UNIVERSAL HEALTH SERVICES, INC. Overview
Our principal business is owning and operating, through our subsidiaries, acute care hospitals and outpatient facilities and behavioral health care facilities.
As ofSeptember 30, 2021 , we owned and/or operated 360 inpatient facilities and 40 outpatient and other facilities including the following located in 38 U.S states,Washington, D.C. , theUnited Kingdom andPuerto Rico :
Acute care facilities located in the
• 27 inpatient acute care hospitals; • 18 free-standing emergency departments, and; • 6 outpatient centers & 1 surgical hospital.
Behavioral health care facilities (333 inpatient facilities and 15 outpatient facilities):
Located in theU.S. : • 185 inpatient behavioral health care facilities, and; • 12 outpatient behavioral health care facilities.
Located in the
• 145 inpatient behavioral health care facilities, and; • 3 outpatient behavioral health care facilities.
Located in
• 3 inpatient behavioral health care facilities.
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and commercial health insurer accounted for 58% and 55% during the three-month periods endedSeptember 30, 2021 and 2020, respectively, and 56% and 54% during the nine-month periods endedSeptember 30, 2021 and 2020, respectively. Net revenues from our behavioral health care facilities and commercial health insurer accounted for 42% and 45% of our consolidated net revenues during the three-month periods endedSeptember 30, 2021 and 2020, respectively, and 44% and 46% during the nine-month periods endedSeptember 30, 2021 and 2020, respectively. Our behavioral health care facilities located in theU.K. generated net revenues of approximately$174 million and$155 million during the three-month periods endedSeptember 30, 2021 and 2020, respectively, and$511 million and$429 million during the nine-month periods endedSeptember 30, 2021 and 2020, respectively. Total assets at ourU.K. behavioral health care facilities were approximately$1.338 billion as ofSeptember 30, 2021 and$1.334 billion as ofDecember 31, 2020 . Services provided by our hospitals include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. We provide capital resources as well as a variety of management services to our facilities, including central purchasing, information services, finance and control systems, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.
Forward-Looking Statements and Risk Factors
You should carefully review the information contained in this Quarterly Report, and should particularly consider any risk factors that we set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , this Quarterly Report and in other reports or documents that we file from time to time with theSecurities and Exchange Commission (the "SEC"). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. This Quarterly Report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. In evaluating those statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those set forth in Item 1A. Risk Factors and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors in our Annual Report on Form 10-K for the year ended 26
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Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
our good faith belief with respect to future events, and is subject to risks and
uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements. Such factors include, among
other things, the following:
• we are subject to risks associated with public health threats and
epidemics, including the health concerns relating to the COVID-19
pandemic. In
("CDC") confirmed the spread of the disease to
pandemic. The federal government has declared COVID-19 a national
emergency, as many federal and state authorities have implemented
aggressive measures to "flatten the curve" of confirmed individuals
diagnosed with COVID-19 in an attempt to curtail the spread of the virus
and to avoid overwhelming the health care system;
• the impact of the COVID-19 pandemic, which began during the second half of
March, 2020, has had a material effect on our operations and financial
results since that time. The COVID-19 vaccination process commenced during
the first quarter of 2021. Since that time through the second quarter of
2021, we had generally experienced a decline in COVID-19 patients as well
as a corresponding recovery in non-COVID patient activity. However, during
the third quarter of 2021, our facilities generally experienced an
increase in COVID-19 patients resulting primarily from the Delta variant.
Since the future volumes and severity of COVID-19 patients remain highly
uncertain and subject to change, including potential increases in future
COVID-19 patient volumes caused by new variants of the virus, as well as
related pressures on staffing and wage rates, we are not able to fully
quantify the impact that these factors will have on our future financial
results. However, developments related to the COVID-19 pandemic could
materially affect our financial performance during the remainder of 2021
and into 2022. Even after the COVID-19 pandemic has subsided, we may
continue to experience materially adverse impacts on our financialcondition and our results of operations as a result of its macroeconomic
impact, and many of our known risks described in the Risk Factors section
of our Annual Report on Form 10-K for the year ended December 31, 2020 ;
• the Centers for Medicare and Medicaid Services ("CMS") issued an Interim
Final Rule ("IFR") effective
vaccinations for all applicable staff at all Medicare and Medicaid
certified facilities. Facilities covered by this regulation must establish
a policy ensuring all eligible staff have received the first dose of a
two-dose COVID-19 vaccine or a one-dose COVID-19 vaccine prior to
providing any care, treatment, or other services by
eligible staff must have received the necessary shots to be fully
vaccinated - either two doses of Pfizer or Moderna or one dose of Johnson
& Johnson - by
exemptions based on recognized medical conditions or religious beliefs,
observances, or practices. Facilities must develop a similar process or
plan for permitting exemptions in alignment with federal law. If
facilities fail to comply with the IFR by the deadlines established, they
are subject to potential termination from the Medicare and Medicaid
program for non-compliance. In addition, the Occupational Safety and
Health Administration also issued an Emergency Temporary Standardrequiring all businesses with 100 or more employees to be vaccinated by
show a negative COVID-19 test weekly and wear a face mask in the
workplace. However, healthcare employees at healthcare facilities covered
by the CMS IFR will not have the option of weekly COVID-19 testing in lieu
of vaccination. Legal challenges to these rules are expected and we cannot
predict at this time the potential viability or impact of such
litigation. Implementation of these rules could have an impact on
staffing at our facilities for those employees that are not vaccinated by
resulting from staffing issues could have a material adverse effect on our
financial results;
• the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"),
a stimulus package signed into law on
billion in grant funding to hospitals and other healthcare providers to be
distributed through the Public Health and Social Services Emergency Fund
(the "PHSSEF"). These funds are not required to be repaid provided the
recipients attest to and comply with certain terms and conditions,
including limitations on balance billing and not using PHSSEF funds to
reimburse expenses or losses that other sources are obligated toreimburse. However, since the expenses and losses will be ultimately
measured over the life of the COVID-19 pandemic, potential retrospective
unfavorable adjustments in future periods, of funds recorded as revenues
in prior periods, could occur. The U.S. Department of Health and Human
Services ("HHS") initially distributed $30 billion of this funding basedon each provider's share of total Medicare fee-for-service reimbursement
in 2019. Subsequently, HHS determined that CARES Act funding (including
the
providers' share of 2018 net patient revenue. We have received payments
from these initial distributions of the PHSSEF as disclosed herein. HHS
has indicated that distributions of the remaining $50 billion will be
targeted primarily to hospitals in COVID-19 high impact areas, to rural
providers, safety net hospitals and certain Medicaid providers and to
reimburse providers for COVID-19
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related treatment of uninsured patients. We have received payments from
these targeted distributions of the PHSSEF, as disclosed herein. The CARES
Act also makes other forms of financial assistance available to healthcare
providers, including through Medicare and Medicaid payment adjustments and
an expansion of the Medicare Accelerated and Advance Payment Program,
which made available accelerated payments of Medicare funds in order to
increase cash flow to providers. On
Medicare and Medicaid Services ("CMS") announced it was reevaluating and
temporarily suspending the Medicare Accelerated and Advance Payment
Program in light of the availability of the PHSSEF and the significant
funds available through other programs. We have received accelerated
payments under this program during 2020, and returned early all of those
funds during the first quarter of 2021, as disclosed herein. The Paycheck
Protection Program and Health Care Enhancement Act (the "PPPHCE Act"), a
stimulus package signed into law on
emergency appropriations for COVID-19 response, including
be distributed to eligible providers through the PHSSEF. A third phase of
PHSSEF allocations made
previously received, rejected or accepted PHSSEF payments. Applicants that
had not yet received PHSSEF payments of 2 percent of patient revenue were
to receive a payment that, when combined with prior payments (if any),
equals 2 percent of patient care revenue. Providers that have already
received payments of approximately 2 percent of annual revenue from
patient care were potentially eligible for an additional
payment. Recipients will not be required to repay the government for
PHSSEF funds received, provided they comply with HHS defined terms and
conditions. On December 27, 2020 , the Consolidated Appropriations Act,
2021 ("CAA") was signed into law. The CAA appropriated an additional
billion to the PHSSEF, codified flexibility for providers to calculate
lost revenues, and permitted parent organizations to allocate PHSSEF
targeted distributions to subsidiary organizations. The CAA also provides
that not less than 85 percent of the unobligated PHSSEF amounts and any
future funds recovered from health care providers should be used for
additional distributions that consider financial losses and changes in
operating expenses in the third or fourth quarters of 2020 and the firstquarter of 2021 that are attributable to the coronavirus. The CAA provided
additional funding for testing, contact tracing and vaccine
administration. Providers receiving payments were required to sign terms
and conditions regarding utilization of the payments. Any provider
receiving funds in excess of
report data elements to HHS detailing utilization of the payments, and we
will be required to file such reports. We, and other providers, willreport healthcare related expenses attributable to COVID-19 that have not
been reimbursed by another source, which may include general and
administrative or healthcare related operating expenses. Funds may also be
applied to lost revenues, represented as a negative change in
year-over-year net patient care operating income. The deadline for using
all
received period; payments received in the first period of
to
received in the fourth period of
expended by
("ARPA"), enacted on
detecting, diagnosing, tracing, and monitoring COVID-19 infections;
establishing community vaccination centers and mobile vaccine units;
promoting, distributing, and tracking COVID-19 vaccines; and reimbursing
rural hospitals and facilities for healthcare-related expenses and lost
revenues attributable to COVID-19. ARPA increased the eligibility for, and
amount of, premium tax credits to purchase health coverage through Patient
Protection and Affordable Care Act, as amended by the Health and Education
Reconciliation Act (collectively, the "Legislation"). Further, ARPA set
the Medicaid program's federal medical assistance percentage ("FMAP") at
100 percent for amounts expended for COVID-19 vaccines and vaccine
administration. ARPA also increases the FMAP by 5 percent for eight
calendar quarters to incentivize states to expand their Medicaid
programs. Finally, ARPA provides subsidies to cover 100 percent of healthinsurance premiums under the Consolidated Omnibus Budget Reconciliation
Act through
surrounding the implementation of the CARES Act, the PPPHCE Act, the CAA
and ARPA, and the federal government may consider additional stimulus and
relief efforts, but we are unable to predict whether additional stimulus
measures will be enacted or their impact. There can be no assurance as to
the total amount of financial and other types of assistance we will
receive under the CARES Act, the PPPHCE Act, the CAA and the ARPA, and itis difficult to predict the impact of such legislation on our operations
or how they will affect operations of our competitors. Moreover, we are
unable to assess the extent to which anticipated negative impacts on usarising from the COVID-19 pandemic will be offset by amounts or benefits
received or to be received under the CARES Act, the PPPHCE Act, the CAA
and the ARPA;
• our ability to comply with the existing laws and government regulations,
and/or changes in laws and government regulations;
• an increasing number of legislative initiatives have been passed into law
that may result in major changes in the health care delivery system on a
national or state level. For example, Congress has reduced to $0 the
penalty for failing to maintain health coverage that was part of the
original Legislation as part of the Tax Cuts and Jobs Act.
has undertaken and is expected to undertake additional executive actions
that will strengthen the Legislation and reverse the policies of the prior
administration. To date, the Biden administration has issued executive
orders implementing a special enrollment period permitting individuals to
enroll in health plans outside of the annual open enrollment period and
reexamining policies that may undermine the Legislation or the Medicaid
program. The ARPA's expansion of subsidies to purchase coverage through a
Legislation exchange is anticipated to increase exchange enrollment. The
Trump
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Administration had directed the issuance of final rules (i) enabling the
formation of association health plans that would be exempt from certain
Legislation requirements such as the provision of essential health
benefits, (ii) expanding the availability of short-term, limited duration
health insurance, (iii) eliminating cost-sharing reduction payments to
insurers that would otherwise offset deductibles and other out-of-pocket
expenses for health plan enrollees at or below 250 percent of the federal
poverty level, (iv) relaxing requirements for state innovation waivers
that could reduce enrollment in the individual and small group markets and
lead to additional enrollment in short-term, limited duration insurance
and association health plans and (v) incentivizing the use of health
reimbursement arrangements by employers to permit employees to purchase
health insurance in the individual market. The uncertainty resulting from
these Executive Branch policies may have led to reduced Exchange
enrollment in 2018, 2019 and 2020. It is also anticipated that these
policies, to the extent that they remain as implemented, may create
additional cost and reimbursement pressures on hospitals, including ours.
In addition, there have been numerous political and legal efforts toexpand, repeal, replace or modify the Legislation since its enactment,
some of which have been successful, in part, in modifying the Legislation,
as well as court challenges to the constitutionality of the Legislation.
when the Court held in California v. Texas that the plaintiffs lacked
standing to challenge the Legislation's requirement to obtain minimum
essential health insurance coverage, or the individual mandate. The Court
dismissed the case without specifically ruling on the constitutionality of
the Legislation. As a result, the Legislation will continue to remain law,
in its entirety, likely for the foreseeable future. Any future efforts to
challenge, replace or replace the Legislation or expand or substantially
amend its provision is unknown. See below in Sources of Revenue and Health
Care Reform for additional disclosure;
• under the Legislation, hospitals are required to make public a list of
their standard charges, and effective
that this disclosure be in machine-readable format and include charges for
all hospital items and services and average charges for diagnosis-related
groups. On
Transparency Requirements for Hospitals to Make Standard Charges Public."
This rule took effect on
also make public their payor-specific negotiated rates, minimum negotiated
rates, maximum negotiated rates, and cash for all items and services,
including individual items and services and service packages, that could
be provided by a hospital to a patient. Failure to comply with these
requirements may result in daily monetary penalties. On November 2, 2021 ,CMS released a final rule amending several hospital price transparency
policies and increasing the amount of penalties for noncompliance through
the use of a scaling factor based on hospital bed count;
• as part of the CAA,
limiting patient balance billing in certain circumstances. The CAA
addresses surprise medical bills stemming from emergency services,
out-of-network ancillary providers at in-network facilities, and air
ambulance carriers. The legislation prohibits surprise billing when
out-of-network emergency services or out-of-network services at anin-network facility are provided, unless informed consent is received. In
these circumstances providers are prohibited from billing the patient for
any amounts that exceed in-network cost-sharing requirements. On
2021, HHS, the
issued an interim final rule, which begins to implement the legislation.
