UNIVERSAL HEALTH SERVICES, INC. Overview
Our principal business is owning and operating, through our subsidiaries, acute care hospitals and outpatient facilities and behavioral health care facilities.
As ofSeptember 30, 2020 , we owned and/or operated 356 inpatient facilities and 41 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 (330 inpatient facilities and 20 outpatient facilities):
Located in theU.S. : • 183 inpatient behavioral health care facilities, and; • 18 outpatient behavioral health care facilities.
Located in the
• 144 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 55% and 54% during the three-month periods endedSeptember 30, 2020 and 2019, respectively, and 54% during each of the nine-month periods endedSeptember 30, 2020 and 2019. Net revenues from our behavioral health care facilities and commercial health insurer accounted for 45% and 46% of our consolidated net revenues during the three-month periods endedSeptember 30, 2020 and 2019, respectively, and 46% during each of the nine-month periods endedSeptember 30, 2020 and 2019. Our behavioral health care facilities located in theU.K. generated net revenues of approximately$155 million and$135 million during the three-month periods endedSeptember 30, 2020 and 2019, respectively, and$429 million and$415 million during the nine-month periods endedSeptember 30, 2020 and 2019, respectively. Total assets at ourU.K. behavioral health care facilities were approximately$1.257 billion as ofSeptember 30, 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 Quarterly Report, and should particularly consider any risk factors that we set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2020 , this Quarterly Report and in other reports or documents that we file from time to time with theSecurities and Exchange Commission (the "SEC"). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. This Quarterly Report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. In evaluating those statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those set forth in Item 1A. Risk Factors and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations- 28
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Forward Looking Statements and Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , in Item 1A. Risk Factors and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 , and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors as included herein. 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, in March, April
and May, most state and local governments mandated general
"shelter-in-place" orders or other similar restrictions that require or
strongly encourage social distancing and, face coverings, and that have
closed or limited non-essential business activities. While some of these
restrictions have been eased across
lifted moratoriums on elective surgeries and procedures, some restrictions
remain in place, and some state and local governments are re-imposing
certain restrictions due to increasing rates of COVID-19 cases. While such
measures are expected to assist in responding to the recent outbreak,
self-quarantines, shelter-in-place orders, and suspension of voluntary
procedures and surgeries have had and will likely have an adverse impact
on the operations and financial position of health care provider systems
due to increased costs, actual reduction and potential reduction in
overall patient volume, and shifts in payor mix. Even if such actions help
reduce the rate of increase in COVID-19 cases in the near term, they may
prove to be ineffective in reducing the total number of cases. 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, most of which are
beyond our control or ability to predict. 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 pandemic 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
on Form 10-Q for the quarter ended
• the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"),
a stimulus package signed into law on
billion in grant funding to hospitals and other healthcare providers to be
distributed through the Public Health and Social Services Emergency Fund
(the "PHSSEF"). These funds are not required to be repaid provided the
recipients attest to and comply with certain terms and conditions,
including limitations on balance billing and not using PHSSEF funds to
reimburse expenses or losses that other sources are obligated toreimburse. However, since the expenses and losses will be ultimately
measured over the life of the COVID-19 pandemic, potential retrospective
unfavorable adjustments in future periods, of funds recorded as revenues
in prior periods, could occur. The U.S. Department of Health and Human
Services ("HHS") initially distributed $30 billion of this funding basedon each provider's share of total Medicare fee-for-service reimbursement
in 2019. Subsequently, HHS distributed
(including the $30 billion already distributed) would be allocated
proportional to providers' share of 2018 net patient revenue. We have
received payments from these initial distributions of the PHSSEF asdisclosed herein. HHS has indicated that distributions of the remaining
$50 billion will be targeted primarily to hospitals in COVID-19 high impact areas, to rural providers, safety net hospitals and certain Medicaid providers and to reimburse providers for COVID-19-related treatment of uninsured patients. We have received payments from these
targeted distributions of the PHSSEF, as disclosed herein. The CARES Act
also makes other forms of financial assistance available to healthcare
providers, including through Medicare and Medicaid payment adjustments and
an expansion of the Medicare Accelerated and Advance Payment Program,
which makes available accelerated payments of Medicare funds in order to
increase cash flow to providers. On April 26, 2020 , CMS announced it was
reevaluating and temporarily suspending the Accelerated
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and Advance Payment Program in light of the availability of the PHSSEF and
the significant funds available through other programs. We have received
accelerated payments under this program as disclosed herein. The Paycheck
Protection Program and Health Care Enhancement Act (the "PPPHCE Act"), a
stimulus package signed into law on
emergency appropriations for COVID-19 response, including
be distributed to eligible providers through the PHSSEF. Recipients will
not be required to repay the government for funds received, provided they
comply with HHS-defined terms and conditions. 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").
all federal agencies with authorities and responsibilities under the
Legislation to "exercise all authority and discretion available to them to
waiver, defer, grant exemptions from, or delay" parts of the Legislation
that place "unwarranted economic and regulatory burdens" on states,
individuals or health care providers; (ii) the issuance of a final rule in
June, 2018 by the
association health plans that would be exempt from certain Legislation
requirements such as the provision of essential health benefits; (iii) the
issuance of a final rule in August, 2018 by the Department of Labor ,
Treasury , and Health and Human Services to expand the availability of
short-term, limited duration health insurance, (iv) eliminating
cost-sharing reduction payments to insurers that would otherwise offsetdeductibles 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,
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 smallgroup 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
ruled the entire Legislation is unconstitutional. That ruling was appealed
and on
strike 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
to be heard on
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 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 in Sources of Revenue and Health Care Reform for
additional disclosure;
• possible unfavorable changes in the levels and terms of reimbursement for
our charges by third party payers or government based payers, including
Medicare or Medicaid in
the
• 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 decline in patient volumes. However, we have entered into an
amended agreement with
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that provide for various rate increases beginning in January, 2020.
Although we estimate that the unfavorable impact of the projected declines
in patient volumes should be largely offset by the favorable impact of the
increased rates, we can provide no assurance that these developments, as
well as the effect of COVID-19 on the
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;
• although we are unable to quantify the ultimate impact of the cyberattack
that we experienced in late September, 2020, that incident could have an
adverse effect on our future results of operations (see below in Results
of Operations-Information Technology Incident for additional disclosure);
• a heightened risk of cybersecurity threats, including ransomware attacks
targeting healthcare providers, that if successful could have a material
adverse effect on our business. Any costs that we incur as a result of a
data security incident or breach, including costs to update our security
protocols to mitigate such an incident or breach could be significant. Any
breach or failure in our operational security systems can result in loss
of data or an unauthorized disclosure of or access to sensitive or
confidential member or protected personal or health information and couldresult in significant penalties or fines, litigation, loss of customers,
significant damage to our reputation and business, and other losses;
• the availability of suitable acquisition and divestiture opportunities and
our ability to successfully integrate and improve our acquisitions since
failure to achieve expected acquisition benefits from certain of our prior
or future acquisitions could result in impairment charges for goodwill and
purchased intangibles;
• the impact of severe weather conditions, including the effects of
hurricanes and climate change;
• as discussed below in Sources of Revenue, we receive revenues from various
state and county based programs, including Medicaid in all the states in
which we operate (we receive Medicaid revenues in excess of
annually from each of
supplemental programs in certain states including
Medicaid disproportionate share hospital payments in certain states
including Texas and South Carolina . We are therefore particularly
sensitive to potential reductions in Medicaid and other state based
revenue programs as well as regulatory, economic, environmental andcompetitive changes in those states. We can provide no assurance that
reductions to revenues earned pursuant to these programs, and the effect
of the COVID-19 pandemic on state budgets, particularly in the
above-mentioned states, will not have a material adverse effect on our
future results of operations;
• our ability to continue to obtain capital on acceptable terms, including
borrowed funds, to fund the future growth of our business;
• our inpatient acute care and behavioral health care facilities may
experience decreasing admission and length of stay trends;
• our financial statements reflect large amounts due from various commercial
and private payers and there can be no assurance that failure of the
payers to remit amounts due to us will not have a material adverse effect
on our future results of operations;
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• 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. We cannot predict whether
implemented Medicare payment reductions or what other federal budget
deficit reduction initiatives may be proposed by
• 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
of 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 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. 32
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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 patientswho are employed but do not have health insurance orwho have policies with relatively high deductibles. Patients treated at our hospitals for non-elective services,who have gross income of various amounts, dependent upon the state, ranging from 200% to 400% of the federal poverty guidelines, are deemed eligible for charity care. The federal poverty guidelines are established by the federal government and are based on income and family size. Because we do not pursue collection of amounts that qualify as charity care, the transaction price is fully adjusted and there is no impact in our net revenues or in our accounts receivable, net. A portion of the accounts receivable at our acute care facilities are comprised of Medicaid accounts that are pending approval from third-party payers but we also have smaller amounts due from other miscellaneous payers such as county indigent programs in certain states. Our patient registration process includes an interview of the patient or the patient's responsible party at the time of registration. At that time, an insurance eligibility determination is made and an insurance plan code is assigned. There are various pre-established insurance profiles in our patient accounting system which determine the expected insurance reimbursement for each patient based on the insurance plan code assigned and the services rendered. Certain patients may be classified as Medicaid pending at registration based upon a screening evaluation if we are unable to definitively determine if they are currently Medicaid eligible. When a patient is registered as Medicaid eligible or Medicaid pending, our patient accounting system records net revenues for services provided to that patient based upon the established Medicaid reimbursement rates, subject to the ultimate disposition of the patient's Medicaid eligibility. When the patient's ultimate eligibility is determined, reclassifications may occur which impacts net revenues in future periods. Although the patient's ultimate eligibility determination may result in adjustments to net revenues, these adjustments did not have a material impact on our results of operations during the three and nine-month periods endedSeptember 30, 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. 33
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The following tables show the amounts recorded at our acute care hospitals for charity care and uninsured discounts, based on charges at established rates, for the three and nine-month periods endedSeptember 30, 2020 and 2019: Uncompensated care: Amounts in millions Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 % 2019 % 2020 % 2019 % Charity care $ 148 27 % $ 152 26 % $ 511 30 % $ 438 27 % Uninsured discounts 410 73 % 424 74 % 1,221 70 % 1,157 73 % Total uncompensated care $ 558 100 % $ 576 100 % $ 1,732 100 % $ 1,595 100 %
Estimated cost of providing uncompensated care:
The estimated costs of providing uncompensated care as reflected below were
based on a calculation which multiplied the percentage of operating expenses for
our acute care hospitals to gross charges for those hospitals by the
above-mentioned total uncompensated care amounts. The percentage of cost to
gross charges is calculated based on the total operating expenses for our acute
care facilities divided by gross patient service revenue for those facilities.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
Amounts in millions 2020 2019 2020 2019
Estimated cost of providing charity
care $ 17 $ 18 $ 60 $ 51
Estimated cost of providing
uninsured discounts related care 47 50 142 133
Estimated cost of providing
uncompensated care $ 64 $ 68 $ 202 $ 184
Self-Insured/Other Insurance Risks: We provide for self-insured risks including
general and professional liability claims, workers' compensation claims and
healthcare and dental claims. Our estimated liability for self-insured
professional and general liability claims is based on a number of factors
including, among other things, the number of asserted claims and reported
incidents, estimates of losses for these claims based on recent and historical
settlement amounts, estimate of incurred but not reported claims based on
historical experience, and estimates of amounts recoverable under our commercial
insurance policies. All relevant information, including our own historical
experience is used in estimating the expected amount of claims. While we
continuously monitor these factors, our ultimate liability for professional and
general liability claims could change materially from our current estimates due
to inherent uncertainties involved in making this estimate. Our estimated
self-insured reserves are reviewed and changed, if necessary, at each reporting
date and changes are recognized currently as additional expense or as a
reduction of expense. In addition, we also: (i) own commercial health insurers
headquartered in Reno, Nevada , and Puerto Rico and; (ii) maintain self-insured
employee benefits programs for employee healthcare and dental claims. The
ultimate costs related to these programs/operations include expenses for claims
incurred and paid in addition to an accrual for the estimated expenses incurred
in connection with claims incurred but not yet reported. Given our significant
insurance-related exposure, there can be no assurance that a sharp increase in
the number and/or severity of claims asserted against us will not have a
material adverse effect on our future results of operations.
