contractors to presume that hospital inpatient admissions are reasonable and necessary when beneficiaries receive a physician order
for admission and receive medically necessary services for at least two midnights (the “Two Midnight” rule). In October, 2015 as part
of the 2016 Medicare Outpatient Prospective Payment System (“OPPS”) final rule (additional related disclosure below), CMS will
allow payment for one-midnight stays under the Medicare Part A benefit on a case-by case basis for rare and unusual exceptions based
the presence of certain clinical factors. CMS also announced in the final rule that, effective October 1, 2015, Quality Improvement
Organizations (“QIOs”) will conduct reviews of short inpatient stay reviews rather than Medicare Administrative Contractors.
Additionally, CMS also announced that Recovery Audit Contractors (“RACs”) resumed patient status reviews for claims with
59
admission dates of January 1, 2016 or later, and the agency indicates that RACs will conduct these reviews focused on providers with
high denial rates that are referred by the QIOs. In its IPPS 2017 final payment rule, CMS: (i) reversed the Two-Midnight rule’s 0.2%
reduction in hospital payments, and; (ii) implemented a temporary one-time increase of 0.8% in FFY2017 payments to offset cuts in
the preceding fiscal years affected by the prior 0.2% reduction.
In August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. Included in this law are the imposition
of annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and
2021, according to a report released by the Congressional Budget Office. Among its other provisions, the law established a bipartisan
Congressional committee, known as the Joint Committee, which was responsible for developing recommendations aimed at reducing
future federal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by
the November 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were
implemented on March 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year. The Bipartisan Budget Act of
2015, enacted on November 2, 2015, and the Bipartisan Budget Act of 2018, enacted on February 9, 2018, continued the 2%
reductions to Medicare reimbursement imposed under the 2011 Act.
On January 2, 2013 ATRA was enacted which, among other things, includes a requirement for CMS to recoup $11 billion from
hospitals from Medicare IPPS rates during federal fiscal years 2014 to 2017. The recoupment relates to IPPS documentation and
coding adjustments for the period 2008 to 2013 for which adjustments were not previously applied by CMS. Both the 2014 and 2015
IPPS final rules include a -0.8% recoupment adjustment. CMS has included the same 0.8% recoupment adjustment in fiscal year 2016,
a 1.5% recoupment adjustment in federal fiscal year 2017, and a 0.45% positive adjustment in fiscal year 2018 in order to recover the
entire $11 billion. This adjustment is reflected in the IPPS estimated impact amounts noted above. On April 16, 2015, the Medicare
Access and CHIP Reauthorization Act of 2015 was enacted and an anticipated 3.2% payment increase in 2018 is scheduled to be
phased in at approximately 0.5% per year over 6 years beginning in fiscal year 2018.
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 August, 2017, CMS published its Psych PPS final rule for the federal fiscal year 2018. Under this final rule, payments to our
psychiatric hospitals and units are estimated to increase by 1.25% compared to federal fiscal year 2017. This amount includes the
effect of the 2.6% market basket update less a 0.75% adjustment as required by the ACA and a 0.6% productivity adjustment.
In July, 2016, CMS published its Psych PPS final rule for the federal fiscal year 2017. Under this final rule, payments to
psychiatric hospitals and units are estimated to increase by 2.3% compared to federal fiscal year 2016. This amount includes the effect
of the 2.8% market basket update less a 0.2% adjustment as required by the ACA and a 0.3% productivity adjustment.
In July, 2015, CMS published its Psych PPS final rule for the federal fiscal year 2016. Under this final rule, payments to
psychiatric hospitals and units increased by approximately 1.7% compared to federal fiscal year 2015. This amount includes the effect
of the 2.4% market basket update less a 0.2% adjustment as required by the ACA and a 0.5% productivity adjustment. The final rule
also updates the Inpatient Psychiatric Quality Reporting Program, which requires psychiatric facilities to report on quality measures or
incur a reduction in their annual payment update.
In November, 2017, CMS published its OPPS final rule for 2018. The hospital market basket increase is 2.7%. The Medicare
statute requires a productivity adjustment reduction of 0.6% and 0.75% reduction to the 2017 OPPS market basket resulting in a 2018
OPPS market basket update at 1.35%. When other statutorily required adjustments and hospital patient service mix are considered, we
estimate that our overall Medicare OPPS update for 2018 will aggregate to a net increase of 4.2% which includes a 0.8% increase to
behavioral health division partial hospitalization rates. When the behavioral health division’s partial hospitalization rate impact is
excluded, we estimate that our Medicare 2018 OPPS payments will result in a 4.8% increase in payment levels for our acute care
division, as compared to 2017. Additionally, the Medicare inpatient-only (IPO) list includes procedures that are only paid under the
Hospital Inpatient Prospective Payment System. Each year, CMS uses established criteria to review the IPO list and determine
whether or not any procedures should be removed from the list. CMS is removing total knee arthroplasty (TKA) from the IPO list
effective January 1, 2018. Additionally, CMS will redistribute $1.6 billion in cost savings within the OPPS system attributable to
changes in the federal 340B hospital drug pricing payment methodology in 2018. The impact of these IPO and 340B changes are
reflected in the above noted estimated acute care division percentage change in OPPS reimbursement.
In November, 2016, CMS published its OPPS final rule for 2017. The hospital market basket increase is 2.7%. The Medicare
statute requires a productivity adjustment reduction of 0.3% and 0.75% reduction to the 2017 OPPS market basket resulting in a 2017
60
OPPS market basket update at 1.65%. When other statutorily required adjustments and hospital patient service mix are considered, we
estimate that our overall Medicare OPPS update for 2017 resulted in a net increase of 1.5% which included a -1.3% decrease to
behavioral health division partial hospitalization rates. When the behavioral health division’s partial hospitalization rate impact is
excluded, we estimate that our Medicare 2017 OPPS payments resulted in a 2.1% increase in payment levels for our acute care
division, as compared to 2016.
In October, 2015, CMS published its OPPS final rule for 2016. The hospital market basket increase is 2.8%. The Medicare
statute requires a productivity adjustment reduction of 0.5% and 0.2% reduction to the 2016 OPPS market basket. Additionally, CMS
also included a reduction of 2.0%, which the CMS claimed was necessary to eliminate $1 billion in excess laboratory payments that
CMS packaged into OPPS payment rates in 2014 resulting in a 2016 OPPS market basket update at -0.3%. When other statutorily
required adjustments and hospital patient service mix are considered, our overall Medicare OPPS update for 2016 aggregated to a net
decrease of approximately -0.2% which includes a 7.0% increase to behavioral health division partial hospitalization rates. When the
behavioral health division’s partial hospitalization rate impact is excluded, our Medicare 2016 OPPS payments resulted in a -1.6%
decrease in payment levels for our acute care division, as compared to 2015.
In October, 2014, CMS published its OPPS final rule for 2015. The hospital market basket increase is 2.9%. The Medicare
statute requires a productivity adjustment reduction of 0.5% and 0.2% reduction to the 2015 OPPS market basket resulting in a 2015
OPPS market basket update at 2.2%. In the final rule, CMS will reduce the 2015 Medicare rates for both hospital-based and
community mental health center partial hospitalization programs. When other statutorily required adjustments, hospital patient service
mix and the aforementioned partial hospitalization rates are considered, our overall Medicare OPPS for 2015 aggregated to a net
increase of approximately 0.2%. Excluding the behavioral health division partial hospitalization rate impact, our Medicare OPPS
payment increase for 2015 was approximately 1.5%.
Medicaid: Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide
benefits to qualifying individuals who are unable to afford care. Most state Medicaid payments are made under a PPS-like system, or
under programs that negotiate payment levels with individual hospitals. Amounts received under the Medicaid program are generally
significantly less than a hospital’s customary charges for services provided. In addition to revenues received pursuant to the Medicare
program, we receive a large portion of our revenues either directly from Medicaid programs or from managed care companies
managing Medicaid. All of our acute care hospitals and most of our behavioral health centers are certified as providers of Medicaid
services by the appropriate governmental authorities.
We receive revenues from various state and county based programs, including Medicaid in all the states in which we operate
(we receive Medicaid revenues in excess of $100 million annually from each of Texas, California, Nevada, Washington, D.C.,
Pennsylvania and Illinois); CMS-approved Medicaid supplemental programs in certain states including Texas, Mississippi, Illinois,
Oklahoma, Nevada, Arkansas, California and Indiana, and; state Medicaid disproportionate share hospital payments in certain states
including Texas and South Carolina. We are therefore particularly sensitive to potential reductions in Medicaid and other state based
revenue programs as well as regulatory, economic, environmental and competitive changes in those states. We can provide no
assurance that reductions to revenues earned pursuant to these programs, particularly in the above-mentioned states, will not have a
material adverse effect on our future results of operations.
The ACA 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 ACA 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 ACA may be additionally penalized by
corresponding reductions to Medicaid disproportionate share hospital payments beginning in 2020, 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.
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.
61
Included in these Provider Tax programs are reimbursements received in connection with 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 Texas (Grayson, Hidalgo, Maverick, Potter and Webb)
participate in Medicaid supplemental payment Section 1115 Waiver indigent care programs. Section 1115 Waiver Uncompensated
Care (“UC”) payments replace the former Upper Payment Limit (“UPL”) payments. These hospitals also have affiliation agreements
with third-party hospitals to provide free hospital and physician care to qualifying indigent residents of these counties. Our hospitals
receive both supplemental payments from the Medicaid program and indigent care payments from third-party, affiliated hospitals. The
supplemental payments are contingent on the county or hospital district making an Inter-Governmental Transfer (“IGT”) to the state
Medicaid program while the indigent care payment is contingent on a transfer of funds from the applicable affiliated hospitals.
However, the county or hospital district is prohibited from entering into an agreement to condition any IGT on the amount of any
private hospital’s indigent care obligation.
For state fiscal year 2017, Texas Medicaid continues to operate under a CMS-approved Section 1115 five-year Medicaid
waiver demonstration program extended by CMS for fifteen months to December 31, 2017. During the first five years of this program
that started in state fiscal year 2012, the THHSC transitioned away from UPL payments to new waiver incentive payment programs,
UC and DSRIP payments. During demonstration periods ending December 31, 2017, THHSC continued to, make incentive payments
under the program after certain qualifying criteria were met by hospitals. Supplemental payments are also subject to aggregate
statewide caps based on CMS approved Medicaid waiver amounts.
On December 21, 2017, CMS approved the 1115 Waiver for the period January 1, 2018 to September 30, 2022. The Waiver
continued to include UC and DSRIP payment pools with modifications and new state specific reporting deadlines that if not met by
THHSC will result in material decreases in the size of the UC and DSRIP pools. For UC during the initial two years of this renewal,
the UC program will remain relatively the same in size and allocation methodology. For year three of this waiver renewal, FFY 2020,
and through FFY 2022, the size and distribution of the UC pool will be determined based on charity care costs reported to HHSC in
accordance with Medicare cost report Worksheet S-10 principles. For FFY2020 and forward, we are unable to estimate the impact on
of these UC program changes on our future operating results.
Texas Delivery System Reform Incentive Payments:
In addition, the Texas Medicaid Section 1115 Waiver includes 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
May, 2014, CMS formally approved specific DSRIP projects for certain of our hospitals for demonstration years 3 to 5 (our facilities
did not materially participate in the DSRIP pool during demonstration years 1 or 2). DSRIP payments are contingent on the hospital
meeting certain pre-determined milestones, metrics and clinical outcomes. Additionally, DSRIP payments are contingent on a
governmental entity providing an IGT for the non-federal share component of the DSRIP payment. THHSC generally approves
DSRIP reported metrics, milestones and clinical outcomes on a semi-annual basis in June and December. Under the CMS approval
noted above, the Waiver renewal requires the transition of the DSRIP program to one focused on "health system performance
measurement and improvement." THHSC must submit a transition plan describing "how it will further develop its delivery system
reforms without DSRIP funding and/or phase out DSRIP funded activities and meet mutually agreeable milestones to demonstrate its
ongoing progress." The size of the DSRIP pool will remain unchanged for the initial two years of the waiver renewal with unspecified
decreases in years three and four of the renewal, FFY 2020 and 2021, respectively. In FFY 2022, DSRIP funding under the waiver is
eliminated. For FFY2020 and 2021, we are unable to estimate the impact of these DSRIP program changes on its operating results.
For FFY 2022, we will no longer receive DSRIP funds due to the elimination of this funding source by CMS in the Waiver renewal.
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 years ended December 31, 2017, 2016 and 2015. The Provider Taxes are recorded in other operating
expenses on the Condensed Consolidated Statements of Income as included herein.
62
Texas UC/UPL:
Revenues
Provider Taxes
Net benefit
Texas DSRIP:
Revenues
Provider Taxes
Net benefit
Various other state programs:
Revenues
Provider Taxes
Net benefit
Total all Provider Tax programs:
Revenues
Provider Taxes
Net benefit
(amounts in millions)
2017
2016
2015
$
$
$
$
$
$
$
$
88 $
(25 )
63 $
46 $
(19 )
27 $
56 $
(10 )
46 $
47 $
(20 )
27 $
223 $
(127 )
96 $
224 $
(136 )
88 $
357 $
(171 )
186 $
327 $
(166 )
161 $
69
(8 )
61
39
(15 )
24
199
(114 )
85
307
(137 )
170
We estimate that our aggregate net benefit from the Texas and various other state Medicaid supplemental payment programs
will approximate $156 million (net of Provider Taxes of $172 million) during the year ended December 31, 2018. This estimate is
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 2016 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.
Texas and South Carolina Medicaid Disproportionate Share Hospital Payments:
Hospitals that have an unusually large number of low-income patients (i.e., those with a Medicaid utilization rate of at least one
standard deviation above the mean Medicaid utilization, or having a low income patient utilization rate exceeding 25%) are eligible to
receive a DSH adjustment. Congress established a national limit on DSH adjustments. Although this legislation and the resulting state
broad-based provider taxes have affected the payments we receive under the Medicaid program, to date the net impact has not been
materially adverse.
Upon meeting certain conditions and serving a disproportionately high share of Texas’ and South Carolina’s low income
patients, five of our facilities located in Texas and one facility located in South Carolina received additional reimbursement from each
state’s DSH fund. The South Carolina and Texas DSH programs were renewed for each state’s 2018 DSH fiscal year (covering the
period of October 1, 2017 through September 30, 2018).
In connection with these DSH programs, included in our financial results was an aggregate of approximately $34 million during
2017, $39 million during 2016 and $36 million during 2015. We expect the aggregate reimbursements to our hospitals pursuant to the
Texas and South Carolina 2018 fiscal year programs to be approximately $36 million.
The ACA and subsequent federal legislation provides for a significant reduction in Medicaid disproportionate share payments
beginning in federal fiscal year 2020 (see below in Sources of Revenues and Health Care Reform-Medicaid Revisions for additional
disclosure). The U.S. Department of Health and Human Services 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 Texas and South Carolina, will be reduced in the coming years. Based on the CMS
proposed rule published in July, 2017, Medicaid DSH payments in South Carolina and Texas could be reduced by approximately 20%
and 14%, respectively, over the prior federal fiscal year.
Nevada SPA:
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In Nevada, CMS approved a state plan amendment (“SPA”) in August, 2014 that implemented a hospital supplemental payment
program retroactive to January 1, 2014. This SPA has been approved for additional state fiscal years including the 2018 fiscal year
covering the period of July 1, 2017 through June 30, 2018.
In connection with this program, included in our financial results was approximately $21 million during 2017, $14 million
during 2016 and $10 million during 2015. Assuming the program is approved for the state’s 2019 fiscal year, we estimate that our
reimbursements pursuant to this program will approximate $22 million during the year ended December 31, 2018.
California SPA:
In California, CMS issued formal approval of the 2017-19 Hospital Fee Program in December, 2017 retroactive to January 1,
2017 through June 30, 2019. This approval included the Medicaid inpatient and outpatient fee-for-service supplemental payments and
the overall provider tax structure but did not yet include the approval of the managed care payment component. Upon approval by
CMS, the managed care payment component will consist of two categories of payments, “pass-through” payments and “directed”
payments. The pass-through payments will be similar in nature to the prior Hospital Fee Program payment method whereas the
directed payment method will be based on actual concurrent hospital Medicaid managed care in-network patient volume. The timing
of CMS approval of the managed care payment component is uncertain. We are unable to estimate the impact of the managed care
component of the Hospital Fee program but it could result in a material favorable impact on our operating results in 2018 and 2019.
The 2017 impact of the California supplemental payment program is included in the above State Medicaid Supplemental Payment
Program table.
Risk Factors Related To State Supplemental Medicaid Payments:
As outlined above, we receive substantial reimbursement from multiple states in connection with various supplemental
Medicaid payment programs. The states include, but are not limited to, Texas, Mississippi, Illinois, Nevada, Arkansas, California and
Indiana. Failure to renew these programs beyond their scheduled termination dates, failure of the public hospitals to provide the
necessary IGTs for the states’ share of the DSH programs, failure of our hospitals that currently receive supplemental Medicaid
revenues to qualify for future funds under these programs, or reductions in reimbursements, could have a material adverse effect on
our future results of operations.
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.
Massachusetts Health Safety Net Care Pool (“SNCP”)
Included in our 2017 financial results was a $7 million pre-tax charge incurred to establish a reserve related to Massachusetts
Health SNCP payments received by certain of our behavioral health facilities during the period October, 2014 through December,
2016. SNCP payments are made by Massachusetts under the current CMS approved Section 1115 Medicaid Waiver available to
Institutions of Medical Disease. During the second quarter of 2017, we received notification that such payments are subject to a
retroactively applied uncompensated care cost limit protocol.
HITECH Act: In July 2010, the Department of Health and Human Services (“HHS”) published final regulations implementing
the health information technology (“HIT”) provisions of the American Recovery and Reinvestment Act (referred to as the “HITECH
Act”). The final regulation defines the “meaningful use” of Electronic Health Records (“EHR”) and establishes the requirements for
the Medicare and Medicaid EHR payment incentive programs. The final rule established an initial set of standards and certification
criteria. The implementation period for these new Medicare and Medicaid incentive payments started in federal fiscal year 2011 and
can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. State Medicaid program participation in this federally
funded incentive program is voluntary but all of the states in which our eligible hospitals operate have chosen to participate. Our acute
care hospitals may qualify for these EHR incentive payments upon implementation of the EHR application assuming they meet the
“meaningful use” criteria. The government’s ultimate goal is to promote more effective (quality) and efficient healthcare delivery
through the use of technology to reduce the total cost of healthcare for all Americans and utilizing the cost savings to expand access to
the healthcare system.
Pursuant to HITECH Act regulations, hospitals that do not qualify as a meaningful user of EHR by 2015 are subject to a reduced
market basket update to the IPPS standardized amount in 2015 and each subsequent fiscal year. We believe that all of our acute care
hospitals have met the applicable meaningful use criteria and therefore are not subject to a reduced market basked update to the IPPS
standardized amount in federal fiscal year 2015. However, under the HITECH Act, hospitals must continue to meet the applicable
64
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 connection with the implementation of EHR applications at our acute care hospitals, our consolidated results of operations
include net pre-tax charges of $22 million during 2017, $28 million during 2016 and $18 million during 2015. These net pre-tax
charges consisted of depreciation and amortization expense related to the costs incurred for the purchase and development of the
application, net of EHR incentive income (as reflected in 2016 and 2015 on our Consolidated Statements of Income) and net of the
portion of the net expense that was attributable to noncontrolling interests.
Federal regulations require that Medicare EHR incentive payments be computed based on the Medicare cost report that begins in
the federal fiscal period in which a hospital meets the applicable “meaningful use” requirements. Since the annual Medicare cost
report periods for each of our acute care hospitals ends on December 31st, we will recognize Medicare EHR incentive income for each
hospital during the fourth quarter of the year in which the facility meets the “meaningful use” criteria and during the fourth quarter of
each applicable subsequent year.
Managed Care: A significant portion of our net patient revenues are generated from managed care companies, which include
health maintenance organizations, preferred provider organizations and managed Medicare (referred to as Medicare Part C or
Medicare Advantage) and Medicaid programs. In general, we expect the percentage of our business from managed care programs to
continue to grow. The consequent growth in managed care networks and the resulting impact of these networks on the operating
results of our facilities vary among the markets in which we operate. Typically, we receive lower payments per patient from managed
care payors than we do from traditional indemnity insurers, however, during the past few years we have secured price increases from
many of our commercial payors including managed care companies.
Commercial Insurance: Our hospitals also provide services to individuals covered by private health care insurance. Private
insurance carriers typically make direct payments to hospitals or, in some cases, reimburse their policy holders, based upon the
particular hospital’s established charges and the particular coverage provided in the insurance policy. Private insurance reimbursement
varies among payors and states and is generally based on contracts negotiated between the hospital and the payor.
Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment
mechanisms, including predetermined payment or DRG-based payment systems, for more inpatient and outpatient services. To the
extent that such efforts are successful and reduce the insurers’ reimbursement to hospitals and the costs of providing services to their
beneficiaries, such reduced levels of reimbursement may have a negative impact on the operating results of our hospitals.
Other Sources: Our hospitals provide services to individuals that do not have any form of health care coverage. Such patients
are evaluated, at the time of service or shortly thereafter, for their ability to pay based upon federal and state poverty guidelines,
qualifications for Medicaid or other state assistance programs, as well as our local hospitals’ indigent and charity care policy. Patients
without health care coverage who do not qualify for Medicaid or indigent care write-offs are offered substantial discounts in an effort
to settle their outstanding account balances.
Health Care Reform: Listed below are the Medicare, Medicaid and other health care industry changes which are have been, or
are scheduled to be, implemented as a result of the ACA.
Implemented Medicare Reductions and Reforms:
(cid:1)(cid:2)
(cid:1)(cid:2)
(cid:1)(cid:2)
(cid:1)(cid:2)
(cid:1)(cid:2)
(cid:1)(cid:2)
The Reconciliation Act reduced the market basket update for inpatient and outpatient hospitals and inpatient behavioral
health facilities by 0.25% in each of 2010 and 2011, by 0.10% in each of 2012 and 2013, 0.30% in 2014, 0.20% in each of
2015 and 2016 and 0.75% in each of 2017 and 2018.
The ACA implemented certain reforms to Medicare Advantage payments, effective in 2011.
A Medicare shared savings program, effective in 2012.
A hospital readmissions reduction program, effective in 2012.
A value-based purchasing program for hospitals, effective in 2012.
A national pilot program on payment bundling, effective in 2013.
65
(cid:1)(cid:2)
Reduction to Medicare DSH payments, effective in 2014, as discussed above.
Medicaid Revisions:
(cid:1)(cid:2)
(cid:1)(cid:2)
Expanded Medicaid eligibility and related special federal payments, effective in 2014.
The ACA (as amended by subsequent federal legislation) requires annual aggregate reductions in federal DSH funding
from federal fiscal year (“FFY”) 2020 through FFY 2025. The aggregate annual reduction amounts are $4.0 billion for FFY
2020 and $8.0 billion for FFY 2021 through FFY 2025.
Health Insurance Revisions:
(cid:1)(cid:2)
(cid:1)(cid:2)
(cid:1)(cid:2)
Large employer insurance reforms, effective in 2015.
Individual insurance mandate and related federal subsidies, effective in 2014. As noted above in Health
Care Reform, the Tax Cuts and Jobs Act enacted into law in December, 2017 will remove the
individual insurance federal mandate after December 31, 2018.
Federally mandated insurance coverage reforms, effective in 2010 and forward.
The ACA seeks to increase competition among private health insurers by providing for transparent federal and state insurance
exchanges. The ACA also prohibits private insurers from adjusting insurance premiums based on health status, gender, or other
specified factors. We cannot provide assurance that these provisions will not adversely affect the ability of private insurers to pay for
services provided to insured patients, or that these changes will not have a negative material impact on our results of operations going
forward.
Value-Based Purchasing:
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing
programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care
provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality
data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse
events. Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not
reimburse hospitals for certain preventable adverse events.
The ACA contains a number of provisions intended to promote value-based purchasing. The ACA 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. Additionally, 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 ACA also required HHS to implement a value-based purchasing program for inpatient hospital services which became
effective on October 1, 2012. The ACA requires HHS to reduce inpatient hospital payments for all discharges by a percentage
beginning at 1% in FFY 2013 and increasing by 0.25% each fiscal year up to 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. In its fiscal year 2016 IPPS final rule, CMS funded the
value-based purchasing program by reducing base operating DRG payment amounts to participating hospitals by 1.75%. For FFY
2017, this reduction was increased to its maximum of 2%.
Readmission Reduction Program:
In the ACA, Congress also mandated implementation of the hospital readmission reduction program (“HRRP”). 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 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. The impact of HRRP has not
had a material adverse effect on our results of operations.
Accountable Care Organizations:
66
The ACA 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.
In addition to statutory and regulatory changes to the Medicare and each of the state Medicaid programs, our operations and
reimbursement may be affected by administrative rulings, new or novel interpretations and determinations of existing laws and
regulations, post-payment audits, requirements for utilization review and new governmental funding restrictions, all of which may
materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments to our
facilities. The final determination of amounts we receive under the Medicare and Medicaid programs often takes many years, because
of audits by the program representatives, providers’ rights of appeal and the application of numerous technical reimbursement
provisions. We believe that we have made adequate provisions for such potential adjustments. Nevertheless, until final adjustments are
made, certain issues remain unresolved and previously determined allowances could become either inadequate or more than ultimately
required.
Finally, we expect continued third-party efforts to aggressively manage reimbursement levels and cost controls. Reductions in
reimbursement amounts received from third-party payors could have a material adverse effect on our financial position and our
results.
Other Operating Results
Interest Expense
Below is a schedule of our interest expense during 2017, 2016 and 2015 (amounts in thousands):
Revolving credit & demand notes (a.)
$400 million, 7.125% Senior Notes due 2016 (b.)
$300 million, 3.75% Senior Notes due 2019
$700 million, 4.75% Senior Notes due 2022 (c.)
$400 million, 5.00% Senior Notes due 2026 (d.)
