UNIVERSAL HEALTH SERVICES, INC.
2018 ANNUAL REPORT
DELIVERING SUPERIOR QUALITY CARE
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 .
2 0 1 8 B Y T H E N U M B E R S
2.6
MILLION
TOTAL PATIENTS SERVED
87,000
EMPLOYEES, GLOBALLY
$665MILLION
INVESTMENT IN
EQUIPMENT, FACILITY
EXPANSIONS AND
RENOVATIONS
18
JOINT VENTURE
PARTNERSHIPS
ACUTE CARE
303,985
patient admissions
1.4 million
patient days
1.2 million
outpatient visits
6,232
licensed beds
33,018 births
BEHAVIORAL
HEALTH
345
freestanding
facilities
23,509 licensed beds
508 inpatient beds
added via expansion
projects
27 newly acquired
or opened facilities
236,758 surgeries
482,658
inpatients served
5 Accountable
Care Organizations
(ACOs)
6.4 million
patient days
24 facilities
offering Patriot
Support Programs
Pictured on the front cover are faces of patients
whom we have been privileged to serve.
F I N A N C I A L H I G H L I G H T S
Year Ended December 31
2018
2017
Percentage
Increase
2016
Net revenues
$10,772,278,000 $10,409,865,000
3.5%
$9,766,210,000
Adjusted net income
attributable to UHS (1)
$894,350,000
$725,459,000
23%
$720,239,000
Adjusted diluted earnings per share
attributable to UHS (1)
$9.53
$7.53
27%
$7.32
Year Ended December 31
2018
2017
Patient days
Admissions
7,795,322
786,643
Average number of licensed beds
29,741
7,694,021
765,212
29,278
Percentage
Increase
1%
3%
2%
2016
7,255,577
730,126
27,763
(1) Calculation of Adjusted Net
Income Attributable to UHS
(in thousands except per share amounts)
2018
2017
2016
2015
Amount
Per
Diluted Share
Amount
Per
Diluted Share
Amount
Per
Diluted Share
Amount
Per
Diluted Share
Net income attributable to UHS
Other combined adjustments
$779,705 $8.31
1.22
114,645
$752,303
(26,844)
$7.81
(0.28)
$702,409
17,830
$7.14
0.18
$680,528 $6.76
11,519
0.11
Adjusted net income attributable to UHS $894,350 $9.53
$725,459
$7.53
$720,239
$7.32
$692,047 $6.87
The “Other combined adjustments” neutralize the effect of items in each year that are nonrecurring or non-operational in nature including items such as: reserves for various
matters, settlements, legal judgments and lawsuits, our adoption of ASU 2016-09, gains/losses on sales of assets and businesses, impairments of long-lived and intangible
assets, the impact of the electronic health records applications and other amounts that may be reflected in a given year that relate to prior periods. 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)
2
7
7
0
1
$
,
0
1
4
0
1
$
,
,
6
6
7
9
3 $
4
0
9
$
,
Adjusted net income per
diluted share attributable
to UHS (1)
Hospital patient days
(in thousands)
.
3
5
9
$
3
5
7
$
.
5
9
7
7
,
4
9
6
7
,
6
5
2
7
,
4
5
0
7
,
.
2
3
7
7 $
8
6
$
.
15
16
17
18
15
16
17
18
15
16
17
18
2 0 1 8 A N N U A L R E P O R T 3
U H S ’ P U R P O S E - D R I V E N M I S S I O N
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 serve.
Our Mission statement has been repeatedly praised by industry
experts for being honest and authentic, and for identifying value
offered to all key stakeholders from our patients and employees
to our investors.
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.
Founded in 1979 by Alan B. Miller, Universal Health Services is one of the nation’s
largest and most respected healthcare management companies, operating through its
subsidiaries, behavioral health facilities, acute care hospitals and ambulatory centers
throughout the United States, the United Kingdom and Puerto Rico. UHS maintains one
of the strongest balance sheets and is rated among the highest in the hospital services
industry by Moody’s and Standard & Poor’s. This strong capital position has enabled
the company to develop and acquire many new facilities over the past few years.
The UHS strategy is to build or purchase healthcare properties in rapidly growing
markets and create a strong franchise based on exceptional service and effective
cost control. UHS owes its success to a responsive management style and to a service
philosophy that is based on integrity, competence and compassion. The healthcare
industry remains a place of rapid change and uncertainty. But with strength, experience
and foresight to chart its own course, UHS has every reason to face the future
with optimism.
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 .
AK
WA
OR
ID
MT
WY
NV
CA
UT
CO
ND
SD
NE
MN
IA
KS
MO
AZ
NM
OK
AR
TX
LA
WI
MI
ME
VT
NH
NY
MA
CT
RI
IN
OH
IL
PA
MD
WV
VA
NC
KY
TN
NJ
DE
DC
SC
GA
MS
AL
UNITED
KINGDOM
FL
PUERTO RICO
Acute Care Hospitals
Ambulatory Centers
Behavioral Health Facilities
Freestanding Emergency Departments
Universal Health Services, Inc.
Corporate Headquarters
For a full state-by-state list of facilities,
visit 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.
INDEX
Acute Care Division
8-15
Behavioral Health
Division
16-21
Form 10K
10K: 1-134
Corporate Information/
Officers and Senior
Management
2 0 1 8 A N N U A L R E P O R T 5
B O A R D O F D I R E C T O R S
Seated left to right: Lawrence S. Gibbs, Elliot J. Sussman, M.D. and Warren J. Nimetz. Standing left to right: Robert H. Hotz,
Marc D. Miller, Alan B. Miller and Eileen C. McDonnell.
Alan B. Miller3,4
Chairman of the Board
Chief Executive Officer
Marc D. Miller3,4
President
Lawrence S. Gibbs1,2,5
Chief Investment Officer at Erdos Capital. Previously
served as Portfolio Manager at Ramius, LLC; and
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.
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.
Warren J. Nimetz3,4
Partner, Norton Rose Fulbright US LLP, New York, NY
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
C O R P O R A T E O F F I C E R S
Alan B. Miller
Chairman of the Board and
Chief Executive Officer
Marc D. Miller
President
Steve G. Filton
Executive Vice President
and Chief Financial Officer
Marvin G. Pember
Executive Vice President
and President
Acute Care Division
David F. Alexander
Senior Vice President
of Finance, Acute Care
Charles F. Boyle
Senior Vice President
and Controller
Geraldine Johnson Geckle
Senior Vice President
Human Resources
Michael S. Nelson
Senior Vice President
Strategic Services
Laurence L. Harrod
Senior Vice President of
Finance, Behavioral Health
Victor J. Radina
Senior Vice President
Corporate Development
Matthew D. Klein
Senior Vice President
and General Counsel
Cheryl K. Ramagano
Senior Vice President
and Treasurer
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 .
L E T T E R T O O U R S H A R E H O L D E R S
For Universal Health Services, 2018 marked another year
of healthy performance. As one of the largest publicly
traded healthcare management companies in the United
States, with a strong and diverse portfolio of hospital-based
care, ambulatory care, behavioral health, an insurance
offering, a physician network and various related services,
we believe we are well positioned for continued growth.
Dear Valued Shareholders,
As we reflect upon 2018, I
am pleased to report another
year of growth, expansion,
excellence in care delivery and
solid performance. We continue
to execute on our long-term
strategies of prioritizing high
quality patient care, investing
in our people, serving our local
communities, driving operational
excellence and growing profitably.
In 2018, UHS generated net
revenues of $10.772 billion,
an increase of 3.5% over 2017.
On a same facility basis, adjusted
admissions increased 2.1% for
Acute Care hospitals and 3.0%
for Behavioral Health facilities.
Highlights in Behavioral Health
include the acquisition of The
Danshell Group in the United
Kingdom, complementing
our existing assets operating
under the Cygnet Health Care
brand, now expanded with the
addition of certain specialized
services and a broadened
geographical footprint. In the
United States, we continued to
engage with noted not-for-profit
organizations in joint venture
partnerships, leveraging our
expertise and scale in behavioral
health and substance abuse
treatment. We opened two
new joint-venture freestanding
behavioral health facilities this
year – Lancaster Behavioral
Health Hospital (in partnership
with Penn Medicine Lancaster
General Health, part of the
University of Pennsylvania
Health System) and Inland
Northwest Behavioral Health
(in partnership with Providence
Health Care) – and signed three
new agreements, with over 40
promising projects in the pipeline.
And among our existing facilities,
we added a total of 508 new beds
and expanded program offerings
to help meet the growing needs
of local community populations.
Among our Acute Care hospitals,
we completed a number of
significant facility expansions and
renovations, added new service
lines and acquired innovative
technologies to support the
advancement of care provided
by our clinicians. We continued to
invest in access points within our
networks that provide increased
convenience and choice to our
patients. Eight freestanding
emergency departments
are currently operational, an
additional seven are slated to
open in 2019 and others across
our markets have received
investment approval and are
on the future horizon. Looking
ahead, broader ambulatory
strategies are a key priority,
whether through organic growth,
acquisition or partnership.
I am proud of the reputation we
have earned as a leader in the
healthcare management
industry. For the ninth
consecutive year, UHS was
recognized among the ‘World’s
Most Admired Companies’
by Fortune magazine. UHS
is currently ranked #268 on
the Fortune 500 list, and our
employees and facilities continue
to be honored by national,
state and local organizations
for achievement of high clinical
quality outcomes, for their
clinical expertise and for their
commitment to serving
our local communities.
We look ahead with great
optimism. In 2019, we will
continue to focus on our core
strategies, remain adaptable
to the changing healthcare
environment and consistently
deliver upon our mission.
Simply said, we are committed
to continuing our tradition
of excellence.
Sincerely,
Alan B. Miller
Founder, Chairman of the Board
and Chief Executive Officer
Since our founding 40 years ago, Universal Health Services has grown from a single hospital
in Las Vegas to an expansive international network. We remain as committed today as we were in
1979 to providing superior quality care and being the preferred provider in our served markets.
2 0 1 8 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
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 deliver superior quality care, aiming
to be the preferred provider in the markets
we serve.
2018 was another year of robust performance and exciting
growth for the Acute Care division. We cared for more than
two million patients, expanded our geographic reach and
service lines, earned distinguished accolades from accrediting
bodies, expanded our ACO offerings and delivered solid
financial results.
Our dedication to delivering clinical excellence sets us apart
in the communities we serve and has resulted in continued
growth across the division. In 2018, adjusted admissions were
up 4 percent; surgeries were up 2 percent; and we experienced
earnings growth of 7 percent.
UHS Acute Care hospitals feature advanced technologies,
from robotic surgical systems to complex imaging technology
and infrared antibacterial lighting. As a leading user of Cerner
information systems, we integrate data and automate processes
resulting in increased standardization, reduced variability,
clinical efficiency and improved outcomes.
Being a leader in the healthcare industry means providing the
highest quality care each and every day. Our clinicians and
hospital staff are committed to providing an excellent patient
experience. Every patient is unique and special, and we are
honored to have contributed on their journey.
2 0 1 8 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
DELIVERING CARE THAT SAVES LIVES
A resident of Victoria, British Columbia,
Sheldon Mack traveled to Las Vegas
in October 2017 to celebrate his 21st
birthday at the Route 91 Harvest Festival.
The concert evening turned to tragedy
when shots were fired into the crowd.
Sheldon was helping someone else when
he was struck twice, in his abdomen and
forearm. At Desert Springs Hospital
Medical Center he underwent life-saving
emergency surgery. Months later and back
to enjoying life, Sheldon was featured in
the Valley Health System’s Living Proof
campaign, returning to Desert Springs
to meet with his care team and express
his gratitude.
“ Without the team at Desert Springs, I wouldn’t be here today.
I’m Living Proof that there are great people and a great hospital
in Las Vegas.” ~ Sheldon Mack
Kenneth Walker (left) and Charlie
Ball were classmates who barely knew
each other but who are now joined
forever by the gift of life. Kenneth
had been on dialysis for over a year
and was in need of a new kidney.
Classmate Charlie Ball was a match.
They underwent transplant surgery at
The George Washington University
Hospital in Washington, DC. The
procedure and recovery were a success
– and Keith and Charlie now appreciate
the new-found bond between them.
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 .
QUALITY DISTINCTIONS
We are honored to receive industry accolades
that recognize the care and services we
provide. In 2018, 11 UHS Acute Care hospitals
earned an “A” safety grade from Leapfrog,
recognizing our hospitals’ efforts in protecting
patients from harm and meeting the highest
safety standards. In addition, two UHS Acute
Care hospitals – Henderson Hospital and
Southwest Healthcare System (Inland Valley
Medical Center and Rancho Springs Medical
Center) – were named Top General Hospitals
by The Leapfrog Group. The Top Hospital award,
given to just 35 hospitals nationally, is widely
acknowledged as one of the most competitive
honors American hospitals can receive.
The Centers for Medicare and Medicaid (CMS)
created the Five-Star Quality Rating System to
help consumers, their families and caregivers
compare hospitals more easily and to help
identify areas about which patients may want
to ask questions. St. Mary’s Regional Medical
Center and Temecula Valley Hospital each
received a 5-Star rating from CMS, recognizing
the facilities’ commitment to delivering high
quality, safe care.
Award-winning care
UHS Hospitals
Recognized
with an “A”
Safety Grade
from Leapfrog
in 2018
Aiken Regional
Medical Centers
Henderson
Hospital
Lakewood Ranch
Medical Center
Northern Nevada
Medical Center
South Texas Health
System Edinburg
South Texas Health
System McAllen
Southwest
Healthcare System
(Inland Valley)
Southwest
Healthcare System
(Rancho Springs)
St. Mary’s Regional
Medical Center
The clinical staff at Inland Valley Medical Center
celebrate receiving an “A” rating from The Leapfrog
Group in recognition of excellence in patient safety.
Temecula Valley
Hospital
Texoma Medical
Center
2 0 1 8 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
GROWTH AND EXPANSION
health coaching, exercise physiologist/fitness
In 2018, we completed a number of
expansions – increasing bed capacities, adding
service lines, installing innovative technologies
– to better meet the evolving healthcare
needs of the communities we serve.
Manatee Memorial Hospital located
in Bradenton, Florida, opened its new
33,000-square-foot emergency care center.
The addition features 48 treatment spaces
organized in four nursing clinical care areas.
In addition, the Manatee Healthcare System
launched a new app that leverages mobile
technology to better engage patients and
drive affinity and brand loyalty for the
Health System.
Lakewood Ranch Medical Center located
in Lakewood Ranch, Florida, added new
operating rooms, a heart catheterization lab,
and a new pre- and post-surgical area.
Wellington Regional Medical Center located
in Wellington, Florida, added a new Weight
Management Center which offers weight
loss programs, dedicated treatment teams,
instruction and nutrition management.
Doctors Hospital of Laredo, located in
Laredo, Texas, completed an expansion
which includes the renovation of the
emergency department, the addition of eight
new ICU beds, and a 4,000-square-foot
cardiac rehabilitation unit including a walking
track and specialized equipment.
Texoma Medical Center, located in
Denison, Texas, opened its new emergency
department and Level 3 trauma center,
increasing capacity from 24 to 48 beds and
now includes psychiatric treatment rooms,
trauma rooms and a dedicated Fast Track
for prompt treatment of minor injuries.
Fort Duncan Regional Medical Center,
located in Eagle Pass, Texas, opened a new
state-of-the-art cardiac catheterization
lab which features a digital cardiovascular
and interventional X-ray imaging system
for coronary angiography and stent
replacement. This will serve elective, urgent
and emergency-level patients.
During 2018, Manatee
Memorial Hospital
commemorated its
65th anniversary
of serving the local
community. In addition,
Manatee opened its
brand-new Emergency
Care Center that doubled
the size of the prior ER.
Processes are in place
to provide faster, more
streamlined care as the
community’s need for
emergency services
continues to grow.
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 .
South Texas Health System McAllen, located in
McAllen, Texas, completed a multi-million dollar
expansion which features enhanced patient
rooms, nursing stations and dining facilities
and also a renovation of the exterior façade.
Temecula Valley Hospital, located in
Temecula, California, completed a new
29,000-square-foot addition including
two new cardiac catheterization labs, a
neuro-interventional operating room, an
endovascular hybrid operating room, seven
additional Post-Anesthesia Care Unit bays,
seven additional ambulatory care unit
bays, an additional CT scanner and a large
community room.
Henderson Hospital, located in Henderson,
Nevada, opened a new advanced wound
care and hyperbaric therapy center, which
features hyperbaric chambers and treatment
rooms. The hospital also added a 28-bed
medical surgical unit and an 8-bed Level 2
neonatal intensive care unit.
Spring Valley Hospital Medical Center,
located in Las Vegas, Nevada, opened two
new medical-surgical units resulting in 72
additional beds. Further, the facility added
12 new intermediate beds.
CARE DELIVERY IN LAS VEGAS
In Las Vegas, The Valley Health System currently comprises
6 acute care hospitals (white), 2 behavioral health facilities
(blue), 4 CentRx pharmacy locations (green), 6 physician
offices (red), a freestanding emergency department
(orange), a bariatric care center (purple), 6 nearby medical
office complexes (yellow) and home care including in-home
nursing and therapy, wound care, cardiac care and respiratory
care. Additionally, we operate a network of over 400
primary care physicians through our ACO; and Prominence
Health Plan offers fully insured and self-funded commercial
insurance and Medicare Advantage coverage.
INTEGRATED DELIVERY
NETWORKS
Establishing clinically integrated, narrow
Summerlin Hospital Medical Center, located
networks in key markets is an important
in Las Vegas, Nevada, expanded its 6th floor
strategy as we provide our patients with
to 36 medical-surgical beds and its OB unit on
improved access to a comprehensive range
the 2nd floor to accommodate additional beds.
of services. The hospital serves as the
Finally, we have expanded our Accountable
Care Organization initiatives to five ACOs
across the country, covering 100,000 lives,
serving over 3,000 providers, achieving $31.5
million in Medicare Shared Savings and over
$5 million in preventative care revenue to
the provider participants.
hub, with affiliated outpatient and ancillary
services conveniently located across the local
geography. The expansion of ambulatory
service offerings – whether owned or aligned
through partnerships – keeps patients
in-network and provides a coordinated
care experience.
2 0 1 8 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 RESULTS
significant reduction in antibiotic days of
therapy signaling the positive effectiveness of
In 2018, our process improvement efforts
yielded 30 percent reduction in the patient’s
length of stay in the Emergency Department
(ED). In part, this was achieved by shortening
and streamlining the time it takes to move
a patient from the ED to an inpatient bed –
typically within a half hour of receiving the
bed assignment versus waiting in excess of
two hours in an ED holding bed. ED holding
hours across the division have declined by
27 percent.
Along with improving the patient experience
in the ED, we continue to make our Operating
Rooms more efficient to provide a better
experience for our surgeons. Operating room
turnover declined from over 30 minutes to 25
our antimicrobial stewardship programs.
The Acute Inpatient Rehabilitation Units saw
a 83 percent improvement in their Program
Evaluation Model (PEM) score in 2018.
PEM incorporates key quality and outcome
elements to include discharge to community,
which was 82 percent. Marketing efforts
and operational improvements resulted in
an increase in admissions and a $5.1 million
increase in revenue over 2017.
In 2018, we saw a $3.5 million reduction
in Registry/Agency nurse contract labor. At
the same time, we also saw a five percent
decrease in overtime for regular full-time staff
as a percentage of total hours worked.
minutes. Process improvement efforts in MRI
At each of our Acute Care hospitals
continue across the division with 10 facilities
across the nation, we are committed to
reducing patient wait-time by 50 percent.
Pharmacy inflation was held to 0.72 percent
yielding a $12.8 million cost avoidance across
the division and an actual reduction of
6.32 percent in antimicrobial reflected in a
6.32 percent in antimicrobial reflected in a
continuous improvement – improving clinical
outcomes, enhancing the patient experience,
streamlining operations and supporting
staff satisfaction.
Reaching our audiences
Reaching our audiences
Utilizing multi-channel integration, our marketing efforts continue to reach key
Utilizing multi-channel integration, our marketing efforts continue to reach key
audiences with relevant meaningful content that differentiates our hospital brands in the
minds of consumers. We seek to be top-of-mind in the markets in which we operate.
We measure digital engagement across all channels including websites, social media
accounts and with online reviews – all of which is to recognize patient sentiment and to
understand how we can continue to optimize the patient experience.
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 .
ENABLING MORE CONVENIENT
ACCESS TO CARE
Our Freestanding Emergency Departments (also known
as FEDs) provide additional, conveniently located access
points for people requiring immediate medical attention.
ER at Green Valley Ranch, an extension of Henderson Hospital, opened
for patient care in November and is already performing above proforma
expectations.
An extension of its respective hospital or health system, the FED
offers 24-hour emergency services comparable to that available
in the hospital’s onsite ED.
In 2018, we opened four new FEDs – one in Las Vegas and three
in South Texas. We are on schedule to open seven additional FEDs
across the network in 2019.
South Texas
Health System
FEDs opened
in 2018
Ware Road
McColl
Monte Cristo
2 0 1 8 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
We provide compassionate, outcomes-focused
care that transforms lives and families.
The Behavioral Health Division recorded another year of
strong clinical quality outcomes, solid financial performance
and continued growth trajectory in both the U.S. and the U.K.
In 2018, our dedicated clinicians and staff delivered
compassionate care to over 600,000 patients, providing hope
and healing to patients and families who struggle with mental
health challenges. Through a variety of inpatient, partial and
outpatient programs, we provide a broad range of services
addressing behavioral health and substance use disorder
needs for adults, adolescents and children.
The division continued to outperform the industry in several
quality measures. And we continue to enhance our relationships
with referral sources. In 2018, we collected more than 1,600
referral source satisfaction surveys with over 80 percent of
respondents indicating that a UHS facility was their provider
of choice.
As we continue to increase awareness and change the
conversation about mental health and addiction issues, we
remain committed to our top priority of taking care of patients
– treating individuals with respect and operating with integrity.
This is the philosophy that has powered past accomplishments
and will continue to fuel our success into the future.
Pictured on left: UHS has a long-standing
commitment to serving the behavioral
health needs of the military.
2 0 1 8 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 L T H D I V I S I O N
In response to the need for more acute
inpatient psychiatric capacity in the U.S.,
we continued to execute on our growth plan,
adding a total of 734 acute psychiatric beds
in new and existing facilities during 2018.
On the de novo front, UHS opened Palm
Point Behavioral Health in Titusville, Florida,
an 80-bed facility that expands access
to inpatient and outpatient mental health
treatment across the region.
The division opened the new Fort Lauderdale
Behavioral Health Center – replacing the
previous location. This is the largest
behavioral health facility in South Florida with
182 beds serving adolescents, adults and older
adults. The division expanded capacity at
facilities across the U.S. including at Holly Hill
Hospital, located in Raleigh, North Carolina,
which added 57 beds to serve more adult
community members.
Emerald Coast Behavioral Hospital in
Panama City, Florida added a new Outpatient
Center offering a variety of programming
to meet the needs of its civilian, veteran and
active duty clients. Facilities that completed
expansion and renovation projects during
2018 include Cypress Creek Hospital in
Houston, Texas; Poplar Springs Hospital in
Located in Kings Norton, Birmingham, United
Kingdom, the Wast Hills facility provides assessment
and treatment for adult men with autism and
complex mental health needs.
GROWTH AND EXPANSION
TO SERVE MORE PATIENTS
We continued to grow and expand the
delivery of care nationally and internationally,
providing more services to more patients.
The cornerstone of the division’s growth is
the team’s ability to identify and execute
on strategic opportunities.
In the U.K., the company completed the
Petersburg, Virginia; and River Park Hospital
acquisition of The Danshell Group in July,
in Huntington, West Virginia.
adding 25 behavioral health facilities with
288 licensed beds and providing care for
adults living with learning disabilities who
may also have a diagnosis of autism. Today,
under the Cygnet Health Care brand name,
the company is a leading provider in the
U.K., offering a full spectrum of behavioral
health services and treatments.
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 .
AN EMPHASIS ON
QUALITY MEASURES
At each of our behavioral health facilities,
quality of care and patient satisfaction have
been, and continue to be, our most important
metrics. UHS is one of the few behavioral
health providers voluntarily measuring clinical
outcomes. Examining a variety of metrics,
Some patients allow our hospitals to
contact them after their discharge to assess
how they are doing following treatment.
Patient responses to the aftercare survey
indicate that the vast majority of patients
sustain the improvements made during
treatment. Eighty-eight percent reported
no re-hospitalization; 73 percent reported
we are able to quantify changes in patients’
a positive quality of life.
conditions from admission to discharge.
A subsidiary of UHS, Mental Health Outcomes
(MHO) is a leading consultancy specializing
in the design and implementation of custom
outcomes measurement, aggregating patient
satisfaction surveys and outcomes.
In CMS’ Inpatient Psychiatric Facility
Quality Reporting requirements, our facilities
are compared to approximately 1,500 other
psychiatric providers across the country.
Our results exceed the national averages
in 12 out of 16 indicators.
We believe that patient satisfaction is a key
indicator of the effectiveness of our treatment
programs. In 2018, our patients rated their overall
care as 4.5 out of 5 in our patient satisfaction
surveys. More than 91 percent indicated they
felt better following care at one of our facilities,
and 87 percent would refer a friend or family
member in need of care.
SPECIALIZED CARE AND
TREATMENT PROGRAMS
Our residential treatment facilities continue
to enhance their therapeutic environments,
clinical programming and educational
services. Our innovative programs offer young
individuals an educational opportunity that
will place them on the road to success.
We are very proud that, in 2018, 330 youth
receiving mental health treatment in our
facilities obtained their high school diploma
or GED, a 7 percent increase from the
previous academic year.
Foundations Recovery Network (FRN),
a premier provider of addiction treatment,
is a national leader in co-occurring disorder
treatment for patients who experience mental
health and substance use issues. FRN operates
4 inpatient and 13 outpatient facilities.
“What Foundations did was show me how to live.
Because I think it’s that glimmer of hope you find
when you walk in the door and somebody offers you
a way out. And you’re just so grateful. I owe them
my life, I sincerely mean it. Everything I was looking
for I found at Foundations to give me the tools I
needed to live the life I’ve been blessed with today.”
~ Margaret Phillips, former patient at The Oaks at La Paloma
in Memphis, Tennessee
2 0 1 8 A N N U A L R E P O R T 1 9
BEHAVIORAL
HEALTH
INTEGRATIONS
In response to the significant
rise in demand for behavioral
health services, the division
is engaging in joint ventures,
partnerships and other new
care delivery models.
Lancaster Behavioral Health Hospital
officially opened in June 2018 to serve
the community.
U H S B E H AV I O R A L H E A L T H D I V I S I O N
Universal Health Services, Inc. has a long-standing
commitment to serving the behavioral health
needs of the military, including active duty service
members, veterans and their families. In 2018, we
served over 7,500 service members through our
Patriot Support Programs.
We also offer specialized programs dedicated to the
needs of First Responders. For example, at Cypress
Creek Hospital, in Houston, Texas, we launched
a dedicated unit to care for and treat firefighters,
police officers and EMS. The Honor Strong Program
provides resiliency-focused, trauma-informed care
for these uniformed professionals who may be
experiencing mental health issues due to exposure
to tragic circumstances.