See Note 6 to the Consolidated Financial Statements-Commitments and Contingencies, for additional disclosure related to our professional and general liability, workers' compensation liability and property insurance.
The total accrual for our professional and general liability claims and workers' compensation claims was$352 million as ofSeptember 30, 2020 , of which$96 million is included in current liabilities. The total accrual for our professional and general liability claims and workers' compensation claims was$323 million as ofDecember 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, which began during the second half of March, 2020, has had a material unfavorable effect on our operations and financial results since that time, before giving effect to the revenues recorded in connection with the CARES Act and other governmental grants as discussed below. Patient volumes at both our acute care and behavioral health care facilities were
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most significantly reduced in March and April. Our acute care and behavioral health facilities began experiencing gradual and continued improvement in patient volumes since May as various states eased stay-at-home restrictions and acute care hospitals were permitted to resume elective surgeries and procedures. Although many of our acute care and behavioral health facilities are located in states that have continued to experience intermittent increases in COVID-19 infections, non-COVID-19 patient volumes at our hospitals have not been as dramatically impacted in recent months by increases experienced from time-to-time in COVID-19 patient volumes. 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.
CARES Act and Other Governmental Grants and Medicare Accelerated Payments:
As ofSeptember 30, 2020 , we have received an aggregate of$1.091 billion as follows: • Approximately$396 million of funds received from various governmental stimulus programs, most notably the PHSSEF, as provided for by the CARES Act. o Included in our net income attributable to UHS for the three-month period endedSeptember 30, 2020 , was an unfavorable impact of approximately$5 million resulting from a reversal of previously recorded CARES Act and other grant income revenues of approximately$5 million . During the third quarter of 2020, approximately$4 million of grant income revenues were recorded by our acute care services, while our behavioral health services reversed approximately$9 million of previously recorded CARES Act and other grant income revenues. o Included in our reported and adjusted net income attributable to UHS for the nine-month period endedSeptember 30, 2020 , was the favorable impact of approximately$157 million resulting from the recording of approximately$213 million of CARES Act and other grant income revenues. Approximately$161 million of the grant income revenues were attributable to our acute care services and approximately$52 million were attributable to our behavioral health care services. o As ofSeptember 30, 2020 , approximately$183 million of these funds remain in the Medicare accelerated payments and deferred CARES Act and other grants liability account in our condensed consolidated balance sheet. • Approximately$695 million of Medicare accelerated payments received. Pursuant to legislation enacted onOctober 1, 2020 , these funds are required to be repaid to the government beginning in the second quarter of 2021 through the third quarter of 2022 through
withholding
of future Medicare revenues earned during those periods. There was no
impact on our earnings during the three and nine-month periods ended
September 30, 2020 in connection with receipt of these funds. As of
September 30, 2020 , the funds are included in the Medicareaccelerated
payments and deferred CARES Act and other grants liability account in
our condensed balance sheet.
We recognized grant income net revenues related to the CARES Act and other
governmental grant funding based on information available at September 30, 2020
based upon laws and regulations governing the funding as well as interpretations
issued by HHS. In October 2020 , HHS issued new reporting requirements for the
CARES Act funding. Due to these new reporting requirements and various
interpretations, there is a reasonable possibility that amounts recorded under
CARES Act funding will change in future periods.
Please see Sources of Revenue- 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation below for additional disclosure.
Information Technology Incident:
As previously disclosed onSeptember 29, 2020 , we experienced an information technology security incident in the early morning hours ofSeptember 27, 2020 . As a result of this cyberattack, we suspended user access to our information technology applications related to operations located inthe United States . While our information technology applications were offline, patient care was delivered safely and effectively at our facilities across the country utilizing established back-up processes, including offline documentation methods. Since that time, our information technology applications have been restored at our acute care and behavioral health hospitals, as well as at the corporate level, thereby re-establishing connections to all major systems and applications, including electronic medical records, laboratory and pharmacy systems. With the back-loading of data substantially complete at this point, our hospitals are resuming normal operations. 35
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We have worked diligently with our information technology security partners to restore our information technology infrastructure and business operations as quickly as possible. In parallel, we immediately began investigating the nature and potential impact of the security incident and engaged third-party information technology and forensic vendors to assist. Although the investigation remains ongoing, no evidence of unauthorized access, copying or misuse of any patient or employee data has been identified to date.
Although we are unable to quantify the ultimate impact of this information technology incident, it could have an adverse effect on our future results of operations
Financial results for the three-month periods ended
The following table summarizes our results of operations and is used in the
discussion below for the three-month periods ended
Three months ended Three months ended
September 30, 2020 September 30, 2019
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 2,912,541 100.0 % $ 2,822,453 100.0 %
Operating charges:
Salaries, wages and benefits 1,406,348 48.3 % 1,408,226 49.9 %
Other operating expenses 666,665 22.9 % 762,174 27.0 %
Supplies expense 335,409 11.5 % 313,936 11.1 %
Depreciation and amortization 125,961 4.3 % 121,528 4.3 %
Lease and rental expense 28,488 1.0 % 27,660 1.0 %
Subtotal-operating expenses 2,562,871 88.0 % 2,633,524 93.3 %
Income from operations 349,670 12.0 % 188,929 6.7 %
Interest expense, net 24,575 0.8 % 41,447 1.5 %
Other (income) expense, net 1,831 0.1 % 9,407 0.3 %
Income before income taxes 323,264 11.1 % 138,075 4.9 %
Provision for income taxes 79,172 2.7 % 37,205 1.3 %
Net income 244,092 8.4 % 100,870 3.6 %
Less: Income attributable to
noncontrolling interests 2,813 0.1 % 3,680 0.1 %
Net income attributable to UHS $ 241,279 8.3 % $ 97,190 3.4 %
Net revenues increased 3.2%, or $90 million , to $2.91 billion during the
three-month period ended September 30, 2020 as compared to $2.82 billion during
the third quarter of 2019. The net increase was primarily attributable to: (i) a
$97 million or 3.5% 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) $7 million of other combined
net decreases. As discussed above, our net revenues during the three-month
period ended September 30, 2020 included the unfavorable impact of approximately
$5 million resulting from the reversal of net revenues previously recorded in
connection with various governmental stimulus programs, most notably the CARES,
Act.
Income before income taxes (before deduction for income attributable to
noncontrolling interests) increased
• an increase of
below in Acute Care Hospital Services, including the favorable impact of
approximately
quarter of 2020 in connection with the California Medicaid supplemental
program (approximately
the first nine months of 2020 and approximately $17 million were
attributable to prior years);
• an increase of
discussed below in Behavioral Health Services , excluding the impact of a
$98 million provision for asset impairment recorded during the third
quarter of 2019;
• an increase of
recorded during the third quarter of 2019 in connection with Foundations
• an increase of $17 million due to a decrease in interest expense due
primarily to lower average outstanding borrowings and a decrease in the
average cost of borrowings;
• an increase of
resulting from a decrease in the market value of shares of certain
marketable securities held for investment and classified as available for
sale (
as compared to $15 million unrealized loss recorded during the third
quarter of 2019);
36
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•
Net income attributable to UHS increased$144 million to$241 million during the three-month period endedSeptember 30, 2020 as compared to$97 million during the comparable prior year quarter. This increase was attributable to:
• a
• an increase of
noncontrolling interests, and;
• a decrease of
income taxes due primarily to: (i) the income tax provision recorded in
connection with the
million increase in the provision for income taxes recorded in connection
with our adoption of ASU 2016-09; partially offset by; (iii) a
decrease in the provision for income taxes due the recording, during the
third quarter of 2019, of the non-deductible portion of the net federal
and state income taxes due on the settlement finalized in July, 2020 with
the
Financial results for the nine-month periods ended
The following table summarizes our results of operations and is used in the
discussion below for the nine-month periods ended
Nine months ended Nine months ended
September 30, 2020 September 30, 2019
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 8,471,962 100.0 % $ 8,482,012 100.0 %
Operating charges:
Salaries, wages and benefits 4,147,027 49.0 % 4,157,253 49.0 %
Other operating expenses 1,982,202 23.4 % 2,079,518 24.5 %
Supplies expense 936,808 11.1 % 927,256 10.9 %
Depreciation and amortization 376,563 4.4 % 362,736 4.3 %
Lease and rental expense 84,967 1.0 % 80,320 0.9 %
Subtotal-operating expenses 7,527,567 88.9 % 7,607,083 89.7 %
Income from operations 944,395 11.1 % 874,929 10.3 %
Interest expense, net 86,399 1.0 % 123,574 1.5 %
Other (income) expense, net 8,291 0.1 % 6,176 0.1 %
Income before income taxes 849,705 10.0 % 745,179 8.8 %
Provision for income taxes 204,649 2.4 % 165,646 2.0 %
Net income 645,056 7.6 % 579,533 6.8 %
Less: Income attributable to
noncontrolling interests 9,811 0.1 % 9,855 0.1 %
Net income attributable to UHS $ 635,245 7.5 % $ 569,678 6.7 %
Net revenues decreased 0.1%, or $10 million , to $8.47 billion during the
nine-month period ended September 30, 2020 as compared to $8.48 billion during
the first nine months of 2019. The net decrease was primarily attributable to:
(i) a $29 million or 0.3% increase in net revenues generated from our acute care
hospital services and behavioral health services operated during both periods,
on a same facility basis, and; (ii) $39 million of other combined net decreases,
including a $14 million reduction in provider tax assessments which had no
impact on net income attributable to UHS as reflected above since the amounts
offset between net revenues and other operating expenses. As discussed above,
included in our net revenues during the nine-month period ended September 30,
2020 was approximately $213 million of net revenues recorded in connection with
various governmental stimulus programs, most notably the CARES, Act.
