Universal Health Services (UHS)

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Because UHS receives the majority of its revenues from its hospitals, the company has been significantly impacted by a shift in the hospital industry towards physician-owned healthcare facilities, which has increased competition for the company's hospitals in urban markets.^[4] Another drag on UHS' financial performance is bad debt expense resulting from rising numbers of uninsured patients nationwide; in 2007, for instance, this expense was equal to 11.1% of hospital revenues, up from 10.6% during the prior year.^[5] UHS's behavioral health services segment, however, lets the firm benefit from a more favorable market environment and higher profit margins at psychiatric and substance abuse facilities (almost 20%, compared to about 7% in UHS's hospitals).^[6]

[edit] Company Overview

As of February 2008, UHS owned, operated or had under construction 31 hospitals (including a new facility being constructed) and 113 behavioral health centers located in 32 states. ^[7] Many of the company's facilities are located in suburban areas, but it also has a presence in urban markets, most significantly Las Vegas, Memphis, and Austin. UHS's facilities provide healthcare services, including general and specialty surgery, internal medicine, obstetrics, emergency room care, diagnostic care, and behavioral health services. The firm receives revenue 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. Over the past few years, the company's growth has been fueled by both acquisitions and the establishment of new operations in mid-size markets with above-average population growth rates. As a result, its acute care facilities are highly concentrated in three key geographies: Las Vegas, McAllen-Edinburg, Texas and San Bernadino, California.^[8]

[edit] Business and Financial Metrics

UHS Revenues and Net Income^[9]

In 2007, revenues grew 13% to $4,751 million, driven primarily by 8% revenue growth in existing facilities (which accounted for over half of total annual revenue growth), acquisitions of new facilities, and revenues from a one-time construction management contract with an unrelated party.^[10] In contrast, net income fell 34% to $170 million, due to slower patient volume growth and the increased proportion of patients treated on an outpatient basis, a shift encouraged by third-party payers (i.e. the federal government and managed care providers) attempting to slow the growth of their own expenses. While the number of beds in UHS hospitals has grown, their occupancy rate, or the average percentage of beds used, has actually fallen, while the total number of patient days (the sum, for all patients, of the number of days that hospital care is provided to each patient), has also decreased slightly. Furthermore, UHS's profitability continues to be impacted by the closing of four of its Louisiana hospitals in the aftermath of Hurricane Katrina. These facilities have been damaged since the third quarter of 2005, and remain closed and non-operational.^[11]

^[12]

[edit] Business Segments

2007 Sales by Segment^[13]

UHS receives the majority of its revenues (about three quarters) from its hospital facilities, while its behavioral health services segment accounts for most of the remainder. In 2007, the firm entered a construction management contract which accounted for about 3% of its revenues that year.

• Acute Care Hospitals (73% of revenues, 51% of income): UHS's largest segment consists of 31 general hospitals, as well as surgical hospitals, ambulatory surgery centers and radiation oncology centers. Segment evenues have grown steadily (11% in 2007), both organically and through acquisitions such as last year's purchase of the Texoma acute care hospital in Texas. Operating income, however, has remained volatile as competition from physician-owned facilities increases and bad debt expense from uninsured or underinsured patients continues to rise.^[14]

• Behavioral Health Services (24% of revenues, 49% of income): This segment consists of 113 centers, including residential facilities for teenagers, psychiatric hospitals, and substance abuse hospitals. Because average patient stays at these facilities are longer than in traditional hospitals (16.7 days in 2007 compared to 4.5 days in UHS's hospitals) and their occupancy rates higher (77% in 2007 compared to 58% in the hospitals), Behavioral Health has much higher profit margins than its sister segment - almost 20% compared to about 7% in hospitals.^[15]

• Other (3% of revenues): In 2007, UHS entered a construction management contract with an unrelated third party to build a new hospital facility, which was completed in Q1 2008.^[16]

[edit] Key Trends, Risks, and Forces

[edit] Physician-run Surgery and Diagnostic Centers Are Entering the Marketplace, Increasing Competition

Historically, the hospital industry has been characterized by low levels of competition, with most communities home to only a few hospitals. However, the number of new facilities for delivering hospital services, such as physician-run outpatient surgery centers, specialty hospitals, and diagnostic centers, has grown rapidly. For instance, in 2006, there were 4618 registered outpatient surgery centers alone, accounting for 31% of the 50 million surgeries performed each year.^[17] As a result of this jump in supply, for-profit hospitals are left with an excess of beds and not enough patients.^[18] Furthermore, independent competitors frequently have lower costs due to their smaller size and simpler infrastructure, so they can provide the same services cheaper than traditional hospitals.^[19] Because hospitals use the income provided by high-margin operations to finance certain unprofitable services and procedures, the increased competition can completely erase profits by eliminating these margins.^[20]In fact, only 500-1000 of the nation's more than 6000 hospitals are consistently profitable.^[21] While all national hospital operators have to deal with these new competitors, UHS has faced more challenges than its peers as a result of the success of a physician-owned hospital in the McAllen/Edinburg, Texas area, a key market for the firm. Competition from this hospital caused large declines in UHS patient volumes in 2004 and 2005, and continues to do so after an expansion at the facility that was completed at the end of 2007.^[22]