Term loan facility A
Accounts receivable securitization program (e.)
Subtotal-revolving credit, demand notes, Senior Notes, term
loan facility and accounts receivable securitization
program
Interest rate swap expense, net
Amortization of financing fees
Other combined interest expense
Capitalized interest on major projects
Interest income
Interest expense, net
$
2017
2016
2015
10,933 $
—
11,250
32,280
20,000
47,745
7,987
4,577 $
12,031
11,250
24,628
11,556
36,578
4,739
3,355
28,496
11,250
14,250
—
30,175
3,074
130,195
2,403
8,932
4,740
(1,020 )
(81 )
145,169 $
105,359
8,488
8,208
5,064
(1,916 )
(150 )
125,053 $
90,600
10,206
7,134
6,137
(304 )
(279 )
113,494
$
67
(a.) In June, 2016, we entered into a fifth amendment to our credit agreement dated November 15, 2010, as amended, to
increase the size of the Term Loan A facility by $200 million. Interest rates were not impacted by this amendment. The
credit agreement, as amended, which is scheduled to expire in August, 2019, consists of: (i) an $800 million revolving
credit facility ($403 million of outstanding borrowings as of December 31, 2017), and; (ii) a Term Loan A facility with
$1.775 billion outstanding as of December 31, 2017.
(b.) The $400 million, 7.125% Senior Notes matured and were repaid in June, 2016 utilizing a portion of the funds generated
from the debt issuances described in (a.), (c.) and (d.).
(c.) In June, 2016, we completed the offering of an additional $400 million aggregate principal amount of 4.75% Senior Notes
due in 2022 (issued at a yield of 4.35%), the terms of which were identical to the terms of our $300 million aggregate
principal amount of 4.75% Senior Notes due in 2022, issued in August, 2014. These Senior Notes, combined, are referred to
as $700 million, 4.75% Senior Notes due in 2022.
(d.) In June, 2016, we completed the offering of $400 million aggregate principal amount of 5.00% Senior Notes due in 2026.
(e.) In July, 2017, we amended our accounts receivable securitization program, which is scheduled to expire on December 21,
2018, to increase the borrowing limit to $440 million from $400 million ($420 million outstanding as of December 31,
2017).
Interest expense increased $20 million during 2017 to $145 million as compared to $125 million during 2016. The increase was
due primarily to: (i) a $25 million increase in aggregate interest expense on our revolving credit, demand notes, senior notes, term loan
facility and accounts receivable securitization program resulting from an increase in the average outstanding borrowings ($4.02 billion
during 2017, as compared to $3.54 billion during 2016), as well as an increase in our aggregate average cost of borrowings pursuant to
these facilities (3.2% during 2017, as compared to 3.0% during 2016); (ii) a $1 million decrease in capitalized interest on major
projects, partially offset by; (iii) a $6 million decrease in our interest rate swap expense.
Interest expense increased $12 million during 2016 to $125 million as compared to $113 million during 2015. The increase was
due primarily to: (i) a $15 million increase in aggregate interest expense on our revolving credit, demand notes, senior notes, term loan
facility and accounts receivable securitization program due to an increase in the aggregate average outstanding borrowings ($3.54
billion during 2016 as compared to $3.14 billion during 2015), as well as an increase in our aggregate average cost of borrowings
pursuant to these facilities (3.0% during 2016 as compared to 2.9% during 2015); (ii) a $2 million decrease in interest rate swap
expense, resulting primarily from the 2015 maturities of previously outstanding interest rate swaps, and; (iii) other combined net
decrease of $1 million.
The aggregate average outstanding borrowings under our revolving credit, demand notes, senior notes, term loan facilities and
accounts receivable securitization program were approximately $4.02 billion during 2017, $3.54 billion during 2016 and $3.14 billion
during 2015. The average effective interest rate on these facilities, including amortization of deferred financing costs and original
issue discounts and designated interest rate swap expense was 3.5% during 2017 and 3.4% during each of 2016 and 2015.
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 each of the years ended December 31, 2017, 2016 and 2015 (dollar amounts in thousands):
Provision for income taxes
Income before income taxes
Effective tax rate
2017
2016
$ 363,697 $ 409,187 $ 395,203
1,135,009 1,156,358 1,145,901
2015
32.0 %
35.4 %
34.5 %
In May, 2016, we purchased third-party minority ownership interests in six acute care hospitals located in Las Vegas, Nevada.
Prior to that date, outside owners held various noncontrolling, minority ownership interests in eight of our acute care facilities and one
behavioral health care facility. Each of these facilities are owned and operated by limited liability companies (“LLC”) or limited
partnerships (“LP”). As a result, since there is no income tax liability incurred at the LLC/LP level (since it passes through to the
members/partners), the net income attributable to noncontrolling interests does not include any income tax provision/benefit. When
computing the provision for income taxes, as reflected on our consolidated statements of income, the net income attributable to
noncontrolling interests is deducted from income before income taxes since it represents the third-party members’/partners’ share of
the income generated by the joint-venture entities. In addition to providing the effective tax rates, as indicated above (as calculated
from dividing the provision for income taxes by the income before income taxes as reflected on the consolidated statements of
income), we believe it is helpful to our investors that we also provide our effective tax rate as calculated after giving effect to the
portion of our pre-tax income that is attributable to the third-party members/partners.
68
The effective tax rates, as calculated by dividing the provision for income taxes by the difference in income before income
taxes, minus net income attributable to noncontrolling interests, were as follows for each of the years ended December 31, 2017, 2016
and 2015 (dollar amounts in thousands):
Provision for income taxes
2017
2016
$ 363,697 $ 409,187 $ 395,203
2015
Income before income taxes
Less: Net income attributable to noncontrolling interests
Income before income taxes and after net income attributable
to noncontrolling interests
Effective tax rate
1,135,009 1,156,358 1,145,901
(70,170 )
(44,762 )
(19,009 )
1,116,000 1,111,596 1,075,731
32.6 %
36.8 %
36.7 %
The decrease in the effective tax rate during 2017, as compared to 2016 and 2015, was due primarily to the following that
increased or decreased our provision for income taxes in 2017:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
a decrease of $30 million resulting from a reduction in our net deferred income tax liability recorded in connection with
the TCJA-17 which reduced the U.S. federal corporate tax rate to 21% from 35%, effective January 1, 2018;
an increase of $11 million due to a one-time repatriation tax incurred pursuant to the TCJA-17 (in connection with our
behavioral health care facilities located in the U.K. and Puerto Rico);
a decrease of $22 million resulting from our January 1, 2017 adoption of ASU 2016-09, as discussed herein, and;
a decrease caused by lower effective rates applicable to the income generated during 2017 in connection with our
acquisition of Cambian Group, PLC’s adult services division (acquired in late December, 2016).
The impact of discrete tax items did not have a material impact on our provision for income taxes during 2016 or 2015.
Previously, in 2016 and 2015, we had provided no deferred taxes related to unremitted earnings from foreign subsidiaries. As a
result of the mandatory repatriation tax provisions in the TCJA-17, we recorded an accrued tax provision of $11 million as of
December 31, 2017. Going forward, we anticipate repatriating only previously taxed foreign income subject to the mandatory
repatriation tax and any future earnings that would qualify for a full dividend received deduction permitted under the TCJA-17 for
distributions after December 31, 2017. At this time, there are no material tax effects related to future cash repatriation of our
previously taxed foreign income. As such, we have not recognized a deferred tax liability related to existing undistributed earnings.
Effects of Inflation and Seasonality
Seasonality —Our acute care services business is typically seasonal, with higher patient volumes and net patient service
revenue in the first and fourth quarters of the year. This seasonality occurs because, generally, more people become ill during the
winter months, which results in significant increases in the number of patients treated in our hospitals during those months.
Inflation —Inflation has not had a material impact on our results of operations over the last three years. However, since the
healthcare industry is very labor intensive and salaries and benefits are subject to inflationary pressures, as are supply and other costs,
we cannot predict the impact that future economic conditions may have on our ability to contain future expense increases. 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 have been enacted that, in certain cases, limit our ability to increase prices. We believe, however, that
through adherence to cost containment policies, labor management and reasonable price increases, the effects of inflation on future
operating margins should be manageable.
69
Liquidity
Year ended December 31, 2017 as compared to December 31, 2016:
Net cash provided by operating activities
Net cash provided by operating activities was $1.183 billion during 2017 as compared to $1.334 billion during 2016. The net
decrease of $151 million was primarily attributable to the following:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
an unfavorable change of $144 million in cash flows from forward exchange contracts related to our investments in the
United Kingdom;
an unfavorable change of $90 million in other working capital accounts resulting primarily from changes in accounts
payable and accrued expenses due to timing of disbursements;
a favorable change of $64 million due to an increase in net income plus depreciation and amortization and stock-based
compensation expense;
a favorable change of $63 million in accounts receivable;
an unfavorable change of $28 million in accrued and deferred income taxes, and;
$16 million of other combined net unfavorable changes.
Days sales outstanding (“DSO”): Our DSO are calculated by dividing our net revenue by the number of days in the year. The
result is divided into the accounts receivable balance the end of the year. Our DSO were 53 days at each of December 31, 2017, 2016
and 2015.
Our accounts receivable as of December 31, 2017 and December 31, 2016 include amounts due from Illinois of approximately
$25 million and $38 million, respectively. Collection of the outstanding receivables continues to be delayed due to state budgetary and
funding pressures. Approximately $8 million as of December 31, 2017 and $25 million as of December 31, 2016, of the receivables
due from Illinois were outstanding in excess of 60 days, as of each respective date. Although the accounts receivable due from Illinois
could remain outstanding for the foreseeable future, since we expect to eventually collect all amounts due to us, no related reserves
have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect
all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due to us from Illinois would have an adverse
impact on our future consolidated results of operations and cash flows.
Net cash used in investing activities
Net cash used in investing activities was $624 million during 2017 and $1.187 billion during 2016
2017:
The $624 million of net cash used in investing activities during 2017 consisted of:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
$557 million spent on capital expenditures including capital expenditures for equipment, renovations and new projects at
various existing facilities;
$29 million spent on the purchase and implementation of information technology applications;
$23 million spent to acquire businesses and property;
$8 million spent to fund construction costs of a new behavioral health care facility which will be jointly owned by us and a
third-party, and;
$7 million spent to increase the statutorily required capital reserves of our commercial insurance subsidiary.
2016:
The $1.187 billion of net cash used in investing activities during 2016 consisted of:
(cid:1)
(cid:1)
(cid:1)
$614 million spent related to the acquisition of businesses and property including the acquisition of the adult services division
of Cambian Group, PLC consisting of 79 inpatient and 2 outpatient behavioral health facilities located in the U.K., the
acquisition of Desert View Hospital, a 25-bed acute care facility located in Pahrump, Nevada, and the acquisition of various
other businesses and real property assets;
$520 million spent on capital expenditures;
$32 million spent to increase the statutorily required capital reserves of our commercial insurance subsidiary, and;
70
(cid:1)
$21 million spent on the purchase and implementation of an information technology application.
Net cash used in financing activities
Net cash used in financing activities was $519 million during 2017 and $171 million during 2016.
2017:
The $519 million of net cash used in financing activities during 2017 consisted of the following:
spent $143 million on net repayment of debt as follows: (i) $89 million related to our term loan A facility; (ii) $52 million
related to our revolving credit facility, and; (iii) $2 million related to other debt facilities;
generated $41 million of proceeds related to new borrowings pursuant to our accounts receivable securitization program
($21 million) and short-term, on-demand credit facility ($20 million);
spent $364 million to repurchase shares of our Class B Common Stock in connection with: (i) open market purchases
pursuant to our $1.2 billion stock repurchase program ($330 million), and; (ii) income tax withholding obligations related
to stock-based compensation programs ($34 million);
spent $38 million to pay dividends (paid quarterly at $.10 per share);
spent $25 million to pay profit distributions related to noncontrolling interests in majority owned businesses, and;
generated $10 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock
purchase plans.
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
2016:
The $171 million of net cash used in financing activities during 2016 consisted of the following:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
spent $459 million on net repayment of debt as follows: (i) $400 million related to the 7.125% senior secured notes that
matured in June, 2016; (ii) $55 million related to our term loan A facility; (iii) $1 million related to our accounts
receivable securitization program, and; (iv) $3 million related to other debt facilities;
generated $1.171 billion of proceeds related to new borrowings as follows: (i) $406 million received in connection with
the issuance of additional 4.75% senior secured notes due in 2022; (ii) $400 million received from the issuance of 5.0%
senior secured notes due in 2026; (iii) $200 million of additional borrowings pursuant to our term loan A facility; (iv)
$155 million of additional borrowings pursuant to our revolving credit facility, and; (v) $10 million of proceeds from new
borrowings pursuant to a short-term, on-demand credit facility;
spent $418 million to purchase third-party minority ownership interests in our six acute care hospitals located in Las
Vegas, Nevada;
spent $353 million to repurchase shares of our Class B Common Stock in connection with: (i) open market purchases
pursuant to our stock repurchase program ($296 million), and; (ii) income tax withholding obligations related to stock-
based compensation programs ($57 million);
spent $70 million to pay profit distributions related to noncontrolling interests in majority owned businesses
spent $39 million to pay dividends (paid quarterly at $.10 per share);
generated $10 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock
purchase plans, and;
spent $12 million in financing costs.
71
Year ended December 31, 2016 as compared to December 31, 2015:
Net cash provided by operating activities
Net cash provided by operating activities was $1.334 billion during 2016 as compared to $1.068 billion during 2015. The net
increase of $266 million was primarily attributable to the following:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
a favorable change of $26 million due to an increase in net income plus/minus depreciation and amortization expense,
stock-based compensation expense and net gains on sales of assets and businesses;
$200 million favorable change in other working capital accounts due primarily to favorable changes in accrued
compensation and accounts payable resulting from the timing of disbursements;
$56 million favorable change in cash flows from forward exchange contracts related to our investment in foreign
operations;
$42 million unfavorable change in accounts receivable;
$56 million favorable change in accrued and deferred income taxes;
$32 million unfavorable change in other assets and deferred charges, and;
$2 million of other combined net favorable changes.
Net cash used in investing activities
Net cash used in investing activities was $1.187 billion during 2016 and $913 million during 2015. The factors contributing to
the $1.187 billion of net cash used in investing activities during 2016 are detailed above.
2015:
The $913 million of net cash used in investing activities during 2015 consisted of:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
$534 million spent related to the acquisition of businesses and property including a 46-bed behavioral health care facility
located in the U.K., Alpha Hospitals Holdings Limited consisting of four behavioral health care hospitals located in the U.K.,
Foundations Recovery Network, LLC consisting of 4 inpatient facilities as well as 8 outpatient centers and various other
businesses, a management contract and real property assets;
$379 million spent on capital expenditures
$3 million spent to increase investments of insurance subsidiary, and;
$3 million received from the sale of assets and businesses consisting primarily of divestiture of a small operator of behavioral
health care services.
Net cash used in financing activities
Net cash used in financing activities was $171 million during 2016 and $125 million during 2015. The factors contributing to
the $171 million of net cash used in financing activities during 2016 are detailed above.
2015:
The $125 million of net cash used in financing activities during 2015 consisted of the following:
(cid:1)
(cid:1)
(cid:1)
generated $234 million of proceeds from additional borrowings consisting of: (i) $160 million of proceeds from new
borrowings pursuant to our revolving credit facility; (ii) $70 million of proceeds from new borrowings pursuant to our
accounts receivable securitization program, and; (iii) $4 million of proceeds from new borrowings pursuant to a short-
term, on-demand credit facility;
spent $68 million on net repayments of debt due primarily to repayments pursuant to our term loan A facility ($44
million) and various other combined debt facilities ($24 million);
spent $210 million to repurchase shares of our Class B Common Stock in connection with: (i) open market purchases
pursuant to our stock repurchase program ($152 million), and; (ii) income tax withholding obligations related to stock-
based compensation programs ($58 million);
72
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
spent $40 million to pay cash dividends (paid quarterly at $.10 per share);
spent $62 million to pay profit distributions related to noncontrolling interests in majority owned businesses;
generated $8 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock
purchase plans;
generated $13 million from the from the sale/leaseback of two free-standing emergency departments, and;
spent $1 million in financing costs.
2018 Expected Capital Expenditures:
During 2018, we expect to spend approximately $600 million to $625 million on capital expenditures which includes expenditures
for capital equipment, renovations and new projects at existing hospitals. Approximately $280 million of our 2018 expected capital
expenditures relates to completion of projects that are in progress as of December 31, 2017. We believe that our capital expenditure
program is adequate to expand, improve and equip our existing hospitals. We expect to finance all capital expenditures and
acquisitions with internally generated funds and/or additional funds, as discussed below.
Capital Resources
Credit Facilities and Outstanding Debt Securities
On June 7, 2016, we entered into a Fifth Amendment (the “Fifth Amendment”) to our credit agreement dated as of November 15,
2010, as amended on March 15, 2011, September 21, 2012, May 16, 2013 and August 7, 2014, among UHS, as borrower, the several
banks and other financial institutions from time to time parties thereto, as lenders (“Credit Agreement”). The Fifth Amendment
increased the size of the term loan A facility by $200 million and those proceeds were utilized to repay outstanding borrowings under
the revolving credit facility of the Credit Agreement. The Credit Agreement, as amended, which is scheduled to mature in August,
2019, consists of: (i) an $800 million revolving credit facility ($403 million of borrowings outstanding as of December 31, 2017), and;
(ii) a term loan A facility with $1.775 billion of borrowings outstanding as of December 31, 2017.
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 LIBOR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each
quarter ranging from 0.50% to 1.25% for revolving credit and term loan-A borrowings, or (2) the one, two, three or six month LIBOR
rate (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from
1.50% to 2.25% for revolving credit and term loan-A borrowings. As of December 31, 2017, the applicable margins were 0.50% for
ABR-based loans and 1.50% for LIBOR-based loans under the revolving credit and term loan-A facilities.
As of December 31, 2017, we had $403 million of borrowings outstanding pursuant to the terms of our $800 million revolving
credit facility and we had $329 million of available borrowing capacity net of $33 million of outstanding letters of credit and $35
million of outstanding borrowings pursuant to a short-term, on-demand credit facility. The revolving credit facility includes a $125
million sub-limit for letters of credit. The Credit Agreement is collateralized by certain assets of the Company (which generally
excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, certain real estate
assets and assets held in joint-ventures with third-parties) and our material subsidiaries and guaranteed by our material subsidiaries.
Pursuant to the terms of the Credit Agreement, term loan-A installment payments of approximately $22 million per quarter
commenced during the fourth quarter of 2016 and are scheduled through June, 2019. Previously, approximately $11 million of
quarterly installment payments were made from the fourth quarter of 2014 through the third quarter of 2016.
In July, 2017, we amended our accounts receivable securitization program (“Securitization”) with a group of conduit lenders and
liquidity banks to increase the borrowing capacity to $440 million from $400 million previously. Pursuant to the terms of our
Securitization program, on which the scheduled maturity date of December, 2018 remained unchanged, substantially all of the patient-
related accounts receivable of our acute care hospitals (“Receivables”) serve as collateral for the outstanding borrowings. We have
accounted for this Securitization as borrowings. We maintain effective control over the Receivables since, pursuant to the terms of the
Securitization, the Receivables are sold from certain of our subsidiaries to special purpose entities that are wholly-owned by us. The
Receivables, however, are owned by the special purpose entities, can be used only to satisfy the debts of the wholly-owned special
purpose entities, and thus are not available to us except through our ownership interest in the special purpose entities. The wholly-
owned special purpose entities use the Receivables to collateralize the loans obtained from the group of third-party conduit lenders
and liquidity banks. The group of third-party conduit lenders and liquidity banks do not have recourse to us beyond the assets of the
wholly-owned special purpose entities that securitize the loans. At December 31, 2017, we had $420 million of outstanding
borrowings pursuant to the terms of the Securitization, which are included in current maturities of long-term debt as of that date, and
$20 million of available borrowing capacity.
73
As of December 31, 2017, we had combined aggregate principal of $1.4 billion from the following senior secured notes:
(cid:1)
(cid:1)
(cid:1)
$300 million aggregate principal amount of 3.75% senior secured notes due in August, 2019 (“2019 Notes”) which were
issued on August 7, 2014.
$700 million aggregate principal amount of 4.75% senior secured notes due in August, 2022 (“2022 Notes”) which were
issued as follows:
o $300 million aggregate principal amount issued on August 7, 2014 at par.
o $400 million aggregate principal amount issued on June 3, 2016 at 101.5% to yield 4.35%.
$400 million aggregate principal amount of 5.00% senior secured notes due in June, 2026 (“2026 Notes”) which were issued
on June 3, 2016.
Interest is payable on the 2019 Notes and the 2022 Notes on February 1 and August 1 of each year until the maturity date of
August 1, 2019 for the 2019 Notes and August 1, 2022 for the 2022 Notes. Interest on the 2026 Notes is payable on June 1 and
December 1 until the maturity date of June 1, 2026. The 2019 Notes, 2022 Notes and 2026 Notes were offered only to qualified
institutional buyers under Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the
Securities Act of 1933, as amended (the “Securities Act”). The 2019 Notes, 2022 Notes and 2026 Notes have not been registered
under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from
registration requirements.
In June, 2016, we repaid the $400 million, 7.125% senior secured notes which matured on June 30, 2016.
The average amounts outstanding during each of years 2017, 2016 and 2015 under the current and prior Credit Agreements,
demand notes and accounts receivable securitization programs was $2.6 billion, $2.3 billion and $2.1 billion, respectively, with
corresponding interest rates of 2.5%, 2.0% and 1.7%, respectively, including commitment and facility fees. The maximum amounts
outstanding at any month-end were $2.7 billion in 2017, $2.7 billion in 2016 and $2.3 billion in 2015. The effective interest rate on
our current and prior Credit Agreements, accounts receivable securitization programs, and demand notes, which includes the
respective interest expense, commitment and facility fees, designated interest rate swaps expense and amortization of deferred
financing costs and original issue discounts, was 2.8% in 2017, 2.6% in 2016 and 2.4% in 2015.
Our Credit Agreement includes a material adverse change clause that must be represented at each draw. The Credit Agreement
contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with
affiliates, dividends and stock repurchases; and requires compliance with financial covenants including maximum leverage and
minimum interest coverage ratios. We are in compliance with all required covenants as of December 31, 2017.
At December 31, 2017, the net carrying value and fair value of our debt were approximately $4.0 billion and $4.1 billion,
respectively. At December 31, 2016, the carrying value and fair value of our debt were each approximately $4.1 billion. The fair
value of our debt was computed based upon quotes received from financial institutions. We consider these to be “level 2” in the fair
value hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments.
Our total debt as a percentage of total capitalization was 45% at December 31, 2017 and 48% at December 31, 2016.
We expect to finance all capital expenditures and acquisitions, pay dividends and potentially repurchase shares of our common
stock utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing
revolving credit facility or through refinancing the existing revolving credit agreement; (ii) the issuance of other long-term debt,
and/or; (iii) the issuance of equity. We believe that our operating cash flows, cash and cash equivalents, available borrowing capacity
under our $800 million revolving credit facility and $440 million accounts receivable securitization program, 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.
Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2017 we were party to certain off balance sheet arrangements consisting of standby letters of credit and
surety bonds which totaled $120 million consisting of: (i) $113 million related to our self-insurance programs, and; (ii) $7 million of
other debt and public utility guarantees.
Obligations under operating leases for real property, real property master leases and equipment amount to $402 million as of
December 31, 2017. The real property master leases are leases for buildings on or near hospital property for which we guarantee a
74
certain level of rental income. We sublease space in these buildings and any amounts received from these subleases are offset against
the expense. In addition, we lease three hospital facilities from Universal Health Realty Trust (the “Trust”) with terms expiring in
2021. These leases contain up to two 5-year renewal options. We also lease two free-standing emergency departments and space in
certain medical office buildings which are owned by the Trust. In addition, we lease the real property of certain other facilities from
non-related parties as indicated in Item 2. Properties, as included herein.
The following represents the scheduled maturities of our contractual obligations as of December 31, 2017:
Long-term debt obligations (a)
Estimated future interest payments on debt
outstanding as of December 31, 2017 (b)
Construction commitments (c)
Purchase and other obligations (d)
Operating leases (e)
Estimated future payments for defined benefit
pension plan, and other retirement plan (f)
Health and dental unpaid claims (g)
Total contractual cash obligations
Payments Due by Period (dollars in thousands)
2-3
years
$ 4,059,238 $ 545,885 $ 2,392,683 $ 708,166 $ 412,504
After
5 years
Less than
4-5
years
1 year
Total
495,757
30,062
315,399
402,417
164,903
30,062
72,070
73,310
156,733
0
108,279
114,104
97,005
0
93,100
67,038
77,116
0
41,950
147,965
205,896
85,527
161,087
0
$ 5,594,296 $ 984,871 $ 2,786,563 $ 982,240 $ 840,622
16,931
0
13,114
85,527
14,764
0
(a) Reflects borrowings outstanding as of December 31, 2017 as discussed in Note 4 to the Consolidated Financial Statements.
(b) Assumes that all debt outstanding as of December 31, 2017, including borrowings under our Credit Agreement, demand note
and accounts receivable securitization program, remain outstanding until the final maturity of the debt agreements at the same
interest rates (some of which are floating) which were in effect as of December 31, 2017. We have the right to repay borrowings
upon short notice and without penalty, pursuant to the terms of the Credit Agreement, demand note and accounts receivable
securitization program. Also includes the impact of various interest rate swap and cap agreements in effect as of December 31,
2017, as calculated to maturity dates utilizing the applicable floating interest rates in effect as of December 31, 2017.
(c) Our share of the remaining estimated construction cost of two newly constructed behavioral health care facilities located in
Pennsylvania and Washington that are scheduled to be completed and opened 2018. We are required to build these facilities
pursuant to joint-venture agreements with third parties. In addition, we had various other projects under construction as of
December 31, 2017. Because we can terminate substantially all of the construction contracts related to the various other projects
at any time without paying a termination fee, these costs are excluded from the table above.
