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 ofMarch 31, 2020 , we owned and/or operated 357 inpatient facilities and 42 outpatient and other facilities including the following located in 37 states,Washington, D.C. , theUnited Kingdom andPuerto Rico :
Acute care facilities located in the
• 26 inpatient acute care hospitals; • 14 free-standing emergency departments, and; • 6 outpatient centers & 1 surgical hospital.
Behavioral health care facilities (331 inpatient facilities and 21 outpatient facilities):
Located in theU.S. : • 185 inpatient behavioral health care facilities, and; • 19 outpatient behavioral health care facilities.
Located in the
• 143 inpatient behavioral health care facilities, and; • 2 outpatient behavioral health care facilities.
Located in
• 3 inpatient behavioral health care facilities.
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and commercial health insurer accounted for 54% during each of the three-month periods endedMarch 31, 2020 and 2019. Net revenues from our behavioral health care facilities and commercial health insurer accounted for 46% of our consolidated net revenues during each of the three-month periods endedMarch 31, 2020 and 2019. Our behavioral health care facilities located in theU.K. generated net revenues of approximately$137 million during each of the three-month periods endedMarch 31, 2020 and 2019. Total assets at ourU.K. behavioral health care facilities were approximately$1.197 billion as ofMarch 31, 2020 and$1.270 billion as ofDecember 31, 2019 . Services provided by our hospitals include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. We provide capital resources as well as a variety of management services to our facilities, including central purchasing, information services, finance and control systems, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.
Forward-Looking Statements and Risk Factors
You should carefully review the information contained in this Annual Report, and should particularly consider any risk factors that we set forth in this Annual Report and in other reports or documents that we file from time to time with theSecurities and Exchange Commission (the "SEC"). In this Annual Report, we state our beliefs of future events and of our future financial performance. This Annual Report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. In evaluating those statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those set forth in Item 1A. Risk Factors and elsewhere herein and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 in Item 1A. Risk Factors and in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors. 28 -------------------------------------------------------------------------------- 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 COVID-19 pandemic has adversely impacted and is likely to further
adversely impact us, our employees, our patients, our vendors and supply
chain partners, and financial institutions, which could have a material
adverse effect on our business, results of operations and financial
condition. In an effort to slow the spread of the disease, most state and
local governments have mandated general "shelter-in-place" orders or other
similar restrictions that require social distancing and that have closed
or limited non-essential business activities. The extent to which the
COVID-19 pandemic and measures taken in response thereto impact our
business, results of operations and financial condition will depend on
numerous factors and future developments. The ultimate impact of the
COVID-19 pandemic is highly uncertain and subject to change. We are not
able to fully quantify the impact that these factors will have on ourfuture financial results, but expect developments related to the COVID-19
pandemic to materially affect our financial performance in 2020. Even
after the COVID-19 outbreak has subsided, we may continue to experience
materially adverse impacts on our financial condition and our results of
operations as a result of its macroeconomic impact, including any
recession that has occurred or may occur in the future, and many of our
known risks described in the "Risk Factors" section of our Annual Report
on Form 10-K for the year ended
Item 1A. Risk Factors as included herein for additional disclosure;
• the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"),
a stimulus package signed into law on March 27, 2020 , authorizes $100
billion in 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 to
reimburse. The U.S. Department of Health and Human Services ("HHS")
initially distributed
share of total Medicare fee-for-service reimbursement in 2019, but has
announced that
already distributed) will be allocated proportional to providers' share of
2018 net patient revenue. We have received payments from the initial
funding of the PHSSEF. HHS has indicated that distributions of the
remaining
high impact areas, to rural providers, and to reimburse providers for
COVID-19-related treatment of uninsured patients. 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
makes available accelerated payments of Medicare funds in order toincrease cash flow to providers. We have received accelerated payments
under this program. The Paycheck Protection Program and Health Care
Enhancement Act (the "PPPHCE Act"), a stimulus package signed into law on
response, including
through the PHSSEF. Recipients will not be required to repay the
government for funds received, provided they comply with terms and
conditions, which have not yet been finalized. There is a high degree of
uncertainty surrounding the implementation of the CARES Act and the PPPHCE
Act, 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 and the PPPHCE Act, and it is difficult topredict the impact of such legislation on our operations or how they will
affect operations of our competitors. Moreover, we are unable to assess
the extent to which anticipated negative impacts on us arising from the
COVID-19 pandemic will be offset by amounts or benefits received or to be
received under the CARES Act and the PPPHCE Act;
• our ability to comply with the existing laws and government regulations,
and/or changes in laws and government regulations;
• an increasing number of legislative initiatives have been passed into law
that may result in major changes in the health care delivery system on a
national or state level. Legislation has already been enacted that has
eliminated the penalty for failing to maintain health coverage that was
part of the original Patient Protection and Affordable Care Act (the
"Legislation").
requiring all federal agencies with authorities and
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responsibilities under the Legislation to "exercise all authority and
discretion available to them to waiver, defer, grant exemptions from, or
delay" parts of the Legislation that place "unwarranted economic and
regulatory burdens" on states, individuals or health care providers; (ii)
the issuance of a final rule in June, 2018 by the
enable the formation of association health plans that would be exempt from
certain Legislation requirements such as the provision of essential health
benefits; (iii) the issuance of a final rule in August, 2018 by the
availability of short-term, limited duration health insurance, (iv)
eliminating cost-sharing reduction payments to insurers that would
otherwise offset deductibles and other out-of-pocket expenses for health
plan enrollees at or below 250 percent of the federal poverty level; (v)
relaxing requirements for state innovation waivers that could reduce
enrollment in the individual and small group markets and lead to
additional enrollment in short-term, limited duration insurance and
association health plans; (vi) the issuance of a final rule in June, 2019
by the Departments of Labor,
would incentivize the use of health reimbursement arrangements by
employers to permit employees to purchase health insurance in the
individual market, and; (vii) the issuance of a final rule intended to
increase transparency of healthcare price and quality information. The
uncertainty resulting from these Executive Branch policies has led to
reduced Exchange enrollment in 2018, 2019 and 2020 and is expected to
further worsen the individual and small group market risk pools in future
years. It is also anticipated that these and future policies may create
additional cost and reimbursement pressures on hospitals, including ours.In addition, while attempts to repeal the entirety of the Legislation have
not been successful to date, a key provision of the Legislation was
repealed as part of the Tax Cuts and Jobs Act and on
federal
unconstitutional. That ruling was stayed and has been appealed. On
down the Legislation individual mandate as unconstitutional and sent the
case back to the
Legislation provisions should be stricken with the mandate or whether the
entire law is unconstitutional without the individual mandate. On
2020, the U.S. Supreme Court agreed to hear, during the 2020-2021 term,
two consolidated cases, filed by the State of California and the United
States House of Representatives , asking the Supreme Court to review the
ruling by the Fifth Circuit Court of Appeals . The Legislation will remainlaw while the case proceeds through the appeals process; however, the case
creates additional uncertainty as to whether any or all of the Legislation
could be struck down, which creates operational risk for the health care
industry. We are unable to predict the final outcome of this matter which
has caused greater uncertainty regarding the future status of the
Legislation. If all or any parts of the Legislation are ultimately found
to be unconstitutional, it could have a material adverse effect on our
business, financial condition and results of operations. See below inSources of Revenue and Health Care Reform for additional disclosure;
• possible unfavorable changes in the levels and terms of reimbursement for
our charges by third party payers or government based payers, including
Medicare or Medicaid in
the
• our ability to enter into managed care provider agreements on acceptable
terms and the ability of our competitors to do the same, including
contracts with
January, 2020,
agreement with a competitor health system that was previously excluded
from their contractual network in the area. As a result, we believe that
our 6 acute care hospitals in the
experience a decrease in patient volumes. However, we have entered into an
amended agreement with
in the
in January, 2020. Although we estimate that the unfavorable impact of the
projected decreases in patient volumes should be largely offset by thefavorable impact of the increased rates, we can provide no assurance that
these developments, as well as the effect of COVID-19 on the
market, will not have a material adverse impact on our future results of
operations;
• 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 Item 1. Legal Proceedings,
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;
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• 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;
• in August, 2011, the Budget Control Act of 2011 (the "2011 Act") was
enacted into law. The 2011 Act imposed annual spending limits for most
federal agencies and programs aimed at reducing budget deficits by
billion between 2012 and 2021, according to a report released by the
established a bipartisan Congressional committee, known as the Joint
tasked with making recommendations aimed at reducing future federal budget
deficits by an additional
was unable to reach an agreement by the
a result, across-the-board cuts to discretionary, national defense and
Medicare spending were implemented on
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
reimbursement imposed under the 2011 Act. The CARES Act suspended payment
reductions
cuts through 2030. Subsequent legislation enacted by
reductions through 2029. We cannot predict whether
restructure the implemented Medicare payment reductions or what other
federal budget deficit reduction initiatives may be proposed by
going forward;
• uninsured and self-pay patients treated at our acute care facilities
unfavorably impact our ability to satisfactorily and timely collect our
self-pay patient accounts;
• changes in our business strategies or development plans;
• in June, 2016, the
referendum in favor of the exit of the
legislature. On
the Lisbon Treaty, formally starting negotiations regarding its exit from
the European Union . On January 31, 2020 , the U.K. formally exited the
European Union . The U.K. and the European Union will now enter into atransition period in which the terms of the future relationship must be
negotiated. The outcome of these negotiations is uncertain, and we do not
know to what extent Brexit will ultimately impact the business and
regulatory environment in the
countries. The
at least
Period may be extended through
Brexit, and others we cannot anticipate, could harm our business,
financial condition and results of operations;
• fluctuations in the value of our common stock, and;
• other factors referenced herein or in our other filings with the
Securities and Exchange Commission .