Our Behavioral Health facilities continue to engage
with local audiences, sharing the meaningful
ways in which we serve patients, their families
and our communities. Compelling content drives
affinity and brand loyalty. In 2018, our facilities’
social media content reached over 8 million people
and drove thousands of click-throughs and phone
calls to facilities for more information.
SUICIDE PREVENTION
As a partner of the National Action Alliance
for Suicide Prevention, we are proud that close
to 40 of our inpatient psychiatric facilities have
adopted the Zero Suicide principles. Further, 92
percent of UHS Behavioral CEOs indicated that
the Suicide Prevention Tool Kit was impactful in
helping communities tap into key resources.
Our leadership of and partnership with the
Action Alliance has provided many opportunities to
demonstrate our commitment to suicide reduction
using evidence-based resources and educating the
community of their role in changing the conversation.
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 .
Integration of behavioral health and physical
health care services can decrease unnecessary
emergency department visits, reduce unnecessary
inpatient admissions, and enhance compliance
with treatment leading to better clinical outcomes
and increased patient satisfaction. The division
currently has over 40 active integration projects
in progress.
During the year, the division operationalized key
joint venture partnerships. We opened Lancaster
Behavioral Health Hospital – a new 126-bed facility
in Lancaster, Pennsylvania, which is a collaboration
with Penn Medicine Lancaster General Health,
part of the University of Pennsylvania Health
System. The facility provides 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.
In partnership with Providence Health and Services,
we opened Inland Northwest Behavioral Health,
a 100-bed de novo hospital in Spokane, Washington,
with inpatient and outpatient services for children,
adolescents, adults and older adults.
Beaumont Health and UHS formed a joint venture
to address the growing, unmet need for accessible,
high-quality and advanced mental health services
in Southeast Michigan and across the state.
Construction of the new facility will begin in 2019
and is expected to open in early to mid-2021.
The division also announced a joint venture with
Mercy Medical Center Des Moines, Iowa, to build
a new 100-bed facility in Clive, Iowa. This will be
UHS’ first facility in the state of Iowa. The new
hospital is on schedule to open in 2020.
Leveraging today’s advancements to improve the
patient experience, UHS has extensive experience
providing psychiatric and other clinical professional
services through the use of secure televideo
technology. We currently have over 168 behavioral
health facilities with active telehealth projects.
Inland Northwest
Behavioral Health
Spokane, Washington
2 0 1 8 A N N U A L R E P O R T 2 1
DELIVERING SUPERIOR
QUALITY CARE
We strive to provide superior quality care for each patient we are privileged
to serve. Many of our patients face complex health challenges and we work
hard to help them lead the fullest lives possible. Every patient interaction
matters and we believe our patient-centric approach is reflected in our high
patient-satisfaction scores and strong regulatory record.
Since his seven-bypass open-
heart surgery, followed by
intense cardiac rehabilitation,
both at Doctors Hospital of
Laredo, Aristeo Gonzalez has
run 12 marathons and 15 half-
marathons. “I’m very grateful
to Dr. Santos, the nurses, and
the whole team. I am going to
continue training to see if I can get a Boston Marathon
qualifying time. That’s my goal.”
Alexis and Melina Garza
are alive and thriving,
thanks to life-saving fetal
laser surgery performed at
Wellington Regional Medical
Center to treat twin-twin
transfusion syndrome.
“We knew Wellington was
on the cutting edge of this.
We are so fortunate.”
“ I had a serious suicide
attempt and was in
a state of complete
despair when I arrived.
Fuller was here for me
when I couldn’t be here
for myself and I will
forever be grateful.
I felt listened to, cared
for and safe from
the moment I arrived
to the moment I
was discharged.”
~ I.M., former patient
at Fuller Hospital
Please visit uhsinc.com/our-stories for the expanded versions of these and other patient testimonials.
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 .
Anthony Roosevelt Stokes knows first-
hand that no two strokes are the same. In
addition to receiving top-notch immediate
medical care, he diligently completed the
rehabilitation program, key to a complete
recovery. “Palmdale Regional Medical
Center saved me – twice.”
Foundations Behavioral Health LifeWorks
Schools are licensed specialty therapeutic
day schools for students in middle and
high school affected by social, emotional
or behavioral health challenges. Mother
Lillian Diaz concluded a long letter
of gratitude with, “Thank You LifeWorks
and your staff for impacting life in such
a positive way!”
“ I quickly learned that The BridgeWay was a safe
place for me. My caregivers worked as a team to
help me to get the right treatment for my diagnosis:
bipolar disorder.”
~ Barbara, former patient at The BridgeWay
A team of service users at Cygnet
Hospital Bierley produced a film
exploring stigma in and around mental
health. “As a mental health patient,
I have found that people who suffer
with their mental health come from all
different backgrounds and have all lived
After a long-term and
increasingly complex
‘mystery’ illness, including
battling life-threatening
complications from
infection, Katie Wheeler
was diagnosed with
Superior Mesenteric
Artery syndrome, a rare
digestive condition.
“There is no doubt in my
mind that I would not
be here to talk about this
today if it weren’t for
Temecula Valley Hospital.
I am truly humbled and
cannot wait to apply to
medical school and help
others in their darkest
times as the doctors and
staff there did for me.”
very different lives, and therefore should not be judged because you never
really know someone just by looking at them,” says Deborah Henry.
“I gained so much from the whole process of creating this film with my
friends,” adds Hannah Christie.
2 0 1 8 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
as well as serving patients and the communities in which
we operate. Keeping our surroundings clean and minimizing
pollution is of benefit to all. We are committed to implementing
best practices when managing energy usage, consumption
and waste disposal. Stewardship continues to play an important
role in our commitment to a clean environment and strong
communities.
UNCOMPENSATED CARE (CHARITY CARE
AND UNINSURED DISCOUNTS):
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, 2018, 2017 and 2016:
2018
2017
2016
Amount
%
Amount
%
Amount
%
Charity care
$761,783
40%
$887,136
50%
$733,585
50%
Uninsured discounts
$1,132,811
60%
$881,265
50%
$720,205
50%
Total uncompensated
care
$1,894,594
100%
$1,768,401
100%
$1,453,790
100%
(dollar amounts in thousands)
Generally, patients treated at our hospitals for non-elective
services, who have gross income less than 400 percent 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 8 A N N U A L R E P O R T 2 5
ENERGY STAR® CERTIFICATION
Green Globes is a science-based building
In 2017, UHS had launched a four-year,
$45 million energy reduction initiative to
be implemented at all facilities. The project
continues today and as such focuses on
replacing fluorescent lighting with more
efficient LED lighting and optimization of
our large HVAC systems.
rating system that supports a wide range
of new construction and existing building
project types, certifying that a building’s
operations are sustainable by both policy and
design. 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
By the end of 2020, we are projected to have
space in the U.S. alone, there is an enormous
reduced our annual energy consumption by
opportunity for the industry to transform
125 million kilowatt hours and 98 million cubic
the impact of the built environment. UHS
feet of gas. This equates to 100,000 tons of
is proud to continue its commitment to
CO2 emissions avoided, or 20,000 passenger
the health and safety of its patients and
vehicles removed from the roads, or 229
employees by providing green and
million miles not driven.
sustainable environments.
LEED / GREEN GLOBES
CERTIFICATION
In continuing 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
CULINARY AND NUTRITION
The Culinary and Nutrition Department seeks
to deliver and utilize the right foods, for the
right reasons, embedded into our menus and
prepared using efficient equipment.
sustainable practices, UHS is in the midst of
We expanded our mission to not only
recertifying five of our six hospitals located
provide foods from sustainable sources, but
in Las Vegas as energy efficient properties.
do so with cleaner labels for a better world
We had previously achieved the first LEED
and a better body. We have successfully
(Leadership in Energy and Environmental
removed all trans-fatty acids and high-
Design) for Existing Buildings Gold
fructose corn syrup (HFCS) from ingredients
certifications for hospitals in Nevada, and
we use in our recipes. We have considerably
are furthering our commitment to operating
decreased the use of HFCS in our Behavioral
efficient and environmentally sustainable
Health division, serving more 100 percent
operations by recertifying these facilities
juices and flavored water alternatives which
under the globally recognized Green Globes
provide a healthier choice for patients, as
green buildings rating system.
opposed to carbonated soft drinks.
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 .
In 2018, we set a goal to increase the use
ENVIRONMENTAL SERVICES
In 2018, UHS continued to innovate the
way we treat and protect hospital floors
at our Acute Care hospitals. In both newly
remodeled and expanded areas of the
hospitals, we are installing no-wax floors
to eliminate the need for protectant
chemicals. In areas not under remodel, we
are reducing the use of floor waxes and
applying environmentally safer floor finishes,
eliminating the need for caustic floor
stripper products.
Partnering with chemical vendors, we also
switched many cleaning agents to ‘Green
Seal Certified’ floor care products within
our Acute Care facilities.
Partnering with floor equipment vendors,
at multiple facilities we began using floor
cleaning equipment for non-patient areas
which electrically charges water for cleaning
purposes, drastically reducing the need
for chemicals.
of seafood served from Best Aquaculture
Practices (BAP) certified sources. We were
able to increase the number of BAP-certified
seafood items by 25 percent, but were limited
by price volatility. This challenge inspired
us to look at other protein opportunities,
such as poultry.
Our use of ‘Antibiotic Free’ and ‘No
Antibiotics Ever’ poultry items increased
during 2018. Although there is a price
difference, we consider it an investment in
the health of our patients and our goal to
move toward clearer label foods.
To make certain that these changes are
sustained, we are utilizing Centralized Order
Guide Management and increasing the
number of Standardized Menu Cycles so
the right product, for the right reason, is
featured consistently.
For the coming year, we will expand
upon the progress made with our Kitchen
Equipment Initiative. Kitchens utilize large
amounts of energy to cool, store and prepare
food. Through a set of Standardized Kitchen
Templates, equipment is now being selected
not only for long term durability, but also for
the ability to conserve energy. By selecting
more technologically advanced and efficient
equipment, we look to deliver a ten percent
decrease in kitchen energy usage in our
new and refurbished kitchens.
2 0 1 8 A N N U A L R E P O R T 2 7
RESPONSIBLE PHARMACEUTICAL
WASTE MANAGEMENT
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 law which provides
the framework for the management of
Proper disposal of pharmaceutical and
controlled substance waste generated at
our hospitals provides an added degree
of safety for our patients and employees
while protecting our communities and
the environment.
REPROCESSING AND
WASTE DIVERSION
hazardous and non-hazardous solid waste.
Through reprocessing and remanufacturing
Pharmaceuticals are considered hazardous
efforts with our business partners, UHS is
because they exhibit hazardous or toxic
able to decrease its environmental impact
chemical properties or they may exhibit
utilizing key programs. In 2018, our Acute
characteristics such as being ignitable,
Care division was able to divert 59,116 pounds
of waste by collecting 487,857 items. UHS
has been participating in reprocessing and
remanufacturing programs for over 15 years.
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 the 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.
We expanded the scope of the pharmaceutical
waste management program by incorporating
the use of controlled substance waste
disposal containers to safely and effectively
manage the disposal of controlled substance
waste generated by UHS facilities. The
containers specifically designed to prevent
diversion of controlled substances in addition
to providing an environmentally friendly
method for disposal.
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 .
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
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 No
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 No
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No
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.
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.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of voting stock held by non-affiliates at June 30, 2018 was $9.4 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, 2019, were 6,577,100; 83,527,315; 661,688 and 18,653,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for our 2019 Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 2018 (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.
2018 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
25
34
37
38
41
42
79
80
80
80
81
82
82
82
82
82
83
87
88
This Annual Report on Form 10-K is for the year ended December 31, 2018. 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 27, 2019, we owned and/or operated 350 inpatient facilities and 37 outpatient and other facilities including the
following located in 37 states, Washington, D.C., the United Kingdom and Puerto Rico:
Acute care facilities located in the U.S.:
26 inpatient acute care hospitals;
9 free-standing emergency departments, and;
6 outpatient centers & 1 surgical hospital.
Behavioral health care facilities (324 inpatient facilities and 21 outpatient facilities):
Located in the U.S.:
188 inpatient behavioral health care facilities, and;
19 outpatient behavioral health care facilities.
Located in the U.K.:
133 inpatient behavioral health care facilities, and;
2 outpatient behavioral health care facilities.
Located in Puerto Rico:
3 inpatient behavioral health care facilities.
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and
commercial health insurer accounted for 53% during each of 2018 and 2017 and 52% during 2016. Net revenues from our behavioral
health care facilities and commercial health insurer accounted for 47% of our consolidated net revenues during each of 2018 and 2017
and 48% during 2016.
Our behavioral health care facilities located in the U.K. generated net revenues of approximately $505 million in 2018, $429
million in 2017 and $241 million in 2016. Total assets at our U.K. behavioral health care facilities were approximately $1.224 billion
as of December 31, 2018, $1.098 billion as of December 31, 2017 and $965 million as of December 31, 2016.
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.
2018 Acquisitions of Assets and Businesses:
2018 Acquisitions:
During 2018 we spent $110 million to acquire businesses and property consisting primarily of:
The Danshell Group, consisting of 25 behavioral health facilities located in the U.K. (acquired during the third quarter of
2018), and;
A 109-bed behavioral health care facility located in Gulfport, Mississippi (acquired during the first quarter of 2018).
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.
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. Our filings are also available to the public at the
website maintained by the SEC, www.sec.gov. The information posted on our website is not incorporated into this Annual Report. Our
1
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 2018. 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:
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. In recent years our behavioral
health services segment has been focused on efforts to partner with non-UHS acute care hospitals to help operate their behavioral
health services. These arrangements include hospital purchases, leased beds and joint venture operating agreements.
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.
2
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 payers 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 payers. 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
2018
2017
2016
2015
2014
6,232
23,509
6,127
23,151
5,934
21,829
5,832
21,202
5,776
20,231
6,056
23,425
5,954
23,068
5,759
21,744
5,656
21,116
5,571
20,131
303,985 297,390 274,074 261,727 251,165
482,658 467,822 456,052 447,007 426,510
4.5
13.3
4.4
13.6
4.6
13.2
4.7
13.1
4.6
12.9
1,376,988 1,312,265 1,251,511 1,218,969 1,167,726
6,418,334 6,381,756 6,004,066 5,835,134 5,518,660
61 %
75 %
62 %
75 %
59 %
76 %
60 %
76 %
58 %
75 %
59 %
75 %
57 %
75 %
59 %
76 %
55 %
75 %
57 %
75 %
3
(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 12 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 or state 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 payers.
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
4
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 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 $24,748 for each violation, and up to $164,992 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
5
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 $100,000 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 $100,000 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
6
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 with an emergency department 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
7
treatment. There are severe penalties 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.
8
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 78,700 employees as of December 31, 2018, of whom approximately 55,800
were employed full-time. In addition, our facilities located in the U.K. had approximately 8,400 employees as of December 31,
2018. 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 250 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 625 of our employees at five 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 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 Service Employees International Union. 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
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.
9
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, 2018, 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. The advisory agreement was Amended and Restated effective January 1, 2019. Among other
things, the Amended and Restated Advisory Agreement (the “Agreement”) eliminated the 20% annual incentive fee clause which we
were previously entitled to under certain conditions (the incentive fee requirements have never been achieved). 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. The
advisory agreement was renewed by the Trust for 2019 at the same rate as the prior three years. During 2018, 2017 and 2016, the
advisory fee was computed at 0.70% of the Trust’s average invested real estate assets. We earned an advisory fee from the Trust,
which is included in net revenues in the accompanying consolidated statements of income, of approximately $3.8 million during 2018,
$3.6 million during 2017 and $3.3 million during 2016.
Our pre-tax share of income from the Trust was $1.4 million during 2018 which is included in other income, net, on the
accompanying consolidated statements of income. Our pre-tax share of income from the Trust was $2.6 million during 2017 and $1.0
million during 2016, which are included in net revenues in the accompanying consolidated statements of income for each year.
Included in our share of the Trust’s income for 2018, is income realized by the Trust in connection with hurricane-related insurance
proceeds received in connection with the damage sustained from Hurricane Harvey in August, 2017. Included in our share of the
Trust’s income for 2017 was a gain realized by the Trust in connection with a divestiture of property that was completed during the
first quarter of 2017, as well as insurance proceeds in excess of damaged Trust property. We received dividends from the Trust
amounting to $2.1 million during each of 2018 and 2017 and $2.0 million during 2016.
The carrying value of our investment in the Trust was $7.5 million and $8.2 million at December 31, 2018 and 2017,
respectively, and is included in other assets in the accompanying consolidated balance sheets. The market value of our investment in
the Trust was $48.3 million at December 31, 2018 and $59.2 million at December 31, 2017, 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
10
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 was $16.0 million during each of
2018 and 2017 and $15.9 million in 2016. 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. During the second quarter of 2018, we exercised our 5-year renewal option on McAllen
Medical Center which extended the lease term on this facility, at the existing lease rate, through December, 2026.
The table below details the renewal options and terms for each of our three acute care hospital facilities leased from the Trust:
Hospital Name
McAllen Medical Center
Wellington Regional Medical Center
Southwest Healthcare System, Inland Valley Campus
Annual
Minimum
Rent
End of Lease Term
Renewal
Term
(years)
$ 5,485,000 December, 2026
$ 3,030,000 December, 2021
$ 2,648,000 December, 2021
5 (a)
10 (b)
10 (b)
(a) We have one 5-year renewal option 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 owned by the Trust or by limited liability companies in which the Trust holds 95% to 100% of the ownership interest.
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 (81)
Marc D. Miller (48)
Steve G. Filton (61)
Marvin G. Pember (65)
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 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.
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.
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
11
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 16% in 2018, 15% in 2017 and 16% in 2016 of our consolidated net revenues. On a
combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 12% in 2018, 11% in 2017 and
7% in 2016, 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% of our consolidated net revenues during each of 2018 and 2017 and 16% in
2016. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 24% in 2018, 20%
in 2017 and 13% in 2016, 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% of our consolidated net revenues during each of 2018, 2017 and
2016. On a combined basis, after deducting an allocation for corporate overhead expense, these facilities generated 16% in 2018, 13%
in 2017 and 15% in 2016, 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 payers.
We derive a significant portion of our revenue from third-party payers, 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 payers. If the rates paid or
the scope of services covered by governmental payers 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.
We receive Medicaid revenues in excess of $100 million annually from each of Texas, California, Washington, D.C.,
Nevada, 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 payers,
including managed care organizations, significantly affects the revenues and operating results of our hospitals. Private payers,
including managed care organizations, 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 payers could have a material adverse effect on our financial position and our results
of operations.
12
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 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.
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
13
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 certain 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 eliminated the penalty for failing to
maintain health coverage that was part of the original Legislation. In addition, Congress has considered legislation that would, if
enacted, 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 final rule in June, 2018 by the Department of Labor to enable the formation of association health plans that would be exempt from
certain Legislation requirements such as the provision of essential health benefits; (iii) the issuance of a final rule in August, 2018 by
the Department of Labor, Treasury, and Health and Human Services to expand the availability of short-term, limited duration health
insurance, (iv) 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; (v) relaxing requirements for state innovation
waivers that could reduce enrollment in the individual and small group markets and lead to additional enrollment in short-term, limited
duration insurance and association health plans; and (vi) the issuance of a proposed rule by the Department of Labor, Treasury, and
Health and Human Services that would incentivize the use of health reimbursement accounts by employers to permit employees to
purchase health insurance in the individual market. The uncertainty resulting from these Executive Branch policies has led to reduced
Exchange enrollment in 2018 and 2019 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.
14
While attempts to repeal the entirety of the ACA have not been successful to date, a key provision of the ACA was repealed as
part of the Tax Cuts and Jobs Act and, on December 14, 2018, a federal U.S. District Court judge in Texas ruled the entire ACA is
unconstitutional. While that ruling is stayed and has been appealed, it has caused greater uncertainty regarding the future status of the
ACA. If all or any parts of the ACA are found to be unconstitutional, it could have a material adverse effect on the Company.
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 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 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 payer 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, payer
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.
In some markets, certain of our competitors may have greater financial resources, be better equipped and offer a broader range
of services than we offer. 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.
15
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 promoting interoperability 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. In the 2019 IPPS final rule, CMS re-named the meaningful use program to “promoting interoperability”. We believe that all of
our acute care hospitals have met the applicable promoting interoperability 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
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.
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
16
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.
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
17
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.
18
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 make acquisitions that meet our
target criteria. We may also have difficulties acquiring hospitals from not-for-profit entities due to regulatory scrutiny.
Acquisitions 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, 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 properties 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 assets 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 assets or entities that we acquire with our ongoing operations. We may
experience delays in implementing operating procedures and systems in newly acquired operations. Integrating an acquisition 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 operations. In addition, some of the acquisitions we have made had significantly lower operating
margins than the assets we operated prior to the time of our acquisition. If we fail to improve the operating margins of the operations
we acquire, operate such assets profitably or effectively integrate the acquired operations, 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 Legislation 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 Legislation also prohibits the
use of federal funds under the Medicaid program to reimburse providers for treating certain provider-preventable conditions.
19
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 assets or entities with unknown or contingent liabilities, we could become liable for material obligations.
Assets or entities 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 for these matters, we could experience difficulty enforcing those obligations or
we could incur material liabilities for the past activities of assets or entities we acquire. Such liabilities and related legal or other costs
and/or resulting damage to an acquired asset’s or entities’ 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 and our reputation
could suffer significantly. 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 and the related publicity and news articles that have been published concerning these matters could
have a material adverse effect on our business, financial condition, results of operations and/or cash flows which in turn could cause a
decline in our stock price.
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 and stockholder 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 payers 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 payer-required preadmission authorization and utilization review and by payer 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
20
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, payer
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, 2018, 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,
scheduled for March 29, 2019. In November 2018, the United Kingdom and the European Union agreed upon a draft Withdrawal
Agreement that set out the terms of the United Kingdom’s departure, including commitments on citizen rights after Brexit, a financial
settlement from the United Kingdom, and a transition period from March 29, 2019 through December 31, 2020 to allow time for a
future trade deal to be agreed. On January 15, 2019, the draft Withdrawal Agreement was rejected by the British legislature, creating
significant uncertainty about the terms and timing under which the United Kingdom will leave the European Union.
If the United Kingdom leaves the European Union with no agreement (a “hard Brexit”), it will likely have an adverse impact on
labor and trade in addition to creating further currency volatility. In the absence of a future trade deal, the United Kingdom’s trade
with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. These
changes to the trading relationship between the United Kingdom and the European Union would likely result in increased cost of
goods imported into the United Kingdom. Additional currency volatility could result in a weaker British pound, which may decrease
the profitability of our operations in the United Kingdom. A weaker British pound versus the U.S. Dollar also causes local currency
results of our United Kingdom operations to be translated into fewer U.S. Dollars during a reporting period.
21
Brexit could lead to legal and regulatory uncertainty as the United Kingdom determines which European Union laws to replace
or replicate. The exit of the United Kingdom from the European Union could also create future economic uncertainty, both in the
United Kingdom and globally, especially in the event of a hard Brexit. 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.
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, payers, 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.
22
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.
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.
The LIBOR calculation method may change and LIBOR is expected to be phased out after 2021.
Our Credit Agreement permits interest on borrowings to be calculated based on LIBOR, and a number of our interest rate swaps
are based on LIBOR. On July 27, 2017, the United Kingdom Financial Conduct Authority (the “FCA”) announced that it will no
longer require banks to submit rates for the calculation of LIBOR after 2021. In the meantime, actions by the FCA, other regulators, or
law enforcement agencies may result in changes to the method by which LIBOR is calculated. At this time, it is not possible to predict
the effect of any such changes or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere.
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, 2018, 24.2 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
23
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.
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 20, 2018, the shares of Class A and Class C Common Stock constituted 7.7% of the aggregate outstanding shares
of our Common Stock, had the right to elect five members of the Board of Directors and constituted 86.8% of our general voting
power as of that date. As of March 20, 2018, the shares of Class B and Class D Common Stock (excluding shares issuable upon
exercise of options) constituted 92.3% of the outstanding shares of our Common Stock, had the right to elect two members of the
Board of Directors and constituted 13.2% 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.
24
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.