(d) Consists of: (i) $73 million related to long-term contracts with third-parties consisting primarily of certain revenue cycle data
processing services for our acute care facilities; (ii) $240 million related to the future expected costs to be paid to a third-party
vendor in connection with the ongoing operation of an electronic health records application and purchase and implementation of
a revenue cycle and other applications for our acute care facilities, and; (iii) a $2 million liability for physician commitments
expected to be paid in the future.
(e) Reflects our future minimum operating lease payment obligations related to our operating lease agreements outstanding as of
December 31, 2017 as discussed in Note 7 to the Consolidated Financial Statements. Some of the lease agreements provide us
with the option to renew the lease and our future lease obligations would change if we exercised these renewal options.
(f) Consists of $188 million of estimated future payments related to our non-contributory, defined benefit pension plan (estimated
through 2089), as disclosed in Note 8 to the Consolidated Financial Statements, and $18 million of estimated future payments
related to another retirement plan liability ($15 million liability recorded in other non-current liabilities as of December 31, 2017
in connection with this retirement plan).
(g) Consists of accrued and unpaid estimated claims expense incurred in connection with our commercial health insurers and self-
insured employee benefit plans.
As of December 31, 2017, the total accrual for our professional and general liability claims was $229 million, of which $54
million is included in other current liabilities and $175 million is included in other non-current liabilities. We exclude the $229 million
for professional and general liability claims from the contractual obligations table because there are no significant contractual
obligations associated with these liabilities and because of the uncertainty of the dollar amounts to be ultimately paid as well as the
timing of such payments. Please see Self-Insured/Other Insurance Risks above for additional disclosure related to our professional and
general liability claims and reserves.
75
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We manage our ratio of fixed and floating rate debt with the objective of achieving a mix that management believes is
appropriate. To manage this risk in a cost-effective manner, we, from time to time, enter into interest rate swap agreements in which
we agree to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts. We account
for our derivative and hedging activities using the Financial Accounting Standard Board’s (“FASB”) guidance which requires all
derivative instruments, including certain derivative instruments embedded in other contracts, to be carried at fair value on the balance
sheet. For derivative transactions designated as hedges, we formally document all relationships between the hedging instrument and
the related hedged item, as well as its risk-management objective and strategy for undertaking each hedge transaction.
Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value
of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in accumulated
other comprehensive income (“AOCI”) within shareholders’ equity. Amounts are reclassified from AOCI to the income statement in
the period or periods the hedged transaction affects earnings. We use interest rate derivatives in our cash flow hedge transactions.
Such derivatives are designed to be highly effective in offsetting changes in the cash flows related to the hedged liability. For
derivative instruments designated as cash flow hedges, the ineffective portion of the change in expected cash flows of the hedged item
are recognized currently in the income statement.
For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a
formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been
highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the
future.
The fair value of interest rate swap agreements approximates the amount at which they could be settled, based on estimates
obtained from the counterparties. We assess the effectiveness of our hedge instruments on a quarterly basis. We performed periodic
assessments of the cash flow hedge instruments during 2017 and 2016 and determined the hedges to be highly effective. We also
determined that any portion of the hedges deemed to be ineffective was de minimis and therefore there was no material effect on our
consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose us to credit
risk in the event of nonperformance. We do not anticipate nonperformance by our counterparties. We do not hold or issue derivative
financial instruments for trading purposes.
Seven interest rate swaps on a total notional amount of $825 million matured in May, 2015. Four of these swaps, with a total
notional amount of $600 million, became effective in December, 2011 and provided that we receive three-month LIBOR while the
average fixed rate payable was 2.38%. The remaining three swaps, with a total notional amount of $225 million, became effective in
March, 2011 and provided that we receive three-month LIBOR while the average fixed rate payable was 1.91%.
During 2015, we entered into nine forward starting interest rate swaps whereby we pay a fixed rate on a total notional amount of
$1.0 billion and receive one-month LIBOR. The average fixed rate payable on these swaps, which are scheduled to mature on April
15, 2019, is 1.31%. These interest rates swaps consist of:
(cid:1)
Four forward starting interest rate swaps, entered into during the second quarter of 2015, whereby we pay a
fixed rate on a total notional amount of $500 million and receive one-month LIBOR. Each of the four swaps became
effective on July 15, 2015 and are scheduled to mature on April 15, 2019. The average fixed rate payable on these
swaps is 1.40%;
(cid:1)
Four forward starting interest rate swaps, entered into during the third quarter of 2015, whereby we pay a
fixed rate on a total notional amount of $400 million and receive one-month LIBOR. One swap on a notional amount
of $100 million became effective on July 15, 2015, two swaps on a total notional amount of $200 million became
effective on September 15, 2015 and another swap on a notional amount of $100 million became effective on
December 15, 2015. All of these swaps are scheduled to mature on April 15, 2019. The average fixed rate payable on
these four swaps is 1.23%, and;
(cid:1)
One interest rate swap, entered into during the fourth quarter of 2015, whereby we pay a fixed rate on a
total notional amount of $100 million and receive one-month LIBOR. The swap became effective on December 15,
2015 and is scheduled to mature on April 15, 2019. The fixed rate payable on this swap is 1.21%.
We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate swaps is based on quotes
from our counterparties. We consider those inputs to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance
for disclosures in connection with derivative instruments and hedging activities. At December 31, 2017, the fair value of our interest
rate swaps was a net asset of $7 million, $4 million of which is included in net accounts receivable and $3 million of which is included
in other assets on the accompanying balance sheet. At December 31, 2016, the fair value of our interest rate swaps was de minimis on
76
a net basis comprised of a $4 million asset which is included in other assets offset by a $4 million liability which in included in other
current liabilities on the accompanying consolidated balance sheet.
The table below presents information about our long-term financial instruments that are sensitive to changes in interest rates as
of December 31, 2017. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by
contractual maturity dates.
Long-term debt:
Fixed rate:
Debt
Average interest rates
Variable rate:
Debt
Average interest rates
Interest rate swaps:
Notional amount
Average interest rates
Maturity Date, Fiscal Year Ending December 31
(dollars in thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$ 2,636 $ 300,286 $ 1,650 $ 1,696 $ 698,835 $ 407,491 $ 1,412,594
4.7 %
4.7 %
5.0 %
5.0 %
4.9 %
4.0 %
4.7 %
$ 542,983 $ 2,084,432
3.0 %
2.9 %
$ 1,000,000
1.3 %
$ 2,627,415
2.2 %
$ 1,000,000
1.3 %
As calculated based upon our variable rate debt outstanding as of December 31, 2017 that is subject to interest rate fluctuations,
each 1% change in interest rates would impact our pre-tax income by approximately $16 million.
ITEM 8.
Financial Statements and Supplementary Data
Our Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Equity and
Consolidated Statements of Cash Flows, together with the reports of PricewaterhouseCoopers LLP, independent registered public
accounting firm, are included elsewhere herein. Reference is made to the “Index to Financial Statements and Financial Statement
Schedule.”
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures.
As of December 31, 2017, under the supervision and with the participation of our management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), we performed an evaluation of the effectiveness of our disclosure controls and
procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on this
evaluation, the CEO and CFO have concluded that our disclosure controls and procedures are effective to ensure that material
information is recorded, processed, summarized and reported by management on a timely basis in order to comply with our disclosure
obligations under the Securities Exchange Act of 1934, as amended, and the SEC rules thereunder.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting or in other factors during the fourth quarter of 2017
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over our financial reporting.
In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley
Act, management has conducted an assessment, including testing, using the criteria on Internal Control—Integrated Framework
(2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our system of internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
and fair presentation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
77
of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management has concluded that we maintained effective internal control over financial reporting as of
December 31, 2017, based on criteria in Internal Control—Integrated Framework (2013), issued by the COSO. The effectiveness of
the Company’s internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP,
an independent registered public accounting firm as stated in its report which appears herein.
ITEM 9B Other Information
None.
78
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
There is hereby incorporated by reference the information to appear under the captions “Election of Directors”, “Section 16(a)
Beneficial Ownership Reporting Compliance” and “Corporate Governance” in our Proxy Statement, to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2017. See also “Executive Officers of the Registrant” appearing in Item 1
hereof.
ITEM 11. Executive Compensation
There is hereby incorporated by reference the information to appear under the caption “Executive Compensation” in our Proxy
Statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2017.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
There is hereby incorporated by reference the information to appear under the caption “Security Ownership of Certain
Beneficial Owners and Management” and “Executive Compensation” in our Proxy Statement, to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2017.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
There is hereby incorporated by reference the information to appear under the captions “Certain Relationships and Related
Transactions” and “Corporate Governance” in our Proxy Statement, to be filed with the Securities and Exchange Commission within
120 days after December 31, 2017.
ITEM 14. Principal Accountant Fees and Services.
There is hereby incorporated by reference the information to appear under the caption “Relationship with Independent Auditors”
in our Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2017.
79
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) Financial Statements:
See “Index to Financial Statements and Financial Statement Schedule.”
(2) Financial Statement Schedules:
See “Index to Financial Statements and Financial Statement Schedule.”
(3) Exhibits:
No.
3.1
Description
Registrant’s Restated Certificate of Incorporation, and Amendments thereto, previously filed as Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, are incorporated herein by reference
(P).
3.2
Bylaws of Registrant, as amended, previously filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1987, is incorporated herein by reference (P).
3.3
Amendment to the Registrant’s Restated Certificate of Incorporation previously filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K dated July 3, 2001 is incorporated herein by reference.
4.1
Indenture, dated as of August 7, 2014, among Universal Health Services, Inc., its subsidiaries specified therein, MUFG
Union Bank, N.A., as Trustee, JPMorgan Chase Bank, N.A., as Collateral Agent (including forms of the 3.750% Senior
Secured Notes due 2019 and the 4.750% Senior Secured Notes due 2022), previously filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K dated August 12, 2014, is incorporated herein by reference.
4.2
Supplemental Indenture, dated as of June 3, 2016, to Indenture, dated as of August 7, 2014, by and among the Company,
the subsidiary guarantors party thereto, MUFG Union Bank, N.A., as trustee, and JPMorgan Chase Bank, N.A., as
collateral agent, previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 8, 2016, is
incorporated herein by reference.
4.3
Indenture, dated as of June 3, 2016, between the Company, the subsidiary guarantors party thereto, MUFG Union Bank,
N.A., as trustee, and JPMorgan Chase Bank, N.A., as collateral agent, previously filed as Exhibit 4.2 to the Company’s
Current Report on Form 8-K dated June 8, 2016, is incorporated herein by reference.
4.4
Additional Authorized Representative Joinder Agreement, dated as of June 3, 2016, among the Company, the subsidiary
guarantors party thereto and JPMorgan Chase Bank, N.A., as collateral agent, previously filed as Exhibit 4.3 to the
Company’s Current Report on Form 8-K dated June 8, 2016, is incorporated herein by reference.
10.1*
Employment Agreement, dated as of July 24, 2013, by and between Universal Health Services, Inc. and Alan B. Miller,
previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 26, 2013, is incorporated
herein by reference.
10.2
Advisory Agreement, dated as of December 24, 1986, between Universal Health Realty Income Trust and UHS of
Delaware, Inc., previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 24,
1986, is incorporated herein by reference (P).
10.3
Agreement, dated December 6, 2017, to renew Advisory Agreement, dated as of December 24, 1986, between Universal
Health Realty Income Trust and UHS of Delaware, Inc.
10.4
Form of Leases, including Form of Master Lease Document for Leases, between certain subsidiaries of the Company and
Universal Health Realty Income Trust, filed as Exhibit 10.3 to Amendment No. 3 of the Registration Statement on Form
S-11 and Form S-2 of Registrant and Universal Health Realty Income Trust (Registration No. 33-7872), is incorporated
herein by reference (P).
80
No.
10.5
Description
Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leases and Contract of Acquisition, dated December 24,
1986, issued by the Company in favor of Universal Health Realty Income Trust, previously filed as Exhibit 10.5 to the
Company’s Current Report on Form 8-K dated December 24, 1986, is incorporated herein by reference (P).
10.6
Universal Health Services, Inc. Executive Retirement Income Plan dated January 1, 1993, previously filed as Exhibit
10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
10.7
Asset Purchase Agreement dated as of February 6, 1996, among Amarillo Hospital District, UHS of Amarillo, Inc. and
Universal Health Services, Inc., previously filed as Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 1995, is incorporated herein by reference (P).
10.8
Agreement of Limited Partnership of District Hospital Partners, L.P. (a District of Columbia limited partnership) by and
among UHS of D.C., Inc. and The George Washington University, previously filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarters ended March 30, 1997, and June 30, 1997, is incorporated herein by
reference (P).
10.9
Contribution Agreement between The George Washington University (a congressionally chartered institution in the
District of Columbia) and District Hospital Partners, L.P. (a District of Columbia limited partnership), previously filed as
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is incorporated
herein by reference (P).
10.10
Amended and Restated Universal Health Services, Inc. Supplemental Deferred Compensation Plan dated as of January 1,
2002, previously filed as Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2002, is incorporated herein by reference.
10.11*
Universal Health Services, Inc. Employee Stock Purchase Plan, previously filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-8 (File No. 333-122188), dated January 21, 2005 is incorporated herein by reference.
10.12*
Universal Health Services, Inc. Third Amended and Restated 2005 Stock Incentive Plan as Amended, previously filed as
Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (File No.333-218359), dated May 31, 2017, is
incorporated herein by reference.
10.13*
Form of Stock Option Agreement, previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K,
dated June 8, 2005, is incorporated herein by reference.
10.14*
Form of Stock Option Agreement for Non-Employee Directors, previously filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K, dated October 3, 2005, is incorporated herein by reference.
10.15
Amendment No. 1 to the Master Lease Document, between certain subsidiaries of Universal Health Services, Inc. and
Universal Health Realty Income Trust, dated April 24, 2006, previously filed as Exhibit 10.29 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2006, is incorporated herein by reference.
10.16*
Amended and Restated Universal Health Services, Inc. 2010 Employees’ Restricted Stock Purchase Plan, previously
filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2015, is incorporated herein
by reference.
10.17*
Universal Health Services, Inc. 2010 Executive Incentive Plan, previously filed as Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q filed on August 7, 2015, is incorporated herein by reference.
10.18
Omnibus Amendment to Receivables Sale Agreements, dated as of October 27, 2010, previously filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K dated November 2, 2010, is incorporated herein by reference.
10.19
Amended and Restated Credit and Security Agreement, dated as of October 27, 2010, previously filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K dated November 2, 2010, is incorporated herein by reference.
10.20
Second Amendment to Amended and Restated Credit and Security Agreement, dated as of October 25, 2013, previously
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 30, 2013, is incorporated herein by
reference.
81
No.
Description
10.21
10.22
Third Amendment to Amended and Restated Credit and Security Agreement, dated as of August 1, 2014, previously
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 4, 2014, is incorporated herein by
reference.
Fourth Amendment to Amended and Restated Credit and Security Agreement, dated as of December 22, 2015,
previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 22, 2015, is
incorporated herein by reference.
10.23
Fifth Amendment to Amended and Restated Credit and Security Agreement, dated as of July 7, 2017, previously filed as
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2017, is incorporated herein by
reference.
10.24
Assignment and Assumption Agreement, dated as of October 27, 2010, previously filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K dated November 2, 2010, is incorporated herein by reference.
10.25
Credit Agreement, dated as of November 15, 2010, by and among Universal Health Services, Inc., JPMorgan Chase
Bank, N.A. and the various financial institutions as are or may become parties thereto, as Lenders, SunTrust Bank, The
Royal Bank of Scotland, Plc, Bank of Tokyo-Mitsubishi UFJ Trust Company and Credit Agricole Corporate and
Investment Bank, as co-documentation agents, Deutsche Bank Securities Inc. and Bank of America N.A. as co-
syndication agents, and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders and as collateral agent for
the secured parties, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 17,
2010, is incorporated herein by reference.
10.26
10.27
First Amendment, dated as of March 15, 2011, to the Credit Agreement, dated as of November 15, 2010, by and among
Universal Health Services, Inc., JPMorgan Chase Bank, N.A. and the various financial institutions as are or may become
parties thereto, as Lenders, certain banks as co-documentation agents, and as co-syndication agents, and JPMorgan
Chase Bank, N.A., as administrative agent for the Lenders and as collateral agent for the secured parties, previously filed
as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 15, 2011, is incorporated herein by
reference.
Credit Agreement, dated as of November 15, 2010 and amended and restated as of September 21, 2012, by and among
Universal Health Services, Inc. (the borrower), the several lenders from time to time parties thereto, Credit Agricole
Corporate and Investment Bank, Mizuho Corporate Bank LTD., Royal Bank of Canada and The Royal Bank of Scotland
PLC (as co-documentation agents), Bank of Tokyo-Mitsubishi UFJ Trust Company, Bank of America N.A. and
SunTrust Bank (as co-syndication agents), and JPMorgan Chase Bank, N.A. (as administrative agent), previously filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 26, 2012, is incorporated herein by
reference.
10.28
Second Amendment, dated as of September 21, 2012, to the Credit Agreement, dated as of November 15, 2010 (as
amended from time to time), among Universal Health Services, Inc., a Delaware corporation, the several banks and other
financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the
other agents party thereto, previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated
September 26, 2012, is incorporated herein by reference.
10.29
Third Amendment, dated as of May 16, 2013, to the Credit Agreement, dated as of November 15, 2010, as amended
from time to time, among Universal Health Services, Inc., a Delaware corporation, the several banks and other financial
institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the other agents
party thereto, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 17, 2013, is
incorporated herein by reference.
10.30
Fourth Amendment, dated as of August 7, 2014, to the Credit Agreement, dated as of November 15, 2010, as previously
amended from time to time, by and among Universal Health Services, Inc., the several banks and other financial
institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the other agents
party thereto, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 12, 2014, is
incorporated herein by reference.
10.31
Fifth Amendment to the Credit Agreement, dated as of November 15, 2010, as amended on March 15, 2011, September
21, 2012, May 16, 2013 and August 7, 2014, among the Company, as borrower, the several banks and other financial
82
No.
Description
institutions from time to time parties thereto, as lenders, JPMorgan Chase Bank, N.A., as administrative agent, and the
other agents party thereto, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 8,
2016, is incorporated herein by reference.
10.32
Credit Agreement, dated as of November 15, 2010 and amended and restated as of August 7, 2014, by and among
Universal Health Services, Inc., the several banks and other financial institutions from time to time parties thereto,
JPMorgan Chase Bank, N.A., as administrative agent and the other agents party thereto, previously filed as Exhibit 10.2
to the Company’s Current Report on Form 8-K dated August 12, 2014, is incorporated herein by reference.
10.33*
Form of Supplemental Life Insurance Plan and Agreement Part A: Alan B. Miller 1998 Dual Life Insurance Trust
(effective December 9, 2010, by and between Universal Health Services, Inc., a Delaware corporation (the “Company”),
and Anthony Pantaleoni as Trustee), previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated December 10, 2010, is incorporated herein by reference.
10.34*
Form of Supplemental Life Insurance Plan and Agreement Part B: Alan B. Miller 2002 Trust (effective December 9,
2010, by and between Universal Health Services, Inc., a Delaware corporation (the “Company”), and Anthony
Pantaleoni as Trustee), previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated
December 10, 2010, is incorporated herein by reference.
10.35*
Universal Health Services, Inc. Termination, Assignment and Release Agreement (effective December 9, 2010, by and
between Universal Health Services, Inc., a Delaware corporation (the “Company”), Anthony Pantaleoni as Trustee of the
Alan B. Miller 1998 Dual Life Insurance Trust, and Alan B. Miller, Executive), previously filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K dated December 10, 2010, is incorporated herein by reference.
10.36*
Universal Health Services, Inc. Termination, Assignment and Release Agreement (effective December 9, 2010, by and
between Universal Health Services, Inc., a Delaware corporation (the “Company”), Anthony Pantaleoni as Trustee of the
Alan B. Miller 2002 Trust, and Alan B. Miller, Executive), previously filed as Exhibit 10.4 to the Company’s Current
Report on Form 8-K dated December 10, 2010, is incorporated herein by reference.
10.37
Collateral Agreement, dated as of August 7, 2014, among Universal Health Services, Inc., the subsidiary guarantors
party thereto, MUFG Union Bank, N.A., as 2014 Trustee, The Bank of New York Mellon Trust Company, N.A., as 2006
Trustee, and JPMorgan Chase Bank, N.A., as collateral agent, previously filed as Exhibit 10.4 to the Company’s Current
Report on Form 8-K dated August 12, 2014, is incorporated herein by reference.
11
21
Statement regarding computation of per share earnings is set forth in Note 1 of the Notes to the Consolidated Financial
Statements.
Subsidiaries of Registrant.
23.1
Consent of Independent Registered Public Accounting Firm-PricewaterhouseCoopers LLP.
31.1
Certification from the Company’s Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities
Exchange Act of 1934.
31.2
Certification from the Company’s Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities
Exchange Act of 1934.
32.1
Certification from the Company’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification from the Company’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
INS XBRL Instance Document
SCH XBRL Taxonomy Extension Schema Document
CAL XBRL Taxonomy Extension Calculation Linkbase Document
101
101
101
83
No.
101
101
101
*
Description
DEF XBRL Taxonomy Extension Definition Linkbase Document
LAB XBRL Taxonomy Extension Label Linkbase Document
PRE XBRL Taxonomy Extension Presentation Linkbase Document
Management contract or compensatory plan or arrangement.
Exhibits, other than those incorporated by reference, have been included in copies of this Annual Report filed with the Securities and
Exchange Commission. Stockholders of the Company will be provided with copies of those exhibits upon written request to the
Company.
ITEM 16. Form 10-K Summary
None.
84
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
UNIVERSAL HEALTH SERVICES, INC.
By:
/s/ ALAN B. MILLER
Alan B. Miller
Chairman of the Board
and Chief Executive Officer
February 28, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
/s/ ALAN B. MILLER
Alan B. Miller
/s/ MARC D. MILLER
Marc D. Miller
/s/ LAWRENCE S. GIBBS
Lawrence S. Gibbs
/s/ JOHN H. HERRELL
John H. Herrell
/s/ ROBERT H. HOTZ
Robert H. Hotz
/s/ EILEEN C. MCDONNELL
Eileen C. McDonnell
/s/ WARREN J. NIMETZ
Warren J. Nimetz
/s/ STEVE FILTON
Steve Filton
Title
Date
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Director and President
Director
Director
Director
Director
Director
Executive Vice President, Chief Financial Officer and
Secretary
(Principal Financial and Accounting Officer)
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
85
UNIVERSAL HEALTH SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for December 31, 2017, 2016, and 2015
Consolidated Statements of Comprehensive Income for December 31, 2017, 2016, and 2015
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Changes in Equity for December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Supplemental Financial Statement Schedule II: Valuation and Qualifying Accounts as of and for December 31, 2017,
2016, and 2015
87
88
89
90
91
94
95
129
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Universal Health Services, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated financial statements, including the related notes and financial statement
schedule, of Universal Health Services, Inc. and its subsidiaries as listed in the accompanying index (collectively referred to as the
“consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December
31, 2017 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the
Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2018
We have served as the Company’s auditor since 2007.
87
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Net revenues before provision for doubtful accounts
Less: Provision for doubtful accounts
Net revenues
Operating charges:
Salaries, wages and benefits
Other operating expenses
Supplies expense
Depreciation and amortization
Lease and rental expense
Electronic health records incentive income
Income from operations
Interest expense, net
Income before income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to UHS
Basic earnings per share attributable to UHS
Diluted earnings per share attributable to UHS
Weighted average number of common shares—basic
Add: Other share equivalents
Weighted average number of common shares and equivalents—diluted
$
$
$
2017
Year Ended December 31,
2016
(in thousands, except per share data)
2015
$
11,278,942 $
869,077
10,409,865
10,507,788 $
741,578
9,766,210
9,784,724
741,273
9,043,451
4,980,637
2,493,062
1,105,096
447,765
103,127
0
9,129,687
1,280,178
145,169
1,135,009
363,697
771,312
19,009
752,303 $
7.86 $
7.81 $
95,652
673
96,325
4,585,530
2,359,339
1,031,337
416,608
97,324
(5,339 )
8,484,799
1,281,411
125,053
1,156,358
409,187
747,171
44,762
702,409 $
7.22 $
7.14 $
97,208
1,172
98,380
4,212,387
2,119,805
974,088
398,618
94,973
(15,815 )
7,784,056
1,259,395
113,494
1,145,901
395,203
750,698
70,170
680,528
6.89
6.76
98,797
1,897
100,694
The accompanying notes are an integral part of these consolidated financial statements.
88
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
Unrealized derivative gains on cash flow hedges
Amortization of terminated hedge
Minimum pension liability
Unrealized loss on marketable security
Foreign currency translation adjustment
Other comprehensive income before tax
Income tax expense related to items of other
comprehensive income
Total other comprehensive income (loss), net of tax
Comprehensive income
Less: Comprehensive income attributable to noncontrolling
interests
Comprehensive income attributable to UHS
2017
Year Ended December 31,
2016
2015
$
771,312 $
747,171 $
750,698
6,679
0
4,070
(2,169 )
26,678
35,258
2,664
32,594
803,906
1,438
(167 )
13,356
(2,229 )
(10,038 )
2,360
4,648
(2,288 )
744,883
4,970
(336 )
2,177
0
(1,728 )
5,083
2,980
2,103
752,801
$
19,009
784,897 $
44,762
700,121 $
70,170
682,631
The accompanying notes are an integral part of these consolidated financial statements.