Given these uncertainties, risks and assumptions, as outlined above, you are
cautioned not to place undue reliance on such forward-looking statements. Our
actual results and financial condition could differ materially from those
expressed in, or implied by, the forward-looking statements. Forward-looking
statements speak only as of the date the statements are made. We assume no
obligation
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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 withU.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our consolidated financial statements. 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, 2019 . 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, 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, consistent with our estimates for provisions for doubtful accounts under ASC 605. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions which might ultimately affect the collectability of the patient accounts and make adjustments to our allowances as warranted. At our acute care hospitals, third party liability accounts are pursued until all payment and adjustments are posted to the patient account. For those accounts with a patient balance after third party liability is finalized or accounts for uninsured patients, the patient receives statements and collection letters. Under ASC 605, our hospitals established a partial reserve for self-pay accounts in the allowance for doubtful accounts for both unbilled balances and those that have been billed and were under 90 days old. All self-pay accounts were fully reserved at 90 days from the date of discharge. Third party liability accounts were fully reserved in the allowance for doubtful accounts when the balance aged past 180 days from the date of discharge. Patients that express an inability to pay were reviewed for potential sources of financial assistance including our charity care policy. If the patient was deemed unwilling to pay, the account was written-off as bad debt and transferred to an outside collection agency for additional collection effort. Under ASC 606, while similar processes and methodologies are considered, these revenue adjustments are considered at the time the services are provided in determination of the transaction price. Historically, a significant portion of the patients treated throughout our portfolio of acute care hospitals are uninsured patients which, in part, has resulted from patients who are employed but do not have health insurance or who have policies with relatively high deductibles. Patients treated at our hospitals for non-elective services, who have gross income 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 32 -------------------------------------------------------------------------------- insurance profiles in our patient accounting system which determine the expected insurance reimbursement for each patient based on the insurance plan code assigned and the services rendered. Certain patients may be classified as Medicaid pending at registration based upon a screening evaluation if we are unable to definitively determine if they are currently Medicaid eligible. When a patient is registered as Medicaid eligible or Medicaid pending, our patient accounting system records net revenues for services provided to that patient based upon the established Medicaid reimbursement rates, subject to the ultimate disposition of the patient's Medicaid eligibility. When the patient's ultimate eligibility is determined, reclassifications may occur which impacts net revenues in future periods. Although the patient's ultimate eligibility determination may result in adjustments to net revenues, these adjustments did not have a material impact on our results of operations during the three-month periods endedMarch 31, 2020 or 2019 since our facilities make estimates at each financial reporting period to adjust revenue based on historical collections. Under ASC 605, these estimates were reported in the provision for doubtful accounts. We also provide discounts to uninsured patients (included in "uninsured discounts" amounts below) who do not qualify for Medicaid or charity care. Because we do not pursue collection of amounts classified as uninsured discounts, the transaction price is fully adjusted and there is no impact in our net revenues or in our net accounts receivable. In implementing the discount policy, we first attempt to qualify uninsured patients for governmental programs, charity care or any other discount program. If an uninsured patient does not qualify for these programs, the uninsured discount is applied. The following tables show the amounts recorded at our acute care hospitals for charity care and uninsured discounts, based on charges at established rates, for the three-month periods ended Mach 31, 2020 and 2019: Uncompensated care: Amounts in millions Three Months Ended March 31, March 31, 2020 % 2019 % Charity care$ 202 32 %$ 146 31 % Uninsured discounts 432 68 % 328 69 % Total uncompensated care$ 634 100 %$ 474 100 %
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
March 31, March 31,
Amounts in millions 2020 2019
Estimated cost of providing charity care $ 23 $ 17
Estimated cost of providing uninsured discounts
related care 48 37
Estimated cost of providing uncompensated care $ 71 $ 54
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.
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The total accrual for our professional and general liability claims and workers'
compensation claims was $345 million as of March 31, 2020 , of which $82 million
is included in current liabilities. The total accrual for our professional and
general liability claims and workers' compensation claims was $323 million as of
December 31, 2019 , of which $82 million is included in current liabilities.
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 has had a material unfavorable effect on our operations and financial results during the first quarter of 2020. Patient volumes at our acute care hospitals and our behavioral health care facilities were significantly reduced during the second half of March as various COVID-19 policies were implemented by our facilities and federal and state governments. These significant reductions to patient volumes experienced at our facilities have continued through April and into May, 2020. We believe that the adverse impact that COVID-19 will have on our future operations and financial results will depend upon many factors, most of which are beyond our capability to control or predict. Our primary focus as the effects of COVID-19 began to impact our facilities was the health and safety of our patients, employees and physicians. We implemented various measures to provide the safest possible environment within our facilities during this pandemic and will continue to do so.
In addition, we recognize the significant financial stress created by the dramatic decline in patient volumes that began in mid-March, 2020, at our acute care and behavioral health facilities, and as a result, have implemented numerous financial-related measures including the following:
• Effected initiatives to increase labor productivity and reductions to
certain other costs.
• Reduced spend rate and magnitude of certain previously planned capital
projects and expenditures.
• Suspended our stock repurchase program and payment of quarterly dividends.
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As discussed below, as of May 6, 2020 , we have received approximately $376
million in accelerated Medicare payments, as well as an aggregate of
approximately $239 million in Public Health and Social Services Emergency Fund
grants, as provided for by the CARES Act, as well as other COVID-19 state and
local grant programs. Although we can provide no assurance that we will
ultimately receive additional accelerated Medicare payments, we believe we are
entitled to additional funds comparable to the amount received thus far should
the Centers for Medicare and Medicaid Services resume the Medicare accelerated
funding program which was suspended on April 26, 2020 for reevaluation. There
was no impact on our financial statements for the three-month period ended March
31, 2020 related to the funds received in connection with the CARES Act. Please
see Sources of Revenue- 2019 Novel Coronavirus Disease Medicare and Medicaid
Payment Related Legislation below for additional disclosure.
Financial results for 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 Mach 31, 2020 and 2019 (dollar amounts in thousands):
Three months ended Three months ended
March 31, 2020 March 31, 2019
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 2,829,667 100.0 % $ 2,804,391 100.0 %
Operating charges:
Salaries, wages and benefits 1,432,669 50.6 % 1,365,546 48.7 %
Other operating expenses 689,790 24.4 % 644,780 23.0 %
Supplies expense 317,827 11.2 % 307,463 11.0 %
Depreciation and amortization 124,394 4.4 % 120,040 4.3 %
Lease and rental expense 28,293 1.0 % 26,125 0.9 %
Subtotal-operating expenses 2,592,973 91.6 % 2,463,954 87.9 %
Income from operations 236,694 8.4 % 340,437 12.1 %
Interest expense, net 36,351 1.3 % 39,640 1.4 %
Other (income) expense, net 9,560 0.3 % 4,501 0.2 %
Income before income taxes 190,783 6.7 % 296,296 10.6 %
Provision for income taxes 46,323 1.6 % 58,898 2.1 %
Net income 144,460 5.1 % 237,398 8.5 %
Less: Income attributable to
noncontrolling interests 2,423 0.1 % 3,230 0.1 %
Net income attributable to UHS $ 142,037 5.0 % $ 234,168 8.4 %
Net revenues increased 0.9%, or $25 million , to $2.83 billion during the
three-month period ended March 31, 2020 as compared to $2.80 billion during the
first quarter of 2019. The net increase was primarily attributable to: (i) a $33
million or 1.2% 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) $6 million of other combined net
decreases.
Income before income taxes (before deduction for income attributable to
noncontrolling interests) decreased
• a decrease of
in Acute Care Hospital Services;
• a decrease of
discussed below in Behavioral Health Services , and;
• $11 million of other combined net decreases.
Net income attributable to UHS decreased $92 million to $142 million during the
three-month period ended March 31, 2020 as compared to $234 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
offset by; (ii) a
resulting from our adoption of ASU 2016-09, which increased our provision
for income taxes by approximately
2020 as compared to a decrease of approximately $11 million during the
first quarter of 2019.
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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 recently experienced, during the first quarter of 2020, we recorded a$20 million increase to our reserves for self-insured professional and general liability claims. Approximately$15 million of the increase to our reserves for self-insured professional and general liability claims is included in our same facility basis acute care hospitals services' results, as reflected below, and approximately$5 million is 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-month periods endedMarch 31, 2020 and 2019 (dollar amounts in thousands): Three months ended Three months ended March 31, 2020 March 31, 2019 % of Net % of Net Amount Revenues Amount Revenues Net revenues$ 1,497,123 100.0 %$ 1,491,351 100.0 % Operating charges: Salaries, wages and benefits 658,929 44.0 % 619,317 41.5 % Other operating expenses 375,531 25.1 % 332,738 22.3 % Supplies expense 264,530 17.7 % 258,144 17.3 % Depreciation and amortization 77,928 5.2 % 74,361 5.0 % Lease and rental expense 16,020 1.1 % 14,299 1.0 % Subtotal-operating expenses 1,392,938 93.0 % 1,298,859 87.1 % Income from operations 104,185 7.0 % 192,492 12.9 % Interest expense, net 618 0.0 % 279 0.0 % Other (income) expense, net - - - - Income before income taxes$ 103,567 6.9 %$ 192,213 12.9 %
Three-month periods ended
During the three-month period endedMarch 31, 2020 , as compared to the comparable prior year quarter, net revenues from our acute care hospital services, on a same facility basis, increased$6 million or 0.4%. Income before income taxes (and before income attributable to noncontrolling interests) decreased$89 million , or 46%, amounting to$104 million or 6.9% of net revenues during the first quarter of 2020 as compared to$192 million or 12.9% of net revenues during the first quarter of 2019. As mentioned above, approximately$15 million of the$20 million increase to our reserves for self-insured professional and general liability claims, as recorded during the first quarter of 2020, is included in our same facility basis acute care hospitals services' results. During the three-month period endedMarch 31, 2020 , net revenue per adjusted admission increased 3.7% while net revenue per adjusted patient day decreased 0.3%, as compared to the comparable quarter of 2019. During the three-month period endedMarch 31, 2020 , as compared to the comparable prior year quarter, inpatient admissions to our acute care hospitals decreased 3.6% and adjusted 36 -------------------------------------------------------------------------------- admissions (adjusted for outpatient activity) decreased 4.0%. Patient days at these facilities increased 0.2% and adjusted patient days decreased 0.2% during the three-month period endedMarch 31, 2020 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 4.8 days and 4.6 days during the three-month periods endedMarch 31, 2020 and 2019, respectively. The occupancy rate, based on the average available beds at these facilities, was 65% and 66% during the three-month periods endedMarch 31, 2020 and 2019, respectively. As mentioned above, patient volumes at our acute care hospitals were significantly reduced during the second half of March as various COVID-19 policies were implemented by our facilities and federal and state governments. During the period ofJanuary 1, 2020 throughMarch 16, 2020 , inpatient admissions and patient days at our acute care hospitals, on a same facility basis, increased approximately 1% and approximately 3%, respectively, as compared to the comparable period of 2019. During the period ofMarch 17, 2020 throughMarch 31, 2020 , inpatient admissions and patient days at these facilities decreased approximately 29% and approximately 19%, respectively, as compared to the comparable period of 2019. During the period ofApril 1, 2020 throughApril 30, 2020 , inpatient admissions and patient days at our acute care hospitals, on a same facility basis, decreased approximately 31% and approximately 20%, respectively, as compared to the one-month period endedApril 30, 2019 . Inpatient admissions to these facilities decreased 35% fromApril 1st through April 15th of 2020, and decreased 27% fromApril 16th through April 30th of 2020, as compared to the comparable periods of 2019. Patient days at these facilities decreased 24% fromApril 1st through April 15th of 2020, and decreased 17% fromApril 16th through April 30th of 2020, as compared to the comparable periods of 2019.