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
ER at Green Valley Ranch ............................................................. 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 Alamo ........................................................................ Alamo, Texas
STHS ER at McColl ....................................................................... Edinburg, Texas
STHS ER at Mission (2) ................................................................. Mission, Texas
STHS ER at Monte Cristo .............................................................. Edinburg, Texas
STHS ER at Ware Road ................................................................. McAllen, Texas
STHS ER at Weslaco (2) ................................................................ 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
25
Number
of
Beds
211
62
250
238
293
25
183
—
101
385
166
—
120
295
108
405
90
—
184
235
441
60
134
—
—
—
—
—
—
130
120
364
229
485
140
266
60
306
Real
Property
Ownership
Interest
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Name of Facility
Wellington Regional Medical Center (2) ................................................. West Palm Beach, Florida
Location
United States:
Inpatient Behavioral Health Care Facilities
Location
Name of Facility
Alabama Clinical Schools ....................................................................... Birmingham, Alabama
Alhambra Hospital .................................................................................. Rosemead, California
Alliance Health Center ............................................................................ Meridian, Mississippi
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
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 ..................................................................................... 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
26
Number
of
Beds
233
Real
Property
Ownership
Interest
Leased
Number
of
Beds
80
109
214
136
102
62
48
58
80
124
102
94
115
78
105
121
200
127
88
110
146
102
68
106
138
34
40
94
60
56
56
110
104
58
174
40
36
112
50
147
57
108
197
Real
Property
Ownership
Interest
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
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
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
United States:
Location
Name of Facility
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
Fairfax
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
Inland Northwest Behavioral Health (12) ............................................... Spokane, Washington
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
Lancaster Behavioral Health Hospital (11) ............................................. Lancaster, Pennsylvania
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
27
Number
of
Beds
80
97
110
128
166
55
104
166
86
239
Real
Property
Ownership
Interest
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
157
30
34
108
182
108
84
100
148
219
88
72
54
24
109
120
186
160
243
151
111
125
86
86
219
285
206
64
100
155
82
153
116
85
345
126
112
124
250
56
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
United States:
Location
Name of Facility
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
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
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 Point Behavioral ............................................................................ Titusville, FL
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
28
Number
of
Beds
68
96
97
140
59
32
117
134
104
120
80
74
134
90
115
132
103
74
30
30
30
98
71
75
164
108
59
64
74
64
84
148
106
246
120
127
208
158
42
274
80
130
102
34
110
80
125
80
210
126
187
Real
Property
Ownership
Interest
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Leased
Leased
Owned
Owned
Leased
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
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 ........................................................................... Burien, Washington
Shadow Mountain Behavioral Health System ....................................... Tulsa, Oklahoma
Sierra Vista Hospital .............................................................................. Sacramento, California
Southern Crescent Behavioral Health
Anchor Hospital ............................................................................. Atlanta, Georgia
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
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
Acer Clinic (9) ........................................................................................ Chestherfield, UK
Acer Clinic 2 (9) .................................................................................... Chestherfield, UK
Albert Ward (9) ...................................................................................... Darlington, UK
Amberwood Lodge (9) ............................................................................ Dorset, UK
Ashfield House (9) .................................................................................. Huddersfield, UK
Location
29
Number
of
Beds
84
138
130
112
118
265
149
60
249
171
Real
Property
Ownership
Interest
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
122
50
101
100
30
110
80
64
178
126
96
60
151
122
64
69
112
104
132
122
98
100
120
100
95
160
116
144
159
146
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
14
14
8
9
6
Real
Property
Ownership
Interest
Owned
Owned
Owned
Owned
Owned
United Kingdom:
Location
Name of Facility
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
Bostall House (10) ................................................................................. London, 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
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
Cedar Vale (10) ...................................................................................... Nottinghamshire, UK
Chaseways .............................................................................................. Sawbridgeworth, UK
Chesterholme (10) .................................................................................. Northumberland, UK
Coulby Lodge (10) ................................................................................. North Yorkshire, 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
30
Number
of
Beds
20
16
8
8
12
6
167
34
20
20
24
26
12
6
24
57
7
10
8
20
8
20
10
36
7
10
9
32
14
6
16
8
56
62
63
32
25
50
26
39
36
61
72
17
88
49
15
52
31
28
24
Real
Property
Ownership
Interest
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
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
United Kingdom:
Location
Name of Facility
Dene Brook (9) ....................................................................................... Dalton Parva, UK
Devon Lodge (9) ..................................................................................... Southampton, UK
Ducks Halt (10) ...................................................................................... Essex, UK
Eleni House (9) ....................................................................................... Essex, UK
Ellen Mhor (10) ..................................................................................... Dundee, UK
Elston House (9) ..................................................................................... Nottinghamshire, UK
Fairways (9) ............................................................................................ Suffolk, UK
Farm Lodge ............................................................................................. Rainham, UK
The Fields (9) .......................................................................................... Sheffield, UK
Flower Adams (9) .................................................................................. Colchester, UK
The Fountains (9) .................................................................................... Blackburn, UK
The Gables (9) ........................................................................................ Essex, UK
Gledcliffe Road (9) ................................................................................. Huddersfield, UK
Gledholt (9) ............................................................................................. Huddersfield, UK
Hawkstone (9) ......................................................................................... Utley, UK
Hollyhurst (10) ....................................................................................... County Durham, UK
Hope House (10) .................................................................................... County Durham, UK
Kirkside House (9) .................................................................................. Leeds, UK
Kirkside Lodge (9) .................................................................................. Leeds, UK
Langdale House (9) ................................................................................. Huddersfield, UK
Langdale Coach House (9) ...................................................................... Huddersfield, UK
Larch Court (9) ....................................................................................... Essex, UK
Limes Houses (9) .................................................................................... Nottinghamshire, UK
Longfield House (9) ................................................................................ Bradford, UK
Lowry House (9) ..................................................................................... Hyde, UK
Maidstone ............................................................................................... Maidstone, UK
Marion House (9) ................................................................................... Derby, UK
Meadows Mews (9) ............................................................................... Tipton, UK
Newbus Grange (10) .............................................................................. County Durham, UK
Norcott House (9) ................................................................................... Liversedge, UK
Norcott Lodge (9) ................................................................................... Liversedge, UK
Oak Court (9) .......................................................................................... Essex, UK
Oakhurst Lodge (9) ................................................................................. Hampshire, UK
Oaklands (10) ......................................................................................... Northumberland, UK
Old Leigh House (10) ............................................................................ Essex, UK
The Orchards (10) .................................................................................. Essex, 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
Ramsey (9) ............................................................................................. Colchester, UK
Ranaich House (10) ................................................................................ Stirling, UK
Redlands (10) ......................................................................................... County Durham, UK
Rhyd Alyn (9) ......................................................................................... Flintshire, UK
Rufford Lodge (9) .................................................................................. Mansfield, 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
31
Number
of
Beds
13
12
5
8
12
8
8
5
54
20
32
7
6
9
10
19
11
7
8
8
3
4
6
9
12
65
5
10
17
11
9
12
8
19
7
5
10
4
13
4
25
21
14
5
6
2
20
14
4
55
30
Real
Property
Ownership
Interest
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
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
United Kingdom:
Location
Name of Facility
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
The Sycamores (9) .................................................................................. Derbyshire, UK
The Sycamores No 4 & 5 (9) ................................................................. Derbyshire, UK
Tabley Nursing Home—Tabley .............................................................. Tabley, UK
Thistle Care Home (10) ......................................................................... Dundee, UK
Thornfield Grange (10) .......................................................................... County Durham, UK
Thornfield House (9)............................................................................... Bradford, UK
Thors Park (10) ...................................................................................... Essex, UK
Toller Road (10) ..................................................................................... Leicestershire, UK
Trinity House (10) ................................................................................. Galloway, UK
Tupwood Gate Nursing Home ................................................................ Caterham, UK
Victoria House (10) ................................................................................ County Durham, UK
Vincent Court (9) .................................................................................... Lancashire, UK
Walkern Lodge (9) ................................................................................. Stevenage, UK
Wallace Hospital (10) ............................................................................ Dundee, UK
Wast Hills (10) ....................................................................................... West Midlands, UK
Whorlton Hall (10) ................................................................................. County Durham, UK
Willow House (10) ................................................................................. West Midlands, UK
Woking Hospital ..................................................................................... Woking, UK
Woodcross Street (9)............................................................................... Wolverhampton, UK
Yew Trees (10) ...................................................................................... Essex, UK
Puerto Rico:
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
Location
Outpatient Behavioral Health Care Facilities
United States:
Number
of
Beds
17
9
9
32
23
22
6
4
51
10
9
7
14
8
13
32
6
5
4
10
26
17
8
60
8
10
Number
of
Beds
165
45
30
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 (VA) ...................................................................................................... Portsmouth, Virginia
Foundations Atlanta .......................................................................................................... Atlanta, Georgia
Foundations Chicago ........................................................................................................ Chicago, Illinois
Foundations Detroit .......................................................................................................... Bingham Farms, Michigan
Location
32
Real
Property
Ownership
Interest
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
Real
Property
Ownership
Interest
Owned
Owned
Owned
Real
Property
Ownership
Interest
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
United States:
Location
Name of Facility
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 Pointe ......................................................................................................................... Little Rock, Arkansas
St. Louis Behavioral Medicine Institute............................................................................ St. Louis, Missouri
Talbott Recovery ............................................................................................................... Atlanta, Georgia
United Kingdom:
Name of Facility
Long Eaton Day Services (9) ............................................................................................ Nottingham, UK
Sheffield Day Services (9) ................................................................................................ Sheffield, UK
Location
Outpatient Centers and Surgical Hospital
Name of Facility
Aiken Surgery Center ....................................................................................................... Aiken, South Carolina
Cancer Care Institute of Carolina ...................................................................................... Aiken, South Carolina
Cornerstone Regional Hospital (4) ................................................................................... Edinburg, Texas
Manatee Diagnostic Center ............................................................................................... Bradenton, Florida
Palms Westside Clinic ASC (6) ........................................................................................ Royal Palm Beach, Florida
Quail Surgical and Pain Management Center (13) ............................................................ Reno, Nevada
Temecula Valley Day Surgery and Pain Therapy Center (5) ............................................ Murrieta, California
Location
Real
Property
Ownership
Interest
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Owned
Owned
Real
Property
Ownership
Interest
Owned
Owned
Real
Property
Ownership
Interest
Owned
Owned
Leased
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 manage and own a minority interest in an LLC that owns and operates this center.
(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”).
(10) These facilities were acquired in late July, 2018, upon our completion of the acquisition of The Danshell Group.
(11) We manage and own a noncontrolling interest of 50% in this facility. The remaining 50% ownership interest is held by an
unaffiliated third party. Land of this facility is leased from the unaffiliated third party member.
33
(12) We manage and hold an 80% ownership interest in this facility. The remaining 20% ownership interest is held by an unaffiliated
third party.
(13) We hold a 51% ownership interest in this facility. The remaining 49% ownership interest is held by unaffiliated third parties.
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 $81 million in 2018, $80 million in 2017 and $74 million in 2016.
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
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
34
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, El Paso Behavioral Health
System, Newport News Behavioral Health Center and The Hughes Center.
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, 2018, the aggregate funds withheld from us in connection with the River
Point Behavioral Health payment suspension amounted to approximately $9 million. Although the operating results of River Point
Behavioral Health did not have a material impact on our consolidated results of operations during 2018, 2017 or 2016, 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. While there have
been various matters raised by DOJ during the pendency of this investigation, DOJ Civil has advised that the focus of their
investigation is on medical necessity issues and billing for services not eligible for payment due to non-compliance with regulatory
requirements relating to, among other things, admission eligibility, discharge decisions, length of stay and patient care issues. It is our
understanding that the DOJ Criminal Fraud Section is investigating issues similar to those focused on by the DOJ Civil Division and
the other related agencies involved in this matter. UHS denies any fraudulent billings were submitted to government payers; however,
we are involved in settlement discussions with the DOJ Civil Division in an attempt to resolve this matter. During 2018, we recorded
pre-tax increases to the reserve established in connection with the civil aspects of these matters amounting to $102 million increasing
the aggregate pre-tax reserve to $123 million as of December 31, 2018 from $22 million as of December 31, 2017. Changes in the
reserve may be required in future periods as discussions with the DOJ 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, as well as the income tax deductibility of payments, will not differ materially from our
established reserve and assumptions related to income tax deductibility.
DOJ investigation of Turning Point Hospital.
During the fourth quarter of 2018, we were notified that the DOJ Civil Division in conjunction with the U.S. Attorney’s Office
for the Northern District of Georgia and the Georgia Attorney General’s Office have opened an investigation of Turning Point Hospital
in Moultrie, GA. The DOJ Civil Division has advised us that they are primarily investigating transportation and housing financial
assistance provided to patients receiving treatment at the facility. The DOJ issued a civil investigative demand to the facility requesting
various documents and other information. At this time, we are unable to assess potential liability or damages, if any.
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
35
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. 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. The amended class action complaint alleges violations of federal securities laws relating to disclosures made in
public filings associated with alleged practices and operations at our behavioral health facilities. Plaintiffs seek monetary damages for
shareholders during the defined class period as a result of the decrease in share price following various public disclosures or reports. 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. 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. The federal court has consolidated all of the cases pending in the Eastern District of Pennsylvania
and has appointed co-lead plaintiffs and co-lead counsel. Lead Plaintiffs have filed a consolidated, amended complaint. We have filed
a motion to dismiss the amended complaint. 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. Each of these cases have named certain current and former members of the Board
of Directors individually and certain officers of Universal Health Services, Inc. as defendants. UHS has also been named as a nominal
defendant in these cases. The derivative cases make substantially similar allegations and claims as the shareholder class action relating
to practices at our behavioral health facilities and board and corporate oversight of these facilities as well as claims relating to the stock
trading by the individual defendants and company repurchase of shares during the relevant time period. The cases make claims of
breaches of fiduciary duties by the named board members and officers; alleged violations of federal securities laws; and common law
causes of action against the individual defendants including unjust enrichment, corporate waste, abuse of control, constructive fraud and
gross mismanagement. The cases seek monetary damages allegedly incurred by the company; restitution and disgorgement of profits,
benefits and other compensation from the individual defendants and various forms of equitable relief relating to corporate governance
matters. 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 had entered a summary judgment order awarding plaintiff $3.85 million in damages.
With prejudgment interest, the total amount of the order amounted to approximately $9 million, for which a corresponding reserve had
previously been included in our financial statements. The case was removed to federal court. During the first quarter of 2019, the federal
court entered an order vacating the state court’s summary judgment. The parties have reached a preliminary settlement of this matter,
pending finalization of settlement documentation, for an amount that did not have a material impact on our consolidated financial
statements.
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
36
excess Medicaid Disproportionate Share Hospital payments (“DSH”) for the federal fiscal year (“FFY”) 2011 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, 2013 and 2014. For FFY 2012, the claimed overpayment amounts to approximately $4 million. For FFY
2013, the claimed overpayments were initially approximately $7 million but have since been reduced to approximately $2 million due
to a change in the Department’s calculations of the hospital specific DSH upper payment limit. For FFY 2014, the claimed overpayments
were approximately $7 million. We filed administrative appeals for all of our facilities contesting the recoupment efforts for FFYs 2011
through 2014 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. 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 2014 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. We have recently been notified by the DOJ that there is no longer an investigation pending against Riveredge
Hospital that is separate from the UHS Behavioral Health matter referenced above.
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. We
have recently been notified by the DOJ that there is no longer an investigation pending against Friends Hospital that is separate from
the UHS Behavioral Health matter referenced above.
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.
37
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 under the symbol UHS. 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, 2018 and 2017:
Quarter:
1st
2nd
3rd
4th
2018
High-Low Sales
Price
2017
High-Low Sales
Price
$127.27-$110.15 $126.65-$106.71
$122.04-$111.44 $125.07-$112.33
$130.16-$110.98 $125.00-$105.37
$137.99-$113.42 $115.06-$95.77
The number of stockholders of record as of January 31, 2019, were as follows:
Class A Common
Class B Common
Class C Common
Class D Common
14
806
1
98
Stock Repurchase Programs
In December of 2018, our Board of Directors authorized a $500 million increase to our stock repurchase program, which
increased the aggregate authorization to $1.7 billion from the previous $1.2 billion authorization approved during 2017, 2016 and
2014. Pursuant to this program, we may purchase shares of our Class B Common Stock, from time to time as conditions allow, on the
open market or in negotiated private transactions. There is no expiration date for our stock repurchase programs.
As reflected below, during the three-month period ended December 31, 2018, we have repurchased approximately 1.2 million
shares at an aggregate cost of approximately $149.3 million pursuant to the terms of our stock repurchase program. In addition,
26,198 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, 2018 through December 31, 2018, we repurchased the following shares:
Additional
Dollars
Authorized
For
Repurchase
(in
thousands)
—
—
Total
number of
shares
Total
number
of
shares
cancelled
Average
price paid
per share
for forfeited
restricted
shares
purchased
1,006
21,561
795 $
796 $
$ 500,000 1,224,852 1,458 $
Average
price paid
Total
per share
Number
for shares
of shares
purchased
purchased
as part of
as part of
publicly
publicly
announced
announced
program
programs
—
N/A
0.01
—
0.01
N/A
0.01 1,221,221 $ 122.23 $
Maximum
number of
dollars that
may yet be
purchased
under the
program
(in
thousands)
Aggregate
purchase
price paid
(in thousands)
— $
— $
149,274 $
111,618
111,618
462,344
October, 2018
November, 2018
December, 2018
Total October through
December
$ 500,000 1,247,419 3,049 $
0.01 1,221,221 $ 122.23 $
149,274
38
Dividends
During the two years ending December 31, 2018, dividends per share were declared and paid as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
Total
2018
2017
$
$
$
$
$
.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, 2018.
The graph assumes an investment of $100 made in our common stock and each Index as of January 1, 2014 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:
Acadia Healthcare Co., Inc., Community Health Systems, Inc., HCA Healthcare, Inc., Health Management Associates, Inc. (included
in January, 2014 when it was acquired by Community Health Systems, Inc.), LifePoint Health, Inc. (included until November, 2018,
when it was acquired by Apollo Management) and Tenet Healthcare Corporation.
Comparison of Cumulative Five Year Total Return
$200
$150
$100
$50
$0
2013
2014
2015
2016
2017
2018
Universal Health Services
S&P 500 Index
Peer Group
39
Company Name / Index
Universal Health Services, Inc.
S&P 500 Index
Peer Group
2013 Base
$
$
$
100.00 $
100.00 $
100.00 $
2014
137.33 $
113.69 $
140.92 $
2015
147.96 $
115.26 $
119.66 $
2016
132.16 $
129.05 $
107.88 $
2017
141.32 $
157.22 $
122.47 $
2018
145.79
150.33
166.09
40
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, 2018.
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.
2018
2017
2016
2015
2014
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
$ 10,772,278 $ 10,409,865 $ 9,766,210 $ 9,043,451 $ 8,205,088
$ 1,034,525 $ 1,135,009 $ 1,156,358 $ 1,145,901 $ 929,667
702,409 $ 680,528 $ 545,343
$
779,705 $
7.2 %
14.7 %
752,303 $
7.2 %
15.5 %
7.2 %
16.0 %
7.5 %
16.6 %
6.6 %
15.3 %
664,962 $
557,506 $
$ 1,340,893 $ 1,183,252 $ 1,333,842 $ 1,068,262 $ 1,069,788
$
519,939 $ 379,321 $ 391,150
$ 11,265,480 $ 10,761,828 $ 10,317,802 $ 9,615,444 $ 8,974,443
68,319
$
$ 3,935,187 $ 3,494,390 $ 4,030,230 $ 3,368,634 $ 3,210,215
$ 5,389,262 $ 4,989,514 $ 4,533,220 $ 4,249,647 $ 3,735,946
545,619 $
105,895 $
63,446 $
62,722 $
43 %
45 %
48 %
45 %
47 %
6,232
6,056
303,985
4.5
5,776
5,571
274,074 261,727 251,165
4.6
1,376,988 1,312,265 1,251,511 1,218,969 1,167,726
6,127
5,954
297,390
4.4
5,934
5,759
5,832
5,656
4.6
4.7
61 %
62 %
59 %
60 %
58 %
59 %
57 %
59 %
55 %
57 %
23,509
23,425
482,658
13.3
20,231
20,131
456,052 447,007 426,510
12.9
6,418,334 6,381,756 6,004,066 5,835,134 5,518,660
23,151
23,068
467,822
13.6
21,829
21,744
21,202
21,116
13.2
13.1
75 %
75 %
8.35 $
8.31 $
0.40 $
76 %
76 %
7.86 $
7.81 $
0.40 $
$
$
$
75 %
75 %
75 %
76 %
75 %
75 %
7.22 $
7.14 $
0.40 $
6.89 $
6.76 $
0.40 $
5.52
5.42
0.30
93,276
95,652
97,208
98,797
98,826
93,750
96,325
98,380 100,694 100,544
(1) Amounts exclude non-cash capital lease obligations, if any.
(2) Excludes statistical information related to divested facilities.
41
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 27, 2019, we owned and/or operated 350 inpatient facilities and 37 outpatient and other facilities including the
following located in 37 states, Washington, D.C., the United Kingdom and Puerto Rico:
Acute care facilities located in the U.S.:
26 inpatient acute care hospitals;
9 free-standing emergency departments, and;
6 outpatient centers & 1 surgical hospital.
Behavioral health care facilities (324 inpatient facilities and 21 outpatient facilities):
Located in the U.S.:
188 inpatient behavioral health care facilities, and;
19 outpatient behavioral health care facilities.
Located in the U.K.:
133 inpatient behavioral health care facilities, and;
2 outpatient behavioral health care facilities.
Located in Puerto Rico:
3 inpatient behavioral health care facilities.
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and
commercial health insurer accounted for 53% during each of 2018 and 2017 and 52% during 2016. Net revenues from our behavioral
health care facilities and commercial health insurer accounted for 47% of our consolidated net revenues during each of 2018 and 2017
and 48% during 2016.
Our behavioral health care facilities located in the U.K. generated net revenues of approximately $505 million in 2018, $429
million in 2017 and $241 million in 2016. Total assets at our U.K. behavioral health care facilities were approximately $1.224 billion
as of December 31, 2018, $1.098 billion as of December 31, 2017 and $965 million as of December 31, 2016.
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.
42
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be
accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based
on information available at the time and/or our good faith belief with respect to future events, and is subject to risks and uncertainties
that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among
other things, the following:
our ability to comply with the existing laws and government regulations, and/or changes in laws and government
regulations;
an increasing number of legislative initiatives have been passed into law that may result in major changes in the health
care delivery system on a national or state level. Legislation has already been enacted that has eliminated the penalty for
failing to maintain health coverage that was part of the original Legislation. 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
final rule in June, 2018 by the Department of Labor to enable the formation of association health plans that would be
exempt from certain Legislation requirements such as the provision of essential health benefits; (iii) the issuance of a final
rule in August, 2018 by the Department of Labor, Treasury, and Health and Human Services to expand the availability of
short-term, limited duration health insurance, (iv) 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; (v) relaxing requirements for state innovation waivers that could reduce enrollment in the individual
and small group markets and lead to additional enrollment in short-term, limited duration insurance and association health
plans; and (vi) the issuance of a proposed rule by the Department of Labor, Treasury, and Health and Human Services that
would be incentivize the use of health reimbursement accounts by employers to permit employees to purchase health
insurance in the individual market. The uncertainty resulting from these Executive Branch policies has led to reduced
Exchange enrollment in 2018 and 2019 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, including ours. In addition, while attempts to repeal the entirety of the Affordable Care Act (“ACA”) have
not been successful to date, a key provision of the ACA was repealed as part of the Tax Cuts and Jobs Act and on
December 14, 2018, a federal U.S. District Court Judge in Texas ruled the entire ACA is unconstitutional. While that
ruling is stayed and has been appealed, it has caused greater uncertainty regarding the future status of the ACA. If all or
any parts of the ACA are found to be unconstitutional, it could have a material adverse effect on our business, financial
condition and 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 payers or
government based payers, including Medicare or Medicaid in the United States, and government based payers 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, and the effects of adverse
publicity relating to such matters;
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;
the availability of suitable acquisition and divestiture opportunities and our ability to successfully integrate and improve
our acquisitions since failure to achieve expected acquisition benefits from certain of our prior or future acquisitions could
result in impairment charges for goodwill and purchased intangibles;
the impact of severe weather conditions, including the effects of hurricanes;
43
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, Washington, D.C., Nevada, 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 payers and there can be no
assurance that failure of the payers to remit amounts due to us will not have a material adverse effect on our future results
of operations;
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 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;
in June, 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, scheduled for March 29, 2019. 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 and results of
operations;
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.
44
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: On January 1, 2018, we adopted, using the modified retrospective approach, 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. The most
significant change from the adoption of the new standard relates to our estimation for the allowance for doubtful accounts. Under the
previous standards, our estimate for amounts not expected to be collected based upon our historical experience, were reflected as
provision for doubtful accounts, included within net revenue. Under the new standard, 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, not reflected separately
as provision for doubtful accounts. Under the new standard, subsequent changes in estimate of collectability due to a change in the
financial status of a payer, for example a bankruptcy, will be recognized as bad debt expense in operating charges. The adoption of
this ASU in 2018, and amounts recognized as bad debt expense and included in other operating expenses, did not have a material
impact on our consolidated financial statements.
See Note 10 to the Consolidated Financial Statements-Revenue Recognition, for additional disclosure related to our revenues
including a disaggregation of our consolidated net revenues by major source for each of the periods presented herein.
We report net patient service revenue at the estimated net realizable amounts from patients and third-party payers and others for
services rendered. We have agreements with third-party payers 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, which represent explicit price concessions under ASC 606, 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 payers 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
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 2018, 2017 or 2016. 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, 2018,
would change our after-tax net income by approximately $1 million.
Charity Care, Uninsured Discounts and Other Adjustments to Revenue: 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
revenue adjustments for implicit price concessions based on general factors such as payer mix, the agings of the receivables and
historical collection experience, consistent with our estimates for provisions for doubtful accounts under ASC 605. 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.
Under ASC 605, our hospitals established a partial reserve for self-pay accounts in the allowance for doubtful accounts for both
unbilled balances and those that have been billed and were under 90 days old. All self-pay accounts were fully reserved at 90 days
from the date of discharge. Third party liability accounts were fully reserved in the allowance for doubtful accounts when the balance
aged past 180 days from the date of discharge. Patients that express an inability to pay were reviewed for potential sources of financial
assistance including our charity care policy. If the patient was deemed unwilling to pay, the account was written-off as bad debt and
transferred to an outside collection agency for additional collection effort. Under ASC 606, while similar processes and
45
methodologies are considered, these revenue adjustments are considered at the time the services are provided in determination of the
transaction price.
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, the transaction price is
fully adjusted and there is no impact 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 net revenues in
future periods . Although the patient’s ultimate eligibility determination may result in adjustments to net revenues, these adjustments
do not have a material impact on our results of operations in 2018, 2017 or 2016 since our facilities make estimates at each financial
reporting period to adjust revenue based on historical collections. Under ASC 605, these estimates were reported in the provision for
doubtful accounts.
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, the transaction price is
fully adjusted and there is no impact 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.
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, 2018, 2017 and 2016:
2018
(dollar amounts in thousands)
2017
2016
Charity care
Uninsured discounts
Total uncompensated care
Amount
$ 761,783
1,132,811
$ 1,894,594
%
%
%
Amount
40 % $ 887,136
60 % 881,265
100 % $ 1,768,401
Amount
50 % $ 733,585
50 % 720,205
100 % $ 1,453,790
50 %
50 %
100 %
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 adjustments to net revenues 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
2018
(amounts in thousands)
2017
120,208 $
119,412
239,620 $
94,088 $
139,913
234,001 $
2016
107,887
105,920
213,807
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,
46
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 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 1 st as our
annual impairment assessment date for our goodwill and indefinite-lived intangible assets.
We performed an impairment assessment as of October 1, 2018 which indicated no impairment of goodwill. There were also no
goodwill impairments during 2017 or 2016.
For our indefinite-lived intangible assets, consisting primarily of a tradename initially valued at $124 million recorded in
connection with our 2015 acquisition of Foundation Recovery Network, L.L.C. (“Foundations”), we recorded a pre-tax $49 million
provision for asset impairment during the fourth quarter of 2018. See below in Provision for Intangible Assets Impairment for
additional information.
Future changes in the 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 basis 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, foreign tax credits, and interest deduction limitations.
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 made 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 current inclusion in U.S. federal taxable income of certain earnings of
controlled foreign corporations through the implementation of a territorial tax system; (5) creating a new limitation on deductible
interest expense, and; (6) limiting certain other deductions. 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 during a measurement period not to extend beyond one year of the enactment date. We
previously provided a provisional estimate of the effects of the TCJA-17 in the fourth quarter of 2017 financial statements. In the
fourth quarter of 2018, we completed our analysis to determine the effects of the TCJA-17 as follows:
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
47
amounts and the tax basis 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. Upon completion of our 2017 U.S.
Corporate Income Tax Return, an increase of $1 million attributable to certain deferred tax assets and a decrease of $5 million
attributable to certain deferred tax liabilities was recorded resulting in an additional net deferred tax benefit of $6 million.
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. The one-time Transition Tax is
based upon the amount of post-1986 E&P of the relevant subsidiaries, the amount of non-U.S. income tax paid on such earnings, as
well as other factors. We originally estimated and recorded a provisional Transition Tax obligation of $11.3 million. Upon
completion of our 2017 U.S. Corporate Income Tax Return, the final Transition Tax increased by $100,000 for a total of $11.4
million.
The decrease in our effective tax rate for the year ended December 31, 2018, as compared to 2017 and 2016, is due to the net
favorable impact of the enactment of the TCJA-17 as discussed above, the tax benefit resulting from our January 1, 2017, adoption of
ASU 2016-09, and the tax effects of our foreign operations in connection with our acquisition of Danshell Group (acquired in July
2018).