89
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
December 31,
2017
2016
(Dollar amounts in thousands)
Current assets:
Cash and cash equivalents
Accounts receivable, net
Supplies
Other current assets
Total current assets
Property and Equipment
Land
Buildings and improvements
Equipment
Property under capital lease
Accumulated depreciation
Construction-in-progress
Other assets:
Goodwill
Deferred income taxes
Deferred charges
Other
Total Assets
Current liabilities:
Liabilities and Stockholders’ Equity
Current maturities of long-term debt
Accounts payable
Accrued liabilities
Compensation and related benefits
Interest
Taxes other than income
Other
Current federal and state income taxes
Total current liabilities
Other noncurrent liabilities
Long-term debt
Deferred income taxes
Commitments and contingencies (Note 8)
Redeemable noncontrolling interest
Equity:
Class A Common Stock, voting, $.01 par value; authorized 12,000,000 shares: issued
and outstanding 6,595,308 shares in 2017 and 6,595,308 shares in 2016
Class B Common Stock, limited voting, $.01 par value; authorized 150,000,000
shares: issued and outstanding 86,947,407 shares in 2017 and 89,348,958 shares in 2016
Class C Common Stock, voting, $.01 par value; authorized 1,200,000 shares: issued
and outstanding 663,940 shares in 2017 and 663,940 shares in 2016
Class D Common Stock, limited voting, $.01 par value; authorized 5,000,000 shares:
issued and outstanding 20,868 shares in 2017 and 22,100 shares in 2016
Cumulative dividends
Retained earnings
Accumulated other comprehensive income (loss)
Universal Health Services, Inc. common stockholders’ equity
Noncontrolling interest
Total Equity
Total Liabilities and Stockholders’ Equity
$
$
$
$
74,423
1,500,898
136,177
86,504
1,798,002
520,447
4,952,856
2,000,305
44,740
7,518,348
(3,349,289 )
4,169,059
402,778
4,571,837
3,825,157
3,007
9,787
554,038
4,391,989
10,761,828
$
545,619
441,984
$
304,668
23,755
85,800
427,874
18,334
1,848,034
306,304
3,494,390
54,962
33,747
1,439,553
125,365
82,706
1,681,371
492,731
4,676,752
1,820,468
45,768
7,035,719
(2,983,481 )
4,052,238
278,718
4,330,956
3,784,106
1,234
13,520
506,615
4,305,475
10,317,802
105,895
439,672
275,288
23,050
68,199
403,120
2,149
1,317,373
275,167
4,030,230
88,119
6,702
9,319
66
869
7
0
(371,814 )
5,353,209
7,177
4,989,514
61,922
5,051,436
$
10,761,828
$
66
893
7
0
(333,603 )
4,891,274
(25,417 )
4,533,220
64,374
4,597,594
10,317,802
The accompanying notes are an integral part of these consolidated financial statements.
90
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T
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation & amortization
Gains on sales of assets and businesses, net of losses
Stock-based compensation expense
Changes in assets & liabilities, net of effects from acquisitions and
dispositions:
Accounts receivable
Accrued interest
Accrued and deferred income taxes
Other working capital accounts
Other assets and deferred charges
Other
Excess income tax benefits related to stock-based compensation
Accrued insurance expense, net of commercial premiums paid
Payments made in settlement of self-insurance claims
Net cash provided by operating activities
Cash Flows from Investing Activities:
Property and equipment additions, net of disposals
Acquisition of property and businesses
Proceeds received from sales of assets and businesses
Costs incurred for purchase and implementation of information
technology applications
Increase in capital reserves of commercial insurance subsidiary
Investment in, and advances to, joint venture
Net cash used in investing activities
Cash Flows from Financing Activities:
Reduction of long-term debt
Additional borrowings
Acquisition of noncontrolling interests in majority owned businesses
Financing costs
Repurchase of common shares
Dividends paid
Issuance of common stock
Profit distributions to noncontrolling interests
Proceeds received from sale/leaseback of real property
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental Disclosures of Cash Flow Information:
Interest paid
Income taxes paid, net of refunds
Noncash purchases of property and equipment
2017
Year Ended December 31,
2016
(Amounts in thousands)
2015
$
771,312 $
747,171 $
750,698
447,883
0
56,738
416,608
0
48,109
398,618
(3,615 )
39,971
(24,719 )
705
(6,405 )
(15,165 )
(28,607 )
(42,564 )
0
102,595
(79,192 )
1,182,581
(87,881 )
9,766
22,068
74,489
(25,671 )
81,139
45,219
84,638
(81,962 )
1,333,693
(557,506 )
(22,878 )
108
(519,939 )
(613,803 )
0
(29,047 )
(7,100 )
(7,976 )
(624,399 )
(21,475 )
(32,000 )
0
(1,187,217 )
(143,106 )
41,100
0
(76 )
(364,401 )
(38,211 )
10,254
(24,713 )
0
(519,153 )
1,647
40,676
33,747
74,423 $
(459,183 )
1,170,800
(418,000 )
(12,449 )
(353,380 )
(38,875 )
9,503
(69,583 )
0
(171,167 )
(2,790 )
(27,481 )
61,228
33,747 $
135,533 $
370,855 $
82,496 $
107,079 $
344,611 $
65,702 $
(45,814 )
(693 )
(34,394 )
(125,556 )
6,631
23,295
47,364
90,895
(79,138 )
1,068,262
(379,321 )
(533,655 )
3,391
0
(3,300 )
0
(912,885 )
(68,166 )
234,400
0
(515 )
(209,782 )
(39,532 )
8,441
(62,220 )
12,765
(124,609 )
(1,609 )
29,159
32,069
61,228
107,054
380,658
49,086
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Services provided by our hospitals, all of which are operated by subsidiaries of ours, 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, through our subsidiaries, 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.
The more significant accounting policies follow:
A) Principles of Consolidation: The consolidated financial statements include the accounts of our majority-owned subsidiaries
and partnerships controlled by us or our subsidiaries as the managing general partner. All significant intercompany accounts and
transactions have been eliminated.
B) Revenue Recognition: We record revenues and related receivables for health care services at the time the services are
provided. Medicare and Medicaid revenues represented 30% of our net patient revenues during 2017, 32% during 2016 and 34%
during 2015. Revenues from managed care entities, including health maintenance organizations and managed Medicare and Medicaid
programs accounted for 56% of our net patient revenues during 2017 and 2016 and 54% during 2015.
We report net patient service revenue at the estimated net realizable amounts from patients and third-party payors and others for
services rendered. We have agreements with third-party payors that provide for payments to us at amounts different from our
established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges
and per diem payments. Estimates of contractual allowances under managed care plans are based upon the payment terms specified in
the related contractual agreements. We closely monitor our historical collection rates, as well as changes in applicable laws, rules and
regulations and contract terms, to assure that provisions are made using the most accurate information available. However, due to the
complexities involved in these estimations, actual payments from payors may be different from the amounts we estimate and record.
We estimate our Medicare and Medicaid revenues using the latest available financial information, patient utilization data,
government provided data and in accordance with applicable Medicare and Medicaid payment rules and regulations. The laws and
regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation and as a result, there
is at least a reasonable possibility that recorded estimates will change by material amounts in the near term. Certain types of payments
by the Medicare program and state Medicaid programs (e.g. Medicare Disproportionate Share Hospital, Medicare Allowable Bad
Debts and Inpatient Psychiatric Services) are subject to retroactive adjustment in future periods as a result of administrative review
and audit and our estimates may vary from the final settlements. Such amounts are included in accounts receivable, net, on our
Consolidated Balance Sheets. The vast majority of the net revenues generated at our behavioral health facilities located in the United
Kingdom are derived from government based payors. The funding of both federal Medicare and state Medicaid programs, and the
government based payor programs in the United Kingdom, are subject to legislative and regulatory changes. As such, we cannot
provide any assurance that future legislation and regulations, if enacted, will not have a material impact on our future government
based reimbursements. Adjustments related to the final settlement of these retrospectively determined amounts did not materially
impact our results in 2017, 2016 and 2015. We provide care to patients who meet certain financial or economic criteria without charge
or at amounts substantially less than our established rates. Because we do not pursue collection of amounts determined to qualify as
charity care, they are not reported in net revenues or in accounts receivable, net. See additional disclosure below in Charity Care,
Uninsured Discounts and Provision for Doubtful Accounts for our estimated uncompensated care provided and estimated cost of
providing uncompensated care.
C) Charity Care, Uninsured Discounts and Provision for Doubtful Accounts: Collection of receivables from third-party
payers and patients is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to
uninsured patients and the portion of the bill which is the patient’s responsibility, primarily co-payments and deductibles. We estimate
our provisions for doubtful accounts based on general factors such as payer mix, the agings of the receivables and historical collection
experience. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions which
might ultimately affect the collectability of the patient accounts and make adjustments to our allowances as warranted. At our acute
care hospitals, third party liability accounts are pursued until all payment and adjustments are posted to the patient account. For those
accounts with a patient balance after third party liability is finalized or accounts for uninsured patients, the patient receives statements
and collection letters. Our hospitals establish a partial reserve for self-pay accounts in the allowance for doubtful accounts for both
unbilled balances and those that have been billed and are under 90 days old. All self-pay accounts are fully reserved at 90 days from
the date of discharge. Third party liability accounts are fully reserved in the allowance for doubtful accounts when the balance ages
past 180 days from the date of discharge. Patients that express an inability to pay are reviewed for potential sources of financial
95
assistance including our charity care policy. If the patient is deemed unwilling to pay, the account is written-off as bad debt and
transferred to an outside collection agency for additional collection effort.
Historically, a significant portion of the patients treated throughout our portfolio of acute care hospitals are uninsured patients
which, in part, has resulted from patients who are employed but do not have health insurance or who have policies with relatively high
deductibles. Patients treated at our hospitals for non-elective services, who have gross income less than 400% of the federal poverty
guidelines, are deemed eligible for charity care. The federal poverty guidelines are established by the federal government and are
based on income and family size. Because we do not pursue collection of amounts that qualify as charity care, they are not reported in
our net revenues or in our accounts receivable, net.
A portion of the accounts receivable at our acute care facilities are comprised of Medicaid accounts that are pending approval
from third-party payers but we also have smaller amounts due from other miscellaneous payers such as county indigent programs in
certain states. Our patient registration process includes an interview of the patient or the patient’s responsible party at the time of
registration. At that time, an insurance eligibility determination is made and an insurance plan code is assigned. There are various pre-
established insurance profiles in our patient accounting system which determine the expected insurance reimbursement for each
patient based on the insurance plan code assigned and the services rendered. Certain patients may be classified as Medicaid pending at
registration based upon a screening evaluation if we are unable to definitively determine if they are currently Medicaid eligible. When
a patient is registered as Medicaid eligible or Medicaid pending, our patient accounting system records net revenues for services
provided to that patient based upon the established Medicaid reimbursement rates, subject to the ultimate disposition of the patient’s
Medicaid eligibility. When the patient’s ultimate eligibility is determined, reclassifications may occur which impacts the reported
amounts in future periods for the provision for doubtful accounts and other accounts such as Medicaid pending. Although the patient’s
ultimate eligibility determination may result in amounts being reclassified among these accounts from period to period, these
reclassifications did not have a material impact on our results of operations in 2017, 2016 or 2015 since our facilities make estimates
at each financial reporting period to reserve for amounts that are deemed to be uncollectible.
We also provide discounts to uninsured patients (included in “uninsured discounts” amounts below) who do not qualify for
Medicaid or charity care. Because we do not pursue collection of amounts classified as uninsured discounts, they are not reported in
our net revenues or in our net accounts receivable. In implementing the discount policy, we first attempt to qualify uninsured patients
for governmental programs, charity care or any other discount program. If an uninsured patient does not qualify for these programs,
the uninsured discount is applied.
On a consolidated basis, we monitor our total self-pay receivables to ensure that the total allowance for doubtful accounts
provides adequate coverage based on historical collection experience. Our accounts receivable are recorded net of allowance for
doubtful accounts of $480 million and $410 million at December 31, 2017 and 2016, respectively.
Uncompensated care (charity care and uninsured discounts):
The following table shows the amounts recorded at our acute care hospitals for charity care and uninsured discounts, based on
charges at established rates, for the years ended December 31, 2017, 2016 and 2015:
2017
(dollar amounts in thousands)
2016
2015
Charity care
Uninsured discounts
Total uncompensated care
Amount
$ 887,136
881,265
$ 1,768,401
%
%
%
Amount
50 % $ 733,585
50 % 720,205
100 % $ 1,453,790
Amount
50 % $ 506,571
50 % 696,463
100 % $ 1,203,034
42 %
58 %
100 %
The provision for doubtful accounts at our acute care hospitals was approximately $756 million during 2017, $628 million
during 2016 and $631 million during 2015.
96
The estimated cost of providing uncompensated care:
The estimated cost 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. An increase in the level of uninsured patients to our
facilities and the resulting adverse trends in the provision for doubtful accounts and uncompensated care provided could have a
material unfavorable impact on our future operating results.
Estimated cost of providing charity care
$
Estimated cost of providing uninsured discounts related care
$
Estimated cost of providing uncompensated care
2017
120,208 $
119,412
239,620 $
(amounts in thousands)
2016
107,887 $
105,920
213,807 $
2015
77,557
106,630
184,187
Our accounts receivable as of December 31, 2017 and December 31, 2016 include amounts due from Illinois of approximately
$25 million and $38 million, respectively. Collection of the outstanding receivables continues to be delayed due to state budgetary and
funding pressures. Approximately $8 million as of December 31, 2017 and $25 million as of December 31, 2016, of the receivables
due from Illinois were outstanding in excess of 60 days, as of each respective date. Although the accounts receivable due from Illinois
could remain outstanding for the foreseeable future, since we expect to eventually collect all amounts due to us, no related reserves
have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect
all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due to us from Illinois would have an adverse
impact on our future consolidated results of operations and cash flows.
D) Concentration of Revenues: Our six acute care hospitals in the Las Vegas, Nevada market contributed, on a combined
basis, 15% in 2017, 14% in 2016 and 13% in 2015 of our consolidated net revenues.
E) Cash and Cash Equivalents: We consider all highly liquid investments purchased with maturities of three months or less to
be cash equivalents.
F) Property and Equipment: Property and equipment are stated at cost. Expenditures for renewals and improvements are
charged to the property accounts. Replacements, maintenance and repairs which do not improve or extend the life of the respective
asset are expensed as incurred. We remove the cost and the related accumulated depreciation from the accounts for assets sold or
retired and the resulting gains or losses are included in the results of operations. Construction-in-progress includes both construction
projects and equipment not yet placed into service.
While in progress, we capitalized interest on major construction projects and the development and implementation of
information technology applications amounting to $1.0 million during 2017, $1.9 million during 2016 and $304,000 during 2015.
Depreciation is provided on the straight-line method over the estimated useful lives of buildings and improvements (twenty to
forty years) and equipment (three to fifteen years). Depreciation expense was $388.4 million during 2017, $350.8 million during 2016
and $337.5 million during 2015.
G) Long-Lived Assets: We review our long-lived assets, including intangible assets, for impairment whenever events or
circumstances indicate that the carrying value of these assets may not be recoverable. The assessment of possible impairment is based
on our ability to recover the carrying value of our asset based on our estimate of its undiscounted future cash flow. If the analysis
indicates that the carrying value is not recoverable from future cash flows, the asset is written down to its estimated fair value and an
impairment loss is recognized. Fair values are determined based on estimated future cash flows using appropriate discount rates.
H) Goodwill: Goodwill and indefinite-lived intangible assets are reviewed for impairment at the reporting unit level on an
annual basis or sooner if the indicators of impairment arise. Our judgments regarding the existence of impairment indicators are based
on market conditions and operational performance of each reporting unit. We have designated October 1st as our annual impairment
assessment date and performed impairment assessments as of October 1, 2017 which indicated no impairment of goodwill or
indefinite-lived intangible assets. There were also no impairments during 2016 or 2015. Future changes in the estimates used to
conduct the impairment reviews, including profitability and market value projections, could indicate impairment in future periods
potentially resulting in a write-off of a portion or all of our goodwill or indefinite-lived intangible assets.
97
Changes in the carrying amount of goodwill for the two years ended December 31, 2017 were as follows (in thousands):
Balance, January 1, 2016
Goodwill acquired during the period
Adjustments to goodwill (a)
Balance, December 31, 2016
Goodwill acquired during the period
Adjustments to goodwill (a)
Balance, December 31, 2017
$
$
Acute Care
Services
Behavioral
Health
Services
50,897
(110 )
Total
Consolidated
389,507 $ 3,206,607 $ 3,596,114
234,658
183,761
(46,666 )
(46,556 )
440,294 3,343,812 3,784,106
80
40,971
441,511 $ 3,383,646 $ 3,825,157
0
39,834
80
1,137
(a)
The increase/(decrease) in the Behavioral Health Services’ goodwill consists primarily of foreign currency translation
adjustments.
I) Other Assets: Other assets consist primarily of amounts related to: (i) intangible assets acquired in connection with our
acquisitions of Cambian Group, PLC’s adult services’ division, Foundations Recovery Network, LLC during 2015, Ascend Health
Corporation during 2012 and Psychiatric Solutions, Inc. during 2010; (ii) prepaid fees for various software and other applications used
by our hospitals; (iii) costs incurred in connection with the purchase and implementation of an electronic health records application for
each of our acute care facilities; (iv) statutorily required capital reserves related to our commercial insurance subsidiary ($110 million
as of December 31, 2017); (v) deposits; (vi) investments in various businesses, including Universal Health Realty Income Trust ($8
million as of December 31, 2017) and Premier, Inc. ($33 million as of December 31, 2017); (vii) the invested assets related to a
deferred compensation plan that is held by an independent trustee in a rabbi-trust and that has a related payable included in other
noncurrent liabilities; (viii) the estimated future payments related to physician-related contractual commitments, as discussed below,
and; (ix) other miscellaneous assets.
The following table shows the amounts recorded as net intangible assets for the years ended December 31, 2017 and 2016:
Tradenames
Medicare licenses
Certificates of need
Contract relationships and other (net of $44 and $34 of
accumulated amortization for 2017 and 2016, respectively)
Net Intangible Assets
$
$
124 $
57
12
27
220 $
124
57
12
35
228
(amounts in millions)
2017
2016
J) Physician Guarantees and Commitments: Our accrued liabilities-other, and our other assets included approximately $2
million of estimated future payments related to physician-related contractual commitments as of each of December 31, 2017 and 2016.
Substantially all of the $2 million of potential future financial obligations outstanding as of December 31, 2017 are potential 2018
obligations.
K) Self-Insured/Other Insurance Risks: We provide for self-insured risks, primarily general and professional liability claims
and workers’ compensation claims. Our estimated liability for self-insured professional and general liability claims is based on a
number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these
claims based on recent and historical settlement amounts, estimate of incurred but not reported claims based on historical experience,
and estimates of amounts recoverable under our commercial insurance policies. All relevant information, including our own historical
experience is used in estimating the expected amount of claims. While we continuously monitor these factors, our ultimate liability for
professional and general liability claims could change materially from our current estimates due to inherent uncertainties involved in
making this estimate. Our estimated self-insured reserves are reviewed and changed, if necessary, at each reporting date and changes
are recognized currently as additional expense or as a reduction of expense. See Note 8 - Commitments and Contingencies for
discussion of adjustments to our prior year reserves for claims related to our self-insured general and professional liability and
workers’ compensation liability.
In addition, we also: (i) own commercial health insurers headquartered in Nevada and Puerto Rico, and; (ii) maintain self-
insured employee benefits programs for employee healthcare and dental claims. The ultimate costs related to these
programs/operations include expenses for claims incurred and paid in addition to an accrual for the estimated expenses incurred in
connection with claims incurred but not yet reported. Given our significant insurance-related exposure, there can be no assurance that
a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results
of operations.
98
L) Income Taxes: Deferred tax assets and liabilities are recognized for the amount of taxes payable or deductible in future
years as a result of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.
We believe that future income will enable us to realize our deferred tax assets net of recorded valuation allowances relating to state net
operating loss carry-forwards.
We operate in multiple jurisdictions with varying tax laws. We are subject to audits by any of these taxing authorities. Our tax
returns have been examined by the Internal Revenue Service (“IRS”) through the year ended December 31, 2006. We believe that
adequate accruals have been provided for federal, foreign and state taxes. See Note 6 - Income Taxes, for additional disclosure.
M) Other Noncurrent Liabilities: Other noncurrent liabilities include the long-term portion of our professional and general
liability, workers’ compensation reserves, pension and deferred compensation liabilities, and liabilities incurred in connection with
split-dollar life insurance agreements on the lives of our chief executive officer and his wife.
N) Redeemable Noncontrolling Interests and Noncontrolling Interest: As of December 31, 2017, outside owners held
noncontrolling, minority ownership interests of: (i) 20% in an acute care facility located in Washington, D.C.; (ii) approximately 11%
in an acute care facility located in Texas; (iii) 20% and 30% in two behavioral health care facilities located in Pennsylvania and Ohio,
respectively, and; (iv) approximately 5% in an acute care facility located in Nevada. The noncontrolling interest and redeemable
noncontrolling interest balances of $62 million and $7 million, respectively, as of December 31, 2017, consist primarily of the third-
party ownership interests in these hospitals.
In May, 2016, we purchased the minority ownership interests held by a third-party in our six acute care hospitals located in
Las Vegas, Nevada, for an aggregate cash payment of $445 million which included both the purchase price ($418 million) and the
return of reserve capital ($27 million). The ownership interests purchased ranged from 26.1% to 27.5%.
In connection with the two behavioral health care facilities located in Pennsylvania and Ohio, the minority ownership interests
of which are reflected as redeemable noncontrolling interests on our Consolidated Balance Sheet, the outside owners have “put
options” to put their entire ownership interest to us at any time. If exercised, the put option requires us to purchase the minority
member’s interest at fair market value.
O) Accumulated Other Comprehensive Income: The accumulated other comprehensive income (“AOCI”) component of
stockholders’ equity includes: net unrealized gains and losses on effective cash flow hedges, foreign currency translation adjustments
and the net minimum pension liability of a non-contributory defined benefit pension plan which covers employees at one of our
subsidiaries. See Note 10 - Pension Plan for additional disclosure regarding the defined benefit pension plan.
The amounts recognized in AOCI for the two years ended December 31, 2017 were as follows (in thousands):
Balance, January 1, 2016, net of income tax
2016 activity:
Pretax amount
Income tax effect
Change, net of income tax
Balance, January 1, 2017, net of income tax
2017 activity:
Pretax amount
Income tax effect
Change, net of income tax
Balance, December 31, 2017, net of income tax
Net Unrealized
Gains (Losses) on
Effective Cash
Flow Hedges
Foreign
Currency
Translation
Adjustment
Unrealized
loss on
marketable
security
Minimum
Pension
Liability
Total
AOCI
$
(776 ) $
(4,159 ) $
— $ (18,194 ) $ (23,129 )
1,271 (10,038 )
—
(476 )
795 (10,038 )
19 (14,197 )
2,360
(2,229 ) 13,356
(4,648 )
(5,003 )
(2,288 )
8,353
(9,841 ) (25,417 )
831
(1,398 )
(1,398 )
6,679 26,678
—
(2,490 )
4,189 26,678
4,208 $ 12,481 $
(2,169 )
809
(1,360 )
(2,758 ) $
4,070 35,258
(2,664 )
(983 )
3,087 32,594
7,177
(6,754 ) $
$
P) Accounting for Derivative Financial Investments and Hedging Activities and Foreign Currency Forward Exchange
Contracts: We manage our ratio of fixed to floating rate debt with the objective of achieving a mix that management believes is
appropriate. To manage this risk in a cost-effective manner, we, from time to time, enter into interest rate swap agreements in which
we agree to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts.
We account for our derivative and hedging activities using the Financial Accounting Standard Board’s (“FASB”) guidance
which requires all derivative instruments, including certain derivative instruments embedded in other contracts, to be carried at fair
99
value on the balance sheet. For derivative transactions designated as hedges, we formally document all relationships between the
hedging instrument and the related hedged item, as well as its risk-management objective and strategy for undertaking each hedge
transaction.
Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value
of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in accumulated
other comprehensive income (“AOCI”) within stockholders’ equity. Amounts are reclassified from AOCI to the income statement in
the period or periods the hedged transaction affects earnings.
We use interest rate derivatives in our cash flow hedge transactions. Such derivatives are designed to be highly effective in
offsetting changes in the cash flows related to the hedged liability. For derivative instruments designated as cash flow hedges, the
ineffective portion of the change in expected cash flows of the hedged item are recognized currently in the income statement.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability,
or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Fair value hedges are
accounted for by recording the changes in the fair value of both the derivative instrument and the hedged item in the income
statement.
For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a
formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been
highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the
future.
We use forward exchange contracts to hedge our net investment in foreign operations against movements in exchange rates. The
effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within
accumulated other comprehensive income and remains there until either the sale or liquidation of the subsidiary. The cash flows from
these contracts are reported as operating activities in the Consolidated Statements of Cash Flows.
Q) Stock-Based Compensation: At December 31, 2017, we have a number of stock-based employee compensation plans.
Pursuant to the FASB’s guidance, we expense the grant-date fair value of stock options and other equity-based compensation pursuant
to the straight-line method over the stated vesting period of the award using the Black-Scholes option-pricing model.
The expense associated with share-based compensation arrangements is a non-cash charge. In the Consolidated Statements of Cash
Flows, share-based compensation expense is an adjustment to reconcile net income to cash provided by operating activities.
R) Earnings per Share: Basic earnings per share are based on the weighted average number of common shares outstanding
during the year. Diluted earnings per share are based on the weighted average number of common shares outstanding during the year
adjusted to give effect to common stock equivalents.
100
The following table sets forth the computation of basic and diluted earnings per share, for the periods indicated:
Twelve Months Ended December 31,
2016
2015
2017
Basic and diluted:
Net Income
Less: Net income attributable to noncontrolling interest
Less: Net income attributable to unvested restricted share
grants
Net income attributable to UHS—basic and diluted
Basic earnings per share attributable to UHS:
Weighted average number of common shares—basic
Total basic earnings per share
Diluted earnings per share attributable to UHS:
Weighted average number of common shares
Net effect of dilutive stock options and grants based
on the treasury stock method
Weighted average number of common shares and
equivalents—diluted
Total diluted earnings per share
$
771,312 $
(19,009 )
747,171 $
(44,762 )
750,698
(70,170 )
$
$
(362 )
751,941 $
(314 )
702,095 $
(281 )
680,247
95,652
7.86 $
97,208
7.22 $
98,797
6.89
95,652
97,208
98,797
673
1,172
1,897
96,325
7.81 $
98,380
7.14 $
100,694
6.76
$
The “Net effect of dilutive stock options and grants based on the treasury stock method”, for all years presented above, excludes
certain outstanding stock options applicable to each year since the effect would have been anti-dilutive. The excluded weighted-
average stock options totaled approximately 6.2 million during 2017, 2.2 million during 2016 and 765,000 during 2015.