Income before income taxes (before deduction for income attributable to
noncontrolling interests) increased
• a decrease of
in Acute Care Hospital Services, including the favorable impact of
approximately
months of 2020 in connection with the California Medicaid supplemental
program (approximately
the first nine months of 2020 and approximately $17 million were
attributable to prior years);
37
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• an increase of
discussed below in Behavioral Health Services , excluding the impact of a
$98 million provision for asset impairment recorded during the third
quarter of 2019;
• an increase of
recorded during the first nine months of 2019 in connection with
Foundations Recovery Network, L.L.C. ;
• an increase of $37 million due to a decrease in interest expense due
primarily to lower average outstanding borrowings and a decrease in the
average cost of borrowings;
• an increase of
nine months of 2019 to the reserve previously established in connection
with the settlement finalized in July, 2020 with the Department of
Justice , Civil Division, and;
• $22 million of other combined net increases.
Net income attributable to UHS increased $66 million to $635 million during the
nine-month period ended September 30, 2020 as compared to $570 million during
the comparable prior year period. This increase was attributable to:
• an
above, and;
• a decrease of
income taxes due primarily to: (i) an increase in the provision for income
taxes resulting from the income tax provision recorded in connection with
the
provision for income taxes of
change resulting from the adoption of ASU 2016-09, which increased our
provision for income taxes by
2020 and decreased our provision for income taxes by
the first nine months of 2019, partially offset by; (iii) a
decrease in the provision for income taxes due the recording, during the
first nine months of 2019, of the non-deductible portion of the net
federal and state income taxes due on the settlement finalized in July,
2020 with the
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 three and nine-month periods endedSeptember 30, 2020 , we recorded increases of$5 million and$25 million , respectively, to our reserves for self-insured professional and general liability claims. For the nine-month periods endedSeptember 30, 2020 , approximately$19 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$6 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 and nine-month periods endedSeptember 30, 2020 and 2019 (dollar amounts in thousands): 38
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Three months ended Three months ended Nine months ended Nine months ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues $ 1,585,142 100.0 % $ 1,502,891 100.0 % $ 4,528,364 100.0 % $ 4,493,296 100.0 %
Operating charges:
Salaries, wages and benefits 660,610 41.7 % 653,792 43.5 % 1,909,216 42.2 % 1,897,144 42.2 %
Other operating expenses 366,754 23.1 % 344,681 22.9 % 1,086,669 24.0 % 1,017,833 22.7 %
Supplies expense 283,829 17.9 % 263,462 17.5 % 781,778 17.3 % 777,309 17.3 %
Depreciation and amortization 78,388 4.9 % 76,318 5.1 % 234,756 5.2 % 226,489 5.0 %
Lease and rental expense 17,641 1.1 % 16,235 1.1 % 50,224 1.1 % 45,270 1.0 %
Subtotal-operating expenses 1,407,222 88.8 % 1,354,488 90.1 % 4,062,643 89.7 % 3,964,045 88.2 %
Income from operations 177,920 11.2 % 148,403 9.9 % 465,721 10.3 % 529,251 11.8 %
Interest expense, net 205 0.0 % 305 0.0 % 1,339 0.0 % 828 0.0 %
Other (income) expense, net - - 13 0.0 % 0 - (32 ) (0.0 )%
Income before income taxes $ 177,715 11.2 % $ 148,085 9.9 % $ 464,382 10.3 % $ 528,455 11.8 %
Three-month periods ended
During the three-month period endedSeptember 30, 2020 , as compared to the comparable prior year quarter, net revenues from our acute care hospital services, on a same facility basis, increased$82 million or 5.5%. Income before income taxes (and before income attributable to noncontrolling interests) increased$30 million , or 20%, amounting to$178 million or 11.2% of net revenues during the third quarter of 2020 as compared to$148 million or 9.9% of net revenues during the third quarter of 2019. During the three-month period endedSeptember 30, 2020 , excluding the impact of the$4 million of governmental stimulus program revenues recorded during the third quarter of 2020, net revenue per adjusted admission increased 26.2% while net revenue per adjusted patient day increased 6.0%, as compared to the comparable quarter of 2019. During the three-month period endedSeptember 30, 2020 , as compared to the comparable prior year quarter, inpatient admissions to our acute care hospitals decreased 9.6% and adjusted admissions (adjusted for outpatient activity) decreased 17.3%. Patient days at these facilities increased 7.6% and adjusted patient days decreased 1.6% during the three-month period endedSeptember 30, 2020 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities increased to 5.4 days during the third quarter of 2020 as compared to 4.5 days during the third quarter of 2019. The occupancy rate, based on the average available beds at these facilities, was 67% and 63% during the three-month periods endedSeptember 30, 2020 and 2019, respectively. Included in our acute care hospital services net revenues and income before income taxes for the three and nine-month periods endedSeptember 30, 2020 , was approximately$28 million of net revenues recorded in connection with the California Medicaid supplemental payment program as disclosed below in Sources of Revenue- California SPA. Approximately$11 million of these supplemental revenues were attributable to the first nine months of 2020 and approximately$17 million were attributable to prior years. Beginning in mid-March of 2020, the incidence of COVID-19 and suspected COVID-19 cases increased in our acute care facilities and, correspondingly, the volume of non COVID-19 patients declined significantly. These declines in patient volumes generally continued into the first half of April. Beginning with the second half of April, our admission and patient day metrics began to rebound. By the first half of May, local authorities had lifted restrictions on elective surgeries and other procedures and those volumes began to rebound sharply, as well. Emergency room visits, while also gradually improving, have been recovering at a slower pace. However, as indicated by the increased average length of inpatient stay, increased patients days despite decreased inpatient admissions, and increased net revenue per adjusted admission and adjusted patient day, acuity of our patient population suggests, at least in part, that the more acutely ill patients tended to return to the emergency rooms and the less acute patients may be continuing to avoid hospital care. In late June and continuing throughout the third quarter, most of our hospitals experienced a second wave of COVID-19 cases, although to date this second wave has not been accompanied by the same magnitude of non-COVID-19 case declines that we experienced in the first wave in the March/April timeframe. Generally, our acute care hospitals were able to better prepare for this second wave with greater intensive care unit and isolation room capacity as well as more ample inventories of personal protective equipment.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2020 , as compared to the comparable prior year period, net revenues from our acute care hospital services, on a same facility basis, increased$35 million or 0.8%. Income before income taxes (and before income attributable to noncontrolling interests) decreased$64 million , or 12%, to$464 million or 10.3% of net revenues during the first nine months of 2020 as compared to$528 million or 11.8% of net revenues during the first nine months of 2019. As mentioned above, 39
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approximately$19 million of the$25 million increase to our reserves for self-insured professional and general liability claims, as recorded during the first nine months of 2020, is included in our same facility basis acute care hospitals services' results. As also mentioned above, included in our acute care hospital services' revenues during the first nine months of 2020 was approximately$161 million of net revenues recorded in connection with funds received from various governmental stimulus programs, most notably the CARES Act. Excluding these governmental stimulus program revenues from the first nine months of 2020, net revenues from our acute care hospital services, on a same facility basis, decreased$126 million or 2.8% during the first nine months of 2020, as compared to the comparable period of 2019. During the nine-month period endedSeptember 30, 2020 , excluding the impact of the$161 million of governmental stimulus program revenues recorded during the first nine months of 2020, net revenue per adjusted admission increased 13.8% while net revenue per adjusted patient day increased 3.0%, as compared to the comparable period of 2019. During the nine-month period endedSeptember 30, 2020 , as compared to the comparable prior year period, inpatient admissions to our acute care hospitals decreased 10.5% and adjusted admissions decreased 15.4%. Patient days at these facilities decreased 1.2% and adjusted patient days decreased 6.6% during the nine-month period endedSeptember 30, 2020 as compared to the comparable prior year period. The average length of inpatient stay at these facilities increased to 5.0 days during the first nine months of 2020, as compared to 4.5 days during the first nine months of 2019. The occupancy rate, based on the average available beds at these facilities, was 62% and 64% during the nine-month periods endedSeptember 30, 2020 and 2019, respectively.
All Acute Care Hospitals
The following table summarizes the results of operations for all our acute care operations during the three and nine-month periods endedSeptember 30, 2020 and 2019. These amounts include: (i) our acute care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including, if applicable, the results of recently acquired/opened ancillary facilities and businesses. Dollar amounts below are reflected in thousands. Three months ended Three months ended Nine months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues Net revenues$ 1,610,003 100.0 %$ 1,528,535 100.0 %$ 4,598,558 100.0 %$ 4,575,088 100.0 % Operating charges: Salaries, wages and benefits 660,694 41.0 % 653,792 42.8 % 1,909,415 41.5 % 1,897,144 41.5 % Other operating expenses 391,642 24.3 % 370,325 24.2 % 1,156,909 25.2 % 1,099,625 24.0 % Supplies expense 283,827 17.6 % 263,462 17.2 % 781,776 17.0 % 777,309 17.0 % Depreciation and amortization 78,388 4.9 % 76,318 5.0 % 234,756 5.1 % 226,489 5.0 % Lease and rental expense 17,641 1.1 % 16,235 1.1 % 50,224 1.1 % 45,270 1.0 % Subtotal-operating expenses 1,432,192 89.0 % 1,380,132 90.3 % 4,133,080 89.9 % 4,045,837 88.4 % Income from operations 177,811 11.0 % 148,403 9.7 % 465,478 10.1 % 529,251 11.6 % Interest expense, net 205 0.0 % 305 0.0 % 1,339 0.0 % 828 0.0 % Other (income) expense, net - - 13 0.0 % - - (32 ) (0.0 )% Income before income taxes$ 177,606 11.0 %$ 148,085 9.7 %$ 464,139 10.1 %$ 528,455 11.6 %
Three-month periods ended
During the three-month period ended
Income before income taxes increased
Nine-month periods ended
During the nine-month period endedSeptember 30, 2020 , as compared to the comparable prior year period, net revenues from our acute care hospital services increased$23 million or 0.5% to$4.60 billion as compared to$4.58 billion due to: (i) the$35 million , or 0.8%, increase in same facility revenues, as discussed above, and; (ii) a$12 million reduction in provider tax assessments which had no impact on net income attributable to UHS since the amounts offset between net revenues and other operating expenses. 40
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Income before income taxes decreased$64 million , or 12%, to$464 million or 10.1% of net revenues during the first nine months of 2020 as compared to$528 million or 11.6% of net revenues during the comparable period of 2019. The$64 million decrease in income before income taxes from our acute care hospital services resulted from the decrease in income before income taxes at our hospitals, on a same facility basis, as discussed above.