All Acute Care Hospitals
The following table summarizes the results of operations for all our acute care operations during the three-month periods endedMarch 31, 2020 and 2019. 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 March 31, 2020 March 31, 2019 % of Net % of Net Amount Revenues Amount Revenues Net revenues$ 1,521,049 100.0 %$ 1,514,844 100.0 % Operating charges: Salaries, wages and benefits 658,959 43.3 % 619,317 40.9 % Other operating expenses 399,457 26.3 % 356,231 23.5 % Supplies expense 264,530 17.4 % 258,144 17.0 % Depreciation and amortization 77,928 5.1 % 74,361 4.9 % Lease and rental expense 16,020 1.1 % 14,299 0.9 % Subtotal-operating expenses 1,416,894 93.2 % 1,322,352 87.3 % Income from operations 104,155 6.8 % 192,492 12.7 % Interest expense, net 618 0.0 % 279 0.0 % Other (income) expense, net - - - - Income before income taxes$ 103,537 6.8 %$ 192,213 12.7 %
Three-month periods ended
During the three-month period ended
Income before income taxes decreased
Our Same Facility basis results (which is a non-GAAP measure), which include the
operating results for facilities and businesses operated in both the current
year and prior year period, neutralize (if applicable) the effect of items that
are non-operational in nature including items such as, but not limited to,
gains/losses on sales of assets and businesses, impact of the reserve
established in
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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-month periods ended March 31, 2020 and 2019 (dollar amounts
in thousands):
Three months ended Three months ended
March 31, 2020 March 31, 2019
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 1,284,000 100.0 % $ 1,256,909 100.0 %
Operating charges:
Salaries, wages and benefits 692,477 53.9 % 667,923 53.1 %
Other operating expenses 243,209 18.9 % 237,272 18.9 %
Supplies expense 51,629 4.0 % 48,716 3.9 %
Depreciation and amortization 42,931 3.3 % 40,929 3.3 %
Lease and rental expense 11,211 0.9 % 10,620 0.8 %
Subtotal-operating expenses 1,041,457 81.1 % 1,005,460 80.0 %
Income from operations 242,543 18.9 % 251,449 20.0 %
Interest expense, net 364 0.0 % 375 0.0 %
Other (income) expense, net 889 0.1 % 675 0.1 %
Income before income taxes $ 241,290 18.8 % $ 250,399 19.9 %
Three-month periods ended
On a same facility basis during the first quarter of 2020, net revenues generated from our behavioral health services increased$27 million , or 2.2%, to$1.28 billion , from$1.26 billion generated during the first quarter of 2019. Income before income taxes decreased$9 million , or 4%, to$241 million or 18.8% of net revenues during the three-month period endedMarch 31, 2020 , as compared to$250 million or 19.9% of net revenues during the comparable quarter of 2019. As mentioned above, approximately$5 million of the$20 million increase to our reserves for self-insured professional and general liability claims, as recorded during the first quarter of 2020, is included in our same facility basis behavioral health services' results. During the three-month period endedMarch 31, 2020 , net revenue per adjusted admission increased 4.3% and net revenue per adjusted patient day increased 3.7%, as compared to the comparable quarter of 2019. On a same facility basis, inpatient admissions and adjusted admissions to our behavioral health facilities decreased 1.5% and 2.0%, respectively, during the three-month period endedMarch 31, 2020 as compared to the comparable quarter of 2019. Patient days and adjusted patient days at these facilities decreased 0.9% and 1.3% during the three-month period endedMarch 31, 2020 , respectively, as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 13.2 days and 13.1 days during the three-month periods endedMarch 31, 2020 and 2019, respectively. The occupancy rate, based on the average available beds at these facilities, was 75% and 77% during the three-month periods endedMarch 31, 2020 and 2019, respectively. As mentioned above, as a result of the COVID-19 pandemic, patient volumes at our behavioral health care facilities were significantly reduced during the second half of March. During the period ofJanuary 1, 2020 throughMarch 16, 2020 , inpatient admissions to our behavioral health facilities, on a same facility basis, increased approximately 3%, while patient days remained relatively unchanged, as compared to the comparable period of 2019. During the period ofMarch 17, 2020 throughMarch 31, 2020 , inpatient admissions and patient days at these facilities decreased approximately 25% and approximately 12%, respectively, as compared to the comparable period of 2019. During the period ofApril 1, 2020 throughApril 30, 2020 , inpatient admissions and patient days at our behavioral health facilities, on a same facility basis, decreased approximately 28% and approximately 16%, respectively, as compared to the one-month period endedApril 30, 2019 . Inpatient admissions to these facilities decreased 31% fromApril 1st through April 15th of 2020, and decreased 24% 38 -------------------------------------------------------------------------------- fromApril 16th through April 30th of 2020, as compared to the comparable periods of 2019. Patient days at these facilities decreased 18% fromApril 1st through April 15th of 2020, and decreased 14% fromApril 16th through April 30th of 2020, as compared to the comparable periods of 2019.
All Behavioral Health Care Facilities
The following table summarizes the results of operations for all our behavioral health care services during the three-month periods endedMarch 31, 2020 and 2019. These amounts include: (i) our behavioral health care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including the results of facilities acquired or opened during the past year (if applicable) as well as the results of certain facilities that were closed or restructured during the past year. Dollar amounts below are reflected in thousands. Three months ended Three months ended March 31, 2020 March 31, 2019 % of Net % of Net Amount Revenues Amount Revenues Net revenues$ 1,306,109 100.0 %$ 1,286,383 100.0 % Operating charges: Salaries, wages and benefits 693,272 53.1 % 675,699 52.5 % Other operating expenses 266,182 20.4 % 262,137 20.4 % Supplies expense 51,639 4.0 % 49,131 3.8 % Depreciation and amortization 43,889 3.4 % 42,552 3.3 % Lease and rental expense 12,158 0.9 % 11,644 0.9 % Subtotal-operating expenses 1,067,140 81.7 % 1,041,163 80.9 % Income from operations 238,969 18.3 % 245,220 19.1 % Interest expense, net 397 0.0 % 375 0.0 % Other (income) expense, net 889 0.1 % 677 0.1 % Income before income taxes$ 237,683 18.2 %$ 244,168 19.0 %
Three-month periods ended
During the three-month period endedMarch 31, 2020 , as compared to the comparable prior year quarter, net revenues generated from our behavioral health services increased$20 million or 1.5% due to: (i) the above-mentioned$27 million or 2.2% increase in net revenues on a same facility basis, partially offset by; (ii)$7 million other combined net decreases. Income before income taxes decreased$6 million , or 3%, to$238 million or 18.2% of net revenues during the first quarter of 2020 as compared to$244 million or 19.0% of net revenues during the first quarter of 2019. The decrease in income before income taxes at our behavioral health facilities was attributable to:
• a
facility basis, as discussed above, partially offset by;
• $3 million of other combined net increases.
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
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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
("COVID-19") Medicare and Medicaid Payment Related Legislation, the federal
government has enacted multiple pieces of legislation to assist healthcare
providers during the COVID-19 world-wide pandemic and U.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.
The Legislation revises reimbursement under the Medicare and Medicaid programs
to emphasize the efficient delivery of high quality care and contains a number
of incentives and penalties under these programs to achieve these goals. The
Legislation provides for decreases in the annual market basket update for
federal fiscal years 2010 through 2019, a productivity offset to the market
basket update beginning October 1, 2011 for Medicare Part B reimbursable items
and services and beginning October 1, 2012 for Medicare inpatient hospital
services. The Legislation and subsequent revisions provide for reductions to
both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions began
in October, 2013 while the Medicaid DSH reductions are scheduled to begin in
2020. The Legislation implements a value-based purchasing program, which will
reward the delivery of efficient care. Conversely, certain facilities will
receive reduced reimbursement for failing to meet quality parameters; such
hospitals will include those with excessive readmission or hospital-acquired
condition rates.
A 2012 U.S. Supreme Court ruling limited the federal government's ability to
expand health insurance coverage by holding unconstitutional sections of the
Legislation that sought to withdraw federal funding for state noncompliance with
certain Medicaid coverage requirements. Pursuant to that decision, the federal
government may not penalize states that choose not to participate in the
Medicaid expansion by reducing their existing Medicaid funding. Therefore,
states can choose to expand or not to expand their Medicaid program without
risking the loss of federal Medicaid funding. As a result, many states,
including Texas , have not expanded their Medicaid programs without the threat of
loss of federal funding. CMS has granted, and is expected to grant additional,
section 1115 demonstration waivers providing for work and community engagement
requirements for certain Medicaid eligible individuals. CMS has also released
guidance to states interested in receiving their Medicaid funding through a
block grant mechanism. It is anticipated this will lead to reductions in
coverage, and likely increases in uncompensated care, in states where these
demonstration waivers are granted.
On December 14, 2018 , a Texas Federal District Court deemed the Legislation to
be unconstitutional in its entirety. The Court concluded that the Individual
Mandate is no longer permissible under Congress's taxing power as a result of
the Tax Cut and Jobs Act of 2017 ("TCJA") reducing the individual mandate's tax
to $0 (i.e., it no longer produces revenue, which is an essential feature of a
tax), rendering the 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 remains in place pending its appeal. The
District Court for the Northern District of Texas ruling was appealed to the
U.S. Court of Appeals for the Fifth Circuit . On December 18, 2019 , the Fifth
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 the Texas district court to determine which Legislation
provisions should be stricken with the mandate or whether the entire Legislation
is unconstitutional. On March 2, 2020 , the U.S. Supreme Court agreed to hear,
during the 2020-2021 term, two consolidated cases, filed by the State of
California and the United States House of Representatives , asking the Supreme
Court to review the ruling by the Fifth Circuit Court of Appeals . The
Legislation will remain law while the case proceeds through the appeals process;
however, the case creates additional uncertainty as to whether any or all of the
Legislation could be struck down, which creates operational risk for the health
care industry. We are unable to predict the final outcome of this legal
challenge and its financial impact on our future results of operation.