S) Fair Value of Financial Instruments: The fair values of our registered debt and investments are based on quoted market
prices. The fair values of other long-term debt, including capital lease obligations, are estimated by discounting cash flows using
period-end interest rates and market conditions for instruments with similar maturities and credit quality. The carrying amounts
reported in the balance sheet for cash, accounts receivable, accounts payable, and short-term borrowings approximates their fair values
due to the short-term nature of these instruments. Accordingly, these items have been excluded from the fair value disclosures
included elsewhere in these notes to consolidated financial statements.
T) Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
U) Mergers and Acquisitions: The acquisition method of accounting for business combinations requires that the assets
acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values with limited exceptions. Fair value
is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Any
excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill.
Transaction costs and costs to restructure the acquired company are expensed as incurred. The fair value of intangible assets, including
Medicare licenses, certificates of need, tradenames and certain contracts, is based on significant judgments made by our management,
and accordingly, for significant items we typically obtain assistance from third party valuation specialists.
V) GPO Agreement/Minority Ownership Interest: During 2013, we entered into a new group purchasing organization
agreement (“GPO”) with Premier, Inc. (“Premier), a healthcare performance improvement alliance, and acquired a minority interest in
the GPO for a nominal amount. During the fourth quarter of 2013, in connection with the completion of an initial public offering of
the stock of Premier, we received cash proceeds for the sale of a portion of our ownership interest in the GPO, which were recorded as
deferred income, on a pro rata basis, as a reduction to our supplies expense over the initial expected life of the GPO agreement. Also
in connection with this GPO agreement, we received shares of restricted stock in Premier which vest ratably over a seven-year period
(2014 through 2020), contingent upon our continued participation and minority ownership interest in the GPO. We recognize the fair
value of this restricted stock, as a reduction to our supplies expense, in our consolidated statements of income, on a pro rata basis, over
the vesting period. We have elected to retain of portion of the previously vested shares of Premier, the value of which is included in
other assets on our consolidated balance sheet. Premier shares held by us after the restrictions have lapsed are adjusted, through
accumulated other comprehensive income/loss, to the then current market value as of each respective balance sheet date amounting to
$33 million and $23 million as of December 31, 2017 and 2016, respectively.
101
W) Provider Taxes: 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. 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.
Under these programs, including the impact of the Texas Uncompensated Care and Upper Payment Limit program, the Texas
Delivery System Reform Incentive program, and various other state programs, we earned revenues (before Provider Taxes) of
approximately $357 million during 2017, $327 million during 2016 and $307 million during 2015. These revenues were offset by
Provider Taxes of approximately $171 million during 2017, $166 million during 2016, $137 million during 2015, which are recorded
in other operating expenses on the Consolidated Statements of Income as included herein. The aggregate net benefit from these
programs was $186 million during 2017, $161 million during 2016 and $170 million during 2015. The aggregate net benefit pursuant
to these programs is earned from multiple states and therefore no particular state’s portion is individually material to our consolidated
financial statements. In addition, under various disproportionate share hospital payment programs and the Nevada state plan
amendment program, we earned revenues of $55 million in 2017, $53 million in 2016 and $46 million in 2015.
X) Recent Accounting Standards: In August, 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash
Receipts and Cash Payments, which adds or clarifies guidance of the classification of certain cash receipts and payments in the
statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is
effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. We are
currently evaluating the impact of this ASU on our statement of cash flows.
In March, 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting”, which amends the accounting for employee share-based payment transactions to
require recognition of the tax effects resulting from the settlement of stock-based awards as income tax expense or benefit in the
income statement in the reporting period in which they occur. We have adopted this new standard, which is effective for annual
reporting periods beginning after December 15, 2016, as of January 1, 2017. The impact of ASU 2016-09 to date is explained in Note
10-Income Taxes. Since the impact of ASU 2016-09 on our future Condensed Consolidated Statements of Income and Condensed
Consolidated Statements of Cash Flows is dependent upon the timing of stock option exercises, and the market price of our stock at
the time of exercise, we are unable to estimate the impact this adoption will have on our future financial statements.
In May 2014 and March 2016, the FASB issued ASU 2014-09 and ASU 2016-08, “Revenue from Contracts with Customers
(Topic 606)” and “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus
Net)”, respectively, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosures. The FASB updated the
new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the
new standard. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016; however, in July 2015, the
FASB approved a one-year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017.
We are currently in the process of assessing and analyzing the various sources of revenue and plan to use a portfolio approach as a
practical expedient to account for patient contracts. We have a team in place to lead the implementation of the new standard, including
the evaluation of our systems and internal controls to ensure adequacy of data and information needed for adoption, as well as
assessing the potential impact of the new standard on various reimbursement programs in which our hospitals participate. The team,
consisting of representatives across the organization is progressing towards the completion of their evaluation and began drafting
required disclosures and updates to our policies and practices in the fourth quarter of 2017. We are planning to adopt the standard
using the modified retrospective approach. We anticipate the most significant change will be how the estimate for the allowance for
doubtful accounts will be recognized under the new standards. Under the current standards, our estimate for amounts not expected to
be collected based upon our historical experience have been included within net revenue. Under the new standards, our estimate for
amounts not expected to be collected based on historical experience will continue to be recognized as a reduction to net revenue.
However, subsequent changes in estimate of collectability due to a change in the financial status of a payor, for example a bankruptcy,
will be recognized as bad debt expense in operating charges. Although we continue to evaluate the impact of this ASU, we do not
expect the adoption to have a material impact on our consolidated financial statements and related disclosures.
In February, 2016, the FASB issued ASU 2016-02, “Leases (Topic 842): Amendments to the FASB Accounting Standards
Codification (“Update 2016-02”), which requires an entity to recognize lease assets and lease liabilities on the balance sheet and to
disclose key qualitative and quantitative information about the entity’s leasing arrangements. This update is effective for annual
reporting periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective approach is required.
Upon adoption of this new standard, we will recognize significant right of use assets and lease obligation liabilities on the
consolidated balance sheet as a result of our operating lease obligations. Operating lease expense will still be recognized on a straight-
102
line basis over the remaining life of the lease within lease and rental expense in the consolidated statements of income. We are
currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
In January, 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the
Accounting for Goodwill Impairment” (“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price
allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for the annual and interim
periods beginning January 1, 2020 with early adoption permitted, and applied prospectively. We do not expect ASU 2017-04 to have
a material impact on our financial statements.
In January, 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a
Business” to clarify the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as
acquisitions or disposals of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. Early adoption is permitted. The future impact of ASU 2017-01 will be dependent
upon the nature of future acquisitions or dispositions made by us, if any.
In August, 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities", which
amends the accounting and presentation of certain hedging activities outlined in ASC 815 and is intended to more accurately present
economic results of hedging activities. This update is effective for annual reporting periods beginning after December 15, 2018 with
early adoption permitted. The adoption is required prospectively with a cumulative-effect adjustment. We are currently evaluating the
impact of this ASU on our financial statements.
From time to time, new accounting guidance is issued by the FASB or other standard setting bodies that is adopted by the
Company as of the effective date or, in some cases where early adoption is permitted, in advance of the effective date. The Company
has assessed the recently issued guidance that is not yet effective and, unless otherwise indicated above, believes the new guidance
will not have a material impact on our results of operations, cash flows or financial position.
Y) Foreign Currency Translation: Assets and liabilities of our U.K. subsidiaries are denominated in pound sterling and
translated into U.S. dollars at: (i) the rates of exchange at the balance sheet date, and; (ii) average rates of exchange prevailing during
the year for revenues and expenses. The currency translation adjustments are reported as a component of accumulated other
comprehensive income. See Note 3 - Financial Instruments, Foreign Currency Forward Exchange Contracts for additional disclosure.
Z) Supplies: Supplies, which consist primarily of medical supplies, are stated at the lower of cost (first-in, first-out basis) or
market.
2) ACQUISITIONS AND DIVESTITURES
2018 Acquisitions:
In January, 2018, we acquired Gulfport Behavioral Health System, a 109-bed behavioral health care facility located in Gulfport,
Mississippi.
Year ended December 31, 2017:
2017 Acquisitions of Assets and Businesses:
During 2017 we spent $23 million to acquire businesses and property.
2017 Divestiture of Assets and Businesses:
There were no significant divestitures during 2017.
103
Year ended December 31, 2016:
2016 Acquisitions of Assets and Businesses:
During 2016 we spent $614 million to:
(cid:1)
(cid:1)
(cid:1)
acquire the adult services division of Cambian Group, PLC consisting of 79 inpatient and 2 outpatient behavioral health
facilities located in the U.K. (acquired late in the fourth quarter);
acquire Desert View Hospital, a 25-bed acute care facility located in Pahrump, Nevada (acquired during the third quarter),
and;
acquire various other businesses and real property assets.
The aggregate net purchase price of the facilities, which were acquired to enhance and expand our existing operations in the
U.S. and the U.K., was allocated to assets and liabilities based on their preliminary estimated fair values as follows:
Working capital, net
Property & equipment
Goodwill
Other assets (includes $18 million of contract-based relationships
intangible assets)
Income tax assets, net of deferred tax liabilities
Debt
Noncontrolling interest
Cash paid in 2016 for acquisitions
Amount
(000s)
6,680
343,846
234,658
19,910
11,551
(152 )
(2,690 )
613,803
$
$
Goodwill of the facilities acquired during each of the last 3 years is computed, pursuant to the residual method, by deducting the
fair value of the acquired assets and liabilities from the total purchase price. The factors that contribute to the recognition of goodwill,
which may also influence the purchase price, include the following for each of the acquired facilities: (i) the historical cash flows and
income levels; (ii) the reputations in their respective markets; (iii) the nature of the respective operations, and; (iv) the future cash
flows and income growth projections. The vast majority of the goodwill resulting from these transactions is not deductible for federal
income tax purposes (see Note 6 - Income Taxes).
On December 28, 2016, we completed the acquisition of Cambian Group, PLC’s adult services’ division (the “Cambian Adult
Services”) for a total purchase price of approximately $473 million. At the time of acquisition, the Cambian Adult Services consisted
of 79 inpatient and 2 outpatient behavioral health facilities located in the U.K. The Competition and Markets Authority (“CMA”) in
the U.K. reviewed our acquisition of the Cambian Adult Services. In April, 2017, the CMA notified us that they identified potential
competition concerns in certain markets and announced its decision to refer our acquisition of Cambian Group, PLC’s Adult Services
division for a Phase 2 investigation. In October, 2017, the CMA provided the final ruling regarding the Phase 2 investigation
requiring us to divest a facility which was subsequently designated to be The Limes, an 18-bed facility. The operating results for The
Limes are reflected as discontinued operations during 2017. Since the aggregate income from discontinued operations before income
tax expense for this facility is not material to our 2017 consolidated financial statements, it is included as a reduction to our operating
expenses. For the twelve-month period ended December 31, 2017, The Limes generated approximately $3 million of net revenues,
$953,000 of income before income taxes and $770,000 of after-tax income.
Our consolidated statement of income for the year ended December 31, 2016 was not impacted by our acquisition of the
Cambian Adult Services business since the acquisition occurred in late December, 2016. Our consolidated net revenues for the year
ended December 31, 2016 included approximately $12 million of net revenues generated at the above-mentioned Desert View
Hospital representing the facility’s net revenues from the date of acquisition through December 31, 2016. The earnings generated by
the hospital since its date of acquisition was not material to our 2016 consolidated net income attributable to UHS and net income
attributable to UHS per diluted share.
Assuming the acquisition of the Cambian Adult Services business and Desert View Hospital occurred on January 1, 2016, our
2016 unaudited pro forma net revenues would have been approximately $9.98 billion and our unaudited pro forma net income
attributable to UHS would have been approximately $730 million, or $7.25 per diluted share. Assuming the above-mentioned
acquisitions occurred on January 1, 2015, our 2015 unaudited pro forma net revenues would have been approximately $9.28 billion
and our unaudited pro forma net income attributable to UHS would have been approximately $708 million and $7.03 per diluted share.
104
2016 Divestiture of Assets and Businesses:
There were no divestitures during 2016.
Year ended December 31, 2015:
2015 Acquisitions of Assets and Businesses:
During 2015 we spent $534 million to:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
acquire a 46-bed behavioral health care facility located in the U.K. (acquired during the first quarter);
acquire Alpha Hospitals Holdings Limited consisting of four behavioral health care hospitals with 305 beds located in the
U.K. (acquired during the third quarter);
acquire Foundations Recovery Network, LLC (“Foundations”) consisting of 4 inpatient facilities (322 beds) as well as 8
outpatient centers (during the fourth quarter), and;
various other businesses, a management contract and real property assets.
The aggregate net purchase price of the facilities was allocated to assets and liabilities based on their preliminary estimated fair
values as follows:
Working capital, net
Property & equipment
Goodwill
Other assets
Income tax assets, net of deferred tax liabilities
Cash paid in 2015 for acquisitions
Amount
(000s)
(7,000 )
116,000
319,000
128,000
(22,000 )
534,000
$
$
Other assets includes an indefinite lived tradename for $124 million recorded in connection with the Foundations acquisition.
Included in our consolidated net revenues for the year ended December 31, 2015 was an aggregate of approximately $30 million
representing the net revenues generated at the newly acquired facilities from their respective dates of acquisition through December
31, 2015. The aggregate effect of the earnings generated by these facilities since the dates of acquisition, less the cost on the
borrowings utilized to finance the acquisition, was not material to our 2015 net income attributable to UHS and net income
attributable to UHS per diluted share.
Assuming the acquisitions occurred on January 1, 2015, our 2015 unaudited pro forma net revenues would have been
approximately $9.17 billion and our unaudited pro forma net income attributable to UHS would have been approximately $690
million, or $6.85 per diluted share. Assuming the above-mentioned acquisitions occurred on January 1, 2014, our 2014 unaudited pro
forma net revenues would have been approximately $8.35 billion and our unaudited pro forma net income attributable to UHS would
have been approximately $545 million and $5.42 per diluted share.
2015 Divestiture of Assets and Businesses:
During 2015 we received $3 million in connection with the divestiture of a small operator of behavioral health care services.
3) FINANCIAL INSTRUMENTS
Fair Value Hedges:
During 2017, 2016 and 2015, we had no fair value hedges outstanding.
Cash Flow Hedges:
We manage our ratio of fixed and floating rate debt with the objective of achieving a mix that management believes is
appropriate. To manage this risk in a cost-effective manner, we, from time to time, enter into interest rate swap agreements in which
we agree to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts. We account
105
for our derivative and hedging activities using the Financial Accounting Standard Board’s (“FASB”) guidance which requires all
derivative instruments, including certain derivative instruments embedded in other contracts, to be carried at fair value on the balance
sheet. For derivative transactions designated as hedges, we formally document all relationships between the hedging instrument and
the related hedged item, as well as its risk-management objective and strategy for undertaking each hedge transaction.
Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value
of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in accumulated
other comprehensive income (“AOCI”) within shareholders’ equity. Amounts are reclassified from AOCI to the income statement in
the period or periods the hedged transaction affects earnings. We use interest rate derivatives in our cash flow hedge transactions.
Such derivatives are designed to be highly effective in offsetting changes in the cash flows related to the hedged liability. For
derivative instruments designated as cash flow hedges, the ineffective portion of the change in expected cash flows of the hedged item
are recognized currently in the income statement.
For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a
formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been
highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the
future.
The fair value of interest rate swap agreements approximates the amount at which they could be settled, based on estimates
obtained from the counterparties. We assess the effectiveness of our hedge instruments on a quarterly basis. We performed periodic
assessments of the cash flow hedge instruments during 2017 and 2016 and determined the hedges to be highly effective. We also
determined that any portion of the hedges deemed to be ineffective was de minimis and therefore there was no material effect on our
consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose us to credit
risk in the event of nonperformance. We do not anticipate nonperformance by our counterparties. We do not hold or issue derivative
financial instruments for trading purposes.
Seven interest rate swaps on a total notional amount of $825 million matured in May, 2015. Four of these swaps, with a total
notional amount of $600 million, became effective in December, 2011 and provided that we receive three-month LIBOR while the
average fixed rate payable was 2.38%. The remaining three swaps, with a total notional amount of $225 million, became effective in
March, 2011 and provided that we receive three-month LIBOR while the average fixed rate payable was 1.91%.
During 2015, we entered into nine forward starting interest rate swaps whereby we pay a fixed rate on a total notional amount of
$1.0 billion and receive one-month LIBOR. The average fixed rate payable on these swaps, which are scheduled to mature on April
15, 2019, is 1.31%. These interest rates swaps consist of:
(cid:1)
Four forward starting interest rate swaps, entered into during the second quarter of 2015, whereby we pay a
fixed rate on a total notional amount of $500 million and receive one-month LIBOR. Each of the four swaps became
effective on July 15, 2015 and are scheduled to mature on April 15, 2019. The average fixed rate payable on these
swaps is 1.40%;
(cid:1)
Four forward starting interest rate swaps, entered into during the third quarter of 2015, whereby we pay a
fixed rate on a total notional amount of $400 million and receive one-month LIBOR. One swap on a notional amount
of $100 million became effective on July 15, 2015, two swaps on a total notional amount of $200 million became
effective on September 15, 2015 and another swap on a notional amount of $100 million became effective on
December 15, 2015. All of these swaps are scheduled to mature on April 15, 2019. The average fixed rate payable on
these four swaps is 1.23%, and;
(cid:1)
One interest rate swap, entered into during the fourth quarter of 2015, whereby we pay a fixed rate on a
total notional amount of $100 million and receive one-month LIBOR. The swap became effective on December 15,
2015 and is scheduled to mature on April 15, 2019. The fixed rate payable on this swap is 1.21%.
We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate swaps is based on quotes
from our counterparties. We consider those inputs to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance
for disclosures in connection with derivative instruments and hedging activities. At December 31, 2017, the fair value of our interest
rate swaps was a net asset of $7 million, $4 million of which is included in net accounts receivable and $3 million of which is included
in other assets on the accompanying balance sheet. At December 31, 2016, the fair value of our interest rate swaps was de minimis on
a net basis comprised of a $4 million asset which is included in other assets offset by a $4 million liability which is included in other
current liabilities on the accompanying consolidated balance sheet.
106
Foreign Currency Forward Exchange Contracts:
We use forward exchange contracts to hedge our net investment in foreign operations against movements in exchange rates. The
effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within
accumulated other comprehensive income and remains there until either the sale or liquidation of the subsidiary. The cash flows from
these contracts are reported as operating activities in the consolidated statements of cash flows. During 2017, we recorded net cash
outflows of $64 million while during 2016 and 2015, we recorded net cash inflows of $79 million and $23 million, respectively,
associated with these forward exchange contracts.
4) LONG-TERM DEBT
A summary of long-term debt follows:
Long-term debt:
Notes payable and Mortgages payable (including obligations under capitalized leases
of $21,780 in 2017 and $23,446 in 2016) and term loans with varying maturities
through 2027; weighted average interest rates of 9.1% in 2017 and 8.9% in 2016 (see
Note 7 regarding capitalized leases)
Revolving credit and on-demand credit facility
Term Loan A, net of unamortized discount of $708 in 2017 and $1,151 in 2016
Accounts receivable securitization program
3.75% Senior Secured Notes due 2019, net of unamortized discount of $69 in 2017
and $112 in 2016
4.75% Senior Secured Notes due 2022, including unamortized premium of $4,430 in
2017 and $5,400 in 2016 and net of unamortized discount of $124 in 2017 and $150 in
2016
5.00% Senior Secured Notes due 2026
Total debt before unamortized financing costs
Less-Unamortized financing costs
Total debt after unamortized financing costs
Less-Amounts due within one year (net of unamortized financing costs)
Long-term debt
$
$
December 31,
2017
2016
(amounts in thousands)
22,794 $
438,100
1,774,607
419,500
25,246
469,700
1,862,915
398,700
299,931
299,888
704,306
400,000
4,059,238
(19,229 )
4,040,009
(545,619 )
3,494,390 $
705,250
400,000
4,161,699
(25,574 )
4,136,125
(105,895 )
4,030,230
On June 7, 2016, we entered into a Fifth Amendment (the “Fifth Amendment”) to our credit agreement dated as of November 15,
2010, as amended on March 15, 2011, September 21, 2012, May 16, 2013 and August 7, 2014, among UHS, as borrower, the several
banks and other financial institutions from time to time parties thereto, as lenders (“Credit Agreement”). The Fifth Amendment
increased the size of the term loan A facility by $200 million and those proceeds were utilized to repay outstanding borrowings under
the revolving credit facility of the Credit Agreement. The Credit Agreement, as amended, which is scheduled to mature in August,
2019, consists of: (i) an $800 million revolving credit facility ($403 million of borrowings outstanding as of December 31, 2017), and;
(ii) a term loan A facility with $1.775 billion of borrowings outstanding as of December 31, 2017.
Borrowings under the Credit Agreement bear interest at either (1) the ABR rate which is defined as the rate per annum equal to, at
our election: 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
LIBOR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter
ranging from 0.50% to 1.25% for revolving credit and term loan-A borrowings, or (2) the one, two, three or six month LIBOR rate (at
our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.50% to
2.25% for revolving credit and term loan-A borrowings. As of December 31, 2017, the applicable margins were 0.50% for ABR-based
loans and 1.50% for LIBOR-based loans under the revolving credit and term loan-A facilities.
As of December 31, 2017, we had $403 million of borrowings outstanding pursuant to the terms of our $800 million revolving
credit facility and we had $329 million of available borrowing capacity net of $33 million of outstanding letters of credit and $35
million of outstanding borrowings pursuant to a short-term, on-demand credit facility. The revolving credit facility includes a $125
million sub-limit for letters of credit. The Credit Agreement is collateralized by certain assets of the Company (which generally
excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, certain real estate
assets and assets held in joint-ventures with third-parties) and our material subsidiaries and guaranteed by our material subsidiaries.
107
Pursuant to the terms of the Credit Agreement, term loan-A installment payments of approximately $22 million per quarter
commenced during the fourth quarter of 2016 and are scheduled through June, 2019. Previously, approximately $11 million of
quarterly installment payments were made from the fourth quarter of 2014 through the third quarter of 2016.
In July, 2017, we amended our accounts receivable securitization program (“Securitization”) with a group of conduit lenders and
liquidity banks to increase the borrowing capacity to $440 million from $400 million previously. Pursuant to the terms of our
Securitization program, on which the scheduled maturity date of December, 2018 remained unchanged, substantially all of the patient-
related accounts receivable of our acute care hospitals (“Receivables”) serve as collateral for the outstanding borrowings. We have
accounted for this Securitization as borrowings. We maintain effective control over the Receivables since, pursuant to the terms of the
Securitization, the Receivables are sold from certain of our subsidiaries to special purpose entities that are wholly-owned by us. The
Receivables, however, are owned by the special purpose entities, can be used only to satisfy the debts of the wholly-owned special
purpose entities, and thus are not available to us except through our ownership interest in the special purpose entities. The wholly-
owned special purpose entities use the Receivables to collateralize the loans obtained from the group of third-party conduit lenders
and liquidity banks. The group of third-party conduit lenders and liquidity banks do not have recourse to us beyond the assets of the
wholly-owned special purpose entities that securitize the loans. At December 31, 2017, we had $420 million of outstanding
borrowings pursuant to the terms of the Securitization, which are included in current maturities of long-term debt as of that date, and
$20 million of available borrowing capacity.
As of December 31, 2017, we had combined aggregate principal of $1.4 billion from the following senior secured notes:
(cid:1)
(cid:1)
(cid:1)
$300 million aggregate principal amount of 3.75% senior secured notes due in 2019 (“2019 Notes”) which were issued on
August 7, 2014.
$700 million aggregate principal amount of 4.75% senior secured notes due in 2022 (“2022 Notes”) which were issued as
follows:
o $300 million aggregate principal amount issued on August 7, 2014 at par.
o $400 million aggregate principal amount issued on June 3, 2016 at 101.5% to yield 4.35%.
$400 million aggregate principal amount of 5.00% senior secured notes due in 2026 (“2026 Notes”) which were issued on
June 3, 2016.
Interest is payable on the 2019 Notes and the 2022 Notes on February 1 and August 1 of each year until the maturity date of
August 1, 2019 for the 2019 Notes and August 1, 2022 for the 2022 Notes. Interest on the 2026 Notes is payable on June 1 and
December 1 until the maturity date of June 1, 2026. The 2019 Notes, 2022 Notes and 2026 Notes were offered only to qualified
institutional buyers under Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the
Securities Act of 1933, as amended (the “Securities Act”). The 2019 Notes, 2022 Notes and 2026 Notes have not been registered
under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from
registration requirements.
In June, 2016, we repaid the $400 million, 7.125% senior secured notes which matured on June 30, 2016.
The average amounts outstanding during each of years 2017, 2016 and 2015 under the current and prior Credit Agreements,
demand notes and accounts receivable securitization programs was $2.6 billion, $2.3 billion and $2.1 billion, respectively, with
corresponding interest rates of 2.5%, 2.0% and 1.7%, respectively, including commitment and facility fees. The maximum amounts
outstanding at any month-end were $2.7 billion in 2017, $2.7 billion in 2016 and $2.3 billion in 2015. The effective interest rate on
our current and prior Credit Agreements, accounts receivable securitization programs, and demand notes, which includes the
respective interest expense, commitment and facility fees, designated interest rate swaps expense and amortization of deferred
financing costs and original issue discounts, was 2.8% in 2017, 2.6% in 2016 and 2.4% in 2015.