Our Same Facility basis results (which is a non-GAAP measure), which include the operating results for facilities and businesses operated in both the current year and prior year period, neutralize (if applicable) the effect of items that are non-operational in nature including items such as, but not limited to, gains/losses on sales of assets and businesses, impact of the reserve established in connection with the civil aspects of the government's investigation of certain of our behavioral health care facilities, impacts of settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets and other amounts that may be reflected in the current or prior year financial statements that relate to prior periods. Our Same Facility basis results reflected on the table below also excludes from net revenues and other operating expenses, provider tax assessments incurred in each period as discussed below Sources of Revenue-Various State Medicaid Supplemental Payment Programs. However, these provider tax assessments are included in net revenues and other operating expenses as reflected in the table below under All Behavioral Health Care Services. The provider tax assessments had no impact on the income before income taxes as reflected on the tables below since the amounts offset between net revenues and other operating expenses. To obtain a complete understanding of our financial performance, the Same Facility results should be examined in connection with our net income as determined in accordance with GAAP and as presented in the condensed consolidated financial statements and notes thereto as contained in this Quarterly Report on Form 10-Q. The following table summarizes the results of operations for our behavioral health care facilities, on a same facility basis, and is used in the discussions below for the three and nine-month periods endedSeptember 30, 2020 and 2019 (dollar amounts in thousands):
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net revenues $ 1,276,975 100.0 % $ 1,261,774 100.0 % $ 3,801,606 100.0 % $ 3,807,798 100.0 %
Operating charges:
Salaries, wages and benefits 683,441 53.5 % 683,345 54.2 % 2,024,303 53.2 % 2,027,271 53.2 %
Other operating expenses 230,060 18.0 % 239,548 19.0 % 694,978 18.3 % 714,310 18.8 %
Supplies expense 51,811 4.1 % 50,336 4.0 % 153,827 4.0 % 148,660 3.9 %
Depreciation and amortization 43,985 3.4 % 41,595 3.3 % 130,258 3.4 % 123,089 3.2 %
Lease and rental expense 10,067 0.8 % 10,910 0.9 % 31,854 0.8 % 32,248 0.8 %
Subtotal-operating expenses 1,019,364 79.8 % 1,025,734 81.3 % 3,035,220 79.8 % 3,045,578 80.0 %
Income from operations 257,611 20.2 % 236,040 18.7 % 766,386 20.2 % 762,220 20.0 %
Interest expense, net 354 0.0 % 359 0.0 % 1,079 0.0 % 1,103 0.0 %
Other (income) expense, net 526 0.0 % 1,058 0.1 % 2,337 0.1 % 1,842 0.0 %
Income before income taxes $ 256,731 20.1 % $ 234,623 18.6 % $ 762,970 20.1 % $ 759,275 19.9 %
Three-month periods ended
On a same facility basis during the third quarter of 2020, net revenues generated from our behavioral health services increased$15 million , or 1.2%, to$1.28 billion , from$1.26 billion generated during the third quarter of 2019. Income before income taxes increased$22 million , or 9%, to$257 million or 20.1% of net revenues during the three-month period endedSeptember 30, 2020 , as compared to$235 million or 18.6% of net revenues during the third quarter of 2019. During the three-month period endedSeptember 30, 2020 , excluding the impact of the reversal of$9 million of previously recorded governmental stimulus program revenues, net revenue per adjusted admission increased 8.0% and net revenue per adjusted patient day increased 5.7%, as compared to the comparable quarter of 2019. On a same facility basis, inpatient admissions and adjusted admissions to our behavioral health facilities decreased 5.3% and 5.6%, respectively, during the three-month period endedSeptember 30, 2020 as compared to the comparable quarter of 2019. Patient days and adjusted patient days at these facilities decreased 3.3% and 3.6% during the three-month period endedSeptember 30, 2020 , respectively, as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 13.5 days and 13.3 days during the three-month periods endedSeptember 30, 2020 and 2019, respectively. The occupancy rate, based on the average available beds at these facilities, was 73% and 75% during the three-month periods endedSeptember 30, 2020 and 2019, respectively. 41
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Nine-month periods ended
On a same facility basis during the first nine months of 2020, net revenues generated from our behavioral health services decreased$6 million , or 0.2%, to$3.80 billion , from$3.81 billion generated during the first nine months of 2019. Income before income taxes increased$4 million , or 1%, to$763 million or 20.1% of net revenues during the nine-month period endedSeptember 30, 2020 , as compared to$759 million or 19.9% of net revenues during the first nine months of 2019. As mentioned above, approximately$6 million of the$25 million increase to our reserves for self-insured professional and general liability claims, as recorded during the first nine months of 2020, is included in our same facility basis behavioral health services' results. As also mentioned above, included in behavioral health services' revenues during the first nine months of 2020 was approximately$52 million of net revenues recorded in connection with funds received from various governmental stimulus programs, most notably the CARES Act. Excluding these governmental stimulus program revenues from the first nine months of 2020, net revenues from our behavioral health services, on a same facility basis, decreased$58 million or 1.5% during the first nine months of 2020, as compared to the comparable period of 2019. During the nine-month period endedSeptember 30, 2020 , excluding the impact of the$52 million of governmental stimulus program revenues, net revenue per adjusted admission increased 6.6% and net revenue per adjusted patient day increased 3.8%, as compared to the comparable period of 2019. On a same facility basis, inpatient admissions and adjusted admissions to our behavioral health facilities decreased 7.2% and 7.6%, respectively, during the nine-month period endedSeptember 30, 2020 as compared to the comparable period of 2019. Patient days and adjusted patient days at these facilities decreased 4.7% and 5.1% during the nine-month period endedSeptember 30, 2020 , respectively, as compared to the comparable prior year period. The average length of inpatient stay at these facilities was 13.6 days and 13.3 days during the nine-month periods endedSeptember 30, 2020 and 2019, respectively. The occupancy rate, based on the average available beds at these facilities, was 72% and 76% during the nine-month periods endedSeptember 30, 2020 and 2019, respectively.
All Behavioral Health Care Facilities
The following table summarizes the results of operations for all our behavioral health care services during the three and nine-month periods endedSeptember 30, 2020 and 2019. These amounts include: (i) our behavioral health care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including the results of facilities acquired or opened during the past year (if applicable) as well as the results of certain facilities that were closed or restructured during the past year. Dollar amounts below are reflected in thousands. Three months ended Three months ended Nine months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues Net revenues$ 1,299,591 100.0 %$ 1,291,816 100.0 %$ 3,864,823 100.0 %$ 3,898,440 100.0 % Operating charges: Salaries, wages and benefits 684,575 52.7 % 690,084 53.4 % 2,027,223 52.5 % 2,049,731 52.6 % Other operating expenses 253,779 19.5 % 363,328 28.1 % 765,006 19.8 % 891,250 22.9 % Supplies expense 51,858 4.0 % 50,692 3.9 % 153,861 4.0 % 149,809 3.8 % Depreciation and amortization 45,154 3.5 % 42,436 3.3 % 134,081 3.5 % 127,327 3.3 % Lease and rental expense 10,734 0.8 % 11,822 0.9 % 34,151 0.9 % 35,185 0.9 % Subtotal-operating expenses 1,046,100 80.5 % 1,158,362 89.7 % 3,114,322 80.6 % 3,253,302 83.5 % Income from operations 253,491 19.5 % 133,454 10.3 % 750,501 19.4 % 645,138 16.5 % Interest expense, net 433 0.0 % 359 0.0 % 1,184 0.0 % 1,103 0.0 % Other (income) expense, net 526 0.0 % (4,924 ) (0.4 )% 2,337 0.1 % (4,138 ) (0.1 )% Income before income taxes$ 252,532 19.4 %$ 138,019 10.7 %$ 746,980 19.3 %$ 648,173 16.6 % 42
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Three-month periods ended
During the three-month period endedSeptember 30, 2020 , as compared to the comparable prior year quarter, net revenues generated from our behavioral health services increased$8 million or 0.6% due to: (i) the above-mentioned$15 million or 1.2% increase in net revenues on a same facility basis, and; (ii)$7 million other combined net decreases. Income before income taxes increased$115 million , or 83%, to$253 million or 19.4% of net revenues during the third quarter of 2020 as compared to$138 million or 10.7% of net revenues during the third quarter of 2019. The increase in income before income taxes at our behavioral health facilities was primarily attributable to the$98 million provision for asset impairment recorded during the third quarter of 2019 in connection withFoundations Recovery Network, L.L.C. , and the above-mentioned increase in income before income taxes, during the third quarter of 2020 as compared to the third quarter of 2019, experienced at our behavioral health facilities on a same facility basis, as discussed above.