The rule would limit our ability to receive payment for services at
usually higher out-of-network rates in certain circumstances and prohibit
out-of-network payments in other circumstances;
• possible unfavorable changes in the levels and terms of reimbursement for
our charges by third party payers or government based payers, including
Medicare or Medicaid in
the
• our ability to enter into managed care provider agreements on acceptable
terms and the ability of our competitors to do the same;
• the outcome of known and unknown litigation, government investigations,
false claims act allegations, and liabilities and other claims asserted
against us and other matters as disclosed in Note 6 to the Consolidated
Financial Statements - Commitments and Contingencies and the effects of
adverse publicity relating to such matters;
• the unfavorable impact on our business of the 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;
• we experienced a cyberattack in September, 2020 that had an adverse effect
on our operating results during the fourth quarter of 2020. Although we
can provide no assurance or estimation related to the amount of the
ultimate insurance
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proceeds that we may receive in connection with this incident (
of insurance proceeds have been received to date), we believe we are
entitled to recovery of the majority of the unfavorable economic impact of
the cyberattack pursuant to a commercial insurance policy. However, there
is a heightened risk of future cybersecurity threats, including ransomware
attacks targeting healthcare providers. If successful, future cyberattacks
could have a material adverse effect on our business. Any costs that we
incur as a result of a data security incident or breach, including costs
to update our security protocols to mitigate such an incident or breach
could be significant. Any breach or failure in our operational security
systems can result in loss of data or an unauthorized disclosure of or
access to sensitive or confidential member or protected personal or health
information and could result in significant penalties or fines,
litigation, loss of customers, significant damage to our reputation and
business, and other losses;
• the availability of suitable acquisition and divestiture opportunities and
our ability to successfully integrate and improve our acquisitions since
failure to achieve expected acquisition benefits from certain of our prior
or future acquisitions could result in impairment charges for goodwill and
purchased intangibles;
• the impact of severe weather conditions, including the effects of
hurricanes and climate change;
• as discussed below in Sources of Revenue, we receive revenues from various
state and county based programs, including Medicaid in all the states in
which we operate (we receive Medicaid revenues in excess of
annually from each of
supplemental programs in certain states including
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 andcompetitive changes in those states. We can provide no assurance that
reductions to revenues earned pursuant to these programs, and the effect
of the COVID-19 pandemic on state budgets, particularly in the
above-mentioned states, will not have a material adverse effect on our
future results of operations;
• our ability to continue to obtain capital on acceptable terms, including
borrowed funds, to fund the future growth of our business;
• our inpatient acute care and behavioral health care facilities may
experience decreasing admission and length of stay trends;
• our financial statements reflect large amounts due from various commercial
and private payers and there can be no assurance that failure of the
payers to remit amounts due to us will not have a material adverse effect
on our future results of operations;
• the Budget Control Act of 2011 (the "2011 Act") imposed annual spending
limits for most federal agencies and programs aimed at reducing budget
deficits by $917 billion between 2012 and 2021, according to a report
released by the
the law established a bipartisan Congressional committee, known as the
was tasked with making recommendations aimed at reducing future federal
budget deficits by an additional $1.5 trillion over 10 years. The Joint
Committee was unable to reach an agreement by 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
2% reductions to Medicare reimbursement imposed under the 2011 Act. Recent
legislation has suspended payment reductions through
exchange for extended cuts through 2030. We cannot predict whether
what other federal budget deficit reduction initiatives may be proposed by
Medicare and Medicaid Payment Related Legislation - Medicare Sequestration
Relief, for additional disclosure related to the favorable effect the
legislative extensions have had/are expected to have on our results of
operations during 2020 and 2021;
• uninsured and self-pay patients treated at our acute care facilities
unfavorably impact our ability to satisfactorily and timely collect our
self-pay patient accounts;
• changes in our business strategies or development plans;
• in June, 2016, the
referendum in favor of the exit of the
legislature. On
the Lisbon Treaty, formally starting negotiations regarding its exit from
the
Union reached a post-Brexit trade and cooperation agreement that created
new business and security requirements and preserved the
tariff- and quota-free access to the European
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Union member states. We do not know to what extent Brexit will ultimately
impact the business and regulatory environment in the
Union, or other countries. Any of these effects of Brexit, and others we
cannot anticipate, could harm our business, financial condition and
results of operations, 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 inthe United States requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. For a summary of our significant accounting policies, please see Note 1 to the Consolidated Financial Statements as included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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: OnJanuary 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 12 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.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 aging of the receivables and historical collection experience. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions which might ultimately affect the collectability of the patient accounts and make adjustments to our allowances as warranted. At our acute care hospitals, third party liability accounts are pursued until all payment and adjustments are posted to the patient account. For those accounts with a patient balance after third party liability is finalized or accounts for uninsured patients, the patient receives statements and collection letters. Historically, a significant portion of the patients treated throughout our portfolio of acute care hospitals are uninsured patients which, in part, has resulted from patientswho are employed but do not have health insurance orwho have policies with relatively high deductibles. Patients treated at our hospitals for non-elective services,who have gross income of various amounts, dependent upon the state, ranging from 200% to 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 31
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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 did not have a material impact on our results of operations during the three and nine-month periods endedSeptember 30, 2021 or 2020 since our facilities make estimates at each financial reporting period to adjust revenue based on historical collections. 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. The following tables show the amounts recorded at our acute care hospitals for charity care and uninsured discounts, based on charges at established rates, for the three and nine-month periods endedSeptember 30, 2021 and 2020: Uncompensated care: Amounts in millions Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 % 2020 % 2021 % 2020 % Charity care $ 189 33 % $ 148 27 % $ 535 35 % $ 511 30 % Uninsured discounts 378 67 % 410 73 % 987 65 % 1,221 70 % Total uncompensated care $ 567 100 % $ 558 100 % $ 1,522 100 % $ 1,732 100 %
Estimated cost of providing uncompensated care:
The estimated costs of providing uncompensated care as reflected below were
based on a calculation which multiplied the percentage of operating expenses for
our acute care hospitals to gross charges for those hospitals by the
above-mentioned total uncompensated care amounts. The percentage of cost to
gross charges is calculated based on the total operating expenses for our acute
care facilities divided by gross patient service revenue for those facilities.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
Amounts in millions 2021 2020 2021 2020
Estimated cost of providing charity
care $ 20 $ 17 $ 57 $ 60
Estimated cost of providing
uninsured discounts related care 41 47 107 142
Estimated cost of providing
uncompensated care $ 61 $ 64 $ 164 $ 202
Self-Insured/Other Insurance Risks: We provide for self-insured risks including
general and professional liability claims, workers' compensation claims and
healthcare and dental claims. Our estimated liability for self-insured
professional and general liability claims is based on a number of factors
including, among other things, the number of asserted claims and reported
incidents, estimates of losses for these claims based on recent and historical
settlement amounts, estimate of incurred but not reported claims based on
historical experience, and estimates of amounts recoverable under our commercial
insurance policies. All relevant information, including our own historical
experience is used in estimating the expected amount of claims. While we
continuously monitor these factors, our ultimate liability for professional and
general liability claims could change materially from our current estimates due
to inherent uncertainties involved in making this estimate. Our estimated
self-insured reserves are reviewed and changed, if necessary, at each reporting
date and changes are recognized currently as additional expense or as a
reduction of expense. In addition, we also: (i) own commercial health insurers
headquartered in Reno, Nevada , and Puerto Rico and; (ii) maintain self-insured
employee benefits programs for employee healthcare and dental claims. The
ultimate costs related to these programs/operations include expenses for claims
incurred and paid in addition to an accrual for the estimated expenses incurred
in connection with claims incurred but not yet reported. Given our significant
insurance-related exposure, there can be no assurance that a sharp increase in
the number and/or severity of claims asserted against us will not have a
material adverse effect on our future results of operations.
See Note 6 to the Consolidated Financial Statements-Commitments and Contingencies, for additional disclosure related to our professional and general liability, workers' compensation liability and property insurance.
The total accrual for our professional and general liability claims and workers' compensation claims was$450 million as ofSeptember 30, 2021 , of which$129 million is included in current liabilities. The total accrual for our professional and general liability 32
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claims and workers' compensation claims was
Recent Accounting Standards: For a summary of accounting standards, please see Note 14 to the Consolidated Financial Statements, as included herein.
Results of Operations COVID-19 The impact of the COVID-19 pandemic, which began during the second half of March, 2020, has had a material effect on our operations and financial results since that time. The COVID-19 vaccination process commenced during the first quarter of 2021. Since that time, through the second quarter of 2021, we had generally experienced a decline in COVID-19 patients as well as a corresponding recovery in non-COVID-19 patient activity. However, during the third quarter of 2021, our facilities generally experienced an increase in COVID-19 patients resulting primarily from the Delta variant. Since the future volumes and severity of COVID-19 patients remain highly uncertain and subject to change, including potential increases in future COVID-19 patient volumes caused by new variants of the virus, as well as related pressures on staffing and wage rates, we are not able to fully quantify the impact that these factors will have on our future financial results. However, developments related to the COVID-19 pandemic could materially affect our financial performance during the remainder of 2021 and into 2022.
2021 CARES Act Grants and Medicare Accelerated Payments Receipts/Disbursements:
During 2021, we received approximately$189 million of additional funds from the federal government in connection with the CARES Act, substantially all of which was received during the first quarter of 2021. During the second quarter of 2021, we returned the$189 million to the appropriate government agencies utilizing a portion of our cash and cash equivalents held on deposit. Therefore, our results of operations for the three and nine-month periods endedSeptember 30, 2021 include no impact from the receipt of those funds. Also, and as previously announced earlier this year, in March of 2021 we made an early repayment of$695 million of funds received during 2020 pursuant to the Medicare Accelerated and Advance Payment Program. These funds were returned to the government utilizing a portion of our cash and cash equivalents held on deposit. Please see Sources of Revenue- 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation below for additional disclosure regarding funds received and related recognition of revenues in our results of operations in connection with various governmental stimulus grant programs, most notably the CARES Act.
Financial results for the three-month periods ended
The following table summarizes our results of operations and is used in the
discussion below for the three-month periods ended
Three months ended Three months ended
September 30, 2021 September 30, 2020
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 3,155,999 100.0 % $ 2,912,541 100.0 %
Operating charges:
Salaries, wages and benefits 1,556,448 49.3 % 1,406,348 48.3 %
Other operating expenses 754,072 23.9 % 666,665 22.9 %
Supplies expense 367,834 11.7 % 335,409 11.5 %
Depreciation and amortization 134,462 4.3 % 125,961 4.3 %
Lease and rental expense 28,375 0.9 % 28,488 1.0 %
Subtotal-operating expenses 2,841,191 90.0 % 2,562,871 88.0 %
Income from operations 314,808 10.0 % 349,670 12.0 %
Interest expense, net 21,199 0.7 % 24,575 0.8 %
Other (income) expense, net 6,719 0.2 % 1,831 0.1 %
Income before income taxes 286,890 9.1 % 323,264 11.1 %
Provision for income taxes 67,515 2.1 % 79,172 2.7 %
Net income 219,375 7.0 % 244,092 8.4 %
Less: Income attributable to
noncontrolling interests 1,024 0.0 % 2,813 0.1 %
Net income attributable to UHS $ 218,351 6.9 % $ 241,279 8.3 %
33
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Net revenues increased 8.4%, or$243 million , to$3.16 billion during the three-month period endedSeptember 30, 2021 as compared to$2.91 billion during the third quarter of 2020. The net increase was primarily attributable to: (i) a$234 million or 8.2% increase in net revenues generated from our acute care hospital services and behavioral health services operated during both periods (which we refer to as "same facility"), and; (ii)$9 million of other combined net increases.
Income before income taxes (before deduction for income attributable to
noncontrolling interests) decreased
• an increase of
in Acute Care Hospital Services;
• a decrease of
discussed below in Behavioral Health Services , and;
• $12 million of other combined net decreases.
Net income attributable to UHS decreased $23 million to $218 million during the
three-month period ended September 30, 2021 as compared to $241 million during
the comparable prior year quarter. This decrease was attributable to:
• a
• an increase of
noncontrolling interests, and;
• an increase of
income taxes due primarily to: (i) the income tax benefit recorded in
connection with the
by; (ii) a
from ASU 2016-09, "Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09").
Financial results for the nine-month periods ended
The following table summarizes our results of operations and is used in the
discussion below for the nine-month periods ended
Nine months ended Nine months ended
September 30, 2021 September 30, 2020
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 9,366,866 100.0 % $ 8,471,962 100.0 %
Operating charges:
Salaries, wages and benefits 4,542,156 48.5 % 4,147,027 49.0 %
Other operating expenses 2,233,590 23.8 % 1,982,202 23.4 %
Supplies expense 1,052,977 11.2 % 936,808 11.1 %
Depreciation and amortization 399,850 4.3 % 376,563 4.4 %
Lease and rental expense 88,848 0.9 % 84,967 1.0 %
Subtotal-operating expenses 8,317,421 88.8 % 7,527,567 88.9 %
Income from operations 1,049,445 11.2 % 944,395 11.1 %
Interest expense, net 64,455 0.7 % 86,399 1.0 %
Other (income) expense, net (1,575 ) (0.0 )% 8,291 0.1 %
Income before income taxes 986,565 10.5 % 849,705 10.0 %
Provision for income taxes 232,844 2.5 % 204,649 2.4 %
Net income 753,721 8.0 % 645,056 7.6 %
Less: Income attributable to
noncontrolling interests 1,255 0.0 % 9,811 0.1 %
Net income attributable to UHS $ 752,466 8.0 % $ 635,245 7.5 %
Net revenues increased 10.6%, or $895 million , to $9.367 billion during the
nine-month period ended September 30, 2021 as compared to $8.47 billion during
the first nine months of 2020. The net increase was primarily attributable to:
(i) a $857 million or 10.3% increase in net revenues generated from our acute
care hospital services and behavioral health services, on a same facility basis,
and; (ii) $38 million of other combined net increases which includes a $21
million increase in provider tax assessments which had no impact on net income
attributable to UHS as reflected above since the amounts offset between net
revenues and other operating expenses. Included in our net revenues during the
nine-month period ended September 30, 2020 was approximately $213 million of net
revenues recorded in connection with various governmental stimulus programs,
most notably the CARES, Act.
34
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Income before income taxes (before deduction for income attributable to
noncontrolling interests) increased
• an increase of
in Acute Care Hospital Services;
• an increase of
discussed below in Behavioral Health Services , and;
• $6 million of other combined net decreases.
Net income attributable to UHS increased $117 million to $752 million during the
nine-month period ended September 30, 2021 as compared to $635 million during
the comparable prior year period. This increase was attributable to:
• a
• an increase of
noncontrolling interests, and;
• a decrease of
income taxes due primarily to: (i) the income tax provision recorded in
connection with the
offset by; (ii) a
resulting from ASU 2016-09.
Increase to self-insured professional and general liability reserves:
Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies.
As a result of unfavorable trends experienced during 2020 and 2021, included in
our results of operations during the first nine months of 2021, was a
Included in our results of operations during the first nine months of 2020, was a$25 million increase to our reserves for self-insured professional and general liability claims ($20 million and$5 million recorded during the first and third quarters of 2020, respectively). Approximately$19 million of the increase to our reserves was included in our same facility basis acute care hospitals services' results during the first nine months of 2020 and approximately$6 million was included in our behavioral health services' results.