The various provisions in the Legislation that directly or indirectly affect
Medicare and Medicaid reimbursement are scheduled to take effect over a number
of years. The impact of the Legislation on healthcare providers will be subject
to implementing regulations, interpretive guidance and possible future
legislation or legal challenges. Certain Legislation provisions, such as that
creating the Medicare Shared Savings Program creates uncertainty in how
healthcare may be reimbursed by federal programs in the future. Thus,
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we cannot predict the impact of the Legislation on our future reimbursement at
this time and we can provide no assurance that the Legislation will not have a
material adverse effect on our future results of operations.
The Legislation also contained provisions aimed at reducing fraud and abuse in
healthcare. The Legislation amends several existing laws, including the federal
Anti-Kickback Statute and the False Claims Act, making it easier for government
agencies and private plaintiffs to prevail in lawsuits brought against
healthcare providers. While Congress had previously revised the intent
requirement of the Anti-Kickback Statute to provide that a person is not
required to "have actual knowledge or specific intent to commit a violation of"
the Anti-Kickback Statute in order to be found in violation of such law, the
Legislation also provides that any claims for items or services that violate the
Anti-Kickback Statute are also considered false claims for purposes of the
federal civil False Claims Act. The Legislation provides that a healthcare
provider that retains an overpayment in excess of 60 days is subject to the
federal civil False Claims Act. The Legislation also expands the Recovery Audit
Contractor program to Medicaid. These amendments also make it easier for severe
fines and penalties to be imposed on healthcare providers that violate
applicable laws and regulations.
We have partnered with local physicians in the ownership of certain of our
facilities. These investments have been permitted under an exception to the
physician self-referral law. The Legislation permits existing physician
investments in a hospital to continue under a "grandfather" clause if the
arrangement satisfies certain requirements and restrictions, but physicians are
prohibited from increasing the aggregate percentage of their ownership in the
hospital. The Legislation also imposes certain compliance and disclosure
requirements upon existing physician-owned hospitals and restricts the ability
of physician-owned hospitals to expand the capacity of their facilities. As
discussed below, should the Legislation be repealed in its entirety, this aspect
of the Legislation would also be repealed restoring physician ownership of
hospitals and expansion right to its position and practice as it existed prior
to the Legislation.
The impact of the Legislation on each of our hospitals may vary. Because
Legislation provisions are effective at various times over the next several
years, we anticipate that many of the provisions in the Legislation may be
subject to further revision. Initiatives to repeal the Legislation, in whole or
in part, to delay elements of implementation or funding, and to offer amendments
or supplements to modify its provisions have been persistent. The ultimate
outcomes of legislative attempts to repeal or amend the Legislation and legal
challenges to the Legislation are unknown. Legislation has already been enacted
that eliminated the individual mandate penalty, effective January 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 individuals who go uninsured for more than two
months and then purchase coverage; (iii) provide tax credits towards the
purchase of health insurance, with a phase-out of tax credits accordingly to
income level; (iv) expand health savings accounts; (v) impose a per capita cap
on federal funding of state Medicaid programs, or, if elected by a state,
transition federal funding to block grants, and; (vi) permit states to seek a
waiver of certain federal requirements that would allow such state to define
essential health benefits differently from federal standards and that would
allow certain commercial health plans to take health status, including
pre-existing conditions, into account in setting premiums.
In addition to legislative changes, the Legislation can be significantly
impacted by executive branch actions. In relevant part, President Trump has
already taken executive actions: (i) requiring all federal agencies with
authorities and responsibilities under the Legislation to "exercise all
authority and discretion available to them to waive, defer, grant exemptions
from, or delay" parts of the Legislation that place "unwarranted economic and
regulatory burdens" on states, individuals or health care providers; (ii) the
issuance of a final rule in June, 2018 by the Department of Labor to enable the
formation of health plans that would be exempt from certain Legislation
essential health benefits requirements; (iii) the issuance of a final rule in
August, 2018 by the Department of Labor , Treasury , and Health and Human Services
to expand the availability of short-term, limited duration health insurance;
(iv) eliminating cost-sharing reduction payments to insurers that would
otherwise offset deductibles and other out-of-pocket expenses for health plan
enrollees at or below 250 percent of the federal poverty level, (v) relaxing
requirements for state innovation waivers that could reduce enrollment in the
individual and small group markets and lead to additional enrollment in
short-term, limited duration insurance and association health plans; (vi) the
issuance of a final rule in June, 2019 by the Departments of Labor, Treasury ,
and Health and Human Services that would incentivize the use of health
reimbursement arrangements by employers to permit employees to purchase health
insurance in the individual market, and; (vii) the issuance of a final rule
intended to increase transparency of healthcare price and quality information.
The uncertainty resulting from these Executive Branch policies led to reduced
Exchange enrollment in 2018, 2019 and 2020 and is expected to further worsen the
individual and small group market risk pools in future years. In May, 2019, the
Congressional Budget Office projected that 32 million people will be uninsured
in 2020. The recent and on-going COVID-19 pandemic and related U.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 and future policies
may create additional cost and reimbursement pressures on hospitals.
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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 on October 1 . The
index used to adjust the MS-DRG rates, known as the "hospital market basket
index," gives consideration to the inflation experienced by hospitals in
purchasing goods and services. Generally, however, the percentage increases in
the MS-DRG payments have been lower than the projected increase in the cost of
goods and services purchased by hospitals.
In August, 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 of October 1, 2019 through September 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 of the American Taxpayer Relief Act of 2012 ("ATRA"), as required by the
21st Century Cures Act but excludes the impact of the sequestration reductions
related to the Budget Control Act of 2011, Bipartisan Budget Act of 2015, and
Bipartisan Budget Act of 2018, as discussed below. CMS 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 the DSH Uncompensated
Care Pool .
In June, 2019, the Supreme 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. 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.
In August, 2018, CMS published its IPPS 2019 final payment rule which provides
for a 2.9% market basket increase to the base Medicare MS-DRG blended rate. When
statutorily mandated budget neutrality factors, annual geographic wage index
updates, documenting and coding adjustments ACA-mandated adjustments are
considered, without consideration for the decreases related to
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the required Medicare DSH payment changes and decrease to the Medicare Outlier
threshold, the overall increase in IPPS payments is approximately 0.5%.
Including the estimated increase to our DSH payments (approximating 2.1%) and
certain other adjustments, we estimate our overall increase from the final IPPS
2019 rule (covering the period of October 1, 2018 through September 30, 2019 )
will approximate 2.7%. This projected impact from the IPPS 2019 final rule
includes an increase of approximately 0.5% to partially restore cuts made as a
result of the ATRA, as required by the 21st Century Cures Act but excludes the
impact of the sequestration reductions related to the Budget Control Act of
2011, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as
discussed below. CMS continued to phase-in the use of uncompensated care data
from both the 2014 and 2015 Worksheet S-10 hospital cost reports, two-third
weighting as part of the proxy methodology to allocate approximately $8 billion
in the DSH Uncompensated Care Pool .
In August, 2011, the Budget Control Act of 2011 (the "2011 Act") was enacted
into law. Included in this law are the imposition of annual spending limits for
most federal agencies and programs aimed at reducing budget deficits by $917
billion between 2012 and 2021, according to a report released by the
Congressional Budget Office . Among its other provisions, the law established a
bipartisan Congressional committee, known as the Joint Committee , which was
responsible for developing recommendations aimed at reducing future federal
budget deficits by an additional $1.5 trillion over 10 years. The Joint
Committee was unable to reach an agreement by the November 23, 2011 deadline
and, as a result, across-the-board cuts to discretionary, national defense and
Medicare spending were implemented on March 1, 2013 resulting in Medicare
payment reductions of up to 2% per fiscal year. The Bipartisan Budget Act of
2015, enacted on November 2, 2015 , and the Bipartisan Budget Act of 2019,
enacted on August 2, 2019 , continued the 2% reductions to Medicare reimbursement
imposed under the 2011 Act through 2029. The CARES Act suspended payment
reductions between May 1 and December 31, 2020 , 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 account for certain facility and patient characteristics. The
Psych PPS also contains provisions for outlier payments and an adjustment to a
psychiatric hospital's base payment if it maintains a full-service emergency
department.
In April, 2020, CMS published its Psych PPS proposed rule for the federal fiscal
year 2021. Under this proposed rule, payments to our psychiatric hospitals and
units are estimated to increase by 2.4% compared to federal fiscal year 2020.
This amount includes the effect of the 3.0% market basket update less a 0.4%
productivity adjustment and an additional 0.2% offset for the outlier
fixed-dollar loss threshold amount.
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.
In August, 2018, CMS published its Psych PPS final rule for the federal fiscal
year 2019. Under this final rule, payments to our psychiatric hospitals and
units are estimated to increase by 1.35% compared to federal fiscal year 2018.
This amount includes the effect of the 2.90% market basket update less a 0.75%
adjustment as required by the ACA and a 0.8% productivity adjustment.
In December, 2018, the U.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 Drug Discount Program and granted a permanent injunction against
the payment reduction. In May, 2019, the U.S. District Court for the District of
Columbia directed CMS to determine a remedy as well as provide a status report
on this remedy by early August, 2019 for this Medicare OPPS payment matter.
However, recognizing both the complexity of the OPPS payment system as well as
its budget neutral rate setting system, the Court refrained from imposing a
remedy. Instead the Judge in the case called for additional briefing from the
Plaintiffs and Defendants on the proper scope and implementation for relief. The
case has been appealed by HHS. In the 2020 OPPS final rule, CMS retained the
rate reduction in dispute, but indicated their intent to potentially use the
results of a future 340B hospital survey to collect drug acquisition cost data
for CY 2018 and 2019 when crafting a remedy. In the event this 340B hospital
survey data is not used to devise a remedy, CMS also indicated that it intends
to consider the public input to inform of the steps they would take to propose a
remedy for CY 2018 and 2019 in the CY 2021 rulemaking. We are unable to predict
the ultimate outcome of any appeal and the type of relief that may be ordered by
the Courts. We estimate that the CMS 2018 change in the 340B payment policy
increased our 2018 Medicare OPPS payments by approximately $8 million , which has
been fully reserved in our results of operations for the year, and estimate that
a comparable amount was scheduled to be earned during 2019 and 2020.