Nine-month periods ended
During the nine-month period endedSeptember 30, 2020 , as compared to the comparable prior year period, net revenues generated from our behavioral health services decreased$34 million or 0.9% due to: (i) the above-mentioned$6 million or 0.2% decrease in net revenues on a same facility basis, and; (ii)$27 million other combined net decreases. Income before income taxes increased$99 million , or 15%, to$747 million or 19.3% of net revenues during the first nine months of 2020 as compared to$648 million or 16.6% of net revenues during the first nine months of 2019. The increase in income before income taxes at our behavioral health facilities was primarily attributable to the$98 million provision for asset impairment recorded during the first nine months of 2019 in connection withFoundations Recovery Network, L.L.C. Sources of Revenue Overview: We receive payments for services rendered from private insurers, including managed care plans, the federal government under the Medicare program, state governments under their respective Medicaid programs and directly from patients. Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary depending on the type of services provided (e.g., medical/surgical, intensive care or behavioral health) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control. The percentage of patient service revenue attributable to outpatient services has generally increased in recent years, primarily as a result of advances in medical technology that allow more services to be provided on an outpatient basis, as well as increased pressure from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to our increased outpatient levels mirrors the general trend occurring in the health care industry and we are unable to predict the rate of growth and resulting impact on our future revenues. Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, and managed care plans, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Indications from recent federal and state legislation are that this trend will continue. Collection of amounts due from individuals is typically more difficult than from governmental or business payers which unfavorably impacts the collectability of our patient accounts. As described below in the section titled 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation, the federal government has enacted multiple pieces of legislation to assist healthcare providers during the COVID-19 world-wide pandemic andU.S. National Emergency declaration. We have outlined those legislative changes related to Medicare and Medicaid payment and their estimated impact on our financial results, where estimates are possible. Sources of Revenues and Health Care Reform: Given increasing budget deficits, the federal government and many states are currently considering additional ways to limit increases in levels of Medicare and Medicaid funding, which could also adversely affect future payments received by our hospitals. In addition, the uncertainty and fiscal pressures placed upon the federal government as a result of, among other things, impacts on state revenue and expenses resulting from the COVID-19 pandemic, economic recovery stimulus packages, responses to natural disasters, and the federal and state budget deficits in general may affect the availability of government funds to provide additional relief in the future. We are unable to predict the effect of future policy changes on our operations. 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 43
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decreases in the annual market basket update for federal fiscal years 2010 through 2019, a productivity offset to the market basket update beginningOctober 1, 2011 for Medicare Part B reimbursable items and services and beginningOctober 1, 2012 for Medicare inpatient hospital services. The Legislation and subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions began in October, 2013 while the Medicaid DSH reductions are scheduled to begin in 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 2012U.S. Supreme Court ruling limited the federal government's ability to expand health insurance coverage by holding unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the Medicaid expansion by reducing their existing Medicaid funding. Therefore, states can choose to expand or not to expand their Medicaid program without risking the loss of federal Medicaid funding. As a result, many states, includingTexas , have not expanded their Medicaid programs without the threat of loss of federal funding. CMS has 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. OnDecember 14, 2018 , aTexas Federal District Court deemed the Legislation to be unconstitutional in its entirety. The Court concluded that the Individual Mandate is no longer permissible underCongress's taxing power as a result of the Tax Cut and Jobs Act of 2017 ("TCJA") reducing the individual mandate's tax to$0 (i.e., it no longer produces revenue, which is an essential feature of a tax), rendering the Legislation unconstitutional. The court also held that because the individual mandate is "essential" to the Legislation and is inseverable from the rest of the law, the entire Legislation is unconstitutional. Because the court issued a declaratory judgment and did not enjoin the law, the Legislation remains in place pending its appeal.The District Court for the Northern District of Texas ruling was appealed to theU.S. Court of Appeals for the Fifth Circuit . OnDecember 18, 2019 , theFifth Circuit Court of Appeals' three-judge panel voted 2-1 to strike down the Legislation individual mandate as unconstitutional.The Fifth Circuit Court also sent the case back to theTexas district court to determine which Legislation provisions should be stricken with the mandate or whether the entire Legislation is unconstitutional. OnMarch 2, 2020 , theU.S. Supreme Court agreed to hear, during the 2020-2021 term, two consolidated cases, filed by theState of California and theUnited States House of Representatives , asking theSupreme Court to review the ruling by theFifth Circuit Court of Appeals . Oral argument is scheduled to be heard onNovember 10, 2020 , and a ruling is not expected until 2021. 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, we cannot predict the impact of the Legislation on our future reimbursement at this time and we can provide no assurance that the Legislation will not have a material adverse effect on our future results of operations. The Legislation also contained provisions aimed at reducing fraud and abuse in healthcare. The Legislation amends several existing laws, including the federal Anti-Kickback Statute and the False Claims Act, making it easier for government agencies and private plaintiffs to prevail in lawsuits brought against healthcare providers. WhileCongress had previously revised the intent requirement of the Anti-Kickback Statute to provide that a person is not required to "have actual knowledge or specific intent to commit a violation of" the Anti-Kickback Statute in order to be found in violation of such law, the Legislation also provides that any claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the federal civil False Claims Act. The Legislation also expands the Recovery Audit Contractor program to Medicaid. These amendments also make it easier for severe fines and penalties to be imposed on healthcare providers that violate applicable laws and regulations. We have partnered with local physicians in the ownership of certain of our facilities. These investments have been permitted under an exception to the physician self-referral law. The Legislation permits existing physician investments in a hospital to continue under a "grandfather" clause if the arrangement satisfies certain requirements and restrictions, but physicians are prohibited from increasing the aggregate percentage of their ownership in the hospital. The Legislation also imposes certain compliance and disclosure requirements upon existing physician-owned hospitals and restricts the ability of physician-owned hospitals to expand the capacity of their facilities. As discussed below, should the Legislation be repealed in its entirety, this aspect of the Legislation would also be 44
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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, effectiveJanuary 1, 2019 , related to the obligation to obtain health insurance that was part of the original Legislation. In addition,Congress previously considered legislation that would, in material part: (i) eliminate the large employer mandate to offer health insurance coverage to full-time employees; (ii) permit insurers to impose a surcharge up to 30 percent on individualswho go uninsured for more than two months and then purchase coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits accordingly to income level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by a state, transition federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would allow such state to define essential health benefits differently from federal standards and that would allow certain commercial health plans to take health status, including pre-existing conditions, into account in setting premiums. In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions. In relevant part,President Trump has 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 theDepartment 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 theDepartment of Labor ,Treasury , andHealth 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 , andHealth 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. The recent and on-going COVID-19 pandemic and relatedU.S. National Emergency declaration may significantly increase the number of uninsured patients treated at our facilities extending beyond the most recent CBO published estimates due to increased unemployment and loss of group health plan health insurance coverage. It is also anticipated that these and future policies may create additional cost and reimbursement pressures on hospitals. It remains unclear what portions of the Legislation may remain, or whether any replacement or alternative programs may be created by any future legislation. Any such future repeal or replacement may have significant impact on the reimbursement for healthcare services generally, and may create reimbursement for services competing with the services offered by our hospitals. Accordingly, there can be no assurance that the adoption of any future federal or state healthcare reform legislation will not have a negative financial impact on our hospitals, including their ability to compete with alternative healthcare services funded by such potential legislation, or for our hospitals to receive payment for services. For additional disclosure related to our revenues including a disaggregation of our consolidated net revenues by major source for each of the periods presented herein, please see Note 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 45
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with that particular diagnosis. The MS-DRG payment rates are based upon historical national average costs and do not consider the actual costs incurred by a hospital in providing care. This MS-DRG assignment also affects the predetermined capital rate paid with each MS-DRG. The MS-DRG and capital payment rates are adjusted annually by the predetermined geographic adjustment factor for the geographic region in which a particular hospital is located and are weighted based upon a statistically normal distribution of severity. While we generally will not receive payment from Medicare for inpatient services, other than the MS-DRG payment, a hospital may qualify for an "outlier" payment if a particular patient's treatment costs are extraordinarily high and exceed a specified threshold. MS-DRG rates are adjusted by an update factor each federal fiscal year, which begins onOctober 1 . The index used to adjust the MS-DRG rates, known as the "hospital market basket index," gives consideration to the inflation experienced by hospitals 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 September, 2020, CMS published its IPPS 2021 final payment rule which provides for a 2.4% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates, documenting and coding adjustments, and adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall increase in IPPS payments is approximately 1.8%. Including DSH payments and certain other adjustments, we estimate our overall increase from the final IPPS 2021 rule (covering the period ofOctober 1, 2020 throughSeptember 30, 2021 ) will approximate 2.3%. This projected impact from the IPPS 2021 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result of the American Taxpayer Relief Act of 2012 ("ATRA"), as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below.
In the final rule, CMS will require:
o Hospitals to report certain market-based payment rate information for
Medicare Advantage ("MA") organizations on their Medicare cost report for
cost reporting periods ending on or after
potential change to the methodology for calculating the IPPS MS-DRG relative
weights to reflect relative market-based pricing, beginning in FY 2024.
o Hospitals to report on the Medicare cost report of its median payer-specific
negotiated charges with all of its MA organizations, by MS-DRG.
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 ATRA, as required by the 21st Century Cures Act but excludes the impact
of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act
of 2015, and Bipartisan Budget Act of 2018, as discussed below. CMS completed
its full phase-in to use uncompensated care data from the 2015 Worksheet S-10
hospital cost reports to allocate approximately $8.5 billion in 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 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 2011 Act, Bipartisan Budget Act of 2015,
and Bipartisan Budget Act of 2018, as discussed below. CMS continued to
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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 theDSH Uncompensated Care Pool . The 2011 Act included the imposition of annual spending limits for most federal agencies and programs aimed at reducing budget deficits by$917 billion between 2012 and 2021, according to a report released by theCongressional Budget Office . Among its other provisions, the law established a bipartisan Congressional committee, known asthe Joint Committee , which was responsible for developing recommendations aimed at reducing future federal budget deficits by an additional$1.5 trillion over 10 years.The Joint Committee was unable to reach an agreement by theNovember 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented onMarch 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year. The Bipartisan Budget Act of 2015, enacted onNovember 2, 2015 , and the Bipartisan Budget Act of 2019, enacted onAugust 2, 2019 , continued the 2% reductions to Medicare reimbursement imposed under the 2011 Act through 2029. The CARES Act suspended payment reductionsbetween 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 July, 2020, CMS published its Psych PPS final rule for the federal fiscal year 2021. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 2.2% compared to federal fiscal year 2020. This amount includes the effect of the 2.2% market basket update. In July, 2019, CMS published its Psych PPS final rule for the federal fiscal year 2020. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 1.7% compared to federal fiscal year 2019. This amount includes the effect of the 2.9% market basket update less a 0.75% adjustment as required by the ACA and a 0.4% productivity adjustment. 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. CMS's calendar year 2018 final OPPS rule, issued onNovember 13, 2017 , substantially reduced Medicare Part B reimbursement for 340B Program drugs paid to hospitals. BeginningJanuary 1, 2018 , CMS reimbursement for certain separately payable drugs or biologicals that are acquired through the 340B Program by a hospital paid under the OPPS (and not excepted from the payment adjustment policy) is the average sales price of the drug or biological minus 22.5 percent, an effective reduction of 26.89% in payments for 340B program drugs. In December, 2018, theU.S. District Court for the District of Columbia ruled that HHS did not have statutory authority to implement the 2018 Medicare OPPS rate reduction related to hospitals that qualify for drug discounts under the federal 340B Program and granted a permanent injunction against the payment reduction. OnJuly 31, 2020 , theU.S. Court of Appeals for the D.C. Circuit reversed the District Court and held that HHS's decision to lower drug reimbursement rates for 340B hospitals rests on a reasonable interpretation of the Medicare statute. The ultimate outcome of the litigation and the type of relief that may be ordered by the courts cannot be predicted. CMS has proposed to further enlarge the cuts to payment rates for 340B Program drugs in CY 2021. The plaintiff hospitals are expected to request review by theU.S. Supreme Court . We are unable to predict the ultimate outcome of any appeal and whether relief 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 August, 2020, CMS published its OPPS proposed rule for 2021. The hospital market basket increase is 3.0%. The Medicare statute requires a productivity adjustment reduction of 0.4% to the 2021 OPPS market basket resulting in a 2021 update to OPPS payment rates by 2.6%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2021 will aggregate to a net increase of 4.6% which includes a 5.0% 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 2021 OPPS payments will result in a 4.5% increase in payment levels for our acute care division, as compared to 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 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 47
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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 was 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. In June, 2020, theU.S. District Court issued a decision in favor of the federal government. The Plaintiffs in the case filed a notice of appeal to theCourt of Appeals for the D.C. Circuit and oral argument was heard onOctober 15, 2020 . 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") which CMS believed would strengthen the fiscal integrity of the Medicaid program and help ensure that state supplemental payments and financing arrangements are transparent and value-driven. OnSeptember 14, 2020 , CMS announced that the rule required further study. Although CMS announced that it has withdrawn the proposed rule from its regulatory agenda, CMS could attempt to finalize it, or a similar rule, in the future.