Acute Care Hospital Services
Same Facility Basis Acute Care Hospital Services
We believe that providing our results on a "Same Facility" basis (which is a non-GAAP measure), which includes the operating results for facilities and businesses operated in both the current year and prior year periods, is helpful to our investors as a measure of our operating performance. Our Same Facility results also neutralize (if applicable) the effect of items that are non-operational in nature including items such as, but not limited to, gains/losses on sales of assets and businesses, impacts of settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets and other amounts that may be reflected in the current or prior year financial statements that relate to prior periods. Our Same Facility basis results reflected on the table below also exclude from net revenues and other operating expenses, provider tax assessments incurred in each period as discussed below Sources of Revenue-Various State Medicaid Supplemental Payment Programs. However, these provider tax assessments are included in net revenues and other operating expenses as reflected in the table below under All Acute Care Hospital Services. The provider tax assessments had no impact on the income before income taxes as reflected on the tables below since the amounts offset between net revenues and other operating expenses. To obtain a complete understanding of our financial performance, the Same Facility results should be examined in connection with our net income as determined in accordance with GAAP and as presented in the condensed consolidated financial statements and notes thereto as contained in this Quarterly Report on Form 10-Q. The following table summarizes the results of operations for our acute care facilities on a same facility basis and is used in the discussion below for the three and nine-month periods endedSeptember 30, 2021 and 2020 (dollar amounts in thousands): 35
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Three months ended Three months ended Nine months ended Nine months ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues $ 1,792,862 100.0 % $ 1,585,142 100.0 % $ 5,178,594 100.0 % $ 4,528,364 100.0 %
Operating charges:
Salaries, wages and benefits 755,216 42.1 % 660,610 41.7 % 2,153,046 41.6 % 1,909,216 42.2 %
Other operating expenses 410,960 22.9 % 366,754 23.1 % 1,216,277 23.5 % 1,086,669 24.0 %
Supplies expense 316,238 17.6 % 283,829 17.9 % 901,827 17.4 % 781,778 17.3 %
Depreciation and amortization 82,478 4.6 % 78,388 4.9 % 246,621 4.8 % 234,756 5.2 %
Lease and rental expense 17,505 1.0 % 17,641 1.1 % 55,663 1.1 % 50,224 1.1 %
Subtotal-operating expenses 1,582,397 88.3 % 1,407,222 88.8 % 4,573,434 88.3 % 4,062,643 89.7 %
Income from operations 210,465 11.7 % 177,920 11.2 % 605,160 11.7 % 465,721 10.3 %
Interest expense, net 255 0.0 % 205 0.0 % 749 0.0 % 1,339 0.0 %
Other (income) expense, net 436 0.0 % - - 436 0.0 % 0 -
Income before income taxes$ 209,774 11.7 %$ 177,715 11.2 %$ 603,975 11.7 %$ 464,382
10.3 %
Three-month periods ended
Included in our acute care hospital services' revenues during the third quarter of 2020 was approximately$4 million of net revenues recorded in connection with funds received from various governmental stimulus programs, most notably the CARES Act. During the three-month period endedSeptember 30, 2021 , as compared to the comparable prior year quarter, net revenues from our acute care hospital services, on a same facility basis, increased$208 million , or 13.1% including the governmental stimulus revenues recorded during the third quarter of 2020, and increased$212 million , or 13.4% excluding the governmental stimulus revenues recorded during the third quarter of 2020. Income before income taxes (and before income attributable to noncontrolling interests) increased$32 million , or 18%, amounting to$210 million , or 11.7% of net revenues during the third quarter of 2021 as compared to$178 million , or 11.2% of net revenues during the third quarter of 2020. During the three-month period endedSeptember 30, 2021 , excluding the impact of the$4 million of governmental stimulus program revenues recorded during the third quarter of 2020, net revenue per adjusted admission increased 1.3% while net revenue per adjusted patient day increased 2.7%, as compared to the comparable quarter of 2020. During the three-month period endedSeptember 30, 2021 , as compared to the comparable prior year quarter, inpatient admissions to our acute care hospitals increased 9.9% and adjusted admissions (adjusted for outpatient activity) increased 12.4%. Patient days at these facilities increased 8.4% and adjusted patient days increased 10.9% during the three-month period endedSeptember 30, 2021 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 5.3 days and 5.4 days during the three-month periods endedSeptember 30, 2021 and 2020, respectively. The occupancy rate, based on the average available beds at these facilities, was 71% and 67% during the three-month periods endedSeptember 30, 2021 and 2020, respectively. Patient volumes at our acute care hospitals during the third quarter of 2021 included a continuation of relatively robust non-COVID patient volumes as well as an increase in COVID-related patients as compared to volumes experienced during the second quarter of 2021. The increased COVID-related patient volumes resulted in increased revenues due to the higher acuity and incremental revenues associated with COVID patients. However, unlike previous surges in COVID-related patient volumes, non-COVID patient volumes experienced at our acute care hospitals, including emergency department visits and elective procedures, were generally consistent with pre-pandemic levels.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2021 , as compared to the comparable prior year period, net revenues from our acute care hospital services, on a same facility basis, increased$650 million , or 14.4%, including the$161 million of governmental stimulus revenues recorded during the first nine months of 2020, and increased$811 million , or 18.6%, excluding the governmental stimulus revenues recorded during the first nine months of 2020. Income before income taxes (and before income attributable to noncontrolling interests) increased$140 million , or 30.1%, amounting to$604 million , or 11.7% of net revenues during the first nine months of 2021 as compared to$464 million , or 10.3% of net revenues during the first nine months of 2020. As mentioned above, included in our same facility basis acute care hospitals services' results during the nine-month periods endedSeptember 30, 2021 and 2020, was approximately$31 million and$20 million , respectively, related to increases to our reserves for self-insured professional and general liability claims. In addition, included in our same facility basis acute care hospitals services' results during the first nine months of 2021 is approximately$25 million of income related to aggregate commercial insurance proceeds received during the second and third quarters ($15 million and$10 million , respectively) in 36
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connection with the previously incurred, unfavorable economic impact resulting from the information technology incident that occurred during 2020, and the COVID-19 pandemic.
During the nine-month period endedSeptember 30, 2021 , excluding the impact of the$161 million of governmental stimulus program revenues recorded during the first nine months of 2020, net revenue per adjusted admission increased 10.4% while net revenue per adjusted patient day increased 7.8%, as compared to the comparable period of 2020. During the nine-month period endedSeptember 30, 2021 , as compared to the comparable prior year period, inpatient admissions to our acute care hospitals increased 6.7% and adjusted admissions increased 7.3%. Patient days at these facilities increased 9.2% and adjusted patient days increased 9.9% during the nine-month period endedSeptember 30, 2021 as compared to the comparable prior year period. The average length of inpatient stay at these facilities was 5.1 days and 5.0 days during the nine-month periods endedSeptember 30, 2021 and 2020, respectively. The occupancy rate, based on the average available beds at these facilities, was 68% and 62% during the nine-month periods endedSeptember 30, 2021 and 2020, respectively.
All Acute Care Hospitals
The following table summarizes the results of operations for all our acute care operations during the three and nine-month periods endedSeptember 30, 2021 and 2020. These amounts include: (i) our acute care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including, if applicable, the results of recently acquired/opened ancillary facilities and businesses. Dollar amounts below are reflected in thousands. Three months ended Three months ended Nine months ended Nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues Net revenues$ 1,822,027 100.0 %$ 1,610,003 100.0 %$ 5,271,000 100.0 %$ 4,598,558 100.0 % Operating charges: Salaries, wages and benefits 757,962 41.6 % 660,694 41.0 % 2,157,060 40.9 % 1,909,415 41.5 % Other operating expenses 436,475 24.0 % 391,642 24.3 % 1,305,544 24.8 % 1,156,909 25.2 % Supplies expense 316,950 17.4 % 283,827 17.6 % 902,654 17.1 % 781,776 17.0 % Depreciation and amortization 83,794 4.6 % 78,388 4.9 % 248,462 4.7 % 234,756 5.1 % Lease and rental expense 17,518 1.0 % 17,641 1.1 % 55,676 1.1 % 50,224 1.1 % Subtotal-operating expenses 1,612,699 88.5 % 1,432,192 89.0 % 4,669,396 88.6 % 4,133,080 89.9 % Income from operations 209,328 11.5 % 177,811 11.0 % 601,604 11.4 % 465,478 10.1 % Interest expense, net 255 0.0 % 205 0.0 % 749 0.0 % 1,339 0.0 % Other (income) expense, net 436 0.0 % - - 436 0.0 % 0
-
Income before income taxes$ 208,637 11.5 %$ 177,606 11.0 %$ 600,419 11.4 %$ 464,139 10.1 %
Three-month periods ended
During the three-month period endedSeptember 30, 2021 , as compared to the comparable prior year quarter, net revenues from our acute care hospital services increased$212 million , or 13.2% to$1.82 billion as compared to$1.61 billion due primarily to the$208 million , or 13.1% increase in same facility revenues, as discussed above.
Income before income taxes increased
Nine-month periods ended
During the nine-month period endedSeptember 30, 2021 , as compared to the comparable prior year period, net revenues from our acute care hospital services increased$672 million , or 14.6% to$5.27 billion as compared to$4.60 billion due primarily to the$650 million , or 14.4% increase in same facility revenues, as discussed above. Income before income taxes increased$136 million , or 29% to$600 million , or 11.4% of net revenues during the first nine months of 2021, as compared to$464 million , or 10.1% of net revenues during the first nine months of 2020. The$136 million increase in income before income taxes from our acute care hospital services resulted primarily from the$140 million , or 30.1% increase in income before income taxes at our hospitals, on a same facility basis, as discussed above.Behavioral Health Services 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 37
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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 table below also excludes from net revenues and other operating expenses, provider tax assessments incurred in each period as discussed below Sources of Revenue-Various State Medicaid Supplemental Payment Programs. However, these provider tax assessments are included in net revenues and other operating expenses as reflected in the table below under All Behavioral Health Care Services. The provider tax assessments had no impact on the income before income taxes as reflected on the tables below since the amounts offset between net revenues and other operating expenses. To obtain a complete understanding of our financial performance, the Same Facility results should be examined in connection with our net income as determined in accordance with GAAP and as presented in the condensed consolidated financial statements and notes thereto as contained in this Quarterly Report on Form 10-Q. The following table summarizes the results of operations for our behavioral health care facilities, on a same facility basis, and is used in the discussions below for the three and nine-month periods endedSeptember 30, 2021 and 2020 (dollar amounts in thousands):
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues $ 1,302,468 100.0 % $ 1,276,568 100.0 % $ 4,004,066 100.0 % $ 3,797,579 100.0 %
Operating charges:
Salaries, wages and benefits 721,949 55.4 % 683,567 53.5 % 2,133,755 53.3 % 2,022,066 53.2 %
Other operating expenses 267,878 20.6 % 229,862 18.0 % 776,087 19.4 % 693,724 18.3 %
Supplies expense 51,337 3.9 % 51,806 4.1 % 151,435 3.8 % 153,761 4.0 %
Depreciation and amortization 45,798 3.5 % 43,919 3.4 % 136,926 3.4 % 129,877 3.4 %
Lease and rental expense 10,311 0.8 % 9,928 0.8 % 31,339 0.8 % 31,384 0.8 %
Subtotal-operating expenses 1,097,273 84.2 % 1,019,082 79.8 % 3,229,542 80.7 % 3,030,812 79.8 %
Income from operations 205,195 15.8 % 257,486 20.2 % 774,524 19.3 % 766,767 20.2 %
Interest expense, net 336 0.0 % 354 0.0 % 1,014 0.0 % 1,079 0.0 %
Other (income) expense, net 27 0.0 % 526 0.0 % 435 0.0 % 2,337 0.1 %
Income before income taxes $ 204,832 15.7 % $ 256,606 20.1 % $ 773,075 19.3 % $ 763,351 20.1 %
Three-month periods ended
Included in our behavioral health services' revenues during the third quarter of 2020 was a$9 million reversal of revenues previously recorded in connection with various governmental stimulus programs, most notably the CARES, Act. During the three-month period endedSeptember 30, 2021 , as compared to the comparable prior year quarter, net revenues from our behavioral health services, on a same facility basis, increased$26 million or 2.0% including the governmental stimulus revenue reversal recorded during the third quarter of 2020, and increased$17 million or 1.3% excluding the governmental stimulus revenue reversal recorded during the third quarter of 2020. Income before income taxes (and before income attributable to noncontrolling interests) decreased$52 million , or 20%, amounting to$205 million or 15.7% of net revenues during the third quarter of 2021 as compared to$257 million or 20.1% of net revenues during the third quarter of 2020. During the three-month period endedSeptember 30, 2021 , excluding the impact of the$9 million of governmental stimulus program revenue reversal recorded during the third quarter of 2020, net revenue per adjusted admission increased 4.2% while net revenue per adjusted patient day increased 3.6%, as compared to the comparable quarter of 2020. During the three-month period endedSeptember 30, 2021 , as compared to the comparable prior year quarter, inpatient admissions to our behavioral health care hospitals decreased 2.8% and adjusted admissions decreased 2.7%. Patient days at these facilities decreased 2.1% and adjusted patient days decreased 2.1% during the three-month period endedSeptember 30, 2021 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 13.6 days and 13.5 days during the three-month periods endedSeptember 30, 2021 and 2020, respectively. The occupancy rate, based on the average available beds at these facilities, was 70% and 73% during the three-month periods endedSeptember 30, 2021 and 2020, respectively. During the third quarter of 2021, patient volumes at our behavioral health care hospitals were pressured by increased COVID-19 infections experienced in many of our markets, as well as clinical staffing shortages caused by the general unfavorable availability of workers in theU.S. , as well as pandemic-related staffing challenges experienced at many of our facilities. These staffing pressures, together with COVID-related patient isolations, resulted in temporary bed closures at certain facilities, as well as higher labor costs. The higher labor costs are reflected in salaries, wages and benefits to the degree they relate to our employees and are reflected in other operating expenses to the degree they relate to contract payments to non-employees. 38
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In addition, three of our behavioral health care facilities located inLouisiana andPennsylvania were damaged and temporarily closed (either entirely or partially) as a result of Hurricane Ida in late August/early September of 2021. Two of these facilities were fully re-opened by the end of September/October, while the other facility is expected to be fully re-opened by mid-November. We estimate that our pre-tax financial results during the third quarter of 2021 were unfavorably impacted by approximately$10 million as a result of the damage sustained from Hurricane Ida.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2021 , as compared to the comparable prior year quarter, net revenues from our behavioral health services, on a same facility basis, increased$206 million or 5.4% including the$52 million of governmental stimulus revenues recorded during the third quarter of 2020, and increased$258 million or 6.9% excluding the governmental stimulus revenues recorded during the third quarter of 2020. Income before income taxes (and before income attributable to noncontrolling interests) increased$10 million , or 1%, amounting to$773 million or 19.3% of net revenues during the first nine months of 2021 as compared to$763 million or 20.1% of net revenues during the first nine months of 2020. As discussed below in Sources of Revenue-Kentucky Hospital Rate Increase Program, included in our same facility basis behavioral health services' results of operations during the first nine months of 2021, is approximately$62 million of revenues recorded in connection with the Kentucky Medicaid Managed Care Hospital Rate Increase Program covering the period ofJuly 1, 2020 toJune 30, 2021 . As also mentioned above, included in our same facility basis behavioral health services' results during the nine-month periods endedSeptember 30, 2021 and 2020, was approximately$10 million and$6 million , respectively, related to increases to our reserves for self-insured professional and general liability claims. During the nine-month period endedSeptember 30, 2021 , excluding the impact of the$52 million of governmental stimulus program revenues recorded during the first nine months of 2020, net revenue per adjusted admission increased 4.7% while net revenue per adjusted patient day increased 6.0%, as compared to the comparable period of 2020. During the nine-month period endedSeptember 30, 2021 , as compared to the comparable prior year period, inpatient admissions to our behavioral health care hospitals increased 1.4% and adjusted admissions increased 1.6%. Patient days at these facilities increased 0.1% and adjusted patient days increased 0.3% during the nine-month period endedSeptember 30, 2021 as compared to the comparable prior year period. The average length of inpatient stay at these facilities was 13.5 days and 13.6 days during the nine-month periods endedSeptember 30, 2021 and 2020, respectively. The occupancy rate, based on the average available beds at these facilities, was 71% and 72% during the nine-month periods endedSeptember 30, 2021 and 2020, respectively.