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
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-------------------------------------------------------------------------------- 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. OnNovember 15, 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. A lawsuit has been filed by several hospital associations, health systems, and hospitals in the U.S. District court for theDistrict of Columbia challenging the legal authority of HHS to implement the final rule. We are unable to predict the ultimate outcome of this legal challenge and the type of relief that may be ordered by the courts. The deadline for compliance with the final rule isJanuary 1, 2021 . We are unable to determine the impact, if any, this final rule will have on our future results of operations. In November, 2018, CMS published its OPPS final rule for 2019. The hospital market basket increase is 2.9%. The Medicare statute requires a productivity adjustment reduction of 0.8% and 0.75% reduction to the 2019 OPPS market basket resulting in a 2019 update to OPPS payment rates by 1.35%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2019 will aggregate to a net increase of 1.1% which includes a 5.7% increase to behavioral health division partial hospitalization rates. When the behavioral health division's partial hospitalization rate impact is excluded, we estimate that our Medicare 2019 OPPS payments will result in a 0.4% increase in payment levels for our acute care hospitals, as compared to 2018. Medicaid: Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide benefits to qualifying individuals. Most state Medicaid payments are made under a PPS-like system, or under programs that negotiate payment levels with individual hospitals. Amounts received under the Medicaid program are generally significantly less than a hospital's customary charges for services provided. In addition to revenues received pursuant to the Medicare program, we receive a large portion of our revenues either directly from Medicaid programs or from managed care companies managing Medicaid. All of our acute care hospitals and most of our behavioral health centers are certified as providers of Medicaid services by the appropriate governmental authorities. We receive revenues from various state and county based programs, including Medicaid in all the states in which we operate (we receive Medicaid revenues in excess of$100 million annually from each ofCalifornia ,Texas ,Nevada ,Washington, D.C. ,Pennsylvania ,Illinois andMassachusetts ); CMS-approved Medicaid supplemental programs in certain states includingTexas ,Mississippi ,Illinois ,Oklahoma ,Nevada ,Arkansas ,California 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") for which CMS believes will strengthen the fiscal integrity of the Medicaid program and help ensure that state supplemental payments and financing arrangements are transparent and value-driven.
This rule proposes to establish regulations to:
•Improve Reporting on Medicaid Supplemental Payments.
•Clarify Medicaid Financing Definitions.
•Reduce what CMS considers "Questionable Financing Mechanisms" by states.
•Clarifies the Definition of Permissible Health Care-Related Taxes and Donations.
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•Implement certain
The MFAR proposed rule, if implemented, could have a significant impact on the
means by which states finance the non-federal share of their Medicaid programs.
Under the proposal, CMS would have the ability to strike down common financing
arrangements such as provider taxes, intergovernmental transfers and
donations. These changes could have detrimental impacts on state Medicaid
programs. If finalized as proposed, the rule could potentially force states to
raise taxes or cut their Medicaid budgets. In subsequent years, it could have an
unfavorable impact on Medicaid beneficiaries by likely limiting access to
providers and requiring states to consider reductions to their Medicaid
programs.
We receive a significant amount of Medicaid and Medicaid managed care revenue
from both base payments and supplemental payments. Although we are unable to
estimate the impact of MFAR on our future results of operations, if implemented
as proposed, MFAR related changes could have a material adverse impact on our
future results of operations.
In January, 2020, CMS announced a new opportunity to support states with greater
flexibility to improve the health of their Medicaid populations. The new 1115
Waiver Block Grant Type Demonstration program, titled Healthy Adult Opportunity
("HAO"), emphasizes the concept of value-based care while granting states
extensive flexibility to administer and design their programs within a defined
budget. CMS believes this state opportunity will enhance the Medicaid program's
integrity through its focus on accountability for results and quality
improvement, making the Medicaid program stronger for states and beneficiaries.
The HAO program will include:
• Beneficiary Protections. • Flexibility in theAdministration of Benefits . • Transparency. • Financing and Program Integrity
o States participating in HAO demonstrations will need to agree to
operate their program within a defined budget target, set on either a
total expenses or per-enrollee basis, in a manner similar to that used
in other section 1115 demonstrations.
o To the extent states achieve savings and demonstrate no declines in
access or quality, CMS will share back a portion of the federal
savings for reinvestment into Medicaid.
• Limited Medicaid Population
o The population includes adults under age 65 who are not eligible for
Medicaid on the basis of disability or on their need for long term
care services and supports, and who are not eligible under a state
plan.
• Benefit Design and Drug Coverage
o States have the opportunity to design a benefit package that aligns
with private coverage.
o Provide states with greater negotiating power to lower drug spending
and promote value in the program.
• Managed Care and Delivery Systems
o States will be able to use any combination of fee-for-service and
managed care delivery systems and will have flexibility to alter these
arrangements over the course of the demonstration
• Streamlined Application Process Transitioning 1115 Demonstrations
• Quality Strategy and Performance Assessment
o States will be held to a high standard of accountability for producing
positive health outcomes and will be subject to regular and thorough
monitoring and evaluation
We are unable to predict whether any states will opt to apply for participation in the HAO demonstration or the impact on our future results of operations.
Various State Medicaid Supplemental Payment Programs:
We incur health-care related taxes ("Provider Taxes") imposed by states in the
form of a licensing fee, assessment or other mandatory payment which are related
to: (i) healthcare items or services; (ii) the provision of, or the authority to
provide, the health care items or services, or; (iii) the payment for the health
care items or services. Such Provider Taxes are subject to various federal
regulations that limit the scope and amount of the taxes that can be levied by
states in order to secure federal matching funds as part of their respective
state Medicaid programs. As outlined below, we derive a related Medicaid
reimbursement benefit from assessed Provider Taxes in the form of Medicaid
claims based payment increases and/or lump sum Medicaid supplemental payments.
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.
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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 ). We estimate the impact on of these UC program changes could result in a 5% to 10% increase to UC payments in DYs 9 to 11 as compared to our DY 8 UC payments. 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. In February, 2020, THHSC announced the UHRIP pool for the state's 2021 fiscal year will increase to$3.0 billion from its current funding level of$1.6 billion . We estimate that this change, if approved by CMS, will favorably impact our annual results of operations by approximately$12 million during that period, of which approximately$4 million relates to the year endedDecember 31, 2020 . OnNovember 16, 2018 , THHSC published a final rule effective in federal fiscal years 2018 and 2019 that changes the definition of a rural hospital for the purposes of determining Texas UC payments and the applicable UC payment reduction. The application of UC payment reduction allows the THHSC to comply with the overall statewide UC payment cap required under the special terms and condition of the approved 1115 Waiver. Two of our acute care hospitals, which have been designated as a Rural Referral Center by CMS and which are located in an urban Metropolitan Statistical Area, recorded: (i) increased UC payments/revenue for the federal fiscal year endingSeptember 30, 2018 , and; (ii) decreased UC payments/revenue for the federal fiscal year beginningOctober 1, 2018 . The net impact of these changes had a favorable impact on our 2018 results of operations and are included in the amounts reflected below in the State Medicaid Supplemental Payment Program table.
Texas Delivery System Reform Incentive Payments:
In addition, the Texas Medicaid Section 1115 Waiver includes a DSRIP pool to incentivize hospitals and other providers to transform their service delivery practices to improve quality, health status, patient experience, coordination, and cost-effectiveness. DSRIP pool payments are incentive payments to hospitals and other providers that develop programs or strategies to enhance access to health care, increase the quality of care, the cost-effectiveness of care provided and the health of the patients and families served. In May, 2014, CMS formally approved specific DSRIP projects for certain of our hospitals for demonstration years 3 to 5 (our facilities did not materially participate in the DSRIP pool during demonstration years 1 or 2). DSRIP payments are contingent on the hospital meeting certain pre-determined milestones, metrics and clinical outcomes. Additionally, DSRIP payments are contingent on a governmental entity providing an IGT for the non-federal share component of the DSRIP payment. THHSC generally approves DSRIP reported metrics, milestones and clinical outcomes on a semi-annual basis in June and December. Under the CMS approval noted above, the Waiver renewal requires the transition of the DSRIP program to one focused on "health system performance measurement and improvement." THHSC must submit a transition plan describing "how it will further develop its delivery system reforms without DSRIP funding and/or phase out DSRIP funded activities and meet mutually agreeable milestones to demonstrate its ongoing progress." The size of the DSRIP pool will remain unchanged for the initial two years of the waiver renewal with unspecified decreases in years three and four of the renewal, FFY 2020 and 2021, respectively. In FFY 2022, DSRIP funding under the waiver is eliminated. For FFY 2020 and 2021, we estimate these changes will result in a$3 million and$4 million decrease in DSRIP payments, respectively. For FFY 2022, we will no longer receive DSRIP funds due to the elimination of this funding source by CMS in the Waiver renewal. In March, 2020, HHSC submitted a DSRIP Transition Plan to CMS as required by the 1115 Waiver Special Terms and Conditions #37 that outlines a transition from the current DSRIP program to a Value-Based Purchasing ("VBP") type payment model. The draft plan was submitted by THHSC to CMS byMarch 31, 2020 . The effective date of the new VBP payment 46
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model (if approved by CMS) is not yet known. Similarly, details of the VBP model are still under development. As a result, we are unable to estimate the financial impact of this payment change.
Summary of Amounts Related To The Above-Mentioned Various State Medicaid Supplemental Payment Programs:
The following table summarizes the revenues, Provider Taxes and net benefit related to each of the above-mentioned Medicaid supplemental programs for the three month periods endedMarch 31, 2020 and 2019. The Provider Taxes are recorded in other operating expenses on the Condensed Consolidated Statements of Income as included herein. (amounts in millions) Three Months Ended March 31, March 31, 2020 2019 Texas UC/UPL: Revenues$ 32 $ 26 Provider Taxes (13 ) (10 ) Net benefit$ 19 $ 16 Texas DSRIP: Revenues $ 0 $ 0 Provider Taxes 0 0 Net benefit $ 0 $ 0 Various other state programs: Revenues$ 74 $ 61 Provider Taxes (33 ) (34 ) Net benefit$ 41 $ 27 Total all Provider Tax programs: Revenues$ 106 $ 87 Provider Taxes (46 ) (44 ) Net benefit$ 60 $ 43 We estimate that our aggregate net benefit from theTexas and various other state Medicaid supplemental payment programs will approximate$237 million (net of Provider Taxes of$207 million ) during the year endingDecember 31, 2020 . This estimate is based upon various terms and conditions that are out of our control including, but not limited to, the states'/CMS's continued approval of the programs and the applicable hospital district or county making IGTs consistent with 2019 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 the 2019 Novel Coronavirus Disease ("COVID-19") Medicare and Medicaid Payment Related Legislation, a 6.2% increase to the Medicaid Federal Matching Assistance Percentage ("FMAP") is included in Public Law No: 116-127 (3/18/2020) Families First Coronavirus Response Act. We are unable to estimate the financial impact of this provision at this time.