MFAR proposed to establish regulations to:
•Improve Reporting on Medicaid Supplemental Payments.
•Clarify Medicaid Financing Definitions.
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•Reduce what CMS considers "Questionable Financing Mechanisms" by states.
•Clarifies the Definition of Permissible Health Care-Related Taxes and Donations.
•Implement certain
An MFAR 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
most recent proposed rule, CMS would have had the ability to strike down common
financing arrangements such as provider taxes, intergovernmental transfers and
donations. These changes could have had detrimental impacts on state Medicaid
programs. If finalized as proposed, the rule could have potentially forced
states to raise taxes or cut their Medicaid budgets. In subsequent years, it
could have had 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 an MFAR final rule on our future results of operations,
if a rule were to be 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
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 ). EffectiveApril 1, 2018 , certain of our acute care hospitals located inTexas began to receive Medicaid managed care rate enhancements under the Uniform Hospital Rate Increase Program ("UHRIP"). The non-federal share component of these UHRIP rate enhancements are financed by Provider Taxes. TheTexas 1115 Waiver rules require UHRIP rate enhancements be considered in the Texas UC payment methodology which results in a reduction to our UC payments. The UC amounts reported in the State Medicaid Supplemental Payment Program Table below reflect the impact of this new UHRIP program. InJuly 2020 , THHSC announced CMS approval of an increase to UHRIP pool for the state's 2021 fiscal year to$2.7 billion from its current funding level of$1.6 billion . We estimate that this UHRIP pool increase will not have a material impact on the Company financial results due to CMS approved pool allocation methodology for the SFY 2021 program. 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 50
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payment model. The effective date of the new VBP payment 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 and nine month periods endedSeptember 30, 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 Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 2020 2019 Texas UC/UPL: Revenues $ 29 $ 41 $ 85 $ 94 Provider Taxes (9 ) (13 ) (25 ) (35 ) Net benefit $ 20 $ 28 $ 60 $ 59 Texas DSRIP: Revenues $ 0 $ 0 $ 29 $ 23 Provider Taxes 0 2 (9 ) (8 ) Net benefit $ 0 $ 2 $ 20 $ 15 Various other state programs: Revenues $ 107 $ 76 $ 249 $ 202 Provider Taxes (39 ) (35 ) (101 ) (103 ) Net benefit $ 68 $ 41 $ 148 $ 99 Total all Provider Tax programs: Revenues $ 136 $ 117 $ 363 $ 319 Provider Taxes (48 ) (46 ) (135 ) (146 ) Net benefit $ 88 $ 71 $ 228 $ 173 We estimate that our aggregate net benefit from theTexas and various other state Medicaid supplemental payment programs will approximate$288 million (net of Provider Taxes of$182 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 Medicare and Medicaid Payment Related Legislation, a 6.2% increase to the Medicaid Federal Matching Assistance Percentage ("FMAP") is included in the Families First Coronavirus Response Act. The impact of the enhanced FMAP Medicaid supplemental and DSH payments are reflected in our results for the nine-month period endedSeptember 30, 2020 . We are unable to estimate the prospective financial impact of this provision at this time as our financial impact is contingent on unknown state action during future eligible federal fiscal quarters.
Hospitals that have an unusually large number of low-income patients (i.e., those with a Medicaid utilization rate of at least one standard deviation above the mean Medicaid utilization, or having a low income patient utilization rate exceeding 25%) are eligible to receive a DSH adjustment.Congress established a national limit on DSH adjustments. Although this legislation and the resulting state broad-based provider taxes have affected the payments we receive under the Medicaid program, to date the net impact has not been materially adverse. Upon meeting certain conditions and serving a disproportionately high share ofTexas' andSouth Carolina's low income patients, five of our facilities located inTexas and one facility located inSouth Carolina received additional reimbursement from each state's DSH fund. TheSouth Carolina and Texas DSH programs were renewed for each state's 2021 DSH fiscal year (covering the period ofOctober 1, 2020 throughSeptember 30, 2021 ). In connection with these DSH programs, included in our financial results was an aggregate of approximately$10 million and$12 million during the three-month periods endedSeptember 30, 2020 and 2019, respectively, and$35 million and$40 million during the 51
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nine-month periods endedSeptember 30, 2020 and 2019, respectively. We expect the aggregate reimbursements to our hospitals pursuant to theTexas andSouth Carolina 2020 fiscal year programs to be approximately$44 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 37% and 22%, respectively, from 2020 DSH payment levels. Our behavioral health care facilities inTexas have been receiving Medicaid DSH payments since FFY 2016. As with all Medicaid DSH payments, hospitals are subject to state audits that typically occur up to three years after their receipt. DSH payments are subject to a federal Hospital Specific Limit ("HSL") and are not fully known until the DSH audit results are concluded. In general, freestanding psychiatric hospitals tend to provide significantly less charity care than acute care hospitals and therefore are at more risk for retroactive recoupment of prior year DSH payments in excess of their respective HSL. In light of the retroactive HSL audit risk for freestanding psychiatric hospitals, we have established DSH reserves for our facilities that have been receiving funds since FFY 2016. These DSH reserves are also impacted by the resolution of federal DSH litigation related toChildren's Hospital Association of Texas v. Azar ("CHAT"), No. 17-cv-844 (D.D.C.March 2, 2018 ), appeal docketed, No. 18-5135 (D.C. Cir.May 9, 2018 ) where the calculation of HSL was being challenged. In August, 2019,DC Circuit Court of Appeals issued a unanimous decision in CHAT and reversed the judgment of the district court in favor of CMS and ordered that CMS's "2017 Rule" (regarding Medicaid DSH Payments-Treatment of Third Party Payers in Calculating Uncompensated Care Costs) be reinstated. CMS has not issued any additional guidance post the ruling. InApril 2020 , the plaintiffs in the case have petitioned theSupreme Court of the United States to hear their case. Additionally, there have been separate legal challenges on this same issue in the Fifth and Eight Circuits. OnNovember 4, 2019 , theUnited States Court of Appeals for the Eighth Circuit issued an opinion upholding the 2017 Rule. Missouri Hosp. Ass'n v. Azar, No. 18-1778 (8th Cir.Nov. 4, 2019 ) (i.e. reversing a district court order enjoining the 2017 rule). OnApril 20, 2020 , theUnited States Court of Appeals of the Fifth Circuit issued a decision also upholding the 2017 Rule.Baptist Memorial Hospital v. Azar, No. 18-60592 (5th Cir.April 20, 2020 ). In light of these court decisions, we continue to maintain reserves in the financial statements for cumulative Medicaid DSH and UC reimbursements related to our behavioral health hospitals located inTexas that amounted to$37 million and$27 million as ofSeptember 30, 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 . The SPA for the 2021 fiscal year program is under CMS review. In connection with this program, included in our financial results was approximately$6 million and$7 million during the three-month periods endingSeptember 30, 2020 and 2019 and$20 million and$21 million during the nine-month periods endedSeptember 30, 2020 and 2019. We estimate that our reimbursements pursuant to this program will approximate$27 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 which represents only a portion of the inter-governmental transfer used by Nevada Medicaid to fund the non-federal share of this supplemental payment program.
California SPA:
InCalifornia , CMS issued formal approval of the 2017-19 Hospital Fee Program in December, 2017 retroactive toJanuary 1, 2017 throughSeptember 30, 2019 . In September, 2019, the state submitted a request to renew the Hospital Fee Program for the periodJuly 1, 2019 toDecember 31, 2021 . OnFebruary 25, 2020 , CMS approved this renewed program. These approvals include the Medicaid inpatient and outpatient fee-for-service supplemental payments and the overall provider tax structure but did not yet include the approval of the managed care rate setting payment component for certain rate periods (see table below). The managed care payment component consists of two categories of payments, "pass-through" payments and "directed" payments. The pass-through payments are similar in nature to the prior Hospital Fee Program payment method whereas the directed payment method will be based on actual concurrent hospital Medicaid managed care in-network patient volume. 52
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California Hospital Fee Program CMS Approval Status:
Hospital Fee Program CMS Methodology CMS Rate Setting Approval
Component Approval Status Status
Fee For Service Payment Approved through Approved through December 31,
December 31, 2021 2021
Managed Approved through Approved through September
Care-Pass-Through December 31, 2020 30, 2017; Paid in advance of
Payment approval through September
30, 2019Managed Care-Directed Approved through Approved through September Payment
December 31, 2020 30, 2019; Paid throughSeptember 30, 2018 In connection with the existing program, included in our financial results was approximately$35 million and$15 million during the three-month periods endedSeptember 30, 2020 and 2019, respectively, and$49 million and$23 million during the nine-month periods endedSeptember 30, 2020 and 2019, respectively. Our financial results for the three and nine-month periods endedSeptember 30, 2020 , include a$28 million favorable adjustment, as discussed below, of which$11 million relates to the first nine months of 2020 and$17 million relates to prior years. We estimate that our reimbursements pursuant to this program will approximate$62 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 Supplemental Payment Program table. In April, 2020, theCalifornia Department of Health Care Services ("DHCS") notified hospital providers that participate in the Medicaid managed care directed payment program that DHCS would recalculate directed payments for the period ofJuly 1, 2017 throughSeptember 30, 2018 ("SFY 2018") to remedy an identified data error. In August, 2020, as a follow-up to that notification, DHCS issued its corrected directed payment calculations. The updated calculation resulted in a favorable adjustment to the above program year and also resulted in increased expected supplemental payment amount for program years subsequent to the recalculated SFY 2018 rate period. The California Hospital Fee amounts noted above include our portion of the state corrected data.
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 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. 53
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In the 2019 IPPS final rule, CMS overhauled the Medicare and Medicaid EHR Incentive Program to focus on interoperability, improve flexibility, relieve burden and place emphasis on measures that require the electronic exchange of health information between providers and patients. We can provide no assurance that the changes will not have a material adverse effect on our future results of operations. Managed Care: A significant portion of our net patient revenues are generated from managed care companies, which include health maintenance organizations, preferred provider organizations and managed Medicare (referred to as Medicare Part C or Medicare Advantage) and Medicaid programs. In general, we expect the percentage of our business from managed care programs to continue to grow. The consequent growth in managed care networks and the resulting impact of these networks on the operating results of our facilities vary among the markets in which we operate. Typically, we receive lower payments per patient from managed care payers than we do from traditional indemnity insurers, however, during the past few years we have secured price increases from many of our commercial payers including managed care companies.Commercial Insurance : Our hospitals also provide services to individuals covered by private health care insurance. Private insurance carriers typically make direct payments to hospitals or, in some cases, reimburse their policy holders, based upon the particular hospital's established charges and the particular coverage provided in the insurance policy. Private insurance reimbursement varies among payers and states and is generally based on contracts negotiated between the hospital and the payer. Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment mechanisms, including predetermined payment or DRG-based payment systems, for more inpatient and outpatient services. To the extent that such efforts are successful and reduce the insurers' reimbursement to hospitals and the costs of providing services to their beneficiaries, such reduced levels of reimbursement may have a negative impact on the operating results of our hospitals. Other Sources: Our hospitals provide services to individuals that do not have any form of health care coverage. Such patients are evaluated, at the time of service or shortly thereafter, for their ability to pay based upon federal and state poverty guidelines, qualifications for Medicaid or other state assistance programs, as well as our local hospitals' indigent and charity care policy. Patients without health care coveragewho do not qualify for Medicaid or indigent care write-offs are offered substantial discounts in an effort to settle their outstanding account balances. Health Care Reform: Listed below are the Medicare, Medicaid and other health care industry changes which have been, or are scheduled to be, implemented as a result of the Legislation.