All Behavioral Health Care Facilities
The following table summarizes the results of operations for all our behavioral health care services during the three and nine-month periods endedSeptember 30, 2021 and 2020. These amounts include: (i) our behavioral health care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including the results of facilities acquired or opened during the past year (if applicable) as well as the results of certain facilities that were closed or restructured during the past year. Dollar amounts below are reflected in thousands. Three months ended Three months ended Nine months ended Nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues Net revenues$ 1,328,293 100.0 %$ 1,299,591 100.0 %$ 4,075,127 100.0 %$ 3,864,823 100.0 % Operating charges: Salaries, wages and benefits 727,137 54.7 % 684,575 52.7 % 2,144,735 52.6 % 2,027,223 52.5 % Other operating expenses 292,794 22.0 % 253,779 19.5 % 847,780 20.8 % 765,006 19.8 % Supplies expense 51,712 3.9 % 51,858 4.0 % 152,273 3.7 % 153,861 4.0 % Depreciation and amortization 47,205 3.6 % 45,154 3.5 % 140,870 3.5 % 134,081 3.5 % Lease and rental expense 10,421 0.8 % 10,734 0.8 % 31,789 0.8 % 34,151 0.9 % Subtotal-operating expenses 1,129,269 85.0 % 1,046,100 80.5 % 3,317,447 81.4 % 3,114,322 80.6 % Income from operations 199,024 15.0 % 253,491 19.5 % 757,680 18.6 % 750,501 19.4 % Interest expense, net 1,218 0.1 % 433 0.0 % 3,564 0.1 % 1,184 0.0 % Other (income) expense, net 27 0.0 % 526 0.0 % 435 0.0 % 2,337 0.1 % Income before income taxes$ 197,779 14.9 %$ 252,532 19.4 %$ 753,681 18.5 %$ 746,980 19.3 % 39
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Three-month periods ended
During the three-month period endedSeptember 30, 2021 , as compared to the comparable prior year quarter, net revenues generated from our behavioral health services increased$29 million , or 2.2% due primarily to the above-mentioned$26 million , or 2.0% increase in net revenues on a same facility basis. Income before income taxes decreased$55 million , or 21.7%, to$198 million or 14.9% of net revenues during the third quarter of 2021, as compared to$253 million or 19.4% of net revenues during the third quarter of 2020. The decrease in income before income taxes at our behavioral health facilities during the third quarter of 2021, as compared to the compared quarter of 2020, was primarily attributable to the$52 million , or 20.2% decrease in income before income taxes experienced at our behavioral health facilities on a same facility basis, as discussed above.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2021 , as compared to the comparable prior year period, net revenues generated from our behavioral health services increased$210 million , or 5.4% due primarily to the above-mentioned$206 million , or 5.4% increase in net revenues on a same facility basis. Income before income taxes increased$7 million , or 0.9%, to$754 million or 18.5% of net revenues during the first nine months of 2021, as compared to$747 million or 19.3% of net revenues during the first nine months of 2020. The increase in income before income taxes at our behavioral health facilities during the first nine months of 2021, as compared to the compared period of 2020, was primarily attributable to the$10 million , or 1.3% increase in income before income taxes experienced at our behavioral health facilities on a same facility basis, as discussed above.
Sources of Revenue
Overview: We receive payments for services rendered from private insurers, including managed care plans, the federal government under the Medicare program, state governments under their respective Medicaid programs and directly from patients. Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary depending on the type of services provided (e.g., medical/surgical, intensive care or behavioral health) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control. The percentage of patient service revenue attributable to outpatient services has generally increased in recent years, primarily as a result of advances in medical technology that allow more services to be provided on an outpatient basis, as well as increased pressure from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to our increased outpatient levels mirrors the general trend occurring in the health care industry and we are unable to predict the rate of growth and resulting impact on our future revenues. Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, and managed care plans, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Indications from recent federal and state legislation are that this trend will continue. Collection of amounts due from individuals is typically more difficult than from governmental or business payers which unfavorably impacts the collectability of our patient accounts. As described below in the section titled 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation, the federal government has enacted multiple pieces of legislation to assist healthcare providers during the COVID-19 world-wide pandemic andU.S. National Emergency declaration. We have outlined those legislative changes related to Medicare and Medicaid payment and their estimated impact on our financial results, where estimates are possible. Sources of Revenues and Health Care Reform: Given increasing budget deficits, the federal government and many states are currently considering additional ways to limit increases in levels of Medicare and Medicaid funding, which could also adversely affect future payments received by our hospitals. In addition, the uncertainty and fiscal pressures placed upon the federal government as a result of, among other things, impacts on state revenue and expenses resulting from the COVID-19 pandemic, economic recovery stimulus packages, responses to natural disasters, and the federal and state budget deficits in general may affect the availability of government funds to provide additional relief in the future. We are unable to predict the effect of future policy changes on our operations. OnMarch 23, 2010 ,President Obama signed into law the Legislation. Two primary goals of the Legislation are to provide for increased access to coverage for healthcare and to reduce healthcare-related expenses. The Legislation revises reimbursement under the Medicare and Medicaid programs to emphasize the efficient delivery of high quality care and contains a number of incentives and penalties under these programs to achieve these goals. The Legislation provides for decreases in the annual market basket update for federal fiscal years 2010 through 2019, a productivity offset to the market basket 40
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update beginningOctober 1, 2011 for Medicare Part B reimbursable items and services and beginningOctober 1, 2012 for Medicare inpatient hospital services. The Legislation and subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions began in October, 2013 while the Medicaid DSH reductions are scheduled to begin in 2024. The Legislation implemented a value-based purchasing program, which will reward the delivery of efficient care. Conversely, certain facilities will receive reduced reimbursement for failing to meet quality parameters; such hospitals will include those with excessive readmission or hospital-acquired condition rates. A 2012U.S. Supreme Court ruling limited the federal government's ability to expand health insurance coverage by holding unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the Medicaid expansion by reducing their existing Medicaid funding. Therefore, states can choose to expand or not to expand their Medicaid program without risking the loss of federal Medicaid funding. As a result, many states, includingTexas , have not expanded their Medicaid programs without the threat of loss of federal funding. CMS has previously granted section 1115 demonstration waivers providing for work and community engagement requirements for certain Medicaid eligible individuals. CMS has also released guidance to states interested in receiving their Medicaid funding through a block grant mechanism. The Biden administration has signaled its intent to withdraw previously issued section 1115 demonstrations aligned with these policies. However, if implemented, the previously issued section 1115 demonstrations are anticipated to lead to reductions in coverage, and likely increases in uncompensated care, in states where these demonstration waivers are granted. OnDecember 14, 2018 , aTexas Federal District Court deemed the Legislation to be unconstitutional in its entirety. The Court concluded that the Individual Mandate is no longer permissible underCongress's taxing power as a result of the Tax Cut and Jobs Act of 2017 ("TCJA") reducing the individual mandate's tax to$0 (i.e., it no longer produces revenue, which is an essential feature of a tax), rendering the Legislation unconstitutional. The court also held that because the individual mandate is "essential" to the Legislation and is inseverable from the rest of the law, the entire Legislation is unconstitutional. Because the court issued a declaratory judgment and did not enjoin the law, the Legislation remained in place pending its appeal.The District Court for the Northern District of Texas ruling was appealed to theU.S. Court of Appeals for the Fifth Circuit . OnDecember 18, 2019 , theFifth Circuit Court of Appeals' three-judge panel voted 2-1 to strike down the Legislation individual mandate as unconstitutional.The Fifth Circuit Court also sent the case back to theTexas district court to determine which Legislation provisions should be stricken with the mandate or whether the entire Legislation is unconstitutional. OnMarch 2, 2020 , theU.S. Supreme Court agreed to hear, during the 2020-2021 term, two consolidated cases, filed by theState of California and theUnited States House of Representatives , asking theU.S. Supreme Court to review the ruling by theFifth Circuit Court of Appeals . Oral argument was heard onNovember 10, 2020 , and onJune 17, 2021 , theU.S. Supreme Court issued an opinion holding 7-2 that a group of states and individuals lacked standing to challenge the constitutionality of the Affordable Care Act ("ACA"). The Court did not reach the plaintiffs' merits arguments, which specifically challenged the constitutionality of the ACA's individual mandate and the entirety of the ACA itself. As a result, the ACA will continue to be law, and HHS and its respective agencies will continue to enforce regulations implementing the law. 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. WhileCongress had previously revised the intent requirement of the Anti-Kickback Statute to provide that a person is not required to "have actual knowledge or specific intent to commit a violation of" the Anti-Kickback Statute in order to be found in violation of such law, the Legislation also provides that any claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the federal civil False Claims Act. The Legislation also expands the Recovery Audit Contractor program to Medicaid. These amendments also make it easier for severe fines and penalties to be imposed on healthcare providers that violate applicable laws and regulations. We have partnered with local physicians in the ownership of certain of our facilities. These investments have been permitted under an exception to the physician self-referral law. The Legislation permits existing physician investments in a hospital to continue under a "grandfather" clause if the arrangement satisfies certain requirements and restrictions, but physicians are prohibited from increasing the aggregate percentage of their ownership in the hospital. The Legislation also imposes certain compliance and disclosure requirements upon existing physician-owned hospitals and restricts the ability of physician-owned hospitals to expand the capacity of their facilities. As discussed below, should the Legislation be repealed in its entirety, this aspect of the Legislation would also be repealed restoring physician ownership of hospitals and expansion right to its position and practice as it existed prior to the Legislation. 41
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The impact of the Legislation on each of our hospitals may vary. Because Legislation provisions are effective at various times over the next several years, we anticipate that many of the provisions in the Legislation may be subject to further revision. Initiatives to repeal the Legislation, in whole or in part, to delay elements of implementation or funding, and to offer amendments or supplements to modify its provisions have been persistent. The ultimate outcomes of legislative attempts to repeal or amend the Legislation and legal challenges to the Legislation are unknown. Legislation has already been enacted that eliminated the individual mandate penalty, effectiveJanuary 1, 2019 , related to the obligation to obtain health insurance that was part of the original Legislation. In addition,Congress previously considered legislation that would, in material part: (i) eliminate the large employer mandate to offer health insurance coverage to full-time employees; (ii) permit insurers to impose a surcharge up to 30 percent on individualswho go uninsured for more than two months and then purchase coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits accordingly to income level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by a state, transition federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would allow such state to define essential health benefits differently from federal standards and that would allow certain commercial health plans to take health status, including pre-existing conditions, into account in setting premiums. In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions.President Biden is expected to undertake executive actions that will strengthen the Legislation and may reverse the policies of the prior administration.The Trump Administration had directed the issuance of final rules (i) enabling the formation of health plans that would be exempt from certain Legislation essential health benefits requirements; (ii) expanding the availability of short-term, limited duration health insurance; (iii) eliminating cost-sharing reduction payments to insurers that would otherwise offset deductibles and other out-of-pocket expenses for health plan enrollees at or below 250 percent of the federal poverty level; (iv) relaxing requirements for state innovation waivers that could reduce enrollment in the individual and small group markets and lead to additional enrollment in short-term, limited duration insurance and association health plans; and (vi) incentivizing the use of health reimbursement arrangements by employers to permit employees to purchase health insurance in the individual market. The uncertainty resulting from these Executive Branch policies led to reduced Exchange enrollment in 2018, 2019 and 2020. To date, the Biden administration has issued executive orders implementing a special enrollment period permitting individuals to enroll in health plans outside of the annual open enrollment period and reexamining policies that may undermine the ACA or the Medicaid program. The ARPA's expansion of subsidies to purchase coverage through an exchange is anticipated to increase exchange enrollment. The recent and on-going COVID-19 pandemic and relatedU.S. National Emergency declaration may significantly increase the number of uninsured patients treated at our facilities extending beyond the most recent CBO published estimates due to increased unemployment and loss of group health plan health insurance coverage. It is also anticipated that these policies may create additional cost and reimbursement pressures on hospitals. It remains unclear what portions of the Legislation may remain, or whether any replacement or alternative programs may be created by any future legislation. Any such future repeal or replacement may have significant impact on the reimbursement for healthcare services generally, and may create reimbursement for services competing with the services offered by our hospitals. Accordingly, there can be no assurance that the adoption of any future federal or state healthcare reform legislation will not have a negative financial impact on our hospitals, including their ability to compete with alternative healthcare services funded by such potential legislation, or for our hospitals to receive payment for services. For additional disclosure related to our revenues including a disaggregation of our consolidated net revenues by major source for each of the periods presented herein, please see Note 12 to the Consolidated Financial Statements-Revenue. Medicare: Medicare is a federal program that provides certain hospital and medical insurance benefits to persons aged 65 and over, some disabled persons and persons with end-stage renal disease. All of our acute care hospitals and many of our behavioral health centers are certified as providers of Medicare services by the appropriate governmental authorities. Amounts received under the Medicare program are generally significantly less than a hospital's customary charges for services provided. Since a substantial portion of our revenues will come from patients under the Medicare program, our ability to operate our business successfully in the future will depend in large measure on our ability to adapt to changes in this program. Under the Medicare program, for inpatient services, our general acute care hospitals receive reimbursement under the inpatient prospective payment system ("IPPS"). Under the IPPS, hospitals are paid a predetermined fixed payment amount for each hospital discharge. The fixed payment amount is based upon each patient's Medicare severity diagnosis related group ("MS-DRG"). Every MS-DRG is assigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. The MS-DRG payment rates are based upon historical national average costs and do not consider the actual costs incurred by a hospital in providing care. This MS-DRG assignment also affects the predetermined capital rate paid with each MS-DRG. The MS-DRG and capital payment rates are adjusted annually by the predetermined geographic adjustment factor for the geographic region in which a particular hospital is located and are weighted based upon a statistically normal distribution of severity. While we generally will not receive payment from Medicare for inpatient services, other than the MS-DRG payment, a hospital may qualify for an "outlier" payment if a particular patient's treatment costs are extraordinarily high and exceed a specified threshold. MS-DRG rates are adjusted by an update factor each federal fiscal year, which begins onOctober 1 . The index used to adjust the MS-DRG rates, known as the "hospital market basket index," gives consideration to the inflation experienced by hospitals 42
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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, 2021, CMS published its IPPS 2022 final payment rule which provides for a 2.7% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates, documenting and coding adjustments, and adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall final increase in IPPS payments is approximately 2.5%. Including DSH payments and certain other adjustments, we estimate our overall increase from the final IPPS 2022 rule (covering the period ofOctober 1, 2021 throughSeptember 30, 2022 ) will approximate 1.5%. This projected impact from the IPPS 2022 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result of the American Taxpayer Relief Act of 2012 ("ATRA"), as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. In September, 2020, CMS published its IPPS 2021 final payment rule which provides for a 2.4% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates, documenting and coding adjustments, and adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall increase in IPPS payments is approximately 1.8%. Including DSH payments and certain other adjustments, we estimate our overall increase from the final IPPS 2021 rule (covering the period ofOctober 1, 2020 throughSeptember 30, 2021 ) will approximate 2.3%. This projected impact from the IPPS 2021 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result of ATRA, as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018. In the final rule, CMS will require hospitals to report certain market-based payment rate information for Medicare Advantage organizations on their Medicare cost report for cost reporting periods ending on or afterJanuary 1, 2021 , to be used in a potential change to the methodology for calculating the IPPS MS-DRG relative weights to reflect relative market-based pricing, beginning in FY 2024. In August, 2019, CMS published its IPPS 2020 final payment rule which provides for a 3.0% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates, documenting and coding adjustments, and adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall increase in IPPS payments is approximately 2.8%. Including DSH payments and certain other adjustments, we estimate our overall increase from the final IPPS 2020 rule (covering the period ofOctober 1, 2019 throughSeptember 30, 2020 ) will approximate 2.1%. This projected impact from the IPPS 2020 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result ATRA, as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. CMS completed its full phase-in to use uncompensated care data from the 2015 Worksheet S-10 hospital cost reports to allocate approximately$8.5 billion in theDSH Uncompensated Care Pool . In June, 2019, theSupreme Court of the United States issued a decision favorable to hospitals impacting prior year Medicare DSH payments (Azar v.Allina Health Services , No. 17-1484 (U.S. Jun. 3, 2019 )). In Allina, the hospitals challenged the Medicare DSH adjustments for federal fiscal year 2012, specifically challenging CMS's decision to include inpatient hospital days attributable to Medicare Part C enrollee patients in the numerator and denominator of the Medicare/SSI fraction used to calculate a hospital's DSH payments. This ruling addresses CMS's attempts to impose the policy espoused in its vacated 2004 rulemaking to a fiscal year in the 2004-2013 time period without using notice-and-comment rulemaking. This decision should require CMS to recalculate hospitals' DSH Medicare/SSI fractions, with Medicare Part C days excluded, for at least federal fiscal year 2012, but likely federal fiscal years 2005 through 2013. In August, 2020, CMS issued a rule that proposed to retroactively negate the effects of the aforementionedSupreme Court decision, which rule has yet to be finalized. Although we can provide no assurance that we will ultimately receive additional funds, we estimate that the favorable impact of this court ruling on certain prior year hospital Medicare DSH payments could range between$18 million to$28 million in the aggregate. The 2011 Act included the imposition of annual spending limits for most federal agencies and programs aimed at reducing budget deficits by$917 billion between 2012 and 2021, according to a report released by theCongressional Budget Office . Among its other provisions, the law established a bipartisan Congressional committee, known asthe Joint Committee , which was responsible for developing recommendations aimed at reducing future federal budget deficits by an additional$1.5 trillion over 10 years.The Joint Committee was unable to reach an agreement by theNovember 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented onMarch 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year. Recent legislation suspended payment reductions throughDecember 31, 2021 , in exchange for extended cuts through 2030. 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 43
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account for certain facility and patient characteristics. The Psych PPS also contains provisions for outlier payments and an adjustment to a psychiatric hospital's base payment if it maintains a full-service emergency department.