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.
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,
2018.
Results of Operations
The following table summarizes our results of operations, and is used in the discussion below, for the years ended December 31,
2018, 2017 and 2016 (dollar amounts in thousands):
2018
Year Ended December 31,
2017
2016
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Amount
% of Net
Revenues
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
Other (income) expense, net
Income before income taxes
Provision for income taxes
Net income
Less: Net income attributable to
noncontrolling interests
Net income attributable to UHS
$ 10,772,278
5,254,536
2,614,687
1,168,654
453,045
106,094
0
9,597,016
1,175,262
154,956
(14,219 )
1,034,525
236,642
797,883
$ 11,278,942
869,077
100.0 % 10,409,865
$ 10,507,788
741,578
100.0 % 9,766,210
100.0 %
4.2 %
1.0 %
0.0 %
48.8 % 4,980,637
24.3 % 2,493,062
10.8 % 1,105,096
447,765
103,127
0
89.1 % 9,129,687
10.9 % 1,280,178
145,169
1.4 %
0
-0.1 %
9.6 % 1,135,009
363,697
2.2 %
771,312
7.4 %
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
0
10.9 % 1,156,358
409,187
747,171
3.5 %
7.4 %
1.4 %
0.0 %
47.0 %
24.2 %
10.6 %
4.3 %
1.0 %
-0.1 %
86.9 %
13.1 %
1.3 %
0.0 %
11.8 %
4.2 %
7.7 %
0.5 %
7.2 %
18,178
779,705
$
0.2 %
7.2 % $
19,009
752,303
0.2 %
7.2 % $
44,762
702,409
48
Year Ended December 31, 2018 as compared to the Year Ended December 31, 2017:
Net revenues increased 3.5% or $362 million to $10.77 billion during 2018 as compared to $10.41 billion during 2017. The
increase was primarily attributable to:
a $369 million or 3.6% 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;
$7 million of other combined net revenue decreases.
Income before income taxes (before deduction for income attributable to noncontrolling interests) decreased $100 million to
$1.03 billion during 2018 as compared to $1.14 billion during 2017. The net decrease in our income before income taxes during 2018,
as compared to 2017, was due to the following:
an increase of $67 million as discussed below in Acute Care Hospital Services;
a decrease of $4 million as discussed below in Behavioral Health Services (excluding the $49 million intangible asset
impairment charge recorded during 2018 related to Foundations Recovery Network, LLC, as discussed below);
a decrease of $102 million due to an increase recorded during 2018 to the reserve established in connection with the civil
aspects of the government’s investigation of certain of our behavioral health care facilities (reserve increased to $123
million as of December 31, 2018; see Item 3 – Legal Proceedings for additional disclosure);
a decrease of $49 million from an intangible asset (tradename) impairment charge recorded during 2018 in connection
with Foundations Recovery Network, LLC which was acquired by us during 2015;
a decrease of $10 million resulting from an increase in interest expense, as discussed below in Other Operating Results,
and;
$2 million of other combined net decreases.
Net income attributable to UHS increased $27 million to $780 million during 2018 as compared to $752 million during 2017.
The increase consisted of:
a decrease of $100 million in income before income taxes, as discussed above;
an increase of $1 million due to a decrease in the income attributable to noncontrolling interests, and;
an increase of $127 million resulting from a net decrease in the provision for income taxes resulting primarily from: (i) a
decrease in the provision for income taxes resulting from the $99 million decrease in pre-tax income ($100 million
decrease in income before income taxes partially offset by a $1 million increase in pre-tax income due to a decrease in
income attributable to noncontrolling interests); (ii) a decrease in the provision for income taxes realized during 2018
resulting from the Tax Cuts and Jobs Act of 2017 which, among other things, reduced the U.S. federal corporate tax rate
from 35% to 21%; (iii) a decrease resulting from an $11 million increase in the provision for income taxes recorded
during 2017 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), partially offset by; (iv) an increase resulting from a $30 million
decrease in the provision for income taxes recorded during 2017 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,
and; (v) a $21 million increase to our provision for income taxes due to an unfavorable change resulting from our January
1, 2017 adoption of ASU 2016-09, which decreased our provision for income taxes by $1 million during 2018 as
compared to $22 million during 2017.
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:
a $313 million or 3.3% increase in net revenues generated from our acute care and behavioral health care operations on a
same facility basis, 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.
49
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:
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.
Net income attributable to UHS increased $50 million to $752 million during 2017 as compared to $702 million during 2016.
The increase consisted of:
a decrease of $21 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 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.
50
Acute Care Hospital Services
Year Ended December 31, 2018 as compared to the Year Ended December 31, 2017:
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, 2018 and 2017 (dollar amounts in thousands):
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Amount
% of Net
Revenues
% of Net
Revenues
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
Other (income) expense, net
Income before income taxes
$ 5,618,428
2,366,078
1,238,787
967,833
278,558
57,229
4,908,485
709,943
1,658
(2,498 )
710,783
$
Amount
$ 6,128,103
755,615
100.0 % 5,372,488
42.1 % 2,241,127
22.0 % 1,244,186
905,164
17.2 %
262,950
5.0 %
57,208
1.0 %
87.4 % 4,710,635
661,853
12.6 %
2,684
0.0 %
0.0 %
0
659,169
12.7 % $
100.0 %
41.7 %
23.2 %
16.8 %
4.9 %
1.1 %
87.7 %
12.3 %
0.0 %
0.0 %
12.3 %
On a same facility basis during 2018, as compared to 2017, net revenues from our acute care services increased $246 million or
4.6%. Income before income taxes increased $52 million or 8% to $711 million or 12.7% of net revenues during 2018 as compared to
$659 million or 12.3% of net revenues during 2017.
Inpatient admissions to our acute care hospitals owned during both years increased 2.2% during 2018, as compared to 2017,
while patient days increased 4.9%. Adjusted admissions (adjusted for outpatient activity) increased 2.1% and adjusted patient days
increased 4.8% during 2018, as compared to 2017. The average length of inpatient stay at these facilities was 4.5 days during 2018
and 4.4 days during 2017. The occupancy rate, based on the average available beds at these facilities, was 62% during 2018 and 60%
during 2017. On a same facility basis, net revenue per adjusted admission at these facilities increased 4.1% during 2018, as compared
to 2017, and net revenue per adjusted patient day increased 1.4% during 2018, as compared to 2017.
All Acute Care Hospital Services
The following table summarizes the results of operations for all our acute care operations during 2018 and 2017. 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 (beginning in 2018, the EHR impact is included in our same facility results as well as all acute
care hospitals); (iii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no
51
impact on income before income taxes, and; (iv) certain other amounts that were included in our results of operations that relate to
prior years, as discussed below. Dollar amounts below are reflected in thousands.
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Amount
% of Net
Revenues
% of Net
Revenues
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
Other (income) expense, net
Income before income taxes
$ 5,719,905
2,367,014
1,341,088
968,067
278,661
57,235
0
5,012,065
707,840
1,658
(2,498 )
708,680
$
Amount
$ 6,240,302
755,619
100.0 % 5,484,683
41.4 % 2,241,527
23.4 % 1,350,741
905,165
16.9 %
285,501
4.9 %
57,208
1.0 %
0
0.0 %
87.6 % 4,840,142
644,541
12.4 %
2,684
0.0 %
0.0 %
0
641,857
12.4 % $
100.0 %
40.9 %
24.6 %
16.5 %
5.2 %
1.0 %
0.0 %
88.2 %
11.8 %
0.0 %
0.0 %
11.7 %
During 2018, as compared to 2017, net revenues generated from our acute care hospital services increased $235 million or 4.3%
to $5.72 billion due primarily to: (i) a $246 million, or 4.6%, increase same facility revenues, as discussed above, and; (ii) other
combined net decrease of $11 million due primarily to $15 million of revenues received during 2017 in connection with Medicaid
settlements related to prior years.
Income before income taxes increased $67 million to $709 million or 12.4% of net revenues during 2018 as compared to $642
million or 11.7% of net revenues during 2017.
Included in these results are the following:
the $52 million increase in income before income taxes from our acute care hospital services, on a same facility basis, as
discussed above, and;
other combined net increase of $15 million resulting primarily from: (i) the unfavorable change caused by the income
recorded during 2017 in connection with Medicaid settlements relating to prior years ($15 million), offset by the
following favorable changes; (ii) the depreciation and amortization expense incurred in connection with the
implementation of EHR applications at our acute care hospitals (this expense, which amounted to approximately $22
million during 2017, was excluded from our same facility basis results prior to January 1, 2018, however, the impact is
included in our same facility basis results thereafter since the amount no longer materially impacts our results of
operations), and; (iii) increased professional and general liability expense relating to prior years that was recorded during
2017, based upon a reserve analysis ($9 million).
52
Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016:
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, 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
$ 5,983,425
728,438
5,254,987
2,187,390
1,225,494
886,829
252,365
55,915
4,607,993
646,994
2,683
$ 644,311
$ 5,649,163
627,827
100.0 % 5,021,336
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 %
3,277
0.1 %
12.3 % $ 592,919
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 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
Medicaid settlements relating to prior years that is included in our results of operations during 2017. Dollar amounts below are
reflected in thousands.
53
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, 2017
% of Net
Revenues
Year Ended
December 31, 2016
Amount
% of Net
Revenues
Amount
$ 6,240,302
755,619
5,484,683
2,241,527
1,350,741
905,165
285,501
57,208
0
4,840,142
644,541
2,684
$ 641,857
$ 5,740,777
627,827
100.0 % 5,112,950
40.9 % 2,086,986
24.6 % 1,308,293
836,481
16.5 %
273,176
5.2 %
52,604
1.0 %
(5,339 )
0.0 %
88.2 % 4,552,201
560,749
11.8 %
3,277
0.0 %
11.7 % $ 557,472
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:
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.
54
Behavioral Health Care Services
Year Ended December 31, 2018 as compared to the Year Ended December 31, 2017
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, impact of the reserve established in
connection with the civil aspects of the government’s investigation of certain of our behavioral health care facilities, impacts of
settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets and other amounts that may be reflected in
the current or prior year financial statements that relate to prior periods. Our Same Facility basis results reflected on the 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, 2018 and 2017 (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
Other (income) expense, net
Income before income taxes
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Amount
% of Net
Revenues
Amount
% of Net
Revenues
$ 4,891,178
2,558,296
935,562
197,305
153,924
46,942
3,892,029
999,149
1,597
0
$ 997,552
$ 4,878,039
110,030
100.0 % 4,768,009
52.3 % 2,437,495
935,750
19.1 %
195,813
4.0 %
145,707
3.1 %
43,825
1.0 %
79.6 % 3,758,590
20.4 % 1,009,419
2,005
0
20.4 % $ 1,007,414
0.0 %
0.0 %
100.0 %
51.1 %
19.6 %
4.1 %
3.1 %
0.9 %
78.8 %
21.2 %
0.0 %
0.0 %
21.1 %
On a same facility basis during 2018, as compared to 2017, net revenues generated from our behavioral health care services
increased $123 million or 2.6% to $4.89 billion during 2018 as compared to $4.77 billion during 2017. Income before income taxes
decreased $10 million or 1% to $998 million or 20.4% of net revenues during 2018 as compared to $1.01 billion or 21.2% of net
revenues during 2017.
Inpatient admissions to our behavioral health care facilities owned during both years increased 3.3% during 2018, as compared
to 2017, while patient days increased 0.8%. Adjusted admissions increased 3.0% and adjusted patient days increased 0.5% during
2018, as compared to 2017. The average length of inpatient stay at these facilities were 13.2 days and 13.5 days during 2018 and 2017,
respectively. The occupancy rate, based on the average available beds at these facilities, were 76% and 77% during 2018 and 2017,
respectively. On a same facility basis, net revenue per adjusted admission at these facilities was unchanged during 2018, as compared
to 2017, and net revenue per adjusted patient day increased 2.5% during 2018, as compared to 2017.
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. Additionally, compression of length of stay from
managed Medicaid and managed Medicare payers continues to create downward pressure on our revenue growth. We can provide no
assurance that these factors will not continue to unfavorably impact our patient volumes.
55
All Behavioral Health Care Services
The following table summarizes the results of operations for all our behavioral health care services during 2018 and 2017. These
amounts include: (i) our behavioral health care results on a same facility basis, as indicated above; (ii) the impact of provider tax
assessments which increased net revenues and other operating expenses but had no impact on income before income taxes; (iii) an
intangible asset impairment charge recorded during 2018 in connection with Foundations Recovery Network, L.L.C., and; (iv) certain
other amounts including the results of facilities acquired or opened during the past year as well as the results of certain facilities that
were closed or restructured during the past year. 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
Other (income) expense, net
Income before income taxes
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Amount
% of Net
Revenues
Amount
% of Net
Revenues
$ 5,038,874
2,617,337
1,091,102
200,008
163,155
48,316
4,119,918
918,956
1,597
1,842
$ 915,517
$ 5,020,177
113,458
100.0 % 4,906,719
4.0 %
3.2 %
1.0 %
51.9 % 2,496,236
21.7 % 1,042,056
199,936
152,067
45,445
81.8 % 3,935,740
970,979
18.2 %
2,005
0.0 %
0
0.0 %
18.2 % $ 968,974
100.0 %
50.9 %
21.2 %
4.1 %
3.1 %
0.9 %
80.2 %
19.8 %
0.0 %
0.0 %
19.7 %
During 2018, as compared to 2017, net revenues generated from our behavioral health care services increased $132 million, or
2.7%, to $5.04 billion during 2018 as compared to $4.91 billion during 2017. The increase in net revenues was attributable to: (i) $123
million or 2.6% increase in same facility revenues, as discussed above, and; (ii) an $9 million other combined net increase consisting
primarily of the revenues generated at the 25 behavioral health facilities acquired in the U.K. in connection with our acquisition of The
Danshell Group (acquired during the third quarter of 2018) and the revenues generated from the acquisition of a 109-bed behavioral
health care facility located in Gulfport, Mississippi (acquired during the first quarter of 2018), partially offset by a decrease to net
revenues resulting from the closure or restructuring of certain behavioral health care facilities.
Income before income taxes decreased $53 million or 6% to $916 million or 18.2% of net revenues during 2018 as compared to
$969 billion or 19.7% of net revenues during 2017. The decrease in income before income taxes at our behavioral health facilities was
attributable to:
a $10 million decrease at our behavioral health facilities on a same facility basis, as discussed above;
a decrease of $49 million from an intangible asset (tradename) impairment charge recorded during 2018 in connection
with Foundations Recovery Network, LLC which was acquired by us during 2015;
a $13 million increase due to the following unfavorable amounts 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 decrease of $7 million consisting primarily of the losses incurred at certain behavioral health care
facilities that have restructured or closed during the past year.
56
Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016
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, 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
21.0 % $ 1,038,257
0.0 %
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.
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
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 previous 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.
57
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
1,728
19.7 % $ 1,030,734
0.0 %
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:
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.
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
58
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 “ACA”). The
Healthcare and Education Reconciliation Act of 2010 (the “Reconciliation Act”), which contains a number of amendments to the
ACA, was signed into law on March 30, 2010. Two primary goals of the ACA, 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.
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.
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.
On December 14, 2018, a Texas Federal District Court deemed the ACA to be unconstitutional in its entirety. The Court
concluded that the Individual Mandate is no longer permissible under Congress’s taxing power as a result of the Tax Cut and Jobs Act
of 2017 (“TCJA”) reducing the Individual Mandate’s tax to $0 (i.e., it no longer produces revenue, which is an essential feature of a
tax), rendering the ACA unconstitutional. The court also held that because the individual mandate is “essential” to the ACA and is
inseverable from the rest of the law, the entire ACA is unconstitutional. Because the court issued a declaratory judgment and did not
enjoin the law, the ACA remains in place pending its appeal. The District Court for the Northern District of Texas ruling has been
appealed to the U.S. Court of Appeals for the Fifth Circuit, and will likely be appealed to the United States Supreme Court. We are
unable to predict the final outcome of this legal challenge and its financial impact on our future results of operation.
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
59
federal civil False Claims Act. The Legislation also expands the Recovery Audit Contractor program to Medicaid. These amendments
also make it easier for severe fines and penalties to be imposed on healthcare providers that violate applicable laws and regulations.
We have partnered with local physicians in the ownership of certain of our facilities. These investments have been permitted
under an exception to the physician self-referral law. The Legislation permits existing physician investments in a hospital to continue
under a “grandfather” clause if the arrangement satisfies certain requirements and restrictions, but physicians are prohibited from
increasing the aggregate percentage of their ownership in the hospital. The Legislation also imposes certain compliance and disclosure
requirements upon existing physician-owned hospitals and restricts the ability of physician-owned hospitals to expand the capacity of
their facilities. As discussed below, should the Legislation be repealed in its entirety, this aspect of the Legislation would also be
repealed restoring physician ownership of hospitals and expansion right to its position and practice as it existed prior to the
Legislation.
The impact of the Legislation on each of our hospitals may vary. Because Legislation provisions are effective at various times
over the next several years, we anticipate that many of the provisions in the Legislation may be subject to further revision. Initiatives
to repeal the Legislation, in whole or in part, to delay elements of implementation or funding, and to offer amendments or supplements
to modify its provisions have been persistent. The ultimate outcomes of legislative attempts to repeal or amend the Legislation and
legal challenges to the Legislation are unknown. Legislation has already been enacted that has eliminated the penalty, beginning on
January 1, 2019, related to the individual mandate to obtain health insurance that was part of the original Legislation. In addition,
Congress previously considered legislation that would, in material part: (i) eliminate the large employer mandate to offer health
insurance coverage to full-time employees; (ii) permit insurers to impose a surcharge up to 30 percent on 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 waive, 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 final rule in June, 2018 by the Department of Labor to enable the formation of health plans that would be exempt from certain
Legislation essential health benefits requirements; (iii) the issuance of a final rule in August, 2018 by the Department of Labor,
Treasury, and Health and Human Services to expand the availability of short-term, limited duration health insurance; (iv) 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, (v) relaxing requirements for state innovation waivers that could reduce
enrollment in the individual and small group markets and lead to additional enrollment in short-term, limited duration insurance and
association health plans, and; (vi) the issuance of a proposed rule by the Department of Labor that would incentivize the use of health
reimbursement accounts by employers to permit employees to purchase health insurance in the individual market. The uncertainty
resulting from these Executive Branch policies has led to reduced Exchange enrollment in 2018 with preliminary CMS reported data
for 2019 indicating further decline 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.
For additional disclosure related to our revenues including a disaggregation of our consolidated net revenues by major source for
each of the periods presented herein, please see Note 11 to the Consolidated Financial Statements-Revenue.
Medicare: Medicare is a federal program that provides certain hospital and medical insurance benefits to persons aged 65 and
over, some disabled persons and persons with end-stage renal disease. All of our acute care hospitals and many of our behavioral
health centers are certified as providers of Medicare services by the appropriate governmental authorities. Amounts received under the
Medicare program are generally significantly less than a hospital’s customary charges for services provided. Since a substantial
portion of our revenues will come from patients under the Medicare program, our ability to operate our business successfully in the
future will depend in large measure on our ability to adapt to changes in this program.
60
Under the Medicare program, for inpatient services, our general acute care hospitals receive reimbursement under the inpatient
prospective payment system (“IPPS”). Under the IPPS, hospitals are paid a predetermined fixed payment amount for each hospital
discharge. The fixed payment amount is based upon each patient’s Medicare severity diagnosis related group (“MS-DRG”). Every
MS-DRG is assigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient
with that particular diagnosis. The MS-DRG payment rates are based upon historical national average costs and do not consider the
actual costs incurred by a hospital in providing care. This MS-DRG assignment also affects the predetermined capital rate paid with
each MS-DRG. The MS-DRG and capital payment rates are adjusted annually by the predetermined geographic adjustment factor for
the geographic region in which a particular hospital is located and are weighted based upon a statistically normal distribution of
severity. While we generally will not receive payment from Medicare for inpatient services, other than the MS-DRG payment, a
hospital may qualify for an “outlier” payment if a particular patient’s treatment costs are extraordinarily high and exceed a specified
threshold. MS-DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The index used to
adjust the MS-DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals
in purchasing goods and services. Generally, however, the percentage increases in the MS-DRG payments have been lower than the
projected increase in the cost of goods and services purchased by hospitals.
In August, 2018, CMS published its IPPS 2019 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 ACA-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 is
approximately 0.5%. Including the estimated increase to our DSH payments (approximating 2.1%) and certain other adjustments, we
estimate our overall increase from the final IPPS 2019 rule (covering the period of October 1, 2018 through September 30, 2019) will
approximate 2.7%. This projected impact from the IPPS 2019 final rule includes an increase of approximately 0.5% to partially restore
cuts made as a result of the American Taxpayer Relief Act of 2012 (“ATRA”), as required by the 21st Century Cures Act but excludes
the impact of the sequestration reductions related to the Budget Control Act of 2011, Bipartisan Budget Act of 2015, and Bipartisan
Budget Act of 2018, as discussed below. CMS continued to phase-in the use of uncompensated care data from both the 2014 and
2015 Worksheet S-10 hospital cost reports, two-third weighting as part of the proxy methodology to allocate approximately $8 billion
in the DSH Uncompensated Care Pool. This final rule change will continue to result in wide variations among all hospitals nationwide
in the distribution of these DSH funds compared to previous years until the full phase-in of worksheet S-10 is completed by CMS.
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 ACA-mandated adjustments are considered, without consideration for the decreases related
to the required Medicare 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 ATRA, 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 began 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 resulted in
wide variations among all hospitals nationwide in the distribution of these DSH funds compared to previous years.
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 ACA-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 ATRA 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
61
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
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 FFY 2017 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, a 0.45% positive adjustment in fiscal year 2018, and a 0.5% positive
adjustment in fiscal year 2019 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, 2018, CMS published its Psych PPS final rule for the federal fiscal year 2019. Under this final rule, payments to our
psychiatric hospitals and units are estimated to increase by 1.35% compared to federal fiscal year 2018. This amount includes the
effect of the 2.90% market basket update less a 0.75% adjustment as required by the ACA and a 0.8% productivity adjustment.
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 December, 2018, the U.S. District Court for the District of Columbia ruled that the U.S. Department of Health and Human
Services (“HHS”) did not have statutory authority to implement the 2018 Medicare OPPS rate reduction related to hospitals that
qualify for drug discounts under the federal 340B Drug Discount Program and granted a permanent injunction against the payment
reduction. However, recognizing both the complexity of the OPPS payment system as well as its budget neutral rate setting system,
the Court refrained from imposing a remedy. Instead the Judge in the case called for additional briefing from the Plaintiffs and
Defendants on the proper scope and implementation for relief. The case is expected to be appealed by HHS. We are unable to predict
the ultimate outcome of any appeal and the type of relief that may be ordered by the Courts. We estimate that the CMS 2018 change in
the 340B payment policy increased our 2018 Medicare OPPS payments by approximately $8 million, which has been fully reserved in
our results of operations for the year, and estimate that a comparable amount was scheduled to be earned during 2019.
In November, 2018, CMS published its OPPS final rule for 2019. The hospital market basket increase is 2.9%. The Medicare
statute requires a productivity adjustment reduction of 0.8% and 0.75% reduction to the 2019 OPPS market basket resulting in a 2019
62
update to OPPS payment rates by 1.35%. When other statutorily required adjustments and hospital patient service mix are considered,
we estimate that our overall Medicare OPPS update for 2019 will aggregate to a net increase of 1.1% which includes a 5.7% 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 2019 OPPS payments will result in a 0.4% increase in payment levels for our acute care
division, as compared to 2018.
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 2018 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 removed total knee arthroplasty (TKA) from the IPO list
effective January 1, 2018. Additionally, CMS redistributed $1.6 billion in cost savings within the OPPS system attributable to changes
in the federal 340B hospital drug pricing payment methodology in 2018 but, as discussed above, this 340B-related payment
methodology is currently under legal challenge. 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
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.
Medicaid: Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide
benefits to qualifying individuals. Most state Medicaid payments are made under a PPS-like system, or under programs that negotiate
payment levels with individual hospitals. Amounts received under the Medicaid program are generally significantly less than a
hospital’s customary charges for services provided. In addition to revenues received pursuant to the Medicare program, we receive a
large portion of our revenues either directly from Medicaid programs or from managed care companies managing Medicaid. All of our
acute care hospitals and most of our behavioral health centers are certified as providers of Medicaid services by the appropriate
governmental authorities.
We receive revenues from various state and county based programs, including Medicaid in all the states in which we operate
(we receive Medicaid revenues in excess of $100 million annually from each of Texas, California, Washington, D.C., Nevada,
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
63
their respective state Medicaid programs. As outlined below, we derive a related Medicaid reimbursement benefit from assessed
Provider Taxes in the form of Medicaid claims based payment increases and/or lump sum Medicaid supplemental payments.
Included in these Provider Tax programs are reimbursements received in connection with 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 continued 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 FFY 2020 and forward, we are unable to estimate the impact on
of these UC program changes on our future operating results.
Effective April 1, 2018, certain of our acute care hospitals located in Texas began to receive Medicaid managed care rate
enhancements under the Uniform Hospital Rate Increase Program (“UHRIP”). The non-federal share component of these UHRIP rate
enhancements are financed by Provider Taxes. The Texas 1115 Waiver rules require UHRIP rate enhancements be considered in the
Texas UC payment methodology which results in a reduction to our UC payments. The UC amounts reported in the State Medicaid
Supplemental Payment Program Table below reflect the impact of this new UHRIP program.
On November 16, 2018, THHSC published a final rule effective in federal fiscal years 2018 and 2019 that changes the definition
of a rural hospital for the purposes of determining Texas UC payments and the applicable UC payment reduction. The application of
UC payment reduction allows the THHSC to comply with the overall statewide UC payment cap required under the special terms and
condition of the approved 1115 Waiver. Two of our acute care hospitals, which have been designated as a Rural Referral Center by
CMS and which are located in an urban Metropolitan Statistical Area, recorded: (i) increased UC payments/revenue for the federal
fiscal year ending September 30, 2018, and; (ii) decreased UC payments/revenue for the federal fiscal year beginning October 1,
2018. The net impact of these changes had a favorable impact on our 2018 results of operations and are included in the amounts
reflected below in the State Medicaid Supplemental Payment Program table.
64
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 FFY 2020 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, 2018, 2017 and 2016. The Provider Taxes are recorded in other operating
expenses on the Condensed Consolidated Statements of Income as included herein.
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)
2018
2017
2016
$
$
$
$
$
$
$
$
135 $
(51 )
84 $
29 $
(9 )
20 $
88 $
(25 )
63 $
46 $
(19 )
27 $
223 $
(119 )
104 $
223 $
(127 )
96 $
387 $
(179 )
208 $
357 $
(171 )
186 $
56
(10 )
46
47
(20 )
27
224
(136 )
88
327
(166 )
161
We estimate that our aggregate net benefit from the Texas and various other state Medicaid supplemental payment programs
will approximate $178 million (net of Provider Taxes of $186 million) during the year ending December 31, 2019. 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 2018 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.