Implemented Medicare Reductions and Reforms:
• 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
Medicaid DSH reductions through
Health Insurance Revisions:
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• Large employer insurance reforms, effective in 2015.
• Individual insurance mandate and related federal subsidies, effective in 2014.
As noted above in Health Care Reform, the Tax Cuts and Jobs Act enacted into
law in December, 2017 eliminated the individual insurance federal mandate
penalty beginning
• Federally mandated insurance coverage reforms, effective in 2010 and forward.
The Legislation seeks to increase competition among private health insurers by providing for transparent federal and state insurance exchanges. The Legislation also prohibits private insurers from adjusting insurance premiums based on health status, gender, or other specified factors. We cannot provide assurance that these provisions will not adversely affect the ability of private insurers to pay for services provided to insured patients, or that these changes will not have a negative material impact on our results of operations going forward.
Value-Based Purchasing:
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not reimburse hospitals for certain preventable adverse events. The Legislation required HHS to implement a value-based purchasing program for inpatient hospital services which became effective onOctober 1, 2012 . The Legislation requires HHS to reduce inpatient hospital payments for all discharges by 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
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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 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 Medicare and Medicaid Payment Related Legislation section could adversely impact BPCI-A program results. In response to the COVID-19 pandemic, CMS provided certain flexibilities to the Model 3 Year (for episodes initiatedJanuary 1, 2020 toSeptember 30, 2020 ) where participants could elect one of three options: (1) make no change to its BPCI-A episode elections; (2) exclude BPCI-A episodes impacted by a COVID-19 diagnosis for the applicable period, or; (3) withdraw completely from the BPCI-A program for Model Year 3. We chose option 2 for sixteen facilities and option 3 for six facilities. The initial CMS BPCI-A reconciliation in the first quarter of 2020, for the periodOctober 1, 2018 throughDecember 31, 2019 , did not have a material impact on our financial results.
2019 Novel Coronavirus Disease 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
including those for physical environment requirements and certain Emergency
Medical Treatment & Labor Act provisions
• Provider Enrollment Flexibilities
• Flexibility and Relief for State Medicaid Programs including those under
section 1135 Waivers
• Suspension of Certain Enforcement Activities
In addition to the national emergency declaration, 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)
o The legislation provides paid sick leave, tax credits, and free
COVID-19 testing; expands nutrition assistance and unemployment
benefits; and increases Medicaid funding.
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• 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 .
• The HHS Secretary renewed the public health emergency ("PHE")
effective October 23, 2020 for ninety (90) days. As a result,
states would be eligible for the enhanced FMAP through the
second quarter of federal fiscal year 2021 should the PHE not be
rescinded by the Secretary before the end of the ninety day
period.
• In response to this legislation, certain state Medicaid
supplemental and DSH payment programs such as those in Texas and
Mississippi have increased the level of provider payments or
reduced the related Provider Tax amount used to fund the
non-federal share of these supplemental payments. The favorable
impact from these state Medicaid responses are included in the
above State Medicaid Supplemental Payment and State Medicaid DSH
Program noted amounts.
• 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
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
Emergency Fund ("PHSSEF") for grants available to hospitals and other healthcare providers (as amended by H.R. 266 onApril 24, 2010 which added$75 billion to the fund). o 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. o The new program will also reimburse hospitals at Medicare rates for uncompensated COVID-19 care for the uninsured (we have received approximately$10 million as ofSeptember 30, 2020 in connection with this program). o Grants to eligible recipients will be made in multiple tranches by HHS • As ofSeptember 30, 2020 , we have received
approximately
various governmental stimulus programs, most notably the PHSSEF as provided by the
CARES Act. Our operating results for the nine-months
ended
the recognition of $213 million in PHSSEF grant income pursuant to meeting the
applicable the terms and conditions of the various distribution programs as of
September 30, 2020 which includes the reversal of$5
million in PHSSEF grant income
recorded during the second quarter of 2020. On October 22, 2020, HHS issued revised
guidance regarding the determination on the appropriate retention of PHSSEF
payments. Additional clarification and guidance by HHS on its policy regarding: (1) the
redistribution of PHSSEF grant payments by a parent company among its subsidiaries,
and; (2) the interaction of certain COVID-19 related expense and lost revenue in a
PHSSEF grant entitlement determination will be required. Due to these new reporting
requirements and various interpretations, there is at least a reasonable possibility
that amounts recorded under CARES Act funding will change in future periods. The HHS
terms and conditions for all grant recipients and specific fund distributions are
located at
https://www.hhs.gov/coronavirus/cares-act-provider-relief-fund/for-providers/index.html
• HHS expects providers will only use Provider Relief Fund
(i.e. "PHSSEF") payments for as long as they have healthcare
related expenses or lost revenue attributable to COVID-19,
they are not reimbursed from other sources and other sources
were not obligated to reimburse them. All provider relief
fund payments must be expended by no later than June 30,
2021 . If providers have leftover Provider Relief Fund money
that they cannot expend on permissible expenses or losses,
then they will return this money to HHS. We are unable to
predict if any funds received will ultimately need to be
returned to HHS.
• HHS Distributions from the PHSSEF include General
Distributions to eligible healthcare providers and Targeted
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.
• 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 .
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• 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.
• Increases the payment that would otherwise be made to a hospital
for treating a Medicare patient admitted with COVID-19 by twenty
percent (20%) for the duration of the COVID-19 public health
emergency.
• As of September 30, 2020 , we estimate that additional payments
under this provision were approximately $8 million . These
payments offset the increased expenses associated with the
treatment of Medicare COVID-19 patients.
• Expansion of the Medicare Accelerated and Advance Payment Program ("MAAPP").
• As of September 30, 2020 , we have received approximately $695
million under MAAPP ($375 million and $320 million were received
during the second and third quarter of 2020,respectively). As a
result of H.R. 8319 Continuing Resolution enacted into law on
October 1, 2020 , hospitals that receive funds under this program
are subject to the following repayment terms.
• No repayment until one year after first receiving the loan.
• Medicare will withhold 25% per claim for the first 11 months of repayment.
• Medicare will withhold 50% per claim for the next 6 months of repayment.
• After 29 months, the HHS Secretary can require the
outstanding balance be paid in full and determine the
percent Medicare will withhold per claim.
• An interest rate of 4% will be assessed on loan balances
outstanding after 29 months.
• 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. 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. Please see
COVID-19 State and Local Grant Programs below for additional
disclosure.
• H.R 266 - The Paycheck Protection Program and Health Care Enhancement
Act (4/24/2020)
• Includes an additional $75 billion for the PHSSEF to reimburse
hospitals 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 asSeptember 30, 2020 include approximately$5 million fromWashington, D.C. , and$3 million fromMassachusetts . 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$25 million and$41 million during the three-month periods endedSeptember 30, 2020 and 2019, respectively, and$86 million and$124 million during the nine-month periods endedSeptember 30, 2020 and 2019, respectively (amounts in thousands): Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2020 2019 2020 2019 Revolving credit & demand notes (a.) $ 510 $ 813 $ 1,737 $ 2,403$700 million , 4.75% Senior Notes due 2022, net (b.) 7,792 8,069 23,932 24,209$400 million , 5.00% Senior Notes due 2026 (c.) 5,000 5,000 15,000 15,000$800 million , 2.65% Senior Notes due 2030 (d.) 532 - 532 - Term loan facility A (a.) 7,584 18,258 31,023 56,827 Term loan facility B (a.) 2,410 5,080 9,511 15,720 Accounts receivable securitization program (e.) 406 3,226 3,032 9,877 Subtotal-revolving credit, demand notes, Senior Notes, term loan facilities and accounts receivable securitization program 24,234 40,446 84,767 124,036 Interest rate swap income, net - - - (3,400 ) Amortization of financing fees 1,305 1,282 3,865 3,838 Other combined interest expense 580 660 1,685 1,964 Capitalized interest on major projects (1,024 ) (876 ) (3,051 ) (2,481 ) Interest income (520 ) (65 ) (867 ) (383 ) Interest expense, net$ 24,575 $ 41,447 $ 86,399 $ 123,574 (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 September 30, 2020 , we had: (i) $1.913 billion of borrowings outstanding
under the term loan A facility; (ii) $491 million of borrowings outstanding
under the term loan B facility, and; (iii) no outstanding borrowings under the
$1 billion revolving credit facility.
(b.) In September, 2020, we redeemed the entire
principal amount of our previously outstanding 4.75% Senior Secured Notes
that were scheduled to mature in 2022 ("2022 Notes") at a cash redemption
price equal to the sum of: (i) 100% of the aggregate principal amount of
the 2022 Notes redeemed, and; (ii) accrued and unpaid interest on the
2022 Notes to the redemption date.
(c.) In June, 2016, we completed the offering of $400 million aggregate
principal amount of 5.00% Senior Notes due in 2026.
(d.) In September, 2020, we completed the offering of
principal amount of 2.65% Senior Notes due in 2030. The net proceeds of
this offering were primarily used to redeem all of the
Notes as discussed above.
(e.) In April, 2018, we amended our accounts receivable securitization
program, which was scheduled to expire in December, 2018. Pursuant to the
amendment, the term has been extended through April 26, 2021 , and the
borrowing limit has been increased to
of September 30, 2020 , we had no outstanding borrowings under our
accounts receivable securitization program.
Interest expense decreased $17 million during the three-month period ended
September 30, 2020 , as compared to the comparable period of 2019, due primarily
to: (i) a net $16 million decrease in aggregate interest expense on our
revolving credit, demand notes, senior notes, term loan facilities and accounts
receivable securitization program resulting from a decrease in our aggregate
average cost of borrowings pursuant to these facilities (2.7% during the three
months ended September 30, 2020 as compared to 4.0% in the
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comparable quarter of 2019), as well as a decrease in the aggregate average outstanding borrowings ($3.59 billion during the three months endedSeptember 30, 2020 as compared to$4.01 billion in the comparable 2019 quarter), and; (ii)$1 million of other combined decreases in interest expense. The average effective interest rate on these facilities, including amortization of deferred financing costs and original issue discounts was 2.8% and 4.1% during the three-month periods endedSeptember 30, 2020 and 2019, respectively. Interest expense decreased$37 million during the nine-month period endedSeptember 30, 2020 , as compared to the comparable period of 2019, due primarily to: (i) a net$39 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 (3.1% during the nine months endedSeptember 30, 2020 as compared to 4.1% in the comparable period of 2019), as well as a decrease in the aggregate average outstanding borrowings ($3.67 billion during the nine months endedSeptember 30, 2020 as compared to$4.01 billion in the comparable 2019 quarter), offset by; (ii)$2 million of other net combined increases in interest expense, resulting primarily from the expiration of our interest rate swaps in 2019. 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 endedSeptember 30, 2019 ) was 3.2% and 4.1% during the nine-month periods endedSeptember 30, 2020 and 2019, respectively.