In July, 2021, CMS published its Psych PPS final rule for the federal fiscal year 2022. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 2.2% compared to federal fiscal year 2021. This amount includes the effect of the 2.0% net market basket update which reflects the offset of a 0.7% productivity adjustment. In July, 2020, CMS published its Psych PPS final rule for the federal fiscal year 2021. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 2.2% compared to federal fiscal year 2020. This amount includes the effect of the 2.2% market basket update. In July, 2019, CMS published its Psych PPS final rule for the federal fiscal year 2020. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 1.7% compared to federal fiscal year 2019. This amount includes the effect of the 2.9% market basket update less a 0.75% adjustment as required by the ACA and a 0.4% productivity adjustment. CMS's calendar year 2018 final OPPS rule, issued onNovember 13, 2017 , substantially reduced Medicare Part B reimbursement for 340B Program drugs paid to hospitals. BeginningJanuary 1, 2018 , CMS reimbursement for certain separately payable drugs or biologicals that are acquired through the 340B Program by a hospital paid under the OPPS (and not excepted from the payment adjustment policy) is the average sales price of the drug or biological minus 22.5 percent, an effective reduction of 26.89% in payments for 340B program drugs. In December, 2018, theU.S. District Court for the District of Columbia ruled that HHS did not have statutory authority to implement the 2018 Medicare OPPS rate reduction related to hospitals that qualify for drug discounts under the federal 340B Program and granted a permanent injunction against the payment reduction. OnJuly 31, 2020 , theU.S. Court of Appeals for the D.C. Circuit reversed the District Court and held that HHS's decision to lower drug reimbursement rates for 340B hospitals rests on a reasonable interpretation of the Medicare statute. No further legal challenges are available to the plaintiffs and, as a result, we recognized$8 million of revenues during 2020 that were previously reserved in a prior year. OnNovember 2, 2021 , CMS issued its OPPS final rule for 2022. The hospital market basket increase is 2.7% and the productivity adjustment reduction is -0.7% for a net market basket increase of 2.0%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2022 will aggregate to a net increase of 2.4% which includes a 3.0% increase to behavioral health division partial hospitalization rates. In December, 2020, CMS published its OPPS final rule for 2021. The hospital market basket increase is 2.4% and there is no productivity adjustment reduction to the 2021 OPPS market basket. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2021 will aggregate to a net increase of 3.3% which includes a 9.2% increase to behavioral health division partial hospitalization rates. In November, 2019, CMS published its OPPS final rule for 2020. The hospital market basket increase is 3.0%. The Medicare statute requires a productivity adjustment reduction of 0.4% to the 2020 OPPS market basket resulting in a 2020 update to OPPS payment rates by 2.6%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2020 will aggregate to a net increase of 2.7% which includes a 7.7% 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 2020 OPPS payments will result in a 1.9% increase in payment levels for our acute care division, as compared to 2019. For CY 2020, CMS will use the FY 2020 hospital IPPS post-reclassified wage index for urban and rural areas as the wage index for the OPPS to determine the wage adjustments for both the OPPS payment rate and the copayment standardized amount. In November, 2019, CMS finalized its Hospital Price Transparency rule that implements certain requirements under theJune 24, 2019 Presidential Executive Order related to Improving Price and Quality Transparency inAmerican Healthcare to Put Patients First. Under this final rule, effectiveJanuary 1, 2021 , CMS will require: (1) hospitals make public their standard changes (both gross charges and payer-specific negotiated charges) for all items and services online in a machine-readable format, and; (2) hospitals to make public standard charge data for a limited set of "shoppable services" the hospital provides in a form and manner that is more consumer friendly. OnNovember 2, 2021 , CMS released a final rule increasing the monetary penalty that CMS can impose on hospitals that fail to comply with the price transparency requirements. We believe that our hospitals are in full compliance with the applicable federal regulations. Medicaid: Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide benefits to qualifying individuals. Most state Medicaid payments are made under a PPS-like system, or under programs that negotiate payment levels with individual hospitals. Amounts received under the Medicaid program are generally significantly less than a hospital's customary charges for services provided. In addition to revenues received pursuant to the Medicare program, we receive a large portion of our revenues either directly from Medicaid programs or from managed care companies managing Medicaid. All of our acute care hospitals and most of our behavioral health centers are certified as providers of Medicaid services by the appropriate governmental authorities. 44
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We receive revenues from various state and county based programs, including Medicaid in all the states in which we operate (we receive Medicaid revenues in excess of$100 million annually from each ofCalifornia ,Texas ,Nevada ,Washington, D.C. ,Pennsylvania ,Illinois ,Florida andMassachusetts ); CMS-approved Medicaid supplemental programs in certain states includingTexas ,Mississippi ,Illinois ,Oklahoma ,Nevada ,Arkansas ,California, Kentucky andIndiana , and; state Medicaid disproportionate share hospital payments in certain states includingTexas andSouth Carolina . We are therefore particularly sensitive to potential reductions in Medicaid and other state based revenue programs as well as regulatory, economic, environmental and competitive changes in those states. We can provide no assurance that reductions to revenues earned pursuant to these programs, particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations. The Legislation substantially increases the federally and state-funded Medicaid insurance program, and authorizes states to establish federally subsidized non-Medicaid health plans for low-income residents not eligible for Medicaid starting in 2014. However, theSupreme Court has struck down portions of the Legislation requiring states to expand their Medicaid programs in exchange for increased federal funding. Accordingly, many states in which we operate have not expanded Medicaid coverage to individuals at 133% of the federal poverty level. Facilities in states not opting to expand Medicaid coverage under the Legislation may be additionally penalized by corresponding reductions to Medicaid disproportionate share hospital payments beginning in 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. OnNovember 12, 2019 , CMS issued the proposed Medicaid Fiscal Accountability Rule ("MFAR") which CMS believed would strengthen the fiscal integrity of the Medicaid program and help ensure that state supplemental payments and financing arrangements are transparent and value-driven. In January, 2021, CMS issued a formal notice of withdrawal of this proposed rule. In January, 2020, CMS announced a new opportunity to support states with greater flexibility to improve the health of their Medicaid populations. The new 1115 Waiver Block Grant Type Demonstration program, titled Healthy Adult Opportunity ("HAO"), emphasizes the concept of value-based care while granting states extensive flexibility to administer and design their programs within a defined budget. CMS believes this state opportunity will enhance the Medicaid program's integrity through its focus on accountability for results and quality improvement, making the Medicaid program stronger for states and beneficiaries. The Biden administration has signaled its intent to withdraw the HAO demonstration. Accordingly, we are unable to predict whether the HAO demonstration will impact our future results of operations.
Various State Medicaid Supplemental Payment Programs:
We incur health-care related taxes ("Provider Taxes") imposed by states in the
form of a licensing fee, assessment or other mandatory payment which are related
to: (i) healthcare items or services; (ii) the provision of, or the authority to
provide, the health care items or services, or; (iii) the payment for the health
care items or services. Such Provider Taxes are subject to various federal
regulations that limit the scope and amount of the taxes that can be levied by
states in order to secure federal matching funds as part of their respective
state Medicaid programs. As outlined below, we derive a related Medicaid
reimbursement benefit from assessed Provider Taxes in the form of Medicaid
claims based payment increases and/or lump sum Medicaid supplemental payments.
Included in these Provider Tax programs are reimbursements received in connection with the Texas Uncompensated Care/Upper Payment Limit program ("UC/UPL") and Texas Delivery System Reform Incentive Payments program ("DSRIP"). Additional disclosure related to the Texas UC/UPL and DSRIP programs is provided below.
Texas Uncompensated Care/Upper Payment Limit Payments:
Certain of our acute care hospitals located in various counties ofTexas (Grayson ,Hidalgo ,Maverick ,Potter andWebb ) participate in Medicaid supplemental payment Section 1115 Waiver indigent care programs. Section 1115 Waiver Uncompensated Care ("UC") payments replace the former Upper Payment Limit ("UPL") payments. These hospitals also have affiliation agreements with third-party hospitals to provide free hospital and physician care to qualifying indigent residents of these counties. Our hospitals receive both supplemental payments from the Medicaid program and indigent care payments from third-party, affiliated hospitals. The supplemental payments are contingent on the county or hospital district making an Inter-Governmental Transfer ("IGT") to the state Medicaid program while the indigent care payment is contingent on a transfer of funds from the applicable affiliated hospitals. However, the county or hospital district is prohibited from entering into an agreement to condition any IGT on the amount of any private hospital's indigent care obligation. OnDecember 21, 2017 , CMS approved the 1115 Waiver for the periodJanuary 1, 2018 toSeptember 30, 2022 . The Waiver continued to include UC and DSRIP payment pools with modifications and new state specific reporting deadlines that if not met by THHSC will result in material decreases in the size of the UC and DSRIP pools. For UC during the initial two years of this renewal, the UC program will remain relatively the same in size and allocation methodology. For year three of this waiver renewal, FFY 2020, and through FFY 2022, the size and distribution of the UC pool will be determined based on charity care costs reported to HHSC in accordance with Medicare cost report Worksheet S-10 principles. InSeptember 2019 , CMS approved the annual UC pool size in the amount of$3.9 billion for demonstration years ("DYs") 9, 10 and 11 (October 1, 2019 toSeptember 30, 2022 ). 45
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OnApril 16, 2021 , CMS rescinded itsJanuary 15, 2021 , 1115 Waiver ten year expedited renewal approval that was effective throughSeptember 30, 2030 . In July, 2021, HHSC submitted another 1115 Waiver renewal application to CMS which reflects the same terms and conditions agreed to by CMS onJanuary 15, 2021 , in order to receive an extension beyondSeptember 30, 2022 . EffectiveApril 1, 2018 , certain of our acute care hospitals located inTexas began to receive Medicaid managed care rate enhancements under the Uniform Hospital Rate Increase Program ("UHRIP"). The non-federal share component of these UHRIP rate enhancements are financed by Provider Taxes. TheTexas 1115 Waiver rules require UHRIP rate enhancements be considered in the Texas UC payment methodology which results in a reduction to our UC payments. The UC amounts reported in the State Medicaid Supplemental Payment Program Table below reflect the impact of this new UHRIP program. InJuly 2020 , THHSC announced CMS approval of an increase to UHRIP pool for the state's 2021 fiscal year to$2.7 billion from its current funding level of$1.6 billion . We estimate that this UHRIP pool increase will not have a material impact on the Company financial results due to CMS approved pool allocation methodology for the SFY 2021 program. OnMarch 26, 2021 , HHSC published a final rule that will apply to program periods on or afterSeptember 1, 2021 , and UHRIP will be re-named the Comprehensive Hospital Increase Reimbursement Program ("CHIRP"). CHIRP will be comprised of a UHRIP component and an Average Commercial Incentive Award ("ACIA") component. HHSC has proposed a pool size of$5.0 billion subject to CMS approval. The Company is not able to estimate the financial impact of the program change. OnJanuary 11, 2021 , HHSC announced that CMS approved the pre-print modification that HHSC submitted for UHRIP periodMarch 1, 2021 throughAugust 31, 2021 . CMS approved rate changes that will now increase rates for private Institutions of Mental Disease ("IMD") for services provided to patients under age 21 or patients 65 years of age or older. The impact of this program is included in the Medicaid Supplemental Payment Programs table below. OnSeptember 24, 2021 , HHSC finalized New Fee-for-Service Supplemental Payment Program: Hospital Augmented Reimbursement Program ("HARP") to be effectiveOctober 1, 2021 . The HARP program continues the financial transition for providerswho have historically participated in the Delivery System Reform Incentive Payment program described below. The program will provide additional funding to hospitals to help offset the cost hospitals incur while providing Medicaid services. HHSC financial model released concurrent with the publication of the final rule indicates net potential incremental Medicaid reimbursements to us of approximately$15 million annually, without consideration of any potential adverse impact on future Medicaid DSH or Medicaid UC payments. This program is subject to CMS approval.
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. During the second quarter of 2021, we recorded$13 million in incremental DSRIP revenues in connection with notification that we received from the THHSC that our DSRIP participant hospitals had met additional DSRIP project metrics. For FFY 2022, we will no longer receive DSRIP funds due to the elimination of this funding source by CMS in the Waiver renewals except for certain carryover DSRIP projects for which achievement of the required metrics will not be known until state fiscal year 2022. In March, 2020, HHSC submitted a DSRIP Transition Plan to CMS as required by the 1115 Waiver Special Terms and Conditions #37 that outlines a transition from the current DSRIP program to a Value-Based Purchasing ("VBP") type payment model. As noted above, HHSC finalized a rule to make changes to existing UHRIP program. This rule change reflects HHSC's effort to comply with federal regulations that require directed-payment programs to advance goals included in the state's Medicaid managed care quality strategy and to align with the ongoing efforts to transition from the Delivery System Reform Incentive Payment program. We are unable to estimate the financial impact of this payment change.