65
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 2019 DSH fiscal year (covering the
period of October 1, 2018 through September 30, 2019).
In connection with these DSH programs, included in our financial results was an aggregate of approximately $38 million during
2018, $34 million during 2017 and $39 million during 2016. We expect the aggregate reimbursements to our hospitals pursuant to the
Texas and South Carolina 2019 fiscal year programs to be approximately $33 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, from projected 2018 DSH payment levels beginning in FFY 2020.
Nevada SPA:
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 2019 fiscal year
covering the period of July 1, 2018 through June 30, 2019.
In connection with this program, included in our financial results was approximately $26 million during 2018, $21 million
during 2017 and $14 million during 2016. We estimate that our reimbursements pursuant to this program will approximate $26 million
during the year ended December 31, 2019.
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. In March,
2018, CMS approved the “directed” payment component methodology for the period of July 1, 2017 through September 30, 2018.
The timing of CMS approval of the “pass through” component and the remaining “directed” payment periods is uncertain. We
estimate that the managed care component of the Hospital Fee Program will result in a favorable impact on our operating results of $6
million in 2019 while this program favorably impacted our 2018 results of operations by $16 million, $7 million of which related to
prior years. The aggregate impact of the California supplemental payment program for 2018, as outlined above, 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
66
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 qualified for these EHR incentive payments upon implementation of the EHR application assuming they meet the
“meaningful use” criteria. The government’s ultimate goal is to promote more effective (quality) and efficient healthcare delivery
through the use of technology to reduce the total cost of healthcare for all Americans and utilizing the cost savings to expand access to
the healthcare system.
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 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.
The pre-tax charges incurred in connection with the implementation of EHR applications at our acute care hospitals did not
have a material impact on our consolidated results of operations during the year ended December 31, 2018. Our consolidated result of
operations during 2017 and 2016 include net pre-tax charges of $22 million and $28 million (net of $5 million of EHR incentive
income), respectively, consisting of depreciation and amortization expense related to the costs incurred for the purchase and
development of the EHR applications.
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.
In the 2019 IPPS final rule, CMS overhauled the Medicare and Medicaid EHR Incentive Program to focus on interoperability,
improve flexibility, relieve burden and place emphasis on measures that require the electronic exchange of health information between
providers and patients. We can provide no assurance that the changes will not have a material adverse effect on our future results of
operations.
Managed Care: A significant portion of our net patient revenues are generated from managed care companies, which include
health maintenance organizations, preferred provider organizations and managed Medicare (referred to as Medicare Part C or
Medicare Advantage) and Medicaid programs. In general, we expect the percentage of our business from managed care programs to
continue to grow. The consequent growth in managed care networks and the resulting impact of these networks on the operating
results of our facilities vary among the markets in which we operate. Typically, we receive lower payments per patient from managed
care payers than we do from traditional indemnity insurers, however, during the past few years we have secured price increases from
many of our commercial payers including managed care companies.
Commercial Insurance: Our hospitals also provide services to individuals covered by private health care insurance. Private
insurance carriers typically make direct payments to hospitals or, in some cases, reimburse their policy holders, based upon the
67
particular hospital’s established charges and the particular coverage provided in the insurance policy. Private insurance reimbursement
varies among payers and states and is generally based on contracts negotiated between the hospital and the payer.
Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment
mechanisms, including predetermined payment or DRG-based payment systems, for more inpatient and outpatient services. To the
extent that such efforts are successful and reduce the insurers’ reimbursement to hospitals and the costs of providing services to their
beneficiaries, such reduced levels of reimbursement may have a negative impact on the operating results of our hospitals.
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 have been, or are
scheduled to be, implemented as a result of the ACA.
Implemented Medicare Reductions and Reforms:
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.
Reduction to Medicare DSH payments, effective in 2014, as discussed above.
Medicaid Revisions:
Expanded Medicaid eligibility and related special federal payments, effective in 2014.
The 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:
Large employer insurance reforms, effective in 2015.
Individual insurance mandate and related federal subsidies, effective in 2014. As noted above in Health
Care Reform, the Tax Cuts and Jobs Act enacted into law in December, 2017 eliminated the individual
insurance federal mandate penalty 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
68
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 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%.
Hospital Acquired Conditions:
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.
Readmission Reduction Program:
In the ACA, Congress also mandated implementation of the hospital readmission reduction program (“HRRP”). Hospitals
with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just
discharges relating to the conditions subject to the excessive readmission standard. The HRRP currently assesses penalties on hospitals
having excess readmission rates for heart failure, myocardial infarction, pneumonia, acute exacerbation of chronic obstructive
pulmonary disease (COPD) and elective total hip arthroplasty (THA) and/or total knee arthroplasty (TKA), excluding planned
readmissions, when compared to expected rates. In the fiscal year 2015 IPPS final rule, CMS added readmissions for coronary artery
bypass graft (CABG) surgical procedures beginning in fiscal year 2017. To account for excess readmissions, an applicable hospital's
base operating DRG payment amount is adjusted for each discharge occurring during the fiscal year. Readmissions payment
adjustment factors can be no more than a 3 percent reduction.
Accountable Care Organizations:
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. CMS is also developing and implementing more advanced ACO
payment models, such as the Next Generation ACO Model, which require ACOs to assume greater risk for attributed beneficiaries.
On December 21, 2018, CMS published a final rule that, in general, requires ACO participants to take on additional risk associated
with participation in the program. It remains unclear to what extent providers will pursue federal ACO status or whether the required
investment would be warranted by increased payment.
Bundled Payments for Care Improvement Advanced:
The Center for Medicare & Medicaid Innovation (“CMMI”) is responsible for establishing demonstration projects and other
initiatives aimed to develop, test and encourage the adoption of new methods for delivery and payment for health care that create savings
under the Federal Medicare and state Medicaid programs while improving quality of care. For example, providers participating in
bundled payment initiatives agree to receive one payment for services provided to Medicare patients for certain medical conditions or
episodes of care, accepting accountability for costs and quality of care across the continuum of care. By rewarding providers for
increasing quality and reducing costs, and penalizing providers if costs exceed a set amount, these models are intended to lead to higher
quality and more coordinated care at a lower cost to the Medicare beneficiary and overall program. The CMMI has previously
implemented a voluntary bundled payment program known as the Bundled Payment for Care Improvement (“BPCI”). Substantially all
of our acute care hospitals were participants in the BPCI program, which ended September 30, 2018.
As of October 1, 2018, the CMMI implemented a new, second generation voluntary episode payment model, Bundled
Payments for Care Improvement Advanced (BPCI-Advanced or the Program). BPCI-Advanced is designed to test a new iteration of
bundled payments for 32 Clinical Episodes (29 inpatient and 3 outpatient) with an aim to align incentives among participating health
care providers to reduce expenditures and improve quality of care for traditional Medicare beneficiaries. The first cohort of
participants entered BPCI-Advanced on October 1, 2018, and agreed to an initial performance period that will run through December
31, 2023. We have elected to participate in BPCI-Advanced at seventeen (17) of our acute care hospitals across almost two hundred
(200) clinical episodes in collaboration with a third-party convener which has extensive experience and success in BPCI. The ultimate
69
success and financial impact of the BPCI-Advanced program is contingent on multiple variables so we are unable to estimate the
impact. However, given the breadth and scope of participation of our acute care hospitals in BPCI-Advanced, the impact could be
significant (either favorably or unfavorably) depending on actual program results.
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 payers could have a material adverse effect on our financial position and our results.
Other Operating Results
Interest Expense
Reflected below are the components of our interest expense which amounted to $155 million during 2018, $145 million during
2017 and $125 million during 2016 (amounts in thousands):
Revolving credit & demand notes (a.)
$400 million, 7.125% Senior Notes due 2016 (c.)
$300 million, 3.75% Senior Notes due 2019 (d.)
$700 million, 4.75% Senior Notes due 2022 (e.)
$400 million, 5.00% Senior Notes due 2026 (f.)
Term loan facility A (a.)
Term loan facility B (a.)(b.)
Accounts receivable securitization program (g.)
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
$
2018
2017
2016
12,240 $
—
10,156
32,280
20,000
63,021
3,511
11,785
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
152,993
(6,726 )
9,143
3,343
(2,266 )
(1,531 )
154,956 $
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
$
(a.) In October, 2018, we entered into a sixth amendment to our credit agreement dated November 15, 2010 to, among other
things: (i.) increase the aggregate amount of the revolving commitments by $200 million to $1 billion; (ii) increase the
aggregate amount of the term loan facility A by approximately $290 million to $2 billion, and; (iii) extend the maturity date
of the credit agreement from August 7, 2019 to October 23, 2023. The credit agreement, as amended in October, 2018,
consists of: (i) an $1 billion revolving credit facility (there are no outstanding borrowings under the revolving credit facility
as of December 31, 2018); (ii) a $2 billion term loan A facility (with $2.0 billion outstanding as of December 31, 2018),
and; (iii) a $500 million term loan B facility (with $500 million outstanding as of December 31, 2018).
(b.) On October 31, 2018 we added a seven-year, Tranche B term loan facility in the aggregate amount of $500 million pursuant
to our credit agreement. The Tranche B term loan matures on October 31, 2025. We used the proceeds to repay borrowings
under the revolving credit facility, the Securitization Program, to redeem our $300 million, 3.75% Senior Notes that were
scheduled to mature in 2019 and for general corporate purposes.
(c.) The $400 million, 7.125% Senior Notes matured and were repaid in June, 2016.
(d.) On November 26, 2018 we redeemed the $300 million aggregate principal, 3.75% Senior Notes due 2019. The 2019 Notes
were redeemed for an aggregate price equal to 100.485% of the principal amount (premium of approximately $1 million)
plus accrued interest to the redemption date.
(e.) 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
70
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.
(f.) In June, 2016, we completed the offering of $400 million aggregate principal amount of 5.00% Senior Notes due in 2026.
(g.) In April, 2018, we amended our accounts receivable securitization program, which was scheduled to expire in December,
2018. Pursuant to the amendment, the term has been extended through April 26, 2021, and the borrowing limit has been
increased to $450 million from $440 million ($390 million outstanding as of December 31, 2018).
Interest expense increased $10 million during 2018 to $155 million as compared to $145 million during 2017. The increase was
due primarily to: (i) a net increase of $23 million in aggregate interest expense on our revolving credit, demand notes, senior notes,
term loan A and B facilities and accounts receivable securitization program resulting from an increase in our aggregate average cost of
borrowings pursuant to these facilities (3.8% during 2018, as compared to 3.2% during 2017), partially offset by a decrease in the
aggregate average outstanding borrowings ($4.00 billion during 2018 as compared to $4.02 billion during 2017), partially offset by;
(ii) a $9 million decrease in the interest rate swap expense; (iii) a $3 million combined increase in capitalized interest and interest
income, and; (iv) $1 million of other combined net decreases.
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, partially offset
by; (iii) a $6 million decrease in our interest rate swap expense.
The aggregate average outstanding borrowings under our revolving credit, demand notes, senior notes, term loan A and B
facilities and accounts receivable securitization program were approximately $4.00 billion during 2018, $4.02 billion during 2017 and
$3.54 billion during 2016. 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 3.8% during 2018, 3.5% during 2017 and 3.4% during 2016.
Costs Related to Early Extinguishment of Debt
In connection with various financing transaction completed during the year, as discussed below in Capital Resources-Credit
Agreements and Outstanding Debt Securities, our 2018 results of operations include a $4 million pre-tax charge incurred for the costs
related to the extinguishment of debt. This charge, which was included in other operating expenses, consisted of the write-off of
deferred charges ($3 million) as well as the make-whole premium paid ($1 million) on the early redemption of the $300 million,
3.75% senior notes scheduled to mature in 2019.
Provision for Intangible Assets Impairment
During 2018, we recorded a pre-tax $49 million provision for asset impairment to reduce the carrying value of a tradename
intangible asset to approximately $75 million from approximately $124 million as previously recorded in connection with our 2015
acquisition of Foundation Recovery Network, L.L.C. (“Foundations”). The intangible asset impairment charge, which is included in
other operating expenses in our 2018 consolidated statements of income, was recorded after evaluation of the estimated fair value of
the Foundations’ tradename for its existing facilities, consisting of 4 inpatient and 12 outpatient facilities as of December 31, 2018, as
well as estimated planned de novos. This asset impairment charge was impacted by the following: (i) the lost future revenue and cash
flows resulting from the permanent closure of a Foundations’ inpatient facility located in Malibu, California that was severely
damaged in the California wildfires during the fourth quarter of 2018; (ii) reduction in growth rates of projected future patient
volumes, revenues and operating cash flows based upon pressures on reimbursement rates experienced from certain payers and
competitive pressures experienced in certain markets, and; (iii) revisions made to the number and timing of planned de novo facilities.
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, 2018, 2017 and 2016 (dollar amounts in thousands):
Provision for income taxes
Income before income taxes
Effective tax rate
2018
2017
$ 236,642 $ 363,697 $ 409,187
1,034,525 1,135,009 1,156,358
2016
22.9 %
32.0 %
35.4 %
The decrease in the effective tax rate during 2018, as compared to 2017, was due primarily to the following:
71
a decrease in the provision for income taxes during 2018 resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA-
17”) which, among other things, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1,
2018, partially offset by;
a net increase of $13 million in the provision for income taxes during 2018, as compared to 2017, due to the following
that decreased or increased our provision for income taxes during 2018 and/or 2017: (i) decreases of $6 million and
$30 million recorded during 2018 and 2017, respectively, 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, partially offset by; (ii) an increase of $11 million recorded during 2017 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), and;
a $21 million increase in our provision for income taxes during 2018, as compared to 2017, due to an unfavorable
change resulting from our January 1, 2017 adoption of ASU 2016-09, which decreased our provision for income taxes
by $1 million during 2018 as compared to $22 million during 2017.
The decrease in the effective tax rate during 2017, as compared to 2016, was due primarily to the following that increased or
decreased our provision for income taxes in 2017:
a decrease of $30 million recorded during 2017 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 recorded during 2017 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 recorded during 2017 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.
Previously, in 2016, 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 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.
72
Liquidity
Year ended December 31, 2018 as compared to December 31, 2017:
Net cash provided by operating activities
Net cash provided by operating activities was $1.341 billion during 2018 as compared to $1.183 billion during 2017. The net
increase of $158 million was primarily attributable to the following:
a favorable change of $130 million in cash flows from forward exchange contracts related to our investments in the
United Kingdom;
a favorable change of $91 million due to an increase in net income plus/minus depreciation and amortization expense,
stock-based compensation, a net gain on sales of assets, and provision for intangible asset impairment;
an unfavorable change of $48 million in accrued and deferred income taxes;
a favorable change of $40 million in other working capital accounts resulting primarily from changes in accrued expenses
and due to timing of disbursements;
an unfavorable change of $18 million in accounts receivable;
an unfavorable change of $7 million in accrued insurance expense, net of commercial premiums paid, and;
$30 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 51 days at December 31, 2018 and 53 days at
each of December 31, 2017 and 2016.
Our accounts receivable as of December 31, 2018 and December 31, 2017 include amounts due from Illinois of approximately
$32 million and $25 million, respectively. Collection of the outstanding receivables continues to be delayed due to state budgetary and
funding pressures. Approximately $18 million as of December 31, 2018 and $8 million as of December 31, 2017, 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 $813 million during 2018 and $620 million during 2017
2018:
The $813 million of net cash used in investing activities during 2018 consisted of:
$665 million spent on capital expenditures including capital expenditures for equipment, renovations and new projects at
various existing facilities;
$110 million spent to acquire businesses and property consisting primarily of the acquisition of: (i) The Danshell Group,
consisting of 25 behavioral health facilities located in the U.K. (acquired during the third quarter of 2018), and; (ii) a 109-bed
behavioral health care facility located in Gulfport, Mississippi (acquired during the first quarter of 2018);
$36 million spent on the purchase and implementation of information technology applications;
$15 million spent to fund construction costs of a new behavioral health care facility, that is jointly owned by us and a third-
party, that was completed and opened during the third quarter of 2018, and;
$13 million received in connection with the sale of a business and property including The Limes, an 18-bed facility located in
the U.K.
2017:
The $620 million of net cash used in investing activities during 2017 consisted of:
73
$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, jointly owned behavioral health care facility, and;
$3 million spent to increase the statutorily required capital reserves of our commercial insurance subsidiary.
Net cash used in financing activities
Net cash used in financing activities was $492 million during 2018 and $519 million during 2017.
2018:
The $492 million of net cash used in financing activities during 2018 consisted of the following:
spent $830 million on net repayment of debt as follows: (i) $67 million related to our term loan A facility; (ii) $403
million related to our revolving credit facility; (iii) $300 million related to the early redemption of our 3.75% bonds that
were scheduled to mature in 2019; (iv) $29 million related to our accounts receivable securitization program; (v) $29
million related to our short-term, on-demand credit facility, and; (vi) $2 million related to other debt facilities;
generated $791 million of proceeds related to new borrowings pursuant to our term loan A facility ($291 million) and our
term loan B facility ($500 million);
spent $397 million to repurchase shares of our Class B Common Stock in connection with: (i) open market purchases
pursuant to our $1.7 billion stock repurchase program ($384 million), and; (ii) income tax withholding obligations related
to stock-based compensation programs ($13 million);
spent $37 million to pay dividends (paid quarterly at $.10 per share);
spent $14 million in financing costs;
spent $15 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.
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 $1.7 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.
74
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:
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.
Net cash used in investing activities
Net cash used in investing activities was $620 million during 2017 and $1.155 billion during 2016. The factors contributing to
the $620 million of net cash used in investing activities during 2017 are detailed above.
2016:
The $1.155 billion of net cash used in investing activities during 2016 consisted of:
$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, and;
$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. The factors contributing to
the $519 million of net cash used in financing activities during 2017 are detailed above.
2016:
The $171 million of net cash used in financing activities during 2016 consisted of the following:
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);
75
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.
2019 Expected Capital Expenditures:
During 2019, we expect to spend approximately $675 million to $725 million on capital expenditures which includes expenditures
for capital equipment, renovations and new projects at existing hospitals. Approximately $250 million of our 2019 expected capital
expenditures relates to completion of projects that are in progress as of December 31, 2018. 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 October 23, 2018, we entered into a Sixth Amendment (the “Sixth Amendment”) to our credit agreement dated as of
November 15, 2010, as amended on March 15, 2011, September 21, 2012, May 16, 2013, August 7, 2014 and June 7, 2016, among
UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders, JPMorgan Chase
Bank, N.A., as administrative agent, and the other agents party thereto (the “Senior Credit Agreement”). The Sixth Amendment
became effective on October 23, 2018.
The Sixth Amendment amended the Senior Credit Facility to, among other things: (i) increase the aggregate amount of the
revolving credit facility to $1 billion (increase of $200 million over the $800 million previous commitment); (ii) increase the
aggregate amount of the tranche A term loan commitments to $2 billion, which represents the outstanding borrowings as of December
31, 2018 (increase of approximately $290 million over the $1.71 billion of outstanding borrowings prior to the amendment), and; (iii)
extended the maturity date of the revolving credit and tranche A term loan facilities to October 23, 2023 from August 7, 2019.
On October 31, 2018, we added a seven-year tranche B term loan facility in the aggregate principal amount of $500 pursuant
(which represents the outstanding borrowings as of December 31, 2018) to the Senior Credit Agreement. The tranche B term loan
matures on October 31, 2025. We used the proceeds to repay borrowings under the revolving credit facility, the Securitization, to
redeem our $300 million, 3.75% Senior Notes that were scheduled to mature in 2019 and for general corporate purposes.
As of December 31, 2018, we had no borrowings outstanding pursuant to our $1 billion revolving credit facility and we had $960
million of available borrowing capacity net of $34 million of outstanding letters of credit and $6 million of outstanding borrowings
pursuant to a short-term credit facility.
Pursuant to the terms of the Sixth Amendment, the tranche A term loan provides for eight installment payments of $12.5 million
per quarter commencing on March 31, 2019 followed by payments of $25 million per quarter until maturity when all outstanding
amounts will be due. The tranche B term loan provides for installment payments of $1.25 million per quarter commencing March 31,
2019 through maturity.
Borrowings under the Senior 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 0.375% to 0.625% for revolving credit and term loan A borrowings and 0.75% for tranche B 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 1.375% to 1.625% for revolving credit and term loan A borrowings and 1.75% for the tranche
B term loan. As of December 31, 2018, 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. The revolving credit facility includes a $125 million sub-limit for letters of
credit. The Senior Credit Agreement is secured by certain assets of the Company and our material subsidiaries (which generally
excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, and certain real
estate assets and assets held in joint-ventures with third parties) and is guaranteed by our material subsidiaries.
The Senior Credit Agreement includes a material adverse change clause that must be represented at each draw. The Senior 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. We are in compliance with all required covenants as of December 31, 2018.
76
In late April, 2018, we entered into the sixth amendment to our accounts receivable securitization program (“Securitization”) dated
as of October 27, 2010 with a group of conduit lenders, liquidity banks, and PNC Bank, National Association, as administrative agent,
which provides for borrowings outstanding from time to time by certain of our subsidiaries in exchange for undivided security
interests in their respective accounts receivable. The sixth amendment, among other things, extended the term of the Securitization
program through April 26, 2021 and increased the borrowing capacity to $450 million (from $440 million previously). Although the
program fee and certain other fees were adjusted in connection with the sixth amendment, substantially all other provisions of the
Securitization program remained unchanged. Pursuant to the terms of our Securitization program, 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, 2018, we had $390 million of outstanding
borrowings pursuant to the terms of the Securitization and $60 million of available borrowing capacity.
As of December 31, 2018, we had combined aggregate principal of $1.1 billion from the following senior secured notes:
$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.
On November 26, 2018 we redeemed the $300 million aggregate principal, 3.75% Senior Notes due in 2019. The 2019 Notes
were redeemed for an aggregate price equal to 100.485% of the principal amount, resulting in a premium paid of approximately $1
million, plus accrued interest to the redemption date.
At December 31, 2018, the carrying value and fair value of our debt were each approximately $4.0 billion. At December 31,
2017, the carrying value and fair value of our debt were approximately $4.0 billion and $4.1 billion, respectively. The fair value of
our debt was computed based upon quotes received from financial institutions. We consider these to be “level 2” in the fair value
hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments.
Our total debt as a percentage of total capitalization was approximately 43% at December 31, 2018 and 45% at December 31,
2017.
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 Senior 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, 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, including the refinancing of our above-mentioned Senior Credit Agreement that is scheduled to mature in October, 2023.
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.
77
Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2018 we were party to certain off balance sheet arrangements consisting of standby letters of credit and
surety bonds which totaled $113 million consisting of: (i) $107 million related to our self-insurance programs, and; (ii) $6 million of
other debt and public utility guarantees.
Obligations under operating leases for real property, real property master leases and equipment amount to $368 million as of
December 31, 2018. The real property master leases are leases for buildings on or near hospital property for which we guarantee a
certain level of rental income. We sublease space in these buildings and any amounts received from these subleases are offset against
the expense. In addition, we lease three hospital facilities from Universal Health Realty Trust (the “Trust”) with two hospital terms
expiring in 2021 and the third in 2026. 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, 2018:
Less than
Payments Due by Period (dollars in thousands)
2-3
years
4-5
years
1 year
Total
After
5 years
Long-term debt obligations (a)
Estimated future interest payments on debt
outstanding as of December 31, 2018 (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
$ 3,998,637 $
63,446 $ 552,746 $ 2,507,105 $ 875,340
846,565
54,750
253,594
367,847
182,808
11,370
60,794
72,353
324,333
43,380
101,700
108,383
245,393
0
91,100
64,072
94,031
0
0
123,039
200,989
78,288
151,302
0
$ 5,800,670 $ 485,457 $ 1,146,247 $ 2,925,254 $ 1,243,712
17,584
0
15,705
0
16,398
78,288
(a) Reflects borrowings outstanding as of December 31, 2018 as discussed in Note 4 to the Consolidated Financial Statements.
(b) Assumes that all debt outstanding as of December 31, 2018, 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, 2018. 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,
2018, as calculated to maturity dates utilizing the applicable floating interest rates in effect as of December 31, 2018.
(c) Our share of the remaining estimated construction cost of two newly constructed behavioral health care facilities located in
Washington and Arizona that are scheduled to be completed and opened 2020. 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,
2018. 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) $57 million related to long-term contracts with third-parties consisting primarily of certain revenue cycle data
processing services for our acute care facilities; (ii) $194 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, 2018 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 $180 million of estimated future payments related to our non-contributory, defined benefit pension plan (estimated
through 2088), as disclosed in Note 8 to the Consolidated Financial Statements, and $21 million of estimated future payments
related to other retirement plan liabilities ($18 million of liabilities recorded in other non-current liabilities as of December 31,
2018 in connection with these retirement plans).
(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, 2018, the total accrual for our professional and general liability claims was $243 million, of which $42
million is included in other current liabilities and $201 million is included in other non-current liabilities. We exclude the $243 million
78
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.
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 2018 and 2017 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.
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:
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%;
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;
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%.
On or before the April 15, 2019 expiration of the $1.0 billion of interest rate swaps, as outlined above, we intend to enter into
new interest rate swap agreements on a similar total notional amount.
79
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, 2018, the fair value of our interest
rate swaps was a net asset of $4 million which is included in net accounts receivable on the accompanying balance sheet. 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.
The table below presents information about our long-term financial instruments that are sensitive to changes in interest rates as
of December 31, 2018. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by
contractual maturity dates.
Maturity Date, Fiscal Year Ending December 31
(dollars in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Long-term debt:
Fixed rate:
Debt
Average interest rates
Variable rate:
Debt
Average interest rates
Interest rate swaps:
Notional amount
Average interest rates
$
2,146 $ 1,650 $ 1,696 $ 699,550 $
4.9 %
5.0 %
4.9 %
5.0 %
2,476 $ 405,613 $ 1,113,131
5.2 %
3.7 %
4.8 %
$
61,300 $ 55,000 494,400 105,000 1,700,079 469,727 $ 2,885,506
3.9 %
3.9 %
3.9 %
4.0 %
4.0 %
2.7 %
3.7 %
$ 1,000,000
1.3 %
$ 1,000,000
1.3 %
As calculated based upon our variable rate debt outstanding as of December 31, 2018 that is subject to interest rate fluctuations,
each 1% change in interest rates would impact our pre-tax income by approximately $19 million.
ITEM 8.
Financial Statements and Supplementary Data
Our Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Equity,
Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income, 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, 2018, 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 2018
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
80
(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
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, 2018, 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, 2018 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.
81
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
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, 2018. 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, 2018.
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, 2018.
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, 2018.
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, 2018.
82
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*
Amendment dated as of November 5, 2018 to the Employment Agreement, dated as July 24, 2013, by and between
Universal Health Services, Inc. and Alan B. Miller, previously filed as Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2018, is incorporated herein by reference.
10.3
Advisory Agreement dated as of December 24, 1986, and amended and restated effective as of January 1, 2019 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).
83
No.
10.5
10.6
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).
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.