Provision for Income Taxes and Effective Tax Rates:
The effective tax rates, as calculated by dividing the provision for income
taxes by income before income taxes, were as follows for the three and
nine-month periods ended
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Provision for income taxes $ 79,172 $ 37,205 $ 204,649 $ 165,646
Income before income taxes 323,264 138,075 849,705 745,179
Effective tax rate 24.5 % 26.9 % 24.1 % 22.2 %
The provision for income taxes increased $42 million during the three-month
period ended September 30, 2020 , as compared to the comparable quarter of 2019,
due primarily to: (i) the income tax provision recorded in connection with the
$185 million increase in pre-tax income; (ii) a $5 million increase in the
provision for income taxes recorded in connection with our adoption of ASU
2016-09; partially offset by; (iii) a $6 million decrease in the provision for
income taxes due the recording, during the third quarter of 2019, of the
non-deductible portion of the net federal and state income taxes due on the
settlement finalized in July, 2020 with the Department of Justice , Civil
Division.
The provision for income taxes increased $39 million during the nine-month
period ended September 30, 2020 , as compared to the comparable period of 2019,
due primarily to: (i) the income tax provision recorded in connection with the
$105 million increase in pre-tax income; (ii) an increase in the provision for
income taxes of $17 million resulting from an unfavorable change resulting from
the adoption of ASU 2016-09, which increased our provision for income taxes by
$4 million during the first nine months of 2020 and decreased our provision for
income taxes by $12 million during the first nine months of 2019, partially
offset by; (iii) a $6 million decrease in the provision for income taxes due the
recording, during the first nine months of 2019, of the non-deductible portion
of the net federal and state income taxes due on the settlement finalized in
July, 2020 with the Department of Justice , Civil Division.
Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was
• a favorable change of
payments and deferred governmental stimulus grants, most notably the CARES
Act, received during the first nine months of 2020;
• a favorable change of
employer's share of
Act;
• a favorable change of $83 million in accounts receivable;
• a favorable change of
•$11 million of other combined net unfavorable changes. 60
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Days sales outstanding ("DSO"): Our DSO are calculated by dividing our net
revenue by the number of days in the nine-month periods. The result is divided
into the accounts receivable balance at September 30th of each year to obtain
the DSO. Our DSO were 51 days and 50 days at September 30, 2020 and 2019,
respectively.
Net cash used in investing activities
During the first nine months of 2020, we used
• $547 million spent on capital expenditures including capital
expenditures for equipment, renovations and new projects at various
existing facilities;
• $52 million spent on the acquisition of businesses and property;
• $22 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;
• $8 million received from the sale of assets and businesses;
• $5 million spent on the purchase and implementation of information
technology applications, and;
• $1 million spent in connection with joint ventures.
During the first nine months of 2019, we used
• $480 million spent on capital expenditures including capital
expenditures for equipment, renovations and new projects at various
existing facilities;
• $34 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;
• $12 million spent to fund investments in and advances to joint
ventures and other, and;
• $7 million received from the sale of assets and businesses.
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 nine-month period ended September 30, 2019 .
Net cash used in financing activities
During the first nine months of 2020, we used
• spent
to redeem our previously outstanding 4.75% senior secured notes which were
scheduled to mature in 2022; (ii)
receivable securitization program; (iii) $38 million related to our term
loan A facility; (iv) $4 million related to our term loan B facility, and;
(v) $32 million related to a short-term credit facility ($31 million ) and
other debt facilities ($1 million ).
• generated
(net of discount) received in connection with the issuance in September of
2020 of the
mature in 2030, and; (ii)
• spent
connection with: (i) open market purchases pursuant to our
stock repurchase program, which has since been suspended as a result of the
COVID-19 pandemic (
obligations related to stock-based compensation programs (
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• spent
interests in majority owned businesses;
• spent
quarter (quarterly dividends have since been suspended as a result of the
COVID-19 pandemic);
• generated
pursuant to the terms of employee stock purchase plans;
• spent
million, 2.65% senior secured notes which were issued during the third
quarter of 2020, and;
• spent
During the first nine months of 2019, we used
• spent
related to our term loan A facility; (ii)
accounts receivable securitization program; (iii)
term 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 (
to stock-based compensation programs (
• spent
interests in majority owned businesses;
• spent$36 million to pay quarterly cash dividends of$.20 per share in September, 2019 and$.10 per share in each of March and June, 2019, and;
• generated
pursuant to the terms of employee stock purchase plans.
Expected capital expenditures during remainder of 2020
Our estimated capital expenditures for the full year of 2020 are projected to be approximately$725 million to$750 million . During the first nine months of 2020, we spent approximately$547 million on capital expenditures. During the remaining three months of 2020, we expect to spend approximately$178 million to$203 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
Cash, Cash Equivalents and Restricted Cash
As of
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) increased the aggregate amount of the revolving credit facility to$1 billion (increase of$200 million over the$800 million previous commitment); (ii) increased 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
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As ofSeptember 30, 2020 , we had no borrowings outstanding pursuant to our$1 billion revolving credit facility and we had$997 million of available borrowing capacity net of$3 million of outstanding letters of credit. Pursuant to the terms of the Sixth Amendment, the tranche A term loan, which had$1.913 billion of borrowings outstanding as ofSeptember 30, 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$491 million of borrowings outstanding as ofSeptember 30, 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 ofSeptember 30, 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 ofSeptember 30, 2020 andDecember 31, 2019 . In late April, 2018, we entered into the sixth amendment to our accounts receivable securitization program ("Securitization") dated as ofOctober 27, 2010 with a group of conduit lenders, liquidity banks, andPNC 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 throughApril 26, 2021 and increased the borrowing capacity to$450 million (from$440 million previously). In July, 2020, we entered into the seventh amendment to the Securitization which temporarily waives a minimum borrowing requirement 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. AtSeptember 30, 2020 , we had no Securitization borrowings outstanding and we had$450 million of available borrowing capacity.
As of
•
October, 2030 ("2030 Notes") which were issued on September 21, 2020 .
•
June, 2026 ("2026 Notes") which were issued on
Interest on the 2026 Notes is payable onJune 1 andDecember 1 until the maturity date ofJune 1, 2026 . Interest on the 2030 Notes payable onApril 15 andOctober 15 , commencingApril 15, 2021 , until the maturity date ofOctober 15, 2030 . The 2026 Notes and 2030 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 2026 Notes and 2030 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. 63
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The 2030 Notes are guaranteed (the "Guarantees") on a senior secured basis by all of our existing and future direct and indirect subsidiaries (the "Subsidiary Guarantors") that guarantee our Senior Credit Agreement, dated as ofNovember 15, 2010 , as amended, restated or supplemented from time to time, or other first lien obligations or any junior lien obligations. The 2030 Notes and the Guarantees are secured by first-priority liens, subject to permitted liens, on certain of the Company's and the Subsidiary Guarantors' assets now owned or acquired in the future by the Company or the Subsidiary Guarantors (other than real property, accounts receivable sold pursuant to the Company's Existing Receivables Facility (as defined in the Indenture pursuant to which the 2030 Notes were issued (the "Indenture")), and certain other excluded assets). The Company's obligations with respect to the 2030 Notes, the obligations of the Subsidiary Guarantors under the Guarantees, and the performance of all of the Company's and the Subsidiary Guarantors' other obligations under the Indenture are secured equally and ratably with the Company's and the Subsidiary Guarantors' obligations under the Senior Credit Agreement and the Company's 2026 Notes by a perfected first-priority security interest, subject to permitted liens, in the collateral owned by the Company and its guarantors, whether now owned or hereafter acquired. However, the liens on the collateral securing the 2030 Notes and the Guarantees will be released if: (i) the 2030 Notes have investment grade ratings; (ii) no default has occurred and is continuing, and; (iii) the liens on the collateral securing all first lien obligations (including the Senior Credit Agreement and the 2026 Notes) and any junior lien obligations are released or the collateral under the Senior Credit Agreement, any other first lien obligations and any junior lien obligations is released or no longer required to be pledged. The liens on any collateral securing the 2030 Notes and the Guarantees will also be released if the liens on that collateral securing the Senior Credit Agreement, other first lien obligations and any junior lien obligations are released. In connection with the issuance of the 2030 Notes, the Company, the Subsidiary Guarantors and the representatives of the several initial purchasers, entered into a Registration Rights Agreement (the "Registration Rights Agreement"), whereby the Company and the Subsidiary Guarantors have agreed, at their expense, to use commercially reasonable best efforts to: (i) cause to be filed a registration statement enabling the holders to exchange the 2030 Notes and Guarantees for registered senior secured notes issued by the Company and guaranteed by the then Subsidiary Guarantors under the Indenture (the "Exchange Securities "), containing terms identical to those of the 2030 Notes (except that theExchange Securities will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with the Registration Rights Agreement); (ii) cause the registration statement to become effective; (iii) complete the exchange offer not later than 60 days after such effective date and in any event on or prior to a target registration date ofMarch 21, 2023 , and; (iv) file a shelf registration statement for the resale of the 2030 Notes if the exchange offer cannot be effected within the time periods listed above. The interest rate on the 2030 Notes will increase and additional interest thereon will be payable if the Company does not comply with its obligations under the Registration Rights Agreement. OnSeptember 28, 2020 , we redeemed the entire$700 million aggregate principal amount of our previously outstanding 4.75% Senior Secured Notes due 2022 (the "2022 Notes"), at a cash redemption price equal to the sum of: (i) 100% of the aggregate principal amount of the 2022 Notes redeemed, and; (ii) accrued and unpaid interest on the 2022 Notes to the redemption date. Included in our financial results for the three and nine-month periods endedSeptember 30, 2020 , was a loss on extinguishment of debt of approximately$1 million recorded in connection with the redemption of the 2022 Notes. AtSeptember 30, 2020 , the carrying value and fair value of our debt were each approximately$3.6 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 38% at
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 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 endedSeptember 30, 2020 , there have been no material changes in the off-balance sheet arrangements consisting of standby letters of credit and surety bonds. 64
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As ofSeptember 30, 2020 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled$103 million consisting of: (i)$94 million related to our self-insurance programs, and; (ii)$9 million of other debt and public utility guarantees.
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