Summary of Amounts Related To The Above-Mentioned Various State Medicaid Supplemental Payment Programs:
The following table summarizes the revenues, Provider Taxes and net benefit related to each of the above-mentioned Medicaid supplemental programs for the three and nine-month periods endedSeptember 30, 2021 and 2020. The Provider Taxes are recorded in other operating expenses on the Condensed Consolidated Statements of Income as included herein. 46
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(amounts in millions)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Texas UC/UPL:
Revenues $ 40 $ 29 $ 107 $ 85
Provider Taxes (12 ) (9 ) (31 ) (25 )
Net benefit $ 28 $ 20 $ 76 $ 60
Texas DSRIP:
Revenues $ 0 $ 0 $ 44 $ 29
Provider Taxes 0 0 (14 ) (9 )
Net benefit $ 0 $ 0 $ 30 $ 20
Various other state programs:
Revenues $ 83 $ 107 $ 317 $ 249
Provider Taxes (36 ) (39 ) (111 ) (101 )
Net benefit $ 47 $ 68 $ 206 $ 148
Total all Provider Tax programs:
Revenues $ 123 $ 136 $ 468 $ 363
Provider Taxes (48 ) (48 ) (156 ) (135 )
Net benefit $ 75 $ 88 $ 312 $ 228
We estimate that our aggregate net benefit from the Texas and various other
state Medicaid supplemental payment programs will approximate $389 million (net
of Provider Taxes of $207 million ) during the year ending December 31, 2021 .
This amount includes approximately $62 million related to the Kentucky Hospital
Rate Increase Program, as described below. These amounts are based upon various
terms and conditions that are out of our control including, but not limited to,
the states'/CMS's continued approval of the programs and the applicable hospital
district or county making IGTs consistent with 2020 levels. Future changes to
these terms and conditions could materially reduce our net benefit derived from
the programs which could have a material adverse impact on our future
consolidated results of operations. In addition, Provider Taxes are governed by
both federal and state laws and are subject to future legislative changes that,
if reduced from current rates in several states, could have a material adverse
impact on our future consolidated results of operations. As described below in
2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related
Legislation, a 6.2% increase to the Medicaid Federal Matching Assistance
Percentage ("FMAP") is included in the Families First Coronavirus Response Act.
The impact of the enhanced FMAP Medicaid supplemental and DSH payments are
reflected in our results for year ended December 31, 2020 and for the three and
nine-month periods ended September 30, 2021 . We are unable to estimate the
prospective financial impact of this provision at this time as our financial
impact is contingent on unknown state action during future eligible federal
fiscal quarters.
Hospitals that have an unusually large number of low-income patients (i.e., those with a Medicaid utilization rate of at least one standard deviation above the mean Medicaid utilization, or having a low income patient utilization rate exceeding 25%) are eligible to receive a DSH adjustment.Congress established a national limit on DSH adjustments. Although this legislation and the resulting state broad-based provider taxes have affected the payments we receive under the Medicaid program, to date the net impact has not been materially adverse. Upon meeting certain conditions and serving a disproportionately high share ofTexas' andSouth Carolina's low income patients, five of our facilities located inTexas and one facility located inSouth Carolina received additional reimbursement from each state's DSH fund. TheSouth Carolina and Texas DSH programs were renewed for each state's 2022 DSH fiscal year (covering the period ofOctober 1, 2021 throughSeptember 30, 2022 ). In connection with these DSH programs, included in our financial results was an aggregate of approximately$12 million and$10 million during the three-month periods endedSeptember 30, 2021 and 2020, respectively, and$35 million during each of the nine-month periods endedSeptember 30, 2021 and 2020. We expect the aggregate reimbursements to our hospitals pursuant to theTexas andSouth Carolina 2021 fiscal year programs to be approximately$48 million . 47
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The Legislation and subsequent federal legislation provides for a significant reduction in Medicaid disproportionate share payments beginning in federal fiscal year 2024 (see above in Sources of Revenues and Health Care Reform-Medicaid Revisions for additional disclosure related to the delay of these DSH reductions). HHS is to determine the amount of Medicaid DSH payment cuts imposed on each state based on a defined methodology. As Medicaid DSH payments to states will be cut, consequently, payments to Medicaid-participating providers, including our hospitals inTexas andSouth Carolina , will be reduced in the coming years. Based on the CMS final rule published in September, 2019, beginning in fiscal year 2024 (as amended by the CARES Act and the CAA), annual Medicaid DSH payments inSouth Carolina andTexas could be reduced by approximately 74% and 44%, respectively, from 2020 DSH payment levels. Our behavioral health care facilities inTexas have been receiving Medicaid DSH payments since FFY 2016. As with all Medicaid DSH payments, hospitals are subject to state audits that typically occur up to three years after their receipt. DSH payments are subject to a federal Hospital Specific Limit ("HSL") and are not fully known until the DSH audit results are concluded. In general, freestanding psychiatric hospitals tend to provide significantly less charity care than acute care hospitals and therefore are at more risk for retroactive recoupment of prior year DSH payments in excess of their respective HSL. In light of the retroactive HSL audit risk for freestanding psychiatric hospitals, we have established DSH reserves for our facilities that have been receiving funds since FFY 2016. These DSH reserves are also impacted by the resolution of federal DSH litigation related toChildren's Hospital Association of Texas v. Azar ("CHAT"), No. 17-cv-844 (D.D.C.March 2, 2018 ), appeal docketed, No. 18-5135 (D.C. Cir.May 9, 2018 ) where the calculation of HSL was being challenged. In August, 2019,DC Circuit Court of Appeals issued a unanimous decision in CHAT and reversed the judgment of the district court in favor of CMS and ordered that CMS's "2017 Rule" (regarding Medicaid DSH Payments-Treatment of Third Party Payers in Calculating Uncompensated Care Costs) be reinstated. CMS has not issued any additional guidance post the ruling. InApril 2020 , the plaintiffs in the case have petitioned theSupreme Court of the United States to hear their case. Additionally, there have been separate legal challenges on this same issue in the Fifth and Eight Circuits. OnNovember 4, 2019 , theUnited States Court of Appeals for the Eighth Circuit issued an opinion upholding the 2017 Rule. Missouri Hosp. Ass'n v. Azar, No. 18-1778 (8th Cir.Nov. 4, 2019 ) (i.e. reversing a district court order enjoining the 2017 rule). OnApril 20, 2020 , theUnited States Court of Appeals of the Fifth Circuit issued a decision also upholding the 2017 Rule.Baptist Memorial Hospital v. Azar, No. 18-60592 (5th Cir.April 20, 2020 ). In light of these court decisions, we continue to maintain reserves in the financial statements for cumulative Medicaid DSH and UC reimbursements related to our behavioral health hospitals located inTexas that amounted to$41 million and$37 million as ofSeptember 30, 2021 and 2020, respectively.
Nevada SPA:
InNevada , CMS approved a state plan amendment ("SPA") in August, 2014 that implemented a hospital supplemental payment program retroactive toJanuary 1, 2014 . This SPA has been approved for additional state fiscal years including the 2021 fiscal year covering the period ofJuly 1, 2020 throughJune 30, 2021 . CMS approval for the 2022 fiscal year, which is still pending, is expected to occur. In connection with this program, included in our financial results was approximately$5 million and$6 million during the three-month periods endedSeptember 30, 2021 and 2020, respectively, and$16 million and$20 million during the nine-month periods endedSeptember 30, 2021 and 2020, respectively. We estimate that our reimbursements pursuant to this program will approximate$20 million during the year endedDecember 31, 2021 .
California SPA:
InCalifornia , CMS issued formal approval of the 2017-19 Hospital Fee Program in December, 2017 retroactive toJanuary 1, 2017 throughSeptember 30, 2019 . In September, 2019, the state submitted a request to renew the Hospital Fee Program for the periodJuly 1, 2019 toDecember 31, 2021 . OnFebruary 25, 2020 , CMS approved this renewed program. These approvals include the Medicaid inpatient and outpatient fee-for-service supplemental payments and the overall provider tax structure but did not yet include the approval of the managed care rate setting payment component for certain rate periods (see table below). The managed care payment component consists of two categories of payments, "pass-through" payments and "directed" payments. The pass-through payments are similar in nature to the prior Hospital Fee Program payment method whereas the directed payment method will be based on actual concurrent hospital Medicaid managed care in-network patient volume. 48
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California Hospital Fee Program CMS Approval Status:
Hospital Fee Program CMS Methodology CMS Rate Setting Approval
Component Approval Status Status
Fee For Service Approved through Approved through December
Payment December 31, 2021 31, 2021; Paid through
March 31, 2021
Managed Approved through Approved through June 30,
Care-Pass-Through December 31, 2021 2017; Paid in advance of
Payment approval through December
31, 2020
Managed Care-Directed Approved through Approved through June 30,
Payment December 31, 2020 2017; Paid in advance of
approval through December
31, 2019
In connection with the existing program, included in our financial results was
approximately $11 million and $35 million for the three-month periods ending
September 30, 2021 and 2020, respectively, and $35 million and $49 million
during the nine-month periods ended September 30, 2021 and 2020, respectively.
We estimate that our reimbursements pursuant to this program will approximate
$46 million during the year ended December 31, 2021 . The aggregate impact of the
California supplemental payment program, as outlined above, is included in the
above State Medicaid Supplemental Payment Program table.
In April, 2020, the California Department of Health Care Services ("DHCS")
notified hospital providers that participate in the Medicaid managed care
directed payment program that DHCS would recalculate directed payments for the
period of July 1, 2017 through September 30, 2018 ("SFY 2018") to remedy an
identified data error. In August, 2020, as a follow-up to that notification,
DHCS issued its corrected directed payment calculations. The updated calculation
resulted in a favorable adjustment to the above program year and also resulted
in increased expected supplemental payment amount for program years subsequent
to the recalculated SFY 2018 rate period. The California Hospital Fee amounts
noted above include our portion of the state corrected data.
Kentucky Hospital Rate Increase Program ("HRIP"):
As previously disclosed in early 2021, CMS approved the Kentucky Medicaid
Managed Care Hospital Rate Increase Program ("HRIP") for SFY 2021, which covered
the period of July 1, 2020 through June 30, 2021 . This program change increased
our reimbursement for SFY 2021 by an aggregate of approximately $62 million , of
which $55 million and $7 million were recorded by us during the second and third
quarter of 2021, respectively.
Programs such as HRIP require an annual state submission and approval by CMS. In
May, 2021, Kentucky submitted a request to CMS in order to continue the HRIP
program for SFY 2022 with a similar payment methodology and payment level as the
SFY 2021 program. Although we believe the CMS approval process is in progress,
we are unable to predict if CMS will ultimately approve the HRIP for SFY 2022,
and if approved, if the rates will be generally comparable to the SFY 2021 HRIP
rates.
Florida Medicaid Managed Care Directed Payment Program ("DPP"):
During the fourth quarter of 2021, we expect to record approximately$25 million of increased reimbursement as a result of recent CMS approval of the Medicaid managed care directed payment program for the 2021 rate period (October 1, 2020 toSeptember 30, 2021 ). Various DPP related legislative and regulatory approvals result in the retroactive payment of the increased reimbursement after the applicable rate year has ended. The payment methodology and amount of the 2022 DPP (covering the period ofOctober 1, 2021 toSeptember 30, 2022 ) is expected to be comparable to the 2021 DPP. As a result, if CMS and other legislative and regulatory approvals occur in connection with the 2022 program, we may be entitled to increased reimbursement during 2022 in an amount comparable to the$25 million expected for the 2021 DPP.
Risk Factors Related To State Supplemental Medicaid Payments:
As outlined above, we receive substantial reimbursement from multiple states in connection with various supplemental Medicaid payment programs. The states include, but are not limited to,Texas ,Mississippi ,Illinois ,Nevada ,Arkansas ,California andIndiana . Failure to renew these programs beyond their scheduled termination dates, failure of the public hospitals to provide the necessary IGTs for the states' share of the DSH programs, failure of our hospitals that currently receive supplemental Medicaid revenues to qualify for future funds under these programs, or reductions in reimbursements, could have a material adverse effect on our future results of operations. In April, 2016, CMS published its final Medicaid Managed Care Rule which explicitly permits but phases out the use of pass-through payments (including supplemental payments) by Medicaid Managed Care Organizations ("MCO") to hospitals over ten years but allows for a transition of the pass-through payments into value-based payment structures, delivery system reform initiatives or payments tied to services under a MCO contract. Since we are unable to determine the financial impact of this aspect of the final rule, we can provide no assurance that the final rule will not have a material adverse effect on our future results of operations. In 49
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November, 2020, CMS issued a final rule permitting pass-through supplemental provider payments during a time-limited period when states transition populations or services from fee-for-service Medicaid to managed care.
HITECH Act: InJuly 2010 , theDepartment 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 Medicare and Medicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. State Medicaid program participation in this federally funded incentive program is voluntary but all of the states in which our eligible hospitals operate have chosen to participate. Our acute care hospitals qualified for these EHR incentive payments upon implementation of the EHR application assuming they meet the "meaningful use" criteria. The government's ultimate goal is to promote more effective (quality) and efficient healthcare delivery through the use of technology to reduce the total cost of healthcare for all Americans and utilizing the cost savings to expand access to the healthcare system. All of our acute care hospitals have met the applicable meaningful use criteria. However, under the HITECH Act, hospitals must continue to meet the applicable meaningful use criteria in each fiscal year or they will be subject to a market basket update reduction in a subsequent fiscal year. Failure of our acute care hospitals to continue to meet the applicable meaningful use criteria would have an adverse effect on our future net revenues and results of operations. In the 2019 IPPS final rule, CMS overhauled the Medicare and Medicaid EHR Incentive Program to focus on interoperability, improve flexibility, relieve burden and place emphasis on measures that require the electronic exchange of health information between providers and patients. We can provide no assurance that the changes will not have a material adverse effect on our future results of operations. Managed Care: A significant portion of our net patient revenues are generated from managed care companies, which include health maintenance organizations, preferred provider organizations and managed Medicare (referred to as Medicare Part C or Medicare Advantage) and Medicaid programs. In general, we expect the percentage of our business from managed care programs to continue to grow. The consequent growth in managed care networks and the resulting impact of these networks on the operating results of our facilities vary among the markets in which we operate. Typically, we receive lower payments per patient from managed care payers than we do from traditional indemnity insurers, however, during the past few years we have secured price increases from many of our commercial payers including managed care companies.Commercial Insurance : Our hospitals also provide services to individuals covered by private health care insurance. Private insurance carriers typically make direct payments to hospitals or, in some cases, reimburse their policy holders, based upon the particular hospital's established charges and the particular coverage provided in the insurance policy. Private insurance reimbursement varies among payers and states and is generally based on contracts negotiated between the hospital and the payer. Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment mechanisms, including predetermined payment or DRG-based payment systems, for more inpatient and outpatient services. To the extent that such efforts are successful and reduce the insurers' reimbursement to hospitals and the costs of providing services to their beneficiaries, such reduced levels of reimbursement may have a negative impact on the operating results of our hospitals. Surprise Billing Interim Final Rule: OnSeptember 30, 2021 , theDepartment of Health and Human Services ("HHS"), theDepartment of Labor , and theDepartment of the Treasury (collectively, the Departments), along with theOffice of Personnel Management ("OPM"), released an interim final rule with comment period, entitled "Requirements Related to Surprise Billing; Part II." This rule is related to Title I (the No Surprises Act) of Division BB of the Consolidated Appropriations Act, 2021, and establishes new protections from surprise billing and excessive cost sharing for consumers receiving health care items/services. It implements additional protections against surprise medical bills under the No Surprises Act, including provisions related to the independent dispute resolution process, good faith estimates for uninsured (or self-pay) individuals, the patient-provider dispute resolution process, and expanded rights to external review. We do not expect this interim final rule to have a material impact on our results of operations. Other Sources: Our hospitals provide services to individuals that do not have any form of health care coverage. Such patients are evaluated, at the time of service or shortly thereafter, for their ability to pay based upon federal and state poverty guidelines, qualifications for Medicaid or other state assistance programs, as well as our local hospitals' indigent and charity care policy. Patients without health care coveragewho do not qualify for Medicaid or indigent care write-offs are offered substantial discounts in an effort to settle their outstanding account balances. Health Care Reform: Listed below are the Medicare, Medicaid and other health care industry changes which have been, or are scheduled to be, implemented as a result of the Legislation.