[edit] A Rising Number of Uninsured Patients Increases Costs

The number of uninsured patients has been rising throughout the nation, growing nearly 5% in 2006 to reach 47 million.^[23] Since hospitals are legally required to provide care to anyone who needs it, whether they are insured or not, UHS faces high expenses (specifically bad debt expense) from this trend.^[24] Because uninsured patients make up 18% of the firm's revenues, higher than many competitors, UHS stands to lose more than its peers from this trend. At the same time, the percentage of uninsured patients has fallen in the past few years (in 2005, it was 20%), which mitigates the potential negative impact of increasing bad debt expense on the firm.^[25]

[edit] A Shortage of Qualified Physicians and Nurses Makes it Harder to Attract Patients

In order to increase or even maintain the breadth of specialized services available to its patients, UHS has to hire qualified physicians and nurses. This has become an industry-wide challenge as the nation faces a shortage in both professions. American physicians are getting older - in the last twenty years, the percentage of doctors over 55 years old has risen from 27% to 34%, meaning that many of them will be retiring in the coming years. In rural areas, where less than 10,000 of 212,000 physicians are surgeons, specialists are especially scarce. Rural doctors generally receive smaller salaries than their urban counterparts, adding to the challenges faced by UHS in recruiting for many of its locations.^[26] UHS has attempted to attract physicians by offering them technologically advanced equipment and facilities as well as adequate support staff. Additionally, a nationwide shortage of skilled nurses has affected UHS, eroding profitability as salaries and benefits rise to recruit the necessary numbers of staff. Furthermore, some of UHS's markets have laws that require healthcare providers to employ a certain number of nurses in order to offer various services; if the company fails to meet these levels, revenues will fall. ^[27]

[edit] Aging Baby Boomers Require More Health Care, Raising Demand for Hospital Services

The retirement of the baby boomers, who make up slightly over a quarter of American's population, has had an economic as well as demographic impact on the US population.^[28] A rapid increase in the number of elderly Americans provides an opportunity for hospital owners like UHS, since people older than 65 generally need more medical care.^[29] People 65 and over account for 40-50% of total spending on healthcare; the per capita healthcare spending in this age group is 3-5 times higher than for people under 65.^[30] As a result, healthcare expenditures are already growing swiftly, rising 6.7% in 2006 to reach $2.1 trillion.^[31] At the same time, the aging of the population will indirectly hurt UHS through its effect on the Medicare system, which is becoming saturated as more baby boomers become eligible to participate. Medicare expenditures already comprised 5.3% of U.S. GDP in 2006^[32] and existing reimbursement levels are not sustainable, suggesting that per-patient Medicare revenues for hospitals will decrease in the near future.^[33] Medicare reimbursements for behavioral health services, however, remain high, partially insulating UHS from this risk.

[edit] Competition

Unlike many peer firms, whose rural hospitals are virtual monopolies in their markets, all of UHS's facilities are located in geographical areas where other hospitals provide comparable services, creating a highly competitive market environment. In addition to other for-profit facilities, UHS has to compete with nonprofit hospitals, which benefit from government support and tax exemptions. The number of independent and physician-owned facilities in UHS's markets, ranging from inpatient facilities to outpatient surgical and diagnostic centers, has also grown rapidly over the last few years. ^[34]

UHS's diversified business model is a primary competitive advantage for the firm - it is unique among national hospital operators in maintaining a portfolio of behavioral health facilities. In fact, as competition among hospitals has increased over the past few years and profit margins have decreased, UHS's psychiatric and substance abuse facilities have actually become more profitable, since they receive more favorable Medicare reimbursement and face smaller risks of bad debt expense from uninsured patients than traditional acute care hospitals. Furthermore, UHS has has followed a much more conservative acquisition strategy than peer firms, boasting an organic growth rate above the industry average.^[35] Industry operating metrics show that UHS, despite owning fewer hospitals than comparable peers, extracts higher profits from them; for instance, while UHS has fewer beds than larger peers, it boasts a significantly higher occupancy rate.