84
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
Sixth Amendment to Amended and Restated Credit and Security Agreement, dated as of April 26, 2018, previously filed
as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 27, 2018, is incorporated herein by reference.
10.25
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.
10.26
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.
10.27
10.28
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.
10.29
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.
10.30
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.
10.31
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.
85
No.
Description
10.32
10.33
10.34
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
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.
Sixth Amendment, dated as of October 23, 2018, to the Credit Agreement, dated as of November 15, 2010, as amended
on March 15, 2011, September 21, 2012, May 16, 2013, August 7, 2014 and June 7, 2016, among the Company, as
borrower, the several banks and other financial 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 October 24, 2018, is incorporated herein by reference.
Increased Facility Activation Notice – Incremental Term Loans, dated as of October 31, 2018, to the Credit Agreement,
dated as of November 15, 2010, as amended on March 15, 2011, September 21, 2012, May 16, 2013, August 7, 2014,
June 7, 2016 and October 23, 2018, among the Company, as borrower, the several banks and other financial 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 November 2, 2018, is
incorporated herein by reference.
10.35
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.
10.36*
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.
10.37*
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.
10.38*
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.
10.39*
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.
10.40
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.
86
No.
Description
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
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.
101
101
101
101
101
101
*
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.
87
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 27, 2019
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/ ROBERT H. HOTZ
Robert H. Hotz
/s/ EILEEN C. MCDONNELL
Eileen C. McDonnell
/s/ WARREN J. NIMETZ
Warren J. Nimetz
/s/ ELLIOTT J. SUSSMAN M.D.
Elliot J. Sussman M.D.
/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 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
88
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, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income for December 31, 2018, 2017, and 2016
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Changes in Equity for December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Supplemental Financial Statement Schedule II: Valuation and Qualifying Accounts as of and for December 31, 2018,
2017, and 2016
90
91
92
93
94
97
98
134
89
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 consolidated financial statements, including the related notes and financial statement schedule, of
Universal Health Services, Inc. and its subsidiaries (the “Company”) 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018 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, 2018, 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
Management's Report on Internal Control over Financial Reporting appearing under Item 9A. 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 27, 2019
We have served as the Company’s auditor since 2007.
90
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
Other (income) 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
$
$
$
2018
Year Ended December 31,
2017
(in thousands, except per share data)
2016
$
10,772,278
11,278,942 $
869,077
10,409,865
10,507,788
741,578
9,766,210
5,254,536
2,614,687
1,168,654
453,045
106,094
0
9,597,016
1,175,262
154,956
(14,219 )
1,034,525
236,642
797,883
18,178
779,705 $
8.35 $
8.31 $
93,276
474
93,750
4,980,637
2,493,062
1,105,096
447,765
103,127
0
9,129,687
1,280,178
145,169
0
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
0
1,156,358
409,187
747,171
44,762
702,409
7.22
7.14
97,208
1,172
98,380
The accompanying notes are an integral part of these consolidated financial statements.
91
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
Foreign currency translation adjustment
Other
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
2018
Year Ended December 31,
2017
2016
$
797,883 $
771,312 $
747,171
(2,805 )
0
(6,892 )
9,718
4,398
4,419
6,679
0
4,070
(2,169 )
26,678
35,258
8,905
(4,486 )
793,397
2,664
32,594
803,906
1,438
(167 )
13,356
(2,229 )
(10,038 )
2,360
4,648
(2,288 )
744,883
$
18,178
775,219 $
19,009
784,897 $
44,762
700,121
The accompanying notes are an integral part of these consolidated financial statements.
92
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
December 31,
2018
2017
(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
Legal reserves
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 6,577,100 shares in 2018 and 6,595,308 shares in 2017
Class B Common Stock, limited voting, $.01 par value; authorized 150,000,000
shares: issued and outstanding 84,092,304 shares in 2018 and 86,947,407 shares in 2017
Class C Common Stock, voting, $.01 par value; authorized 1,200,000 shares: issued
and outstanding 661,688 shares in 2018 and 663,940 shares in 2017
Class D Common Stock, limited voting, $.01 par value; authorized 5,000,000 shares:
issued and outstanding 18,653 shares in 2018 and 20,868 shares in 2017
Cumulative dividends
Retained earnings
Accumulated other comprehensive income
Universal Health Services, Inc. common stockholders’ equity
Noncontrolling interest
Total Equity
Total Liabilities and Stockholders’ Equity
$
$
$
$
105,220
1,509,909
148,206
174,467
1,937,802
565,607
5,387,646
2,251,822
44,020
8,249,095
(3,715,515 )
4,533,580
314,360
4,847,940
3,844,628
5,280
8,772
621,058
4,479,738
11,265,480
$
63,446
445,652
$
343,384
19,277
56,218
129,150
389,183
2,428
1,448,738
361,809
3,935,187
49,661
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
38,555
389,319
18,334
1,848,034
306,304
3,494,390
54,962
4,292
6,702
66
841
7
0
(409,156 )
5,793,262
4,242
5,389,262
76,531
5,465,793
$
11,265,480
$
66
869
7
0
(371,814 )
5,353,209
7,177
4,989,514
61,922
5,051,436
10,761,828
The accompanying notes are an integral part of these consolidated financial statements.
93
S
E
I
R
A
I
D
I
S
B
U
S
D
N
A
.
C
N
I
,
S
E
C
I
V
R
E
S
H
T
L
A
E
H
L
A
S
R
E
V
I
N
U
Y
T
I
U
Q
E
N
I
S
E
G
N
A
H
C
F
O
S
T
N
E
M
E
T
A
T
S
D
E
T
A
D
I
L
O
S
N
O
C
6
1
0
2
d
n
a
7
1
0
2
,
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
s
r
a
e
Y
e
h
t
r
o
F
)
s
d
n
a
s
u
o
h
t
n
i
(
1
6
1
,
9
0
3
,
4
$
4
1
5
,
9
5
$
7
4
6
,
9
4
2
,
4
$
)
9
2
1
,
3
2
(
$
1
2
5
,
6
6
5
,
4
$
)
8
2
7
,
4
9
2
(
$
0
$
7
$
0
1
9
$
6
6
$
9
0
5
,
2
4
2
$
l
a
t
o
T
t
s
e
r
e
t
n
I
y
t
i
u
q
E
)
s
s
o
L
(
e
m
o
c
n
I
g
n
i
l
l
o
r
t
n
o
c
n
o
N
'
s
r
e
d
l
o
h
k
c
o
t
S
e
v
i
s
n
e
h
e
r
p
m
o
C
d
e
n
i
a
t
e
R
s
g
n
i
n
r
a
E
s
d
n
e
d
i
v
i
D
n
o
m
m
o
C
n
o
m
m
o
C
n
o
m
m
o
C
n
o
m
m
o
C
t
s
e
r
e
t
n
I
e
v
i
t
a
l
u
m
u
C
D
s
s
a
l
C
C
s
s
a
l
C
B
s
s
a
l
C
A
s
s
a
l
C
g
n
i
l
l
o
r
t
n
o
c
n
o
N
S
H
U
n
o
m
m
o
C
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
O
e
l
b
a
m
e
e
d
e
R
3
5
8
,
4
5
)
0
9
8
,
6
4
3
(
9
3
4
,
1
)
5
7
8
,
8
3
(
7
7
7
,
5
4
)
5
3
7
,
7
1
(
0
9
6
,
2
)
2
5
8
,
2
3
1
(
)
8
3
0
,
0
1
(
4
1
3
,
2
2
7
)
7
0
1
(
)
8
9
3
,
1
(
2
0
9
3
5
3
,
8
6
2
0
,
0
2
7
4
9
5
,
7
9
5
,
4
$
—
—
—
—
—
)
5
3
7
,
7
1
(
—
0
9
6
,
2
5
0
9
,
9
1
—
—
—
—
—
5
0
9
,
9
1
4
7
3
,
4
6
—
3
5
8
,
4
5
)
0
9
8
,
6
4
3
(
9
3
4
,
1
)
5
7
8
,
8
3
(
7
7
7
,
5
4
—
)
2
5
8
,
2
3
1
(
)
8
3
0
,
0
1
(
9
0
4
,
2
0
7
—
—
—
—
—
—
—
—
—
)
8
3
0
,
0
1
(
)
7
0
1
(
)
7
0
1
(
)
8
9
3
,
1
(
)
8
9
3
,
1
(
2
0
9
2
0
9
3
5
3
,
8
1
2
1
,
0
0
7
3
5
3
,
8
)
8
8
2
,
2
(
0
4
8
,
4
5
)
0
6
8
,
6
4
3
(
—
—
9
3
4
,
1
7
7
7
,
5
4
—
)
2
5
8
,
2
3
1
(
9
0
4
,
2
0
7
—
—
—
—
—
9
0
4
,
2
0
7
—
—
—
)
5
7
8
,
8
3
(
—
—
—
—
—
—
—
—
—
—
—
$
0
2
2
,
3
3
5
,
4
$
)
7
1
4
,
5
2
(
$
4
7
2
,
1
9
8
,
4
$
)
3
0
6
,
3
3
3
(
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
1
)
0
3
(
—
—
—
—
—
—
—
—
—
—
—
—
—
$
7
$
3
9
8
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6
6
—
—
—
—
—
)
7
4
8
,
1
5
(
—
)
0
0
2
,
6
0
2
(
7
5
8
,
4
2
—
—
—
—
—
$
9
1
3
,
9
7
5
8
,
4
2
$
x
a
t
e
m
o
c
n
i
f
o
t
e
n
(
e
g
d
e
h
d
e
t
a
n
i
m
r
e
t
f
o
n
o
i
t
a
z
i
t
r
o
m
A
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
n
o
n
/
S
H
U
o
t
e
m
o
c
n
i
t
e
N
s
t
n
e
m
t
s
u
j
d
a
n
o
i
t
a
l
s
n
a
r
t
y
c
n
e
r
r
u
c
n
g
i
e
r
o
F
)
0
6
$
f
o
t
c
e
f
f
e
e
m
o
c
n
i
f
o
t
e
n
(
y
t
i
r
u
c
e
s
e
l
b
a
t
e
k
r
a
m
n
o
s
s
o
l
d
e
z
i
l
a
e
r
n
U
)
1
3
8
$
f
o
t
c
e
f
f
e
x
a
t
t
e
n
(
s
e
g
d
e
h
w
o
l
f
h
s
a
c
n
o
s
n
i
a
g
e
v
i
t
a
v
i
r
e
d
d
e
z
i
l
a
e
r
n
U
)
6
3
5
$
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
f
o
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
f
o
t
e
n
(
y
t
i
l
i
b
a
i
l
n
o
i
s
n
e
p
m
u
m
i
n
i
M
d
e
n
w
o
y
t
i
r
o
j
a
m
n
i
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
n
o
n
f
o
n
o
i
t
i
s
i
u
q
c
A
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
n
o
n
o
t
s
n
o
i
t
u
b
i
r
t
s
i
D
:
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
C
s
e
s
s
e
n
i
s
u
b
r
e
h
t
O
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
-
l
a
t
o
t
b
u
S
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
e
c
n
a
l
a
B
)
3
0
0
,
5
$
m
o
r
f
s
t
i
f
e
n
e
b
x
a
t
g
n
i
d
u
l
c
n
i
)
d
e
t
r
e
v
n
o
c
(
/
d
e
u
s
s
I
s
n
o
i
t
p
o
k
c
o
t
s
f
o
e
s
i
c
r
e
x
e
d
e
s
a
h
c
r
u
p
e
R
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
e
r
a
h
s
d
e
t
c
i
r
t
s
e
R
6
1
0
2
,
1
y
r
a
u
n
a
J
,
e
c
n
a
l
a
B
k
c
o
t
S
n
o
m
m
o
C
e
s
n
e
p
x
e
n
o
i
t
p
o
k
c
o
t
S
d
i
a
p
s
d
n
e
d
i
v
i
D
94
S
E
I
R
A
I
D
I
S
B
U
S
D
N
A
.
C
N
I
,
S
E
C
I
V
R
E
S
H
T
L
A
E
H
L
A
S
R
E
V
I
N
U
(
)
d
e
u
n
i
t
n
o
C
—
Y
T
I
U
Q
E
N
I
S
E
G
N
A
H
C
F
O
S
T
N
E
M
E
T
A
T
S
D
E
T
A
D
I
L
O
S
N
O
C
6
1
0
2
d
n
a
7
1
0
2
,
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
s
r
a
e
Y
e
h
t
r
o
F
)
s
d
n
a
s
u
o
h
t
n
i
(
l
a
t
o
T
t
s
e
r
e
t
n
I
y
t
i
u
q
E
)
s
s
o
L
(
e
m
o
c
n
I
g
n
i
l
l
o
r
t
n
o
c
n
o
N
'
s
r
e
d
l
o
h
k
c
o
t
S
e
v
i
s
n
e
h
e
r
p
m
o
C
d
e
n
i
a
t
e
R
s
g
n
i
n
r
a
E
s
d
n
e
d
i
v
i
D
n
o
m
m
o
C
n
o
m
m
o
C
n
o
m
m
o
C
n
o
m
m
o
C
t
s
e
r
e
t
n
I
e
v
i
t
a
l
u
m
u
C
D
s
s
a
l
C
C
s
s
a
l
C
B
s
s
a
l
C
A
s
s
a
l
C
g
n
i
l
l
o
r
t
n
o
c
n
o
N
S
H
U
n
o
m
m
o
C
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
O
e
l
b
a
m
e
e
d
e
R
9
7
3
,
0
1
)
3
1
4
,
6
5
3
(
7
7
3
,
1
)
1
1
2
,
8
3
(
5
6
2
,
4
5
)
2
3
9
,
2
2
(
5
3
6
8
7
6
,
6
2
8
4
1
,
2
7
7
)
0
6
3
,
1
(
9
8
1
,
4
7
8
0
,
3
2
4
7
,
4
0
8
6
3
4
,
1
5
0
,
5
$
—
—
—
—
—
5
3
6
)
2
3
9
,
2
2
(
5
4
8
,
9
1
—
—
—
—
5
4
8
,
9
1
2
2
9
,
1
6
—
—
9
7
3
,
0
1
)
3
1
4
,
6
5
3
(
7
7
3
,
1
)
1
1
2
,
8
3
(
5
6
2
,
4
5
8
7
6
,
6
2
3
0
3
,
2
5
7
—
—
—
—
—
—
—
—
8
7
6
,
6
2
)
0
6
3
,
1
(
)
0
6
3
,
1
(
9
8
1
,
4
7
8
0
,
3
7
9
8
,
4
8
7
9
8
1
,
4
7
8
0
,
3
4
9
5
,
2
3
0
7
3
,
0
1
)
0
8
3
,
6
5
3
(
—
—
—
7
7
3
,
1
5
6
2
,
4
5
3
0
3
,
2
5
7
—
—
—
—
3
0
3
,
2
5
7
—
—
—
)
1
1
2
,
8
3
(
—
—
—
—
—
—
—
—
—
$
4
1
5
,
9
8
9
,
4
$
7
7
1
,
7
$
9
0
2
,
3
5
3
,
5
$
)
4
1
8
,
1
7
3
(
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9
)
3
3
(
—
—
—
—
—
—
—
—
—
—
—
$
7
$
9
6
8
$
—
—
—
—
—
—
—
—
—
—
—
—
—
6
6
—
—
—
—
—
—
)
1
8
7
,
1
(
)
6
3
8
(
—
—
—
—
$
2
0
7
,
6
)
6
3
8
(
$
e
m
o
c
n
i
f
o
t
e
n
(
y
t
i
r
u
c
e
s
e
l
b
a
t
e
k
r
a
m
n
o
s
s
o
l
d
e
z
i
l
a
e
r
n
U
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
n
o
n
/
S
H
U
o
t
e
m
o
c
n
i
t
e
N
s
t
n
e
m
t
s
u
j
d
a
n
o
i
t
a
l
s
n
a
r
t
y
c
n
e
r
r
u
c
n
g
i
e
r
o
F
)
9
0
8
$
f
o
t
c
e
f
f
e
x
a
t
t
e
n
(
s
e
g
d
e
h
w
o
l
f
h
s
a
c
n
o
s
n
i
a
g
e
v
i
t
a
v
i
r
e
d
d
e
z
i
l
a
e
r
n
U
)
0
9
4
2
$
,
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
f
o
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
f
o
t
e
n
(
y
t
i
l
i
b
a
i
l
n
o
i
s
n
e
p
m
u
m
i
n
i
M
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
-
l
a
t
o
t
b
u
S
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
e
c
n
a
l
a
B
)
3
8
9
$
m
o
r
f
s
t
i
f
e
n
e
b
x
a
t
g
n
i
d
u
l
c
n
i
)
d
e
t
r
e
v
n
o
c
(
/
d
e
u
s
s
I
s
n
o
i
t
p
o
k
c
o
t
s
f
o
e
s
i
c
r
e
x
e
d
e
s
a
h
c
r
u
p
e
R
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
e
r
a
h
s
d
e
t
c
i
r
t
s
e
R
k
c
o
t
S
n
o
m
m
o
C
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
n
o
n
o
t
s
n
o
i
t
u
b
i
r
t
s
i
D
:
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
C
r
e
h
t
O
e
s
n
e
p
x
e
n
o
i
t
p
o
k
c
o
t
S
d
i
a
p
s
d
n
e
d
i
v
i
D
95
S
E
I
R
A
I
D
I
S
B
U
S
D
N
A
.
C
N
I
,
S
E
C
I
V
R
E
S
H
T
L
A
E
H
L
A
S
R
E
V
I
N
U
(
)
d
e
u
n
i
t
n
o
C
—
Y
T
I
U
Q
E
N
I
S
E
G
N
A
H
C
F
O
S
T
N
E
M
E
T
A
T
S
D
E
T
A
D
I
L
O
S
N
O
C
6
1
0
2
d
n
a
7
1
0
2
,
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
s
r
a
e
Y
e
h
t
r
o
F
)
s
d
n
a
s
u
o
h
t
n
i
(
l
a
t
o
T
t
s
e
r
e
t
n
I
y
t
i
u
q
E
)
s
s
o
L
(
e
m
o
c
n
I
g
n
i
l
l
o
r
t
n
o
c
n
o
N
'
s
r
e
d
l
o
h
k
c
o
t
S
e
v
i
s
n
e
h
e
r
p
m
o
C
d
e
n
i
a
t
e
R
s
g
n
i
n
r
a
E
s
d
n
e
d
i
v
i
D
n
o
m
m
o
C
n
o
m
m
o
C
n
o
m
m
o
C
n
o
m
m
o
C
t
s
e
r
e
t
n
I
e
v
i
t
a
l
u
m
u
C
D
s
s
a
l
C
C
s
s
a
l
C
B
s
s
a
l
C
A
s
s
a
l
C
g
n
i
l
l
o
r
t
n
o
c
n
o
N
S
H
U
n
o
m
m
o
C
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
O
e
l
b
a
m
e
e
d
e
R
—
—
3
5
3
,
3
)
3
5
3
,
3
(
8
8
8
,
1
1
)
2
0
0
,
4
1
4
(
4
2
9
,
2
)
2
4
3
,
7
3
(
1
6
0
,
1
6
)
5
9
0
,
2
1
(
6
1
6
,
8
—
—
—
—
—
6
1
6
,
8
)
5
9
0
,
2
1
(
3
9
7
,
7
9
7
8
8
0
,
8
1
4
9
8
,
2
)
8
3
1
,
2
(
)
2
4
2
,
5
(
7
0
3
,
3
9
7
3
9
7
,
5
6
4
,
5
$
—
—
—
8
8
0
,
8
1
1
3
5
,
6
7
—
—
8
8
8
,
1
1
)
2
0
0
,
4
1
4
(
4
2
9
,
2
)
2
4
3
,
7
3
(
1
6
0
,
1
6
—
5
0
7
,
9
7
7
—
—
—
—
—
—
—
—
)
2
0
8
,
1
(
4
9
8
,
2
4
9
8
,
2
)
8
3
1
,
2
(
)
8
3
1
,
2
(
)
2
4
2
,
5
(
9
1
2
,
5
7
7
)
2
4
2
,
5
(
)
5
3
9
,
2
(
2
8
8
,
1
1
)
8
6
9
,
3
1
4
(
—
—
—
4
2
9
,
2
1
6
0
,
1
6
2
0
8
,
1
5
0
7
,
9
7
7
—
—
—
4
5
1
,
8
7
7
—
—
—
)
2
4
3
,
7
3
(
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6
)
4
3
(
—
—
—
—
—
—
—
—
—
—
—
$
2
6
2
,
9
8
3
,
5
$
2
4
2
,
4
$
2
6
2
,
3
9
7
,
5
$
)
6
5
1
,
9
0
4
(
$
0
$
7
$
1
4
8
$
—
—
—
—
—
—
—
—
—
—
—
—
—
6
6
—
0
9
—
—
—
—
0
9
$
2
9
2
,
4
$
2
0
-
8
1
0
2
U
S
A
f
o
n
o
i
t
p
o
d
a
o
t
e
u
d
n
o
i
t
a
c
i
f
i
s
s
a
l
c
e
R
f
o
t
e
n
(
s
t
n
e
m
t
s
u
j
d
a
n
o
i
t
a
l
s
n
a
r
t
y
c
n
e
r
r
u
c
n
g
i
e
r
o
F
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
n
o
n
/
S
H
U
o
t
e
m
o
c
n
i
t
e
N
,
)
4
2
8
6
$
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
t
e
n
(
s
e
g
d
e
h
w
o
l
f
h
s
a
c
n
o
s
n
i
a
g
e
v
i
t
a
v
i
r
e
d
d
e
z
i
l
a
e
r
n
U
)
7
6
6
$
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
f
o
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
f
o
t
e
n
(
y
t
i
l
i
b
a
i
l
n
o
i
s
n
e
p
m
u
m
i
n
i
M
:
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
C
r
e
h
t
O
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
-
l
a
t
o
t
b
u
S
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
e
c
n
a
l
a
B
)
0
5
6
,
1
$
)
0
0
5
,
2
(
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
n
o
n
o
t
s
n
o
i
t
u
b
i
r
t
s
i
D
—
—
—
—
—
U
S
A
f
o
n
o
i
t
p
o
d
a
o
t
e
u
d
t
n
e
m
t
s
u
j
d
a
t
c
e
f
f
e
-
e
v
i
t
a
l
u
m
u
C
,
)
5
4
0
1
$
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
f
o
t
e
n
(
1
0
-
6
1
0
2
k
c
o
t
S
n
o
m
m
o
C
m
o
r
f
s
t
i
f
e
n
e
b
x
a
t
g
n
i
d
u
l
c
n
i
)
d
e
t
r
e
v
n
o
c
(
/
d
e
u
s
s
I
s
n
o
i
t
p
o
k
c
o
t
s
f
o
e
s
i
c
r
e
x
e
d
e
s
a
h
c
r
u
p
e
R
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
e
r
a
h
s
d
e
t
c
i
r
t
s
e
R
e
s
n
e
p
x
e
n
o
i
t
p
o
k
c
o
t
S
d
i
a
p
s
d
n
e
d
i
v
i
D
96
.
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
i
f
d
e
t
a
d
i
l
o
s
n
o
c
e
s
e
h
t
f
o
t
r
a
p
l
a
r
g
e
t
n
i
n
a
e
r
a
s
e
t
o
n
g
n
i
y
n
a
p
m
o
c
c
a
e
h
T
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
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
Costs related to extinguishment of debt
Provision for intangible asset impairment
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
Decrease (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
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Supplemental Disclosures of Cash Flow Information:
Interest paid
Income taxes paid, net of refunds
Noncash purchases of property and equipment
2018
Year Ended December 31,
2017
(Amounts in thousands)
2016
$
797,883 $
771,312 $
747,171
453,076
(2,513 )
66,581
2,727
49,310
447,883
0
56,738
0
0
416,608
0
48,109
0
0
(42,239 )
(4,478 )
(54,052 )
24,696
(31,429 )
64,615
0
92,863
(76,147 )
1,340,893
(24,719 )
705
(6,405 )
(15,165 )
(27,936 )
(42,564 )
0
102,595
(79,192 )
1,183,252
(87,881 )
9,766
22,068
74,489
(25,522 )
81,139
45,219
84,638
(81,962 )
1,333,842
(664,962 )
(110,464 )
13,502
(557,506 )
(22,878 )
108
(519,939 )
(613,803 )
0
(36,243 )
(29,047 )
(21,475 )
100
(15,331 )
(813,398 )
(3,100 )
(7,976 )
(620,399 )
0
0
(1,155,217 )
(830,496 )
791,247
0
(13,787 )
(397,425 )
(37,342 )
10,196
(14,595 )
(492,202 )
(2,905 )
32,388
167,297
199,685 $
(143,106 )
41,100
0
(76 )
(364,401 )
(38,211 )
10,254
(24,713 )
(519,153 )
1,647
45,347
121,950
167,297 $
(459,183 )
1,170,800
(418,000 )
(12,449 )
(353,380 )
(38,875 )
9,503
(69,583 )
(171,167 )
(2,790 )
4,668
117,282
121,950
150,293 $
293,837 $
77,674 $
135,533 $
370,855 $
82,496 $
107,079
344,611
65,702
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
97
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 intercompany accounts and transactions
have been eliminated.
B) Revenue Recognition: On January 1, 2018, we adopted, using the modified retrospective approach, 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. The most
significant change from the adoption of the new standard relates to our estimation for the allowance for doubtful accounts. Under the
previous standards, our estimate for amounts not expected to be collected based upon our historical experience, were reflected as
provision for doubtful accounts, included within net revenue. Under the new standard, 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, not reflected separately
as provision for doubtful accounts. Under the new standard, subsequent changes in estimate of collectability due to a change in the
financial status of a payer, for example a bankruptcy, will be recognized as bad debt expense in operating charges. The adoption of
this ASU in 2018, and amounts recognized as bad debt expense and included in other operating expenses, did not have a material
impact on our consolidated financial statements.
See Note 10-Revenue Recognition, for additional disclosure related to our revenues including a disaggregation of our
consolidated net revenues by major source for each of the periods presented herein.
We report net patient service revenue at the estimated net realizable amounts from patients and third-party payers and others for
services rendered. We have agreements with third-party payers 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, which represent explicit price concessions under ASC 606, 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 payers 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
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 2018, 2017 or 2016. 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, 2018,
would change our after-tax net income by approximately $1 million.
C) Charity Care, Uninsured Discounts and Other Adjustments to Revenue: 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
98
our revenue adjustments for implicit price concessions based on general factors such as payer mix, the agings of the receivables and
historical collection experience, consistent with our estimates for provision for doubtful accounts under ASC 605. 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.
Under ASC 605, our hospitals established a partial reserve for self-pay accounts in the allowance for doubtful accounts for both
unbilled balances and those that have been billed and were under 90 days old. All self-pay accounts were fully reserved at 90 days
from the date of discharge. Third party liability accounts were fully reserved in the allowance for doubtful accounts when the balance
aged past 180 days from the date of discharge. Patients that express an inability to pay were reviewed for potential sources of financial
assistance including our charity care policy. If the patient was deemed unwilling to pay, the account was written-off as bad debt and
transferred to an outside collection agency for additional collection effort. Under ASC 606, while similar processes and
methodologies are considered, these revenue adjustments are considered at the time the services are provided in determination of the
transaction price.