Implemented Medicare Reductions and Reforms:
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• The Legislation reduced the market basket update for inpatient and outpatient
hospitals and inpatient behavioral health facilities by 0.25% in each of 2010 and
2011, by 0.10% in each of 2012 and 2013, 0.30% in 2014, 0.20% in each of 2015 and
2016 and 0.75% in each of 2017, 2018 and 2019.
• The Legislation implemented certain reforms to Medicare Advantage payments,
effective in 2011.
• A Medicare shared savings program, effective in 2012.
• A hospital readmissions reduction program, effective in 2012.
• A value-based purchasing program for hospitals, effective in 2012.
• A national pilot program on payment bundling, effective in 2013.• Reduction to Medicare DSH payments, effective in 2014, as discussed above.
Medicaid Revisions:
• Expanded Medicaid eligibility and related special federal payments,
effective in 2014.
• The Legislation (as amended by subsequent federal legislation) requires annual
aggregate reductions in federal DSH funding from federal fiscal year ("FFY")
2024 through FFY 2027. Medicaid DSH reductions have been delayed several times.
Commencing in federal fiscal year 2024, and continuing through 2027, DSH
payments will be reduced by
Health Insurance Revisions:
• Large employer insurance reforms, effective in 2015.
• Individual insurance mandate and related federal subsidies, effective in 2014.
As noted above in Health Care Reform, the Tax Cuts and Jobs Act enacted into
law in December, 2017 eliminated the individual insurance federal mandate
penalty beginning
• Federally mandated insurance coverage reforms, effective in 2010 and forward.
The Legislation seeks to increase competition among private health insurers by providing for transparent federal and state insurance exchanges. The Legislation also prohibits private insurers from adjusting insurance premiums based on health status, gender, or other specified factors. We cannot provide assurance that these provisions will not adversely affect the ability of private insurers to pay for services provided to insured patients, or that these changes will not have a negative material impact on our results of operations going forward.
Value-Based Purchasing:
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not reimburse hospitals for certain preventable adverse events. The Legislation required HHS to implement a value-based purchasing program for inpatient hospital services which became effective onOctober 1, 2012 . The Legislation requires HHS to reduce inpatient hospital payments for all discharges by 2% in FFY 2017 and subsequent years. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions. As part of the FFY 2022 IPPS final rule described above, and as a result of the on-going COVID-19 pandemic, CMS has implemented a budget neutral payment policy to fully offset the 2% VBP withhold during FFY 2022.
Hospital Acquired Conditions:
The Legislation prohibits the use of federal funds under the Medicaid program to
reimburse providers for medical assistance provided to treat hospital acquired
conditions ("HAC"). Beginning in FFY 2015, hospitals that fall into the top 25%
of national risk-adjusted HAC rates for all hospitals in the previous year will
receive a 1% reduction in their total Medicare payments.
Readmission Reduction Program:
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In the Legislation,Congress also mandated implementation of the hospital readmission reduction program ("HRRP"). Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard. The HRRP currently assesses penalties on hospitals having excess readmission rates for heart failure, myocardial infarction, pneumonia, acute exacerbation of chronic obstructive pulmonary disease (COPD) and elective total hip arthroplasty (THA) and/or total knee arthroplasty (TKA), excluding planned readmissions, when compared to expected rates. In the fiscal year 2015 IPPS final rule, CMS added readmissions for coronary artery bypass graft (CABG) surgical procedures beginning in fiscal year 2017. To account for excess readmissions, an applicable hospital's base operating DRG payment amount is adjusted for each discharge occurring during the fiscal year. Readmissions payment adjustment factors can be no more than a 3 percent reduction.
Accountable Care Organizations:
The Legislation requires HHS to establish a Medicare Shared Savings Program that
promotes accountability and coordination of care through the creation of
accountable care organizations ("ACOs"). The ACO program allows providers
(including hospitals), physicians and other designated professionals and
suppliers to voluntarily work together to invest in infrastructure and redesign
delivery processes to achieve high quality and efficient delivery of services.
The program is intended to produce savings as a result of improved quality and
operational efficiency. ACOs that achieve quality performance standards
established by HHS will be eligible to share in a portion of the amounts saved
by the Medicare program. CMS is also developing and implementing more advanced
ACO payment models, 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. On April 30, 2020 ,
CMS issued an interim final rule with comment in response to the COVID-19
national emergency permitting ACOs with current agreement periods expiring on
December 31, 2020 the option to extend their existing agreement period by one
year, and permitting certain ACOs to retain their participation level through
2021. It remains unclear to what extent providers will pursue federal ACO status
or whether the required investment would be warranted by increased payment.
Bundled Payments for Care Improvement Advanced:
The Center for Medicare & Medicaid Innovation ("CMMI") implemented a new, second generation voluntary episode payment model, Bundled Payments for Care Improvement Advanced ("BPCI-Advanced" or the "Program"), with the first performance period beginningOctober 1, 2018 . BPCI-Advanced is designed to test a new iteration of bundled payments with an aim to align incentives among participating health care providers to reduce expenditures and improve quality of care for traditional Medicare beneficiaries. During the fourth quarter of 2020, CMS restructured the FY2021 to FY2023 program and required participants to select from eight Clinical Episode Service Line Groups instead of individual clinical episodes. CMS also announced that the now voluntary program would become mandatory in 2024.
For our hospitals that participated in the program, the CMS BPCI-A
reconciliation for the period
The ultimate success and financial impact of the BPCI-Advanced program is contingent on multiple variables so we are unable to estimate the future 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.
2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation
In response to the growing threat of COVID-19, onMarch 13, 2020 a national emergency was declared. The declaration empowered the HHS Secretary to waive certain Medicare, Medicaid andChildren's Health Insurance Program ("CHIP") program requirements and Medicare conditions of participation under Section 1135 of the Social Security Act. Having been granted this authority by HHS, CMS issued a broad range of blanket waivers, which eased certain requirements for impacted providers, including:
• Waivers and Flexibilities for Hospitals and other Healthcare Facilities
including those for physical environment requirements and certain Emergency
Medical Treatment & Labor Act provisions
• Provider Enrollment Flexibilities
• Flexibility and Relief for State Medicaid Programs including those under
section 1135 Waivers
• Suspension of Certain Enforcement Activities
In addition to the national emergency declaration,
Some of the financial support included in the various legislative actions include:
• Medicaid FMAP Enhancement
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• The FMAP was increased by 6.2% retroactive to the federal fiscal
quarter beginning January 1, 2020 and each subsequent federal fiscal
quarter for all states and U.S. territories during the declared public
health emergency, in accordance with specified conditions.
• Public Health Emergency Declaration
• The HHS Secretary renewed the public health emergency ("PHE") effective
October 18, 2021 for ninety (90) days. As a result, states would be
eligible for the enhanced FMAP through the end of federal fiscal
quarter ending March 31, 2022 should the PHE not be rescinded by the
Secretary before the end of the ninety day period.
• Creation of a
("PHSSEF")
• Makes grants available to hospitals and other healthcare providers to
cover unreimbursed healthcare related expenses or lost revenues
attributable to the public health emergency resulting from the
coronavirus.
• During 2021, we received approximately
from the federal government as provided for by the CARES Act. As
previously disclosed, we returned these funds to HHS during the second
quarter of 2021. Since our intent was to return these funds, our
results of operations for during the three and nine-month periods ended
September 30, 2021 include no impact from the receipt of the
funds.
Included in our results of operations for the three and nine-month
periods ended September 30, 2021 was approximately $3 million and $16
million , respectively, of revenues recognized in connection with funds
received from various state and local governmental stimulus grant
programs.
• During the year ended
million of funds from various governmental stimulus programs, most
notably the PHSSEF as provided for by the CARES Act. Included in our
results of operations for the year ended December 31, 2020 was
approximately $413 million of revenues recognized in connection with
funds received from these federal, state and local governmental
stimulus programs. Our results of operations for the three-month period
ended September 30, 2020 included a reversal of approximately $5
million of previously recognized revenues in connection with these
governmental stimulus programs; and our results of operations for the
nine-month period ended September 30, 2020 included
approximately
million of revenues recorded in connection with these governmental
stimulus programs.
• All PHSSEF receipts are pursuant to meeting the applicable the terms and conditions of
the various distribution programs as of September 30, 2021 . The Consolidated
Appropriations Act, 2021 (H.R. 133) enacted on December 27 , 2020 includes language that
provides specific instructions on: (1) the redistribution of PHSSEF grant payments by a
parent company among its subsidiaries, and; (2) the calculation of lost revenue in a
PHSSEF grant entitlement determination. The HHS terms and conditions for all grant
recipients and specific fund distributions are located at
https://www.hhs.gov/coronavirus/cares-act-provider-relief-fund/for-providers/index.html
• Reimburse hospitals at Medicare rates for uncompensated COVID-19 care for
the uninsured
• Our operating results for the three and nine-month periods ended
September 30, 2021 included$11 million and$42 million ,
respectively,
of revenues in connection with this program. During the year ended
December 31, 2020 , we recorded $29 million in connection with this
program, approximately $9 million and $11 million of which were
included in our operating results for the three and nine-month periods
ended September 30, 2020 , respectively. Revenue for the eligible
patient encounters is recorded in the period in which theencounter is
deemed eligible for this program net of any normal accounting reserves.
• Medicare Sequestration Relief
• Suspension of the 2% Medicare sequestration offset for Medicare
services provided from May 1, 2020 through December 31, 2021 by various
legislative extensions.
• We estimate that this provision had a favorable impact of approximately
$11 million and$34 million during the three and nine-month
periods
ended September 30, 2021 , respectively, and will have a favorable
impact of approximately $11 million over the remaining three months of
2021. We estimate that this provision had a favorable impact of $30
million during the year ended December 31, 2020 , approximately $11
million and $19 million of which was included in our results of
operations during the three and nine-month periods ended
2020, respectively.
• Medicare add-on for inpatient hospital COVID-19 patients
• Increases the payment that would otherwise be made to a hospital for
treating a Medicare patient admitted with COVID-19 by twenty percent
(20%) for the duration of the COVID-19 public health emergency.
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• For the three and nine-month periods ended September 30, 2021 , we
estimate that additional payments under this provision were
approximately $8 million and $27 million , respectively. For the year
ended December 31, 2020 , we estimate that additional payments under
this provision were approximately $32 million , approximately $13
million and $18 million of which were included in our results of
operations during the three and nine-month periods ended
2020, respectively. These payments offset the increased expenses
associated with the treatment of Medicare COVID-19 patients.
• Expansion of the Medicare Accelerated and Advance Payment Program ("MAAPP")
• In March, 2021, we fully repaid the $695 million of Medicare
Accelerated payments received during 2020.
In addition to statutory and regulatory changes to the Medicare program and each
of the state Medicaid programs, our operations and reimbursement may be affected
by administrative rulings, new or novel interpretations and determinations of
existing laws and regulations, post-payment audits, requirements for utilization
review and new governmental funding restrictions, all of which may materially
increase or decrease program payments as well as affect the cost of providing
services and the timing of payments to our facilities. The final determination
of amounts we receive under the Medicare and Medicaid programs often takes many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical reimbursement provisions. We
believe that we have made adequate provisions for such potential adjustments.
Nevertheless, until final adjustments are made, certain issues remain unresolved
and previously determined allowances could become either inadequate or more than
ultimately required.
Finally, we expect continued third-party efforts to aggressively manage reimbursement levels and cost controls. Reductions in reimbursement amounts received from third-party payers could have a material adverse effect on our financial position and our results.
Other Operating Results
Interest Expense:
As reflected on the schedule below, interest expense was
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Revolving credit & demand notes (a.) $ 502 $ 510 $ 1,502 $ 1,737
$700 million , 4.75% Senior Notes due
2022, net (b.) - 7,792 - 23,932
$400 million , 5.00% Senior Notes due 2026
(c.) 4,000 5,000 14,000 15,000
$800 million , 2.65% Senior Notes due 2030
(d.) 5,356 532 16,113 532
$700 million , 1.65% Senior Notes due 2026
(e.) 1,205 - 1,205 -
$500 million , 2.65% Senior Notes due 2032
(f.) 1,376 - 1,376 -
Tranche A term loan facility (a.) 6,460 7,584 20,576 31,023
Tranche B term loan facility (a.) 1,352 2,410 5,941 9,511
Accounts receivable securitization
program (g.) 10 406 777 3,032
Subtotal-revolving credit, demand notes,
Senior Notes,
term loan facilities and accounts
receivable
securitization program 20,261 24,234 61,490 84,767
Amortization of financing fees 1,087 1,305 3,205 3,865
Other combined interest expense 1,322 580 4,197 1,685
Capitalized interest on major projects (1,305 ) (1,024 ) (2,957 ) (3,051 )
Interest income (166 ) (520 ) (1,480 ) (867 )
Interest expense, net $ 21,199 $ 24,575 $ 64,455 $ 86,399
(a.) In August, 2021, we entered into a seventh amendment to our credit
agreement dated
amendment and restatement of the previously existing credit facility. In
September, 2021, we entered into an eight amendment to our credit
agreement which modified the definition of "Adjusted LIBO Rate". The
seventh amendment, provided for, among other things, the following: (i) a
to mature in August, 2026, representing an increase of
the
that is scheduled to mature in August, 2026, resulting in a reduction of
previous tranche A term loan facility, and; (iii) repayment of
approximately $488 million of
54
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borrowings outstanding under the previous tranche B term loan facility. The
term loan facilities in connection with the seventh amendment (
and
proceeds generated from the August, 2021 issuance of the
1.65% Senior Notes due in 2026, and the $500 million , 2.65%, Senior Notes
due in 2032.
(b.) In September, 2020, we redeemed the entire $700 million aggregate
principal amount of our previously outstanding 4.75% Senior Secured Notes
that were scheduled to mature in 2022.
(c.) In September, 2021, we redeemed the entire $400 million aggregateprincipal amount of our previously outstanding 5.00% Senior Secured Notes
that were scheduled to mature in 2026 ("2026 Notes") at a cash redemption
price equal to the sum of: (i) 102.50% of the aggregate principal amount
of the 2026 Notes redeemed, and; (ii) accrued and unpaid interest on the2026 Notes to the redemption date. This redemption was funded utilizing a
portion of the proceeds generated from the August, 2021 issuance of the
Senior Notes due in 2032, as discussed in (e.) and (f.) below.