Our Credit Agreement includes a material adverse change clause that must be represented at each draw. The Credit Agreement
contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with
affiliates, dividends and stock repurchases; and requires compliance with financial covenants including maximum leverage and
minimum interest coverage ratios. We are in compliance with all required covenants as of December 31, 2017.
108
At December 31, 2017, the net carrying value and fair value of our debt were each approximately $4.0 billion and $4.1 billion,
respectively. At December 31, 2016, the carrying value and fair value of our debt were each approximately $4.1 billion. The fair
value of our debt was computed based upon quotes received from financial institutions. We consider these to be “level 2” in the fair
value hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments.
The aggregate scheduled maturities of our total debt outstanding as of December 31, 2017 are as follows:
2018
2019
2020
2021
2022
Later
Total maturities before unamortized financing costs
Less-Unamortized financing costs
Total
(000s)
$
545,885
2,391,033
1,650
1,696
706,470
412,504
4,059,238
(19,229 )
$ 4,040,009
5) COMMON STOCK
Dividends
Cash dividends of $0.40 per share ($38.2 million in the aggregate) were declared and paid during 2017, $0.40 per share ($38.9
million in the aggregate) were declared and paid during 2016, and $.40 per share ($39.5 million in the aggregate) were declared and
paid during 2015. All classes of our common stock have similar economic rights.
Stock Repurchase Programs
In July, 2014, our Board of Directors authorized a stock repurchase program whereby, from time to time as conditions allow, we
may spend up to $400 million to purchase shares of our Class B Common Stock on the open market at prevailing market prices or in
negotiated private transactions. In February, 2016, our Board of Directors authorized a $400 million increase to our stock repurchase
program, which then increased the aggregate authorization to $800 million from the previous $400 million mentioned above. In
November, 2017, our Board of Directors again authorized an additional $400 million increase in our stock purchase program, which
increased the aggregate authorization to $1.2 billion from the previous $800 million authorization approved in 2016 and 2014, as
mentioned above. There is no expiration date for our stock repurchase programs.
109
The following schedule provides information related to our stock repurchase program for each of the three years ended
December 31, 2017. During 2017, 2,960,843 shares ($322.2 million) were repurchased pursuant to the terms of our stock repurchase
program, 305,278 shares ($34.2 million in the aggregate) were repurchased in connection with the income tax withholding obligations
resulting from the exercise of stock options and the vesting of restricted stock grants and 10,791 shares were repurchased as a result of
forfeited restricted shares. During 2016, 2,512,592 shares ($289.9 million) were repurchased pursuant to the terms of our stock
repurchase program, 468,228 shares ($57.0 million in the aggregate) were repurchased in connection with the income tax withholding
obligations resulting from the exercise of stock options and the vesting of restricted stock grants and 2,500 shares were repurchased as
a result of forfeited restricted shares. During 2015, 1,326,207 shares ($166.2 million) were repurchased pursuant to the terms of our
stock repurchase program and 493,296 shares ($58.0 million in the aggregate) were repurchased in connection with the income tax
withholding obligations resulting from the exercise of stock options and the vesting of restricted stock grants.
Additional
dollars
authorized
for
repurchase
(in
thousands)
Total
number of
shares
purchased
(a.)
Total
number
of shares
cancelled
Average
price
paid per
share for
forfeited
restricted
shares
Total
number of
shares
purchased
as part of
publicly
announced
programs
Average
price paid
per share
for shares
purchased
as part of
publicly
announced
program
Aggregate
purchase
price paid
for shares
purchased
as part of
publicly
announced
program
Maximum
number of
dollars
that may
yet be
purchased
under the
program
(in
thousands)
Aggregate
purchase
price paid
(in
thousands)
Balance as of
January 1, 2015
2015
2016
2017
Total for three year
period ended
December 31, 2017 $ 800,000 8,068,944 13,291 $ 0.01 6,799,642 $ 114.48 $ 927,563 $ 778,390
$ 342,050
$
N/A 1,326,207 $ 125.34 $ 224,260 $ 166,222 $ 175,828
$ 400,000 2,983,320 2,500 $ 0.01 2,512,592 $ 115.39 $ 346,890 $ 289,937 $ 285,891
$ 400,000 3,266,121 10,791 $ 0.01 2,960,843 $ 108.83 $ 356,413 $ 322,231 $ 363,660
— 1,819,503 —
(a.)
Includes 10,791 and 2,500 of restricted shares that were forfeited by former employees pursuant to the terms of our restricted stock purchase plan during
2017 and 2016, respectively.
Stock-based Compensation Plans
At December 31, 2017, we have a number of stock-based employee compensation plans. Pursuant to the FASB’s guidance, we
expense the grant-date fair value of stock options and other equity-based compensation pursuant to the straight-line method over the
stated vesting period of the award using the Black-Scholes option-pricing model.
Pre-tax compensation costs of $54.3 million during 2017, $45.8 million during 2016 and $38.0 million during 2015 were
recognized related to outstanding stock options. In addition, pre-tax compensation costs of $2.5 million during 2017, $2.3 million
during 2016 and $2.0 million during 2015 were recognized related to amortization of restricted stock and discounts provided in
connection with shares purchased pursuant to our 2005 Employee Stock Purchase Plan. As of December 31, 2017, there was
approximately $98.2 million of unrecognized compensation cost related to unvested stock options and restricted stock which is
expected to be recognized over the remaining average vesting period of 2.6 years.
The expense associated with stock-based compensation arrangements is a non-cash charge. In the Consolidated Statements of
Cash Flows, stock-based compensation expense is an adjustment to reconcile net income to cash provided by operating activities and
aggregated to $56.7 million in 2017, $48.1 million in 2016 and $40.0 million in 2015.
Effective January 1, 2017, we adopted ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting”, which amends the accounting for employee share-based payment transactions to
require recognition of the tax effects resulting from the settlement of stock-based awards as income tax expense or benefit in the
income statement in the reporting period in which they occur. For the year ended December 31, 2017, our provision for income taxes
and our net income attributable to UHS were each favorably impacted by $22.1 million resulting from our adoption of ASU 2016-09.
Additionally, effective with our modified retrospective adoption of ASU 2016-09 on January 1, 2017, excess income tax benefits
related to stock based compensation, amounting to $45.2 million during 2016 and $47.4 million during 2015, are reflected as cash
inflows from operating activities in our Consolidated Statement of Cash Flows. Prior to the adoption of ASU 2016-09, excess income
tax benefits related to stock based compensation were reflected as cash inflows from financings activities in our Consolidated
Statement of Cash Flows.
110
In 2005, we adopted the 2005 Stock Incentive Plan which was amended in 2008, 2010, 2015 and 2017 (the “Stock Incentive
Plan”). An aggregate of 35.6 million shares of Class B Common Stock has been reserved under the Stock Incentive Plan. During
2017, 2016 and 2015, stock options, net of cancellations, of approximately 2.9 million, 2.7 million and 2.7 million, respectively, were
granted. The per option weighted-average grant-date fair value of options granted during 2017, 2016 and 2015 was $27.05, $23.80 and
$21.37, respectively. Stock options to purchase Class B Common Stock have been granted to our officers, key employees and
members of our Board of Directors. All stock options were granted with an exercise price equal to the fair market value on the date of
the grant. Options are exercisable ratably over a four-year period beginning one year after the date of the grant. All outstanding
options expire five years after the date of the grant. As of December 31, 2017, approximately 7.8 million shares of Class B Common
Stock remain available for issuance pursuant to the Stock Incentive Plan.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The
following weighted average assumptions were derived from averaging the number of options granted during the most recent five-year
period. The weighted-average assumptions reflected below were based upon twenty-seven option grants for the five-year period
ending December 31, 2017, twenty-seven option grants for the five-year period ending December 31, 2016 and twenty-five option
grants for the five-year period ending December 31, 2015.
Year Ended December 31,
Volatility
Interest rate
Expected life (years)
Forfeiture rate
Dividend yield
2017
2016
2015
28 %
1 %
3.4
10 %
0.4 %
31 %
1 %
3.4
10 %
0.4 %
33 %
1 %
3.4
10 %
0.4 %
The risk-free rate is based on the U.S. Treasury zero coupon four year yield in effect at the time of grant. The expected life of
the stock options granted was estimated using the historical behavior of employees. Expected volatility was based on historical
volatility for a period equal to the stock option’s expected life. Expected dividend yield is based on our dividend yield at the time of
grant. The forfeiture rate is based upon the actual historical forfeitures utilizing the 5-year term of the option.
The table below summarizes our stock option activity during each of the last three years:
Outstanding Options
Balance, January 1, 2015
Granted
Exercised
Cancelled
Balance, January 1, 2016
Granted
Exercised
Cancelled
Balance, January 1, 2017
Granted
Exercised
Cancelled
Balance, December 31, 2017
Outstanding options vested and exercisable as of
December 31, 2017
Number
of Shares
7,897,451 $
3,039,350 $
(2,256,454 ) $
(280,164 ) $
8,400,183 $
2,945,550 $
(2,162,850 ) $
(412,750 ) $
8,770,133 $
3,061,725 $
(1,734,409 ) $
(457,500 ) $
9,639,949 $
Average
Option
Price
Range
(High-Low)
57.29 $102.21-$36.95
117.70 $142.43-$108.29
48.97 $102.21-$36.95
83.63 $134.70-$36.95
80.50 $142.43-$36.95
118.72 $138.00-$107.39
53.02 $117.29-$36.95
103.01 $130.32-$36.95
99.06 $142.43-$36.95
124.38 $124.56-$110.15
64.41 $118.62-$36.95
118.65 $142.43-$53.38
112.40 $138.00-$53.38
2,869,346 $
100.51 $138.00-$53.38
111
The following table provides information about unvested options for the year December 31, 2017:
Unvested options as of January 1, 2017
Granted
Vested
Cancelled
Unvested options as of December 31, 2017
Weighted
Average
Grant Date
Fair Value
Shares
6,695,266 $
3,061,725 $
(2,555,013 ) $
(431,375 ) $
6,770,603 $
20.94
27.05
19.21
24.02
24.16
The following table provides information regarding all options outstanding at December 31, 2017:
Number of options outstanding
Weighted average exercise price
Aggregate intrinsic value as of December 31, 2017
Weighted average remaining contractual life
Options
Outstanding
Options
Exercisable
112.40 $
9,639,949 2,869,346
$
100.51
$ 65,133,533 $ 44,588,121
2.0
2.9
The total in-the-money value of all stock options exercised during the years ended December 31, 2017, 2016 and 2015 were
$85.5 million, $149.4 million and $154.1 million, respectively.
The weighted average remaining contractual life for options outstanding and weighted average exercise price per share for
exercisable options at December 31, 2017 were as follows:
Exercise Price
$53.38 – $79.79
$96.98 – $117.29
$118.60 – $124.44
$124.56 – $138.00
Total
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual Life
(in Years)
Options
Outstanding
Shares
1,752,085 $
2,384,488
2,583,401
2,919,975
9,639,949 $
76.37
117.06
118.65
124.69
112.40
Exercisable
Options
Shares
1.1 1,173,671 $
2.2 1,070,813
3.2 605,862
19,000
4.2
2.9 2,869,346 $
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Exercise Price
Per Share
Expected to
Vest
Options (a)
Shares
75.48 565,589 $
117.12 1,152,681
118.65 1,549,346
131.62 1,763,506
100.51 5,031,122 $
78.17
117.05
118.65
124.67
118.17
(a) Assumes a weighted average forfeiture rate of 9.64%.
In addition to the Stock Incentive Plan, we have the following stock incentive and purchase plans: (i) the 2010 Employees’
Restricted Stock Purchase Plan, as amended in 2015, (“2010 Plan”) which allows eligible participants to purchase shares of Class B
Common Stock at par value, subject to certain restrictions, and; (ii) a 2005 Employee Stock Purchase Plan which allows eligible
employees to purchase shares of Class B Common Stock at a ten percent discount. There were 23,557, 14,146 and 17,789 shares of
restricted stock granted pursuant to the 2010 Plan during 2017, 2016 and 2015, respectively, with various ratable vesting periods
ranging up to five years from the date of grant. There were 86,693, 75,792 and 68,213 and shares issued pursuant to the Employee
Stock Purchase Plan during 2017, 2016 and 2015, respectively.
We have reserved 2.8 million shares of Class B Common Stock for issuance under these various plans (excluding terminated
plans and including a reserve reduction during 2015) and have issued approximately 1.5 million shares, net of cancellations, pursuant
to the terms of these plans (excluding terminated plans) as of December 31, 2017. As of December 31, 2017, approximately 1.3
million shares of Class B Common Stock remain available for issuance pursuant to these various plans.
At December 31, 2017, 26,069,031 shares of Class B Common Stock were reserved for issuance upon conversion of shares of
Class A, C and D Common Stock outstanding, for issuance upon exercise of options to purchase Class B Common Stock and for
issuance of stock under other incentive plans. Class A, C and D Common Stock are convertible on a share for share basis into Class B
Common Stock.
112
6) INCOME TAXES
Components of income tax expense/(benefit) are as follows (amounts in thousands):
Current
Federal
Foreign
State
Deferred
Federal
Foreign
State
Total
Year Ended December 31,
2016
2015
2017
$
352,433 $
10,625
37,421
400,479
368,957 $
8,513
42,166
419,636
363,734
3,151
38,987
405,872
(36,998 )
24
192
(36,782 )
363,697 $
(12,092 )
2,463
(820 )
(10,449 )
409,187 $
(15,912 )
5,545
(302 )
(10,669 )
395,203
$
On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to
as the Tax Cuts and Jobs Act of 2017 (the “TCJA-17”). The TCJA-17 makes broad and complex changes to the U.S. tax code,
including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to
pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income
taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of
controlled foreign corporations through the implementation of a territorial tax system; and (5) creating a new limitation on deductible
interest expense. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in
situations when a registrant has not obtained, prepared, or analyzed (including computations) all of the information needed in order to
complete the accounting for certain income tax effects of the TCJA-17. To the extent that a company’s accounting for certain income
tax effects of the TCJA-17 is incomplete, a reasonable estimate should be recorded as a provisional amount in the financial statements.
We were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete. We recorded
the following provisional adjustments:
Reduction of U.S. federal corporate tax rate: The TCJA-17 reduces the corporate tax rate to 21 percent, effective January 1,
2018. Deferred income taxes are based on the estimated future tax effects of differences between the financial statement carrying
amounts and the tax bases of assets and liabilities under the provisions of the enacted tax laws. For certain of our deferred tax assets
and deferred tax liabilities, we have recorded a provisional decrease of $97 million and $127 million, respectively, with a
corresponding net adjustment to deferred tax benefit of $30 million for the year ended December 31, 2017. While we are able to make
a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the TCJA-17,
including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments
made to federal temporary differences.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously
untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the
Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as
the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax and
recorded a provisional Transition Tax obligation of $11.3 million. However, we are continuing to gather additional information to
more precisely compute the amount of the Transition Tax.
Valuation allowances: We must assess whether valuation allowance analyses are affected by various aspects of the TCJA-17
(e.g., deemed repatriation of deferred foreign income). Since, as discussed herein, we have recorded provisional amounts related to
certain portions of the TCJA-17, any corresponding determination of the need for a change in valuation allowance is also provisional.
The accounting for the above provisional amounts is expected to be complete when our 2017 U.S. Corporate Income Tax return
is filed in 2018.
The TCJA-17 contains two new anti-base erosion tax provisions, (1) the global intangible low-taxed income (“GILTI”)
provisions and (2) the base erosion and anti-abuse tax (“BEAT”) provisions:
113
GILTI: The GILTI provisions require the inclusion of the earnings of certain foreign subsidiaries in excess of an acceptable rate
of return on certain assets of the respective subsidiaries in our U.S. tax return for tax years beginning after December 31, 2017. Due to
complexities around the calculation we have not recorded any provisional deferred tax effects related to the GILTI tax and will not
make an accounting policy election at this time with respect to GILTI for our consolidated financial statements for the year ended
December 31, 2017.
BEAT: The BEAT provisions limit the deduction for U.S. tax base erosion related payments made by U.S. operations to related
foreign affiliates. We do not expect any BEAT tax for our U.S. operations; therefore, we have not recorded any tax expense related to
BEAT tax in our consolidated financial statements.
The foreign provision for income taxes is based on foreign pre-tax earnings of $70 million in 2017, $58 million in 2016 and $41
million in 2015. Previously, in 2016 and 2015, we had provided no deferred taxes related to unremitted earnings from foreign
subsidiaries. As a result of the mandatory repatriation tax provisions in the TCJA-17, we recorded an accrued tax provision of $11.3
million as of December 31, 2017. Going forward, we anticipate repatriating only previously taxed foreign income subject to the
mandatory repatriation tax and any future earnings that would qualify for a full dividend received deduction permitted under the
TCJA-17 for distributions after December 31, 2017. At this time, there are no material tax effects related to future cash repatriation of
our previously taxed foreign income. As such, we have not recognized a deferred tax liability related to existing undistributed
earnings.
Our provision for income taxes for the year ended December 31, 2017 included tax benefits of $22 million related to the
adoption of ASU 2016-09, which changes how companies account for certain aspects of share-based payments to employees. Under
ASU 2016-09, we no longer record excess tax benefits (when the deductible amount related to the settlement of employee equity
awards for tax purposes exceeds the cumulative compensation cost recognized for financial reporting purposes) in equity. Instead, we
recognize these tax benefits (and deficiencies, if applicable) as a component of our tax provision. This reporting change is applied
prospectively and prior period amounts are not restated (the excess tax benefit for the years ending December 31, 2016 and 2015,
related to the settlement of employee equity awards, were $45 million and $47 million, respectively, and were recorded in equity).
ASU 2016-09 requires companies to present excess tax benefits as an operating activity on the Consolidated Statement of Cash Flows
rather than as a financing activity, as previously required. We have elected to apply the change to the Consolidated Statement of Cash
Flows on a modified retrospective basis resulting in a reclassification of the 2016 and 2015 excess income tax benefits related to
stock-based compensation from financing activities to operating activities.
A reconciliation between the federal statutory rate and the effective tax rate is as follows:
Federal statutory rate
State taxes, net of federal income tax benefit
Tax effects of foreign operations
Tax benefit from settlement of employee equity awards
Enactment of the TCJA-17
Other items
Impact of income attributable to noncontrolling interests
Effective tax rate
Year Ended December 31,
2016
2015
2017
35.0 %
2.2 %
-1.2 %
-1.9 %
-1.7 %
0.2 %
-0.6 %
32.0 %
35.0 %
2.4 %
-0.8 %
0.0 %
0.0 %
0.2 %
-1.4 %
35.4 %
35.0 %
2.3 %
-0.9 %
0.0 %
0.0 %
0.3 %
-2.2 %
34.5 %
Our effective tax rates were 32.0%, 35.4% and 34.5% for the years ended December 31, 2017, 2016 and 2015, respectively. The
decrease in our effective tax rate for the year ended December 31, 2017, as compared to 2016 and 2015, is due to the tax benefit
resulting from our January 1, 2017 adoption of ASU 2016-09, the net favorable impact of the enactment of the TCJA-17 as discussed
above, and the tax effects of our foreign operations in connection with our acquisition of Cambian Group, PLC's adult services
division (acquired in late December, 2016). The increase in our effective tax rate for the year ended December 31, 2016 is primarily
impacted by the decrease in net income attributable to noncontrolling interests due to our purchase of the minority ownership interests
held by a third-party in our six acute care hospitals located in Las Vegas, Nevada, which is not tax effected in the statement of income.
Including the expense related to income attributable to noncontrolling interests, the effective tax rate for the years ended December 31,
2017, 2016 and 2015 were 32.6%, 36.8% and 36.7%, respectively.
Included in “Other current assets” on our Consolidated Balance Sheet are prepaid federal and state income taxes amounting to
approximately $5 million and $10 million as of December 31, 2017 and 2016, respectively.
114
As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018 under the TCJA-
17, we revalued our ending deferred tax assets and deferred tax liabilities at December 31, 2017 and we have recorded a provisional
decrease of $97 million and $127 million, respectively, with a corresponding net adjustment to deferred tax benefit of $30 million in
the consolidated statement of income for the year ended December 31, 2017. The components of deferred taxes are as follows
(amounts in thousands):
Self-insurance reserves
Compensation accruals
Doubtful accounts and other reserves
Other currently non-deductible accrued liabilities
Depreciable and amortizable assets
State and foreign net operating loss carryforwards
and other state and foreign deferred tax assets
Net pension liabilities – OCI only
Other combined items – OCI only
Other liabilities
Valuation Allowance
Total deferred income taxes
Year Ended December 31,
2017
2016
Assets
Liabilities
Assets
Liabilities
$
64,181 $
63,021
20,809
19,759
$
85,940 $
83,328
38,017
24,058
226,389
332,326
76,439
2,825
550
1,824
$ 247,034 $ 228,763
0
$ 176,807 $ 228,763
(70,227 )
66,639
5,926
815
2,949
$ 304,723 $ 335,275
0
$ 248,390 $ 335,275
(56,333 )
At December 31, 2017, state net operating loss carryforwards (expiring in years 2018 through 2037), and credit carryforwards
available to offset future taxable income approximated $1.09 billion representing approximately $70 million in deferred state tax
benefit (net of the federal benefit). At December 31, 2017, there were foreign net operating losses and credit carryforwards of
approximately $26 million, most of which are carried forward indefinitely, representing approximately $6 million in deferred foreign
tax benefit.
A valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be
realized. Based on available evidence, it is more likely than not that certain of our state tax benefits will not be realized. Therefore,
valuation allowances of approximately $66 million and $52 million have been reflected as of December 31, 2017 and 2016,
respectively. During 2017, the valuation allowance on these state tax benefits increased by $2 million due to additional net operating
losses incurred and by $12 million due to the reduction of the federal benefit due to the change in U.S. corporate income tax rates. In
addition, valuation allowances of approximately $4 million have been reflected as of December 31, 2017 and 2016 related to foreign
net operating losses and credit carryforwards.
During 2017 and 2016, the estimated liabilities for uncertain tax positions (including accrued interest and penalties) were
increased less than $1 million due to tax positions taken in the current and prior years. The balance at each of December 31, 2017 and
2016, if subsequently recognized, that would favorably affect the effective tax rate and the provision for income taxes is
approximately $1 million as of each date.
115
We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of
December 31, 2017 and 2016, we have accrued interest and penalties of less than $1 million as of each date. The U.S. federal statute
of limitations remains open for the 2014 and subsequent years. Foreign and U.S. state and local jurisdictions have statutes of
limitations generally ranging for 3 to 4 years. The statute of limitations on certain jurisdictions could expire within the next twelve
months. It is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months, however, it is
anticipated that any such change, if it were to occur, would not have a material impact on our results of operations.
The tabular reconciliation of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows
(amounts in thousands).
2017
As of December 31,
2016
2015
Balance at January 1,
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at December 31,
$
$
1,259 $
500
47
0
(710 )
1,096 $
1,982 $
50
74
(94 )
(753 )
1,259 $
2,402
50
111
(524 )
(57 )
1,982
7) LEASE COMMITMENTS
Three of our hospital facilities are held under operating leases with Universal Health Realty Income Trust with terms expiring in
2021 (see Note 9 for additional disclosure). We also lease the real property of certain facilities (see Item 2. Properties for additional
disclosure).
A summary of property under capital lease follows (amounts in thousands):
Land, buildings and equipment
Less: accumulated amortization
As of December 31,
2017
2016
$
$
44,740 $
(29,628 )
15,112 $
45,768
(28,864 )
16,904
Future minimum rental payments under lease commitments with a term of more than one year as of December 31, 2017, are as
follows (amounts in thousands):
Year
2018
2019
2020
2021
2022
Later years
Total minimum rental
Less: Amount representing interest
Present value of minimum rental commitments
Less: Current portion of capital lease obligations
Long-term portion of capital lease obligations
Capital
Leases
Operating
Leases
73,310
63,156
50,948
42,167
24,871
147,965
402,417
$
$
$
3,899 $
4,003
3,345
3,227
3,508
15,694
33,676 $
(11,891 )
21,785
(1,837 )
19,948
We assumed no capital lease obligations in 2017 and assumed capital lease obligations of approximately $152,000 in 2016 and
$7 million in 2015, in connection with the leases on certain real estate assets. In the ordinary course of business, our facilities
routinely lease equipment pursuant to new lease arrangements that will likely result in future lease and rental expense in excess of
amounts indicated above.
116
8) COMMITMENTS AND CONTINGENCIES
Professional and General Liability, Workers’ Compensation Liability
Effective January, 2017, the vast majority of our subsidiaries are self-insured for professional and general liability exposure up
to $5 million and $3 million per occurrence, respectively, subject to certain aggregate limitations. Prior to January, 2017, the vast
majority of our subsidiaries were self-insured for professional and general liability exposure up to $10 million and $3 million per
occurrence, respectively. These subsidiaries are provided with several excess policies through commercial insurance carriers which
provide for coverage in excess of the applicable per occurrence self-insured retention or underlying policy limits up to $250 million
per occurrence and in the aggregate for claims incurred after 2013 and up to $200 million per occurrence and in the aggregate for
claims incurred from 2011 through 2013. We remain liable for 10%, up to an annual aggregate limitation of $5 million, of the claims
paid pursuant to the commercially insured excess coverage. In addition, from time to time based upon marketplace conditions, we may
elect to purchase additional commercial coverage for certain of our facilities or businesses. Our behavioral health care facilities
located in the U.K. have policies through a commercial insurance carrier located in the U.K. that provides for £10 million of
professional liability coverage and £25 million of general liability coverage. The coverage for the facilities located in the U.K.
acquired in late December, 2016 in connection with our acquisition of the Cambian Group, PLC’s adult services division is similar to
the above-mentioned U.K. insurance program.