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 2020 DSH fiscal year (covering the period ofOctober 1, 2019 throughSeptember 30, 2020 ). 47 -------------------------------------------------------------------------------- In connection with these DSH programs, included in our financial results was an aggregate of approximately$9 million during each of the three-month periods endedMarch 31, 2020 and 2019. We expect the aggregate reimbursements to our hospitals pursuant to theTexas andSouth Carolina 2020 fiscal year programs to be approximately$36 million . The Legislation and subsequent federal legislation provides for a significant reduction in Medicaid disproportionate share payments beginning in federal fiscal year 2021 (see below 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 2021 (as amended by the CARES Act), annual Medicaid DSH payments inSouth Carolina andTexas could be reduced by approximately 32% and 23%, respectively, from 2019 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, the Company continues to maintain reserves in its financial statements for cumulative Medicaid DSH and UC reimbursements related to our behavioral health hospitals located inTexas that amounted to$36 million and$20 million as ofMarch 31, 2020 and 2019, 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 2020 fiscal year covering the period ofJuly 1, 2019 throughJune 30, 2020 . In connection with this program, included in our financial results was approximately$7 million during each of the three-month periods endingMarch 31, 2020 and 2019. We estimate that our reimbursements pursuant to this program will approximate$25 million during the year endedDecember 31, 2020 . This 2020 projected amount reflects aMarch 2020 Board of Trustees for theFund for Hospital Care For Indigent Persons ("IAF Board") approval to reduce funding for the non-federal share of theNevada supplemental payment program for SFY 2021. Concurrent IAF Board action also approved the elimination of this funding of the non-federal share of theNevada supplemental payment program for SFY 2022. California SPA: InCalifornia , CMS issued formal approval of the 2017-19 Hospital Fee Program in December, 2017 retroactive toJanuary 1, 2017 throughJune 30, 2019 . This approval included the Medicaid inpatient and outpatient fee-for-service supplemental payments and the overall provider tax structure but did not yet include the approval of the managed care payment component. Upon approval by CMS, the managed care payment component will consist of two categories of payments, "pass-through" payments and "directed" payments. The pass-through payments will be similar in nature to the prior Hospital Fee Program payment method whereas the directed payment method will be based on actual concurrent hospital Medicaid managed care in-network patient volume. CMS has approved the "directed" payment component methodology for the period ofJuly 1, 2017 throughJune 30, 2019 . The timing of CMS's approval of the "pass through" component is uncertain. 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. The actual managed care payment rate component associated with the renewed program are still under development and subject to CMS approval. The timing of these additional approvals are uncertain. In connection with the existing program, included in our financial results was approximately$7 million and$4 million during the three-month period endingMarch 31, 2020 andMarch 31, 2019 , respectively. We estimate that our reimbursements pursuant to this program will approximate$29 million during the year endedDecember 31, 2020 . The aggregate impact of theCalifornia supplemental payment program, as outlined above, is included in the above State Medicaid 48
-------------------------------------------------------------------------------- Supplemental Payment Program table. OnApril 28, 2020 , theCalifornia Department of Health Care Services ("DHCS") notified hospital providers that participate in the Medicaid managed care directed payment program that DHCS has identified a data error with their directed payment calculation for the periodJuly 1, 2017 toJune 30, 2018 . DHCS will recalculate the directed payment add-on payment amount and plan to notify providers of their new respective payment amounts likely in Q3 2020. We are unable to determine the impact of this planned DCHS directed payment change.
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 November, 2018, CMS issued a proposed rule that would permit 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 new Medicare and Medicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. State Medicaid program participation in this federally funded incentive program is voluntary but all of the states in which our eligible hospitals operate have chosen to participate. Our acute care hospitals qualified for these EHR incentive payments upon implementation of the EHR application assuming they meet the "meaningful use" criteria. The government's ultimate goal is to promote more effective (quality) and efficient healthcare delivery through the use of technology to reduce the total cost of healthcare for all Americans and utilizing the cost savings to expand access to the healthcare system. 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
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efforts are successful and reduce the insurers' reimbursement to hospitals and
the costs of providing services to their beneficiaries, such reduced levels of
reimbursement may have a negative impact on the operating results of our
hospitals.
Other Sources: Our hospitals provide services to individuals that do not have
any form of health care coverage. Such patients are evaluated, at the time of
service or shortly thereafter, for their ability to pay based upon federal and
state poverty guidelines, qualifications for Medicaid or other state assistance
programs, as well as our local hospitals' indigent and charity care policy.
Patients without health care coverage who do not qualify for Medicaid or
indigent care write-offs are offered substantial discounts in an effort to
settle their outstanding account balances.
Health Care Reform: Listed below are the Medicare, Medicaid and other health
care industry changes which have been, or are scheduled to be, implemented as a
result of the Legislation.
Implemented Medicare Reductions and Reforms:
• 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")
2021 through FFY 2025. The aggregate annual reduction amounts are
for FFY 2021 (effective
FFY 2025. In December, 2019, federal legislation was enacted which delays the
reduction in the Medicaid DSH allotment through
subsequent federal legislation in March, 2020 delayed the reduction through
November 30, 2020 . 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
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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 a percentage beginning at 1% in FFY 2013 and increasing by 0.25% each fiscal year up to 2% in FFY 2017 and subsequent years. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions. In its fiscal year 2016 IPPS final rule, CMS funded the value-based purchasing program by reducing base operating DRG payment amounts to participating hospitals by 1.75%. For FFY 2017 and subsequent years, this reduction was increased to its maximum of 2%.
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:
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") is responsible for establishing demonstration projects and other initiatives aimed to develop, test and encourage the adoption of new methods for delivery and payment for health care that create savings under the Federal Medicare and state Medicaid programs while improving quality of care. For example, providers participating in bundled payment initiatives agree to receive one payment for services provided to Medicare beneficiaries for certain medical conditions or episodes of care, accepting accountability for costs and quality of care across the continuum of care. By rewarding providers for increasing quality and reducing costs, and penalizing providers if costs exceed a set amount, these models are intended to lead to higher quality and more coordinated care at a lower cost to the Medicare beneficiary and overall program. The CMMI has previously implemented a voluntary bundled payment program known as the Bundled Payment for Care Improvement ("BPCI"). Substantially all of our acute care hospitals were participants in the BPCI program, which endedSeptember 30, 2018 . 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 for 32 Clinical Episodes (29 inpatient and 3 outpatient) with an aim to align 51 -------------------------------------------------------------------------------- incentives among participating health care providers to reduce expenditures and improve quality of care for traditional Medicare beneficiaries. The first cohort of participants entered BPCI-Advanced onOctober 1, 2018 , and agreed to an initial performance period that will run throughDecember 31, 2023 . We initially elected to participate in BPCI-Advanced at seventeen (17) of our acute care hospitals across almost two hundred (200) clinical episodes in collaboration with a third-party convener which has extensive experience and success in BPCI. A second BPCI-Advanced cohort startedJanuary 1, 2020 where our participation in the program increased to twenty-two (22) acute care hospitals with over three hundred (300) clinical episodes. The ultimate success and financial impact of the BPCI-Advanced program is contingent on multiple variables so we are unable to estimate the impact. However, given the breadth and scope of participation of our acute care hospitals in BPCI-Advanced, the impact could be significant (either favorably or unfavorably) depending on actual program results. The COVID-19 national emergency described below in the 2019 Novel Coronavirus Disease ("COVID-19") Medicare and Medicaid Payment Related Legislation section could adversely impact BPCI-A program results absent CMS intervention to provide temporary participant hold harmless financial protections similar to ones that have been implemented in the past by CMS after the occurrence of other natural disaster events. We are unable to predict whether such protections will be implemented by CMS during this COVID-19 national emergency. The initial CMS BPCI-A reconciliation in Q1 2020 for the periodOctober 1, 2018 throughJune 30, 2019 did not have material impact on our financial results.
2019 Novel Coronavirus Disease ("COVID-19") Medicare and Medicaid Payment Related Legislation
In response to the growing threat of the 2019 Novel Coronavirus Disease
("COVID-19"), on March 13, 2020 President Trump declared a national emergency.
The President's declaration empowered the HHS Secretary to waive certain
Medicare, Medicaid and Children'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
o CMS temporarily waived or modified hospital physical environment
requirements under the Medicare conditions of participation, granting
hospitals flexibility to expand services and manage COVID-19
populations.
o CMS expanded reimbursement and waived certain limitations on the
conduct of telehealth services.
o CMS granted certain waivers from compliance with Emergency Medical
Treatment & Labor Act requirements, permitting hospitals to better
manage patients presenting to the hospital with COVID-19.
• Provider Enrollment Flexibilities
o CMS temporarily suspended certain Medicare enrollment screening
requirements including site visits and fingerprinting for
non-certified Part B suppliers, physicians and non-physician
practitioners.
• Flexibility and Relief for State Medicaid Programs
o The national emergency declaration also enabled CMS to grant state and
territorial Medicaid agencies a wider range of flexibilities under
section 1135 waivers. Examples of flexibilities available to states
under section 1135 waivers include the ability to permitout-of-state
providers to render services, temporarily suspend certain provider
enrollment and revalidation requirements to promote access to care,
allow providers to provide care in alternative settings, waive prior
authorization requirements, and temporarily suspend certain
pre-admission and annual screenings for nursing home residents.
• Suspension of Enforcement Activities
o CMS temporarily suspended non-emergency survey inspections, allowing
providers to focus on the most current serious health and safety
threats, like infectious diseases and abuse.
o CMS has issued certain blanket waivers under Section 1877(g) of the
Social Security Act.
o OCR is exercising temporary enforcement discretion regarding
compliance with certain civil rights laws and privacy and security
requirements under the Health Insurance Portability andAccountability
Act of 1996.
o OIG issued a Policy Statement announcing temporary enforcement
discretion under the Federal anti-kickback statute for certain
remuneration related to COVID-19.
In addition to the national emergency declaration, Congress passed and President
Trump signed legislation intended to support state and local authority responses
to COVID-19 as well as provide fiscal support to businesses, individuals,
financial markets, hospitals and other healthcare providers. This enacted
legislation includes:
• Public Law No: 116-123 - Coronavirus Preparedness and Response Supplemental
Appropriations Act, 2020 (3/06/2020)
o The legislation provided $8.3 billion in emergency funding for federal
agencies to respond to the coronavirus outbreak.
• Public Law No: 116-127 Families First Coronavirus Response Act (3/18/2020)
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o The legislation provides paid sick leave, tax credits, and free
COVID-19 testing; expands nutrition assistance and unemployment
benefits; and increases Medicaid funding.