(d.) In September, 2020, we completed the offering of
principal amount of 2.65% Senior Notes due in 2030.
(e.) In August, 2021, we completed the offering of
principal amount of 1.65% Senior Notes due in 2026.
(f.) In August, 2021, we completed the offering of
principal amount of 2.65% Senior Notes due in 2032.
(g.) Our accounts receivable securitization program was amended in April, 2021
to reduce the borrowing commitment to
previously) and to extend the maturity date to
no outstanding borrowings as of September 30, 2021 .
Interest expense decreased approximately $3 million during the three-month
period ended September 30, 2021 , as compared to the comparable quarter of 2020,
due primarily to: (i) a net $4 million decrease in aggregate interest expense on
our revolving credit, demand notes, senior notes, term loan facilities and
accounts receivable securitization program resulting from a decrease in our
aggregate average cost of borrowings pursuant to these facilities (2.13% during
the third quarter of 2021 as compared to 2.67% in the comparable quarter of
2020), offset by an increase in the aggregate average outstanding borrowings
($3.70 billion during the third quarter of 2021 as compared to $3.59 billion
during the comparable quarter of 2020), and; (ii) $1 million of other combined
net increases in interest expense.
Interest expense decreased $22 million during the nine-month period ended
September 30, 2021 as compared to the comparable prior year period of 2020,
primarily due to: (i) a net $23 million decrease in aggregate interest expense
on our revolving credit, demand notes, senior notes, term loan facilities and
accounts receivable securitization program resulting from a decrease in our
aggregate average cost of borrowings pursuant to these facilities (2.19% during
the first nine months of 2021 as compared to 3.06% during the comparable period
of 2020), as well as a slight increase in the aggregate average outstanding
borrowings ($3.69 billion during the nine months ended September 30, 2021 as
compared to $3.67 billion during the comparable 2020 period).
Costs Related to Early Extinguishment of Debt:
In connection with the refinancing transaction completed during the third quarter of 2021, our results of operations for the three and nine-months endedSeptember 30, 2021 include a pre-tax charge of approximately$17 million incurred for the costs related to the extinguishment of debt. This charge, which is included in other (income) expense, net, consists of the write-off of deferred charges (approximately$7 million ) as well as the make-whole premium paid on the early redemption of the$400 million , 5% senior notes (approximately$10 million ).
Provision for Income Taxes and Effective Tax Rates:
The effective tax rates, as calculated by dividing the provision for income
taxes by income before income taxes, were as follows for the three and
nine-month periods ended
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Provision for income taxes $ 67,515 $ 79,172 $ 232,844 $ 204,649
Income before income taxes 286,890 323,264 986,565 849,705
Effective tax rate 23.5 % 24.5 % 23.6 % 24.1 %
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The provision for income taxes decreased$12 million during the three-month period endedSeptember 30, 2021 , as compared to the third quarter of 2020, due primarily to: (i) the income tax benefit recorded in connection with the$35 million decrease in pre-tax income, and; (ii) a$3 million decrease in the provision for income taxes recorded in connection with ASU 2016-09. The provision for income taxes increased$28 million during the nine-month period endedSeptember 30, 2021 , as compared to the first nine months of 2020, due primarily to: (i) the income tax provision recorded in connection with the$145 million increase in pre-tax income, partially offset by; (ii) a$7 million decrease in the provision for income taxes recorded in connection with ASU 2016-09.
Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was$562 million during the nine-month period endedSeptember 30, 2021 and$2.218 billion during the first nine months of 2020. The net decrease of$1.656 billion was attributable to the following:
• an unfavorable change of
return of the
repaid during the first quarter of 2021, as compared to a favorable change
of
from receipt of the Medicare accelerated payments and other deferred
governmental stimulus grants;
• a favorable change of
plus depreciation and amortization expense, stock-based compensation
expense, gain/loss on sale of assets and businesses, costs related to debt
extinguishment and provision for asset impairment;
• an unfavorable change of
including the favorable impact of the payment deferral of the employer's
share of Social Security taxes, as provided for by the CARES, Act;
• an unfavorable change of $75 million in accounts receivable;
• an unfavorable change of
and;
• $4 million of other combined net favorable changes.
Days sales outstanding ("DSO"): Our DSO are calculated by dividing our net
revenue by the number of days in the nine-month periods. The result is divided
into the accounts receivable balance at September 30th of each year to obtain
the DSO. Our DSO were 51 days at both September 30, 2021 and 2020.
Net cash used in investing activities
During the first nine months of 2021, we used
•
for equipment, renovations and new projects at various existing facilities;
•$39 million spent on acquisition of business and property;
•
•
technology applications (consists primarily of refunded costs previously
paid), and;
•
exchange contracts that hedge our investment in the
in exchange rates.
During the first nine months of 2020, we used
•
for equipment, renovations and new projects at various existing facilities;
•$52 million spent on acquisition of businesses and property;
•
exchange contracts that hedge our investment in the
in exchange rates;
• $8 million received from the sale of assets and businesses;
• $5 million spent on the purchase and implementation of information
technology applications, and;
• $1 million spent on investments in joint ventures.
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Net cash used in financing activities
During the first nine months of 2021, we used
• spent
related to our tranche A term loan facility; (ii)
our recently terminated tranche B term loan facility; (iii)
related to the early redemption of our previously outstanding
5.00% senior secured notes which were scheduled to mature in June, 2026;
(iv)
program, and; (v)
• generated
billion related to our tranche A term loan facility; (ii)
of discount) related to the August, 2021 issuance of
senior secured notes due in September, 2026; (iii)
discount) related to the August, 2021 issuance of
secured notes due in January, 2032, and; (iv) received $14 million of
proceeds related to other debt facilities;
• spent
connection with: (i) open market purchases pursuant to our stock repurchase
program (
to stock-based compensation programs (
• spent
first, second and third quarters;
• spent
various financing transactions, as discussed herein;
• received
minority members;
• generated
Stock pursuant to the terms of employee stock purchase plans, and;
• spent
interests in majority owned businesses.
During the first nine months of 2020, we used
• spent
to redeem our previously outstanding 4.75% senior secured notes which were
scheduled to mature in 2022; (ii)
receivable securitization program; (iii)
A term loan facility; (iv)
facility, and; (v)
million) and other debt facilities (
• generated
(net of discount) received in connection with the issuance in September,
2020 of the
mature in 2030, and; (ii)
• spent
connection with: (i) open market purchases pursuant to our
stock repurchase program, which has since been suspended as a result of the
COVID-19 pandemic (
obligations related to stock-based compensation programs (
• spent
interests in majority owned businesses;
• spent
quarter (prior to dividends being suspended from April, 2020 until March,
2021 as a result of various initiatives implemented by us related to the
COVID-19 pandemic);
• generated
pursuant to the terms of employee stock purchase plans;
• spent
million, 2.65% senior secured notes which were issued during the third
quarter of 2020, and;
• spent
Expected capital expenditures during remainder of 2021
Our estimated capital expenditures for the full year of 2021 are projected to be approximately$850 million to$1.0 billion . During the first nine months of 2021, we spent approximately$666 million on capital expenditures. During the remaining three months of 2021, we expect to spend approximately$184 million to$334 million which includes expenditures for capital equipment, renovations and new projects at existing hospitals. 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. 57
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Capital Resources
Cash and Cash Equivalents
As ofSeptember 30, 2021 , we had approximately$190 million of cash and cash equivalents consisting primarily of short-term cash accounts on which interest is being earned at various annual rates ranging from 0.20% to 0.26%.
OnAugust 24, 2021 , we entered into a seventh amendment to our credit agreement dated as ofNovember 15, 2010 , as amended and restated as ofSeptember 21, 2012 ,August 7, 2014 andOctober 23, 2018 , among UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders, andJPMorgan Chase Bank, N.A ., as administrative agent, (the "Credit Agreement"). In September, 2021, we entered into an eight amendment to our Credit Agreement which modified the definition of "Adjusted LIBO Rate".
The seventh amendment to the Credit Agreement, among other things, provided for the following:
o a
scheduled to mature on
million over the
this facility had no borrowings outstanding and
borrowing capacity, net of
o a
billion of borrowings outstanding under the previous tranche A term loan
facility, and;
o repayment of approximately $488 million of outstanding borrowings and
termination of the previous tranche B term loan facility.
Pursuant to the terms of the seventh amendment, the tranche A term loan, which
had $1.70 billion of borrowings outstanding as of September 30, 2021 , provides
for installment payments of $10.625 million per quarter beginning on December
31, 2021 through September 30, 2023 and $21.25 million per quarter beginning on
December 31, 2023 through June 30, 2026 . The unpaid principal balance at June
30, 2026 is due on the maturity date.
Borrowings under the Credit Agreement bear interest at our election at either
(1) the ABR rate which is defined as the rate per annum equal to the greatest of
(a) the lender's prime rate, (b) the weighted average of the federal funds rate,
plus 0.5% and (c) one month LIBOR rate plus 1%, in each case, plus an applicable
margin based upon our consolidated leverage ratio at the end of each quarter
ranging from 0.25% to 0.625% for revolving credit and term loan A borrowings or
(2) the one, 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 1.25% to 1.625% for revolving credit and term loan A borrowings. As
of September 30, 2021 , the applicable margins were 0.25% for ABR-based loans and
1.25% 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 Credit Agreement is secured by certain assets of the
Company and our material subsidiaries (which generally excludes asset classes
such as substantially all of the patient-related accounts receivable of our
acute care hospitals, and certain real estate assets and assets held in
joint-ventures with third parties) and is guaranteed by our material
subsidiaries.
The Credit Agreement includes a material adverse change clause that must be
represented at each draw. The Credit Agreement also contains covenants that
include a limitation on sales of assets, mergers, change of ownership, liens 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 September 30, 2021 and December
31, 2020 .
On August 24, 2021 , we completed the following via private offerings to
qualified institutional buyers under Rule 144A and to non-U.S. persons outside
the United States in reliance on Regulation S under the Securities Act of 1933,
as amended:
o Issued
notes due on
o Issued
notes due on
In April, 2021, our accounts receivable securitization program
("Securitization") was amended (the eighth amendment) to: (i) reduce the
aggregate borrowing commitments to $20 million (from $450 million previously);
(ii) slightly reduce the borrowing rates and commitment fee, and; (iii) extend
the maturity date to April 25, 2022 (from April, 2021 previously). Substantially
all other material terms and conditions remained unchanged. There were no
borrowings outstanding pursuant to the Securitization as of September 30, 2021 .
On September 13, 2021 , we redeemed $400 million of aggregate principal amount of
5.00% senior secured notes, that were scheduled to mature on June 1, 2026 , at
102.50% of the aggregate principal, or $410 million .
As of
o
September, 2026 ("2026 Notes") which were issued on
58
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o
October, 2030 ("2030 Notes") which were issued on
o
in January, 2032 ("2032 Notes") which were issued on
On
Interest on the 2026 Notes is payable onMarch 1st andSeptember 1st until the maturity date ofSeptember 1, 2026 . Interest on the 2030 Notes payable onApril 15th andOctober 15th , until the maturity date ofOctober 15, 2030 . Interest on the 2032 Notes is payable onJanuary 15th andJuly 15th until the maturity date ofJanuary 15, 2032 . The 2026 Notes, 2030 Notes and 2032 Notes (collectively "The Notes") were offered only to qualified institutional buyers under Rule 144A and to non-U.S. persons outsidethe United States in reliance on Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). The Notes have not been registered under the Securities Act and may not be offered or sold inthe United States absent registration or an applicable exemption from registration requirements. The Notes are guaranteed (the "Guarantees") on a senior secured basis by all of our existing and future direct and indirect subsidiaries (the "Subsidiary Guarantors") that guarantee our Credit Agreement, or other first lien obligations or any junior lien obligations. The Notes and the Guarantees are secured by first-priority liens, subject to permitted liens, on certain of the Company's and the Subsidiary Guarantors' assets now owned or acquired in the future by the Company or the Subsidiary Guarantors (other than real property, accounts receivable sold pursuant to the Company's Existing Receivables Facility (as defined in the Indenture pursuant to which The Notes were issued (the "Indenture")), and certain other excluded assets). The Company's obligations with respect to The Notes, the obligations of the Subsidiary Guarantors under the Guarantees, and the performance of all of the Company's and the Subsidiary Guarantors' other obligations under the Indenture, are secured equally and ratably with the Company's and the Subsidiary Guarantors' obligations under the Credit Agreement and The Notes by a perfected first-priority security interest, subject to permitted liens, in the collateral owned by the Company and its Subsidiary Guarantors, whether now owned or hereafter acquired. However, the liens on the collateral securing The Notes and the Guarantees will be released if: (i) The Notes have investment grade ratings; (ii) no default has occurred and is continuing, and; (iii) the liens on the collateral securing all first lien obligations (including the Credit Agreement and The Notes) and any junior lien obligations are released or the collateral under the Credit Agreement, any other first lien obligations and any junior lien obligations is released or no longer required to be pledged. The liens on any collateral securing The Notes and the Guarantees will also be released if the liens on that collateral securing the Credit Agreement, other first lien obligations and any junior lien obligations are released. In connection with the issuance of The Notes, the Company, the Subsidiary Guarantors and the representatives of the several initial purchasers, entered into Registration Rights Agreements (the "Registration Rights Agreements"), whereby the Company and the Subsidiary Guarantors have agreed, at their expense, to use commercially reasonable best efforts to: (i) cause to be filed a registration statement enabling the holders to exchange The Notes and the Guarantees for registered senior secured notes issued by the Company and guaranteed by the then Subsidiary Guarantors under the Indenture (the "Exchange Securities "), containing terms identical to those of The Notes (except that theExchange Securities will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with the Registration Rights Agreements); (ii) cause the registration statement to become effective; (iii) complete the exchange offer not later than 60 days after such effective date and in any event on or prior to a target registration date ofMarch 21, 2023 in the case of the 2030 Notes andFebruary 24, 2024 in the case of the 2026 and 2032 Notes, and; (iv) file a shelf registration statement for the resale of The Notes if the exchange offers cannot be effected within the time periods listed above. The interest rate on The Notes will increase and additional interest thereon will be payable if the Company does not comply with its obligations under the Registration Rights Agreements. AtSeptember 30, 2021 , the carrying value and fair value of our debt were each approximately$3.75 billion . AtDecember 31, 2020 , the carrying value and fair value of our debt were each approximately$3.9 billion . The fair value of our debt was computed based upon quotes received from financial institutions. We consider these to be "level 2" in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments.
Our total debt as a percentage of total capitalization was approximately 37% at
We expect to finance all capital expenditures and acquisitions and pay dividends and potentially repurchase shares of our common stock utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing revolving credit facility, which had$1.196 billion of available borrowing capacity as ofSeptember 30, 2021 , or through refinancing the existing Credit Agreement; (ii) the issuance of other short-term and/or long-term debt, and/or; (iii) the issuance of equity. We believe that our operating cash flows, cash and cash equivalents, available commitments under existing agreements, as well as access to the capital markets, provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months. However, in the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity. 59
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Off-Balance Sheet Arrangements
During the three months endedSeptember 30, 2021 , there have been no material changes in the off-balance sheet arrangements consisting of standby letters of credit and surety bonds. As ofSeptember 30, 2021 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled$169 million consisting of: (i)$159 million related to our self-insurance programs, and; (ii)$10 million of other debt and public utility guarantees.
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