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, the transaction price is
fully adjusted and there is no impact 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 net revenues in
future periods. Although the patient’s ultimate eligibility determination may result in adjustments to net revenues, these adjustments
do not have a material impact on our results of operations in 2018, 2017 or 2016 since our facilities make estimates at each financial
reporting period to adjust revenue based on historical collections. Under ASC 605, these estimates were reported in the provision for
doubtful accounts.
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, the transaction price is
fully adjusted and there is no impact 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.
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, 2018, 2017 and 2016:
2018
(dollar amounts in thousands)
2017
2016
Charity care
Uninsured discounts
Total uncompensated care
Amount
$ 761,783
1,132,811
$ 1,894,594
%
%
%
Amount
40 % $ 887,136
60 % 881,265
100 % $ 1,768,401
Amount
50 % $ 733,585
50 % 720,205
100 % $ 1,453,790
50 %
50 %
100 %
99
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 adjustments to net revenues 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
2018
(amounts in thousands)
2017
120,208 $
119,412
239,620 $
94,088 $
139,913
234,001 $
2016
107,887
105,920
213,807
Our accounts receivable as of December 31, 2018 and December 31, 2017 include amounts due from Illinois of approximately
$32 million and $25 million, respectively. Collection of the outstanding receivables continues to be delayed due to state budgetary and
funding pressures. Approximately $18 million as of December 31, 2018 and $8 million as of December 31, 2017, 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 2018, 15% in 2017 and 14% in 2016 of our consolidated net revenues.
E) Cash, Cash Equivalents and Restricted Cash: We consider all highly liquid investments purchased with maturities of
three months or less to be cash equivalents.
Cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows are presented separately on
our consolidated balance sheets as follow:
Cash and cash equivalents
Restricted cash (a)
Total cash, cash equivalents and restricted cash
$
$
(amounts in thousands)
2017
2018
105,220 $
94,465
199,685 $
74,423 $
92,874
167,297 $
2016
33,747
88,203
121,950
(a) Restricted cash is included in other assets on the accompanying consolidated balance sheet and consists of statutorily
required capital reserves related to our commercial insurance subsidiary.
The fair value of our restricted cash was computed based upon quotes received from financial institutions. We consider these to be
“level 1” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with financial securities.
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 $2.3 million during 2018, $1.0 million during 2017 and $1.9 million during 2016.
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 $410.0 million during 2018, $388.4 million during 2017
and $350.8 million during 2016.
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.
100
H) Goodwill: Goodwill is 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
quantitative impairment assessments as of October 1, 2018 which indicated no impairment of goodwill. There were also no goodwill
impairments during 2017 or 2016. 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.
Changes in the carrying amount of goodwill for the two years ended December 31, 2018 were as follows (in thousands):
Balance, January 1, 2017
Goodwill acquired during the period
Adjustments to goodwill (a)
Balance, December 31, 2017
Goodwill acquired during the period
Goodwill divested during the period
Adjustments to goodwill (a)
Balance, December 31, 2018
$
$
Acute Care
Services
Behavioral
Health
Services
80
1,137
0
39,834
Total
Consolidated
440,294 $ 3,343,812 $ 3,784,106
80
40,971
441,511 3,383,646 3,825,157
45,090
(2,135 )
(23,484 )
442,462 $ 3,402,166 $ 3,844,628
44,173
(2,135 )
(23,518 )
917
0
34
(a)
The increase/(decrease) in the Behavioral Health Services’ goodwill consists primarily of foreign currency translation
adjustments.
I) Other Assets and Intangible 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, L.L.C.
(“Foundations”) 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 ($112 million as of December 31, 2018); (v) deposits; (vi) investments in various
businesses, including Universal Health Realty Income Trust ($8 million as of December 31, 2018) and Premier, Inc. ($56 million as of
December 31, 2018); (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.
Intangible assets are reviewed for impairment 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 asset. We have
designated October 1st as our annual impairment assessment date and performed impairment assessments as of October 1, 2018 which
indicated an impairment to the Foundations tradename intangible asset, as discussed below. There were no impairments during 2017
or 2016.
During 2018, we recorded a pre-tax $49 million provision for asset impairment to reduce the carrying value of a tradename
intangible asset to approximately $75 million from approximately $124 million as previously recorded in connection with our 2015
acquisition of Foundations. The intangible asset impairment charge, which is included in other operating expenses in our 2018
consolidated statements of income, was recorded after evaluation of the estimated fair value of the Foundations’ tradename for its
existing facilities, consisting of 4 inpatient and 12 outpatient facilities as of December 31, 2018, as well as estimated planned de
novos. This asset impairment charge was impacted by the following: (i) the lost future revenue and cash flows resulting from the
permanent closure of a Foundations’ inpatient facility located in Malibu, California that was severely damaged in the California
wildfires during the fourth quarter of 2018; (ii) reduction in growth rates of projected future patient volumes, revenues and operating
cash flows based upon pressures on reimbursement rates experienced from certain payers and competitive pressures experienced in
certain markets, and; (iii) revisions made to the number and timing of planned de novo facilities.
101
The following table shows the amounts recorded as net intangible assets for the years ended December 31, 2018 and 2017:
Foundations tradename
Medicare licenses
Certificates of need
Contract relationships and other (net of $49 and $44 of
accumulated amortization for 2018 and 2017, respectively)
Net Intangible Assets
$
$
75 $
57
21
20
173 $
124
57
12
27
220
(amounts in millions)
2018
2017
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, 2018 and 2017.
Substantially all of the $2 million of potential future financial obligations outstanding as of December 31, 2018 are potential 2019
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.
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, 2018, 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; (iv) approximately 5% in an acute care facility located in Nevada and; (v) approximately 20% in a newly constructed
behavioral health care facility located in Spokane, Washington which was completed and opened in October, 2018. The
noncontrolling interest and redeemable noncontrolling interest balances of $77 million and $4 million, respectively, as of December
31, 2018, 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%.
102
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 11 - Pension Plan for additional disclosure regarding the defined benefit pension plan.
The amounts recognized in AOCI for the two years ended December 31, 2018 were as follows (in thousands):
Balance, January 1, 2017, net of income tax
2017 activity:
Pretax amount
Income tax effect
Change, net of income tax
Balance, January 1, 2018, net of income tax
2018 activity:
Pretax amount
Income tax effect, net of adoption of ASU 2018-02
Change, net of income tax
Balance, December 31, 2018, 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
$
19 $ (14,197 ) $
(1,398 ) $
(9,841 ) $ (25,417 )
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
(983 )
(2,664 )
3,087 32,594
7,177
(6,754 )
9,718
(2,805 )
(6,824 )
1,577
(1,228 )
2,894
2,980 $ 15,375 $
4,398
(1,640 )
2,758
(6,892 )
(467 )
(7,359 )
— $ (14,113 ) $
4,419
(7,354 )
(2,935 )
4,242
$
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
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.
103
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, 2018, 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.
The following table sets forth the computation of basic and diluted earnings per share, for the periods indicated:
Twelve Months Ended December 31,
2017
2016
2018
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
$
797,883 $
(18,178 )
771,312 $
(19,009 )
747,171
(44,762 )
$
$
(1,091 )
778,614 $
(362 )
751,941 $
(314 )
702,095
93,276
8.35 $
95,652
7.86 $
97,208
7.22
93,276
95,652
97,208
474
673
1,172
93,750
8.31 $
96,325
7.81 $
98,380
7.14
$
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 7.9 million during 2018, 6.2 million during 2017 and 2.2 million during 2016.
S) Fair Value of Financial Instruments: The fair values of our 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
104
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 a portion of the previously vested shares of Premier, the 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 $56 million and $33 million as of December 31, 2018 and
2017, respectively. The $23 million increase in market value at December 31, 2018, as compared to December 31, 2017, consists of
$17 million of additional vested shares and $6 million of increased market value. In connection with our 2018 adoption of ASU
2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, since our vested shares of Premier are held for
investment and classified as available for sale, the $6 million increase in market value of these shares since December 31,2017 was
recorded as an unrealized gain and included in “Other (income) expense, net” on our consolidated statements of income for the
twelve-month period ended December 31, 2018. Prior to 2018, changes in the market value of our vested Premier stock were recorded
to other comprehensive income/loss on our consolidated balance sheet.
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 $387 million during 2018, $357 million during 2017 and $327 million during 2016. These revenues were offset by
Provider Taxes of approximately $179 million during 2018, $171 million during 2017, $166 million during 2016, which are recorded
in other operating expenses on the Consolidated Statements of Income as included herein. The aggregate net benefit from these
programs was $208 million during 2018, $186 million during 2017 and $161 million during 2016. 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 $64 million in 2018, $55 million in 2017 and $53 million in 2016.
X) Recent Accounting Standards: On January 1, 2018, we adopted 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, and ASU 2016-18, Restricted Cash, which requires an entity to show the changes in total cash, cash equivalents, restricted cash
and restricted cash equivalents in the statement of cash flows. We adopted these ASUs by applying a retrospective transition method,
which requires a restatement of our Consolidated Statement of Cash Flows for all periods presented.
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. In July 2018, the FASB issued ASU
2018-11, “Leases (Topic 842) - Targeted Improvements (“ASU 2018-11”), which provides an additional transition method allowing
entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. This update is effective for annual reporting periods beginning after December
15, 2018 with early adoption permitted.
While we continue to evaluate other practical expedients available under the guidance, we expect to elect the package of
practical expedients permitted under the transition guidance within ASU 2016-02 to not reassess prior conclusions related to contracts
containing leases, lease classification and initial direct costs and, therefore, do not anticipate a material impact on our consolidated
statements of income. While we are continuing to assess the effects of adoption, we currently believe the most significant changes
relate to the recognition of significant right-of-use assets and lease liabilities on our consolidated balance sheet as a result of our
operating lease obligations, as well as the impact of new disclosure requirements. Operating lease expense will still be recognized on a
straight-line basis over the remaining life of the lease within lease and rental expense in the consolidated statements of income. We
105
plan to adopt ASU 2016-02 on January 1, 2019 and anticipate using the optional transition method in ASU 2018-11. Under this
method, we would not adjust our comparative period financial statements for the effects of the new standard or make the new required
lease disclosures for periods prior to the effective date.
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 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.
In February, 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income”, which allows a reclassification from accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. We early adopted this ASU effective January 1, 2018, which
required a cumulative-effect reclass from accumulated other comprehensive income to retained earnings.
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
Year ended December 31, 2018:
2018 Acquisitions of Assets and Businesses:
During 2018 we spent $110 million primarily to:
acquire The Danshell Group, consisting of 25 behavioral health facilities located in the U.K. (acquired during the third
quarter of 2018), and;
acquire a 109-bed behavioral health care facility located in Gulfport, Mississippi (acquired during the first quarter of
2018).
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
Income tax assets, net of deferred tax liabilities
Other
Cash paid in 2018 for acquisitions
106
Amount
(000s)
(3,988 )
59,520
45,090
8,409
1,749
(316 )
110,464
$
$
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).
2018 Divestiture of Assets and Businesses:
During 2018, we received $13 million in connection with the sale of a business and property including The Limes, an 18-bed
facility located in the UK.
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.
Year ended December 31, 2016:
2016 Acquisitions of Assets and Businesses:
During 2016 we spent $614 million to:
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
$
$
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.
107
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.
2016 Divestiture of Assets and Businesses:
There were no divestitures during 2016.
3) FINANCIAL INSTRUMENTS
Fair Value Hedges:
During 2018, 2017 and 2016, 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
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 2018 and 2017 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.
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:
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
108
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%;
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;
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, 2018, the fair value of our interest
rate swaps was a net asset of $4 million which is included in net accounts receivable on the accompanying balance sheet. 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.
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 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. In connection with these forward exchange
contracts, we recorded net cash inflows of $66 million during 2018, net cash outflows of $64 million during 2017 and net cash inflows
of $79 million during 2016.
Our open foreign exchange forward contracts are recorded at fair value with the corresponding gain or loss recorded in foreign
currency translation adjustment within accumulated other comprehensive income. We consider inputs to determine fair value 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.
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 $19,941 in 2018 and $21,780 in 2017) and term loans with varying maturities
through 2027; weighted average interest rates of 9.5% in 2018 and 9.1% in 2017 (see
Note 7 regarding capitalized leases)
Revolving credit and on-demand credit facility
Term Loan A, net of unamortized discount of $708 in 2017
Term Loan B
Accounts receivable securitization program
3.75% Senior Secured Notes due 2019, net of unamortized discount of $69 in 2017
4.75% Senior Secured Notes due 2022, including unamortized premium of $3,460 in
2018 and $4,430 in 2017 and net of unamortized discount of $97 in 2018 and $124 in
2017
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
$
$
109
December 31,
2018
2017
(amounts in thousands)
20,159 $
6,300
2,000,000
500,000
390,000
—
703,363
400,000
4,019,822
(21,189 )
3,998,633
(63,446 )
3,935,187 $
22,794
438,100
1,774,607
—
419,500
299,931
704,306
400,000
4,059,238
(19,229 )
4,040,009
(545,619 )
3,494,390
Credit Facilities and Outstanding Debt Securities
On October 23, 2018, we entered into a Sixth Amendment (the “Sixth Amendment”) to our credit agreement dated as of
November 15, 2010, as amended on March 15, 2011, September 21, 2012, May 16, 2013, August 7, 2014 and June 7, 2016, among
UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders, JPMorgan Chase
Bank, N.A., as administrative agent, and the other agents party thereto (the “Senior Credit Agreement”). The Sixth Amendment
became effective on October 23, 2018.
The Sixth Amendment amended the Senior Credit Facility to, among other things: (i) increase the aggregate amount of the
revolving credit facility to $1 billion (increase of $200 million over the $800 million previous commitment); (ii) increase the
aggregate amount of the tranche A term loan commitments to $2 billion, which represents the outstanding borrowings as of December
31, 2018 (increase of approximately $290 million over the $1.71 billion of outstanding borrowings prior to the amendment), and; (iii)
extended the maturity date of the revolving credit and tranche A term loan facilities to October 23, 2023 from August 7, 2019.
On October 31, 2018, we added a seven-year tranche B term loan facility in the aggregate principal amount of $500 pursuant
(which represents the outstanding borrowings as of December 31, 2018) to the Senior Credit Agreement. The tranche B term loan
matures on October 31, 2025. We used the proceeds to repay borrowings under the revolving credit facility, the Securitization, to
redeem our $300 million, 3.75% Senior Notes that were scheduled to mature in 2019 and for general corporate purposes.
As of December 31, 2018, we had no borrowings outstanding pursuant to our $1 billion revolving credit facility and we had $960
million of available borrowing capacity net of $34 million of outstanding letters of credit and $6 million of outstanding borrowings
pursuant to a short-term credit facility.
Pursuant to the terms of the Sixth Amendment, the tranche A term loan provides for eight installment payments of $12.5 million
per quarter commencing on March 31, 2019 followed by payments of $25 million per quarter until maturity when all outstanding
amounts will be due. The tranche B term loan provides for installment payments of $1.25 million per quarter commencing March 31,
2019 through maturity.
Borrowings under the Senior 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 0.375% to 0.625% for revolving credit and term loan A borrowings and 0.75% for tranche B 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 1.375% to 1.625% for revolving credit and term loan A borrowings and 1.75% for the tranche
B term loan. As of December 31, 2018, the applicable margins were 0.375% for ABR-based loans and 1.375% for LIBOR-based loans
under the revolving credit and term loan A facilities. The revolving credit facility includes a $125 million sub-limit for letters of
credit. The Senior Credit Agreement is secured by certain assets of the Company and our material subsidiaries (which generally
excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, and certain real
estate assets and assets held in joint-ventures with third parties) and is guaranteed by our material subsidiaries.
The Senior Credit Agreement includes a material adverse change clause that must be represented at each draw. The Senior 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. We are compliant with all required covenants as of December 31, 2018 and 2017.
In late April, 2018, we entered into the sixth amendment to our accounts receivable securitization program (“Securitization”) dated
as of October 27, 2010 with a group of conduit lenders, liquidity banks, and PNC Bank, National Association, as administrative agent,
which provides for borrowings outstanding from time to time by certain of our subsidiaries in exchange for undivided security
interests in their respective accounts receivable. The sixth amendment, among other things, extended the term of the Securitization
program through April 26, 2021 and increased the borrowing capacity to $450 million (from $440 million previously). Although the
program fee and certain other fees were adjusted in connection with the sixth amendment, substantially all other provisions of the
Securitization program remained unchanged. Pursuant to the terms of our Securitization program, 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, 2018, we had $390 million of outstanding
borrowings pursuant to the terms of the Securitization and $60 million of available borrowing capacity.
110
As of December 31, 2018, we had combined aggregate principal of $1.1 billion from the following senior secured notes:
$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 on the 2022 Notes is payable on February 1 and August 1 of each year until the maturity date of August 1, 2022. Interest
on the 2026 Notes is payable on June 1 and December 1 until the maturity date of June 1, 2026. The 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 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.
On November 26, 2018 we redeemed the $300 million aggregate principal, 3.75% Senior Notes due in 2019. The 2019 Notes
were redeemed for an aggregate price equal to 100.485% of the principal amount, resulting in a premium paid of approximately $1
million, plus accrued interest to the redemption date.
At December 31, 2018, the carrying value and fair value of our debt were each approximately $4.0 billion. At December 31,
2017, the carrying value and fair value of our debt were approximately $4.0 billion and $4.1 billion, respectively. 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, 2018 are as follows:
2019
2020
2021
2022
2023
Later
Total maturities before unamortized financing costs
Less-Unamortized financing costs
Total
(000s)
$
63,446
56,650
496,696
810,526
1,707,476
885,028
4,019,822
(21,189 )
$ 3,998,633
5) COMMON STOCK
Dividends
Cash dividends of $0.40 per share ($37.3 million in the aggregate) were declared and paid during 2018, $0.40 per share ($38.2
million in the aggregate) were declared and paid during 2017 and $0.40 per share ($38.9 million in the aggregate) were declared and
paid during 2016. All classes of our common stock have similar economic rights.
Stock Repurchase Programs
In December of 2018, our Board of Directors authorized a $500 million increase to our stock repurchase program, which
increased the aggregate authorization to $1.7 billion from the previous $1.2 billion authorization approved during 2017, 2016 and
2014. Pursuant to this program, we may purchase shares of our Class B Common Stock, from time to time as conditions allow, on the
open market or in negotiated private transactions. There is no expiration date for our stock repurchase programs.
The following schedule provides information related to our stock repurchase program for each of the three years ended
December 31, 2018. During 2018, 3,321,968 shares ($401.3 million) were repurchased pursuant to the terms of our stock repurchase
program, 102,800 shares ($12.7 million in the aggregate) were repurchased in connection with the income tax withholding obligations
111
resulting from the exercise of stock options and the vesting of restricted stock grants, and 11,224 shares were repurchased as a result
of forfeited restricted shares. 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.
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
(in
thousands)
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)
$ 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
$ 500,000 3,435,992 11,224 $ 0.01 3,321,968 $ 120.81 $ 414,002 $ 401,316 $ 462,344
$ 1,300,000 9,685,433 24,515 $ 0.01 8,795,403 $ 115.23 $ 1,117,305 $ 1,013,484
Balance as of
January 1, 2016
2016
2017
2018
Total for three year
period ended
December 31,
2018
(a.)
Includes 11,224, 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 2018, 2017 and 2016, respectively.
Stock-based Compensation Plans
At December 31, 2018, 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 $61.1 million during 2018, $54.3 million during 2017 and $45.8 million during 2016 were
recognized related to outstanding stock options. In addition, pre-tax compensation costs of $5.5 million during 2018, $2.5 million
during 2017 and $2.3 million during 2016 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, 2018, there was
approximately $110.8 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 $66.6 million in 2018, $56.7 million in 2017 and $48.1 million in 2016.
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, 2018 and 2017, our provision for
income taxes and our net income attributable to UHS were each favorably impacted by $1.2 million and $22.1 million, respectively,
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 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.
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
112
2018, 2017 and 2016, stock options, net of cancellations, of approximately 2.4 million, 2.9 million and 2.7 million, respectively, were
granted. Stock options to purchase Class B Common Stock have been granted to our officers, key employees and members of our
Board of Directors. Commencing in 2018, our key employees and non-executive officers began receiving a portion of their stock-
based compensation in the form of restricted stock (as discussed below) in addition to receiving options to purchase Class B Common
Stock.
The per option weighted-average grant-date fair value of options granted during 2018, 2017 and 2016 was $28.19, $27.05 and,
$23.80, respectively. 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, 2018, approximately 6.2 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, 2018, twenty-seven option grants for the five-year period ending December 31, 2017 and twenty-seven option
grants for the five-year period ending December 31, 2016.
Year Ended December 31,
Volatility
Interest rate
Expected life (years)
Forfeiture rate
Dividend yield
2018
2017
2016
27 %
1 %
3.4
13 %
0.3 %
28 %
1 %
3.4
10 %
0.4 %
31 %
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, 2016
Granted
Exercised
Cancelled
Balance, January 1, 2017
Granted
Exercised
Cancelled
Balance, January 1, 2018
Granted
Exercised
Cancelled
Balance, December 31, 2018
Outstanding options vested and exercisable as of
December 31, 2018
Number
of Shares
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 $
2,567,653 $
(1,591,859 ) $
(940,952 ) $
9,674,791 $
Average
Option
Price
Range
(High-Low)
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
119.73 $127.29-$112.68
100.95 $124.56-$53.38
121.07 $136.00-$78.17
115.39 $138.00-$78.17
3,724,179 $
106.77 $138.00-$78.17
113
The following table provides information about unvested options for the year ending December 31, 2018:
Unvested options as of January 1, 2018
Granted
Vested
Cancelled
Unvested options as of December 31, 2018
Weighted
Average
Grant Date
Fair Value
Shares
6,770,603 $
2,567,653 $
(2,568,379 ) $
(819,265 ) $
5,950,612 $
24.16
28.19
22.60
25.87
26.34
The following table provides information regarding all options outstanding at December 31, 2018:
Number of options outstanding
Weighted average exercise price
Aggregate intrinsic value as of December 31, 2018
Weighted average remaining contractual life
Options
Outstanding
Options
Exercisable
115.39 $
9,674,791 3,724,179
$
106.77
$ 43,806,400 $ 43,594,160
1.4
2.6
The total in-the-money value of all stock options exercised during the years ended December 31, 2018, 2017 and 2016 were
$39.9 million, $85.5 million and $149.4 million, respectively.
The weighted average remaining contractual life for options outstanding and weighted average exercise price per share for
exercisable options at December 31, 2018 were as follows:
Exercise Price
$78.17 – $96.98
$102.21 – $118.60
$118.62 – $124.22
$124.44 – $138.00
Total
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual Life
(in Years)
Options
Outstanding
Shares
1,134,475 $
1,788,801
4,288,690
2,462,825
9,674,791 $
78.17
117.14
119.19
124.65
115.39
Exercisable
Options
Shares
0.2 1,134,475 $
1.3 1,183,150
3.3 854,088
3.2 552,466
2.6 3,724,179 $
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Exercise Price
Per Share
Expected to
Vest
Options (a)
Shares
78.17
N/A $
117.25 572,521
118.64 2,265,877
124.68 1,575,926
106.77 4,414,324 $
78.17
117.14
119.19
124.65
120.82
(a) Assumes a weighted average forfeiture rate of 13.06%.
Under our Amended and Restated 2010 Employees’ Restricted Stock Purchase Plan (the “Restricted Stock Plan”), which allows
eligible participants to purchase shares of Class B Common Stock at par value, subject to certain restrictions, 600,000 shares of Class
B Common Stock have been reserved. During 2018, 2017 and 2016, restricted shares, net of cancellations, of approximately 136,571,
23,557, and 13,021, respectively, were granted and issued, with various ratable vesting periods ranging up to five years from the date
of grant. The weighted-average grant-date fair value of the restricted shares granted during 2018, 2017 and 2016 was $119.51,
$118.14 and $120.26, respectively. The fair value of each restricted stock grant was determined as the closing UHS market price on
the date of grant. Restricted shares of Class B Common Stock have been granted to our officers and key employees.
In addition to the Stock Incentive Plan and the Restricted Stock Plan, we have our 2005 Employee Stock Purchase Plan (the
“Employee Stock Plan”) which allows eligible employees to purchase shares of Class B Common Stock at a ten percent discount.
There were 87,051, 86,693 and 75,792 and shares issued pursuant to the Employee Stock Purchase Plan during 2018, 2017 and 2016,
respectively.
In connection with the Restricted Stock Plan and the Employee Stock Plan, we have reserved 2.6 million shares of Class B
Common Stock for issuance and have issued approximately 1.6 million shares, net of cancellations, as of December 31, 2018. As of
December 31, 2018, approximately 1.0 million shares of Class B Common Stock remain available for issuance pursuant to these
plans.
At December 31, 2018, 24,230,875 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
114
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.
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,
2017
2016
2018
$
195,862 $
13,699
37,555
247,116
352,433 $
10,625
37,421
400,479
368,957
8,513
42,166
419,636
(6,216 )
(666 )
(3,592 )
(10,474 )
236,642 $
(36,998 )
24
192
(36,782 )
363,697 $
(12,092 )
2,463
(820 )
(10,449 )
409,187
$
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 made 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; (5) creating a new limitation on deductible
interest expense; and (6) limiting certain other deductions. 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 during a measurement period not to extend beyond one year of the enactment date. We
previously provided a provisional estimate of the effects of the TCJA-17 in the fourth quarter of 2017 financial statements. In the
fourth quarter of 2018, we completed our analysis to determine the effects of the TCJA-17 as follows:
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. Upon completion of our
2017 U.S. Corporate Income Tax Return in the fourth quarter, an increase of $1 million attributable to certain deferred tax assets and a
decrease of $5 million attributable to certain deferred tax liabilities was recorded resulting in an additional net deferred tax benefit of
$6 million.
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. The one-time Transition Tax is
based upon the amount of post-1986 E&P of the relevant subsidiaries, the amount of non-U.S. income tax paid on such earnings, as
well as other factors. We originally estimated and recorded a provisional Transition Tax obligation of $11.3 million. Upon completion
of our 2017 U.S. Corporate Income Tax Return, the final Transition Tax increased by $100,000 for a total of $11.4 million.
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:
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. An
115
accounting policy election was made during 2018 to treat taxes related to GILTI as a period cost when the tax is incurred. We
recorded a GILTI tax provision of less than $1 million for the year ended December 31, 2018.
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 have any tax expense related to BEAT included in our consolidated financial statements.