• This legislation increases the Medicaid FMAP 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. For example, in order to
receive the increased FMAP, a state Medicaid program may not
require standards for eligibility that are morerestrictive than
the standards that were in effect on January 1, 2020 .
• We are unable to estimate the financial impact at this time.
However, this provision will result in a net favorable impact to
certain Medicaid supplemental payments where states make payments
to our hospitals during an eligible quarter.
• H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act, ("CARES
Act")(03/27/2020)
o The CARES Act includes sweeping measures that provides $2.2 trillion
in emergency assistance to individuals, families, and businesses
affected by the COVID-19 pandemic. Legislative provisions granting
immediate funding relief are:
o The creation of a $175 billion Public Health and Social Services
Emergency Fund ("PHSSEF") for grants available to hospitals and other
healthcare providers (as amended by H.R. 266 on April 24, 2010 which
added $75 billion to the fund).
• This new program will provide grants intended to cover
unreimbursed health care related expenses or lost revenues
attributable to the public health emergency resulting from the
coronavirus.
• The new program will also reimburse hospitals atMedicare rates
for uncompensated COVID-19 care for the uninsured.
• Grants to eligible recipients will be made in multiple tranches by HHS
• HHS Distributions 1 and 2 - As of May 5, 2020 , we have
received approximately $198 million in PHSSEF grant payments
that were part of an initial $50 billion distribution of
funds that are subject to specific terms and conditions. The
HHS terms and conditions for all grant recipients are
located at
https://www.hhs.gov/provider-relief/index.html. Our
operating results for the three-months ended March 31, 2020
do not include the recognition of any PHSSEF grant income.
Although we can provide no assurance that we will ultimately
be deemed qualified, our future results of operations will
include the applicable income recognition related to these
funds received, to the extent that we successfully submit
the required attestations to HHS signifying our
qualification pursuant to the terms and conditions of this
program.
• HHS Distributions 3 and Beyond - HHS has stated the $50
billion residual balance of the PHSSEF will target
subsequent distributions that focus on providers in areas
particularly impacted by the COVID-19 outbreak, rural
providers, providers of services with lower shares of
Medicare reimbursement or who predominantly serve the
Medicaid population, and providers requesting reimbursement
for the treatment of uninsured Americans. Specifically, HHS
has committed to:
o $10 billion Allocation for COVID-19 High Impact Areas
? Our acute care hospital located in Washington,
D.C. received approximately $15 million in
connection with this funding.
o $10 billion Allocation for Rural Hospitals
? As of May 6, 2020 , we have received $21 million
of this rural hospital funding from HHS.
o $2 billion for COVID-19 Testing for the Uninsured
o Unspecified Allocation for Treatment of COVID-19 Uninsured
The specific uses of the remaining $95 billion PHSSEF funds including the
additional $75 billion authorized under H.R. 266 (outlined below) has not yet
been determined by HHS. We are unable to estimate the level of additional grant
payments and their impact on future financial operating results.
• Increase of provider funding through immediate Medicare sequester relief.
• Suspension of the 2% Medicare sequestration offset for Medicare
services provided from May 1, 2020 through December 31, 2020 .
• We estimate that this provision will have a favorable impact of
$30 million during this period.
• Medicare add-on for inpatient hospital COVID-19 patients.
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• Increases the payment that would otherwise be made to a hospital
for treating a Medicare patient admitted with COVID-19 by twenty
percent (20%).
• We are unable to estimate the financial impact of this provision.
• Expansion of the Medicare Accelerated and Advance Payment Program.
• Expands the Medicare Accelerated and Advance Payment Program for
the duration of the COVID-19 public health emergency. These
payments were provided to ensure Medicare providers and suppliers
have reliable and stable cash flow in order to maintain an
adequate workforce, buy essential supplies, create additional
infrastructure, and keep their respective operations in place for
patient.
• As of May 5, 2020 , we received approximately $376 million under
the Accelerated and Advance Payment Program. Although we can
provide no assurance that we will ultimately receive additional
accelerated Medicare payments, we believe we are entitled to
additional funds comparable to the amount received thus far
should the Centers for Medicare and Medicaid Services resume the
Medicare accelerated funding program which was suspended on April
26, 2020 for reevaluation. A hospital that receives funds under
this program is not required to start repayment for 120 days,
general acute care hospitals have up to one year and psychiatric
hospitals will have up to 210 days to complete repayment without
the assessment of interest. As such, we will beginrepaying this
loan through the recoupment of future Medicare claims in July,
2020, likely through December, 2020, but as late as April, 2021.
o Coronavirus Relief Fund .
• Establishes a $150 billion Coronavirus Relief Fund . The Secretary
of Treasury is authorized to make payments for COIVD-19 response
efforts to states, tribal governments and localgovernments with
populations of 500,000 or more. It requires that the District of
Columbia andU.S. territories collectively receive$3
billion of
this funding, that $8 billion in payments be provided to tribal
governments, and that no state receives less than $1.25 billion .
State allocations are determined on the state'spopulation,
relative to the population in all 50 states. Any funding to the
local governments is subtracted from the amount otherwise
available to their state government. Local government funding is
also apportioned by population, but local governments may receive
only 45% of the amount associated with their population. We are
unable to predict whether any portion of this this state and
local funding will ultimately be paid to our hospitals impacted
by COVID-19.
• H.R 266 - The Paycheck Protection Program and Health Care Enhancement Act(4/24/2020)
o Includes an additional
and health care providers for COVID-19 related expenses and lost
revenue. The legislation also includes $25 billion for necessary
expenses to research, develop, validate, manufacture, purchase,
administer and expand capacity for COVID-19 tests.
COVID-19 State and Local Grant Programs
We have pursued available COVID-19 related state and local grant funding opportunities where available. State and local grants received asMay 5, 2020 , include approximately$5 million fromWashington, D.C. , to be used for supplies, equipment, personnel and construction and operation of temporary structures for testing and treatment of COVID-19 patients. We are unable to predict the aggregate amount of state and local grant opportunities that we will ultimately secure. 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.
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Other Operating Results
Interest Expense:
As reflected on the schedule below, interest expense was
Three Months Three Months
Ended Ended
March 31, March 31,
2020 2019
Revolving credit & demand notes (a.) $ 716 $ 745
$700 million , 4.75% Senior Notes due 2022, net (b.) 8,069 8,069
$400 million , 5.00% Senior Notes due 2026 (c.) 5,000 5,000 Term loan facility A (a.) 14,365 19,334 Term loan facility B (a.) 4,284 5,318 Accounts receivable securitization program (d.) 2,043
3,192
Subtotal-revolving credit, demand notes, Senior Notes,
term loan facility and accounts receivable
securitization program 34,477
41,658
Interest rate swap income, net - (2,944 ) Amortization of financing fees 1,282
1,278
Other combined interest expense 1,671 691 Capitalized interest on major projects (1,049 ) (774 ) Interest income (30 ) (269 ) Interest expense, net$ 36,351 $ 39,640 (a.) In October, 2018, we entered into a sixth amendment to our credit
agreement dated
the aggregate amount of the revolving commitments by
billion; (ii) increase the aggregate amount of the term loan facility A
by approximately
maturity date of the credit agreement from
2023. On
facility in the aggregate amount of
agreement. The Tranche B term loan matures on October 31, 2025 .
As of March 31, 2020 , we had: (i) $1.938 billion of borrowings outstanding under
the term loan A facility; (ii) $493.8 million of borrowings outstanding under
the term loan B facility, and; (iii) no outstanding borrowings under the $1
billion revolving credit facility.
(b.) In June, 2016, we completed the offering of an additional
aggregate principal amount of 4.75% Senior Notes due in 2022 (issued at a
yield of 4.35%), the terms of which were identical to the terms of our
$300 million aggregate principal amount of 4.75% Senior Notes due in2022, issued in August, 2014. These Senior Notes, combined, are referred
to as $700 million , 4.75% Senior Notes due in 2022.
(c.) In June, 2016, we completed the offering of $400 million aggregate
principal amount of 5.00% Senior Notes due in 2026.
(d.) In April, 2018, we amended our accounts receivable securitizationprogram, which was scheduled to expire in December, 2018. Pursuant to the
amendment, the term has been extended through
borrowing limit has been increased to
($260 million outstanding as of March 31, 2020 ).
Interest expense decreased $3 million during the three-month period ended
March 31, 2020 , as compared to the comparable period of 2019, due primarily to:
(i) a net $7 million decrease in aggregate interest expense on our revolving
credit, demand notes, senior notes, term loan facility and accounts receivable
securitization program resulting from a decrease in our aggregate average cost
of borrowings pursuant to these facilities (3.6% during the three months ended
March 31, 2020 as compared to 4.2% in the comparable quarter of 2019), as well
as a decrease in the aggregate average outstanding borrowings ($3.85 billion
during the three months ended March 31, 2020 as compared to $3.99 billion in the
comparable 2019 quarter), offset by; (ii) a $3 million unfavorable change in
interest rate swap income, and; (iii) a $1 million of other combined increases
in interest expense The average effective interest rate on these facilities,
including amortization of deferred financing costs and original issue discounts
and designated interest rate swap expense (for the period ended March 31, 2019 )
was 3.7% and 4.0% during the three-month periods ended March 31, 2020 and 2019,
respectively.
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Provision for Income Taxes and Effective Tax Rates:
The effective tax rates, as calculated by dividing the provision for income
taxes by income before income taxes, were as follows for the three month periods
ended
Three months ended
March 31, March 31,
2020 2019
Provision for income taxes $ 46,323 $ 58,898
Income before income taxes 190,783 296,296
Effective tax rate 24.3 % 19.9 %
The provision for income taxes decreased $13 million during the three-month
period ended March 31, 2020 , as compared to the comparable quarter of 2019, due
primarily to: (i) the income tax benefit recorded in connection with the $105
million decrease in pre-tax income, partially offset by; (ii) a $12 million
increase in the provision for income taxes resulting from our adoption of ASU
2016-09, which increased our provision for income taxes by approximately $1
million during the first quarter of 2020 as compared to a decrease of
approximately $11 million during the first quarter of 2019.
Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was
• an unfavorable change of
income plus/minus depreciation and amortization expense and stock-based
compensation expense;
• a favorable change of $171 million in accounts receivable;
• an unfavorable change of
resulting primarily from changes in accounts payable due to timing of
disbursements;
• a favorable change of
commercial premiums paid due to the above-mentioned
to our reserves for self-insured professional and general liability claims
recorded during the first quarter of 2020, and;
• $4 million of other combined net unfavorable changes.