As of December 31, 2017, the total accrual for our professional and general liability claims was $229 million, of which $54
million was included in current liabilities. As of December 31, 2016, the total accrual for our professional and general liability claims
was $207 million, of which $48 million was included in current liabilities. During 2017, based upon a reserve analysis of our
estimated future claims payments, we recorded an increase to our professional and general liability self-insurance reserves (relating to
prior years) of $15 million. Our consolidated results of operations during 2016 and 2015 were not materially impacted by adjustments
to our prior year reserves for professional and general liability claims.
As of December 31, 2017, the total accrual for our workers’ compensation liability claims was $70 million, of which $35
million is included in current liabilities. As of December 31, 2016, the total accrual for our workers’ compensation liability claims
was $67 million, of which $33 million is included in current liabilities. Our consolidated results of operations during 2017, 2016 and
2015 were not materially impacted by adjustments to our prior year reserves for workers’ compensation claims.
Below is a schedule showing the changes in our general and professional liability and workers’ compensation reserves during
the three years ended December 31, 2017 (amount in thousands):
Balance at January 1, 2015
Plus: Accrued insurance expense, net of commercial
premiums paid
Less: Payments made in settlement of self-insured claims
Balance at January 1, 2016
Liabilities assumed in acquisition
Plus: Accrued insurance expense, net of commercial
premiums paid
Less: Payments made in settlement of self-insured claims
Balance at January 1, 2017
Plus: Accrued insurance expense, net of commercial
premiums paid
Less: Payments made in settlement of self-insured claims
Balance at December 31, 2017
General and
Professional Workers’
Liability
$
192,904 $
Compensation
66,814 $
Total
259,718
58,460
(47,391 )
203,973
0
32,435
(31,746 )
67,503
661
90,895
(79,137 )
271,476
661
54,671
(51,185 )
207,459
29,967
(30,775 )
67,356
84,638
(81,960 )
274,815
65,049
(43,817 )
228,691 $
37,546
(35,371 )
69,531 $
102,595
(79,188 )
298,222
$
Our estimated liability for self-insured professional and general liability claims is based on a number of factors including,
among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and
historical settlement amounts, estimates of incurred but not reported claims based on historical experience, and estimates of amounts
recoverable under our commercial insurance policies. While we continuously monitor these factors, our ultimate liability for
professional and general liability claims could change materially from our current estimates due to inherent uncertainties involved in
making this estimate. Given our significant self-insured exposure for professional and general liability claims, there can be no
assurance that a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on
our future results of operations. Although we are unable to predict whether or not our future financial statements will include
adjustments to our prior year reserves for self-insured general and professional and workers’ compensation claims, given the relatively
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unpredictable nature of the these potential liabilities and the factors impacting these reserves, as discussed above, it is reasonably
likely that our future financial results may include material adjustments to prior period reserves.
Property Insurance:
We have commercial property insurance policies for our properties covering catastrophic losses, including windstorm damage,
up to a $1 billion policy limit, subject to a deductible ranging from $50,000 to $250,000 per occurrence. Losses resulting from named
windstorms are subject to deductibles between 3% and 5% of the total insurable value of the property. In addition, we have
commercial property insurance policies covering catastrophic losses resulting from earthquake and flood damage, each subject to
aggregated loss limits (as opposed to per occurrence losses). Commercially insured earthquake coverage for our facilities is subject to
various deductibles and limitations including: (i) $500 million limitation for our facilities located in Nevada; (ii) $130 million
limitation for our facilities located in California; (iii) $100 million limitation for our facilities located in fault zones within the United
States; (iv) $40 million limitation for our facility located in Puerto Rico, and; (v) $250 million limitation for many of our facilities
located in other states. Deductibles for flood losses vary in amount, up to a maximum of $500,000, based upon location of the facility.
Since certain of our facilities have been designated by our insurer as flood prone, we have elected to purchase policies from The
National Flood Insurance Program. Property insurance for our behavioral health facilities located in the U.K. are provided on an all
risk basis up to a £1.29 billion policy limit, with coverage caps per location, that includes coverage for real and personal property as
well as business interruption losses.
Other Contractual Commitments:
In addition to our long-term debt obligations as discussed in Note 4 - Long-Term Debt and our operating lease obligations as
discussed in Note 7 - Lease Commitments, we have various other contractual commitments outstanding as of December 31, 2017 as
follows: (i) other combined estimated future purchase obligations of $315 million related to a long-term contract with third-parties
consisting primarily of certain revenue cycle data processing services for our acute care facilities ($73 million), expected future costs
to be paid to a third-party vendor in connection with the ongoing operation of an electronic health records application and purchase
implementation of a revenue cycle and other applications for our acute care facilities ($240 million) and estimated minimum liabilities
for physician commitments expected to be paid in the future ($2 million); (ii) estimated construction commitment of $30 million
representing our share of the construction costs of two new behavioral health care facilities located in Pennsylvania and Washington
that we are required to build pursuant to joint-venture agreements with third-parties; (iii) combined estimated future payments of $206
million related to our non-contributory, defined benefit pension plan ($188 million consisting of estimated payments through 2089)
and other retirement plan liabilities ($18 million), and; (iv) accrued and unpaid estimated claims expense incurred in connection with
our commercial health insurers and self-insured employee benefit plans ($86 million).
Legal Proceedings
We operate in a highly regulated and litigious industry which subjects us to various claims and lawsuits in the ordinary course
of business as well as regulatory proceedings and government investigations. These claims or suits include claims for damages for
personal injuries, medical malpractice, commercial/contractual disputes, wrongful restriction of, or interference with, physicians’ staff
privileges, and employment related claims. In addition, health care companies are subject to investigations and/or actions by various
state and federal governmental agencies or those bringing claims on their behalf. Government action has increased with respect to
investigations and/or allegations against healthcare providers concerning possible violations of fraud and abuse and false claims
statutes as well as compliance with clinical and operational regulations. Currently, and from time to time, we and some of our facilities
are subjected to inquiries in the form of subpoenas, Civil Investigative Demands, audits and other document requests from various
federal and state agencies. These inquiries can lead to notices and/or actions including repayment obligations from state and federal
government agencies associated with potential non-compliance with laws and regulations. Further, the federal False Claim Act allows
private individuals to bring lawsuits (qui tam actions) against healthcare providers that submit claims for payments to the government.
Various states have also adopted similar statutes. When such a claim is filed, the government will investigate the matter and decide if
they are going to intervene in the pending case. These qui tam lawsuits are placed under seal by the court to comply with the False
Claims Act’s requirements. If the government chooses not to intervene, the private individual(s) can proceed independently on behalf
of the government. Health care providers that are found to violate the False Claims Act may be subject to substantial monetary
fines/penalties as well as face potential exclusion from participating in government health care programs or be required to comply
with Corporate Integrity Agreements as a condition of a settlement of a False Claim Act matter. In September 2014, the Criminal
Division of the Department of Justice (“DOJ”) announced that all qui tam cases will be shared with their Division to determine if a
parallel criminal investigation should be opened. The DOJ has also announced an intention to pursue civil and criminal actions against
individuals within a company as well as the corporate entity or entities. In addition, health care facilities are subject to monitoring by
state and federal surveyors to ensure compliance with program Conditions of Participation. In the event a facility is found to be out of
compliance with a Condition of Participation and unable to remedy the alleged deficiency(s), the facility faces termination from the
Medicare and Medicaid programs or compliance with a System Improvement Agreement to remedy deficiencies and ensure
compliance.
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The laws and regulations governing the healthcare industry are complex covering, among other things, government healthcare
participation requirements, licensure, certification and accreditation, privacy of patient information, reimbursement for patient services
as well as fraud and abuse compliance. These laws and regulations are constantly evolving and expanding. Further, the Affordable
Care Act has added additional obligations on healthcare providers to report and refund overpayments by government healthcare
programs and authorizes the suspension of Medicare and Medicaid payments “pending an investigation of a credible allegation of
fraud.” We monitor our business and have developed an ethics and compliance program with respect to these complex laws, rules and
regulations. Although we believe our policies, procedures and practices comply with government regulations, there is no assurance
that we will not be faced with the sanctions referenced above which include fines, penalties and/or substantial damages, repayment
obligations, payment suspensions, licensure revocation, and expulsion from government healthcare programs. Even if we were to
ultimately prevail in any action brought against us or our facilities or in responding to any inquiry, such action or inquiry could have a
material adverse effect on us.
Certain legal matters are described below:
Government Investigations:
UHS Behavioral Health
In February, 2013, the Office of Inspector General for the United States Department of Health and Human Services (“OIG”)
served a subpoena requesting various documents from January, 2008 to the date of the subpoena directed at Universal Health Services,
Inc. (“UHS”) concerning it and UHS of Delaware, Inc., and certain UHS owned behavioral health facilities including: Keys of
Carolina, Old Vineyard Behavioral Health, The Meadows Psychiatric Center, Streamwood Behavioral Health, Hartgrove Hospital,
Rock River Academy and Residential Treatment Center, Roxbury Treatment Center, Harbor Point Behavioral Health Center, f/k/a The
Pines Residential Treatment Center, including the Crawford, Brighton and Kempsville campuses, Wekiva Springs Center and River
Point Behavioral Health. Prior to receipt of this subpoena, some of these facilities had received independent subpoenas from state or
federal agencies. Subsequent to the February 2013 subpoenas, some of the facilities above have received additional, specific
subpoenas or other document and information requests. In addition to the OIG, the DOJ and various U.S. Attorneys’ and state
Attorneys’ General Offices are also involved in this matter. Since February 2013, additional facilities have also received subpoenas
and/or document and information requests or we have been notified are included in the omnibus investigation. Those facilities
include: National Deaf Academy, Arbour-HRI Hospital, Behavioral Hospital of Bellaire, St. Simons By the Sea, Turning Point Care
Center, Salt Lake Behavioral Health, Central Florida Behavioral Hospital, University Behavioral Center, Arbour Hospital, Arbour-
Fuller Hospital, Pembroke Hospital, Westwood Lodge, Coastal Harbor Health System, Shadow Mountain Behavioral Health, Cedar
Hills Hospital, Mayhill Hospital, Southern Crescent Behavioral Health (Anchor Hospital and Crescent Pines campuses), Valley
Hospital (AZ), Peachford Behavioral Health System of Atlanta, University Behavioral Health of Denton, and El Paso Behavioral
Health System.
In October, 2013, we were advised that the DOJ’s Criminal Frauds Section had opened an investigation of River Point
Behavioral Health and Wekiva Springs Center. Since that time, we have been notified that the Criminal Frauds section has opened
investigations of National Deaf Academy, Hartgrove Hospital and UHS as a corporate entity. In April 2017, the DOJ’s Criminal
Division issued a subpoena requesting documentation from Shadow Mountain Behavioral Health. In August 2017, Kempsville Center
of Behavioral Health (a part of Harbor Point Behavioral Health previously identified above) received a subpoena requesting
documentation.
In April, 2014, the Centers for Medicare and Medicaid Services (“CMS”) instituted a Medicare payment suspension at River
Point Behavioral Health in accordance with federal regulations regarding suspension of payments during certain investigations. The
Florida Agency for Health Care Administration (“AHCA”) subsequently issued a Medicaid payment suspension for the facility. River
Point Behavioral Health submitted a rebuttal statement disputing the basis of the suspension and requesting revocation of the
suspension. Notwithstanding, CMS continued the payment suspension. River Point Behavioral Health provided additional information
to CMS in an effort to obtain relief from the payment suspension but the Medicare suspension remains in effect. In June 2017, AHCA
advised that while they were maintaining the suspension for dual eligible and cross-over Medicare beneficiaries, the Medicaid
payment suspension was lifted effective June 27, 2017. We cannot predict if and/or when the facility’s remaining suspended payments
will resume in total. From inception through December 31, 2017, the aggregate funds withheld from us in connection with the River
Point Behavioral Health payment suspension amounted to approximately $10 million. Although the operating results of River Point
Behavioral Health did not have a material impact on our consolidated results of operations during 2017, 2016 or 2015, the payment
suspension has had a material adverse effect on the facility’s results of operations and financial condition.
The DOJ has advised us that the civil aspect of the coordinated investigation referenced above is a False Claims Act
investigation focused on billings submitted to government payers in relation to services provided at those facilities. Based upon our
initial discussions with the DOJ, our financial statements as of December 31, 2017 include a $22 million reserve established in
connection with the civil aspects of these matters. However, changes in the reserve may be required in future periods as discussions
continue and additional information becomes available. We cannot predict the ultimate resolution of these matters and therefore can
provide no assurance that final amounts paid in settlement or otherwise, if any, or associated costs, will not differ materially from our
established reserve.
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Litigation:
U.S. ex rel Escobar v. Universal Health Services, Inc. et.al.
This is a False Claims Act case filed against Universal Health Services, Inc., UHS of Delaware, Inc. and HRI Clinics, Inc.
d/b/a Arbour Counseling Services in U.S. District Court for the District of Massachusetts. This qui tam action primarily alleges that
Arbour Counseling Services failed to appropriately supervise certain clinical providers in contravention of regulatory requirements
and the submission of claims to Medicaid were subsequently improper. Relators make other claims of improper billing to Medicaid
associated with alleged failures of Arbour Counseling to comply with state regulations. The U.S. Attorney’s Office and the
Massachusetts Attorney General’s Office initially declined to intervene. UHS filed a motion to dismiss and the trial court originally
granted the motion dismissing the case. The First Circuit Court of Appeals (“First Circuit”) reversed the trial court’s dismissal of the
case. The United States Supreme Court subsequently vacated the First Circuit’s opinion and remanded the case for further
consideration under the new legal standards established by the Supreme Court for False Claims Act cases. During the 4th quarter of
2016, the First Circuit issued a revised opinion upholding their reversal of the trial court’s dismissal. The case was then remanded to
the trial court for further proceedings. In January 2017, the U.S. Attorney’s Office and Massachusetts Attorney General’s Office
advised of the potential for intervention in the case. The Massachusetts Attorney General’s Office subsequently filed its motion to
intervene which was granted and, in April 2017, filed their Complaint in Intervention. We are defending this case vigorously. At this
time, we are uncertain as to potential liability or financial exposure, if any, which may be associated with this matter.
Shareholder Class Action
In December 2016 a purported shareholder class action lawsuit was filed in U.S. District Court for the Central District of
California against UHS, and certain UHS officers alleging violations of the federal securities laws. Plaintiff alleges that defendants
violated federal securities laws relating to the disclosures made in public filings associated with practices at our behavioral health
facilities. The case was originally filed as Heed v. Universal Health Services, Inc. et. al. (Case No. 2:16-CV-09499-PSG-JC). The
court subsequently appointed Teamsters Local 456 Pension Fund and Teamsters Local 456 Annuity Fund to serve as lead plaintiffs.
The case has been transferred to the U.S. District Court for the Eastern District of Pennsylvania and the style of the case has been
changed to Teamsters Local 456 Pension Fund, et. al. v. Universal Health Services, Inc. et. al. (Case No. 2:17-CV-02817-LS). In
September, 2017, Teamsters Local 456 Pension Fund filed an amended complaint. In December 2017, we filed a motion to dismiss the
amended complaint. We deny liability and intend to defend ourselves vigorously. At this time, we are uncertain as to potential liability
or financial exposure, if any, which may be associated with this matter.
Shareholder Derivative Cases
In March 2017, a shareholder derivative suit was filed by plaintiff David Heed in the Court of Common Pleas of Philadelphia
County. A notice of removal to the United States District Court for the Eastern District of Pennsylvania was filed (Case No. 2:17-cv-
01476-LS). Plaintiff filed a motion to remand. In December 2017, the Court denied plaintiff’s motion to remand and has retained the
case in federal court. The suit alleges breaches of fiduciary duties and other allegedly wrongful conduct by the members of the Board
of Directors and certain officers of Universal Health Services, Inc. relating to practices at our behavioral health facilities. UHS has
been named as a nominal defendant in the case. In May, June and July 2017, additional shareholder derivative suits were filed in the
United States District Court for the Eastern District of Pennsylvania. The plaintiffs in those cases are: Central Laborers’ Pension Fund
(Case No. 17-cv-02187-LS); Firemen’s Retirement System of St. Louis (Case No. 17—cv-02317-LS); Waterford Township Police &
Fire Retirement System (Case No. 17-cv-02595-LS); and Amalgamated Bank Longview Funds (Case No. 17-cv-03404-LS). The
Fireman’s Retirement System case has since been voluntarily dismissed. In addition, a shareholder derivative case was filed in
Chancery Court in Delaware by the Delaware County Employees’ Retirement Fund (Case No. 2017-0475-JTL). In December 2017,
the Chancery Court stayed this case pending resolution of other contemporaneous matters. These additional cases make substantially
similar allegations and claims based upon alleged violations of federal securities laws as well common law causes of action against the
individual defendants. All of these additional cases have also named all members of the UHS Board of Directors as well as certain
officers of the Company. The defendants deny liability and intend to defend these cases vigorously. At this time, we are uncertain as
to potential liability or financial exposure, if any, which may be associated with these matters.
Chowdary v. Universal Health Services, Inc., et. al.
This is a lawsuit filed in 1999 in state court in Hidalgo County, Texas by a physician and his professional associations
alleging tortious interference with contractual relationships and retaliation against McAllen Medical Center in McAllen, Texas as well
as Universal Health Services, Inc. The state court has entered a summary judgment order awarding plaintiff $3.85 million in damages.
With prejudgment interest, the total amount of the order amounts to approximately $9 million, for which a reserve is included in our
financial statements as of December 31, 2017. A trial on punitive damages, emotional distress and attorneys’ fees remains to be
conducted if the summary judgment order is not vacated. The case has been removed to federal court. Plaintiffs filed a motion to
remand. In February 2018, the federal court denied plaintiffs’ motion to remand and retained the case in federal court. Plaintiffs have
filed a writ of mandamus with the 5th Circuit Court of Appeals seeking to overturn the federal court’s decision denying remand. We
have filed a motion for reconsideration of state court’s summary judgment order in the federal court proceeding.
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Disproportionate Share Hospital Payment Matter:
In late September, 2015, many hospitals in Pennsylvania, including seven of our behavioral health care hospitals located in
the state, received letters from the Pennsylvania Department of Human Services (the “Department”) demanding repayment of
allegedly excess Medicaid Disproportionate Share Hospital payments (“DSH”) for the federal fiscal year 2011 (“FFY2011”)
amounting to approximately $4 million in the aggregate. Since that time, we have received similar requests for repayment for alleged
DSH overpayments for FFYs 2012 and 2013 aggregating to approximately $11 million. We filed administrative appeals for all of our
facilities contesting the recoupment efforts for FFYs 2011 through 2013 as we believe the Department’s calculation methodology is
inaccurate and conflicts with applicable federal and state laws and regulations. The Department has agreed to postpone the
recoupment of the state’s share of the DSH payments until all hospital appeals are resolved but started recoupment of the federal
share. The Department will likely make similar repayment demand for FFY 2014. Due to a change in the Pennsylvania Medicaid
State Plan and implementation of a CMS-approved Medicaid Section 1115 Waiver, we do not believe the methodology applied by the
Department to FFYs 2011 through 2013 is applicable to reimbursements received for Medicaid services provided after January 1,
2015 by our behavioral health care facilities located in Pennsylvania. We can provide no assurance that we will ultimately be
successful in our legal and administrative appeals related to the Department’s repayment demands. If our legal and administrative
appeals are unsuccessful, our future consolidated results of operations and financial condition could be adversely impacted by these
repayments.
Matters Relating to Psychiatric Solutions, Inc. (“PSI”):
The following matters pertain to PSI or former PSI facilities (owned by subsidiaries of PSI) which were in existence prior to
the acquisition of PSI and for which we have assumed the defense as a result of our acquisition which was completed in November,
2010:
Department of Justice Investigation of Riveredge Hospital
In 2008, Riveredge Hospital in Chicago, Illinois received a subpoena from the DOJ requesting certain information from the
facility. Additional requests for documents were also received from the DOJ in 2009 and 2010. The requested documents have been
provided to the DOJ. All documents requested and produced pertained to the operations of the facility while under PSI’s ownership
prior to our acquisition. At present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or
potential financial exposure, if any, in connection with this matter.
Department of Justice Investigation of Friends Hospital
In October, 2010, Friends Hospital in Philadelphia, Pennsylvania, received a subpoena from the DOJ requesting certain
documents from the facility. The requested documents were collected and provided to the DOJ for review and examination. Another
subpoena was issued to the facility in July, 2011 requesting additional documents, which have also been delivered to the DOJ. All
documents requested and produced pertained to the operations of the facility while under PSI’s ownership prior to our acquisition. At
present, we are uncertain as to the focus, scope or extent of the investigation, liability of the facility and/or potential financial
exposure, if any, in connection with this matter.
Other Matters:
Various other suits, claims and investigations, including government subpoenas, arising against, or issued to, us are pending
and additional such matters may arise in the future. Management will consider additional disclosure from time to time to the extent it
believes such matters may be or become material. The outcome of any current or future litigation or governmental or internal
investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting penalties, fines
or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such
contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time
regarding the matters described above or that are otherwise pending because the inherently unpredictable nature of legal proceedings
may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or
indeterminate; (ii) discovery is not complete; (iii) the matter is in its early stages; (iv) the matters present legal uncertainties; (v) there
are significant facts in dispute; (vi) there are a large number of parties, or; (vii) there is a wide range of potential outcomes. It is
possible that the outcome of these matters could have a material adverse impact on our future results of operations, financial position,
cash flows and, potentially, our reputation.
9) RELATIONSHIP WITH UNIVERSAL HEALTH REALTY INCOME TRUST AND OTHER RELATED PARTY
TRANSACTIONS
Relationship with Universal Health Realty Income Trust:
At December 31, 2017, we held approximately 5.7% of the outstanding shares of Universal Health Realty Income Trust (the
“Trust”). We serve as Advisor to the Trust under an annually renewable advisory agreement, which is scheduled to expire on
December 31st of each year, pursuant to the terms of which we conduct the Trust’s day-to-day affairs, provide administrative services
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and present investment opportunities. In December, 2017, the advisory agreement was renewed by the Trust for 2018 pursuant to the
same terms in place during each of the last three years. During 2017, 2016 and 2015, the advisory fee was computed at 0.70% of the
Trust’s average invested real estate assets. In addition, certain of our officers and directors are also officers and/or directors of the
Trust. Management believes that it has the ability to exercise significant influence over the Trust, therefore we account for our
investment in the Trust using the equity method of accounting. We earned an advisory fee from the Trust, which is included in net
revenues in the accompanying consolidated statements of income, of approximately $3.6 million during 2017, $3.3 million during
2016 and $2.8 million during 2015.
Our pre-tax share of income from the Trust was $2.6 million during 2017, $1.0 million during 2016 and $1.4 million during
2015, and is included in net revenues in the accompanying consolidated statements of income for each year. Included in our share of
the Trust’s income was approximately $1.7 million in 2017 related to our share of a gain recorded resulting from a property
transaction, as well as insurance proceeds in excess of damaged Trust property. During 2015, our share of the Trust’s income included
$500,000 related to our share of a gain on an exchange transaction recorded by the Trust. We received dividends from the Trust
amounting to $2.1 million during 2017 and $2.0 million during each of 2016 and 2015.
The carrying value of our investment in the Trust was $8.2 million and $7.7 million at December 31, 2017 and 2016,
respectively, and is included in other assets in the accompanying consolidated balance sheets. The market value of our investment in
the Trust was $59.2 million at December 31, 2017 and $51.7 million at December 31, 2016, based on the closing price of the Trust’s
stock on the respective dates.
The Trust commenced operations in 1986 by purchasing certain hospital properties from us and immediately leasing the
properties back to our respective subsidiaries. Most of the leases were entered into at the time the Trust commenced operations and
provided for initial terms of 13 to 15 years with up to six additional 5-year renewal terms. Each hospital lease also provided for
additional or bonus rental, as discussed below. The base rents are paid monthly and the bonus rents are computed and paid on a
quarterly basis, based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The
leases with those subsidiaries are unconditionally guaranteed by us and are cross-defaulted with one another.
Total rent expense under the operating leases on the three hospital facilities with the Trust during 2017, 2016 and 2015 was
$16.0 million, $15.9 million, and $15.6 million, respectively. Pursuant to the terms of the three hospital leases with the Trust, we have
the option to renew the leases at the lease terms described above by providing notice to the Trust at least 90 days prior to the
termination of the then current term. We also have the right to purchase the respective leased hospitals at the end of the lease terms or
any renewal terms at their appraised fair market value as well as purchase any or all of the three leased hospital properties at the
appraised fair market value upon one month’s notice should a change of control of the Trust occur. In addition, we have rights of first
refusal to: (i) purchase the respective leased facilities during and for 180 days after the lease terms at the same price, terms and
conditions of any third-party offer, or; (ii) renew the lease on the respective leased facility at the end of, and for 180 days after, the
lease term at the same terms and conditions pursuant to any third-party offer.
The table below details the renewal options and terms for each of our three hospital facilities leased from the Trust:
Hospital Name
McAllen Medical Center
Wellington Regional Medical Center
Southwest Healthcare System, Inland Valley Campus
End of Lease Term
Acute Care $ 5,485,000 December, 2021
Acute Care $ 3,030,000 December, 2021
Acute Care $ 2,648,000 December, 2021
Type of
Facility
Annual
Minimum
Rent
Renewal
Term
(years)
10 (a)
10 (b)
10 (b)
(a) We have two 5-year renewal options at existing lease rates (through 2031).
(b) We have two 5-year renewal options at fair market value lease rates (2022 through 2031).
In addition, certain of our subsidiaries are tenants in various medical office buildings and two free-standing emergency
departments (“FEDs”) owned by the Trust or by limited liability companies in which the Trust holds 95% to 100% of the ownership
interest. During the first quarter of 2015, wholly-owned subsidiaries of ours sold to and leased back from the Trust, two newly
constructed FEDs located in Texas which were completed and opened during the first quarter of 2015. In conjunction with these
transactions, ten-year lease agreements with six, five-year renewal options have been executed with the Trust. We have the option to
purchase the properties upon the expiration of the fixed terms and each five-year renewal terms at the fair market value of the
property. The aggregate construction cost/sales proceeds of these facilities was approximately $13 million, and the aggregate rent
expense paid to the Trust at the commencement of the leases was approximately $900,000 annually.