The foreign provision for income taxes is based on foreign pre-tax earnings of $84 million in 2018, $70 million in 2017 and $58
million in 2016. Prior to the TCJA-17, no deferred taxes were provided related to unremitted earnings from foreign subsidiaries. As a
result of the mandatory repatriation tax provisions of the Transition Tax included in the TCJA-17, all undistributed earnings from
foreign subsidiaries as of December 31, 2017, were subject to tax. Going forward, we anticipate repatriating only previously taxed
foreign earnings subjected to the mandatory repatriation tax as well as any future earnings that would qualify for a full dividend
received deduction permitted under the TCJA-17 for distributions post-December 31, 2017. As of December 31, 2018, the amount of
previously taxed earnings and earnings that would qualify for a full dividend received deduction total $148 million. At this time, there
are no material tax effects related to future cash repatriation of undistributed foreign earnings. 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, 2018 and 2017 included tax benefits of $1 million and $22
million, respectively, 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, 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) are
no longer recorded 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 year
ending December 31, 2016, related to the settlement of employee equity awards, was $45 million, and was 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 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,
2017
2016
2018
21.0 %
2.6 %
-0.5 %
-0.1 %
-0.6 %
0.9 %
-0.4 %
22.9 %
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 %
Our effective tax rates were 22.9%, 32.0% and 35.4% for the years ended December 31, 2018, 2017 and 2016, respectively. The
decrease in our effective tax rate for the year ended December 31, 2018 as compared to 2017 is due primarily to the net favorable
impact of the enactment of the TCJA-17, as discussed above, partially offset by a $21 million unfavorable change in the tax benefit
resulting from our January 1, 2017 adoption of ASU 2016-09, as discussed above. The decrease in our effective tax rate for the year
ended December 31, 2017, as compared to 2016, is due primarily to the $22 million tax benefit recorded in 2017 resulting from our
January 1, 2017 adoption of ASU 2016-09, the $19 million net favorable impact of the enactment of the TCJA-17 ($30 million
favorable impact recorded during 2017 resulting from a reduction in our net deferred income tax liability, partially offset by an $11
million unfavorable impact recorded during 2017 resulting from a one-time repatriation tax, 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).
Included in “Other current assets” on our Consolidated Balance Sheet are prepaid federal and state income taxes amounting to
approximately $24 million and $5 million as of December 31, 2018 and 2017, respectively.
116
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, the deferred tax assets and liabilities were revalued with a provisional net deferred tax benefit of $30 million recorded in the
consolidated statement of income for the year ended December 31, 2017. Upon completion of our 2017 U.S. Corporate Income Tax
Return, an increase of $1 million attributable to certain deferred tax assets and a decrease of $5 million attributable to certain deferred
tax liabilities was recorded resulting in an additional net deferred tax benefit of $6 million. 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,
2018
2017
Assets
Liabilities
Assets
Liabilities
$
68,402 $
74,124
27,184
35,253
$
64,181 $
63,021
20,809
19,759
257,896
226,389
86,315
4,475
76,439
2,825
929
2,045
$ 295,753 $ 260,870
0
$ 216,489 $ 260,870
(79,264 )
550
1,824
$ 247,034 $ 228,763
0
$ 176,807 $ 228,763
(70,227 )
At December 31, 2018, state net operating loss carryforwards (expiring in years 2019 through 2038), and credit carryforwards
available to offset future taxable income approximated $1.12 billion representing approximately $75 million in deferred state tax
benefit (net of the federal benefit); and state related interest expense carryforwards approximated $78 million representing
approximately $4 million in deferred state tax benefit (net of the federal benefit). At December 31, 2018, there were foreign net
operating losses and credit carryforwards of approximately $30 million, most of which are carried forward indefinitely, representing
approximately $7 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 $75 million and $66 million have been reflected as of December 31, 2018 and 2017,
respectively. During 2018, the valuation allowance on these state tax benefits increased by $9 million due to additional net operating
losses incurred and state related interest expense carryforwards. In addition, valuation allowances of approximately $4 million have
been reflected as of December 31, 2018 and 2017 related to foreign net operating losses and credit carryforwards.
During 2018 and 2017, 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, 2018 and
2017, 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.
We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of
December 31, 2018 and 2017, 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 2015 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
117
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, 2018, 2017 and 2016 is as follows
(amounts in thousands):
2018
As of December 31,
2017
2016
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,
$
$
1,096 $
500
62
0
(105 )
1,553 $
1,259 $
500
47
0
(710 )
1,096 $
1,982
50
74
(94 )
(753 )
1,259
7) LEASE COMMITMENTS
Three of our hospital facilities are held under operating leases with Universal Health Realty Income Trust with two hospital
terms expiring in 2021 and the third expiring in 2026 (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,
2018
2017
$
$
44,020 $
(30,646 )
13,374 $
44,740
(29,628 )
15,112
Future minimum rental payments under lease commitments with a term of more than one year as of December 31, 2018, are as
follows (amounts in thousands):
Year
2019
2020
2021
2022
2023
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
72,353
59,492
48,891
35,233
28,839
123,039
367,847
$
$
$
3,996 $
3,345
3,227
3,508
3,624
12,070
29,770 $
(9,829 )
19,941
(2,128 )
17,813
We assumed no capital lease obligations in 2018 or 2017 and assumed capital lease obligations of approximately $152,000 in
2016 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.
118
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 ($8.5 million
for facilities located in the U.K.), 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.
As of December 31, 2018, the total the total accrual for our professional and general liability claims was $243 million, of which
$42 million was included in current liabilities. 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. 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 2018 and 2016 were not materially impacted by adjustments
to our prior year reserves for professional and general liability claims.
As of December 31, 2018, the total accrual for our workers’ compensation liability claims was $72 million, of which $40
million was included in current liabilities. As of December 31, 2017, the total accrual for our workers’ compensation liability claims
was $70 million, of which $35 million was included in current liabilities. Our consolidated results of operations during 2018, 2017
and 2016 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, 2018 (amount in thousands):
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 January 1, 2018
Plus: Accrued insurance expense, net of commercial
premiums paid
Less: Payments made in settlement of self-insured claims
Balance at December 31, 2018
General and
Professional Workers’
Liability
$
Compensation
203,973 $
0
67,503 $
661
Total
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
54,387
(40,027 )
243,051 $
38,476
(36,117 )
71,890 $
92,863
(76,144 )
314,941
$
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
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.
119
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, 2018 as
follows: (i) other combined estimated future purchase obligations of $254 million related to a long-term contract with third-parties
consisting primarily of certain revenue cycle data processing services for our acute care facilities ($57 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 ($194 million) and estimated minimum liabilities
for physician commitments expected to be paid in the future ($2 million); (ii) estimated construction commitment of $55million
representing our share of the construction costs of two newly constructed behavioral health care facilities located in Washington and
Arizona that we are required to build pursuant to joint-venture agreements with third-parties; (iii) combined estimated future payments
of $201 million related to our non-contributory, defined benefit pension plan ($180 million consisting of estimated payments through
2088) and other retirement plan liabilities ($21 million), and; (iv) accrued and unpaid estimated claims expense incurred in connection
with our commercial health insurers and self-insured employee benefit plans ($78 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.
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
120
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 El Paso Behavioral Health
System, Newport News Behavioral Health Center and The Hughes Center.
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, 2018, the aggregate funds withheld from us in connection with the River
Point Behavioral Health payment suspension amounted to approximately $9 million. Although the operating results of River Point
Behavioral Health did not have a material impact on our consolidated results of operations during 2018, 2017 or 2016, 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. While there have
been various matters raised by DOJ during the pendency of this investigation, DOJ Civil has advised that the focus of their
investigation is on medical necessity issues and billing for services not eligible for payment due to non-compliance with regulatory
requirements relating to, among other things, admission eligibility, discharge decisions, length of stay and patient care issues. It is our
understanding that the DOJ Criminal Fraud Section is investigating issues similar to those focused on by the DOJ Civil Division and
the other related agencies involved in this matter. UHS denies any fraudulent billings were submitted to government payers; however,
we are involved in settlement discussions with the DOJ Civil Division in an attempt to resolve this matter. During 2018, we recorded
pre-tax increases to the reserve established in connection with the civil aspects of these matters amounting to $102 million increasing
the aggregate pre-tax reserve to $123 million as of December 31, 2018 from $22 million as of December 31, 2017. Changes in the
121
reserve may be required in future periods as discussions with the DOJ 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, as well as the income tax deductibility of payments, will not differ materially from our
established reserve and assumptions related to income tax deductibility.
DOJ investigation of Turning Point Hospital.
During the fourth quarter of 2018, we were notified that the DOJ Civil Division in conjunction with the U.S. Attorney’s Office
for the Northern District of Georgia and the Georgia Attorney General’s Office have opened an investigation of Turning Point Hospital
in Moultrie, GA. The DOJ Civil Division has advised us that they are primarily investigating transportation and housing financial
assistance provided to patients receiving treatment at the facility. The DOJ issued a civil investigative demand to the facility requesting
various documents and other information. At this time, we are unable to assess potential liability or damages, if any.
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 4 th 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. 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. The amended class action complaint alleges violations of federal securities laws relating to disclosures made in
public filings associated with alleged practices and operations at our behavioral health facilities. Plaintiffs seek monetary damages for
shareholders during the defined class period as a result of the decrease in share price following various public disclosures or reports. 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. 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. The federal court has consolidated all of the cases pending in the Eastern District of Pennsylvania
and has appointed co-lead plaintiffs and co-lead counsel. Lead Plaintiffs have filed a consolidated, amended complaint. We have filed
a motion to dismiss the amended complaint. 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. Each of these cases have named certain current and former members of the Board
of Directors individually and certain officers of Universal Health Services, Inc. as defendants. UHS has also been named as a nominal
122
defendant in these cases. The derivative cases make substantially similar allegations and claims as the shareholder class action relating
to practices at our behavioral health facilities and board and corporate oversight of these facilities as well as claims relating to the stock
trading by the individual defendants and company repurchase of shares during the relevant time period. The cases make claims of
breaches of fiduciary duties by the named board members and officers; alleged violations of federal securities laws; and common law
causes of action against the individual defendants including unjust enrichment, corporate waste, abuse of control, constructive fraud and
gross mismanagement. The cases seek monetary damages allegedly incurred by the company; restitution and disgorgement of profits,
benefits and other compensation from the individual defendants and various forms of equitable relief relating to corporate governance
matters. 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 had entered a summary judgment order awarding plaintiff $3.85 million in damages.
With prejudgment interest, the total amount of the order amounted to approximately $9 million, for which a corresponding reserve had
previously been included in our financial statements. The case was removed to federal court. During the first quarter of 2019, the federal
court entered an order vacating the state court’s summary judgment. The parties have reached a preliminary settlement of this matter,
pending finalization of settlement documentation, for an amount that did not have a material impact on our consolidated financial
statements.
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 (“FFY”) 2011 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, 2013 and 2014. For FFY 2012, the claimed overpayment amounts to approximately $4 million. For FFY
2013, the claimed overpayments were initially approximately $7 million but have since been reduced to approximately $2 million due
to a change in the Department’s calculations of the hospital specific DSH upper payment limit. For FFY 2014, the claimed overpayments
were approximately $7 million. We filed administrative appeals for all of our facilities contesting the recoupment efforts for FFYs 2011
through 2014 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. 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 2014 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. We have recently been notified by the DOJ that there is no longer an investigation pending against Riveredge
Hospital that is separate from the UHS Behavioral Health matter referenced above.
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. We
have recently been notified by the DOJ that there is no longer an investigation pending against Friends Hospital that is separate from
the UHS Behavioral Health matter referenced above.
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
123
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, 2018, 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. The advisory agreement was Amended and Restated effective January 1, 2019. Among other
things, the Amended and Restated Advisory Agreement (the “Agreement”) eliminated the 20% annual incentive fee clause which we
were previously entitled to under certain conditions (the incentive fee requirements have never been achieved). 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. The
advisory agreement was renewed by the Trust for 2019 at the same rate as the prior three years. During 2018, 2017 and 2016, the
advisory fee was computed at 0.70% of the Trust’s average invested real estate assets. We earned an advisory fee from the Trust,
which is included in net revenues in the accompanying consolidated statements of income, of approximately $3.8 million during 2018,
$3.6 million during 2017 and $3.3 million during 2016.
Our pre-tax share of income from the Trust was $1.4 million during 2018 which is included in other income, net, on the
accompanying consolidated statements of income. Our pre-tax share of income from the Trust was $2.6 million during 2017 and $1.0
million during 2016, which are included in net revenues in the accompanying consolidated statements of income for each year.
Included in our share of the Trust’s income for 2018, is income realized by the Trust in connection with hurricane-related insurance
proceeds received in connection with the damage sustained from Hurricane Harvey in August, 2017. Included in our share of the
Trust’s income for 2017 was a gain realized by the Trust in connection with a divestiture of property that was completed during the
first quarter of 2017, as well as insurance proceeds in excess of damaged Trust property. We received dividends from the Trust
amounting to $2.1 million during each of 2018 and 2017 and $2.0 million during 2016.
The carrying value of our investment in the Trust was $7.5 million and $8.2 million at December 31, 2018 and 2017,
respectively, and is included in other assets in the accompanying consolidated balance sheets. The market value of our investment in
the Trust was $48.3 million at December 31, 2018 and $59.2 million at December 31, 2017, 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 was $16.0 million during each of
2018 and 2017 and $15.9 million in 2016. 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. During the second quarter of 2018, we exercised our 5-year renewal option on McAllen
Medical Center which extended the lease term on this facility, at the existing lease rate, through December, 2026.
124
The table below details the renewal options and terms for each of our three acute care hospital facilities leased from the Trust:
Hospital Name
McAllen Medical Center
Wellington Regional Medical Center
Southwest Healthcare System, Inland Valley Campus
Annual
Minimum
Rent
End of Lease Term
Renewal
Term
(years)
$ 5,485,000 December, 2026
$ 3,030,000 December, 2021
$ 2,648,000 December, 2021
5 (a)
10 (b)
10 (b)
(a) We have one 5-year renewal option 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 owned by the Trust or by limited liability companies in which the Trust holds 95% to 100% of the ownership interest.
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 $1.1 million,
net, and $1.2 million, net, in premium payments during 2018 and 2017, respectively.
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 $56 million as of December 31, 2018 and $33 million as of December 31, 2017. The $23 million increase in market
value at December 31, 2018, as compared to December 31, 2017, consists of $17 million of additional vested shares and $6 million of
increased market value. In connection with our 2018 adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets
and Financial Liabilities”, since our vested shares of Premier are held for investment and classified as available for sale, the $6 million
increase in market value of these shares since December 31, 2017 was recorded as an unrealized gain and included in “Other (income)
expense, net” on our condensed consolidated statements of income for the twelve-month period ended December 31, 2018. Prior to
2018, changes in the market value of our vested Premier stock were recorded to other comprehensive income/loss on our consolidated
balance sheet.
A member of our Board of Directors and member of the Executive Committee and Finance Committee is a partner in Norton
Rose Fulbright US LLP, a law firm engaged by us for a variety of legal services. The Board member and his law firm also provide
personal legal services to our CEO and acts as trustee of certain trusts for the benefit of our CEO and his family.
10) REVENUE RECOGNITION
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. 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 payer, for example a bankruptcy, will be recognized as bad debt expense in
operating charges.
The performance obligation is separately identifiable from other promises in the customer contract. As the performance obligations are
met (i.e.: room, board, ancillary services, level of care), revenue is recognized based upon allocated transaction price. The transaction
125
price is allocated to separate performance obligations based upon the relative standalone selling price. In instances where we
determine there are multiple performance obligations across multiple months, the transaction price will be allocated by applying an
estimated implicit and explicit rate to gross charges based on the separate performance obligations.
In assessing collectability, we have elected the portfolio approach. This portfolio approach is being used as we have large volume of
similar contracts with similar classes of customers. We reasonably expect that the effect of applying a portfolio approach to a group of
contracts would not differ materially from considering each contract separately. Management’s judgment to group the contracts by
portfolio is based on the payment behavior expected in each portfolio category. As a result, aggregating all of the contracts (which are
at the patient level) by the particular payer or group of payers, will result in the recognition of the same amount of revenue as applying
the analysis at the individual patient level.
On January 1, 2018, we adopted the new accounting standard using the modified retrospective method. The information in
comparative periods have not been restated and continues to be reported under the accounting standards in effect for those periods. In
accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated statements of
income was as follows (in thousands):
For the twelve months ended December 31, 2018:
Net Revenue before provision for doubtful accounts
Less: Provision for doubtful accounts
Net Revenues
Other operating expenses
As
Reported
$
$
10,772,278
2,614,687
Balances
Without
Adoption
ASC 606
$
$
$
11,846,088
1,088,267
10,757,821
2,600,230
Effect
of Change
$
$
14,457
14,457
126
We group our revenues into categories based on payment behaviors. Each component has its own reimbursement structure which
allows us to disaggregate the revenue into categories that share the nature and timing of payments. The other patient revenue consists
primarily of self-pay, government-funded non-Medicaid, and other.
The following table disaggregates our revenue by major source for the years ended December 31, 2018, 2017 and 2016 (in thousands):
Medicare
Managed Medicare
Medicaid
Managed Medicaid
Managed Care (HMO and PPOs)
UK Revenue
Other patient revenue and adjustments, net
Other non-patient revenue
Total Net Revenue
Medicare
Managed Medicare
Medicaid
Managed Medicaid
Managed Care (HMO and PPOs)
UK Revenue
Other patient revenue and adjustments, net
Other non-patient revenue
Total Net Revenue
Medicare
Managed Medicare
Medicaid
Managed Medicaid
Managed Care (HMO and PPOs)
UK Revenue
Other patient revenue and adjustments, net
Other non-patient revenue
Total Net Revenue
11) PENSION PLAN
Acute Care
$ 1,296,152
730,387
487,197
554,438
2,093,890
0
167,570
390,271
23 %
13 %
9 %
10 %
37 %
0 %
3 %
7 %
$ 5,719,905 100 %
Acute Care
$ 1,223,150
630,083
482,820
511,844
1,949,435
0
219,056
468,295
22 %
11 %
9 %
9 %
36 %
0 %
4 %
9 %
$ 5,484,683 100 %
Acute Care
$ 1,114,911
536,224
424,934
444,164
1,845,571
0
284,872
462,274
22 %
10 %
8 %
9 %
36 %
0 %
6 %
9 %
$ 5,112,950 100 %
For the year ended December 31, 2018
Behavioral Health
Other
$
579,723
199,003
696,421
975,567
1,395,980
504,721
483,417
204,042
12 %
4 %
14 %
19 %
28 %
10 %
10 %
4 %
$ 5,038,874 100 %
13,499
13,499
$
For the year ended December 31, 2017
Behavioral Health
Other
$
593,690
161,320
723,544
876,907
1,412,086
426,575
498,915
213,682
12 %
3 %
15 %
18 %
29 %
9 %
10 %
4 %
$ 4,906,719 100 %
18,463
18,463
$
For the year ended December 31, 2016
Behavioral Health
Other
$
614,182
143,554
755,226
793,234
1,407,458
241,098
456,350
233,905
13 %
3 %
16 %
17 %
30 %
5 %
10 %
5 %
$ 4,645,007 100 %
8,253
8,253
$
Total
$ 1,875,875
929,390
1,183,618
1,530,005
3,489,870
504,721
650,987
607,812
17 %
9 %
11 %
14 %
32 %
5 %
6 %
6 %
10,772,278 100 %
Total
$ 1,816,840
791,403
1,206,364
1,388,751
3,361,521
426,575
717,971
700,440
17 %
8 %
12 %
13 %
32 %
4 %
7 %
7 %
10,409,865 100 %
Total
$ 1,729,093
679,778
1,180,160
1,237,398
3,253,029
241,098
741,222
704,432
18 %
7 %
12 %
13 %
33 %
2 %
8 %
7 %
9,766,210 100 %
We maintain contributory and non-contributory retirement plans for eligible employees. Our contributions to the contributory
plan amounted to $56.6 million, $50.1 million and $45.7 million in 2018, 2017 and 2016, 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.
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
127
concerning future interest rates and future compensation levels. The following table shows the reconciliation of the defined benefit
pension plan as of December 31, 2018 and 2017:
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
2018
2017
(000s)
$
$
$
$
118,667 $
(7,522 )
(6,031 )
(523 )
104,591 $
116,056 $
689
4,063
(6,031 )
(6,350 )
108,427 $
109,677
15,533
(5,846 )
(697 )
118,667
110,949
721
4,465
(5,846 )
5,767
116,056
$
2018
3,836
3,836 $
2017
(000s)
2,611
2,611
2016
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
$
$
689 $
4,063
(5,197 )
—
(445 ) $
721 $
4,465
(5,862 )
863
187 $
926
4,997
(5,708 )
3,072
3,287
2018
2017
12/31/2018
12/31/2018
12/31/2017
12/31/2017
2018
2017
4.03 %
4.00 %
3.60 %
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
2018
2017
2016
3.60 %
4.50 %
4.00 %
4.14 %
5.50 %
4.00 %
4.34 %
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 $108.3 million and $115.9 million as of December 31, 2018 and 2017, respectively. As of
December 31, 2018, the accumulated benefit obligation exceeded the fair value of plan assets by $3.7 million. As of December 31,
2017, the fair value of plan assets exceeded the accumulated benefit obligation by $2.7 million.
We estimate that there will be no net loss or prior service cost amortized from accumulated other comprehensive income during
2019.
128
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, 2018 and December 31, 2017, 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
$
2018
2017
$
7,711
2,309
2,094
5,710
4,137
24,617
55,318
9,393
2,937
3,005
7,213
4,792
25,915
62,522
2,037
2,370
$
658
104,591
$
520
118,667
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, 2019 through 2028 for our defined
pension plan. There will be benefit payments under this plan beyond 2028.
Estimated Future Benefit Payments (000s)
2019
2020
2021
2022
2023
2024-2028
Total
Plan Assets
Asset Category
Equity securities
Fixed income securities
Other
Total
$
$
6,595
6,744
6,834
6,891
6,921
34,270
68,255
2018
2017
21 %
76 %
3 %
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
129
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
12/31/2018
Permitted Range
10-30%
70-90%
0-10%
21 %
76 %
3 %
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.
12) 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, 2018. 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.
2018
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
$ 24,814,959 $ 9,735,521 $
$ 14,967,313 $ 1,025,721 $
$ 5,719,905 $ 5,038,874 $
— $ 34,550,480
— $ 15,993,034
13,499 $ 10,772,278
$
$
708,680 $ 915,517 $ (589,672 ) $ 1,034,525
0
(199,823 ) $ (161,282 ) $ 361,105 $
508,857 $ 754,235 $ (228,567 ) $ 1,034,525
$
$ 4,094,537 $ 6,786,369 $ 384,574 $ 11,265,480
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
130
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
(a.) Includes net revenues generated from our behavioral health care facilities located in the U.K. amounting to approximately $505
million in 2018, $429 million in 2017 and $241 million in 2016. Total assets at our U.K. behavioral health care facilities were
approximately $1.224 billion as of December 31, 2018, $1.098 billion as of December 31, 2017 and $965 million as of December 31,
2016. In addition, included in our 2018 Behavioral Health Services operating segment Income (loss) before allocation of corporate
overhead and income taxes is a pre-tax $49 million provision for asset impairment to reduce the carrying value of a tradename
intangible asset.
13) QUARTERLY RESULTS (unaudited)
The quarterly financial data is prepared on the same basis as the audited annual financial statements, and include all
adjustments, which include only normal recurring adjustments, necessary for the fair statement of our results of operations for these
periods. The following tables summarize the quarterly financial data for the two years ended December 31, 2018 and 2017:
2018
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)
$ 2,687,516 $ 2,681,353 $ 2,648,913 $ 2,754,496 $ 10,772,278
797,883
$ 228,669 $ 230,711 $ 174,881 $ 163,622 $
18,178
5,547 $
$
779,705
$ 223,832 $ 226,052 $ 171,746 $ 158,075 $
Fourth
Quarter
4,659 $
3,135 $
4,837 $
Total
Total basic earnings per share
Earnings per share attributable to UHS-Diluted:
Total diluted earnings per share
$
$
2.37 $
2.40 $
1.85 $
1.71 $
8.35
2.36 $
2.39 $
1.84 $
1.70 $
8.31
The 2018 quarterly financial data presented above includes the following:
First Quarter:
an unfavorable $13.0 million pre-tax impact ($9.9 million, or $.11 per diluted share, net of taxes) increase in the reserve
established in connection with the discussions with the Department of Justice related to the civil aspects of the
government’s investigation of certain of our behavioral health care facilities (“ DOJ Reserve”);
a favorable after-tax impact of $1.6 million, or $.02 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:
an unfavorable $9.5 million pre-tax impact ($7.2 million, or $.08 per diluted share, net of taxes) increase in the DOJ
Reserve.
131
2017
Third Quarter:
an unfavorable $48.0 million pre-tax impact ($36.6 million, or $.39 per diluted share, net of taxes) increase in the DOJ
Reserve.
Fourth Quarter:
an unfavorable $31.9 million pre-tax impact ($24.5 million, or $.26 per diluted share, net of taxes) increase in the DOJ
Reserve;
an unfavorable $49.3 million pre-tax impact ($37.7 million, or $.41 per diluted share, net of taxes) recorded in connection
with provision for intangible asset impairment .
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
4,117 $
4,472 $
4,994 $
Total
Total basic earnings per share
$
2.13 $
1.93 $
1.48 $
2.32 $
7.86
Earnings per share attributable to UHS-Diluted:
Total diluted earnings per share
$
2.12 $
1.91 $
1.47 $
2.31 $
7.81
The 2017 quarterly financial data presented above includes the following:
First Quarter:
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 electronic health records (“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.
Second Quarter:
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.
132
Third Quarter:
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 (“TCJA-17”);
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 TCJA-17 (in connection with our behavioral health care facilities located in the U.K. and Puerto
Rico).
133
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Valuation Allowance for Deferred Tax Assets:
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Allowance for Doubtful Accounts Receivable:
Year ended December 31, 2017 (a)
Year ended December 31, 2016
Balance at
beginning
of period
Charges to
costs and
expenses
Acquisitions uncollectible
of business
accounts
Write-off of Balance
at end
$
$
$
70,227 $
56,333 $
52,567 $
9,037 $
13,894 $
3,766 $
- $
- $
- $
of period
- $
- $
- $
79,264
70,227
56,333
Balance
at end
Balance at
beginning
of period
Charges to
costs and
expenses
Acquisitions
of business
$ 410,374 $ 869,077 $
$ 398,797 $ 741,578 $
of period
Write-offs
- $ (799,162 ) $ 480,289
- $ (730,001 ) $ 410,374
(a) Effective January 1, 2018, the Company adopted ASC 606 using a modified retrospective approach. This schedule
discloses allowance for doubtful accounts receivable for periods reported under ASC 605 only.
134
C O R P O R A T E I N F O R M A T I O N
EXECUTIVE OFFICES
Universal Corporate Center
367 South Gulph Road
King of Prussia, PA 19406
(610) 768-3300
ANNUAL MEETING
May 15, 2019, 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
King of Prussia, PA 19406
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 2018.
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 27, 2019, 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.
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.
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
UNITED KINGDOM
PUERTO RICO
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 .
Corporate Center
367 South Gulph Road
King of Prussia, PA 19406
www.uhsinc.com
Cygnet Health Care
Third Floor - 4 Millbank
SW1P 3JA London
United Kingdom