[edit] Market Share

The hospital industry is fragmented, with hundreds of providers of various sizes spread throughout the country. No provider holds more than 1% of the total market. Competition is limited by geographic constraints (there are never more than a few hospitals in one geographic area). UHS is the fourth largest for-profit national hospital operator, accounting for a little less than 1% of the market. ^[37]

Market Share of Major Hospital Operators, 2007^[38]

• Community Health Systems (CYH) owns or leases 100 hospitals in 28 states, all in rural areas. After the 2007 acquisition of Triad Hospitals, which doubled the size of the CYH network, the firm is the largest publicly traded hospital operator chain in the country. CYH follows an acquisition-based growth strategy, growing at a 30% Compounded annual growth rate - CAGR during the 2003-2007 period. ^[39]
• LifePoint Hospitals (LPNT) owns 48 hospitals located throughout the United States, primarily in rural markets. The firm's revenue growth over the past few years has been driven primarily by acquisitions, as well as its 2005 merger with Province Healthcare, which doubled the firm's size. While the rural locations of its hospitals provide LifePoint with several competitive advantages, the firm's operating income has remained volatile, affected by the seasonality of earnings (dependent on the winter flu season), increasing numbers of uninsured patients, and employee turnover among qualified specialists.^[40]
• Tenet Healthcare (THC) manages 59 hospitals in both urban and suburban areas. The firm's facilities are primarily clustered in three states - California, Florida, and Texas; as a result, demographic shifts in these states strongly affect the company's revenues and profitability.^[41]
• Health Management Associates (HMA) operates 59 general acute care hospitals in rural areas across the Southeastern United States. All of its hospitals provide basic services such as general surgery and diagnostic care, while some also provide specialized services like cardiology and neurosurgery. HMA has distinguished itself from its peers by forming partnerships with physicians to stave off competition from independent and physician-owned facilities.^[42]

[edit] References

1. ↑ Investing Minds - Universal Health Services
2. ↑ UHS 2007 10-K Section 7 -MD&A p.63
3. ↑ UHS 2007 10-K Section 7 -MD&A p.53
4. ↑ Palank, Jacqueline. "Hospitals Face Financial Squeeze." Wall Street Journal. April 30,2008.
5. ↑ UHS 2007 10-K Section 7 -MD&A p.53
6. ↑ UHS 2007 10-K Section 7 -MD&A p.53
7. ↑ UHS 2007 10-K Section 1 - Business p.4
8. ↑ UHS 2007 10-K Section 7 -MD&A p.55
9. ↑ UHS 2007 10-K Section 6 - Selected Financial Data p. 35
10. ↑ UHS 2007 10-K Section 7 -MD&A p.44
11. ↑ UHS 2007 10-K Section 7 -MD&A p.63
12. ↑ UHS 2007 10-K Section 1 - Business p.7
13. ↑ UHS 2007 10-K Section 8 - Notes to Financial Statements Pg. 119
14. ↑ UHS 2007 10-K Section 7 -MD&A p.46-47
15. ↑ UHS 2007 10-K Section 7 -MD&A p.53
16. ↑ UHS 2007 10-K Section 7 -MD&A p.36
17. ↑ Brophy Marcus, Mary. "The spotlight grows on outpatient surgery." USA Today. July 29, 2007.
18. ↑ Palank, Jacqueline. "Hospitals Face Financial Squeeze." Wall Street Journal. April 30,2008.
19. ↑ Sutter Health Forms New Joint Venture to Operate and Develop Surgery Centers. June 8, 2007
20. ↑ FTC Testifies on New Entry into Hospital Competition. May 24, 2005.
21. ↑ Palank, Jacqueline. "Hospitals Face Financial Squeeze." Wall Street Journal. April 30,2008.
22. ↑ UHS 2007 10-K Section 1 - Business p.14
23. ↑ Kaiser Daily Health Policy Report
24. ↑ Emergency physicians treating more uninsured patients, survey finds
25. ↑ UHS 2007 10-K Section 7 - MD&A p.56
26. ↑ Davis, Robert. "Shortage of surgeons pinches U.S. hospitals." USA Today. February 26, 2008.
27. ↑ UHS 2007 10-K Section 1 - Business p.14
28. ↑ Growing Old, Baby-Boomer Style
29. ↑ "Aging Baby Boomers" Wikinvest Article
30. ↑ Healthcare Expenditure: A Future in Question
31. ↑ Statistics, Trends and Reports.
32. ↑ National Health Expenditure Accounts 2006 Highlights
33. ↑ "Hospitals, Insurers Still Expected to Feel Long-Term Squeeze From Medicare Funding Deficit". AP. March 26,2008
34. ↑ UHS 2007 10-K Section 1 - Business p.20
35. ↑ Fitch Affirms Universal Health Services Inc.'s at BBB
36. ↑ All data from 2007 10-Ks; data for UHS is for hospital segment only
37. ↑ U.S. Department of Health & Human Services: April 2005
38. ↑ American Hospital Association - 2006 Health and Hospital Trends; Revenues data from company profiles at www.hoovers.com
39. ↑ CYH Wikinvest Article
40. ↑ LPNT Wikinvest Article
41. ↑ THC Wikinvest Article
42. ↑ HMA Wikinvest Article