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Other Related Party Transactions:
In December, 2010, our Board of Directors approved the Company’s entering into supplemental life insurance plans and
agreements on the lives of our chief executive officer (“CEO”) and his wife. As a result of these agreements, as amended in October,
2016, based on actuarial tables and other assumptions, during the life expectancies of the insureds, we would pay approximately $28
million in premiums, and certain trusts owned by our CEO, would pay approximately $9 million in premiums. Based on the projected
premiums mentioned above, and assuming the policies remain in effect until the death of the insureds, we will be entitled to receive
death benefit proceeds of no less than approximately $37 million representing the $28 million of aggregate premiums paid by us as
well as the $9 million of aggregate premiums paid by the trusts. In connection with these policies, we paid approximately $1.2 million
and $1.3 million in premium payments during 2017 and 2016.
In August, 2015, Marc D. Miller, our President and member of our Board of Directors, was appointed to the Board of Directors
of Premier, Inc. (“Premier”), a healthcare performance improvement alliance. During 2013, we entered into a new group purchasing
organization agreement (“GPO”) with Premier. In conjunction with the GPO agreement, we acquired a minority interest in Premier for
a nominal amount. During the fourth quarter of 2013, in connection with the completion of an initial public offering of the stock of
Premier, we received cash proceeds for the sale of a portion of our ownership interest in the GPO. Also in connection with this GPO
agreement, we received shares of restricted stock of Premier which vest ratably over a seven-year period (2014 through 2020),
contingent upon our continued participation and minority ownership interest in the GPO. We have elected to retain a portion of the
previously vested shares of Premier, the market value of which is included in other assets on our consolidated balance sheet. Based
upon the closing price of Premier’s stock on each respective date, the market value of our shares of Premier on which the restrictions
have lapsed was $33 million as of December 31, 2017 and $23 million as of December 31, 2016. See Note 1 to the Consolidated
Financial Statements-Business and Summary of Significant Accounting Policies, V) GPO Agreement/Minority Ownership Interest for
additional disclosure related to this agreement.
In January, 2018, our Board of Directors elected a new member to fill a vacancy created by the retirement of another member.
The retired Director was a member of the Executive Committee and Finance Committee of our Board of Directors, was Of Counsel to
Norton Rose Fulbright US LLP, and was also the trustee of certain trusts for the benefit of our Chief Executive Officer (“CEO”) and
his family. The newly elected Director, who is a Partner in Norton Rose Fulbright US LLP, will serve as a member of the Executive
Committee and Finance Committee and acts as a trustee of certain trusts for the benefit of our CEO and his family. We engage Norton
Rose Fulbright US LLP for a variety of legal services and the law firm also provides personal legal services to our CEO.
10) PENSION PLAN
We maintain contributory and non-contributory retirement plans for eligible employees. Our contributions to the contributory
plan amounted to $50.1 million, $45.7 million and $40.7 million in 2017, 2016 and 2015, respectively. The non-contributory plan is a
defined benefit pension plan which covers employees of one of our subsidiaries. The benefits are based on years of service and the
employee’s highest compensation for any five years of employment. Our funding policy is to contribute annually at least the minimum
amount that should be funded in accordance with the provisions of ERISA.
123
For defined benefit pension plans, the benefit obligation is the “projected benefit obligation”, the actuarial present value, as of
December 31 measurement date, of all benefits attributed by the pension benefit formula to employee service rendered to that date.
The amount of benefit to be paid depends on a number of future events incorporated into the pension benefit formula, including
estimates of the average life of employees/survivors and average years of service rendered. It is measured based on assumptions
concerning future interest rates and future compensation levels. The following table shows the reconciliation of the defined benefit
pension plan as of December 31, 2017 and 2016:
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return (loss) on plan assets
Benefits paid
Administrative expenses
Fair value of plan assets at end of year
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of year
Amounts recognized in the Consolidated Balance Sheet:
Other non-current assets
Other non-current liabilities
Total amounts recognized at end of year
2017
2016
(000s)
$
$
$
$
109,677 $
15,533
(5,846 )
(697 )
118,667 $
110,949 $
721
4,465
(5,846 )
5,767
116,056 $
2,611
$
2,611 $
2017
2016
(000s)
106,839
8,858
(5,651 )
(369 )
109,677
118,180
926
4,997
(5,651 )
(7,503 )
110,949
1,272
1,272
2015
Components of net periodic cost (benefit)
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial loss
Net periodic cost
Measurement Dates
Benefit obligations
Fair value of plan assets
Weighted average assumptions as of December 31
Discount rate
Rate of compensation increase
$
$
721 $
4,465
(5,862 )
863
187 $
926 $
4,997
(5,708 )
3,072
3,287 $
1,051
4,912
(6,254 )
3,164
2,873
2017
2016
12/31/2017
12/31/2017
12/31/2016
12/31/2016
2017
2016
3.60 %
4.00 %
4.14 %
4.00 %
Weighted-average assumptions for net periodic benefit
cost calculations
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
2017
2016
2015
4.14 %
5.50 %
4.00 %
4.34 %
5.50 %
4.00 %
3.95 %
5.50 %
4.00 %
The accumulated benefit obligation for our pension plan represents the actuarial present value of benefits based on employee
service and compensation as of a certain date and does not include an assumption about future compensation levels. The accumulated
benefit obligation for our plan was $115.9 million and $110.6 million as of December 31, 2017 and 2016, respectively. As of
December 31, 2017, the fair value of plan assets exceed the accumulated benefit obligation by $2.7 million. As of December 31, 2016,
the accumulated benefit obligation exceeded the fair value of plan assets by $0.9 million.
124
We estimate that there will be no net loss or prior service cost amortized from accumulated other comprehensive income during
2018.
In May, 2015, the FASB issued ASU No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset
Value per Share (or its Equivalent)," which is effective for annual reporting periods beginning after December 15, 2015. The standard
removes the requirement to categorize investments for which fair value is measured using the net asset value (NAV) per share
practical expedient within the fair value hierarchy. We have adopted this standard effective January 1, 2016, and applied the guidance
retrospectively. This standard impacts financial statement disclosure only. In previous reporting periods, we disclosed the full fair
value hierarchy and disclosed our pension assets as level 2 within the hierarchy. Going forward, we will disclose our pension assets
by asset category reported using NAV as a practical expedient for comparative years.
The market values of our pension plan assets at December 31, 2017 and December 31, 2016, reported using net asset value as a
practical expedient, by asset category are as follows:
Equities:
U.S. Large Cap
U.S. Mid Cap
U.S. Small Cap
International Developed
Emerging Markets
Fixed income:
Core Fixed Income
Long Duration Fixed Income
Real Estate:
REIT Fund
Cash/Currency:
Cash Equivalents
Total market value
$
2017
2016
$
9,393
2,937
3,005
7,213
4,792
25,915
62,522
8,547
2,651
2,669
6,534
4,360
23,719
58,312
2,370
2,216
$
520
118,667
$
669
109,677
To develop the expected long-term rate of return on plan assets assumption, we considered the historical returns and the future
expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.
The following table shows expected benefit payments for the years ended December 31, 2018 through 2027 for our defined
pension plan. There will be benefit payments under this plan beyond 2027.
Estimated Future Benefit Payments (000s)
2018
2019
2020
2021
2022
2023-2027
Total
Plan Assets
Asset Category
Equity securities
Fixed income securities
Other
Total
$
$
6,376
6,578
6,705
6,789
6,841
34,230
67,519
2017
2016
23 %
75 %
2 %
100 %
23 %
75 %
2 %
100 %
Investment Policy, Guidelines and Objectives have been established for the defined benefit pension plan. The investment policy
is in keeping with the fiduciary requirements under existing federal laws and managed in accordance with the Prudent Investor Rule.
Total portfolio risk is regularly evaluated and compared to that of the plan’s policy target allocation and judged on a relative basis over
125
a market cycle. The following asset allocation policy and ranges have been established in accordance with the overall risk and return
objectives of the portfolio:
Total Equity
Total Fixed Income
Other
As of
12/31/2017
Permitted Range
10-30%
70-90%
0-10%
23 %
75 %
2 %
In accordance with the investment policy, the portfolio will invest in high quality, large and small capitalization companies
traded on national exchanges, and investment grade securities. The investment managers will not write or buy options for speculative
purposes; securities may not be margined or sold short. The manager may employ futures or options for the purpose of hedging
exposure, and will not purchase unregistered sectors, private placements, partnerships or commodities.
11) SEGMENT REPORTING
Our reportable operating segments consist of acute care hospital services and behavioral health care services. The “Other”
segment column below includes centralized services including, but not limited to, information technology, purchasing, reimbursement,
accounting and finance, taxation, legal, advertising and design and construction. The chief operating decision making group for our
acute care services and behavioral health care services is comprised of our Chief Executive Officer, the President and the Presidents of
each operating segment. The Presidents for each operating segment also manage the profitability of each respective segment’s various
facilities. The operating segments are managed separately because each operating segment represents a business unit that offers
different types of healthcare services or operates in different healthcare environments. The accounting policies of the operating
segments are the same as those described in the summary of significant accounting policies included in this Annual Report on Form
10-K for the year ended December 31, 2017. The corporate overhead allocations, as reflected below, are utilized for internal reporting
purposes and are comprised of each period’s projected corporate-level operating expenses (excluding interest expense). The overhead
expenses are captured and allocated directly to each segment, to the extent possible, based upon each segment’s respective percentage
of total operating expenses.
2017
Acute Care
Hospital
Services
Behavioral
Health
Services (a.)
(Dollar amounts in thousands)
Other
Total
Consolidated
Gross inpatient revenues
Gross outpatient revenues
Total net revenues
Income (loss) before allocation of corporate overhead and
income taxes
Allocation of corporate overhead
Income (loss) after allocation of corporate overhead and
before income taxes
Total assets
$ 21,888,207 $ 8,949,984 $
$ 13,115,881 $ 993,409 $
$ 5,484,683 $ 4,906,719 $
— $ 30,838,191
— $ 14,109,290
18,463 $ 10,409,865
$
$
641,857 $ 968,974 $ (475,822 ) $ 1,135,009
0
(182,713 ) $ (158,735 ) $ 341,448 $
459,144 $ 810,239 $ (134,374 ) $ 1,135,009
$
$ 3,849,214 $ 6,648,818 $ 263,796 $ 10,761,828
2016
Acute Care
Hospital
Services
Behavioral
Health
Services (a.)
(Dollar amounts in thousands)
Other
Total
Consolidated
Gross inpatient revenues
Gross outpatient revenues
Total net revenues
Income (loss) before allocation of corporate overhead and
income taxes
Allocation of corporate overhead
Income (loss) after allocation of corporate overhead and
before income taxes
Total assets
$ 19,042,627 $ 8,017,585 $
$ 11,374,098 $ 902,102 $
$ 5,112,950 $ 4,645,007 $
— $ 27,060,212
— $ 12,276,200
8,253 $ 9,766,210
$
$
557,472 $ 1,030,734 $ (431,848 ) $ 1,156,358
0
(170,767 ) $ (154,843 ) $ 325,610 $
$
386,705 $ 875,891 $ (106,238 ) $ 1,156,358
$ 3,723,075 $ 6,440,195 $ 154,532 $ 10,317,802
126
2015
Acute Care
Hospital
Services
Behavioral
Health
Services (a.)
(Dollar amounts in thousands)
Other
Total
Consolidated
Gross inpatient revenues
Gross outpatient revenues
Total net revenues
Income (loss) before allocation of corporate overhead and
income taxes
Allocation of corporate overhead
Income (loss) after allocation of corporate overhead and
before income taxes
Total assets
$ 16,847,944 $ 7,456,397 $
$ 9,604,952 $ 839,884 $
$ 4,632,564 $ 4,400,335 $
— $ 24,304,341
15,794 $ 10,460,630
10,552 $ 9,043,451
$
$
519,630 $ 1,021,823 $ (395,552 ) $ 1,145,901
0
(197,699 ) $ (117,203 ) $ 314,902 $
321,931 $ 904,620 $
$
(80,650 ) $ 1,145,901
$ 3,413,879 $ 5,867,088 $ 334,477 $ 9,615,444
(a.) Includes net revenues generated from our behavioral health care facilities located in the U.K. amounting to approximately $429
million in 2017, $241 million in 2016 and $203 million in 2015. Total assets at our U.K. behavioral health care facilities were
approximately $1.098 billion as of December 31, 2017, $965 million as of December 31, 2016 and $521 million as of December 31,
2015.
12) QUARTERLY RESULTS (unaudited)
The following tables summarize the quarterly financial data for the two years ended December 31, 2017 and 2016:
2017
Net revenues
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to UHS
Earnings per share attributable to UHS-Basic:
First
Quarter
Second
Quarter
Third
Quarter
(amounts in thousands, except per share amounts)
$ 2,612,858 $ 2,612,356 $ 2,541,864 $ 2,642,787 $ 10,409,865
771,312
$ 210,527 $ 190,388 $ 145,362 $ 225,035 $
19,009
5,426 $
$
752,303
$ 206,055 $ 185,394 $ 141,245 $ 219,609 $
Fourth
Quarter
4,472 $
4,994 $
4,117 $
Total
Total basic earnings per share
Earnings per share attributable to UHS-Diluted:
Total diluted earnings per share
$
$
2.13 $
1.93 $
1.48 $
2.32 $
7.86
2.12 $
1.91 $
1.47 $
2.31 $
7.81
The 2017 quarterly financial data presented above includes the following:
First Quarter:
(cid:1)
(cid:1)
an unfavorable $8.1 million pre-tax impact ($5.1 million, or $.05 per diluted share, net of taxes) recorded in connection
with the implementation of EHR applications;
a favorable after-tax impact of $6.8 million, or $.07 per diluted share, resulting from our January 1, 2017 adoption of ASU
2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting” (“ASU 2016-09”).
Second Quarter:
(cid:1)
(cid:1)
an unfavorable $6.4 million pre-tax impact ($4.0 million, or $.04 per diluted share, net of taxes) recorded in connection
with the implementation of EHR applications;
a favorable after-tax impact of $1.4 million, or $.01 per diluted share, resulting from our January 1, 2017 adoption of ASU
2016-09.
127
(cid:1)
(cid:1)
(cid:1)
(cid:1)
2016
Third Quarter:
(cid:1)
(cid:1)
an unfavorable $4.2 million pre-tax impact ($2.6 million, or $.03 per diluted share, net of taxes) recorded in connection
with the implementation of EHR application;
a favorable after-tax impact of $487,000, or $.01 per diluted share, resulting from our January 1, 2017 adoption of ASU
2016-09.
Fourth Quarter:
an unfavorable $3.6 million pre-tax impact ($2.3 million, or $.03 per diluted share, net of taxes) recorded in connection
with the implementation of EHR applications;
a favorable after-tax impact of $13.5 million, or $.14 per diluted share, resulting from our January 1, 2017 adoption of
ASU 2016-09;
a favorable after-tax impact of $30.0 million, or $.32 per diluted share, resulting from a reduction in our net deferred
income tax liability resulting from lower federal income tax rates beginning January 1, 2018 pursuant to the Tax Cuts and
Jobs Act of 2017;
an unfavorable after-tax impact of $11.3 million, or $.12 per diluted share, resulting from the one-time repatriation tax
incurred pursuant to the Tax Cuts and Jobs Act of 2017 (in connection with our behavioral health care facilities located in
the U.K. and Puerto Rico).
Net revenues
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to UHS
Earnings per share attributable to UHS-Basic:
First
Quarter
Second
Quarter
Third
Quarter
(amounts in thousands, except per share amounts)
$ 2,449,798 $ 2,430,855 $ 2,409,872 $ 2,475,685 $ 9,766,210
$ 215,719 $ 195,449 $ 157,265 $ 178,738 $ 747,171
44,762
$
$ 190,759 $ 185,577 $ 151,865 $ 174,208 $ 702,409
Fourth
Quarter
24,960 $
4,530 $
5,400 $
9,872 $
Total
Total basic earnings per share
$
1.95 $
1.91 $
1.56 $
1.80 $
7.22
Earnings per share attributable to UHS-Diluted:
Total diluted earnings per share
$
1.93 $
1.89 $
1.54 $
1.78 $
7.14
The 2016 quarterly financial data presented above includes the following:
First Quarter:
(cid:1)
an unfavorable $8.3 million pre-tax impact ($5.2 million, or $.05 per diluted share, net of taxes) recorded in connection
with the implementation of EHR applications;
Second Quarter:
(cid:1)
an unfavorable $8.7 million pre-tax impact ($5.5 million, or $.05 per diluted share, net of taxes) recorded in connection
with the implementation of EHR applications.
Third Quarter:
(cid:1)
an unfavorable $8.5 million pre-tax impact ($5.3 million, or $.06 per diluted share, net of taxes) recorded in connection
with the implementation of EHR applications.
Fourth Quarter:
(cid:1)
an unfavorable $2.8 million pre-tax impact ($1.8 million, or $.02 per diluted share, net of taxes) recorded in connection
with the implementation of EHR applications.
128
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Allowance for Doubtful Accounts Receivable:
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Valuation Allowance for Deferred Tax Assets:
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Balance at
beginning
of period
Charges to
costs and
expenses
Acquisitions uncollectible
of business
of period
Write-off of Balance
at end
$
$
$
410,374 $
398,797 $
324,648 $
869,077 $
741,578 $
741,273 $
Balance at
beginning
of period
Charges to
costs and
expenses
$
$
$
56,333 $
52,567 $
52,764 $
13,894 $
3,766 $
(197 ) $
Acquisitions
of business
accounts
- $ (799,162 ) $
- $ (730,001 ) $
- $ (667,124 ) $
480,289
410,374
398,797
Balance
at end
Write-offs
- $
- $
- $
of period
- $
- $
- $
70,227
56,333
52,567
129
CORPORATE INFORMATION
EXECUTIVE OFFICES
Universal Corporate Center
367 South Gulph Road
P.O. Box 61558
King of Prussia, PA 19406
(610) 768-3300
ANNUAL MEETING
May 16, 2018, 10:00 a.m.
Universal Corporate Center
367 South Gulph Road
King of Prussia, PA 19406
COMPANY COUNSEL
Norton Rose Fulbright
New York, New York
AUDITORS
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
TRANSFER AGENT AND REGISTRAR
Computershare
250 Royall Street
Canton, MA 02021
1-800-851-9677
Shareholder website:
www.computershare.com/investor
Shareholder online inquiries:
https://www-us.computershare.com/investor/
Contact
TDD: Hearing Impaired # 1-800-231-5469
Please contact Computershare for prompt
assistance on address changes, lost
certificates, consolidation of duplicate
accounts or related matters.
INTERNET ADDRESS
The Company can be accessed online at
www.uhsinc.com.
LISTING
Class B Common Stock: New York Stock
Exchange under the symbol UHS
PUBLICATIONS
For copies of the Company’s annual report,
Form 10-K, Form 10-Q, quarterly earnings
releases, and proxy statements, please call
1-800-874-5819, or write
Investor Relations
Universal Health Services, Inc.
Universal Corporate Center
367 South Gulph Road
P.O. Box 61558
King of Prussia, PA 19406
OFFICERS AND SENIOR MANAGEMENT
FINANCIAL COMMUNITY INQUIRIES
The Company welcomes inquiries from
members of the financial community seeking
information on the Company. These should be
directed to Steve Filton, Chief Financial Officer.
DISCLOSURE UNDER 303A.12(a)
In accordance with Section 303A.12(a) of The
New York Stock Exchange Listed Company
Manual, we submitted our CEO’s Certification
to the New York Stock Exchange in 2017.
Additionally, contained in Exhibits 31.1 and 31.2
of our Annual Report on Form 10-K filed with
the Securities and Exchange Commission on
February 28, 2018, are our CEO’s and CFO’s
Certifications regarding the quality of our
public disclosure under Section 302 of the
Sarbanes-Oxley Act of 2002.
ACUTE CARE DIVISION
BEHAVIORAL HEALTH DIVISION
CORPORATE OFFICERS
Alan B. Miller
Chief Executive Officer
and Chairman of the Board
Marc D. Miller
President
Steve G. Filton
Executive Vice President
and Chief Financial Officer
Debra K. Osteen
Executive Vice President
Marvin G. Pember
Executive Vice President
Charles F. Boyle
Senior Vice President
and Controller
Geraldine Johnson Geckle
Senior Vice President
Human Resources
Laurence L. Harrod
Senior Vice President
Behavioral Health Finance
Matthew D. Klein
Senior Vice President and
General Counsel
Michael S. Nelson
Senior Vice President
Strategic Services
Victor J. Radina
Senior Vice President
Corporate Strategy and
Development
Cheryl K. Ramagano
Senior Vice President and
Treasurer
CORPORATE VICE
PRESIDENTS
George Brunner
Staff Vice President and
Deputy General Counsel
James Caponi
Staff Vice President
Chief Compliance and
Privacy Officer
Roselle Charlier
Vice President
Public Relations and
Corporate Communications
Mark D’Arcy
Vice President
Design and Construction
Raymond Davis
Vice President
Supply Chain
Robert Engelhard
Vice President
Insurance
Robert Halinski
Vice President
Reimbursement
Marvin G. Pember
President
Frank Lopez
Regional Vice President
Karla Perez
Regional Vice President
Kevin DiLallo
Group Vice President
Michael Fencel
Group Vice President
Howard Cutler
Vice President
Payer Relations
Charles DeBusk
Vice President
Performance and
Process Improvement
John Johannessen
Vice President
Physician Operations
Jacalyn Liebowitz
Vice President and
Chief Nursing Officer
Ehab Hanna
Staff Vice President
Chief Medical Information
Officer
Douglas Matney
Vice President
Ambulatory Emergency
Services
Keith Siddel
Vice President
Revenue Cycle
Management
Paul Stefanacci, M.D.
Vice President
Quality Management and
Chief Medical Officer
Michael Kahler
Staff Vice President
Information Services
Nancy Kurtzman
Staff Vice President
Employee Benefits
Kenneth Lubben
Staff Vice President
Information Services
Mary Ann Ninnis
Staff Vice President
Advertising
Jeanne Schmid
Staff Vice President
Labor Relations
Robert Zurad
Vice President
Tax
Karen E. Johnson
Senior Vice President
Clinical Services and
Division Compliance
Officer
Darien Applegate
Senior Vice President
Business Development
Carothers H. Evans
Senior Vice President
Business Development
Valerie Devereaux
Vice President
Nursing
Isa Diaz
Vice President
Strategic Planning
and Public Affairs
Robert E. Minor
Vice President
Development
Barbara Yody
Vice President
Performance and
Process Improvement
Debra K. Osteen
President
Robert A. Deney
Senior Vice President
Gary M. Gilberti
Senior Vice President
John Hollinsworth
Senior Vice President
Roslind S. Hudson
Senior Vice President
Tony Romero, M.D.
CEO, Cygnet Health
Care
Joe C. Crabtree
Divisional Vice
President
Shelley Nowak
Divisional Vice
President
Diane Henneman
Regional Vice
President
Kerry Knott
Regional Vice
President
Ethan Permenter
Regional Vice
President
Joe Sheehy
Regional Vice
President
John Willingham
Regional Vice
President
Sharon Worsham
Regional Vice
President
130
UHS of Delaware, Inc. is the management company for, and a wholly owned subsidiary of Universal
Health Services, Inc. All of our “Corporate Officers” listed above are employees of UHS of Delaware,
Inc. The Staff Vice Presidents and officers of the Acute and Behavioral Divisions listed above are
solely officers and employees of UHS of Delaware, Inc.
B O A R D O F D I R E C T O R S
Alan B. Miller3,4
Chairman of the Board
Chief Executive Officer
Marc D. Miller3,4
President
Lawrence S. Gibbs1,2,5
Portfolio Manager
at Ramius, LLC.
Previously served as
Chief Investment Officer
and Portfolio Manager
at JP Morgan Chase
Bank N.A.
Robert H. Hotz1,2*,3,4,5*
Senior Managing
Director, Global
Co-Head of Corporate
Finance, and Vice
Chairman of Houlihan
Lokey Howard &
Zukin. Prior thereto,
Senior Vice Chairman,
Investment
Banking for the
Americas, UBS LLC.
Warren J. Nimetz3,4
Partner, Norton
Rose Fulbright US LLP,
New York, NY
John H. Herrell1*,2,5
Former Chief
Administrative
Officer and Member,
Board of Trustees,
Mayo Foundation,
Rochester, MN
Eileen C. McDonnell1
Chairman and Chief
Executive Officer of The
Penn Mutual Life Insurance
Company. Served as
president of New England
Financial, a wholly owned
subsidiary of MetLife, and
senior vice president of
the Guardian Life Insurance
Company. Member
of The Penn Mutual
Board of Trustees.
Elliot J. Sussman, M.D.1,2,5
Chairman of The Villages
Health. Previously served
as President and Chief
Executive Officer of
Lehigh Valley Hospital
and Health Network.
Member, Board of
Directors of iCAD, Inc.
Committees of the Board: 1Audit Committee, 2Compensation Committee,
3Executive Committee, 4Finance Committee, 5Nominating/Corporate
Governance Committee, *Committee Chairman
F A C I L I T Y L O C A T I O N S
UNITED STATES
Alabama | Alaska | Arizona
Arkansas | California | Colorado | Connecticut
Delaware | District of Columbia
Florida | Georgia | Idaho | Illinois
Indiana | Kentucky | Louisiana
Massachusetts | Michigan | Minnesota
Mississippi | Missouri
Nevada | New Jersey | New Mexico
North Carolina | North Dakota | Ohio
Oklahoma | Oregon | Pennsylvania
South Carolina | Tennessee | Texas
Utah | Virginia | Washington
West Virginia | Wyoming
PUERTO RICO
U.S. VIRGIN ISLANDS
UNITED KINGDOM
U N I V E R S A L H E A L T H S E R V I C E S , I N C .
Universal Corporate Center
P.O. Box 61558
367 South Gulph Road
King of Prussia, PA 19406
www.uhsinc.com