Days sales outstanding ("DSO"): Our DSO are calculated by dividing our net
revenue by the number of days in the three-month periods. The result is divided
into the accounts receivable balance at March 31st of each year to obtain the
DSO. Our DSO were 48 days and 51 days at March 31, 2020 and 2019, respectively.
Our accounts receivable as of March 31, 2020 and December 31, 2019 include
amounts due from Illinois of approximately $23 million and $36 million ,
respectively. Collection of the outstanding receivables continues to be delayed
due to state budgetary and funding pressures. Approximately $11 million as of
March 31, 2020 and $18 million as of December 31, 2019 , of the receivables due
from Illinois were outstanding in excess of 60 days, as of each respective date.
Although the accounts receivable due from Illinois could remain outstanding for
the foreseeable future, since we expect to eventually collect all amounts due to
us, no related reserves have been established in our consolidated financial
statements. However, we can provide no assurance that we will eventually collect
all amounts due to us from Illinois . Failure to ultimately collect all
outstanding amounts due to us from Illinois would have an adverse impact on our
future consolidated results of operations and cash flows.
Net cash used in investing activities
During the first three months of 2020, we used
• $184 million spent on capital expenditures including capital
expenditures for equipment, renovations and new projects at various
existing facilities;
• $52 million received in connection with net cash inflows from forward
exchange contracts that hedge our investment in the U.K. against
movements in exchange rates;
•
technology applications, and;
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•
and other.
During the first three months of 2019, we used
• $170 million spent on capital expenditures including capital
expenditures for equipment, renovations and new projects at various
existing facilities;
• $28 million paid in connection with net cash inflows from forward
exchange contracts that hedge our investment in the U.K. against
movements in exchange rates;
•
technology applications, and;
• $1 million spent to fund investments in and advances to joint ventures
and other.
During the fourth quarter of 2019, we identified certain cash inflows related to
operating activities that were incorrectly classified as cash inflows from
foreign currency exchange contracts, as included cash flows from investing
activities, on our condensed consolidated statements of cash flows for the
quarterly periods in 2019. The cash flows related to our foreign currency
exchange contracts were correctly classified on our consolidated statements of
cash flows for the year ended December 31, 2019 . We determined that these
misclassifications were not material to the financial statements of any period
during 2019. However, in order to improve the consistency and comparability of
the financial statements, we have revised the condensed consolidated statements
of cash flows for the quarter ended March 31, 2019 .
Net cash used in financing activities
During the first three months of 2020, we used
• spent
related to our term loan A facility; (ii)
accounts receivable securitization program; (iii)
term loan B facility, and; (iv)
facility.
• generated $5 million of proceeds related to other debt facilities;
• spent
connection with: (i) open market purchases pursuant to our
stock repurchase program (
obligations related to stock-based compensation programs (
• spent
interests in majority owned businesses;
• spent
• generated
pursuant to the terms of employee stock purchase plans.
During the first three months of 2019, we used
• spent
related to our accounts receivable securitization program; (ii)
related to our term loan A facility; (iii)
loan B facility, and; (iv)
• generated
short-term, on-demand credit facility;
• spent
connection with: (i) open market purchases pursuant to our
stock repurchase program (
obligations related to stock-based compensation programs (
• spent
interests in majority owned businesses;
• spent
• generated
pursuant to the terms of employee stock purchase plans.
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Expected capital expenditures during remainder of 2020
In our Form 10-K for the year endedDecember 31, 2019 , we estimated that we would spend approximately$775 million to$825 million on capital expenditures during the year endedDecember 31, 2020 . As mentioned above, we spent approximately$184 million on capital expenditures during the first quarter of 2020.
As mentioned above, as a result of the COVID-19 pandemic, we plan to reduce the
spend rate and magnitude of certain previously planned capital projects and
expenditures. We are therefore reducing our planned capital expenditures
estimate for the full year of 2020 to approximately
During the remaining nine months of 2020, we expect to spend approximately$390 million to$440 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.
Capital Resources
OnOctober 23, 2018 , we entered into a Sixth Amendment (the "Sixth Amendment") to our credit agreement dated as ofNovember 15, 2010 , as amended onMarch 15, 2011 ,September 21, 2012 ,May 16, 2013 ,August 7, 2014 andJune 7, 2016 , among UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders,JPMorgan Chase Bank, N.A ., as administrative agent, and the other agents party thereto (the "Senior Credit Agreement"). The Sixth Amendment became effective onOctober 23, 2018 . The Sixth Amendment amended the Senior Credit Agreement to, among other things: (i) increase the aggregate amount of the revolving credit facility to$1 billion (increase of$200 million over the$800 million previous commitment); (ii) increase the aggregate amount of the tranche A term loan commitments to$2 billion (increase of approximately$290 million over the$1.71 billion of outstanding borrowings prior to the amendment), and; (iii) extended the maturity date of the revolving credit and tranche A term loan facilities toOctober 23, 2023 fromAugust 7, 2019 .
On
As of
Pursuant to the terms of the Sixth Amendment, the tranche A term loan, which had$1.938 billion of borrowings outstanding as ofMarch 31, 2020 , provides for eight installment payments of$12.5 million per quarter which commenced in March of 2019 and are scheduled to continue through December of 2020. Thereafter, payments of$25 million per quarter are scheduled, commencing in March of 2021 until maturity in October of 2023, when all outstanding amounts will be due. The tranche B term loan, which had$494 million of borrowings outstanding as ofMarch 31, 2020 , provides for installment payments of$1.25 million per quarter, which commenced onMarch 31, 2019 and are scheduled to continue until maturity in October of 2025, when all outstanding amounts will be due. Borrowings under the Senior Credit Agreement bear interest at our election at either (1) the ABR rate which is defined as the rate per annum equal to the greatest of (a) the lender's prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month LIBOR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.375% to 0.625% for revolving credit and term loan A borrowings and 0.75% for tranche B borrowings, or (2) the one, two, three or six month LIBOR rate (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.375% to 1.625% for revolving credit and term loan A borrowings and 1.75% for the tranche B term loan. As ofMarch 31, 2020 , the applicable margins were 0.375% for ABR-based loans and 1.375% for LIBOR-based loans under the revolving credit and term loan A facilities. The revolving credit facility includes a$125 million sub-limit for letters of credit. The Senior Credit Agreement is secured by certain assets of the Company and our material subsidiaries (which generally excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, and certain real estate assets and assets held in joint-ventures with third parties) and is guaranteed by our material subsidiaries. The Senior Credit Agreement includes a material adverse change clause that must be represented at each draw. The Senior Credit Agreement contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with affiliates, dividends and stock repurchases; and requires compliance with financial covenants including maximum leverage. We are in compliance with all required covenants as ofMarch 31, 2020 andDecember 31, 2019 . 58
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In late April, 2018, we entered into the sixth amendment to our accounts
receivable securitization program ("Securitization") dated as of October 27,
2010 with a group of conduit lenders, liquidity banks, and PNC Bank, National
Association , as administrative agent, which provides for borrowings outstanding
from time to time by certain of our subsidiaries in exchange for undivided
security interests in their respective accounts receivable. The sixth amendment,
among other things, extended the term of the Securitization program through
April 26, 2021 and increased the borrowing capacity to $450 million (from $440
million previously). Although the program fee and certain other fees were
adjusted in connection with the sixth amendment, substantially all other
provisions of the Securitization program remained unchanged. Pursuant to the
terms of our Securitization program, substantially all of the patient-related
accounts receivable of our acute care hospitals ("Receivables") serve as
collateral for the outstanding borrowings. We have accounted for this
Securitization as borrowings. We maintain effective control over the Receivables
since, pursuant to the terms of the Securitization, the Receivables are sold
from certain of our subsidiaries to special purpose entities that are
wholly-owned by us. The Receivables, however, are owned by the special purpose
entities, can be used only to satisfy the debts of the wholly-owned special
purpose entities, and thus are not available to us except through our ownership
interest in the special purpose entities. The wholly-owned special purpose
entities use the Receivables to collateralize the loans obtained from the group
of third-party conduit lenders and liquidity banks. The group of third-party
conduit lenders and liquidity banks do not have recourse to us beyond the assets
of the wholly-owned special purpose entities that securitize the loans. At March
31, 2020 , we had $260 million of outstanding borrowings pursuant to the terms of
the Securitization and $190 million of available borrowing capacity.
As of
•
August, 2022 ("2022 Notes") which were issued as follows:
•$300 million aggregate principal amount issued onAugust 7, 2014 at par. •$400 million aggregate principal amount issued onJune 3, 2016 at 101.5% to yield 4.35%.
•
in June, 2026 ("2026 Notes") which were issued on
Interest on the 2022 Notes is payable onFebruary 1 andAugust 1 of each year until the maturity date ofAugust 1, 2022 . Interest on the 2026 Notes is payable onJune 1 andDecember 1 until the maturity date ofJune 1, 2026 . The 2022 Notes and 2026 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 2022 Notes and 2026 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. OnNovember 26, 2018 we redeemed the$300 million aggregate principal, 3.75% Senior Notes due in 2019. The 2019 Notes were redeemed for an aggregate price equal to 100.485% of the principal amount, resulting in a premium paid of approximately$1 million , plus accrued interest to the redemption date. AtMarch 31, 2020 , the carrying value and fair value of our debt were each approximately$3.8 billion . AtDecember 31, 2019 , the carrying value and fair value of our debt were each approximately$4.0 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 41% at
During 2015, we entered into nine forward starting interest rate swaps whereby we paid a fixed rate on a total notional amount of$1.0 billion and received one-month LIBOR. The average fixed rate payable on these swaps, all of which matured onApril 15, 2019 , was 1.31%. Although we can provide no assurance that we will ultimately do so, we are currently monitoring the interest rate environment and evaluating the terms of potential replacement interest rate swaps that we may enter into for a large portion, or potentially all, of the$1 billion total notional amount that expired onApril 15, 2019 . We expect to finance all capital expenditures and acquisitions and, if and when we determine to restart our quarterly dividend and stock repurchase programs, pay dividends and potentially repurchase shares of our common stock utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing revolving credit facility or through refinancing the existing Senior Credit Agreement; (ii) the issuance of other long-term debt, and/or; (iii) the issuance of equity. We believe that our operating cash flows, cash and cash equivalents, as well as access to the capital markets, provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months, including the refinancing of our above-mentioned Senior Credit Agreement that is scheduled to mature in October, 2023. However, in the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable 59
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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.
Off-Balance Sheet Arrangements
During the three months ended
As ofMarch 31, 2020 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled$92 million consisting of: (i)$88 million related to our self-insurance programs, and; (ii)$4 million of other debt and public utility guarantees.
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